-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
NWRPMDP2VBc1dt+m6qYHnvJzscLfSrItKHJgQM+K4c/rNnS3znSsq7PpQz/Sc4HN
49E3valw8ir2sIoyoAz8mw==
<SEC-DOCUMENT>0000950134-01-001917.txt : 20010307
<SEC-HEADER>0000950134-01-001917.hdr.sgml : 20010307
ACCESSION NUMBER: 0000950134-01-001917
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 19
CONFORMED PERIOD OF REPORT: 20001230
FILED AS OF DATE: 20010305
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: TEMPLE INLAND INC
CENTRAL INDEX KEY: 0000731939
STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631]
IRS NUMBER: 751903917
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1230
FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-08634
FILM NUMBER: 1561160
BUSINESS ADDRESS:
STREET 1: 303 S TEMPLE DR
STREET 2: P.O. DRAWER N
CITY: DIBOLL
STATE: TX
ZIP: 75941
BUSINESS PHONE: 9368295511
MAIL ADDRESS:
STREET 1: 303 SOUTH TEMPLE DR
CITY: DIBOLL
STATE: TX
ZIP: 75941
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<FILENAME>d84570e10-k405.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR END DECEMBER 30, 2000
<TEXT>
<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 DECEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001-08634
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>
1300 MOPAC EXPRESSWAY SOUTH
AUSTIN, TEXAS 78746
(Address of principal executive offices, including Zip code)
Registrant's telephone number, including area code: (512) 434-8000
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 February 28, 2001, was $1,556,825,328. 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 February 28, 2001, 49,260,508 shares of Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement to be prepared in
connection with the Annual Meeting of Shareholders to be held May 4, 2001, are
incorporated by reference into Part III of this report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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,
- one corrugating medium mill,
- 41 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, 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 Bank ("Guaranty"), conducts its
business through 154 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 producing properties. Insurance brokerage activities include selling a
full range of insurance products.
Temple-Inland is a Delaware corporation that was organized in 1983. Its
principal operating subsidiaries include:
- Inland Paperboard and Packaging, Inc.,
1
<PAGE> 3
- Temple-Inland Forest Products Corporation,
- Temple-Inland Financial Services Inc.,
- Guaranty Bank, and
- Temple-Inland Mortgage Corporation.
Temple-Inland's principal executive offices are located at 1300 MoPac
Expressway South, Austin, Texas 78746. Its telephone number is (512) 434-8000.
Additional information about the Company may be obtained from Temple-Inland's
home page on the Internet, the address of which is http://www.temple-inland.com.
FINANCIAL INFORMATION
The results of operations including information regarding the principal
business segments are shown in the financial statements of the Company and the
notes thereto contained in Item 8 of this Annual Report on Form 10-K. Certain
statistical information concerning revenues and unit sales by product line is
contained in Item 7 of this Annual Report on Form 10-K.
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 2000;
- the Building Products Group, which provided 19 percent of Temple-Inland's
consolidated net revenues for 2000; and
- the Financial Services Group, which provided 32 percent of
Temple-Inland's consolidated net revenues for 2000.
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. All subsidiaries shown are 100 percent owned by
their immediate parent company listed in the chart.
2
<PAGE> 4
TEMPLE-INLAND INC.
SELECTED SUBSIDIARY CHART
[SELECTED SUBSIDIARY CHART]
Paper Group. The Paper Group manufactures containerboard that it converts
into a complete line of corrugated packaging and point-of-purchase displays.
Approximately 20 percent of the containerboard produced by the Paper Group in
2000 was sold in the domestic and export markets. The Paper Group converted the
remainder, and containerboard purchased in the domestic markets, 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.
The Paper Group serves about 7,000 customers with approximately 9,000
shipping destinations. The largest single customer accounted for approximately 4
percent, and the ten largest customers accounted for approximately 27 percent,
of the 2000 corrugated packaging revenues. Costs of freight and customer service
requirements necessitate the location of box plants relatively close to
customers. Each plant tends to service a market within a 150-mile radius of the
plant.
Sales of corrugated shipping containers closely track changing population
patterns and other demographics. Historically, there has been a correlation
between the demand for containers and containerboard and real growth in the
United States gross domestic product, particularly the non-durable goods
segment. As e-commerce develops, the demand for corrugated packaging could
improve as the shipment of products ordered on-line increases.
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 Inland's
containerboard mill in Newport, Indiana. In the summer of 2000, the joint
venture completed a 14-month, $70 million project to modify the mill to produce
3
<PAGE> 5
lightweight gypsum facing paper. The conversion will increase the amount of
corrugating medium purchased by the company while diversifying its product
lines. During a transition period, the mill may produce both gypsum facing paper
and corrugating medium. For a period of twelve months following the conversion,
the Paper Group is obligated to purchase, at market rates, all of the medium
produced by the venture that meets the Paper Group's specifications.
Building Products Group. The Building Products Group produces a wide
variety of building products, such as lumber, plywood, particleboard, medium
density fiberboard, gypsum wallboard, 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 78 percent of particleboard sales are to commercial fabricators,
such as manufacturers of cabinets and furniture. The ten largest customers
accounted for approximately 28 percent of the Building Products Group's 2000
sales. The building products business is heavily dependent upon the level of
residential housing expenditures, including the repair and remodeling market.
The Building Products Group is a 50 percent owner in two joint ventures:
Del-Tin Fiber LLC, which produces medium density fiberboard at a facility in
Arkansas; and Standard Gypsum LP, which produces gypsum wallboard at a plant and
related quarry in Texas and a plant in Tennessee. During 2000, the Company
decided to exit the fiber-cement business by acquiring a controlling interest in
its Fortra Fiber-Cement LLC joint venture, which produced fiber-cement products
at a plant in Texas, and leasing its facility to a third party.
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 is being 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 154 banking centers. The 110 Texas banking centers
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 44 California banking centers 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. Guaranty also provides leasing and secured financing of industrial
equipment, since acquiring American Finance Group, Inc. during 2000, and
asset-based lending, since acquiring Fidelity Funding, Inc. in 1999.
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
4
<PAGE> 6
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 2000, Guaranty had a leverage capital ratio of 7.77 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 60 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 2000, the
mortgage banking operation was servicing $19.5 billion in mortgage loans,
including loans serviced for affiliates. The mortgage banking operation produced
$2.1 billion in mortgage loans during 2000.
Real Estate. The Financial Services Group is involved in the development
of 40 residential subdivisions in Texas, California, Colorado, Florida, Georgia,
Missouri, Tennessee, and Utah. Real estate activities also include ownership of
12 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 Guaranty.
5
<PAGE> 7
Statistical Disclosures. The following tables present various statistical
and financial information for the Financial Services Group.
The following schedule presents the average balances, interest
income/expense, and rates earned or paid by major balance sheet category for the
years 1998 through 2000:
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST SPREAD
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------- --------------------------- ---------------------------
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............................... $ 35 $ 2 7.15% $ 27 $ 1 5.36% $ 26 $ 1 5.27%
Mortgage-backed and other
securities.......................... 3,011 197 6.55% 2,347 126 5.36% 2,606 150 5.76%
Securities purchased under agreements
to resell, agency discount notes,
federal funds sold, and commercial
paper............................... 75 5 6.32% 66 3 4.94% 61 3 5.47%
Loans receivable and mortgage loans
held for sale (1)................... 10,377 884 8.52% 9,482 705 7.43% 7,701 583 7.57%
Other................................... 16 1 4.03% 10 1 4.98% 13 1 4.80%
------- ------ ------- ---- ------- ----
Total interest-earning assets... 13,514 $1,089 8.06% 11,932 $836 7.01% 10,407 $738 7.09%
====== ==== ====
Cash.................................... 122 102 100
Allowance for loan losses............... (121) (105) (90)
Other assets............................ 1,076 1,069 924
------- ------- -------
Total assets.................... $14,591 $12,998 $11,341
======= ======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand............. $ 2,294 $ 93 4.04% $ 1,851 $ 56 3.04% $ 1,177 $ 27 2.31%
Savings deposits.................... 189 4 1.94% 215 5 2.17% 215 5 2.25%
Time deposits....................... 6,993 396 5.67% 6,052 318 5.25% 5,866 325 5.55%
------- ------ ------- ---- ------- ----
Total interest-bearing
deposits...................... 9,476 493 5.20% 8,118 379 4.66% 7,258 357 4.92%
Advances from the Federal Home Loan
Bank................................ 2,511 159 6.35% 2,683 139 5.19% 1,892 106 5.63%
Securities sold under repurchase
agreements.......................... 484 32 6.51% 112 5 4.98% 349 20 5.62%
Other borrowings...................... 217 16 7.34% 217 14 6.35% 203 11 5.53%
------- ------ ------- ---- ------- ----
Total interest-bearing
liabilities................... 12,688 $ 700 5.52% 11,130 $537 4.83% 9,702 $494 5.10%
====== ==== ====
Noninterest-bearing demand deposits... 132 111 63
Other liabilities..................... 465 620 726
Stock issued by subsidiaries.......... 230 227 197
Shareholder's equity.................. 1,076 910 653
------- ------- -------
Total liabilities and
shareholder's equity.......... $14,591 $12,998 $11,341
======= ======= =======
Net interest income............. $ 389 $299 $244
====== ==== ====
Net yield on interest-earning
assets........................ 2.88% 2.50% 2.34%
==== ==== ====
</TABLE>
- ---------------
(1) Nonaccruing loans are included in average loans receivable.
6
<PAGE> 8
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>
2000 COMPARED WITH 1999 1999 COMPARED WITH 1998
--------------------------- ---------------------------
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...... $ -- $ 1 $ 1 $ -- $ -- $ --
Mortgage-backed and other securities.......... 40 31 71 (14) (10) (24)
Securities purchased under agreements to
resell, agency discount notes, federal
funds sold, and commercial paper........... 1 1 2 -- -- --
Loans receivable and mortgage loans held for
sale....................................... 70 109 179 133 (11) 122
---- ---- ---- ---- ---- ----
Total interest income................. $111 $142 $253 $119 $(21) $ 98
==== ==== ==== ==== ==== ====
Interest expense:
Deposits:
Interest-bearing demand deposits......... $ 15 $ 22 $ 37 $ 19 $ 10 $ 29
Savings deposits......................... -- (1) (1)
Time deposits............................ 52 26 78 10 (17) (7)
---- ---- ---- ---- ---- ----
Total interest on deposits............ 67 47 114 29 (7) 22
Advances from the Federal Home Loan Bank...... (9) 29 20 41 (8) 33
Securities sold under repurchase agreements... 24 3 27 (12) (3) (15)
Other borrowings.............................. -- 2 2 1 2 3
---- ---- ---- ---- ---- ----
Total interest expense................ $ 82 $ 81 $163 $ 59 $(16) $ 43
==== ==== ==== ==== ==== ====
Net interest income............................. $ 29 $ 61 $ 90 $ 60 $ (5) $ 55
==== ==== ==== ==== ==== ====
</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
------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Held-to-Maturity:
Mortgage-backed securities............................... $ 864 $1,061 $1,413
Available-for-Sale:
Mortgage-backed securities............................... 2,237 1,256 892
Debt securities
U.S. government....................................... -- 7 --
Corporate............................................. 3 2 3
Equity securities, primarily
Federal Home Loan Bank Stock.......................... 175 166 177
------ ------ ------
$3,279 $2,492 $2,485
====== ====== ======
</TABLE>
7
<PAGE> 9
The table below sets forth the maturities of mortgage-backed and other
securities as of year end 2000:
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............... $-- -- $-- -- $-- -- $-- -- $ 864 6.05% $ 864
Available-for-Sale:
Mortgage-backed
securities............... -- -- -- -- -- -- -- -- 2,237 6.98% 2,237
Debt securities
U.S. Government.......... -- -- -- -- -- -- -- -- -- -- --
Corporate................ 1 6.58% 1 6.20% 1 6.97% -- -- 3
Equity securities,
primarily
Federal Home Loan Bank
Stock.................. -- -- -- -- -- -- -- -- 175 6.55% 175
--- --- --- --- ------ ------
$-- $ 1 $ 1 $ 1 $3,276 $3,279
=== === === === ====== ======
</TABLE>
The following table shows the loan distribution for the Financial Services
Group:
TYPES OF LOANS
<TABLE>
<CAPTION>
AT YEAR END
-------------------------------------------
2000 1999 1998 1997 1996
------- ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate mortgage............................. $ 3,618 $3,763 $4,105 $3,997 $3,784
Construction and development (including
residential)................................... 4,007 3,253 2,210 1,379 1,013
Commercial and business.......................... 1,681 1,265 1,031 582 284
Consumer and other............................... 1,215 1,121 827 565 393
Premiums, discounts and deferred fees, net....... 8 7 15 19 8
------- ------ ------ ------ ------
10,529 9,409 8,188 6,542 5,482
Less:
Allowance for loan losses................. (118) (113) (87) (91) (68)
------- ------ ------ ------ ------
$10,411 $9,296 $8,101 $6,451 $5,414
======= ====== ====== ====== ======
</TABLE>
8
<PAGE> 10
The table below presents the maturity distribution of loans (excluding real
estate mortgage and consumer and other loans) outstanding at year-end 2000,
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)........ $3,692 $314 $ 1 $4,007
Commercial and business..................................... 1,123 431 127 1,681
------ ---- ---- ------
$4,815 $745 $128 $5,688
====== ==== ==== ======
Loans maturing after 1 year with:
Fixed interest rates...................................... $ -- $160 $115 $ 275
Variable interest rates................................... -- 585 13 598
------ ---- ---- ------
$ -- $745 $128 $ 873
====== ==== ==== ======
</TABLE>
Loans accounted for on a nonaccrual basis, accruing loans that are
contractually past due 90 days or more, and restructured or other potential
problem loans were less than 2 percent of total loans at each year end in the
five-year period ended December 31, 2000. The aggregate amounts and the interest
income foregone on such loans are immaterial.
The recorded investment in impaired loans was $5.6 million at December 31,
2000, and $78.9 million at December 31, 1999, with a related allowance for loan
losses of $2.9 million and $34.3 million, respectively. The average recorded
investment in impaired loans during the years ended December 31, 2000 and 1999,
was approximately $44.8 million and $34.3 million, respectively. The related
amount of interest income recognized for the years ended December 31, 2000 and
1999, on impaired loans was immaterial.
9
<PAGE> 11
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>
2000 1999 1998 1997 1996
---- ----- ---- ---- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year..................... $113 $ 87 $91 $68 $ 66
Charge-offs:
Real estate mortgage........................... (22) (16) (6) (5) (6)
Commercial and business........................ (11) (7) -- (1) (3)
Consumer and other............................. (4) (2) (2) (2) (4)
---- ----- --- --- -----
(37) (25) (8) (8) (13)
Recoveries:
Real estate mortgage........................... -- -- 3 1 2
Commercial and business........................ -- -- -- -- --
Consumer and other............................. 1 1 -- 1 1
---- ----- --- --- -----
1 1 3 2 3
---- ----- --- --- -----
Net charge-offs............................. (36) (24) (5) (6) (10)
Additions charged to operations.................. 39 38 1 (2) 13
Additions related to bulk purchases of loans, net
of adjustments................................. 2 12(a) -- 31(b) (1)
---- ----- --- --- -----
Balance at end of year........................... $118 $ 113 $87 $91 $ 68
==== ===== === === =====
Ratio of net charge-offs during the year to
average loans outstanding during the year...... .35% .26% .07% .10% .20%
==== ===== === === =====
</TABLE>
- ---------------
(a) Principally related to the loan portfolio from the acquisition of Hemet
Federal Savings and Loan Association.
(b) Principally related to the loan portfolio from the acquisition of Stockton
Savings Bank, F.S.B.
10
<PAGE> 12
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AT YEAR END
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997
----------------------- ----------------------- ----------------------- -----------------------
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...... $ 26 34% $ 60 40% $36 50% $46 61%
Construction and
development.............. 30 38% 24 35% 17 27% 15 21%
Commercial and business... 31 16% 12 13% 14 13% 4 9%
Consumer and other........ 5 12% 5 12% 3 10% 3 9%
Unallocated............... 26 -- 12 -- 17 -- 23 --
---- --- ---- --- --- --- --- ---
$118 100% $113 100% $87 100% $91 100%
==== === ==== === === === === ===
<CAPTION>
AT YEAR END
-----------------------
1996
-----------------------
PERCENT OF
AMOUNT OF LOANS TO
ALLOWANCE TOTAL LOANS
--------- -----------
<S> <C> <C>
Real estate mortgage...... $42 69%
Construction and
development.............. 8 19%
Commercial and business... 1 5%
Consumer and other........ 4 7%
Unallocated............... 13 --
--- ---
$68 100%
=== ===
</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.
Additional information regarding the allowance for doubtful accounts is
contained in Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations, contained in this Annual Report on Form 10-K.
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 6 hereof.
The amount of time deposits of $100,000 or more and related maturities at
year end 2000, are disclosed in Note E to Financial Services Group Summarized
Financial Statements on page 53 of this Annual Report on Form 10-K.
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>
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Return on average assets.................................. 1.01% 0.93% 1.12%
Return on average equity.................................. 13.64% 13.29% 19.48%
Dividend payout ratio..................................... 74.92% 57.85% 47.17%
Equity to assets ratio.................................... 7.38% 7.00% 5.76%
</TABLE>
11
<PAGE> 13
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
INTEREST OUTSTANDING OUTSTANDING INTEREST RATE
BALANCE AT RATE AT DURING THE DURING THE DURING THE
YEAR END YEAR END YEAR YEAR YEAR
---------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
2000
Securities sold under agreements to
repurchase....................... $ 595 6.6% $ 898 $ 484 6.5%
Short-term FHLB advances........... $2,742 6.4% $2,911 $2,306 6.4%
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%
</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 bleached 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.
Revenues for 2000 from this agreement were $49 million. 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 2001 at a price that approximates
its carrying value.
RAW MATERIALS
The Company's main resource is timber, with approximately 2.2 million acres
of owned and leased timberland located in Texas, Louisiana, Alabama, and
Georgia. In 2000, wood fiber required for the Company's paper and wood products
operations was produced from these lands and as a by-product of its solid wood
operations to the extent shown on the following chart:
WOOD FIBER REQUIREMENTS
<TABLE>
<CAPTION>
PERCENTAGE
SUPPLIED
RAW MATERIALS INTERNALLY
- ------------- ----------
<S> <C>
Sawtimber................................................. 63%
Pine Pulpwood............................................. 65%
Hardwood Pulpwood......................................... 37%
</TABLE>
The balance of the wood fiber required for these operations was purchased
from numerous landowners and other lumber companies.
12
<PAGE> 14
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 New Johnsonville, Tennessee, mill is solely a
corrugating medium mill. The principal raw material used by the Rome, Georgia,
and Orange, Texas, mills is virgin fiber. The Ontario, California, 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
2000, OCC represented approximately 41 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 trades and the excess linerboard is sold in the open
market. The conversion of the Newport mill for the production of gypsum facing
paper will require the Company to buy increasing amounts of corrugating medium.
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 supplies 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 was
able to generate approximately 60 percent of its energy requirements at its
mills in Rome, Georgia, and Orange, Texas, during 2000. 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 turbines is acquired pursuant to a multiple vendor
solicitation process that provides for the purchase of gas on an interruptible
basis at rates that historically have been favorable to spot market rates.
Energy costs began rising during the second quarter of 2000. This trend
continued through the remainder of 2000 and into the first quarter of 2001. In
some instances, the Company elected to curtail production at certain of its
manufacturing facilities rather than pay the significantly higher energy prices.
The Company expects this trend of higher energy costs to continue into the
foreseeable future. Accordingly, the Company is exploring alternative
arrangements and fuel sources in an effort to contain energy costs.
EMPLOYEES
At December 30, 2000, the Company and its subsidiaries had approximately
14,800 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
13
<PAGE> 15
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, 235 hourly Production Employees July 31, 2005
Orange, Texas Chemical and Energy Workers and 116 hourly Maintenance
Intl. ("PACE"), Local 1398, and Employees
PACE, Local 391
Linerboard Mill, PACE, Local 804, International 319 hourly Production Employees, July 31, 2006
Rome, Georgia Brotherhood of Electrical 36 Electrical Maintenance
Workers ("IBEW"), Local 613, Employees, and 166 hourly
United Association of Journeymen Maintenance 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, Local 109, 107, and 111 hourly April 30, 2002
Louisville, Kentucky, 1737,and PACE, Local 114, Production Employees,
and Middletown, Ohio, respectively respectively
Box Plants ("Northern
Multiple")
Rome, Georgia, and PACE Local 838 and PACE Local 150 and 105 hourly Production December 1, 2003
Orlando, Florida, Box 834, respectively Employees, respectively
Plants ("Southern
Multiple")
</TABLE>
The Company has additional collective bargaining agreements with the
employees of various of its other box plants, mills, and building products
plants. These agreements each cover a relatively small number of employees and
are negotiated on an individual basis at each such facility.
The Company considers its relations with its employees to be good.
ENVIRONMENTAL PROTECTION
The operations conducted by the subsidiaries of the Company are subject to
federal, state, and local provisions regulating the discharge of materials into
the environment and otherwise related to the protection of the environment.
Compliance with these provisions, primarily the Federal Clean Air Act, Clean
Water Act, Comprehensive Environmental Response, Compensation and Liability Act
of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization
Act of 1986 ("SARA"), 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 $19 million
during 2000. 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 prominence of environmental regulation to continue for the foreseeable
future. Given these uncertainties, the Company currently estimates that capital
expenditures for environmental purposes
14
<PAGE> 16
during the period 2001 through 2003 will average approximately $9 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 and 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. The Company has incurred approximately $11 million toward
Cluster Rule compliance through the end of 2000, excluding such expenditures
related to discontinued operations, and expects that additional expenditures
related to Cluster Rule compliance will be approximately $2 million by the
initial compliance deadline of April 15, 2001.
Not included in the phase I Cluster Rule was the Maximum Achievable Control
Technology ("MACT") II Standard for the control of hazardous air pollutant
emissions from pulp and paper mill combustion sources. Final promulgation of the
MACT II Standard occurred on December 15, 2000, and applies to two kraft mills
operated by the Company. Preliminary estimates indicate that the Company could
be required to make total capital expenditures for monitoring both particulate
matter ("PM") and gaseous hazardous air pollutants ("HAPs") associated with the
reporting and record-keeping activities of the rule of up to $2 million over the
next few years.
Future national emission standards for HAPs will apply to facilities that
are major sources in the plywood and composite wood products ("PCWP") industry.
The proposed standard would limit emissions of HAPs including acetaldehyde,
acrolein, formaldehyde, methanol, phenol, and other HAPs. EPA estimates that
implementation of the proposed standards would reduce HAP emissions from the
PCWP source category industry-wide by approximately 11,000 tons per year. In
addition, the proposed standards would reduce emissions of volatile organic
compounds ("VOCs") industry-wide by approximately 27,000 tons per year. The
estimated capital costs of these proposed standards for the Company are
approximately $25 million over the next five years.
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 percent of total industry shipments
during 2000. 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
15
<PAGE> 17
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......... 53 Chairman of the Board and Chief Executive Officer
William B. Howes............... 63 Executive Vice President
Harold C. Maxwell.............. 60 Executive Vice President
Bart J. Doney.................. 51 Group Vice President
Kenneth R. Dubuque............. 52 Group Vice President
James C. Foxworthy............. 49 Group Vice President
Dale E. Stahl.................. 53 Group Vice President
Jack C. Sweeny................. 54 Group Vice President
M. Richard Warner.............. 49 Chief Administrative Officer, Vice President, and General
Counsel
Randall D. Levy................ 49 Chief Financial Officer
Louis R. Brill................. 59 Vice President, Chief Accounting Officer
Scott Smith.................... 46 Chief Information Officer
Doyle R. Simons................ 37 Vice President -- Administration
David W. Turpin................ 50 Treasurer
Leslie K. O'Neal............... 45 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 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.
16
<PAGE> 18
Dale E. Stahl became Group Vice President of the Company in July 2000. Mr.
Stahl served as President and Chief Operating Officer of Gaylord Container
Corporation for twelve years prior to joining the Company.
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 from 1994 to 1999.
Louis R. Brill became Vice President, Controller of the Company in December
1999 and was named Chief Accounting Officer in May 2000. Before joining the
Company in 1999, Mr. Brill was a partner of Ernst & Young LLP for 25 years.
Scott Smith became Chief Information Officer of the Company in February
2000. Prior to that, Mr. Smith was Treasurer of Guaranty from November 1993 to
December 1999 and Chief Information Officer of Financial Services from August
1995 to June 1999.
Doyle R. Simons became Vice President -- Administration in November 2000.
Mr. Simons has served as the Director of Investor Relations for the Company
since 1994.
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.
ITEM 2. PROPERTIES
The Company owns and operates manufacturing facilities throughout the
United States, three box plants and a sheet plant 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 2000
LOCATION PRODUCT MACHINES CAPACITY PRODUCTION
- -------- ------- -------- -------- ----------
(IN TONS)
<S> <C> <C> <C> <C>
Ontario, California........................ Linerboard 1 330,000 278,000
Rome, Georgia.............................. Linerboard 2 810,000 730,000
Orange, Texas.............................. Linerboard 2 580,000 530,000
Maysville, Kentucky........................ Linerboard 1 405,000 390,000
New Johnsonville, Tennessee................ Medium 1 265,000 249,000
</TABLE>
During 2000, the Company transferred its Newport, Indiana, mill to a joint
venture in which Inland owns a 50 percent interest. The joint venture completed
converting this mill to produce gypsum wallboard facing paper in the third
quarter. Prior to the transfer, the mill produced 120,000 tons of corrugating
medium. The mill now has a rated annual capacity to produce 264,000 tons of
gypsum facing paper per year, production of
17
<PAGE> 19
which will begin during 2001. For a period of twelve months following the
conversion, the Paper Group is obligated to purchase, at market rates, all of
the medium produced by the venture that meets the Paper Group's specifications.
During 2000, the Company purchased 72,000 tons of medium from this venture.
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......................................... 96inches 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
Milltown, 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
Ashland City, Tennessee(1)***............................... None 1998
Dallas, Texas............................................... 98inches 1962
Edinburg, Texas............................................. 87inches 1988
Petersburg, Virginia........................................ 87inches 1991
Petersburg, Virginia(1)***.................................. None 1998
San Jose Iturbide, Guanajuato, Mexico....................... 87inches 1994
Monterrey, Leon, Mexico..................................... 87inches 1994
Los Mochis, Sinaloa, Mexico................................. 80inches 1997
Guadalajara, Jalisco, Mexico(1)***.......................... None 2000
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.
18
<PAGE> 20
Additionally, Inland owns a fulfillment center in Gettysburg, Pennsylvania,
a graphics resource center in Indianapolis, Indiana, that has a 100inches
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; Leominster,
Massachusetts; and Linden, New Jersey, 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
</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.
19
<PAGE> 21
TIMBER AND TIMBERLANDS*
(IN ACRES)
<TABLE>
<S> <C> <C> <C> <C>
Pine Plantations............................ 1,403,338
Natural Pine................................ 125,394
Hardwood.................................... 124,588
Special Use/Non-Forested.................... 495,011
----------
Total............................. 2,148,331
==========
</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 approximately 445,000 square
feet of office space in Austin, Texas.
The Company also owns approximately 381,000 mineral acres in Texas and
Louisiana. Revenue from lease and production activities on these acres totaled
$8.3 million in 2000. Additionally, the Company owns approximately 395,830
mineral acres in Alabama and Georgia, which produced no lease or production
revenue in 2000.
At year end 2000, property and equipment having a net book value of
approximately $58.4 million were subject to liens in connection with $86.2
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 may 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. No assurance can be given, therefore, that any fines levied against
the Company in the future for any such violations will not be material.
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 nine proceedings relating to the cleanup of hazardous
waste sites under CERCLA and similar state laws, excluding sites to which the
Company's records disclose no involvement or as to which the Company's potential
liability has finally been determined. The subsidiaries have conducted
investigations of the sites and in certain instances believe that there is no
basis for liability and have so informed the governmental entities. The internal
investigations of the remaining sites reveal that the portion of the remediation
costs for these sites to be allocated to the Company is approximately $2 million
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
20
<PAGE> 22
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 Common Stock of the Company is traded on the New York Stock Exchange
and The Pacific Exchange. The table below sets forth the high and low sales
price for the Common Stock during each fiscal quarter in the two most recent
fiscal years.
<TABLE>
<CAPTION>
2000 1999
------------------------- ------------------------
PRICE RANGE PRICE RANGE
------------------------- ------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
----- ----- --------- ----- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter...................... 67 11/16 43 3/4 $0.32 $67 3/ 56 7/16 $0.32
Second Quarter..................... 57 1/2 40 15/16 $0.32 77 1/ 61 3/8 $0.32
Third Quarter...................... 47 5/8 37 1/16 $0.32 73 7/1 58 $0.32
Fourth Quarter..................... 55 1/2 34 5/8 $0.32 66 1/1 53 5/8 $0.32
----- -----
For the Year....................... 67 11/16 34 5/8 $1.28 77 1/ 53 5/8 $1.28
</TABLE>
SHAREHOLDERS
The Company's stock transfer records indicated that as of February 28,
2001, there were approximately 5,900 holders of record of the Common Stock.
DIVIDEND POLICY
As indicated above, the Company paid quarterly dividends during each of the
two most recent fiscal years in the amounts shown. On February 2, 2001, the
Board of Directors declared a quarterly dividend on the Common Stock of $0.32
per share payable on March 15, 2001, to shareholders of record on March 1, 2001.
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.
21
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR
---------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues(a)
Paper.......................... $ 2,089 $ 1,869 $ 1,707 $ 1,768 $ 1,830
Building Products.............. 828 823 660 662 604
Financial Services............. 1,369 1,116 1,036 923 800
------- ------- ------- ------- -------
Total revenues......... $ 4,286 $ 3,808 $ 3,403 $ 3,353 $ 3,234
======= ======= ======= ======= =======
Segment Operating Income
Paper.......................... $ 205 $ 103 $ 39 $ (54) $ 120
Building Products.............. 68 174 112 131 102
Financial Services............. 189 138 154 132 63(b)
------- ------- ------- ------- -------
Segment operating
income............... $ 462 $ 415 $ 305 $ 209 $ 285
======= ======= ======= ======= =======
Income from continuing
operations..................... $ 195(c) $ 191 $ 88(d) $ 59 $ 155
Discontinued operations.......... -- (92) (21) (8) (22)
Cumulative effect of accounting
change......................... -- -- (3) -- --
------- ------- ------- ------- -------
Net income............. $ 195 $ 99 $ 64 $ 51 $ 133
======= ======= ======= ======= =======
Capital expenditures:
Manufacturing.................. $ 223 $ 178 $ 157 $ 213 $ 250
Financial Services............. 34 26 39 18 15
Depreciation and depletion:
Manufacturing.................. 198 200 192 187 178
Financial Services............. 18 17 14 13 12
Earnings per share -- continuing
operations:
Basic.......................... 3.83 3.45 1.60 1.05 2.79
Diluted........................ 3.83 3.43 1.59 1.04 2.79
Earnings per share -- net
income(e):
Basic.......................... 3.83 1.79 1.16 0.91 2.39
Diluted........................ 3.83 1.78 1.15 0.90 2.39
Dividends per common share....... 1.28 1.28 1.28 1.28 1.24
Weighted average shares
outstanding:
Basic.......................... 50.9 55.6 55.8 56.0 55.5
Diluted........................ 50.9 55.8 55.9 56.2 55.6
Common shares outstanding at year
end............................ 49.2 54.2 55.6 56.3 55.4
At year end
Total assets..................... $18,142 $16,186 $15,868 $14,257 $12,858
Long-term debt:
Parent company................. 1,381 1,253 1,501 1,356 1,440
Financial Services............. 210 212 210 167 133
Stock issued by subsidiaries..... 306 226 225 150 --
Shareholders' equity............. 1,833 1,927 1,998 2,045 2,015
Ratio of total debt to total
capitalization -- parent
company........................ 43% 39% 43% 40% 42%
</TABLE>
- ---------------
(a) Restated to reflect the reclassification of shipping and handling costs
from revenues to cost of sales.
(b) 1996 includes a one-time assessment of $44 million to recapitalize the
Savings Association Insurance Fund.
(c) 2000 includes a pre-tax special charge of $15 million.
(d) 1998 includes a pre-tax special charge of $47 million.
(e) 1998 includes a $.06 per share charge from cumulative effect of accounting
change. 1999, 1998, 1997, and 1996 include a loss from discontinued
operation of $1.65, $.38, $.14 and $.40 per share, respectively.
22
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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-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.
SUMMARY
Consolidated revenues were $4.3 billion in 2000, $3.8 billion in 1999 and
$3.4 billion in 1998. Segment operating income was $462 million in 2000, $415
million in 1999 and $305 million in 1998. Income from continuing operations was
$195 million in 2000, $191 million in 1999 and $88 million in 1998. Income from
continuing operations per diluted share was $3.83 in 2000, $3.43 in 1999 and
$1.59 in 1998. The year 2000 results include a $15 million special charge
related to the decision to exit the fiber-cement business. The year 1998 results
include a $47 million special charge related to work force reductions and asset
impairment.
BUSINESS SEGMENTS
The Company manages its operations through three business segments: Paper,
Building Products and Financial Services.
A summary of the results of operations by business segment follows.
<TABLE>
<CAPTION>
FOR THE YEAR
------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Paper...................................................... $2,089 $1,869 $1,707
Building Products.......................................... 828 823 660
Financial Services......................................... 1,369 1,116 1,036
------ ------ ------
Total revenues................................... $4,286 $3,808 $3,403
====== ====== ======
INCOME BEFORE TAXES
Paper...................................................... $ 205 $ 103 $ 39
Building Products.......................................... 68 174 112
Financial Services......................................... 189 138 154
------ ------ ------
Segment operating income................................. 462 415 305
Corporate expense.......................................... (33) (30) (28)
Special charge............................................. (15) -- (47)
Parent company interest.................................... (104) (95) (78)
Other...................................................... 10 16 6
------ ------ ------
Income from continuing operations before taxes........... 320 306 158
Income taxes............................................... (125) (115) (70)
------ ------ ------
Income from continuing operations........................ $ 195 $ 191 $ 88
====== ====== ======
</TABLE>
Each of these business segments is affected by the factors of supply and
demand and changes in domestic and global economic conditions. These conditions
include, but are not limited to, changes in interest rates, new housing starts,
home repair and remodeling activities, and the strength of the U.S. dollar, some
or all of which may have varying degrees of impact on the business segments.
23
<PAGE> 25
The Paper Group
The Paper Group manufactures containerboard that it converts into a
complete line of corrugated packaging and point of purchase displays. The Paper
Group operations consist of four linerboard mills, one corrugating medium mill,
41 box plants, eight specialty-converting plants and an interest in a gypsum
facing paper joint venture, which for some time also may continue to produce
corrugating medium. The Paper Group's facilities are located throughout the
United States and in Chile, Mexico and Puerto Rico.
The Paper Group's revenues were $2.1 billion in 2000, $1.9 billion in 1999
and $1.7 billion in 1998. Compared with the preceding year, average domestic box
prices were up 17 percent in 2000, 3 percent in 1999 and 7 percent in 1998.
Domestic box shipments were 2.0 million tons in 2000, 2.1 million tons in 1999
and 2.0 million tons in 1998. The increases in prices in 2000 and 1999 and the
decrease in shipments in 2000 were due in part to an upgrading and realignment
of the customer base as part of the Paper Group's ongoing revenue enhancement
initiatives. A slowing of demand beginning in the second quarter 2000 and
continuing throughout the year also contributed to the decrease in box shipments
in 2000. Compared with the preceding year, average linerboard prices were up 20
percent in 2000, 6 percent in 1999 and 12 percent in 1998.
Compared with the third quarter 2000, fourth quarter 2000 revenues were
down slightly with average box prices and linerboard prices about even and box
and linerboard shipments down slightly. During the first quarter 2001, this
trend of lower box and linerboard shipments continued. This trend, coupled with
a decrease in the published price for linerboard during January 2001, may result
in downward pressure on box prices.
Production, distribution and administrative costs were $1.9 billion in
2000, $1.8 billion in 1999 and $1.7 billion in 1998. Costs for 2000 were up due
to higher energy and old corrugated containers (OCC) costs coupled with
increased outside purchases of corrugating medium. Energy costs, principally
natural gas, began to rise during the second quarter 2000 and continued to rise
throughout the year. During 2000, energy costs were up $10 million compared with
1999. OCC accounted for about 41 percent of the Paper Group's fiber requirements
in 2000 and 46 percent in 1999 and 1998. OCC costs rose dramatically during the
first quarter 2000, but began to decline near the end of the second quarter 2000
and continued to decline throughout the year. OCC costs averaged $107 per ton in
2000, $89 per ton in 1999 and $85 per ton in 1998. OCC costs averaged $139 per
ton in second quarter 2000, $91 per ton in third quarter 2000 and $74 per ton in
fourth quarter 2000. Year-end OCC prices were $67 per ton in 2000, $99 per ton
in 1999 and $85 per ton in 1998. OCC costs remained at these levels early in
2001. However, OCC costs traditionally rise as box demand improves. Outside
purchases of corrugating medium increased in 2000 due to the conversion of the
Newport, Indiana, joint venture corrugating medium mill.
Mill production was 2.3 million tons in 2000, 2.7 million tons in 1999 and
2.5 million tons in 1998. Of the mill production, 20 percent in 2000, 20 percent
in 1999 and 13 percent in 1998 was sold in the domestic and export markets. The
Paper Group's converting operations used the remainder of the mill production.
The decrease in production was due to curtailments throughout the year and the
conversion of the Newport, Indiana, corrugating medium mill during the third
quarter 2000. Production was curtailed by 315,000 tons in 2000 due to market,
maintenance and operational factors. During the fourth quarter 2000, production
was curtailed by 135,000 tons including a shut down of the Ontario, California,
mill for most of December 2000. The Ontario mill was shut down due to higher
energy prices and weaker box demand. The mill resumed production in January
2001. Year-end 2000 inventories were down about 60,000 tons compared with
year-end 1999, as the Paper Group continues to improve the balance between its
supply and the demand of its customers. Production curtailments were minimal
during 1999 and 1998.
The Paper Group's joint venture conversion of its Newport, Indiana, mill to
enable it to produce lightweight gypsum facing paper was completed during the
third quarter 2000 with start-up efforts continuing through fourth quarter 2000.
For both start-up and market reasons, the venture did not produce significant
24
<PAGE> 26
volumes of gypsum facing paper during fourth quarter 2000. This conversion
reduced the Paper Group's annualized productive capacity by 285,000 tons. The
mill remains capable of producing corrugating medium, and for a period of twelve
months after the conversion of the mill, the Paper Group is obligated to
purchase, at market rates, the medium produced by the venture that meets the
Paper Group's specifications. During the third and fourth quarters 2000, the
Paper Group purchased 72,000 tons of medium from the venture.
The Paper Group has undertaken a number of initiatives to enhance return on
investment. An important and ongoing initiative is the design and installation
of new information systems, portions of which were installed during the fourth
quarter 2000. It is anticipated that the remainder will be installed during 2001
and 2002. Other initiatives include the December 1999 sale of the discontinued
bleached paperboard operation, which resulted in a $71 million loss; the 1998
closing and dismantling of the Newark, California, mill and the subsequent sale
of the land, which resulted in a $13 million gain; and the sale of the Argentine
operation and domestic workforce reductions, which resulted in a $37 million
special charge in 1998.
Operating income was $205 million in 2000, $103 million in 1999 and $39
million, excluding the $37 million special charge, in 1998.
The Building Products Group
The Building Products Group produces a variety of building products
including lumber, plywood, particleboard, fiberboard, medium density fiberboard
(MDF) and gypsum wallboard. The Building Products Group operations consist of 19
facilities, including interests in a gypsum joint venture and an MDF joint
venture, and two facilities, a particleboard plant and a medium density
fiberboard plant, operated under long-term lease agreements that began during
December 1999. The Building Products Group operates throughout the United States
and in Canada and manages the company's 2.2 million acres of owned and leased
forestlands located in Texas, Louisiana, Georgia and Alabama.
The Building Products Group's revenues were $828 million in 2000, $823
million in 1999 and $660 million in 1998. Average prices for lumber, plywood,
particleboard and gypsum began to decline during the first quarter 2000 and
continued to fall throughout the year. Average MDF prices rose slightly during
2000 due to improved product mix. Average prices for all products manufactured
by the Building Products Group were higher during 1999 compared with 1998. For
the year 2000, shipments of lumber, particleboard and MDF were up compared with
1999 due to a full year's operation of the Diboll sawmill and the Mt. Jewett
particleboard and MDF facilities. Other revenues were up in 2000 due to
deliveries under the long-term fiber supply agreement entered into in connection
with the sale of the bleached paperboard mill in December 1999. Compared with
the third quarter 2000, fourth quarter 2000 revenues were down 20 percent with
average prices and shipments down for all products. During the first quarter
2001, these trends of lower prices and shipments continued.
Production, distribution and administrative costs were $760 million in
2000, $649 million in 1999 and $548 million in 1998. Cost of sales for 2000 were
up due to additional manufacturing facilities, higher energy costs, and $13
million of operating losses from the fiber-cement joint venture, which the group
exited in the third quarter 2000. Energy costs, principally natural gas, began
to rise during the second quarter 2000 and continued to rise throughout the
year. During 2000, energy costs were up approximately $7 million compared with
1999. During the third quarter 2000, the Building Products Group completed the
assessment of its fiber-cement joint venture and decided to exit this business
by assuming control of the joint venture and leasing most of its production
assets to a third party. As a result, a $15 million special charge was
recognized that included $11 million for assets excluded from the lease
agreement that will be disposed of and $4 million for other costs. Following a
six-month rental ramp-up period, the lease agreement provides for payments of
$3.4 million per year over the balance of the 19 1/2-year lease term.
Beginning in the third quarter 2000 and continuing through the balance of
the year, production was curtailed in all product lines due to market
conditions. For the fourth quarter 2000, production averaged from a low of 54
percent to a high of 76 percent of capacity in the various product lines. In
early 2001, further production curtailments were announced including a temporary
shut down of the MDF joint venture plant in El Dorado, Arkansas, due to market
conditions, higher energy prices and reconstruction of the plant's heat
25
<PAGE> 27
energy system. The plant is anticipated to resume production in June 2001
following completion of the reconstruction project. Production levels in 2001
will depend on demand levels for the various products. Production curtailments
were minimal during 1999 and 1998.
Operating income was $68 million, excluding the $15 million special charge,
in 2000, $174 million in 1999 and $112 million, excluding a $10 million special
charge for asset impairment, in 1998.
The Financial Services Group
The Financial Services Group operates a savings bank and engages in
mortgage banking, insurance brokerage and real estate activities.
The savings bank, Guaranty Bank (Guaranty), conducts business through
banking centers in Texas and California. The primary business of Guaranty
includes providing deposit products to the general public, investing in
single-family adjustable-rate mortgages, lending for the construction of real
estate projects and the financing of business operations, and providing a
variety of other financial products to consumers and businesses. During 2000,
Guaranty acquired American Finance Group, Inc. (AFG), a commercial finance
company engaged in leasing and secured financing of a variety of types of
equipment. During 1999, Guaranty acquired Hemet Federal Savings and Loan
Association (Hemet) and also acquired the assets of Fidelity Funding Inc.
(Fidelity), an asset based lending company. Hemet operated 18 branches in the
Southern California markets of Riverside County, Palm Springs and northern San
Diego County. During February 2001, Guaranty acquired an asset based loan
portfolio and two production offices for approximately $300 million in cash.
The mortgage banking operation arranges mortgage financing of single-family
homes, securitizes the mortgage loans, sells the resulting securities in the
secondary market and services mortgage loans for Guaranty and unrelated third
parties. The insurance brokerage operation sells a full range of insurance
products. The real estate operations include the development of residential
subdivisions and multi-family housing and the management and sale of income
producing properties. The real estate operations are principally located in
Texas, Colorado, Florida, Tennessee and California.
The Financial Services Group revenues, consisting of interest and
noninterest income, were $1.4 billion in 2000, $1.1 billion in 1999 and $1.0
billion in 1998. Selected financial information for the Financial Services Group
follows:
<TABLE>
<CAPTION>
FOR THE YEAR
---------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
OPERATING INCOME
Net interest income......................................... $ 389 $ 299 $ 244
Provision for loan losses................................... (39) (38) (1)
Noninterest income.......................................... 280 280 298
Noninterest expense......................................... (423) (388) (373)
Minority interest........................................... (18) (15) (14)
----- ----- -----
Total............................................. $ 189 $ 138 $ 154
===== ===== =====
BY ACTIVITY
Savings Bank................................................ $ 168 $ 109 $ 113
Mortgage Banking............................................ 11 19 22
Real Estate................................................. 3 4 13
Insurance Brokerage......................................... 7 6 6
----- ----- -----
Total............................................. $ 189 $ 138 $ 154
===== ===== =====
</TABLE>
OPERATIONS
Net interest income was $389 million in 2000, $299 million in 1999 and $244
million in 1998. The increases in net interest income in each successive year
were primarily the result of growth in average earning
26
<PAGE> 28
assets and a change in the mix of earning assets. Average earning assets were
$13.5 billion in 2000, compared with $11.9 billion in 1999 and $10.4 billion in
1998.
The provision for loan losses was $39 million in 2000, $38 million in 1999
and $1 million in 1998. The increase in the provision in 1999 compared with 1998
was the result of growth, a change in the mix of the loan portfolio and a
decline in asset quality related to several mortgage warehouse loans.
Noninterest income, which consists primarily of income from real estate and
insurance activities, loan related fees and service charges on deposits, was
$280 million in 2000, unchanged from 1999, and was $298 million in 1998. The
2000 noninterest income was affected by increases in real estate and insurance
activities and the savings bank's focus on fee-based products such as operating
leases through the AFG acquisition, alternative investments and cash management
services. However, these increases were offset by a decline in noninterest
income from mortgage banking activities due to the impact of the higher interest
rate environment on mortgage financing and refinancing activities. The decrease
in noninterest income in 1999 compared with 1998 was primarily the result of the
sale of a large commercial property in 1998.
Noninterest expense, which consists primarily of compensation and benefits,
occupancy and data processing was $423 million in 2000, $388 million in 1999 and
$373 million in 1998. Approximately $25 million of the increase in noninterest
expense in 2000 compared with 1999 was the result of the Hemet, Fidelity and AFG
acquisitions. After adjusting for the impact of these acquisitions, noninterest
expense increased $10 million, or 3 percent, in 2000 compared with 1999.
Approximately $9 million of the increase in noninterest expense in 1999 compared
with 1998 was the result of the Hemet and Fidelity acquisitions.
EARNING ASSETS
Interest income from earning assets is the main source of income for the
Financial Services Group. Average earning assets totaled $13.5 billion in 2000,
$11.9 billion in 1999 and $10.4 billion in 1998. A portion of the increase in
average earning assets was the result of the Hemet and Fidelity acquisitions,
which occurred in mid-1999. In addition, the AFG acquisition in 2000 increased
average earning assets. The remainder of the increases in earning assets was due
to internally generated growth, primarily in construction and development loans
and in commercial and business loans, resulting in a change in the mix of
average loans and improved spreads.
Loan demand remained strong throughout 2000. Average loans receivable and
mortgage loans held for sale totaled $10.4 billion in 2000, $9.5 billion in 1999
and $7.7 billion in 1998. Average loans receivable and mortgage loans held for
sale as a percentage of average earning assets were 77 percent in 2000, compared
with 79 percent in 1999 and 74 percent in 1998.
During 2000, the Financial Services Group continued to securitize portions
of the mortgage loans held in its portfolio, ending the year with $689 million
in securitized mortgage loans. Average loans receivable, mortgage loans held for
sale and securitized mortgage loans as a percentage of average earning assets
were 82 percent in 2000, 85 percent in 1999 and 81 percent in 1998.
The Financial Services Group's lending activities are subject to
underwriting standards and liquidity considerations. The Financial Services
Group continued to increase the size and alter the mix of the loan portfolio
through increased construction and development lending, and commercial and
business loans and the introduction of new products. These changes to the loan
portfolio provide further product and geographic diversification.
Specific underwriting criteria for each type of loan are outlined in a
credit policy approved by the Board of Directors of Guaranty. In general,
commercial loans are evaluated based on cash flow, collateral, market
conditions, prevailing economic trends, leverage capacity of the borrower and
capital and investment in a particular property, if applicable. Most small
business and consumer loans are underwritten using credit-scoring models that
consider factors including payment capacity, credit history and collateral. In
addition, market conditions and economic trends are considered. The credit
policy, including the underwriting criteria for loan categories, is reviewed on
a regular basis and adjusted when warranted.
27
<PAGE> 29
Average mortgage-backed and other securities totaled $3.0 billion in 2000,
$2.3 billion in 1999 and $2.6 billion in 1998. The increase in average
mortgage-backed and other securities in 2000 was the result of purchases of $1.0
billion offset by maturities and prepayments. The decrease in average
mortgage-backed and other securities in 1999 was primarily the result of
maturities and prepayments on mortgage-backed securities.
ASSET QUALITY
Several key measures are used to evaluate and monitor the asset quality of
the Financial Services Group. These measures include the level of loan
delinquencies, nonperforming loans, nonperforming assets and net loan
charge-offs compared to average loans and are summarized in the following table.
<TABLE>
<CAPTION>
AT YEAR END
---------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Accruing loans past due 30-89 days..................... $ 170 $ 95 $ 131
Accruing loans past due 90 days or more................ 6 6 9
------- ------- -------
Accruing loans past due 30 days or more.............. $ 176 $ 101 $ 140
======= ======= =======
Nonaccrual loans....................................... $ 65 $ 85 $ 48
Restructured loans..................................... -- -- --
------- ------- -------
Nonperforming loans.................................. 65 85 48
Foreclosed property.................................... 3 8 15
------- ------- -------
Nonperforming assets................................. $ 68 $ 93 $ 63
======= ======= =======
Allowance for loan losses.............................. $ 118 $ 113 $ 87
Net charge-offs........................................ $ 36 $ 24 $ 5
Nonperforming loan ratio............................... 0.62% 0.90% 0.58%
Nonperforming asset ratio.............................. 0.65% 0.99% 0.77%
Allowance for loan losses/total loans.................. 1.12% 1.20% 1.06%
Allowance for loan losses/nonperforming loans.......... 179.73% 133.52% 180.79%
Net loans charged off/average loans.................... 0.35% 0.26% 0.07%
</TABLE>
Accruing delinquent loans past due 30 days or more were 1.67 percent of
total loans at year-end 2000, 1.07 percent at year-end 1999 and 1.71 percent at
year-end 1998. Accruing delinquent loans past due 90 days or more were 0.06
percent of total loans at year-end 2000, 0.07 percent at year-end 1999 and 0.10
percent at year-end 1998.
Nonperforming loans consist of nonaccrual loans (loans on which interest
income is not currently recognized) and restructured loans (loans with below
market interest rates or other concessions due to deteriorated financial
condition of the borrower). Interest payments received on nonperforming loans
are applied to reduce principal if there is doubt as to the collectibility of
contractually due principal and interest. The level of nonperforming loans
declined in both dollars and as a percent of total loans in 2000 compared with
1999, while the allowance for loan losses as a percent of nonperforming loans
increased.
ALLOWANCE FOR LOAN LOSSES
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 is increased by charges to income and by the portion of
the purchase price related to credit risk on bulk purchases of loans and by
acquisitions, 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
28
<PAGE> 30
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 and lease 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. These factors include inherent delays in obtaining
information and the volatility of economic conditions.
The allowance for loan losses by loan type and related loan balance
follows:
<TABLE>
<CAPTION>
AT YEAR END
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
ALLOWANCE ALLOWANCE ALLOWANCE
LOAN FOR LOAN LOAN FOR LOAN LOAN FOR LOAN
BALANCE LOSSES BALANCE LOSSES BALANCE LOSSES
------- --------- ------- --------- ------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage................ $ 3,618 $ 26 $3,763 $ 60 $4,105 $36
Construction and development
(including residential)........... 4,007 30 3,253 24 2,210 17
Commercial and business............. 1,681 31 1,265 12 1,031 14
Consumer and other.................. 1,215 5 1,121 5 827 3
Premiums, discounts and deferred
fees, net......................... 8 -- 7 -- 15 --
Unallocated......................... -- 26 -- 12 -- 17
------- ---- ------ ---- ------ ---
Total............................... $10,529 $118 $9,409 $113 $8,188 $87
======= ==== ====== ==== ====== ===
</TABLE>
The decrease in allowance for loan losses during 2000 was primarily the
result of net charge-offs. The increase during 1999 was the result of the change
in the mix of the loan portfolio, the Hemet acquisition and a decline in asset
quality.
The allowance allocated to the real estate mortgage portfolio decreased $34
million in 2000, primarily due to the charge-off of mortgage warehouse loans for
which provision had previously been made. The allowance allocated to the
commercial and business portfolio increased $19 million in 2000 due to
provisions recorded relating to several large syndicated commercial loans. The
increase in the unallocated allowance in 2000 is reflective of the slowing
economic activity and an increase in the size of the loan portfolio.
While the Financial Services Group considers the allowance for loan losses
to be adequate based on information currently available, adjustments to the
allowance may be necessary due to changes in economic conditions, assumptions as
to future delinquencies or loss rates and intent with regard to asset
disposition options. In addition, regulatory authorities periodically review the
allowance for loan losses as a part of their examination process. Based on their
review, the regulatory authorities may require adjustments to the allowance for
loan losses based on their judgment about the information available to them at
the time of their review.
FUNDING SOURCES
Deposits are the Financial Services Group's primary funding source.
Guaranty offers a variety of deposit products designed to attract and retain
customers. Average deposits totaled $9.6 billion in 2000, $8.2 billion in 1999
and $7.3 billion in 1998. Growth in average deposits totaled $1.4 billion or 17
percent in 2000 and $908 million or 12 percent in 1999. A portion of the
increase in both 2000 and 1999 was the result of the Hemet acquisition, which
occurred in mid-1999. The remainder of the increase was the result of internally
generated growth through new products and marketing campaigns.
Borrowings are another source of funding. The Financial Services Group's
borrowings consist primarily of advances from the Federal Home Loan Bank and
securities sold under repurchase agreements. Average borrowings were $3.2
billion in 2000, $3.0 billion in 1999 and $2.4 billion in 1998. The increase in
average borrowings in both 2000 and 1999 resulted from funding needs as average
earning asset growth outpaced average deposit growth.
29
<PAGE> 31
MORTGAGE BANK ACTIVITIES
Higher interest rates during 2000 resulted in a significant industry wide
reduction in mortgage refinancing activity, contributing to a reduction in both
mortgage loan origination volume and prepayments. Mortgage origination volume
was $2.1 billion in 2000, $3.7 billion in 1999 and $6.1 billion in 1998.
Mortgage servicing portfolio runoff was 13.9 percent in 2000, 21.0 percent in
1999 and 28.9 percent in 1998. The mortgage servicing portfolio was $19.5
billion at year-end 2000 and $22.2 billion at year-end 1999. The decline in
mortgage origination volume and servicing has necessitated staff reductions,
branch closures and consolidations. The workforce engaged in mortgage bank
activities was reduced by about 200 during 2000.
Corporate, Interest and Other
Parent company interest expense was $104 million in 2000, $95 million in
1999 and $78 million in 1998. Parent company interest expense for 1999 and 1998
was reduced by $28 million each year to reflect an allocation of parent company
debt to the bleached paperboard operation, which was sold at year-end 1999. The
changes in parent company interest expense were due to fluctuating debt levels
and interest rates.
Pension Credits
Non-cash pension credits were $9 million in 2000, $1 million in 1999 and $9
million in 1998. The increase in 2000 reflects cumulative performance of the
pension plan assets in 1999 that resulted in an excess of plan assets over
liabilities at year-end 1999. Based upon the actuarial valuation as of year-end
2000, the pension credit for 2001 will approximate $19 million, due mainly to
continued better than expected performance of the pension plan assets in 2000.
Income Taxes
The effective tax rate was 39 percent in 2000, 38 percent in 1999 and 44
percent in 1998. The difference between the effective tax rate and the statutory
rate is due to state income taxes, nondeductible goodwill amortization and
losses in certain foreign operations for which no financial benefit was
recognized. The 1999 effective tax rate reflects a one time, two percent
financial benefit realized as the result of the sale of the Argentine operation.
The 1998 effective tax rate reflects the effects of lower overall earnings and
larger losses in foreign operations for which no financial benefit was
recognized.
Average Shares Outstanding
Average diluted shares outstanding were 50.9 million in 2000, down nine
percent due mainly to the effects of share repurchases under the stock
repurchase programs authorized during the fourth quarter 1999 and the third
quarter 2000. Average diluted shares outstanding were 55.8 million in 1999 and
55.9 million in 1998.
CAPITAL RESOURCES AND LIQUIDITY FOR THE YEAR 2000
The consolidated net assets invested in the Financial Services Group are
subject, in varying degrees, to regulatory rules and regulations. Accordingly,
parent company and the Financial Services Group capital resources and liquidity
are discussed separately.
Parent Company
OPERATING ACTIVITIES
Cash from operations was $372 million, up 17 percent. The increase was due
to more efficient use of working capital and an increase in the dividends
received from the Financial Services Group.
Depreciation and amortization was $201 million, about equal to last year.
30
<PAGE> 32
INVESTING ACTIVITIES
Capital expenditures were $223 million, up 25 percent. About half of this
increase was due to a $20 million increase in expenditures for information
technology and systems. Capital expenditures are expected to approximate $200
million for 2001.
Capital contributions to the Financial Services Group were $10 million.
Dividends received from the Financial Services Group were $110 million.
FINANCING ACTIVITIES
In the fourth quarter 1999, the Board of Directors authorized the
repurchase of up to 6.0 million shares of the company's common stock. This
repurchase was completed during the third quarter 2000. In August 2000, the
Board of Directors authorized the repurchase of an additional 2.5 million
shares. During the year, 5.1 million shares were repurchased at a cost of $250
million. At year-end 2000, an aggregate of 6.75 million shares had been
repurchased since the inception of these programs at a cost of $350 million.
In the third quarter 2000, new bank credit facilities were arranged
including a three year revolving credit agreement and a five year term loan.
These facilities may be used to refund the $202 million of long-term debt
scheduled to mature in 2001 or to fund other needs. Dividends paid were $65
million or $1.28 per share.
As required by its joint venture agreement, the company contributed its
Newport, Indiana, medium mill and associated debt of $50 million to the venture
to maintain its 50 percent ownership interest. In connection with assuming
control of the fiber-cement joint venture, the company obtained control over $53
million of assets that were subject to $53 million of debt. A majority of these
assets were subsequently leased to a third party.
CASH EQUIVALENTS
At year-end 1999, $50 million of the proceeds from the sale of the bleached
paperboard operation was temporarily invested in cash equivalents. These were
used during the year in investing and financing activities.
OTHER
The parent company has sufficient liquidity and capital resources to meet
its anticipated needs.
The Financial Services Group
The principal sources of cash for the Financial Services Group are
operating cash flows, deposits and borrowings. The Financial Services Group uses
these funds to invest in earning assets, generally loans and securities.
OPERATING ACTIVITIES
Cash provided by operations was $217 million, down 43 percent. The decrease
in the change in mortgage loans held for sale was partially offset by an
increase in earnings and a decrease in the change in cash for mortgage loans
serviced for others.
INVESTING ACTIVITIES
Loans and securities increased $1.8 billion. The increase in loans and
securities was primarily attributable to increased construction and development
and commercial and business lending activities and purchases of securities.
Capital expenditures were $34 million, and cash paid for acquisitions was
$20 million.
31
<PAGE> 33
FINANCING ACTIVITIES
Deposits increased $857 million, and borrowings increased $1.1 billion.
Borrowings consist primarily of advances from the Federal Home Loan Bank and
securities sold under repurchase agreements and resulted from funding needs as
the growth in earning assets outpaced the growth in deposits.
A subsidiary of the savings bank that qualifies as a real estate investment
trust (REIT) sold $80 million of preferred stock during December 2000 in a
private placement. At year-end 2000, an aggregate of $305 million of subsidiary
preferred stock was outstanding.
Dividends, net of capital contributions, paid to the parent company totaled
$100 million.
CASH EQUIVALENTS
Cash equivalents increased $87 million to $320 million.
OTHER
The Financial Services Group has sufficient liquidity and capital resources
to meet its anticipated needs. At year end, the savings bank exceeded all
applicable regulatory capital requirements. The parent company expects to
maintain the savings bank's capital at a level that exceeds the minimum required
for designation as "well capitalized" under the capital adequacy regulations of
the Office of Thrift Supervision. From time to time, the parent company may make
capital contributions to the savings bank or receive dividends from the savings
bank. During the year, the parent company contributed $10 million to the savings
bank and received $110 million in dividends from the savings bank.
Selected financial and regulatory capital data for the savings bank
follows:
<TABLE>
<CAPTION>
AT YEAR END
-------------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
Balance sheet data
Total assets.............................................. $14,885 $12,892
Total deposits............................................ 10,088 9,329
Shareholder's equity...................................... 931 857
</TABLE>
<TABLE>
<CAPTION>
SAVINGS REGULATORY
BANK ACTUAL MINIMUM
----------- ----------
<S> <C> <C>
Regulatory capital ratios
Tangible capital.......................................... 7.8% 2.0%
Leverage capital.......................................... 7.8% 4.0%
Risk-based capital........................................ 10.3% 8.0%
</TABLE>
Of the $305 million in subsidiary preferred stock outstanding at year-end
2000, $288 million qualifies as regulatory capital. The remaining $17 million is
available for inclusion in regulatory capital as the savings bank increases its
total non-preferred core capital.
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.
The company has been designated as a potentially responsible party at nine
Superfund sites, excluding sites as to which the company's records disclose no
involvement or as to which the company's potential
32
<PAGE> 34
liability has been finally determined. In addition, other claims and proceedings
have been asserted against the company seeking remediation of alleged
environmental impairments at four facilities. At year end 2000, the company
estimated that the undiscounted total costs it could probably incur for the
remediation and toxic tort actions at Superfund sites and other sites to be
about $4 million, which has been accrued.
The company utilized landfill operations to dispose of non-hazardous waste
at three paperboard and two building product mill operations. At year-end 2000,
the company estimated that the undiscounted total costs it could probably incur
to ensure proper closure of these landfills over the next twenty-five years to
be about $15 million, which is being accrued over the estimated lives of the
landfills.
On April 15, 1998, the U.S. Environmental Protection Agency (EPA) issued
the Cluster Rule regulations governing air and water emissions from the pulp and
paper industry. The company has spent approximately $11 million toward Cluster
Rule compliance through 2000, and will expend an additional $2 million to
satisfy requirements relating to the initial compliance deadline of April 15,
2001. Future expenditures for environmental control facilities will depend on
additional Maximum Available Control Technology (MACT) II regulations for
hazardous air pollutants relating to pulp mill combustion sources and the
upcoming plywood and composite wood products MACT proposal, as well as changing
laws and regulations and technological advances. Given these uncertainties, the
company estimates that capital expenditures for environmental purposes during
the period 2001 through 2003 will average approximately $9 million each year.
EFFECTS OF INFLATION
Inflation has had minimal effects on operating results the last three
years, except for the increase in energy costs during 2000. During 2000, energy
costs were up approximately $17 million compared with 1999. Energy costs began
rising during the second quarter 2000 and have continued to rise throughout the
year. In some instances, the company elected to curtail production at certain of
its manufacturing facilities rather than pay significantly higher energy prices.
The company expects this trend of higher energy costs to continue. The company
is exploring alternative arrangements and fuel sources in an effort to contain
energy costs.
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.
NEW ACCOUNTING PRONOUNCEMENTS AND PROSPECTIVE CHANGES IN ESTIMATES
During 2000, the company adopted the consensus of the Emerging Issues Task
Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs. This
consensus stated that shipping and handling costs could not be offset against
related revenues. Shipping and handling costs have been reclassified and are now
included as a component of cost of sales instead of as a reduction of revenue.
This reclassification had no effect on net income.
Beginning January 2001, the company adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement requires that derivative instruments be recognized on
the balance sheet at fair value with the changes in their fair value reflected
in net income or other comprehensive income, depending upon the classification
of the derivative instrument. The company uses derivative instruments to hedge
risks, including those associated with changes in product pricing, manufacturing
cost and interest rates. The company does not use derivatives for trading
purposes. The cumulative effect of adoption will be to reduce first quarter 2001
net income by $2 million. Additionally, as permitted by this Statement, the
Financial Services Group changed the designation of its portfolio of held-to-
maturity securities, which are carried at unamortized cost, to
available-for-sale, which are carried at fair value. As a result, the carrying
value of these securities was adjusted to their fair value with a corresponding
after tax reduction of $16 million in other comprehensive income, a component of
shareholders' equity.
Beginning January 2001, the company began computing depreciation of certain
production equipment using revised useful lives. These revisions ranged from a
reduction of several years to a lengthening of up to
33
<PAGE> 35
five years and were based on an assessment performed by the manufacturing
groups, which indicated that revisions of the estimated useful lives of certain
production equipment were warranted. The maximum estimated useful lives for
production equipment is 25 years. As a result of this change in the estimated
useful lives, the company expects to reduce its annual depreciation expense
between $25 million to $30 million per year beginning in 2001 and continuing for
several years thereafter.
STATISTICAL AND OTHER DATA(A)
<TABLE>
<CAPTION>
FOR THE YEAR
---------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES
Paper Group............................................ $ 2,089 $ 1,869 $ 1,707
------- ------- -------
Building Products Group
Pine lumber.......................................... $ 218 $ 239 $ 219
Plywood.............................................. 52 70 63
Particleboard........................................ 230 189 158
Medium density fiberboard............................ 90 66 10
Gypsum wallboard..................................... 98 162 130
Fiberboard........................................... 67 75 69
Other................................................ 73 22 11
------- ------- -------
Total Building Products...................... $ 828 $ 823 $ 660
======= ======= =======
Financial Services Group
Savings bank......................................... $ 1,121 $ 841 $ 743
Mortgage banking..................................... 92 131 153
Real estate.......................................... 117 111 107
Insurance brokerage.................................. 39 33 33
------- ------- -------
Total Financial Services..................... $ 1,369 $ 1,116 $ 1,036
======= ======= =======
UNIT SALES
Paper Group
Corrugated packaging, thousands of tons(b)........... 2,685 2,802 2,519
Building Products Group
Pine lumber, mbf..................................... 666 618 603
Plywood, msf......................................... 258 296 289
Particleboard, msf................................... 676 574 518
Medium density fiberboard, msf....................... 244 187 35
Gypsum wallboard, msf................................ 678 890 858
Fiberboard, msf...................................... 368 439 423
Financial Services Group
Assets at year end
Savings bank......................................... $14,885 $12,892 $11,947
Mortgage banking..................................... 319 363 442
Real estate.......................................... 321 313 295
Insurance brokerage.................................. 42 33 32
Eliminations......................................... (243) (280) (340)
------- ------- -------
Total Financial Services assets.............. $15,324 $13,321 $12,376
======= ======= =======
Equity at year end
Savings bank......................................... $ 931 $ 857 $ 559
Mortgage banking..................................... 78 90 84
Real estate.......................................... 56 54 48
Insurance brokerage.................................. 28 22 17
------- ------- -------
Total Financial Services equity.............. $ 1,093 $ 1,023 $ 708
======= ======= =======
</TABLE>
- ---------------
(a) Revenues and unit sales do not include joint venture operations.
(b) Includes boxes sold and open market sales of linerboard.
34
<PAGE> 36
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 effect on pre-tax income of
immediate, parallel and sustained shifts in interest rates for the subsequent
12-month period at year-end 2000, with comparative information at year-end 1999:
<TABLE>
<CAPTION>
INCREASE/(DECREASE)
IN INCOME BEFORE
TAXES
CHANGE IN -------------------
INTEREST RATES 2000 1999
- -------------- ------ ------
(IN MILLIONS)
<S> <C> <C>
+2%......................................................... $ (7) $ (1)
+1%......................................................... $ (1) $ --
0.......................................................... $ -- $ --
- -1%......................................................... $ (1) $ (1)
- -2%......................................................... $(13) $(16)
</TABLE>
The change in exposure to interest rate risk from year-end 1999 is
primarily due to increases in the Company's adjustable-rate debt obligations and
growth in the Financial Services Group loan and mortgage-backed securities
portfolios, funded by short-term borrowings and growth in deposits.
The operations of the Financial Services Group's savings bank are subject
to interest rate risk to the extent that interest-earning assets and
interest-bearing liabilities mature or reprice at different times or in
differing amounts. Because approximately 89 percent of the savings bank's assets
at year-end 2000 have adjustable rates, this risk is significantly mitigated.
However, the savings bank is also subject to prepayment risk inherent in a
portion of its single-family adjustable-rate mortgage-backed assets. A
substantial portion of the savings bank's investment in adjustable-rate
mortgage-backed assets have annual and lifetime caps that subject the savings
bank to interest rate risk should rates rise above certain levels. From time to
time, to optimize net interest income while maintaining acceptable levels of
interest rate and liquidity risk, the savings bank may enter into various
interest rate contracts to better match assets and liabilities.
Additionally, the fair value of the Financial Services Group's mortgage
servicing rights (estimated at $305 million at year-end 2000) is also affected
by changes in interest rates. The Company estimates that a 1 percent decline in
interest rates from current levels would decrease the fair value of the mortgage
servicing rights by approximately $48 million.
35
<PAGE> 37
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
From time to time, the Company uses commodity derivative instruments to
mitigate its exposure to changes in product pricing and manufacturing costs.
These instruments cover a small portion of the Company's volume and range in
duration from three months to three years. Based on the fair value of these
instruments at year-end 2000, the potential loss in fair value resulting from a
hypothetical 10 percent change in the underlying commodity prices would not be
significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Parent Company (Temple-Inland Inc.)
Summarized Statements of Income -- for the years 2000, 37
1999, and 1998.........................................
Summarized Balance Sheets at year end 2000 and 1999....... 38
Summarized Statements of Cash Flows -- for the years 2000, 39
1999, and 1998.........................................
Notes to the Parent Company (Temple-Inland Inc.) 40
Summarized Financial Statements........................
Financial Services Group
Summarized Statements of Income -- for the years 2000, 45
1999, and 1998.........................................
Summarized Balance Sheets at year end 2000 and 1999....... 46
Summarized Statements of Cash Flows -- for the years 2000, 47
1999, and 1998.........................................
Notes to Financial Services Group Summarized Financial 48
Statements.............................................
Temple-Inland Inc. and Subsidiaries
Consolidated Statements of Income -- for the years 2000, 59
1999, and 1998.........................................
Consolidating Balance Sheets at year end 2000 and 1999.... 60
Consolidated Statements of Cash Flows -- for the years 62
2000, 1999, and 1998...................................
Consolidated Statements of Shareholders' Equity -- for the 63
years 2000, 1999, and 1998.............................
Notes to Consolidated Financial Statements................ 64
Management's Report on Financial Statements................. 75
Report of Independent Auditors.............................. 76
</TABLE>
36
<PAGE> 38
PARENT COMPANY (TEMPLE-INLAND INC.)
SUMMARIZED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR
------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
NET REVENUES................................................ $2,917 $2,692 $2,367
COSTS AND EXPENSES
Cost of sales............................................. 2,441 2,180 1,982
Selling and administrative................................ 236 265 262
Special charge............................................ 15 -- 47
------ ------ ------
2,692 2,445 2,291
------ ------ ------
225 247 76
FINANCIAL SERVICES EARNINGS................................. 189 138 154
------ ------ ------
OPERATING INCOME............................................ 414 385 230
Interest -- net........................................... (104) (95) (78)
Other..................................................... 10 16 6
------ ------ ------
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES.............. 320 306 158
Income taxes.............................................. (125) (115) (70)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS........................... 195 191 88
Discontinued operations................................... -- (92) (21)
------ ------ ------
INCOME BEFORE ACCOUNTING CHANGE............................. 195 99 67
Effect of accounting change............................... -- -- (3)
------ ------ ------
NET INCOME.................................................. $ 195 $ 99 $ 64
====== ====== ======
</TABLE>
See the notes to the parent company summarized financial statements.
37
<PAGE> 39
PARENT COMPANY (TEMPLE-INLAND INC.)
SUMMARIZED BALANCE SHEETS
<TABLE>
<CAPTION>
AT YEAR END
-----------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Current Assets
Cash...................................................... $ 2 $ 51
Receivables, less allowances of $10 in 2000 and $9 in
1999................................................... 320 328
Inventories:
Work in process and finished goods..................... 61 71
Raw material........................................... 192 216
------- -------
253 287
Prepaid expenses and other................................ 25 16
------- -------
Total current assets.............................. 600 682
------- -------
Investment in Temple-Inland Financial Services.............. 1,093 1,023
Property and Equipment
Land and buildings........................................ 452 464
Machinery and equipment................................... 2,734 2,743
Construction in progress.................................. 160 102
Less allowances for depreciation.......................... (1,822) (1,759)
------- -------
1,524 1,550
Timber and timberlands -- less depletion.................. 503 502
------- -------
Total property and equipment...................... 2,027 2,052
Other Assets................................................ 227 184
------- -------
Total Assets...................................... $ 3,947 $ 3,941
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.......................................... $ 112 $ 156
Accrued expenses and other................................ 127 186
Employee compensation and benefits........................ 62 38
Current portion of long-term debt......................... 2 1
------- -------
Total current liabilities......................... 303 381
Long-Term Debt.............................................. 1,381 1,253
Deferred Income Taxes....................................... 276 226
Postretirement Benefits..................................... 142 143
Other Liabilities........................................... 12 11
Shareholders' Equity........................................ 1,833 1,927
------- -------
Total Liabilities and Shareholders' Equity........ $ 3,947 $ 3,941
======= =======
</TABLE>
See the notes to the parent company summarized financial statements.
38
<PAGE> 40
PARENT COMPANY (TEMPLE-INLAND INC.)
SUMMARIZED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
---------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income................................................ $ 195 $ 99 $ 64
Adjustments:
Loss on disposal of discontinued operation............. -- 77 --
Cumulative effect of accounting change................. -- -- 3
Special charge......................................... 15 -- 47
Depreciation and depletion............................. 198 200 192
Deferred taxes......................................... 52 10 17
Unremitted earnings from financial services............ (147) (121) (127)
Dividends from financial services...................... 110 70 44
Receivables............................................ 9 (74) (11)
Inventories............................................ 16 (4) 2
Accounts payable and accrued expenses.................. (84) 42 (16)
Change in net assets of discontinued operation......... -- 23 63
Other.................................................. 8 (4) 14
----- ----- -----
372 318 292
----- ----- -----
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures...................................... (223) (178) (157)
Proceeds from sale of discontinued operations............. -- 576 --
Proceeds from sale of property and equipment.............. 17 55 6
Acquisitions, net of cash acquired, and joint ventures.... (18) (49) (123)
Capital contributions to financial services............... (10) (279) (44)
----- ----- -----
(234) 125 (318)
----- ----- -----
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt......................................... 260 312 319
Payments of debt.......................................... (134) (560) (175)
Purchase of stock for treasury............................ (250) (100) (48)
Cash dividends paid to shareholders....................... (65) (71) (71)
Other..................................................... 2 12 3
----- ----- -----
(187) (407) 28
----- ----- -----
Net increase (decrease) in cash and cash equivalents........ (49) 36 2
Cash and cash equivalents at beginning of year.............. 51 15 13
----- ----- -----
Cash and cash equivalents at end of year.................... $ 2 $ 51 $ 15
===== ===== =====
</TABLE>
See the notes to the parent company summarized financial statements.
39
<PAGE> 41
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 Temple-Inland
Inc. and its manufacturing subsidiaries (the parent company). The net assets
invested in Temple-Inland Financial Services are subject, in varying degrees, to
regulatory rules and restrictions. Accordingly, the investment in Temple-Inland
Financial Services is reflected in the summarized financial statements on the
equity basis. Related earnings, however, 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.
Certain amounts have been reclassified to conform to the current year's
classifications.
Inventories
Inventories are stated at the lower of cost or market.
The cost of inventories amounting to $93 million at year-end 2000 and $85
million at year-end 1999 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 determined by the LIFO method, inventories would have been $28 million and
$21 million more than reported at year-end 2000 and 1999, respectively.
Property and Equipment
Property and equipment are stated at cost minus allowances for depreciation
and depletion. Depreciation is generally provided on the straight-line method
based on estimated useful lives as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
CLASSIFICATION LIVES
- -------------- ---------
<S> <C>
Buildings............................................ 15 to 40 years
Machinery and equipment:
Manufacturing and production equipment............. 3 to 25 years
Transportation equipment........................... 3 to 10 years
Office and other equipment......................... 2 to 10 years
</TABLE>
Certain machinery and production equipment is depreciated based on
operating hours or units of production because depreciation occurs primarily
through use rather than through elapsed time.
The parent company has completed an assessment of the estimated useful
lives of certain production equipment and believes that a revision of these
estimated useful lives is warranted. Accordingly, beginning January 2001, the
parent company will begin computing depreciation of certain production equipment
using revised estimated useful lives. These revisions ranged from a reduction of
several years to a lengthening of up to five years. As a result of this change
in estimated useful lives, the parent company expects to reduce its annual
depreciation expense between $25 million to $30 million per year for the next
several years.
Timber and timberlands are stated at cost, minus accumulated cost of timber
harvested. Cost 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.
40
<PAGE> 42
NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)
SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
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 a charge of $3 million, net of
tax benefit of $2 million, and was recognized as of the beginning of the year
1998.
Environmental Liabilities
When environmental assessments or cleanups are probable and the costs can
be reasonably estimated, remediation liabilities are recorded on an undiscounted
basis and are adjusted as further information develops or circumstances change.
The estimated undiscounted cost 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.
New Accounting Pronouncements
During the fourth quarter 2000, the parent company adopted the consensus of
the Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling
Fees and Costs, that shipping and handling costs cannot be netted against
revenues. Accordingly, for all periods presented, shipping and handling costs
have been reclassified and are now included as a component of costs of sales
instead of as a reduction of revenues. This reclassification had no effect on
net income.
41
<PAGE> 43
NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)
SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AT YEAR END
---------------
2000 1999
------ ------
(IN MILLIONS)
<S> <C> <C>
Commercial paper, other short-term borrowings, and borrowing
under bank credit agreements -- average interest rate was
6.55% in 2000 and 5.71% in 1999........................... $ 90 $ --
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................................ 300 300
Private placement debt -- 6.59% to 7.02% notes due 2000
through 2007.............................................. 118 188
Revenue bonds due 2007 through 2028 -- average interest rate
was 4.77% in 2000 and 4.58% in 1999....................... 114 119
Term note due 2005 -- average interest rate was 7.89% in
2000...................................................... 100 --
Other indebtedness due through 2006 -- average interest rate
was 7.11% in 2000 and 5.96% in 1999....................... 111 97
------ ------
1,383 1,254
Less:
Current portion of long-term debt......................... (2) (1)
------ ------
$1,381 $1,253
====== ======
</TABLE>
At year-end 2000, the parent company had credit agreements with banks
totaling $738 million with final maturities at various dates in 2002 and 2003
that support commercial paper and other short-term borrowings. Commercial paper
and other short-term borrowings totaling $90 million and current maturities of
medium-term notes totaling $200 million are classified as long-term debt in
accordance with the parent company's intent and ability to refinance such
obligations on a long-term basis.
Stated maturities of the parent company's long-term debt during the next
five years are as follows (in millions): 2001 -- $202; 2002 -- $68;
2003 -- $159; 2004 -- $101; 2005 -- $139; 2006 and thereafter -- $714.
Capitalized construction period interest in 2000, 1999 and 1998 was $4
million, $2 million and $1 million, respectively, and is deducted from interest
expense. Parent company interest paid during 2000, 1999 and 1998 was $108
million, $117 million and $101 million, respectively.
NOTE C -- JOINT VENTURES
The parent company's significant joint venture investments at year-end 2000
are:
Del-Tin Fiber LLC -- a 50 percent owned venture that produces medium
density fiberboard in El Dorado, Arkansas.
Standard Gypsum LP -- a 50 percent owned venture that produces gypsum
wallboard at facilities in McQueeney, Texas, and Cumberland City,
Tennessee.
Premier Boxboard Ltd. -- a 50 percent owned venture that produces
corrugating medium and gypsum facing paper in Newport, Indiana.
42
<PAGE> 44
NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)
SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
Combined summarized financial information for these joint ventures follows:
<TABLE>
<CAPTION>
AT YEAR END
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Current assets.............................................. $ 35 $ 33
Total assets................................................ 379 213
Current liabilities......................................... 16 20
Long-term debt.............................................. 225 145
Equity...................................................... 138 48
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR
------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net revenues................................................ $152 $86 $46
Operating income............................................ 4 9 1
Net income (loss)........................................... (9) 1 (2)
Parent company's equity in net income (loss)................ (2) (1) 1
</TABLE>
The parent company provides marketing and management services to these
ventures. Fees for such services aggregated $5 million, $3 million, and $2
million during 2000, 1999 and 1998, respectively, and are reported as a
reduction of cost of sales and selling expense. The parent company purchases, at
market rates, finished products from these joint ventures. These purchases
aggregated $29 million during 2000.
In connection with the operations of these joint ventures, the parent
company has guaranteed certain obligations and letters of credit aggregating $94
million at year-end 2000.
Near the end of second quarter 2000, the parent company transferred
ownership of its corrugating medium mill in Newport, Indiana, and associated
debt of $50 million to Premier Boxboard Ltd. This was done as part of its
agreement to maintain a 50 percent interest in the venture. The fair value of
the assets contributed exceeded their carrying value. This difference will be
recognized in earnings over the life of the venture. In the third quarter 2000,
the venture completed its conversion of the mill so that it could produce
lightweight gypsum facing paper as well as corrugating medium. For a period of
twelve months after the transfer, the parent company is obligated to purchase,
at market rates, all of the corrugating medium produced by the venture that
meets the parent company's specifications.
During the third quarter 2000, the Parent Company decided to exit its
fiber-cement joint venture. See Note D for information about this transaction
and a related special charge. Operating losses of this venture were $13 million
for the nine months ended September 2000 and $14 million for the year 1999.
NOTE D -- SPECIAL CHARGES AND DISCONTINUED OPERATIONS
During the third quarter 2000, the parent company decided to exit its
fiber-cement joint venture by assuming control and leasing most of the venture's
assets to a third party. As a result, the parent company obtained control over
$53 million of assets, which were subject to $53 million of liabilities, and
recorded a $15 million special charge that includes $11 million for assets
excluded from the lease agreement that will be disposed of and $4 million of
other costs. Following a six-month ramp-up period, the lease agreement provides
for payments of $3.4 million per year over the balance of the 19 1/2 year lease
term.
During the third quarter of 1999, the parent 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 $576 million in cash and the assumption of $82 million of
debt. The eucalyptus fiber project in
43
<PAGE> 45
NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.)
SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
Mexico, which was to be a source of hardwood fiber for the bleached paperboard
mill, is expected to be sold during 2001 at a price that approximates its
carrying value.
Information related to the discontinued operations follows:
<TABLE>
<CAPTION>
FOR THE YEAR
-------------
1999 1998
----- -----
(IN MILLIONS)
<S> <C> <C>
Revenues.................................................... $381 $376
Loss from operations........................................ (21) (21)
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 both 1999 and 1998. 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.
In connection with the sale of the bleached paperboard mill, the parent
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 parent company does not believe that
the resolution of these matters will have a material adverse effect on its
operations or financial position.
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 operation, and $10 million of
asset impairments related to the Building Products Group. Substantially all of
the charge for work force reductions was utilized or paid in 1999. The Argentine
operation was sold during the second quarter of 1999, for its carrying value.
The sale proceeds included $1 million in cash and $11 million in promissory
notes. The promissory notes were subsequently sold with recourse. Of the
remaining $14 million in asset impairments, $8 million was for manufacturing
assets abandoned in 1998, and $6 million was for property and equipment still in
use.
NOTE E -- COMMITMENTS
The parent company leases timberlands, equipment and facilities under
operating lease agreements. Future minimum rental commitments under
non-cancelable operating leases having a remaining term in excess of one year,
exclusive of related expenses are as follows (in millions): 2001 -- $29;
2002 -- $24; 2003 -- $21; 2004 -- $19; 2005 -- $17; 2006 and thereafter -- $272.
Total rent expense was $46 million, $34 million and $30 million during
2000, 1999 and 1998, respectively.
In connection with its joint venture operations, the parent company has
guaranteed certain obligations and letters of credit aggregating $94 million at
year-end 2000.
The parent company has unconditional purchase obligations, principally for
gypsum and timber, aggregating $36 million at year-end 2000.
44
<PAGE> 46
FINANCIAL SERVICES GROUP
SUMMARIZED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR
--------------------
2000 1999 1998
------ ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Interest Income
Loans receivable and mortgage loans held for sale......... $ 884 $705 $583
Mortgage-backed and other securities available-for-sale... 143 64 62
Mortgage-backed and other securities held-to-maturity..... 54 62 88
Other earning assets...................................... 8 5 5
------ ---- ----
Total interest income............................. 1,089 836 738
------ ---- ----
Interest Expense
Deposits.................................................. 493 379 357
Borrowed funds............................................ 207 158 137
------ ---- ----
Total interest expense............................ 700 537 494
------ ---- ----
Net Interest Income......................................... 389 299 244
Provision for loan losses................................. (39) (38) (1)
------ ---- ----
Net Interest Income After Provision For Loan Losses......... 350 261 243
------ ---- ----
Noninterest Income
Loan origination, marketing and servicing fees, net....... 84 115 135
Other..................................................... 196 165 163
------ ---- ----
Total noninterest income.......................... 280 280 298
------ ---- ----
Noninterest Expense
Compensation and benefits................................. 177 166 174
Other..................................................... 246 222 199
------ ---- ----
Total noninterest expense......................... 423 388 373
------ ---- ----
Income Before Taxes And Minority Interest................... 207 153 168
Minority interest in income of consolidated subsidiaries.... (18) (15) (14)
------ ---- ----
Income Before Taxes......................................... 189 138 154
Income Taxes................................................ (42) (17) (27)
------ ---- ----
Net Income.................................................. $ 147 $121 $127
====== ==== ====
</TABLE>
See the notes to Financial Services Group summarized financial statements.
45
<PAGE> 47
FINANCIAL SERVICES GROUP
SUMMARIZED BALANCE SHEETS
<TABLE>
<CAPTION>
AT YEAR END
-----------------
2000 1999
------- -------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 320 $ 233
Mortgage loans held for sale................................ 232 252
Loans receivable, net of allowance for loan losses of $118
in 2000 and $113 in 1999.................................. 10,411 9,296
Mortgage-backed and other securities available-for-sale..... 2,415 1,431
Mortgage-backed and other securities held-to-maturity....... 864 1,061
Other assets................................................ 1,082 1,048
------- -------
Total Assets...................................... $15,324 $13,321
======= =======
LIABILITIES
Deposits.................................................... $ 9,828 $ 9,027
Federal Home Loan Bank advances............................. 2,869 2,403
Securities sold under repurchase agreements................. 595 --
Other borrowings............................................ 210 212
Other liabilities........................................... 423 430
Stock issued by subsidiaries................................ 306 226
------- -------
Total Liabilities................................. 14,231 12,298
------- -------
Shareholder's Equity........................................ 1,093 1,023
------- -------
Total Liabilities and Shareholder's Equity........ $15,324 $13,321
======= =======
</TABLE>
See the notes to the Financial Services Group summarized financial statements.
46
<PAGE> 48
FINANCIAL SERVICES GROUP
SUMMARIZED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
---------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income................................................ $ 147 $ 121 $ 127
Adjustments:
Amortization, depreciation and accretion............... 52 62 108
Mortgage loans held for sale........................... 20 369 (183)
Collections and remittances on loans serviced for
others, net.......................................... (32) (251) 129
Other.................................................. 30 82 (86)
------- ------- -------
217 383 95
------- ------- -------
CASH PROVIDED BY (USED FOR) INVESTMENTS
Purchases of securities available-for-sale................ (1,036) (294) (208)
Maturities of securities available-for-sale............... 338 279 300
Sales of securities available-for-sale.................... -- 145 53
Maturities and redemptions of securities
held-to-maturity....................................... 192 351 349
Loans originated or acquired, net of principal
collected.............................................. (1,506) (1,163) (1,852)
Sales of loans............................................ 253 299 16
Acquisitions, net of cash acquired of $10 in 2000 and $29
in 1999................................................ (20) (108) --
Capital expenditures...................................... (34) (26) (39)
Other..................................................... (59) (17) 12
------- ------- -------
(1,872) (534) (1,369)
------- ------- -------
CASH PROVIDED BY (USED FOR) FINANCING
Net increase (decrease) in deposits....................... 857 808 (36)
Securities sold under repurchase agreements and short-term
borrowings, net........................................ 1,071 (121) 788
Additions to debt......................................... 37 35 770
Payments of debt.......................................... (178) (775) (251)
Sale of stock by subsidiaries............................. 80 1 75
Capital contributions from parent company................. 10 279 44
Dividends paid to parent company.......................... (110) (70) (44)
Other..................................................... (25) (2) (18)
------- ------- -------
1,742 155 1,328
------- ------- -------
Net increase in cash and cash equivalents................... 87 4 54
Cash and cash equivalents at beginning of year.............. 233 229 175
------- ------- -------
Cash and cash equivalents at end of year.................... $ 320 $ 233 $ 229
======= ======= =======
</TABLE>
See the notes to the Financial Services Group summarized financial statements.
47
<PAGE> 49
FINANCIAL SERVICES GROUP
NOTES TO 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 to the
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 minus any
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 and 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 on acquisitions. The allowance is 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 rating to distinguish levels of credit risk
and 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 economic factors.
Specific allowances established on the outstanding principal balance of
criticized graded loans range from 5 percent to 40 percent on Substandard
classified loans, 35 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
homogenous 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 allowances 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 the 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
48
<PAGE> 50
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
unique business conditions; the judgmental nature of individual loan
evaluations, collateral assessments and the interpretation of economic trends;
volatility of economic conditions affecting the identification and estimation of
losses for larger non-homogeneous 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.
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
debt securities as of each balance sheet date. Debt securities are classified as
held-to-maturity and stated at amortized cost when the group has both the intent
and ability to hold the securities to maturity. Otherwise, debt securities and
marketable equity securities are classified as available-for-sale and are stated
at fair value with any unrealized gains and losses, net of tax, reported as a
component of shareholder's 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.
Derivative Financial Instruments
The operations of Guaranty Bank (Guaranty) are subject to the risk of
interest rate fluctuations to the extent that interest-earning assets and
interest-bearing liabilities mature or reprice at different times or in
differing amounts. To maintain acceptable levels of interest rate and liquidity
risk, Guaranty from time to time 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.
Real estate held for future development and real estate projects 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 minus the 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,
49
<PAGE> 51
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
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 the 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 net
capitalized mortgage servicing rights 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.
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 March 1, 2000, the group acquired all of the outstanding stock of
American Finance Group, Inc. (AFG) for $32 million cash. AFG, an industrial and
commercial equipment leasing and financing operation, had total assets
(primarily financing leases, loans, and equipment under operating leases) of
$161 million and total liabilities (primarily debt) of $132 million, of which
$128 million was repaid after acquisition. The excess of the purchase price over
the fair value of the identifiable net assets acquired of $1 million is being
amortized on the straight-line method over 10 years.
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) for $119 million cash. Hemet had total assets of $1.2 billion (primarily
loans and securities) and total liabilities of $1.1 billion (primarily
deposits). The excess of the purchase price over the fair value of the
identifiable net assets acquired of $40 million is being amortized on the
straight-line method over 25 years.
On June 11, 1999, the group acquired the assets of Fidelity Funding, Inc.
(Fidelity) for $18 million in cash. Fidelity, an asset based lending operation,
had assets (primarily loans) of $111 million. The excess of the purchase price
over the fair value of the identifiable net assets acquired of $18 million is
being amortized on the straight-line method over 10 years.
The 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 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.
50
<PAGE> 52
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE C -- LOANS RECEIVABLE
The outstanding principal balances of loans receivable consists of the
following:
<TABLE>
<CAPTION>
AT YEAR END
----------------
2000 1999
------- ------
(IN MILLIONS)
<S> <C> <C>
Real estate mortgage........................................ $ 3,618 $3,763
Construction and development................................ 4,007 3,253
Commercial and business..................................... 1,681 1,265
Consumer and other.......................................... 1,215 1,121
Premiums, discounts and deferred fees, net.................. 8 7
------- ------
10,529 9,409
Less: Allowance for loan losses........................... (118) (113)
------- ------
$10,411 $9,296
======= ======
</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 properties 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 2000, the group had unfunded commitments on outstanding loans
totaling approximately $4.7 billion. In addition, at year-end 2000, the group
had issued letters of credit totaling approximately $148 million. The portion of
these amounts to be ultimately funded is uncertain.
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Balance, beginning of year.................................. $113 $ 87 $91
Provision for loan losses................................. 39 38 1
Additions related to acquisitions
and bulk purchases of loans............................ 2 12 --
Charge-offs, net of recoveries............................ (36) (24) (5)
---- ---- ---
Balance, end of year........................................ $118 $113 $87
==== ==== ===
</TABLE>
51
<PAGE> 53
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- MORTGAGE-BACKED AND OTHER SECURITIES
The amortized cost and fair values of mortgage-backed and other securities
consists of the following:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
AT YEAR-END 2000
Available-for-sale
Mortgage-backed securities:
FNMA certificates........................ $1,876 $19 $ (2) $1,893
FHLMC certificates....................... 89 2 -- 91
GNMA certificates........................ 133 -- -- 133
Collateralized mortgage obligations...... 112 -- (2) 110
Private issuer pass-through securities... 10 -- -- 10
------ --- ---- ------
2,220 21 (4) 2,237
Debt securities:
Corporate securities..................... 3 -- -- 3
Equity securities, primarily Federal Home
Loan Bank stock.......................... 175 -- -- 175
------ --- ---- ------
$2,398 $21 $ (4) $2,415
====== === ==== ======
Held-to-maturity
Mortgage-backed securities:
FNMA certificates........................ $ 555 $-- $(17) $ 538
FHLMC certificates....................... 105 -- (3) 102
Collateralized mortgage obligations...... 104 -- (3) 101
Private issuer pass-through securities... 100 -- (3) 97
------ --- ---- ------
$ 864 $-- $(26) $ 838
====== === ==== ======
AT YEAR-END 1999
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:
US Government............................ 7 -- -- 7
Corporate securities..................... 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>
52
<PAGE> 54
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
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>
AT YEAR END 2000
------------------
AMORTIZED FAIR
COST VALUE
--------- ------
(IN MILLIONS)
<S> <C> <C>
Due in 1 year or less....................................... $ -- $ --
Due after 1 year through 5 years............................ 3 1
Due after 5 years through 10 years.......................... 118 116
Due after 10 years.......................................... 3,141 3,136
------ ------
Total mortgage-backed and other securities........ $3,262 $3,253
====== ======
</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 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.
The group securitized and continued to hold $297 million and $217 million
of mortgage loans previously held in the loan portfolio during 2000 and 1999,
respectively. The transfer to mortgage-backed securities was recorded at the
carrying value of the mortgage loans at the time of securitization. The market
value of the securities generated through these securitization activities are
obtained through active market quotes. The group held $689 million and $601
million in such securities at year-end 2000 and 1999, respectively.
NOTE E -- DEPOSITS
Deposits consists of the following:
<TABLE>
<CAPTION>
2000 1999
-------------------- --------------------
AVERAGE AVERAGE
STATED RATE AMOUNT STATED RATE AMOUNT
----------- ------ ----------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Noninterest bearing demand................... -- $ 302 -- $ 329
Interest bearing demand...................... 4.36% 2,504 3.46% 2,035
Savings deposits............................. 1.83% 167 1.96% 214
Time deposits................................ 6.13% 6,855 5.36% 6,449
------ ------
$9,828 $9,027
====== ======
</TABLE>
53
<PAGE> 55
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of time deposits at year-end 2000 are as follows:
<TABLE>
<CAPTION>
$100,000 OR LESS THAN
MORE $100,000 TOTAL
----------- --------- ------
(IN MILLIONS)
<S> <C> <C> <C>
3 months or less....................................... $ 547 $1,651 $2,198
Over 3 through 6 months................................ 307 1,485 1,792
Over 6 through 12 months............................... 344 1,549 1,893
Over 12 months......................................... 175 797 972
------ ------ ------
$1,373 $5,482 $6,855
====== ====== ======
</TABLE>
At year-end 2000, time deposits maturity dates were as follows (in
millions): 2001 -- $5,883; 2002 -- $619; 2003 -- $182; 2004 -- $83; 2005 -- $86;
2006 and thereafter -- $2.
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
--------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Average daily balance....................................... $484 $112
Maximum month-end balance................................... $898 $223
</TABLE>
There were $595 million of securities sold under repurchase agreements
outstanding at year-end 2000 and no securities sold under repurchase agreements
at year-end 1999. At year-end 2000, the fair value of securities sold under
repurchase agreements was $623 million of FNMA certificates and $19 million of
FHLMC certificates.
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 6.37 percent and 5.75 percent at year-end 2000 and 1999,
respectively. At year-end 2000, the advances had maturity dates as follows (in
millions): 2001 -- $2,857 and 2003 -- $12.
54
<PAGE> 56
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- OTHER BORROWINGS
Other borrowings, which represent borrowings of non-savings bank entities,
consists of the following:
<TABLE>
<CAPTION>
AT YEAR END
--------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Long-term debt with an average rate of 7.91% and 6.75%
during 2000 and 1999, respectively, due through 2001...... $168 $175
Long-term debt at various rates which approximate prime,
secured primarily by real estate.......................... 42 37
---- ----
$210 $212
==== ====
</TABLE>
At year-end 2000, a non-savings bank subsidiary had a $210 million credit
facility, which expires in 2001, with $42 million remaining unused.
At year-end 2000, maturities of other borrowings are as follows (in
millions): 2001 -- $170; 2002 -- $2; 2003 -- $2; 2004 -- $2; 2005 -- $2; 2006
and thereafter -- $32.
NOTE I -- PREFERRED STOCK ISSUED BY SUBSIDIARIES
Guaranty has two subsidiaries that qualify as real estate investment
trusts, Guaranty Preferred Capital Corporation (GPCC) and Guaranty Preferred
Capital Corporation II (GPCC II). Both are authorized to issue floating rate and
fixed rate preferred stock. These preferred stocks have a liquidation preference
of $1,000 per share, dividends that are non-cumulative and payable when
declared, and are convertible into Guaranty preferred stock upon the occurrence
of certain regulatory events.
In 1997, GPCC issued an aggregate of 150,000 shares of floating rate
preferred stock for an aggregate consideration of $150 million cash. GPCC issued
an additional 75,000 shares in 1998 for an aggregate consideration of $75
million cash. Within ten years of issuance, at the option of GPCC, these shares
may be redeemed in whole or in part for $1,000 per share cash.
At inception in December 2000, GPCC II issued 35,000 shares of floating
rate preferred stock and 45,000 shares of 9.15 percent fixed rate preferred
stock for an aggregate consideration of $80 million cash. Prior to May 2007, at
the option of GPCC II, these shares may be redeemed in whole or in part for
$1,000 per share cash plus, under certain circumstances, a make-whole premium.
NOTE J -- MORTGAGE LOAN SERVICING
The group services mortgage loans that are owned primarily by independent
investors. The group serviced approximately 209,600 and 241,400 mortgage loans
aggregating $19.5 billion and $22.2 billion as of year-end 2000 and 1999,
respectively.
The group is required to advance, from group funds, escrow and foreclosure
costs on loans 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 the
disposal of certain foreclosed VA loans. No significant losses were incurred
during 2000, 1999 or 1998 in connection with this risk.
55
<PAGE> 57
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
Capitalized mortgage loan servicing rights, net of accumulated
amortization, were as follows:
<TABLE>
<CAPTION>
PURCHASED ORIGINATED
LOAN LOAN
SERVICING SERVICING
RIGHTS RIGHTS TOTAL
--------- ---------- -----
(IN MILLIONS)
<S> <C> <C> <C>
FOR THE YEAR 2000
Balance, beginning of year............................... $155 $113 $268
Additions.............................................. 4 12 16
Amortization expense................................... (20) (14) (34)
Sales.................................................. (1) (3) (4)
---- ---- ----
Subtotal............................................ $138 $108 246
Valuation allowance................................. --
----
Balance, end of year..................................... $246
====
FOR THE YEAR 1999
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
====
</TABLE>
Amortization expense related to mortgage loan servicing rights totaled $34
million, $49 million and $56 million for 2000, 1999 and 1998, respectively. The
valuation allowance was reduced $1 million in 2000 and $16 million in 1999 by a
credit to operations and increased $17 million in 1998 by a charge to
operations.
The estimated fair value of the capitalized mortgage servicing rights at
year-end 2000 was approximately $305 million. Fair value was determined
utilizing market-driven assumptions for prepayment speeds, discount rates and
other variables.
NOTE K -- INTEREST RATE RISK MANAGEMENT
Guaranty is a party to various interest rate corridor agreements, which
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 $213 million and
$291 million at year end 2000 and 1999, 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 (5.61 percent at year-end
2000) 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 not the notional amounts used to
express the volumes of these transactions. Guaranty minimizes its exposure to
credit risk by entering into contracts with major U.S. securities firms.
56
<PAGE> 58
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
The mortgage banking operation enters into forward sales commitments to
deliver mortgage loans to third parties. These forward sales commitments hedge
volatility of interest rates between the time a mortgage loan commitment is made
and the subsequent funding and sale of the loan to a third party.
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): 2001 -- $11;
2002 -- $9; 2003 -- $8; 2004 -- $6; 2005 -- $5; 2006 and thereafter -- $6.
Total rent expense under these lease agreements was $15 million, $14
million and $15 million for 2000, 1999 and 1998, respectively.
At year-end 2000, the group had commitments to originate or purchase loans
totaling approximately $1.0 billion and commitments to sell mortgage loans of
approximately $251 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. The payment of dividends from Guaranty is
subject to proper regulatory notification.
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.
Capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors. At year-end
2000, Guaranty met all of its capital adequacy requirements.
At year-end 2000, the most recent notification from regulators categorized
Guaranty as "well capitalized." The following table sets forth Guaranty's actual
capital amounts and ratios along with the minimum capital amounts and ratios
Guaranty must maintain in order to meet capital adequacy requirements and to be
categorized as "well capitalized." No amounts were deducted from capital for
interest-rate risk at year-end 2000 or 1999.
<TABLE>
<CAPTION>
AT YEAR END 2000
--------------------------------------------------------------
FOR CAPITAL ADEQUACY
ACTUAL REQUIREMENTS
------------------ -----------------------------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------------------ -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Total Risk-Based Ratio (Risk-based
capital/Total risk-weight
assets)............................ $1,283 10.29% > or = $ 998 > or = 8.00%
Tier 1 (Core) Risk-Based Ratio (Core
capital/Total risk-weight
assets)............................ $1,153 9.24% > or = $ 499 > or = 4.00%
Tier 1 (Core) Leverage Ratio (Core
capital/Adjusted tangible
assets)............................ $1,153 7.77% > or = $ 593 > or = 4.00%
Tangible Ratio (Tangible
equity/Tangible assets)............ $1,153 7.77% > or = $ 297 > or = 2.00%
<CAPTION>
AT YEAR END 2000
-------------------------------------------
FOR CATEGORIZATION AS
"WELL CAPITALIZED"
-------------------------------------------
AMOUNT RATIO
-------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Total Risk-Based Ratio (Risk-based
capital/Total risk-weight
assets)............................ > or = $ 1,247 > or = 10.00%
Tier 1 (Core) Risk-Based Ratio (Core
capital/Total risk-weight
assets)............................ > or = $ 748 > or = 6.00%
Tier 1 (Core) Leverage Ratio (Core
capital/Adjusted tangible
assets)............................ > or = $ 742 > or = 5.00%
Tangible Ratio (Tangible
equity/Tangible assets)............ Not applicable
</TABLE>
57
<PAGE> 59
FINANCIAL SERVICES GROUP
NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
AT YEAR END 1999
--------------------------------------------------------------
FOR CAPITAL ADEQUACY
ACTUAL REQUIREMENTS
------------------ -----------------------------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------------------ -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Total Risk-Based Ratio (Risk-based
capital/Total risk-weight
assets)............................ $1,139 10.33% > OR = $ 882 > OR = 8.00%
Tier 1 (Core) Risk-Based Ratio (Core
capital/Total risk-weight
assets)............................ $1,058 9.60% > OR = $ 441 > OR = 4.00%
Tier 1 (Core) Leverage Ratio (Core
capital/Adjusted tangible
assets)............................ $1,058 8.22% > OR = $ 515 > OR = 4.00%
Tangible Ratio (Tangible
equity/Tangible assets)............ $1,058 8.22% > OR = $ 257 > OR = 2.00%
<CAPTION>
AT YEAR END 1999
-------------------------------------------
FOR CATEGORIZATION AS
"WELL CAPITALIZED"
-------------------------------------------
AMOUNT RATIO
-------------------- --------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Total Risk-Based Ratio (Risk-based
capital/Total risk-weight
assets)............................ > OR = $ 1,102 > OR = 10.00%
Tier 1 (Core) Risk-Based Ratio (Core
capital/Total risk-weight
assets)............................ > OR = $ 661 > OR = 6.00%
Tier 1 (Core) Leverage Ratio (Core
capital/Adjusted tangible
assets)............................ > OR = $ 643 > OR = 5.00%
Tangible Ratio (Tangible
equity/Tangible assets)............ Not applicable
</TABLE>
58
<PAGE> 60
TEMPLE-INLAND INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR
------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
REVENUES
Manufacturing............................................. $2,917 $2,692 $2,367
Financial Services........................................ 1,369 1,116 1,036
------ ------ ------
4,286 3,808 3,403
------ ------ ------
COSTS AND EXPENSES
Manufacturing............................................. 2,677 2,445 2,244
Special charge............................................ 15 -- 47
Financial Services........................................ 1,180 978 882
------ ------ ------
3,872 3,423 3,173
------ ------ ------
OPERATING INCOME............................................ 414 385 230
Parent Company interest................................... (104) (95) (78)
Other..................................................... 10 16 6
------ ------ ------
INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES.............................................. 320 306 158
Income taxes.............................................. (125) (115) (70)
------ ------ ------
INCOME FROM CONTINUING OPERATIONS........................... 195 191 88
Discontinued operation.................................... -- (92) (21)
------ ------ ------
INCOME BEFORE ACCOUNTING CHANGE............................. 195 99 67
Effect of accounting change............................... -- -- (3)
------ ------ ------
NET INCOME.................................................. $ 195 $ 99 $ 64
====== ====== ======
EARNINGS PER SHARE
Basic:
Income from continuing operations...................... $ 3.83 $ 3.45 $ 1.60
Discontinued operation................................. -- (1.66) (.38)
Effect of accounting change............................ -- -- (.06)
------ ------ ------
Net income............................................. $ 3.83 $ 1.79 $ 1.16
====== ====== ======
Diluted:
Income from continuing operations...................... $ 3.83 $ 3.43 $ 1.59
Discontinued operation................................. -- (1.65) (.38)
Effect of accounting change............................ -- -- (.06)
------ ------ ------
Net income............................................. $ 3.83 $ 1.78 $ 1.15
====== ====== ======
</TABLE>
See the notes to the consolidated financial statements.
59
<PAGE> 61
TEMPLE-INLAND INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
AT YEAR END 2000
----------------------------------
PARENT FINANCIAL
COMPANY SERVICES CONSOLIDATED
------- --------- ------------
(IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2 $ 320 $ 322
Mortgage loans held for sale................................ -- 232 232
Loans receivable, net....................................... -- 10,411 10,411
Mortgage-backed and other securities available-for-sale..... -- 2,415 2,415
Mortgage-backed and other securities held-to-maturity....... -- 864 864
Trade and other receivables................................. 320 -- 309
Inventories................................................. 253 -- 253
Property and equipment...................................... 2,027 157 2,184
Other assets................................................ 252 925 1,152
Investment in Financial Services............................ 1,093 -- --
------ ------- -------
Total assets...................................... $3,947 $15,324 $18,142
====== ======= =======
LIABILITIES
Deposits.................................................... $ -- $ 9,828 $ 9,828
Federal Home Loan Bank advances............................. -- 2,869 2,869
Securities sold under repurchase agreements................. -- 595 595
Other liabilities........................................... 315 423 706
Long-term debt.............................................. 1,381 210 1,591
Deferred income taxes....................................... 276 -- 272
Postretirement benefits..................................... 142 -- 142
Stock issued by subsidiaries................................ -- 306 306
------ ------- -------
Total liabilities................................. $2,114 $14,231 $16,309
------ ------- -------
SHAREHOLDERS' EQUITY
Preferred stock -- par value $1 per share: authorized
25,000,000 shares; none issued............................ --
Common stock -- par value $1 per share: authorized
200,000,000 shares; issued 61,389,552 shares, including
shares held in the treasury............................... 61
Additional paid-in capital.................................. 365
Accumulated other comprehensive income (loss)............... (8)
Retained earnings........................................... 1,968
-------
2,386
Cost of shares held in the treasury: 12,215,499 shares...... (553)
-------
Total shareholders' equity........................ 1,833
-------
Total liabilities and shareholders' equity.................. $18,142
=======
</TABLE>
See the notes to the consolidated financial statements.
60
<PAGE> 62
TEMPLE-INLAND INC. AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEETS
<TABLE>
<CAPTION>
AT YEAR END 1999
----------------------------------
PARENT FINANCIAL
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, net....................................... -- 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 subsidiaries................................ -- 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, including
shares held in the treasury............................... 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>
See the notes to the consolidated financial statements.
61
<PAGE> 63
TEMPLE-INLAND INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
---------------------------
2000 1999 1998
------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income................................................ $ 195 $ 99 $ 64
Adjustments:
Loss on disposal of discontinued operation............. -- 77 --
Cumulative effect of accounting change................. -- -- 3
Special charge......................................... 15 -- 47
Depreciation and depletion............................. 216 217 206
Amortization of goodwill............................... 9 8 7
Deferred taxes......................................... 57 14 18
Amortization and accretion on financial instruments.... 28 40 90
Mortgage loans held for sale........................... 20 369 (183)
Receivables............................................ 9 (74) (11)
Inventories............................................ 16 (4) 2
Accounts payable and accrued expenses.................. (84) 42 (16)
Collections and remittances on loans serviced for
others, net.......................................... (32) (251) 129
Change in net assets of discontinued operations........ -- 23 63
Other.................................................. 30 71 (76)
------- ------- -------
479 631 343
------- ------- -------
CASH PROVIDED BY (USED FOR) INVESTMENTS
Capital expenditures...................................... (257) (204) (196)
Proceeds from sale of discontinued operations............. -- 576 --
Proceeds from sale of property and equipment.............. 22 55 28
Purchase of securities available-for-sale................. (1,036) (294) (208)
Maturities of securities available-for-sale............... 338 279 300
Proceeds from sale of securities available-for-sale....... -- 145 53
Maturities and redemptions of securities
held-to-maturity....................................... 192 351 349
Loans originated or acquired, net of principal collected
on loans............................................... (1,506) (1,163) (1,852)
Proceeds from sale of loans............................... 253 299 16
Acquisitions, net of cash acquired, and joint ventures.... (38) (157) (123)
Other..................................................... (64) (17) (10)
------- ------- -------
(2,096) (130) (1,643)
------- ------- -------
CASH PROVIDED BY (USED FOR) FINANCING
Additions to debt......................................... 297 347 1,089
Payments of debt.......................................... (312) (1,335) (426)
Securities sold under repurchase agreements and short-term
borrowings, net........................................ 1,071 (121) 788
Net increase (decrease) in deposits....................... 717 808 (36)
Purchase of deposits...................................... 140 -- --
Purchase of stock for treasury............................ (250) (100) (48)
Cash dividends paid to shareholders....................... (65) (71) (71)
Proceeds from sale of subsidiary preferred stock.......... 80 1 75
Other..................................................... (23) 10 (15)
------- ------- -------
1,655 (461) 1,356
------- ------- -------
Net increase in cash and cash equivalents................... 38 40 56
Cash and cash equivalents at beginning of year.............. 284 244 188
------- ------- -------
Cash and cash equivalents at end of year.................... $ 322 $ 284 $ 244
======= ======= =======
</TABLE>
See the notes to the consolidated financial statements.
62
<PAGE> 64
TEMPLE-INLAND INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY
STOCK CAPITAL INCOME (LOSS) EARNINGS STOCK TOTAL
------ ------- ------------- -------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
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 losses 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
--- ---- ---- ------ ----- ------
Comprehensive income
Net income................................... -- -- -- 195 -- 195
Other comprehensive income
Unrealized gains on securities............. -- -- 23 -- -- 23
Minimum pension liability.................. -- -- (2) -- -- (2)
Foreign currency translation adjustment.... -- -- 2 -- -- 2
------
Total comprehensive income................... -- -- -- -- -- 218
------
Dividends paid on common stock -- $1.28 per
share........................................ -- -- -- (65) -- (65)
Stock issued for stock plans -- 57,999
shares....................................... -- 1 -- -- 2 3
Stock acquired for treasury -- 5,095,906
shares....................................... -- -- -- -- (250) (250)
--- ---- ---- ------ ----- ------
Balance at year end 2000....................... $61 $365 $ (8) $1,968 $(553) $1,833
=== ==== ==== ====== ===== ======
</TABLE>
See the notes to the consolidated financial statements.
63
<PAGE> 65
TEMPLE-INLAND INC. AND SUBSIDIARIES
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 its manufacturing and financial services subsidiaries (the company).
Investments in joint ventures and other subsidiaries in which the company has
between a 20 percent and 50 percent equity ownership are reflected using the
equity method. All material intercompany amounts and transactions have been
eliminated. Certain amounts have been reclassified to conform to current year's
classifications.
The consolidated net assets invested in financial services activities are
subject, in varying degrees, to regulatory rules and restrictions. Accordingly,
included as an integral part of the consolidated financial statements are
separate summarized financial statements and notes for the company's
manufacturing and financial services groups, as well as the significant
accounting policies unique to each group.
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.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand 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 values 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.
64
<PAGE> 66
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. Such costs are amortized using the straight-line method over
estimated useful lives of three to seven years. Costs capitalized were $58
million in 2000, $31 million in 1999 and $10 million in 1998. Amortization of
these costs was $8 million in 2000, $6 million in 1999 and $3 million in 1998.
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 effect of adopting this
statement will not materially affect the company's earnings or financial
position. As permitted by this statement, the company will change the
designation of its portfolio of held-to-maturity securities, which are carried
at unamortized cost, to available-for-sale, which are carried at fair value. As
a result, the carrying value of these securities will be adjusted to their fair
value with a corresponding after tax reduction of $16 million in other
comprehensive income, a component of shareholders' equity.
NOTE 2 -- TAXES ON INCOME
Taxes on income from continuing operations consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEAR
------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Current tax provision:
U.S. Federal.............................................. $ 44 $ 89 $ 38
State and other........................................... 14 12 10
---- ---- ----
58 101 48
---- ---- ----
Deferred tax provision:
U.S. Federal.............................................. 66 14 21
State and other........................................... 1 -- 1
---- ---- ----
67 14 22
---- ---- ----
Provision for income taxes.................................. $125 $115 $ 70
==== ==== ====
</TABLE>
Earnings or losses from operations consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEAR
------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Earnings (Losses):
U.S. ..................................................... $319 $311 $189
Non-U.S. ................................................. 1 (5) (31)
---- ---- ----
$320 $306 $158
==== ==== ====
</TABLE>
65
<PAGE> 67
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The difference between the consolidated effective income tax rate and the
federal statutory income tax rate include the following:
<TABLE>
<CAPTION>
FOR THE YEAR
------------------
2000 1999 1998
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Taxes on income at statutory rate........................... $112 $107 $ 56
State net of federal benefit................................ 9 8 6
Foreign operations.......................................... 1 3 6
Sale of foreign subsidiary.................................. -- (7) --
Goodwill.................................................... 2 2 1
Other....................................................... 1 2 1
---- ---- ----
$125 $115 $ 70
==== ==== ====
</TABLE>
Significant components of the company's consolidated deferred tax assets
and liabilities are as follows:
<TABLE>
<CAPTION>
AT YEAR END
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation.............................................. $ 270 $ 254
Timber and timberlands.................................... 37 37
Pensions.................................................. 33 26
Originated mortgage servicing rights...................... 36 38
Other..................................................... 32 34
----- -----
Total deferred tax liabilities.................... 408 389
----- -----
Deferred Tax Assets:
Alternative minimum tax credits........................... 142 185
Net operating loss carryforwards.......................... 20 12
OPEB obligations.......................................... 55 56
Bad debt reserve.......................................... 33 27
Other..................................................... 46 67
----- -----
Total deferred tax assets......................... 296 347
Valuation allowance......................................... (160) (154)
----- -----
Net deferred tax liability.................................. $ 272 $ 196
===== =====
</TABLE>
The valuation allowance represents accruals for deductions and credits that
are uncertain and, accordingly, have not been recognized for financial reporting
purposes. The change in the valuation allowance is primarily the result of
increased foreign net operating losses, the future realization of which is not
assured.
The company has domestic net operating loss carryforwards of $1 million
that expire in 2005. In addition, the company has foreign net operating loss
carryforwards of $39 million that will expire from the year 2005 through the
year 2011 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.
In 1999, the Internal Revenue Service (IRS) concluded its examination of
the company's consolidated tax returns for the years 1987 through 1992. As a
result of this examination, the company agreed to pay approximately $36 million
in taxes and interest for those years, of which $19 million was paid in 1999 and
the remainder in 2000. The IRS is currently examining the company's consolidated
tax returns for the years 1993
66
<PAGE> 68
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Cash income tax payments, net of refunds received, including the payments
related to the IRS exam were $88 million, $72 million and $39 million during
2000, 1999 and 1998, respectively.
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
--------------------------------------
2000 1999
------------------ -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Financial assets
Loans receivable................................ $10,411 $10,414 $9,296 $9,248
Mortgage-backed and other securities............ 3,279 3,253 2,492 2,440
Financial liabilities
Deposits........................................ 9,828 9,835 9,027 8,987
FHLB advances................................... 2,869 2,869 2,403 2,403
Total debt...................................... 1,593 1,577 1,466 1,443
Off-balance-sheet instruments
Interest rate contracts......................... -- (2) -- 2
Commodity futures contracts..................... -- (3) -- --
Commitments to extend credit.................... -- 3 -- 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 company has guaranteed certain joint venture obligations principally
related to variable-rate debt instruments at year-end 2000. It is not
practicable to estimate the fair value of these guarantees.
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 $.01 per Right at any time until the 10th
business day following public announcement that a 20 percent position has been
acquired. The Rights will expire on February 20, 2009.
67
<PAGE> 69
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 in order 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, as a postretirement benefit, medical and insurance
coverage to 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>
AT YEAR END
-----------------------------------
POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------- --------------
2000 1999 2000 1999
------- ------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year.................... $ 582 $597 $ 111 $ 133
Service cost............................................... 15 17 3 3
Interest cost.............................................. 42 39 8 8
Change in assumptions...................................... -- (50) -- --
Plan amendments............................................ 6 3 -- (2)
Actuarial (gain)/loss...................................... 4 4 30 (21)
Termination benefits....................................... -- -- -- --
Benefits paid.............................................. (35) (28) (12) (11)
Retiree contributions...................................... -- -- 1 1
----- ---- ----- -----
Benefit obligation at end of the year...................... $ 614 $582 $ 141 $ 111
----- ---- ----- -----
Fair value of plan assets at beginning of year............. $ 711 $616 $ -- $ --
Actual return.............................................. 158 122 -- --
Benefits paid.............................................. (35) (28) -- --
Contributions.............................................. 4 1 -- --
----- ---- ----- -----
Fair value of plan assets at end of year................... $ 838 $711 $ -- $ --
----- ---- ----- -----
Funded status.............................................. $ 224 $129 $(141) $(111)
Unrecognized net loss/(gain)............................... (160) (69) 6 (24)
Prior service costs not yet recognized..................... 11 5 (7) (8)
Unrecognized net transition obligation/(asset)............. -- (4) -- --
Additional minimum liability............................... (7) (4) -- --
----- ---- ----- -----
Prepaid (accrued) benefit cost............................. $ 68 $ 57 $(142) $(143)
===== ==== ===== =====
</TABLE>
The net prepaid benefit cost of $68 million at year-end 2000 is comprised
of pension plans with prepaid benefit cost totaling $90 million and accrued
benefit liability totaling $22 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
-------------
2000 1999
----- -----
(IN MILLIONS)
<S> <C> <C>
Projected benefit obligation................................ $20 $16
Accumulated benefit obligation.............................. $17 $14
Fair value of plan assets................................... $-- $--
</TABLE>
68
<PAGE> 70
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant assumptions used for the employee pension plans follow:
<TABLE>
<CAPTION>
FOR THE YEAR
------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ ------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Weighted average assumptions:
Discount rate............................ 7.50% 7.50% 6.75% 7.50% 7.50% 6.75%
Expected long-term rate of return........ 9.00% 9.00% 9.00% -- -- --
Rate of compensation increase............ 4.75% 4.75% 4.00% -- -- --
</TABLE>
A 7.75 percent annual rate of increase in the per capita cost of covered
health care benefits was assumed for 2001. The rate was assumed to decrease
gradually to 6 percent for 2010 and remain at that level thereafter.
Net periodic benefit cost (credit) for pension and postretirement plans
include the following:
<TABLE>
<CAPTION>
FOR THE YEAR
------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
------------------ ------------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Charges (Credits)
Service cost -- benefits earned during the
period................................... $ 15 $ 17 $ 15 $ 3 $ 3 $ 3
Interest cost on projected benefit
obligation............................... 42 39 37 8 8 8
Expected return on plan assets............. (62) (54) (56) -- -- --
Net amortization and deferral.............. (4) (3) (5) (1) (1) (1)
---- ---- ---- ---- ---- ----
Net periodic benefit cost (credit)(a)...... $ (9) $ (1) $ (9) $ 10 $ 10 $ 10
==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(a) In addition to the above, in 2000 the company recognized an additional $.3
million expense relating to postretirement benefits for special termination
benefits resulting from restructuring of the Pineland operation. 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
2000.................................................... $ 1 $(1)
Effect on postretirement benefit obligation at year-end
2000.................................................... $11 $(9)
</TABLE>
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, of stock appreciation rights
with all or part of any options so granted. Options granted after 1995 generally
have a ten-year term and become exercisable in steps from one to five years.
69
<PAGE> 71
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity follows:
<TABLE>
<CAPTION>
FOR THE YEAR
------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
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...... 1,974 $53 1,892 $51 1,430 $47
Granted.......................... 971 55 455 61 654 56
Exercised........................ (88) 48 (315) 47 (139) 38
Forfeited........................ (101) 54 (58) 53 (53) 50
------ ------ ------
Outstanding end of year............ 2,756 $54 1,974 $53 1,892 $51
====== ====== ======
Weighted average fair value of
options granted during the
year............................. $16.63 $23.06 $17.68
</TABLE>
Options exercisable at year end were (in thousands): 2000-896; 1999-691;
and 1998-737. The weighted average exercise price for options exercisable was
$50 per share and $49 per share for year-end 2000 and 1999, respectively.
Exercise prices for options outstanding at year-end 2000 range from $27 to $75.
The weighted average remaining contractual life of these options is eight years.
An additional 755,956 and 1,727,156 shares of common stock were available for
grants at year-end 2000 and 1999, respectively. Under the 1993 restricted stock
plan, at year-end 2000, awards of 56,248 shares of restricted common stock were
outstanding. The 1997 restricted stock plan provided for a maximum of 300,000
shares of restricted common stock to be reserved for awards. Under this plan, at
year-end 2000, awards of 54,000 shares of restricted common stock were
outstanding and an additional 244,950 shares were available for grants.
The fair value of the options granted in 2000, 1999 and 1998 was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
FOR THE YEAR
---------------------------------
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected dividend yield.............................. 2.7% 2.0% 2.0%
Expected stock price volatility...................... 29.7% 29.4% 28.7%
Risk-free interest rate.............................. 5.1% 6.8% 4.8%
Expected life of options............................. 8.0 years 8.0 years 7.0 years
</TABLE>
Assuming that the company had accounted for its employee stock options
using the fair value method and amortized such to expense over the options
vesting period, pro forma net income and diluted earnings per share would have
been $189 million and $3.71 per diluted share in 2000; $96 million and $1.73 per
diluted share in 1999; and $62 million and $1.10 per diluted share in 1998. 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.
70
<PAGE> 72
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- EARNINGS PER SHARE
Numerators and denominators used in computing earnings per share are as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR
---------------------
2000 1999 1998
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Numerators for basic and diluted earnings per share:
Income from continuing operations......................... $ 195 $ 191 $ 88
Discontinued operation.................................... (92) (21)
Effect of accounting change............................... -- -- (3)
----- ----- -----
Net income........................................ $ 195 $ 99 $ 64
===== ===== =====
Denominator for basic earnings per share:
Weighted average shares outstanding....................... 50.9 55.6 55.8
Dilutive effect of stock options.......................... -- .2 .1
----- ----- -----
Denominator for diluted earnings per share................ 50.9 55.8 55.9
===== ===== =====
</TABLE>
NOTE 8 -- ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
UNREALIZED
CURRENCY GAINS ON MINIMUM
TRANSLATION AVAILABLE-FOR PENSION
ADJUSTMENTS SALE SECURITIES LIABILITY TOTAL
----------- --------------- --------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
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 adjustments........ 1 -- -- 1
---- ---- --- ----
Balance at year-end 1999.......................... (16) (13) (2) (31)
Unrealized gains available-for-sale
securities................................... -- 36 -- 36
Deferred taxes relating to unrealized gains on
available-for-sale securities................ -- (13) -- (13)
Minimum pension liability....................... -- -- (3) (3)
Deferred taxes relating to minimum pension
liability.................................... -- -- 1 1
Deferred taxes relating to foreign currency
translation adjustment....................... 2 -- -- 2
---- ---- --- ----
Balance at year-end 2000.......................... $(14) $ 10 $(4) $ (8)
==== ==== === ====
</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 and claims, if any, by plaintiffs
or claimants resulting from the foregoing litigation will not have a material
adverse effect on its operations or the financial position of the company.
71
<PAGE> 73
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- SEGMENT INFORMATION
The company has three reportable segments: paper, building products and
financial services. The paper segment manufactures containerboard and 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. Parent company interest expense is not
allocated to the 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.
<TABLE>
<CAPTION>
CORPORATE
BUILDING FINANCIAL AND OTHER
PAPER PRODUCTS SERVICES ELIMINATIONS TOTAL
------ -------- --------- ------------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
For the year or at year-end 2000:
Revenues from external customers....... $2,089 $ 828 $ 1,369 $ -- $ 4,286
Depreciation, depletion and
amortization........................ 131 63 24 7 225
Operating income....................... 205 68 189 (48)(a) 414
Financial Services net interest
income.............................. -- -- 389 -- 389
Total assets........................... 1,589 1,199 15,324 30 18,142
Investment in equity method
investees........................... 4 33 27 -- 64
Capital expenditures................... 115 87 34 21 257
------------------------------------------------------
For the year or at year-end 1999:
Revenues from external customers....... $1,869 $ 823 $ 1,116 $ -- $ 3,808
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
------------------------------------------------------
For the year or at year-end 1998:
Revenues from external customers....... $1,707 $ 660 $ 1,036 $ -- $ 3,403
Depreciation, depletion and
amortization........................ 138 53 18 4 213
Operating income....................... 39 112 154 (75)(b) 230
Financial Services net interest
income.............................. -- -- 244 -- 244
Total assets........................... 1,728 1,043 12,376 721(c) 15,868
Investment in equity method
investees........................... 8 29 3 -- 40
Capital expenditures................... 79 73 39 5 196
------------------------------------------------------
</TABLE>
- ---------------
(a) Includes a special charge of $15 million applicable to the building
products segment.
(b) 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.
(c) Includes net assets of discontinued operations.
72
<PAGE> 74
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table includes revenues and property and equipment based on
the location of the operation:
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR
------------------------
2000 1999 1998
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Revenues from external customers
United States............................................ $4,122 $3,672 $3,286
Canada................................................... 33 27 4
Mexico................................................... 106 82 68
South America............................................ 25 27 45
------ ------ ------
Total............................................ $4,286 $3,808 $3,403
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AT YEAR END
------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Property and Equipment
United States............................................ $2,069 $2,090 $2,115
Canada................................................... 63 61 56
Mexico................................................... 34 28 27
South America............................................ 18 18 40
------ ------ ------
Total............................................ $2,184 $2,197 $2,238
====== ====== ======
</TABLE>
NOTE 11 -- SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Selected quarterly financial results for the years 2000 and 1999 are
summarized below. Quarterly financial results have been restated to reflect the
reclassification of shipping and handling costs.
<TABLE>
<CAPTION>
2000
--------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues.................................... $1,066 $1,096 $1,081 $1,043
Manufacturing net revenues........................ 757 753 734 673
Manufacturing gross profit........................ 148 140 107 81
Financial Services operating income before
taxes........................................... 35 48 50 56
Income from continuing operations................. 55 62 43(a) 35
Net income........................................ 55 62 43(a) 35
Earnings per Share:
Basic:
Income from continuing operations............ $ 1.04 $ 1.20 $ .87 $ .72
Net income................................... 1.04 1.20 .87 .72
Diluted:
Income from continuing operations............ $ 1.04 $ 1.20 $ .87 $ .72
Net income................................... 1.04 1.20 .87 .72
</TABLE>
- ---------------
(a) Includes a $15 million special charge related to the discontinued
fiber-cement operation.
73
<PAGE> 75
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues..................................... $ 880 $ 937 $ 988 $1,003
Manufacturing net revenues......................... 622 675 701 694
Manufacturing gross profit......................... 101 128 143 140
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............. $ .47 $ .88 $ 1.07 $ 1.03
Discontinued operations....................... (.13) (.14) (1.43) .04
----- ----- ------ ------
Net income.................................... $ .34 $ .74 $ (.36) $ 1.07
===== ===== ====== ======
Diluted:
Income from continuing operations............. $ .46 $ .87 $ 1.07 $ 1.03
Discontinued operations....................... (.13) (.13) (1.43) .04
----- ----- ------ ------
Net income.................................... $ .33 $ .74 $ (.36) $ 1.07
===== ===== ====== ======
</TABLE>
74
<PAGE> 76
MANAGEMENT'S 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.
Kenneth M. Jastrow, II
Chairman and
Chief Executive Officer
Louis R. Brill
Vice President,
Chief Accounting Officer
75
<PAGE> 77
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 December 30, 2000 and January 1, 2000,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 30, 2000.
Our audits also included the financial statement schedules listed in the Index
at Item 14(a). These financial statements and schedules are the responsibility
of the company's management. Our responsibility is to express an opinion on
these financial statements and schedules 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 December 30, 2000 and January 1, 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 30, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Austin, Texas
January 31, 2001
76
<PAGE> 78
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with its independent
auditors to report under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference
from 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 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 the
Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from 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
The financial statements of the Company and its consolidated subsidiaries
are included in Part II, Item 8 of this Annual Report on Form 10-K.
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 December 30, 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.......... 84
</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.
77
<PAGE> 79
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(17)
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(11), and as amended by Third
Supplemental Indenture dated as of May 9, 1991(12)
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(11)
4.05 -- Form of Floating-rate Medium Term Note, Series B, of the
Company(11)
4.06 -- Form of 9% Note due May 1, 2001, of the Company(14)
4.07 -- Form of Fixed-rate Medium Term Note, Series D, of the
Company(13)
4.08 -- Form of Floating-rate Medium Term Note, Series D, of the
Company(13)
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(15)
4.12 -- Form of 8.25% Debenture due September 15, 2022, of the
Company(15)
4.13 -- Form of Fixed-rate Medium Term Note, Series F, of the
Company(22)
4.14 -- Form of Floating-rate Medium Term Note, Series F, of the
Company(22)
10.01* -- Temple-Inland Inc. Incentive Stock Plan(1), as amended
May 6, 1988(8), as amended February 7, 1992(17)
10.02* -- Form of Incentive Shares Agreement(9)
10.03 -- 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.(10)
10.04* -- Temple-Inland Inc. 1993 Stock Option Plan(16)
10.05* -- Temple-Inland Inc. 1993 Restricted Stock Plan(16)
10.06 -- 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(18)
10.07 -- 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(18)
10.08 -- 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(18)
</TABLE>
78
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.09 -- 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(18)
10.10 -- Holdback Escrow Agreement by and among LST, Guaranty, and
Bank One, Texas, N.A. dated as of November 12, 1993(18)
10.11 -- 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(19)
10.12 -- 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(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., 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(19)
10.14 -- 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(19)
10.15 -- 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(20)
10.16* -- Temple-Inland Inc. 1997 Stock Option Plan(21), as amended
May 7, 1999(25)
10.17* -- Temple-Inland Inc. 1997 Restricted Stock Plan(21)
10.18 -- 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(23)
10.19 -- 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(24)
10.20* -- Temple-Inland Inc. Stock Deferral and Payment Plan(26)
10.21* -- Employment Agreement dated July 1, 2000, between Inland
Paperboard and Packaging, Inc. and Dale E. Stahl(27)
10.22* -- Change in Control Agreement dated October 2, 2000,
between the Company and Kenneth M. Jastrow, II(27)
10.23* -- Change in Control Agreement dated October 2, 2000,
between the Company and William B. Howes(27)
10.24* -- Change in Control Agreement dated October 2, 2000,
between the Company and Harold C. Maxwell(27)
</TABLE>
79
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.25* -- Change in Control Agreement dated October 2, 2000,
between the Company and Bart J. Doney(27)
10.26* -- Change in Control Agreement dated October 2, 2000,
between the Company and Kenneth R. Dubuque(27)
10.27* -- Change in Control Agreement dated October 2, 2000,
between the Company and James C. Foxworthy(27)
10.28* -- Change in Control Agreement dated October 2, 2000,
between the Company and Dale E. Stahl(27)
10.29* -- Change in Control Agreement dated October 2, 2000,
between the Company and Jack C. Sweeny(27)
10.30* -- Change in Control Agreement dated October 2, 2000,
between the Company and M. Richard Warner(27)
10.31* -- Change in Control Agreement dated October 2, 2000,
between the Company and Randall D. Levy(27)
10.32* -- Change in Control Agreement dated October 2, 2000,
between the Company and Louis R. Brill(27)
10.33* -- Change in Control Agreement dated October 2, 2000,
between the Company and Scott Smith(27)
10.34* -- Change in Control Agreement dated October 2, 2000,
between the Company and Doyle R. Simons(27)
10.35* -- Change in Control Agreement dated October 2, 2000,
between the Company and David W. Turpin(27)
10.36* -- Change in Control Agreement dated October 2, 2000,
between the Company and Leslie K. O'Neal(27)
21 -- Subsidiaries of the Company(27)
23 -- Consent of Ernst & Young LLP(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 the Company's Definitive Proxy Statement filed
with the Commission on March 18, 1988.
80
<PAGE> 82
(9) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1983.
(10) Incorporated by reference to the Company's Form 8-K filed with the
Commission on October 14, 1988.
(11) Incorporated by reference to the Company's Form 8-K filed with the
Commission on December 27, 1990.
(12) Incorporated by reference to Registration Statement No. 33-40003 on Form
S-3 filed by the Company with the Commission.
(13) Incorporated by reference to Registration Statement No. 33-43978 on Form
S-3 filed by the Company with the Commission.
(14) Incorporated by reference to the Company's Form 8-K filed with the
Commission on May 2, 1991.
(15) Incorporated by reference to Registration Statement No. 33-50880 on Form
S-3 filed by the Company with the Commission.
(16) 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.
(17) Incorporated by reference to the Company's Form 10-K for the year ended
January 2, 1993.
(18) Incorporated by reference to the Company's Form 8-K filed with the
Commission on November 24, 1993.
(19) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995.
(20) Incorporated by reference to Registration Statement on Form S-4 (No.
333-21937) filed by the Company with the Commission.
(21) 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.
(22) Incorporated by reference to the Company's Form 8-K filed with the
Commission on June 2, 1998.
(23) Incorporated by reference to Registration Statement on Form S-4 (No.
333-71699) filed by the Company with the Commission.
(24) Incorporated by reference to the Company's Form 8-K filed with the
Commission on October 6, 1999.
(25) 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.
(26) Incorporated by reference to Registration Statement on Form S-8 (No.
333-33702) filed by the Company with the Commission.
(27) Filed herewith.
(b) Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the fourth
quarter of the fiscal year ended December 30, 2000.
81
<PAGE> 83
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 2, 2001.
TEMPLE-INLAND INC.
(Registrant)
By: /s/ KENNETH M. JASTROW, III
----------------------------------
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 2, 2001
- ----------------------------------------------------- Board, and Chief Executive
Kenneth M. Jastrow, II Officer
/s/ RANDALL D. LEVY Chief Financial Officer March 2, 2001
- -----------------------------------------------------
Randall D. Levy
/s/ LOUIS R. BRILL Vice President, Chief March 2, 2001
- ----------------------------------------------------- Accounting Officer
Louis R. Brill
/s/ ROBERT CIZIK Director March 2, 2001
- -----------------------------------------------------
Robert Cizik
/s/ ANTHONY M. FRANK Director March 2, 2001
- -----------------------------------------------------
Anthony M. Frank
/s/ JAMES T. HACKETT Director March 2, 2001
- -----------------------------------------------------
James T. Hackett
/s/ WILLIAM B. HOWES Director March 2, 2001
- -----------------------------------------------------
William B. Howes
/s/ BOBBY R. INMAN Director March 2, 2001
- -----------------------------------------------------
Bobby R. Inman
/s/ JAMES A. JOHNSON Director March 2, 2001
- -----------------------------------------------------
James A. Johnson
</TABLE>
82
<PAGE> 84
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<C> <S> <C>
/s/ W. ALLEN REED Director March 2, 2001
- -----------------------------------------------------
W. Allen Reed
/s/ HERBERT A. SKLENAR Director March 2, 2001
- -----------------------------------------------------
Herbert A. Sklenar
/s/ WALTER P. STERN Director March 2, 2001
- -----------------------------------------------------
Walter P. Stern
/s/ ARTHUR TEMPLE III Director March 2, 2001
- -----------------------------------------------------
Arthur Temple III
/s/ CHARLOTTE TEMPLE Director March 2, 2001
- -----------------------------------------------------
Charlotte Temple
/s/ LARRY E. TEMPLE Director March 2, 2001
- -----------------------------------------------------
Larry E. Temple
</TABLE>
83
<PAGE> 85
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 2000:
Deducted from related asset accounts:
Allowance for doubtful accounts....... $ 9 $ 6 $-- $ 5(a) $ 10
Allowance for loan losses............. 113 39 2(b) 36(a) 118
Allowance for unrealized losses on
available-for-sale securities....... 19 -- -- 35(c) (16)
Allowance for mortgage servicing
rights.............................. 1 -- -- 1(a) --
---- ---- --- ---- ----
Totals........................... $142 $ 45 $ 2 $ 77 $112
==== ==== === ==== ====
For the year 1999:
Deducted from related asset accounts:
Allowance for doubtful accounts....... $ 10 $ 5 $-- $ 6(a) $ 9
Allowance for loan losses............. 87 38 12(b) 24(a) 113
Allowance for unrealized losses on
available-for-sale securities....... (3) -- -- (22)(c) 19
Allowance for mortgage servicing
rights.............................. 17 (16) -- -- 1
---- ---- --- ---- ----
Totals........................... $111 $ 27 $12 $ 8 $142
==== ==== === ==== ====
For the year 1998:
Deducted from related asset accounts:
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 $-- $ 16 $111
==== ==== === ==== ====
</TABLE>
- ---------------
(a) Uncollectible accounts written off, net of recoveries.
(b) Additions related to acquisitions and bulk purchases of loans, net of
adjustments.
(c) Net increase (decrease) in market value of available-for-sale securities.
84
<PAGE> 86
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT PAGE NO.
------- ------- --------
<C> <S> <C>
10.21* -- Employment Agreement dated July 1, 2000, between Inland
Paperboard and Packaging, Inc. and Dale E. Stahl
10.22* -- Change in Control Agreement dated October 2, 2000,
between the Company and Kenneth M. Jastrow, II
10.23* -- Change in Control Agreement dated October 2, 2000,
between the Company and William B. Howes
10.24* -- Change in Control Agreement dated October 2, 2000,
between the Company and Harold C. Maxwell
10.25* -- Change in Control Agreement dated October 2, 2000,
between the Company and Bart J. Doney
10.26* -- Change in Control Agreement dated October 2, 2000,
between the Company and Kenneth R. Dubuque
10.27* -- Change in Control Agreement dated October 2, 2000,
between the Company and James C. Foxworthy
10.28* -- Change in Control Agreement dated October 2, 2000,
between the Company and Dale E. Stahl
10.29* -- Change in Control Agreement dated October 2, 2000,
between the Company and Jack C. Sweeny
10.30* -- Change in Control Agreement dated October 2, 2000,
between the Company and M. Richard Warner
10.31* -- Change in Control Agreement dated October 2, 2000,
between the Company and Randall D. Levy
10.32* -- Change in Control Agreement dated October 2, 2000,
between the Company and Louis R. Brill
10.33* -- Change in Control Agreement dated October 2, 2000,
between the Company and Scott Smith
10.34* -- Change in Control Agreement dated October 2, 2000,
between the Company and Doyle R. Simons
10.35* -- Change in Control Agreement dated October 2, 2000,
between the Company and David W. Turpin
10.36* -- Change in Control Agreement dated October 2, 2000,
between the Company and Leslie K. O'Neal
21 -- Subsidiaries of the Company
23 -- Consent of Ernst & Young LLP
</TABLE>
- ---------------
* Management contract or compensatory plan or arrangement.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>2
<FILENAME>d84570ex10-21.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT-DALE E. STAHL
<TEXT>
<PAGE> 1
EXHIBIT 10.21
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into by and between
Inland Paperboard and Packaging, Inc., a Delaware corporation (the "Company")
and Dale E. Stahl (the "Employee"), effective as of July 1, 2000.
WHEREAS, the Company and the Employee desire to set forth the terms and
conditions of the Employee's employment with the Company in writing;
NOW, THEREFORE, in consideration of the above recitals and the mutual
promises and conditions contained below, the parties hereby agree as follows:
1. EMPLOYMENT: The Employee's employment shall be subject to and
conditioned upon Employee's furnishing documentation required by law
and providing appropriate background information as required of
salaried employees under the Company's normal hiring practices.
Employee's employment with the Company shall commence as of July 1,
2000 ("Employment Date").
2. TITLE AND DUTIES: During the term of this Agreement, the Employee shall
be employed by the Company as its President and Chief Operating
Officer. Employee shall also serve as Group Vice President-Paper of the
Company's parent, Temple-Inland Inc. ("Temple-Inland"). The Employee
agrees to devote his full time, attention, skill and energy to the
business and affairs of the Company and Temple-Inland, and will use his
best efforts to promote the success of the Company and Temple-Inland.
3. NO INCONSISTENT OBLIGATIONS: The Employee affirms that he is not bound
by any contract or agreement with any other person or entity which
would be violated by his employment with the Company under the terms
and conditions of this Agreement.
4. COMPENSATION: During the term of this Agreement, the Company shall pay
the Employee no less than the following amounts:
<TABLE>
<CAPTION>
SALARY MINIMUM BONUS TOTAL CASH
<S> <C> <C> <C>
Year 1 $325,000 $275,000 $600,000
Year 2 $350,000 $275,000 $625,000
</TABLE>
The Employee's compensation shall be paid according to the Company's
normal pay/bonus cycle for executive officers; provided, however, that
the bonus payable in February 2001 shall be a prorata amount based on
Employee's length of service between the Employment Date and the
initial bonus payment date. All payments shall be subject to all
applicable tax withholding and deductions.
1
<PAGE> 2
5. BENEFITS:
a. BENEFIT PLANS: The Employee shall be eligible to participate
in the Company's health and welfare benefit plans, retirement
plan, 401(k) plan and any other benefit plans provided to
other salaried employees from time to time during his
employment according to the terms set forth in such plans.
b. VACATION: The Employee shall be eligible for four weeks paid
vacation and the Company's normal paid holidays, as provided
to other salaried employees from time to time during the term
of employment.
c. STOCK OPTIONS: Effective on July 3, 2000, Employee shall be
granted an option to purchase 25,000 shares of Temple-Inland
Inc. common stock at fair market value on the date of such
grant as determined under the Temple-Inland Inc. Stock Option
Plan. Thereafter, Employee shall be eligible to be considered
for additional stock option grants as a Tier I employee
beginning in 2001. Employee understands and agrees that the
Temple-Inland Inc. Management Development and Executive
Compensation Committee has full and complete discretion to
award options to employees and, other than the initial grant
described above, no subsequent grants are guaranteed to be
awarded or to be awarded in any particular amount.
6. RELOCATION EXPENSES: The Company shall reimburse the Employee for all
reasonable and customary expenses incurred by the Employee in
relocating his principal residence to Indianapolis, Indiana under the
Company's standard relocation policy; provided, that the Employee shall
submit to the Company a normal expense voucher which will be subject to
the approval of the Company. Employee shall complete his relocation no
later than December 31, 2000.
7. CHANGE IN CONTROL: In the event Employee's employment by the Company is
terminated or Employee resigns for Good Reason, as defined below,
within two (2) years following any Change in Control, Employee shall be
paid the Compensation Amount in a lump sum within thirty (30) days of
the date of such termination or resignation. In the event Company or
Temple-Inland adopts a change in control plan or provisions for senior
management, Employee shall receive the benefits of such plan or
provisions if they provide a greater cash payment to Employee, but
shall not receive both the payment under the Agreement and the payment
under such new plan or provisions. This item 7 shall survive the
termination of this Agreement. For purposes of this Agreement:
a. CHANGE IN CONTROL: "Change in Control" means (i) a merger or
consolidation to which the Company or Temple-Inland is a party
and for which the approval of any shareholders of the Company
or Temple-Inland is required; (ii) any "person" (as such term
is used in Sections 13(d) and
2
<PAGE> 3
14(d)(2) of the Securities Exchange Act of 1934, as amended)
becoming the beneficial owner, directly or indirectly, of
securities representing 25% or more of the combined voting
power of the Company's or Temple-Inland's then outstanding
securities; (iii) a sale or transfer of substantially all of
the assets of the Company or Temple-Inland; or (iv) a
liquidation or reorganization of the Company or Temple-Inland.
b. COMPENSATION AMOUNT: "Compensation Amount" means the gross
amount of cash required to provide a net payment after
federal, state and local taxes to Employee equal to two (2)
times his annual cash compensation (salary and minimum bonus)
as set forth in item 3 above.
c. GOOD REASON: "Good Reason" means a substantial reduction in
the Employee's duties as set forth in item 2 above, a
reduction in Employee's annual cash compensation as set forth
in item 4 above or a failure to pay such compensation within
seven (7) days of the date such compensation is due, a
substantial reduction in Employee's benefits as set forth in
item 4(a) above, or the relocation of Employee's principal
place of employment to a location more than 15 miles from
Indianapolis, Indiana.
8. TERMINATION OF AGREEMENT:
a. TERM: Except for the covenants set out in sections 7, 9 and
10, which shall survive, this Agreement shall terminate upon
the earliest to occur of the following:
i. 24 months from the Employment Date;
ii. the Employee's death, resignation or retirement;
iii. immediately and without prior notice upon Disability of
the Employee (as defined below); or
iv. immediately and without prior notice upon the
determination of the Company to terminate the Employee's
employment, with or without cause, for any reason.
b. DEFINITION OF DISABILITY: The Employee will be deemed to have
a "disability" if, for physical or mental reasons, the
Employee is unable to perform the essential functions of the
Employee's duties under this Agreement for one-hundred-twenty
(120) consecutive days, or one-hundred-eighty (180) days
during any twelve month period, as determined in accordance
with this Section 8(b). The disability of the Employee will be
determined by a physician selected by written agreement of the
Company and the Employee upon the request of either party by
notice to the other. If the Company and the Employee cannot
agree on the selection of a physician, each of them will
select a physician and the two physicians will select a third
physician who will determine whether the
3
<PAGE> 4
Employee has a disability. The determination of the physician
selected under this Section 8(b) will be binding on both
parties. The Employee must submit to a reasonable number of
examinations by the physician making the determination of
disability under this Section 8(b), and the Employee hereby
authorizes the disclosure and release to the Company of such
determination and all supporting medical records. If the
Employee is not legally competent, the Employee's legal
guardian or duly authorized attorney-in-fact will act in the
Employee's stead, under this Section 8(b), for the purposes of
submitting the Employee to the examinations, and providing the
authorization of disclosure, required under this Section 8(b).
c. TERMINATION PAY: In the event that the Employee's employment
with the Company is terminated for any reason other than (i) a
Change in Control, (ii) the Employee's resignation, (iii)
retirement, (iv) disability, or (v) willful misconduct
(including, but not limited to, dishonesty, fraud,
embezzlement, gross insubordination, gross misconduct and the
like), the Employee shall be entitled to receive a severance
payment in a gross amount (less applicable tax withholdings)
equal to the projected two-year cash compensation set forth
above of $1,225,000 reduced by all cash compensation paid to
Employee up to and including the date of termination.
d. EMPLOYMENT-AT-WILL: If the Employee remains employed by the
Company at the termination of this Agreement pursuant to item
8.(a)(i) hereof, his employment shall be at-will and may be
terminated by either the Employee or the Company thereafter
without regard to this Agreement except as set forth in item 7
hereof.
9. NON-DISCLOSURE COVENANT:
a. The Employee acknowledges that:
i. During the Agreement the Employee will be afforded access
to trade secrets and confidential business information,
including but not limited to: corporate planning;
production; distribution or marketing processes;
manufacturing techniques; customer lists or customer
leads; marketing information or procedures; development
or environmental work; work in process; financial
statements or notes, schedules or supporting financial
data; or any other secret or confidential matter relating
to the products, sales or business of the Company or
Temple-Inland, including plans for expansion to new
products, areas and markets; new product development
budgets and forecasts, together with all written and
graphic materials relating thereto (collectively
"Confidential Information");
4
<PAGE> 5
ii. Public disclosure of such Confidential Information could
have an adverse effect on the Company and its business or
Temple-Inland and its business;
iii. The Employee's covenants in this Section 9 are a material
inducement for the Company to enter into this Agreement
and to allow the Employee access to the Confidential
Information; and
iv. The provisions of this Section 9 are reasonable and
necessary to prevent improper use of Confidential
Information.
b. At all times during the term of this Agreement and thereafter,
the Employee shall hold in strictest confidence and not
disclose, directly or indirectly, to any person, firm or
corporation, without the express written prior authorization
of the Company or Temple-Inland, any Confidential Information.
10. CONFIDENTIALITY: The parties agree that this Agreement is of a
confidential nature and that neither the existence of this Agreement
nor its terms shall be disclosed except (i) to consultants, advisors
and affiliates (who shall be informed of and be bound by the terms of
this Section 10), (ii) as required by securities laws or other law, or
(iii) to the Internal Revenue Service in connection with an audit of
any of the Company's or the Employee's tax returns.
11. GOVERNING LAW: This Agreement will be governed by the laws of the
United States and the State of Indiana, as applicable, without regard
to conflicts of laws principles.
12. MISCELLANEOUS:
a. The parties agree that the covenants and other terms contained
in this Agreement are reasonable in all respects.
b. The parties agree that each and every paragraph, sentence,
term and provision of this Agreement shall be considered
severable and that, in the event a court or other tribunal
finds any paragraph, sentence, term or provision to be invalid
or unenforceable, the validity, enforceability, operation or
effect of the remaining paragraphs, sentences, terms or
provisions shall not be affected.
c. The failure of either party to insist in any one or more
instances upon performance of any of the provisions of the
Agreement or to pursue their rights thereunder, shall not be
construed as a waiver of any such provisions or the
relinquishment of any rights.
d. Any notices, requests or other communications required
hereunder shall be in writing and shall be personally
delivered or, if mailed, by first class mail
5
<PAGE> 6
If to the Company, to:
Inland Paperboard and Packaging, Inc.
4030 Vincennes Road
Indianapolis, Indiana 46268
Attn: Steven L. Householder
If to the Employee, to:
Dale E. Stahl
4030 Vincennes Road
Indianapolis, Indiana 46268
e. This Agreement represents the sole and entire agreement among
the Employee and the Company relating to the Employee's
employment and supersedes all prior promises, contracts and
agreements of any kind, whether written or oral, express or
implied, as well as any negotiations and/or discussions
between the parties hereto. Any amendment to this Agreement
must be in writing and signed by duly authorized
representatives of each of the parties hereto and must
expressly state that it is the intention of each of the
parties hereto to amend this Agreement.
f. Except for the rights of the Company or Temple-Inland set
forth in Sections 9 and 10, this Agreement is for the benefit
of, and may be enforced only by, the Company and the Employee
and their respective assignees, heirs and personal
representatives, and is not for the benefit of, and may not be
enforced by, any other person or entity. This Agreement shall
be binding upon the successors and assigns of the Company.
Dated:
------------------------ -----------------------------------
Dale E. Stahl
Dated: INLAND PAPERBOARD AND PACKAGING,
------------------------ INC.
BY:
--------------------------------
6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>3
<FILENAME>d84570ex10-22.txt
<DESCRIPTION>CHANGE IN CONTROL AGREEMENT-KENNETH M. JASTROW II
<TEXT>
<PAGE> 1
EXHIBIT 10.22
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"),
is made by and between Temple-Inland Inc., a Delaware corporation
("Temple-Inland"), and Kenneth M. Jastrow, II (the "Executive").
WHEREAS, Temple-Inland considers it essential to the best
interests of its stockholders to foster the continued employment of key
management personnel; and
WHEREAS, the Board recognizes that, as is the case with many
publicly held corporations, the possibility of a Change in Control exists and
that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of Temple-Inland and its stockholders; and
WHEREAS, the Board has determined that appropriate steps
should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management, including the Executive, to
their assigned duties without distraction in the face of potentially disturbing
circumstances arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants herein contained, Temple-Inland and the Executive hereby agree
as follows:
1. Defined Terms. The definitions of capitalized terms used in
this Agreement are provided in the last Section hereof.
2. Term of Agreement. The Term of this Agreement shall
commence on the Effective Date and shall continue in effect through the second
anniversary of the Effective Date; provided, however, that commencing on the
first anniversary of the Effective Date, and on each anniversary of the
Effective Date thereafter, the Term shall automatically be extended for one
additional year unless, not later than 90 days prior to each such date, the
Company or the Executive shall have given notice not to extend the Term; and
provided, further, that if a Change in Control shall have occurred during the
Term, the Term shall expire no earlier than 36 months beyond the month in which
such Change in Control occurred.
<PAGE> 2
3. Company's Covenants Summarized. In order to induce the
Executive to remain in the employ of the Company and in consideration of the
Executive's covenants set forth in Section 4 hereof, the Company agrees, under
the conditions described herein, to pay the Executive the Severance Payments and
the other payments and benefits described herein. Except as provided in Section
9.1 hereof, no Severance Payments shall be payable under this Agreement unless
there shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. The Executive's Covenants. The Executive agrees that,
subject to the terms and conditions of this Agreement, in the event of a
Potential Change in Control during the Term, the Executive will remain in the
employ of the Company until the earliest of (i) a date which is six months from
the date of such Potential Change of Control, (ii) the date of a Change in
Control, (iii) the date of termination by the Executive of the Executive's
employment for Good Reason or by reason of death, Disability or Retirement, or
(iv) the termination by the Company of the Executive's employment for any
reason.
5. Compensation Other Than Severance Payments.
5.1 Following a Change in Control and during the Term, during
any period that the Executive fails to perform the Executive's full-time duties
with the Company as a result of incapacity due to physical or mental illness,
the Company shall pay the Executive's full salary to the Executive at the rate
in effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or
benefit plan, program or arrangement maintained by the Company during such
period (other than any disability plan), until the Executive's employment is
terminated by the Company for Disability.
5.2 If the Executive's employment shall be terminated for any
reason following a Change in Control and during the Term, the Company shall pay
the Executive's full salary to the Executive through the Date of Termination at
the highest rate in effect during the three-year period ending immediately prior
2
<PAGE> 3
to the Date of Termination together with all compensation and benefits payable
to the Executive through the Date of Termination under the terms of the
Company's compensation and benefit plans, programs or arrangements as in effect
immediately prior to the Date of Termination or, if more favorable to the
Executive, as in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any
reason following a Change in Control and during the Term, the Company shall pay
to the Executive the Executive's normal post-termination compensation and
benefits as such payments become due. Such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
retirement, insurance and other compensation or benefit plans, programs and
arrangements as in effect immediately prior to the Date of Termination or, if
more favorable to the Executive, as in effect immediately prior to the
occurrence of the first event or circumstance constituting Good Reason.
6. Severance Payments.
6.1 If the Executive's employment is terminated following a
Change in Control and within two (2) years after a Change in Control, other than
(A) by the Company for Cause, (B) by reason of death or Disability, or (C) by
the Executive without Good Reason, then the Company shall pay the Executive the
amounts, and provide the Executive the benefits, described in this Section 6.1
("Severance Payments") and Section 6.2, in addition to any payments and benefits
to which the Executive is entitled under Section 5 hereof. For purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (whether or not a Change in Control
ever occurs) and such termination was at the request or direction of a Person
who has entered into an agreement with the Company the consummation of which
would constitute a Change in Control, or (ii) the Executive terminates his
employment for Good Reason prior to a Change in Control (whether or not a Change
in Control ever occurs) and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person. For purposes of any
determination regarding the applicability of the immediately preceding sentence,
any position taken by the
3
<PAGE> 4
Executive shall be presumed to be correct unless the Company establishes to the
Board by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination, the Company shall
pay to the Executive a lump sum severance payment, in cash, equal to three (3)
times the sum of (i) the Executive's highest base salary as in effect during the
three-year period ending immediately prior to the Date of Termination and (ii)
the Executive's target annual bonus pursuant to any annual bonus or incentive
plan maintained by the Company in respect of the fiscal year in which occurs the
Date of Termination (or, if higher, in respect of any of the three preceding
fiscal years). The amount payable pursuant to this Section 6.1(A) shall be
reduced by the amount of any cash severance or salary continuation benefit paid
or payable to the Executive under any other plan, policy or program of the
Company or any written employment agreement between the Executive and the
Company.
(B) For the three-year period immediately following
the Date of Termination, the Company shall arrange to provide the Executive and
his dependents life, short-term disability, long-term disability, travel
accident, accidental death and dismemberment, medical, dental and other health
and welfare benefits substantially similar to those provided to the Executive
and his dependents immediately prior to the Date of Termination or, if more
favorable to the Executive, those provided to the Executive and his dependents
immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, at no greater cost to the Executive than the cost to
the Executive immediately prior to such date or occurrence; provided, however,
that, unless the Executive consents to a different method (after taking into
account the effect of such method on the calculation of "parachute payments"
pursuant to Section 6.2 hereof), such health and welfare benefits shall be
provided through a third- party insurer. To the extent that health and welfare
benefits of the same type are received by or made available to the Executive
during the three-year period following the Executive's Date of Termination
(which such benefits received by or made available to the Executive shall be
reported by the Executive to the insurance company or other appropriate party in
accordance with any applicable coordination of benefits provisions), the
benefits otherwise receivable by the Executive pursuant to this Section 6.1(B)
shall be made secondary to such benefits; provided, however, that the Company
shall reimburse the Executive for the excess, if any, of the cost of such
benefits to the Executive over such cost
4
<PAGE> 5
immediately prior to the Date of Termination or, if more favorable to the
Executive, the first occurrence of an event or circumstance constituting Good
Reason.
(C) Each option held by the Executive to purchase
shares of common stock of Temple-Inland outstanding as of the Date of
Termination shall be treated in accordance with the applicable terms of any plan
(including any underlying agreement) pursuant to which it was granted.
(D) For purposes of determining the amount of any
benefit payable to the Executive and the Executive's right to any benefit
otherwise payable under a Pension Plan, the Executive shall be treated as if he
had accumulated (after the Date of Termination) thirty-six (36) additional
months of service credit thereunder and had been credited during such period
with compensation at the highest rate in effect during the three-year period
ending immediately prior to the Date of Termination.
(E) Notwithstanding any provision of any Pension
Plan or deferred compensation plan to the contrary, and except to the extent
otherwise provided in Section 6.1(F), in lieu of any other benefit under a
supplemental, excess benefit or deferred compensation plan, the Company shall
pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the
actuarial equivalent of the aggregate benefit which the Executive had accrued
under the terms of all supplemental and excess benefit plans and (ii) the
actuarial equivalent of the deferred compensation otherwise payable to the
Executive, in either case without regard to any amendment to any such plan made
subsequent to a Change in Control and on or prior to the Date of Termination,
which amendment adversely affects in any manner the computation of benefits
thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be
determined (x) using the same assumptions utilized under the applicable plan (or
if there is no provision for such assumptions, under the Company's tax-qualified
Pension Plan in which the Executive participates) immediately prior to the Date
of Termination or, if more favorable to the Executive, immediately prior to the
first occurrence of an event or circumstance constituting Good Reason, (y)
taking into account any early retirement subsidies associated with the
applicable benefit, and (z) on the basis of a straight life annuity (or other
default form of benefit) commencing at the date (but in no event earlier than
the third anniversary of the Date of Termination) as of which the actuarial
equivalent of such annuity or other form of benefit is greatest.
5
<PAGE> 6
(F) In addition to the benefits to which the
Executive is entitled under any defined contribution Pension Plan, the Company
shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the
amount that would have been contributed thereto by the Company on the
Executive's behalf during the three (3) years immediately following the Date of
Termination, determined (x) as if the Executive made the maximum permissible
contributions thereto during such period, (y) as if the Executive earned
compensation during such period at a rate equal to the Executive's highest rate
of compensation (as defined in the Pension Plan) during the three-year period
ending immediately prior to the Date of Termination, and (z) without regard to
any amendment to the Pension Plan made subsequent to a Change in Control and on
or prior to the Date of Termination, which amendment adversely affects in any
manner the computation of benefits thereunder, and (ii) the excess, if any, of
(x) the Executive's account balance under the Pension Plan as of the Date of
Termination over (y) the portion of such account balance that is nonforfeitable
under the terms of the Pension Plan.
(G) Notwithstanding any provision of any annual or
long-term incentive plan to the contrary, the Company shall pay to the Executive
a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive
compensation which has been allocated or awarded to the Executive for a
completed annual bonus cycle preceding the Date of Termination under any such
plan and which, as of the Date of Termination, is contingent only upon the
continued employment of the Executive to a subsequent date, (ii) if the Date of
Termination occurs before the end of the first six months in the then-current
annual bonus cycle under the applicable plan, a pro rata portion to the Date of
Termination of the aggregate value of all contingent incentive compensation
awards to the Executive for the uncompleted period under any such plan,
calculated as to each such award by multiplying the award that the Executive
would have earned on the last day of the performance award period, assuming the
achievement, at the target level (or if higher, at the then projected actual
final level), of the individual and corporate performance goals established with
respect to such award, by the fraction obtained by dividing the number of full
months and any fractional portion of a month during such performance award
period through the Date of Termination by the total number of months contained
in such performance award period, and (iii) if the Date of Termination occurs
after the end of the first six months in the then-current annual bonus cycle but
before the end of such annual bonus cycle under the applicable plan, the full
aggregate value of all contingent incentive compensation awards to the Executive
for the uncompleted period
6
<PAGE> 7
under any such plan assuming the achievement, at the target level (or if higher,
at the then projected actual final level), of the individual and corporate
performance goals established with respect to such award.
(H) If the Executive would have become entitled to
benefits under the Company's post-retirement health care or life insurance
plans, as in effect immediately prior to the Date of Termination or, if more
favorable to the Executive, as in effect immediately prior to the first
occurrence of an event or circumstance constituting Good Reason, had the
Executive's employment terminated at any time within three (3) years after the
Date of Termination, the Company shall provide such post-retirement health care
or life insurance benefits to the Executive and the Executive's dependents
commencing on the later of (i) the date on which such coverage would have first
become available and (ii) the date on which benefits described in subsection (B)
of this Section 6.1 terminate.
(I) The Company shall reimburse the Executive for
expenses incurred for outplacement services suitable to the Executive's position
for a period of one (1) year following the Date of Termination (or, if earlier,
until the first acceptance by the Executive of an offer of employment) in an
amount not exceeding 15% of the sum of the Executive's highest annual base rate
of salary as in effect during the three-year period ending immediately prior to
the Date of Termination, and the greatest target annual bonus pursuant to any
annual bonus or incentive plan maintained by the Company in respect of the
fiscal year in which occurs the Date of Termination (or, if higher, in respect
of any of the three preceding fiscal years).
(J) For the three-year period immediately following
the Date of Termination, the Company shall provide the Executive with his
customary perquisites (such as any use of a Company provided automobile, club
membership fee reimbursements, income tax preparation and financial advisory
services) in each case on the same terms and conditions that were applicable
immediately prior to the Date of Termination or, if more favorable, immediately
prior to the first occurrence of an event or circumstance constituting Good
Reason.
6.2 (A) Whether or not the Executive becomes entitled to the
Severance Payments, if any payment or benefit received or to be received by the
Executive in connection with a Change in Control or the termination of the
Executive's employment (whether pursuant to the terms of this Agreement or
7
<PAGE> 8
any other plan, arrangement or agreement with the Company, any Person whose
actions result in a Change in Control or any Person affiliated with the Company
or such Person) (all such payments and benefits, including the Severance
Payments, being hereinafter called "Total Payments") will be subject (in whole
or part) to the Excise Tax, then, subject to the provisions of subsection (B) of
this Section 6.2, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Total Payments and any federal, state
and local income and employment taxes and Excise Tax upon the Gross-Up Payment,
shall be equal to the Total Payments. For purposes of determining the amount of
the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes
at the highest marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the Date of Termination (or if there is no Date of Termination,
then the date on which the Gross-up Payment is calculated for purposes of this
Section 6.2), net of the maximum reduction in federal income tax which could be
obtained from deduction of such state and local taxes.
(B) In the event that the amount of the Total Payments does
not exceed 110% of the largest amount that would result in no portion of the
Total Payments being subject to the Excise Tax (the "Safe Harbor"), then
subsection (A) of this Section 6.2 shall not apply and the noncash Severance
Payments shall first be reduced (if necessary, to zero), and the cash Severance
Benefits shall thereafter be reduced (if necessary, to zero) so that the amount
of the Total Payments is equal to the Safe Harbor; provided, however, that the
Executive may elect to have the cash Severance Payments reduced (or eliminated)
prior to any reduction of the noncash Severance Payments.
(C) For purposes of determining whether any of the Total
Payments will be subject to the Excise Tax and the amount of such Excise Tax,
(i) all of the Total Payments shall be treated as "parachute payments" within
the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax
counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by
the accounting firm which was, immediately prior to the Change in Control, the
Company's independent auditor (the "Auditor"), such other payments or benefits
(in whole or in part) do not constitute parachute payments, including by reason
of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments"
within the meaning of section 280G(b)(l) of the Code shall be treated as subject
8
<PAGE> 9
to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute
payments (in whole or in part) represent reasonable compensation for services
actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in
excess of the Base Amount allocable to such reasonable compensation, or are
otherwise not subject to the Excise Tax, and (iii) the value of any noncash
benefits or any deferred payment or benefit shall be determined by the Auditor
in accordance with the principles of sections 280G(d)(3) and (4) of the Code.
Prior to the payment date set forth in Section 6.3 hereof, the Company shall
provide the Executive with its calculation of the amounts referred to in this
Section 6.2(C) and such supporting materials as are reasonably necessary for the
Executive to evaluate the Company's calculations. If the Executive disputes the
Company's calculations (in whole or in part), the reasonable opinion of Tax
Counsel with respect to the matter in dispute shall prevail.
(D) (I) In the event that (1) amounts are paid to the
Executive pursuant to Section 6.2(A), (2) there is a Final Determination that
the Excise Tax is less than the amount taken into account hereunder in
calculating the Gross-Up Payment, and (3) after giving effect to such Final
Determination, the Severance Payments are to be reduced pursuant to Section
6.2(B), the Executive shall repay to the Company, within five (5) business days
following the date of the Final Determination, the Gross-Up Payment, the amount
of the reduction in the Severance Payments, plus interest on the amount of such
repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code.
(II) In the event that (1) amounts are paid to the
Executive pursuant to Section 6.2(A), (2) there is a Final Determination that
the Excise Tax is less than the amount taken into account hereunder in
calculating the Gross-Up Payment, and (3) after giving effect to such Final
Determination, the Severance Payments are not to be reduced pursuant to Section
6.2(B), the Executive shall repay to the Company, within five (5) business days
following the date of the Final Determination, the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Executive),
to the extent that such repayment results in a reduction in the Excise Tax and a
dollar-for-dollar reduction in the Executive's taxable income and wages for
purposes of federal, state and local income and employment taxes, plus interest
on the amount of such repayment at 120% of the rate provided in section
1274(b)(2)(B) of the Code.
9
<PAGE> 10
(III) Except as otherwise provided in clause (IV)
below, in the event there is a Final Determination that the Excise Tax exceeds
the amount taken into account hereunder in determining the Gross-Up Payment
(including by reason of any payment the existence or amount of which cannot be
determined at the time of the Gross-Up Payment), the Company shall pay to the
Executive, within five (5) business days following the date of the Final
Determination, the sum of (1) a Gross-Up Payment in respect of such excess and
in respect of any portion of the Excise Tax with respect to which the Company
had not previously made a Gross-Up Payment, including a Gross-Up Payment in
respect of any Excise Tax attributable to amounts payable under clauses (2) and
(3) of this paragraph (III) (plus any interest, penalties or additions payable
by the Executive with respect to such excess and such portion), (2) if Severance
Payments were reduced pursuant to Section 6.2(B) but after giving effect to such
Final Determination, the Severance Payments should not have been reduced
pursuant to Section 6.2(B), the amount by which the Severance Payments were
reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of
the rate provided in section 1274(b)(2)(B) of the Code.
(IV) In the event that (1) Severance Payments were
reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments
which are considered "parachute payments" within the meaning of section
280G(b)(2) of the Code is subsequently redetermined in a Final Determination,
but such redetermined value still does not exceed 110% of the Safe Harbor, then,
within five (5) business days following such Final Determination, (x) the
Company shall pay to the Executive the amount (if any) by which the reduced
Severance Payments (after taking the Final Determination into account) exceeds
the amount of the reduced Severance Payments actually paid to the Executive,
plus interest on the amount of such repayment at 120% of the rate provided in
section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company
the amount (if any) by which the reduced Severance Payments actually paid to the
Executive exceeds the amount of the reduced Severance Payments (after taking the
Final Determination into account), plus interest on the amount of such repayment
at 120% of the rate provided in section 1274(b)(2)(B) of the Code.
6.3 The payments provided in subsections (A), (E), (F) and (G)
of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
amounts of such payments cannot be finally determined on or before such day,
10
<PAGE> 11
the Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 6.2
hereof, in accordance with Section 6.2 hereof, of the minimum amount of such
payments to which the Executive is clearly entitled and shall pay the remainder
of such payments (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the 30th day after the Date
of Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth business
day after demand by the Company (together with interest at 120% of the rate
provided in section 1274(b)(2)(B) of the Code). At the time that payments are
made under this Agreement, the Company shall provide the Executive with a
written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice the Company has received from Tax Counsel, the
Auditor or other advisors or consultants (and any such opinions or advice which
are in writing shall be attached to the statement).
6.4 The Company also shall pay to the Executive all legal fees
and expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
7.1. Notice of Termination. After a Change in Control and
during the Term, any purported termination of the Executive's employment (other
than by reason of death) shall be communicated by written Notice of Termination
from one party hereto to the other party hereto in accordance with Section 10
hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and
11
<PAGE> 12
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, any
purported termination of the Executive's employment shall be presumed to be
other than for Cause unless the Notice of Termination includes a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
(3/4) of the entire membership of the Board at a meeting of the Board which was
called and held for the purpose of considering such termination (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty of
conduct set forth in clause (i) or (ii) of the definition of Cause herein, and
specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect
to any purported termination of the Executive's employment after a Change in
Control and during the Term, shall mean (i) if the Executive's employment is
terminated for Disability, 30 days after Notice of Termination is given
(provided that the Executive shall not have returned to the full-time
performance of the Executive's duties during such 30 day period), and (ii) if
the Executive's employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination by
the Company, shall not be less than 30 days (except in the case of a termination
for Cause) and, in the case of a termination by the Executive, shall not be less
than 15 days nor more than 60 days, respectively, from the date such Notice of
Termination is given).
7.3 Dispute Concerning Termination. If within 15 days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the Term ends or (ii) the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.
12
<PAGE> 13
7.4 Compensation During Dispute. If a purported termination
occurs following a Change in Control and during the Term and the Date of
Termination is extended in accordance with Section 7.3 hereof, the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the Date of Termination, as determined in
accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.
8. No Mitigation. The Company agrees that, if the Executive's
employment with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Section 6 hereof or Section
7.4 hereof. Further, the amount of any payment or benefit provided for in this
Agreement (other than Section 6.1(B) hereof) shall not be reduced by any
compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.
9. Successors; Binding Agreement.
9.1 In addition to any obligations imposed by law upon any
successor to Temple-Inland, Temple-Inland will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Temple-Inland to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that Temple-Inland would be required to perform it if no such succession
had taken place. Failure of Temple-Inland to obtain such assumption and
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from the Company
in the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
13
<PAGE> 14
9.2 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death of
the Executive) if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.
10. Notices. For the purpose of this Agreement, notices and
all other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed, if
to the Executive, to the address of the Executive as maintained from time to
time on the payroll system of the Company and, if to the Company, to the address
set forth below, or to such other address as either party may have furnished to
the other in writing in accordance herewith, except that notice of change of
address shall be effective only upon actual receipt:
To the Company:
Temple-Inland Inc.
303 South Temple Drive
Diboll, Texas 75941
Attention: M. Richard Warner
11. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the Board. No waiver by either party hereto at any
time of any breach by the other party hereto of, or of any lack of compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. This Agreement supersedes any
other agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof which have been made by the Executive or
the Company; provided, however, that this Agreement shall supersede any
agreement setting forth the terms and conditions of the
14
<PAGE> 15
Executive's employment with the Company only in the event that the Executive's
employment with the Company is terminated on or following a Change in Control,
by the Company other than for Cause or by the Executive other than for Good
Reason. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Texas without regard to
its principles of conflicts of law. All references to sections of the Exchange
Act or the Code shall be deemed also to refer to any successor provisions to
such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The obligations of the
Company and the Executive under this Agreement which by their nature may require
either partial or total performance after the expiration of the Term (including,
without limitation, those under Sections 6 and 7 hereof) shall survive such
expiration.
15
<PAGE> 16
12. Validity.
12.1 Any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden
Parachute and Indemnification Payments.
12.2 The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Settlement of Disputes. All claims by the Executive for
benefits under this Agreement shall be directed to and determined by the Board
and shall be in writing. Any denial by the Board of a claim for benefits under
this Agreement shall be delivered to the Executive in writing and shall set
forth the specific reasons for the denial and the specific provisions of this
Agreement relied upon. The Board shall afford a reasonable opportunity to the
Executive for a review of the decision denying a claim and shall further allow
the Executive to appeal to the Board a decision of the Board within 60 days
after notification by the Board that the Executive's claim has been denied.
15. Definitions. For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in
Rule 12b-2 promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in
Section 6.2 hereof.
(C) "Base Amount" shall have the meaning set forth
in section 280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set
forth in Rule 13d-3 under the Exchange Act.
16
<PAGE> 17
(E) "Board" shall mean the Board of Directors of
Temple-Inland Inc.
(F) "Cause" for termination by the Company of the
Executive's employment shall mean (i) the willful and continued failure by the
Executive to substantially perform the Executive's duties with the Company
(other than any such failure resulting from the Executive's incapacity due to
physical or mental illness or any such actual or anticipated failure after the
issuance of a Notice of Termination for Good Reason by the Executive pursuant to
Section 7.1 hereof) after a written demand for substantial performance is
delivered to the Executive by the Board, which demand specifically identifies
the manner in which the Board believes that the Executive has not substantially
performed the Executive's duties, or (ii) the willful engaging by the Executive
in conduct which is demonstrably and materially injurious to the Company,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Company and (y) in the event of a dispute
concerning the application of this provision, no claim by the Company that Cause
exists shall be given effect unless the Company establishes to the Board by
clear and convincing evidence that Cause exists.
(G) "Change in Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs shall
have occurred:
(I) any Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of the Company (not including in
the securities beneficially owned by such Person any securities acquired
directly from the Company or its Affiliates) representing 25% or more of the
combined voting power of the Company's then outstanding securities, excluding
any Person who becomes such a Beneficial Owner in connection with a transaction
described in clauses (a), (b) or (c) of paragraph (III) below;
(II) within any twenty-four (24) month
period, the following individuals cease for any reason to constitute a majority
of the number of directors then serving on the Board: individuals who, on the
Effective Date, constitute the Board and any new director (other than a director
whose initial
17
<PAGE> 18
assumption of office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or election by the Board
or nomination for election by the Company's shareholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors on the date hereof or whose appointment,
election or nomination for election was previously so approved or recommended;
(III) there is consummated a merger,
consolidation of the Company or any direct or indirect subsidiary of the Company
with any other corporation or any recapitalization of the Company (for purposes
of this paragraph (III), a "Business Event") unless, immediately following such
Business Event (a) the directors of the Company immediately prior to such
Business Event continue to constitute at least a majority of the board of
directors of the Company, the surviving entity or any parent thereof, (b) the
voting securities of the Company outstanding immediately prior to such Business
Event continue to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or any parent thereof),
in combination with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any subsidiary of
the Company, at least 60% of the combined voting power of the securities of the
Company or such surviving entity or any parent thereof outstanding immediately
after such Business Event, or (c) no Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company or such surviving entity or
any parent thereof (not including in the securities Beneficially Owned by such
Person any securities acquired directly from the Company or its Affiliates)
representing 25% or more of the combined voting power of the then outstanding
securities of the Company or such surviving entity or any parent thereof (except
to the extent such ownership existed prior to the Business Event);
(IV) the shareholders of the Company
approve a plan of complete liquidation or dissolution of the Company;
(V) there is consummated an agreement for
the sale, disposition or long-term lease by the Company of:
18
<PAGE> 19
(A) substantially all of the Company's
assets,
(B) (i) substantially all of the
Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any
successor thereto) or (ii) substantially all of the assets of Inland Paperboard
and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or
successors thereto), or
(C) (i) substantially all of the
Company's ownership interest in Temple-Inland Forest Products Corporation or
Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii)
substantially all of the assets of Temple-Inland Forest Products Corporation or
Guaranty Federal Bank, F.S.B. and their respective direct or indirect
subsidiaries (or any respective successor or successors thereto),
other than such a sale, disposition or lease to an entity, at least 50% of the
combined voting power of the voting securities of which are owned by
shareholders of the Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale or disposition; or
(VI) any other event that the Board, in
its sole discretion, determines to be a Change in Control for purposes of this
Agreement.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record holders
of the common stock of the Company immediately prior to such transaction or
series of transactions continue to have substantially the same proportionate
ownership in an entity which owns all or substantially all of the assets of the
Company immediately following such transaction or series of transactions.
(H) "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
(I) "Company" shall mean, unless the context clearly
requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its
Affiliates that actually employ the Executive; provided, that (I) for purposes
of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc.,
19
<PAGE> 20
except that in determining under Section 15(G) hereof whether or not any Change
in Control of the Company has occurred, Company shall include any successor to
Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform
this Agreement by operation of law or otherwise, (II) unless the context clearly
requires otherwise, references to the Company in a capacity of employer shall
mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the
Executive, and (III) where the Agreement requires the Company to make a payment
to the Executive or to take some other action, either Temple-Inland, Inc. shall
do so or it shall cause any of its Affiliates that actually employ the Executive
to do so.
(J) "Date of Termination" shall have the meaning set
forth in Section 7.2 hereof.
(K) "Disability" shall be deemed the reason for the
termination by the Company of the Executive's employment, if, as a result of the
Executive's incapacity due to physical or mental illness, the Executive shall
have been absent from the full-time performance of the Executive's duties with
the Company for a period of six consecutive months, the Company shall have given
the Executive a Notice of Termination for Disability, and, within 30 days after
such Notice of Termination is given, the Executive shall not have returned to
the full-time performance of the Executive's duties.
(L) "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended from time to time.
(M) "Excise Tax" shall mean any excise tax imposed
under section 4999 of the Code.
(N) "Executive" shall mean the individual named in
the first paragraph of this Agreement.
(O) "Final Determination" means a final
determination by the Internal Revenue Service or, if such determination is
appealed, a final determination by any court of competent jurisdiction.
(P) "Good Reason" for termination by the Executive
of the Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or prior to a Change in
20
<PAGE> 21
Control under the circumstances described in clauses (i) and (ii) of the second
sentence of Section 6.1 hereof (treating all references in paragraphs (I)
through (VI) below to a "Change in Control" as references to a "Potential Change
in Control"), of any one of the following acts by the Company, or failures by
the Company to act, unless, in the case of any act or failure to act described
in paragraph (I), (IV), or (V) below, such act or failure to act is corrected
prior to the Date of Termination specified in the Notice of Termination given in
respect thereof:
(I) the assignment to the Executive of any
duties substantially inconsistent with the Executive's status as a senior
executive officer of the Company or a material adverse alteration in the nature
or status of the Executive's responsibilities from those in effect immediately
prior to the Change in Control (including, as applicable and without limitation,
the Executive ceasing to be an executive officer of a public company);
(II) a substantial reduction by the Company
in the Executive's annual base salary as in effect on the date hereof or as the
same may be increased from time to time;
(III) the relocation of the Executive's
principal place of employment to a location more than 50 miles from the
Executive's principal place of employment immediately prior to the Change in
Control or the Company's requiring the Executive to be based anywhere other than
such principal place of employment (or permitted relocation thereof) except for
required travel on the Company's business to an extent substantially consistent
with the Executive's present business travel obligations;
(IV) the failure by the Company to pay to
the Executive any portion of the Executive's current compensation, or to pay to
the Executive any portion of an installment of deferred compensation under any
deferred compensation program of the Company, within seven days of the date such
compensation is due;
(V) the failure by the Company to continue
to provide the Executive with benefits substantially similar to the material
benefits enjoyed by the Executive under any of the Company's executive
compensation (including bonus, equity or incentive compensation), pension,
savings, life insurance, medical, health and accident, or disability plans in
which the
21
<PAGE> 22
Executive was participating immediately prior to the Change in Control, the
taking of any other action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive the Executive of any material
fringe benefit enjoyed by the Executive at the time of the Change in Control, or
the failure by the Company to provide the Executive with the number of paid
vacation days to which the Executive is entitled on the basis of years of
service with the Company in accordance with the Company's normal vacation policy
in effect at the time of the Change in Control; or
(VI) any purported termination of the
Executive's employment which is not effected pursuant to a Notice of Termination
satisfying the requirements of Section 7.1 hereof; for purposes of this
Agreement, no such purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder. For purposes of any determination regarding
the existence of Good Reason, any claim by the Executive that Good Reason exists
shall be presumed to be correct unless the Company establishes to the Board by
clear and convincing evidence that Good Reason does not exist.
(Q) "Gross-Up Payment" shall have the meaning set
forth in Section 6.2 hereof.
(R) "Notice of Termination" shall have the meaning
set forth in Section 7.1 hereof.
(S) "Pension Plan" shall mean any tax-qualified,
supplemental or excess benefit pension plan maintained by the Company and any
other plan or agreement entered into between the Executive and the Company which
is designed to provide the Executive with supplemental retirement benefits, and
any tax-qualified, supplemental or excess defined contribution plan maintained
by the Company and any other defined contribution plan or agreement entered into
between the Executive and the Company.
(T) "Person" shall have the meaning given in Section
3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d)
22
<PAGE> 23
thereof, except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
(U) "Potential Change in Control" shall be deemed
to have occurred if the event set forth in any one of the following paragraphs
shall have occurred:
(I) the Company enters into an agreement,
the consummation of which would result in the occurrence of a Change in Control;
(II) the Company or any Person publicly
announces an intention to take or to consider taking actions which, if
consummated, would constitute a Change in Control;
(III) any Person becomes the Beneficial
Owner, directly or indirectly, of securities of the Company representing 20% or
more of either the then outstanding shares of common stock of the Company or the
combined voting power of the Company's then outstanding securities (not
including in the securities beneficially owned by such Person any securities
acquired directly from the Company or its affiliates); or
(IV) the Board adopts a resolution to the
effect that, for purposes of this Agreement, a Potential Change in Control has
occurred.
(V) "Retirement" shall be deemed the reason for the
termination by the Executive of the Executive's employment if such employment is
terminated in accordance with the Company's retirement policy, including early
retirement, generally applicable to its salaried employees.
(W) "Severance Payments" shall have the meaning set
forth in Section 6.1 hereof.
(X) "Tax Counsel" shall have the meaning set forth
in Section 6.2 hereof.
23
<PAGE> 24
(Y) "Term" shall mean the period of time described
in Section 2 hereof (including any extension, continuation or termination
described therein).
(Z) "Total Payments" shall mean those payments so
described in Section 6.2 hereof.
IN WITNESS WHEREOF, the parties have duly executed this
Agreement to be effective as of the Effective Date.
TEMPLE-INLAND INC.
By:
-----------------------------------
Name:
Title:
EXECUTIVE
--------------------------------------
Kenneth M. Jastrow, II
24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.23
<SEQUENCE>4
<FILENAME>d84570ex10-23.txt
<DESCRIPTION>CHANGE IN CONTROL AGREEMENT-WILLIAM B. HOWES
<TEXT>
<PAGE> 1
EXHIBIT 10.23
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made
by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and
William B. Howes (the "Executive").
WHEREAS, Temple-Inland considers it essential to the best interests of
its stockholders to foster the continued employment of key management personnel;
and
WHEREAS, the Board recognizes that, as is the case with many publicly
held corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of Temple-Inland and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, Temple-Inland and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.
2. Term of Agreement. The Term of this Agreement shall commence on the
Effective Date and shall continue in effect through the second anniversary of
the Effective Date; provided, however, that commencing on the first anniversary
of the Effective Date, and on each anniversary of the Effective Date thereafter,
the Term shall automatically be extended for one additional year unless, not
later than 90 days prior to each such date, the Company or the Executive shall
have given notice not to extend the Term; and provided, further, that if a
Change in Control shall have occurred during the Term, the Term shall expire no
earlier than 36 months beyond the month in which such Change in Control
occurred.
<PAGE> 2
3. Company's Covenants Summarized. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 9.1
hereof, no Severance Payments shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. The Executive's Covenants. The Executive agrees that, subject to the
terms and conditions of this Agreement, in the event of a Potential Change in
Control during the Term, the Executive will remain in the employ of the Company
until the earliest of (i) a date which is six months from the date of such
Potential Change of Control, (ii) the date of a Change in Control, (iii) the
date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
5.1 Following a Change in Control and during the Term, during any
period that the Executive fails to perform the Executive's full-time duties with
the Company as a result of incapacity due to physical or mental illness, the
Company shall pay the Executive's full salary to the Executive at the rate in
effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or
benefit plan, program or arrangement maintained by the Company during such
period (other than any disability plan), until the Executive's employment is
terminated by the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay the
Executive's full salary to the Executive through the Date of Termination at the
highest rate in effect during the three-year period ending immediately prior
2
<PAGE> 3
to the Date of Termination together with all compensation and benefits payable
to the Executive through the Date of Termination under the terms of the
Company's compensation and benefit plans, programs or arrangements as in effect
immediately prior to the Date of Termination or, if more favorable to the
Executive, as in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay to the
Executive the Executive's normal post-termination compensation and benefits as
such payments become due. Such post-termination compensation and benefits shall
be determined under, and paid in accordance with, the Company's retirement,
insurance and other compensation or benefit plans, programs and arrangements as
in effect immediately prior to the Date of Termination or, if more favorable to
the Executive, as in effect immediately prior to the occurrence of the first
event or circumstance constituting Good Reason.
6. Severance Payments.
6.1 If the Executive's employment is terminated following a Change in
Control and within two (2) years after a Change in Control, other than (A) by
the Company for Cause, (B) by reason of death or Disability, or (C) by the
Executive without Good Reason, then the Company shall pay the Executive the
amounts, and provide the Executive the benefits, described in this Section 6.1
("Severance Payments") and Section 6.2, in addition to any payments and benefits
to which the Executive is entitled under Section 5 hereof. For purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (whether or not a Change in Control
ever occurs) and such termination was at the request or direction of a Person
who has entered into an agreement with the Company the consummation of which
would constitute a Change in Control, or (ii) the Executive terminates his
employment for Good Reason prior to a Change in Control (whether or not a Change
in Control ever occurs) and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person. For purposes of any
determination regarding the applicability of the immediately preceding sentence,
any position taken by the
3
<PAGE> 4
Executive shall be presumed to be correct unless the Company establishes to the
Board by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay to the
Executive a lump sum severance payment, in cash, equal to three (3) times the
sum of (i) the Executive's highest base salary as in effect during the
three-year period ending immediately prior to the Date of Termination and (ii)
the Executive's target annual bonus pursuant to any annual bonus or incentive
plan maintained by the Company in respect of the fiscal year in which occurs the
Date of Termination (or, if higher, in respect of any of the three preceding
fiscal years). The amount payable pursuant to this Section 6.1(A) shall be
reduced by the amount of any cash severance or salary continuation benefit paid
or payable to the Executive under any other plan, policy or program of the
Company or any written employment agreement between the Executive and the
Company.
(B) For the three-year period immediately following the Date of
Termination, the Company shall arrange to provide the Executive and his
dependents life, short-term disability, long-term disability, travel accident,
accidental death and dismemberment, medical, dental and other health and welfare
benefits substantially similar to those provided to the Executive and his
dependents immediately prior to the Date of Termination or, if more favorable to
the Executive, those provided to the Executive and his dependents immediately
prior to the first occurrence of an event or circumstance constituting Good
Reason, at no greater cost to the Executive than the cost to the Executive
immediately prior to such date or occurrence; provided, however, that, unless
the Executive consents to a different method (after taking into account the
effect of such method on the calculation of "parachute payments" pursuant to
Section 6.2 hereof), such health and welfare benefits shall be provided through
a third-party insurer. To the extent that health and welfare benefits of the
same type are received by or made available to the Executive during the
three-year period following the Executive's Date of Termination (which such
benefits received by or made available to the Executive shall be reported by the
Executive to the insurance company or other appropriate party in accordance with
any applicable coordination of benefits provisions), the benefits otherwise
receivable by the Executive pursuant to this Section 6.1(B) shall be made
secondary to such benefits; provided, however, that the Company shall reimburse
the Executive for the excess, if any, of the cost of such benefits to the
Executive over such cost
4
<PAGE> 5
immediately prior to the Date of Termination or, if more favorable to the
Executive, the first occurrence of an event or circumstance constituting Good
Reason.
(C) Each option held by the Executive to purchase shares of common
stock of Temple-Inland outstanding as of the Date of Termination shall be
treated in accordance with the applicable terms of any plan (including any
underlying agreement) pursuant to which it was granted.
(D) For purposes of determining the amount of any benefit payable
to the Executive and the Executive's right to any benefit otherwise payable
under a Pension Plan, the Executive shall be treated as if he had accumulated
(after the Date of Termination) thirty-six (36) additional months of service
credit thereunder and had been credited during such period with compensation at
the highest rate in effect during the three-year period ending immediately prior
to the Date of Termination.
(E) Notwithstanding any provision of any Pension Plan or deferred
compensation plan to the contrary, and except to the extent otherwise provided
in Section 6.1(F), in lieu of any other benefit under a supplemental, excess
benefit or deferred compensation plan, the Company shall pay to the Executive a
lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of
the aggregate benefit which the Executive had accrued under the terms of all
supplemental and excess benefit plans and (ii) the actuarial equivalent of the
deferred compensation otherwise payable to the Executive, in either case without
regard to any amendment to any such plan made subsequent to a Change in Control
and on or prior to the Date of Termination, which amendment adversely affects in
any manner the computation of benefits thereunder. For purposes of this Section
6.1(E), "actuarial equivalent" shall be determined (x) using the same
assumptions utilized under the applicable plan (or if there is no provision for
such assumptions, under the Company's tax-qualified Pension Plan in which the
Executive participates) immediately prior to the Date of Termination or, if more
favorable to the Executive, immediately prior to the first occurrence of an
event or circumstance constituting Good Reason, (y) taking into account any
early retirement subsidies associated with the applicable benefit, and (z) on
the basis of a straight life annuity (or other default form of benefit)
commencing at the date (but in no event earlier than the third anniversary of
the Date of Termination) as of which the actuarial equivalent of such annuity or
other form of benefit is greatest.
5
<PAGE> 6
(F) In addition to the benefits to which the Executive is entitled
under any defined contribution Pension Plan, the Company shall pay the Executive
a lump sum amount, in cash, equal to the sum of (i) the amount that would have
been contributed thereto by the Company on the Executive's behalf during the
three (3) years immediately following the Date of Termination, determined (x) as
if the Executive made the maximum permissible contributions thereto during such
period, (y) as if the Executive earned compensation during such period at a rate
equal to the Executive's highest rate of compensation (as defined in the Pension
Plan) during the three-year period ending immediately prior to the Date of
Termination, and (z) without regard to any amendment to the Pension Plan made
subsequent to a Change in Control and on or prior to the Date of Termination,
which amendment adversely affects in any manner the computation of benefits
thereunder, and (ii) the excess, if any, of (x) the Executive's account balance
under the Pension Plan as of the Date of Termination over (y) the portion of
such account balance that is nonforfeitable under the terms of the Pension Plan.
(G) Notwithstanding any provision of any annual or long-term
incentive plan to the contrary, the Company shall pay to the Executive a lump
sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation
which has been allocated or awarded to the Executive for a completed annual
bonus cycle preceding the Date of Termination under any such plan and which, as
of the Date of Termination, is contingent only upon the continued employment of
the Executive to a subsequent date, (ii) if the Date of Termination occurs
before the end of the first six months in the then-current annual bonus cycle
under the applicable plan, a pro rata portion to the Date of Termination of the
aggregate value of all contingent incentive compensation awards to the Executive
for the uncompleted period under any such plan, calculated as to each such award
by multiplying the award that the Executive would have earned on the last day of
the performance award period, assuming the achievement, at the target level (or
if higher, at the then projected actual final level), of the individual and
corporate performance goals established with respect to such award, by the
fraction obtained by dividing the number of full months and any fractional
portion of a month during such performance award period through the Date of
Termination by the total number of months contained in such performance award
period, and (iii) if the Date of Termination occurs after the end of the first
six months in the then-current annual bonus cycle but before the end of such
annual bonus cycle under the applicable plan, the full aggregate value of all
contingent incentive compensation awards to the Executive for the uncompleted
period
6
<PAGE> 7
under any such plan assuming the achievement, at the target level (or if higher,
at the then projected actual final level), of the individual and corporate
performance goals established with respect to such award.
(H) If the Executive would have become entitled to benefits under
the Company's post-retirement health care or life insurance plans, as in effect
immediately prior to the Date of Termination or, if more favorable to the
Executive, as in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason, had the Executive's employment terminated
at any time within three (3) years after the Date of Termination, the Company
shall provide such post-retirement health care or life insurance benefits to the
Executive and the Executive's dependents commencing on the later of (i) the date
on which such coverage would have first become available and (ii) the date on
which benefits described in subsection (B) of this Section 6.1 terminate.
(I) The Company shall reimburse the Executive for expenses
incurred for outplacement services suitable to the Executive's position for a
period of one (1) year following the Date of Termination (or, if earlier, until
the first acceptance by the Executive of an offer of employment) in an amount
not exceeding 15% of the sum of the Executive's highest annual base rate of
salary as in effect during the three-year period ending immediately prior to the
Date of Termination, and the greatest target annual bonus pursuant to any annual
bonus or incentive plan maintained by the Company in respect of the fiscal year
in which occurs the Date of Termination (or, if higher, in respect of any of the
three preceding fiscal years).
(J) For the three-year period immediately following the Date of
Termination, the Company shall provide the Executive with his customary
perquisites (such as any use of a Company provided automobile, club membership
fee reimbursements, income tax preparation and financial advisory services) in
each case on the same terms and conditions that were applicable immediately
prior to the Date of Termination or, if more favorable, immediately prior to the
first occurrence of an event or circumstance constituting Good Reason.
6.2 (A) Whether or not the Executive becomes entitled to the Severance
Payments, if any payment or benefit received or to be received by the Executive
in connection with a Change in Control or the termination of the Executive's
employment (whether pursuant to the terms of this Agreement or
7
<PAGE> 8
any other plan, arrangement or agreement with the Company, any Person whose
actions result in a Change in Control or any Person affiliated with the Company
or such Person) (all such payments and benefits, including the Severance
Payments, being hereinafter called "Total Payments") will be subject (in whole
or part) to the Excise Tax, then, subject to the provisions of subsection (B) of
this Section 6.2, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Total Payments and any federal, state
and local income and employment taxes and Excise Tax upon the Gross-Up Payment,
shall be equal to the Total Payments. For purposes of determining the amount of
the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes
at the highest marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the Date of Termination (or if there is no Date of Termination,
then the date on which the Gross-up Payment is calculated for purposes of this
Section 6.2), net of the maximum reduction in federal income tax which could be
obtained from deduction of such state and local taxes.
(B) In the event that the amount of the Total Payments does not
exceed 110% of the largest amount that would result in no portion of the Total
Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection
(A) of this Section 6.2 shall not apply and the noncash Severance Payments shall
first be reduced (if necessary, to zero), and the cash Severance Benefits shall
thereafter be reduced (if necessary, to zero) so that the amount of the Total
Payments is equal to the Safe Harbor; provided, however, that the Executive may
elect to have the cash Severance Payments reduced (or eliminated) prior to any
reduction of the noncash Severance Payments.
(C) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of
the Total Payments shall be treated as "parachute payments" within the meaning
of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the accounting
firm which was, immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such other payments or benefits (in whole
or in part) do not constitute parachute payments, including by reason of section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(l) of the Code shall be treated as subject
8
<PAGE> 9
to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute
payments (in whole or in part) represent reasonable compensation for services
actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in
excess of the Base Amount allocable to such reasonable compensation, or are
otherwise not subject to the Excise Tax, and (iii) the value of any noncash
benefits or any deferred payment or benefit shall be determined by the Auditor
in accordance with the principles of sections 280G(d)(3) and (4) of the Code.
Prior to the payment date set forth in Section 6.3 hereof, the Company shall
provide the Executive with its calculation of the amounts referred to in this
Section 6.2(C) and such supporting materials as are reasonably necessary for the
Executive to evaluate the Company's calculations. If the Executive disputes the
Company's calculations (in whole or in part), the reasonable opinion of Tax
Counsel with respect to the matter in dispute shall prevail.
(D) (I) In the event that (1) amounts are paid to the Executive
pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise
Tax is less than the amount taken into account hereunder in calculating the
Gross-Up Payment, and (3) after giving effect to such Final Determination, the
Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive
shall repay to the Company, within five (5) business days following the date of
the Final Determination, the Gross-Up Payment, the amount of the reduction in
the Severance Payments, plus interest on the amount of such repayments at 120%
of the rate provided in section 1274(b)(2)(B) of the Code.
(II) In the event that (1) amounts are paid to the Executive
pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise
Tax is less than the amount taken into account hereunder in calculating the
Gross-Up Payment, and (3) after giving effect to such Final Determination, the
Severance Payments are not to be reduced pursuant to Section 6.2(B), the
Executive shall repay to the Company, within five (5) business days following
the date of the Final Determination, the portion of the Gross-Up Payment
attributable to such reduction (plus that portion of the Gross-Up Payment
attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Executive),
to the extent that such repayment results in a reduction in the Excise Tax and a
dollar-for-dollar reduction in the Executive's taxable income and wages for
purposes of federal, state and local income and employment taxes, plus interest
on the amount of such repayment at 120% of the rate provided in section
1274(b)(2)(B) of the Code.
9
<PAGE> 10
(III) Except as otherwise provided in clause (IV) below, in the
event there is a Final Determination that the Excise Tax exceeds the amount
taken into account hereunder in determining the Gross-Up Payment (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross-Up Payment), the Company shall pay to the Executive,
within five (5) business days following the date of the Final Determination, the
sum of (1) a Gross-Up Payment in respect of such excess and in respect of any
portion of the Excise Tax with respect to which the Company had not previously
made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise
Tax attributable to amounts payable under clauses (2) and (3) of this paragraph
(III) (plus any interest, penalties or additions payable by the Executive with
respect to such excess and such portion), (2) if Severance Payments were reduced
pursuant to Section 6.2(B) but after giving effect to such Final Determination,
the Severance Payments should not have been reduced pursuant to Section 6.2(B),
the amount by which the Severance Payments were reduced pursuant to Section
6.2(B), and (3) interest on such amounts at 120% of the rate provided in section
1274(b)(2)(B) of the Code.
(IV) In the event that (1) Severance Payments were reduced
pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which
are considered "parachute payments" within the meaning of section 280G(b)(2) of
the Code is subsequently redetermined in a Final Determination, but such
redetermined value still does not exceed 110% of the Safe Harbor, then, within
five (5) business days following such Final Determination, (x) the Company shall
pay to the Executive the amount (if any) by which the reduced Severance Payments
(after taking the Final Determination into account) exceeds the amount of the
reduced Severance Payments actually paid to the Executive, plus interest on the
amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B)
of the Code, or (y) the Executive shall pay to the Company the amount (if any)
by which the reduced Severance Payments actually paid to the Executive exceeds
the amount of the reduced Severance Payments (after taking the Final
Determination into account), plus interest on the amount of such repayment at
120% of the rate provided in section 1274(b)(2)(B) of the Code.
6.3 The payments provided in subsections (A), (E), (F) and (G) of
Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
amounts of such payments cannot be finally determined on or before such day,
10
<PAGE> 11
the Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 6.2
hereof, in accordance with Section 6.2 hereof, of the minimum amount of such
payments to which the Executive is clearly entitled and shall pay the remainder
of such payments (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the 30th day after the Date
of Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth business
day after demand by the Company (together with interest at 120% of the rate
provided in section 1274(b)(2)(B) of the Code). At the time that payments are
made under this Agreement, the Company shall provide the Executive with a
written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice the Company has received from Tax Counsel, the
Auditor or other advisors or consultants (and any such opinions or advice which
are in writing shall be attached to the statement).
6.4 The Company also shall pay to the Executive all legal fees and
expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
7.1. Notice of Termination. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 10 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and cir-
11
<PAGE> 12
cumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, any
purported termination of the Executive's employment shall be presumed to be
other than for Cause unless the Notice of Termination includes a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
(3/4) of the entire membership of the Board at a meeting of the Board which was
called and held for the purpose of considering such termination (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty of
conduct set forth in clause (i) or (ii) of the definition of Cause herein, and
specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, 30 days after Notice of Termination is given (provided that the
Executive shall not have returned to the full-time performance of the
Executive's duties during such 30 day period), and (ii) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a termination by the Company, shall not be
less than 30 days (except in the case of a termination for Cause) and, in the
case of a termination by the Executive, shall not be less than 15 days nor more
than 60 days, respectively, from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within 15 days after any Notice
of Termination is given, or, if later, prior to the Date of Termination (as
determined without regard to this Section 7.3), the party receiving such Notice
of Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be extended until the earlier of (i)
the date on which the Term ends or (ii) the date on which the dispute is finally
resolved, either by mutual written agreement of the parties or by a final
judgment, order or decree of an arbitrator or a court of competent jurisdiction
(which is not appealable or with respect to which the time for appeal therefrom
has expired and no appeal has been perfected); provided, however, that the Date
of Termination shall be extended by a notice of dispute given by the Executive
only if such notice is given in good faith and the Executive pursues the
resolution of such dispute with reasonable diligence.
12
<PAGE> 13
7.4 Compensation During Dispute. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3 hereof, the Company shall continue to
pay the Executive the full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given, until the Date of Termination, as determined in accordance with
Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all
other amounts due under this Agreement (other than those due under Section 5.2
hereof) and shall not be offset against or reduce any other amounts due under
this Agreement.
8. No Mitigation. The Company agrees that, if the Executive's
employment with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Section 6 hereof or Section
7.4 hereof. Further, the amount of any payment or benefit provided for in this
Agreement (other than Section 6.1(B) hereof) shall not be reduced by any
compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.
9. Successors; Binding Agreement.
9.1 In addition to any obligations imposed by law upon any successor to
Temple-Inland, Temple-Inland will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Temple-Inland to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that Temple-Inland would be required to perform it if no such succession
had taken place. Failure of Temple-Inland to obtain such assumption and
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from the Company
in the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
13
<PAGE> 14
9.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
10. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address of the Executive as maintained from time to time on
the payroll system of the Company and, if to the Company, to the address set
forth below, or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of address
shall be effective only upon actual receipt:
To the Company:
Temple-Inland Inc.
303 South Temple Drive
Diboll, Texas 75941
Attention: M. Richard Warner
11. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. This Agreement supersedes any other
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof which have been made by the Executive or
the Company; provided, however, that this Agreement shall supersede any
agreement setting forth the terms and conditions of the
14
<PAGE> 15
Executive's employment with the Company only in the event that the Executive's
employment with the Company is terminated on or following a Change in Control,
by the Company other than for Cause or by the Executive other than for Good
Reason. The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of Texas without regard to
its principles of conflicts of law. All references to sections of the Exchange
Act or the Code shall be deemed also to refer to any successor provisions to
such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The obligations of the
Company and the Executive under this Agreement which by their nature may require
either partial or total performance after the expiration of the Term (including,
without limitation, those under Sections 6 and 7 hereof) shall survive such
expiration.
15
<PAGE> 16
12. Validity.
12.1 Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and
Indemnification Payments.
12.2 The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
14. Settlement of Disputes. All claims by the Executive for benefits
under this Agreement shall be directed to and determined by the Board and shall
be in writing. Any denial by the Board of a claim for benefits under this
Agreement shall be delivered to the Executive in writing and shall set forth the
specific reasons for the denial and the specific provisions of this Agreement
relied upon. The Board shall afford a reasonable opportunity to the Executive
for a review of the decision denying a claim and shall further allow the
Executive to appeal to the Board a decision of the Board within 60 days after
notification by the Board that the Executive's claim has been denied.
15. Definitions. For purposes of this Agreement, the following terms
shall have the meanings indicated below:
(A) "Affiliate" shall have the meaning set forth in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(B) "Auditor" shall have the meaning set forth in Section 6.2
hereof.
(C) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning set forth in Rule
13d-3 under the Exchange Act.
16
<PAGE> 17
(E) "Board" shall mean the Board of Directors of Temple-Inland
Inc.
(F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
after a written demand for substantial performance is delivered to the Executive
by the Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Company, monetarily or otherwise.
For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure
to act, on the Executive's part shall be deemed "willful" unless done, or
omitted to be done, by the Executive not in good faith and without reasonable
belief that the Executive's act, or failure to act, was in the best interest of
the Company and (y) in the event of a dispute concerning the application of this
provision, no claim by the Company that Cause exists shall be given effect
unless the Company establishes to the Board by clear and convincing evidence
that Cause exists.
(G) "Change in Control" shall be deemed to have occurred if the
event set forth in any one of the following paragraphs shall have occurred:
(I) any Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including in the securities
beneficially owned by such Person any securities acquired directly from the
Company or its Affiliates) representing 25% or more of the combined voting power
of the Company's then outstanding securities, excluding any Person who becomes
such a Beneficial Owner in connection with a transaction described in clauses
(a), (b) or (c) of paragraph (III) below;
(II) within any twenty-four (24) month period, the following
individuals cease for any reason to constitute a majority of the number of
directors then serving on the Board: individuals who, on the Effective Date,
constitute the Board and any new director (other than a director whose initial
17
<PAGE> 18
assumption of office is in connection with an actual or threatened election
contest, including but not limited to a consent solicitation, relating to the
election of directors of the Company) whose appointment or election by the Board
or nomination for election by the Company's shareholders was approved or
recommended by a vote of at least two-thirds (2/3) of the directors then still
in office who either were directors on the date hereof or whose appointment,
election or nomination for election was previously so approved or recommended;
(III) there is consummated a merger, consolidation of the
Company or any direct or indirect subsidiary of the Company with any other
corporation or any recapitalization of the Company (for purposes of this
paragraph (III), a "Business Event") unless, immediately following such Business
Event (a) the directors of the Company immediately prior to such Business Event
continue to constitute at least a majority of the board of directors of the
Company, the surviving entity or any parent thereof, (b) the voting securities
of the Company outstanding immediately prior to such Business Event continue to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the Company, at least
60% of the combined voting power of the securities of the Company or such
surviving entity or any parent thereof outstanding immediately after such
Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company or such surviving entity or any parent
thereof (not including in the securities Beneficially Owned by such Person any
securities acquired directly from the Company or its Affiliates) representing
25% or more of the combined voting power of the then outstanding securities of
the Company or such surviving entity or any parent thereof (except to the extent
such ownership existed prior to the Business Event);
(IV) the shareholders of the Company approve a plan of complete
liquidation or dissolution of the Company;
(V) there is consummated an agreement for the sale, disposition
or long-term lease by the Company of:
18
<PAGE> 19
(A) substantially all of the Company's assets, or
(B) (i) substantially all of the Company's ownership
interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or
(ii) substantially all of the assets of Inland Paperboard and Packaging, Inc.
and its direct or indirect subsidiaries (or any successor or successors
thereto),
other than such a sale, disposition or lease to an entity, at least 50% of the
combined voting power of the voting securities of which are owned by
shareholders of the Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale or disposition; or
(VI) any other event that the Board, in its sole discretion,
determines to be a Change in Control for purposes of this Agreement.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record holders
of the common stock of the Company immediately prior to such transaction or
series of transactions continue to have substantially the same proportionate
ownership in an entity which owns all or substantially all of the assets of the
Company immediately following such transaction or series of transactions.
(H) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(I) "Company" shall mean, unless the context clearly requires
otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates
that actually employ the Executive; provided, that (I) for purposes of Sections
15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., except that in
determining under Section 15(G) hereof whether or not any Change in Control of
the Company has occurred, Company shall include any successor to Temple-Inland
Inc.'s business and/or assets which assumes and agrees to perform this Agreement
by operation of law or otherwise, (II) unless the context clearly requires
otherwise, references to the Company in a capacity of employer shall mean
Temple-Inland Inc. or any of its Affiliates, whichever actually employs the
Executive, and (III) where the Agreement requires the
19
<PAGE> 20
Company to make a payment to the Executive or to take some other action, either
Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that
actually employ the Executive to do so.
(J) "Date of Termination" shall have the meaning set forth in
Section 7.2 hereof.
(K) "Disability" shall be deemed the reason for the termination by
the Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of six consecutive months, the Company shall have given the
Executive a Notice of Termination for Disability, and, within 30 days after such
Notice of Termination is given, the Executive shall not have returned to the
full-time performance of the Executive's duties.
(L) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
(M) "Excise Tax" shall mean any excise tax imposed under section
4999 of the Code.
(N) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(O) "Final Determination" means a final determination by the
Internal Revenue Service or, if such determination is appealed, a final
determination by any court of competent jurisdiction.
(P) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or prior to a Change in
Control under the circumstances described in clauses (i) and (ii) of the second
sentence of Section 6.1 hereof (treating all references in paragraphs (I)
through (VI) below to a "Change in Control" as references to a "Potential Change
in Control"), of any one of the following acts by the Company, or failures by
the Company to act, unless, in the case of any act or failure to act described
in paragraph (I), (IV), or (V) below, such act or failure to act is corrected
prior to the
20
<PAGE> 21
Date of Termination specified in the Notice of Termination given in respect
thereof:
(I) the assignment to the Executive of any duties substantially
inconsistent with the Executive's status as a senior executive officer of the
Company or a material adverse alteration in the nature or status of the
Executive's responsibilities from those in effect immediately prior to the
Change in Control (including, as applicable and without limitation, the
Executive ceasing to be an executive officer of a public company);
(II) a substantial reduction by the Company in the Executive's
annual base salary as in effect on the date hereof or as the same may be
increased from time to time;
(III) the relocation of the Executive's principal place of
employment to a location more than 50 miles from the Executive's principal place
of employment immediately prior to the Change in Control or the Company's
requiring the Executive to be based anywhere other than such principal place of
employment (or permitted relocation thereof) except for required travel on the
Company's business to an extent substantially consistent with the Executive's
present business travel obligations;
(IV) the failure by the Company to pay to the Executive any
portion of the Executive's current compensation, or to pay to the Executive any
portion of an installment of deferred compensation under any deferred
compensation program of the Company, within seven days of the date such
compensation is due;
(V) the failure by the Company to continue to provide the
Executive with benefits substantially similar to the material benefits enjoyed
by the Executive under any of the Company's executive compensation (including
bonus, equity or incentive compensation), pension, savings, life insurance,
medical, health and accident, or disability plans in which the Executive was
participating immediately prior to the Change in Control, the taking of any
other action by the Company which would directly or indirectly materially reduce
any of such benefits or deprive the Executive of any material fringe benefit
enjoyed by the Executive at the time of the Change in Control, or the failure by
the Company to provide the Executive with the number of paid vacation days to
which the Executive is entitled on the basis of years of service
21
<PAGE> 22
with the Company in accordance with the Company's normal vacation policy in
effect at the time of the Change in Control; or
(VI) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 7.1 hereof; for purposes of this Agreement, no such
purported termination shall be effective.
The Executive's right to terminate the Executive's employment for Good
Reason shall not be affected by the Executive's incapacity due to physical or
mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder. For purposes of any determination regarding
the existence of Good Reason, any claim by the Executive that Good Reason exists
shall be presumed to be correct unless the Company establishes to the Board by
clear and convincing evidence that Good Reason does not exist.
(Q) "Gross-Up Payment" shall have the meaning set forth in Section
6.2 hereof.
(R) "Notice of Termination" shall have the meaning set forth in
Section 7.1 hereof.
(S) "Pension Plan" shall mean any tax-qualified, supplemental or
excess benefit pension plan maintained by the Company and any other plan or
agreement entered into between the Executive and the Company which is designed
to provide the Executive with supplemental retirement benefits, and any
tax-qualified, supplemental or excess defined contribution plan maintained by
the Company and any other defined contribution plan or agreement entered into
between the Executive and the Company.
(T) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company.
22
<PAGE> 23
(U) "Potential Change in Control" shall be deemed to have occurred
if the event set forth in any one of the following paragraphs shall have
occurred:
(I) the Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;
(II) the Company or any Person publicly announces an intention
to take or to consider taking actions which, if consummated, would constitute a
Change in Control;
(III) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of the Company representing 20% or more of either the
then outstanding shares of common stock of the Company or the combined voting
power of the Company's then outstanding securities (not including in the
securities beneficially owned by such Person any securities acquired directly
from the Company or its affiliates); or
(IV) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.
(V) "Retirement" shall be deemed the reason for the termination by
the Executive of the Executive's employment if such employment is terminated in
accordance with the Company's retirement policy, including early retirement,
generally applicable to its salaried employees.
(W) "Severance Payments" shall have the meaning set forth in
Section 6.1 hereof.
(X) "Tax Counsel" shall have the meaning set forth in Section 6.2
hereof.
(Y) "Term" shall mean the period of time described in Section 2
hereof (including any extension, continuation or termination described therein).
(Z) "Total Payments" shall mean those payments so described in
Section 6.2 hereof.
23
<PAGE> 24
IN WITNESS WHEREOF, the parties have duly executed this Agreement to be
effective as of the Effective Date.
TEMPLE-INLAND INC.
By:
----------------------------------------
Name: Kenneth M. Jastrow, II
Title: Chairman and Chief Executive Officer
EXECUTIVE
-------------------------------------------
William B. Howes
Tier I: Paper 24
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>5
<FILENAME>d84570ex10-24.txt
<DESCRIPTION>CHANGE IN CONTROL AGREEMENT-HAROLD C. MAXWELL
<TEXT>
<PAGE> 1
EXHIBIT 10.24
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made
by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and
Harold C. Maxwell (the "Executive").
WHEREAS, Temple-Inland considers it essential to the best interests of
its stockholders to foster the continued employment of key management personnel;
and
WHEREAS, the Board recognizes that, as is the case with many publicly
held corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of Temple-Inland and its stockholders; and
WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, Temple-Inland and the Executive hereby agree as
follows:
1. Defined Terms. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.
2. Term of Agreement. The Term of this Agreement shall commence on the
Effective Date and shall continue in effect through the second anniversary of
the Effective Date; provided, however, that commencing on the first anniversary
of the Effective Date, and on each anniversary of the Effective Date thereafter,
the Term shall automatically be extended for one additional year unless, not
later than 90 days prior to each such date, the Company or the Executive shall
have given notice not to extend the Term; and provided, further, that if a
Change in Control shall have occurred during the Term, the Term shall expire no
earlier than 36 months beyond the month in which such Change in Control
occurred.
<PAGE> 2
3. Company's Covenants Summarized. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 9.1
hereof, no Severance Payments shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. The Executive's Covenants. The Executive agrees that, subject to
the terms and conditions of this Agreement, in the event of a Potential Change
in Control during the Term, the Executive will remain in the employ of the
Company until the earliest of (i) a date which is six months from the date of
such Potential Change of Control, (ii) the date of a Change in Control, (iii)
the date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
5.1 Following a Change in Control and during the Term, during any
period that the Executive fails to perform the Executive's full-time duties with
the Company as a result of incapacity due to physical or mental illness, the
Company shall pay the Executive's full salary to the Executive at the rate in
effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation or
benefit plan, program or arrangement maintained by the Company during such
period (other than any disability plan), until the Executive's employment is
terminated by the Company for Disability.
5.2 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay the
Executive's full salary to the Executive through the Date of Termination at the
highest rate in effect during the three-year period ending immediately prior
2
<PAGE> 3
to the Date of Termination together with all compensation and benefits payable
to the Executive through the Date of Termination under the terms of the
Company's compensation and benefit plans, programs or arrangements as in effect
immediately prior to the Date of Termination or, if more favorable to the
Executive, as in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason.
5.3 If the Executive's employment shall be terminated for any reason
following a Change in Control and during the Term, the Company shall pay to the
Executive the Executive's normal post-termination compensation and benefits as
such payments become due. Such post-termination compensation and benefits shall
be determined under, and paid in accordance with, the Company's retirement,
insurance and other compensation or benefit plans, programs and arrangements as
in effect immediately prior to the Date of Termination or, if more favorable to
the Executive, as in effect immediately prior to the occurrence of the first
event or circumstance constituting Good Reason.
6. Severance Payments.
6.1 If the Executive's employment is terminated following a Change in
Control and within two (2) years after a Change in Control, other than (A) by
the Company for Cause, (B) by reason of death or Disability, or (C) by the
Executive without Good Reason, then the Company shall pay the Executive the
amounts, and provide the Executive the benefits, described in this Section 6.1
("Severance Payments") and Section 6.2, in addition to any payments and benefits
to which the Executive is entitled under Section 5 hereof. For purposes of this
Agreement, the Executive's employment shall be deemed to have been terminated
following a Change in Control by the Company without Cause or by the Executive
with Good Reason, if (i) the Executive's employment is terminated by the Company
without Cause prior to a Change in Control (whether or not a Change in Control
ever occurs) and such termination was at the request or direction of a Person
who has entered into an agreement with the Company the consummation of which
would constitute a Change in Control, or (ii) the Executive terminates his
employment for Good Reason prior to a Change in Control (whether or not a Change
in Control ever occurs) and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person. For purposes of any
determination regarding the applicability of the immediately preceding sentence,
any position taken by the
3
<PAGE> 4
Executive shall be presumed to be correct unless the Company establishes to the
Board by clear and convincing evidence that such position is not correct.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay to the
Executive a lump sum severance payment, in cash, equal to three (3) times the
sum of (i) the Executive's highest base salary as in effect during the
three-year period ending immediately prior to the Date of Termination and (ii)
the Executive's target annual bonus pursuant to any annual bonus or incentive
plan maintained by the Company in respect of the fiscal year in which occurs the
Date of Termination (or, if higher, in respect of any of the three preceding
fiscal years). The amount payable pursuant to this Section 6.1(A) shall be
reduced by the amount of any cash severance or salary continuation benefit paid
or payable to the Executive under any other plan, policy or program of the
Company or any written employment agreement between the Executive and the
Company.
(B) For the three-year period immediately following the Date of
Termination, the Company shall arrange to provide the Executive and his
dependents life, short-term disability, long-term disability, travel accident,
accidental death and dismemberment, medical, dental and other health and welfare
benefits substantially similar to those provided to the Executive and his
dependents immediately prior to the Date of Termination or, if more favorable to
the Executive, those provided to the Executive and his dependents immediately
prior to the first occurrence of an event or circumstance constituting Good
Reason, at no greater cost to the Executive than the cost to the Executive
immediately prior to such date or occurrence; provided, however, that, unless
the Executive consents to a different method (after taking into account the
effect of such method on the calculation of "parachute payments" pursuant to
Section 6.2 hereof), such health and welfare benefits shall be provided through
a third-party insurer. To the extent that health and welfare benefits of the
same type are received by or made available to the Executive during the
three-year period following the Executive's Date of Termination (which such
benefits received by or made available to the Executive shall be reported by the
Executive to the insurance company or other appropriate party in accordance with
any applicable coordination of benefits provisions), the benefits otherwise
receivable by the Executive pursuant to this Section 6.1(B) shall be made
secondary to such benefits; provided, however, that the Company shall reimburse
the Executive for the excess, if any, of the cost of such benefits to the
Executive over such cost
4
<PAGE> 5
immediately prior to the Date of Termination or, if more favorable to the
Executive, the first occurrence of an event or circumstance constituting Good
Reason.
(C) Each option held by the Executive to purchase shares of common
stock of Temple-Inland outstanding as of the Date of Termination shall be
treated in accordance with the applicable terms of any plan (including any
underlying agreement) pursuant to which it was granted.
(D) For purposes of determining the amount of any benefit payable
to the Executive and the Executive's right to any benefit otherwise payable
under a Pension Plan, the Executive shall be treated as if he had accumulated
(after the Date of Termination) thirty-six (36) additional months of service
credit thereunder and had been credited during such period with compensation at
the highest rate in effect during the three-year period ending immediately prior
to the Date of Termination.
(E) Notwithstanding any provision of any Pension Plan or deferred
compensation plan to the contrary, and except to the extent otherwise provided
in Section 6.1(F), in lieu of any other benefit under a supplemental, excess
benefit or deferred compensation plan, the Company shall pay to the Executive a
lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of
the aggregate benefit which the Executive had accrued under the terms of all
supplemental and excess benefit plans and (ii) the actuarial equivalent of the
deferred compensation otherwise payable to the Executive, in either case without
regard to any amendment to any such plan made subsequent to a Change in Control
and on or prior to the Date of Termination, which amendment adversely affects in
any manner the computation of benefits thereunder. For purposes of this Section
6.1(E), "actuarial equivalent" shall be determined (x) using the same
assumptions utilized under the applicable plan (or if there is no provision for
such assumptions, under the Company's tax-qualified Pension Plan in which the
Executive participates) immediately prior to the Date of Termination or, if more
favorable to the Executive, immediately prior to the first occurrence of an
event or circumstance constituting Good Reason, (y) taking into account any
early retirement subsidies associated with the applicable benefit, and (z) on
the basis of a straight life annuity (or other default form of benefit)
commencing at the date (but in no event earlier than the third anniversary of
the Date of Termination) as of which the actuarial equivalent of such annuity or
other form of benefit is greatest.
5
<PAGE> 6
(F) In addition to the benefits to which the Executive is entitled
under any defined contribution Pension Plan, the Company shall pay the Executive
a lump sum amount, in cash, equal to the sum of (i) the amount that would have
been contributed thereto by the Company on the Executive's behalf during the
three (3) years immediately following the Date of Termination, determined (x) as
if the Executive made the maximum permissible contributions thereto during such
period, (y) as if the Executive earned compensation during such period at a rate
equal to the Executive's highest rate of compensation (as defined in the Pension
Plan) during the three-year period ending immediately prior to the Date of
Termination, and (z) without regard to any amendment to the Pension Plan made
subsequent to a Change in Control and on or prior to the Date of Termination,
which amendment adversely affects in any manner the computation of benefits
thereunder, and (ii) the excess, if any, of (x) the Executive's account balance
under the Pension Plan as of the Date of Termination over (y) the portion of
such account balance that is nonforfeitable under the terms of the Pension Plan.
(G) Notwithstanding any provision of any annual or long-term
incentive plan to the contrary, the Company shall pay to the Executive a lump
sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation
which has been allocated or awarded to the Executive for a completed annual
bonus cycle preceding the Date of Termination under any such plan and which, as
of the Date of Termination, is contingent only upon the continued employment of
the Executive to a subsequent date, (ii) if the Date of Termination occurs
before the end of the first six months in the then-current annual bonus cycle
under the applicable plan, a pro rata portion to the Date of Termination of the
aggregate value of all contingent incentive compensation awards to the Executive
for the uncompleted period under any such plan, calculated as to each such award
by multiplying the award that the Executive would have earned on the last day of
the performance award period, assuming the achievement, at the target level (or
if higher, at the then projected actual final level), of the individual and
corporate performance goals established with respect to such award, by the
fraction obtained by dividing the number of full months and any fractional
portion of a month during such performance award period through the Date of
Termination by the total number of months contained in such performance award
period, and (iii) if the Date of Termination occurs after the end of the first
six months in the then-current annual bonus cycle but before the end of such
annual bonus cycle under the applicable plan, the full aggregate value of all
contingent incentive compensation awards to the Executive for the uncompleted
period
6
<PAGE> 7
under any such plan assuming the achievement, at the target level (or if higher,
at the then projected actual final level), of the individual and corporate
performance goals established with respect to such award.
(H) If the Executive would have become entitled to benefits under
the Company's post-retirement health care or life insurance plans, as in effect
immediately prior to the Date of Termination or, if more favorable to the
Executive, as in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason, had the Executive's employment terminated
at any time within three (3) years after the Date of Termination, the Company
shall provide such post-retirement health care or life insurance benefits to the
Executive and the Executive's dependents commencing on the later of (i) the date
on which such coverage would have first become available and (ii) the date on
which benefits described in subsection (B) of this Section 6.1 terminate.
(I) The Company shall reimburse the Executive for expenses
incurred for outplacement services suitable to the Executive's position for a
period of one (1) year following the Date of Termination (or, if earlier, until
the first acceptance by the Executive of an offer of employment) in an amount
not exceeding 15% of the sum of the Executive's highest annual base rate of
salary as in effect during the three-year period ending immediately prior to the
Date of Termination, and the greatest target annual bonus pursuant to any annual
bonus or incentive plan maintained by the Company in respect of the fiscal year
in which occurs the Date of Termination (or, if higher, in respect of any of the
three preceding fiscal years).
(J) For the three-year period immediately following the Date of
Termination, the Company shall provide the Executive with his customary
perquisites (such as any use of a Company provided automobile, club membership
fee reimbursements, income tax preparation and financial advisory services) in
each case on the same terms and conditions that were applicable immediately
prior to the Date of Termination or, if more favorable, immediately prior to the
first occurrence of an event or circumstance constituting Good Reason.
6.2 (A) Whether or not the Executive becomes entitled to the Severance
Payments, if any payment or benefit received or to be received by the Executive
in connection with a Change in Control or the termination of the Executive's
employment (whether pursuant to the terms of this Agreement or
7
<PAGE> 8
any other plan, arrangement or agreement with the Company, any Person whose
actions result in a Change in Control or any Person affiliated with the Company
or such Person) (all such payments and benefits, including the Severance
Payments, being hereinafter called "Total Payments") will be subject (in whole
or part) to the Excise Tax, then, subject to the provisions of subsection (B) of
this Section 6.2, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Total Payments and any federal, state
and local income and employment taxes and Excise Tax upon the Gross-Up Payment,
shall be equal to the Total Payments. For purposes of determining the amount of
the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes
at the highest marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the Date of Termination (or if there is no Date of Termination,
then the date on which the Gross-up Payment is calculated for purposes of this
Section 6.2), net of the maximum reduction in federal income tax which could be
obtained from deduction of such state and local taxes.
(B) In the event that the amount of the Total Payments does not exceed
110% of the largest amount that would result in no portion of the Total Payments
being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this
Section 6.2 shall not apply and the noncash Severance Payments shall first be
reduced (if necessary, to zero), and the cash Severance Benefits shall
thereafter be reduced (if necessary, to zero) so that the amount of the Total
Payments is equal to the Safe Harbor; provided, however, that the Executive may
elect to have the cash Severance Payments reduced (or eliminated) prior to any
reduction of the noncash Severance Payments.
(C) For purposes of determining whether any of the Total Payments will
be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the
Total Payments shall be treated as "parachute payments" within the meaning of
section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax
Counsel") reasonably acceptable to the Executive and selected by the accounting
firm which was, immediately prior to the Change in Control, the Company's
independent auditor (the "Auditor"), such other payments or benefits (in whole
or in part) do not constitute parachute payments, including by reason of section
280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the
meaning of section 280G(b)(l) of the Code shall be treated as subject
8
<PAGE> 9
to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute
payments (in whole or in part) represent reasonable compensation for services
actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in
excess of the Base Amount allocable to such reasonable compensation, or are
otherwise not subject to the Excise Tax, and (iii) the value of any noncash
benefits or any deferred payment or benefit shall be determined by the Auditor
in accordance with the principles of sections 280G(d)(3) and (4) of the Code.
Prior to the payment date set forth in Section 6.3 hereof, the Company shall
provide the Executive with its calculation of the amounts referred to in this
Section 6.2(C) and such supporting materials as are reasonably necessary for the
Executive to evaluate the Company's calculations. If the Executive disputes the
Company's calculations (in whole or in part), the reasonable opinion of Tax
Counsel with respect to the matter in dispute shall prevail.
(D) (I) In the event that (1) amounts are paid to the Executive
pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise
Tax is less than the amount taken into account hereunder in calculating the
Gross-Up Payment, and (3) after giving effect to such Final Determination, the
Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive
shall repay to the Company, within five (5) business days following the date of
the Final Determination, the Gross-Up Payment, the amount of the reduction in
the Severance Payments, plus interest on the amount of such repayments at 120%
of the rate provided in section 1274(b)(2)(B) of the Code.
(II) In the event that (1) amounts are paid to the Executive
pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise
Tax is less than the amount taken into account hereunder in calculating the
Gross-Up Payment, and (3) after giving effect to such Final Determination, the
Severance Payments are not to be reduced pursuant to Section 6.2(B), the
Executive shall repay to the Company, within five (5) business days following
the date of the Final Determination, the portion of the Gross-Up Payment
attributable to such reduction (plus that portion of the Gross-Up Payment
attributable to the Excise Tax and federal, state and local income and
employment taxes imposed on the Gross-Up Payment being repaid by the Executive),
to the extent that such repayment results in a reduction in the Excise Tax and a
dollar-for-dollar reduction in the Executive's taxable income and wages for
purposes of federal, state and local income and employment taxes, plus interest
on the amount of such repayment at 120% of the rate provided in section
1274(b)(2)(B) of the Code.
9
<PAGE> 10
(III) Except as otherwise provided in clause (IV) below, in the
event there is a Final Determination that the Excise Tax exceeds the amount
taken into account hereunder in determining the Gross-Up Payment (including by
reason of any payment the existence or amount of which cannot be determined at
the time of the Gross-Up Payment), the Company shall pay to the Executive,
within five (5) business days following the date of the Final Determination, the
sum of (1) a Gross-Up Payment in respect of such excess and in respect of any
portion of the Excise Tax with respect to which the Company had not previously
made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise
Tax attributable to amounts payable under clauses (2) and (3) of this paragraph
(III) (plus any interest, penalties or additions payable by the Executive with
respect to such excess and such portion), (2) if Severance Payments were reduced
pursuant to Section 6.2(B) but after giving effect to such Final Determination,
the Severance Payments should not have been reduced pursuant to Section 6.2(B),
the amount by which the Severance Payments were reduced pursuant to Section
6.2(B), and (3) interest on such amounts at 120% of the rate provided in section
1274(b)(2)(B) of the Code.
(IV) In the event that (1) Severance Payments were reduced
pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which
are considered "parachute payments" within the meaning of section 280G(b)(2) of
the Code is subsequently redetermined in a Final Determination, but such
redetermined value still does not exceed 110% of the Safe Harbor, then, within
five (5) business days following such Final Determination, (x) the Company shall
pay to the Executive the amount (if any) by which the reduced Severance Payments
(after taking the Final Determination into account) exceeds the amount of the
reduced Severance Payments actually paid to the Executive, plus interest on the
amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B)
of the Code, or (y) the Executive shall pay to the Company the amount (if any)
by which the reduced Severance Payments actually paid to the Executive exceeds
the amount of the reduced Severance Payments (after taking the Final
Determination into account), plus interest on the amount of such repayment at
120% of the rate provided in section 1274(b)(2)(B) of the Code.
6.3 The payments provided in subsections (A), (E), (F) and (G) of
Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
amounts of such payments cannot be finally determined on or before such day,
10
<PAGE> 11
the Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 6.2
hereof, in accordance with Section 6.2 hereof, of the minimum amount of such
payments to which the Executive is clearly entitled and shall pay the remainder
of such payments (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the 30th day after the Date
of Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to the Executive, payable on the fifth business
day after demand by the Company (together with interest at 120% of the rate
provided in section 1274(b)(2)(B) of the Code). At the time that payments are
made under this Agreement, the Company shall provide the Executive with a
written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice the Company has received from Tax Counsel, the
Auditor or other advisors or consultants (and any such opinions or advice which
are in writing shall be attached to the statement).
6.4 The Company also shall pay to the Executive all legal fees and
expenses incurred by the Executive in disputing in good faith any issue
hereunder relating to the termination of the Executive's employment, in seeking
in good faith to obtain or enforce any benefit or right provided by this
Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
7.1. Notice of Termination. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 10 hereof. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and
11
<PAGE> 12
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, any
purported termination of the Executive's employment shall be presumed to be
other than for Cause unless the Notice of Termination includes a copy of a
resolution duly adopted by the affirmative vote of not less than three-quarters
(3/4) of the entire membership of the Board at a meeting of the Board which was
called and held for the purpose of considering such termination (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive's counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, the Executive was guilty of
conduct set forth in clause (i) or (ii) of the definition of Cause herein, and
specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, 30 days after Notice of Termination is given (provided that the
Executive shall not have returned to the full-time performance of the
Executive's duties during such 30 day period), and (ii) if the Executive's
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a termination by the Company, shall not be
less than 30 days (except in the case of a termination for Cause) and, in the
case of a termination by the Executive, shall not be less than 15 days nor more
than 60 days, respectively, from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within 15 days after any Notice
of Termination is given, or, if later, prior to the Date of Termination (as
determined without regard to this Section 7.3), the party receiving such Notice
of Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be extended until the earlier of (i)
the date on which the Term ends or (ii) the date on which the dispute is finally
resolved, either by mutual written agreement of the parties or by a final
judgment, order or decree of an arbitrator or a court of competent jurisdiction
(which is not appealable or with respect to which the time for appeal therefrom
has expired and no appeal has been perfected); provided, however, that the Date
of Termination shall be extended by a notice of dispute given by the Executive
only if such notice is given in good faith and the Executive pursues the
resolution of such dispute with reasonable diligence.
12
<PAGE> 13
7.4 Compensation During Dispute. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3 hereof, the Company shall continue to
pay the Executive the full compensation in effect when the notice giving rise to
the dispute was given (including, but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given, until the Date of Termination, as determined in accordance with
Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all
other amounts due under this Agreement (other than those due under Section 5.2
hereof) and shall not be offset against or reduce any other amounts due under
this Agreement.
8. No Mitigation. The Company agrees that, if the Executive's
employment with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Section 6 hereof or Section
7.4 hereof. Further, the amount of any payment or benefit provided for in this
Agreement (other than Section 6.1(B) hereof) shall not be reduced by any
compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.
9. Successors; Binding Agreement.
9.1 In addition to any obligations imposed by law upon any successor to
Temple-Inland, Temple-Inland will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of Temple-Inland to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that Temple-Inland would be required to perform it if no such succession
had taken place. Failure of Temple-Inland to obtain such assumption and
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from the Company
in the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.
13
<PAGE> 14
9.2 This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive shall
die while any amount would still be payable to the Executive hereunder (other
than amounts which, by their terms, terminate upon the death of the Executive)
if the Executive had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the executors, personal representatives or administrators of the Executive's
estate.
10. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address of the Executive as maintained from time to time on
the payroll system of the Company and, if to the Company, to the address set
forth below, or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of address
shall be effective only upon actual receipt:
To the Company:
Temple-Inland Inc.
303 South Temple Drive
Diboll, Texas 75941
Attention: M. Richard Warner
11. Miscellaneous. No p