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10-K 1 d22600e10vk.htm FORM 10-K e10vk

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		For the Fiscal Year Ended January 1, 2005
or


o		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)


Delaware		75-1903917


(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1300 MoPac Expressway South

Austin, Texas 78746

(Address of principal executive offices, including Zip code)

Registrant’s telephone number, including area code: (512) 434-5800

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange On Which Registered

Common Stock, $1.00 Par Value per Share, non-cumulative Preferred Share Purchase Rights 7.50% Upper DECS^SM		New York Stock Exchange The Pacific Exchange New York Stock Exchange The Pacific Exchange New York Stock Exchange The Pacific Exchange

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 þ No o

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

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 July 3, 2004, was approximately $3,025,000,000. For purposes of this computation, all officers, directors, and five 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 five percent beneficial owners are, in fact, affiliates of the registrant.

As of March 1, 2005, there were 57,217,459 shares of Common Stock 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 6, 2005, are incorporated by reference into Part III of this report.

TABLE OF CONTENTS


			Page

PART I.
	Item 1.	Business		1
	Item 2.	Properties		10
	Item 3.	Legal Proceedings		14
	Item 4.	Submission of Matters to a Vote of Security Holders		15

PART II.
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
	Item 6.	Selected Financial Data		17
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		46
	Item 8.	Financial Statements and Supplementary Data		47
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		104
	Item 9A.	Controls and Procedures		104
	Item 9B.	Other Information		106

PART III.
	Item 10.	Directors and Executive Officers of the Registrant		107
	Item 11.	Executive Compensation		107
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		108
	Item 13.	Certain Relationships and Related Transactions		108
	Item 14.	Principal Accounting Fees and Services		108

PART IV.
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		108
Subsidiaries of the Company
Consent of Ernst & Young LLP
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I


Item 1.	*Business*

Introduction

Temple-Inland Inc. is a holding company that, through its subsidiaries, operates three business segments:


	•	corrugated packaging, which provided 58 percent of our consolidated net revenues for 2004, is a vertically integrated corrugated packaging operation that consists of:


	•	five linerboard mills,

	•	one corrugating medium mill, and

	•	72 converting and other facilities;


	•	forest products, which provided 20 percent of our consolidated net revenues for 2004, manages our forest resources of approximately two million acres of timberland in Texas, Louisiana, Georgia, and Alabama (including our approximately 173,000 acres of high-value land located near Atlanta, Georgia), and manufactures a wide range of building products, including:


	•	lumber,

	•	particleboard,

	•	medium density fiberboard,

	•	gypsum wallboard, and

	•	fiberboard; and


	•	financial services, which provided 22 percent of our consolidated net revenues for 2004, provides financial services in the areas of:


	•	consumer and commercial banking,

	•	real estate development, and

	•	insurance.

Temple-Inland Inc. is a Delaware corporation that was organized in 1983. Its significant subsidiaries are:


	•	TIN Inc., which operates our corrugated packaging and forest products segments,

	•	Temple-Inland Financial Services Inc., a financial services holding company,

	•	Guaranty Holdings Inc. I, a financial services holding company, and

	•	Guaranty Bank (“Guaranty”), a savings bank.

Our principal executive offices are located at 1300 MoPac Expressway South, Austin, Texas 78746. Our telephone number is (512) 434-5800. Additional information about us may be obtained from our Internet website, the address of which is http://www.templeinland.com. We provide access through the website to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including amendments to these reports, and other documents as soon as reasonably practicable after we file them with the Securities and Exchange Commission (“SEC”). In addition, beneficial ownership reports filed by officers, directors and principal security holders under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are also available through our website. Our website also contains a corporate governance section that includes our corporate governance principles, audit committee charter, management development and executive compensation committee charter, nominating and governance committee charter, standards of business conduct and ethics, and code of ethics for senior financial officers, as well as information on how to communicate directly with our board of directors. We will also provide printed copies of any of these documents to any shareholder upon request.

Financial Information

Our results of operations, including information regarding our principal business segments, are shown in the financial statements and the notes thereto contained in Item 8 of this Annual Report on Form 10-K. Certain statistical information required by Securities Act Industry Guide 3 and revenues and unit sales by product line and geographic area is also contained in Item 8 of this Annual Report on Form 10-K.

Narrative Description of the Business

The following chart presents the ownership structure for our significant subsidiaries. It does not contain all our subsidiaries, many of which are dormant or immaterial entities. A list of our subsidiaries 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.

Temple-Inland Inc.

Selected Subsidiary Chart

At the end of 2004, we merged Inland Paperboard and Packaging, Inc. (“Inland”) and Gaylord Container Corporation (“Gaylord”), both of which historically operated our corrugated packaging segment, into Temple-Inland Forest Products Corporation, which historically operated our forest products segment. These actions combined substantially all of our manufacturing operations into a single corporation that we re-named TIN Inc., which operates under the assumed name Temple-Inland.

Corrugated Packaging. We manufacture containerboard and convert it into a complete line of corrugated packaging. Approximately ten percent of the containerboard we produced in 2004 was sold in the domestic and export markets. We converted the remaining internal production, in combination with external containerboard we purchased, into corrugated containers at our box plants. We convert more containerboard than we produce.

Our 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. Our corrugated packaging is sold to a variety of customers in the food, paper, glass containers, chemical, appliance, and plastics industries, among others.

We also manufacture bulk containers constructed of multi-wall corrugated board for extra strength, which are used for bulk shipments of various materials. In 2004, we sold certain assets used in our specialty packaging business.

We serve about 7,100 packaging customers with approximately 10,000 shipping destinations. The largest single customer accounted for approximately three percent and the ten largest customers accounted for approximately 16 percent of 2004 corrugated packaging revenues.

Sales of corrugated packaging track changing population patterns and other demographics. Historically, there has been a correlation between the demand for corrugated packaging and orders for nondurable goods.

We also own a 50 percent interest in Premier Boxboard Limited LLC, a joint venture that produces light-weight gypsum facing paper and corrugating medium at a mill in Newport, Indiana.

During 2004, we closed converting facilities in Dallas, Texas; Raleigh, North Carolina; Rock Hill, South Carolina; Louisville, Kentucky; and Mishawaka, Indiana, as we continued efforts to improve our asset utilization and enhance return on investment from corrugated packaging. These closures were part of our initiatives announced in November 2003 to lower costs and improve profitability from corrugated packaging. We will continue to consolidate converting facilities, eliminate positions, and improve asset utilization as part of these initiatives.

Forest Products. We manage two million acres of timberland, which is located in Texas, Louisiana, Georgia, and Alabama. This timberland is an important source of wood fiber used in manufacturing both forest products and corrugated packaging. In our forest products segment, we manufacture lumber, particleboard, medium density fiberboard (“MDF”), gypsum wallboard, and fiberboard.

We sell forest products throughout the continental United States and in Canada, with the majority of sales occurring in the southern United States. The ten largest customers accounted for approximately 25 percent of 2004 forest products revenues. Most of our products are sold by account managers and representatives to distributors, retailers, and original equipment manufacturers. The forest products business is heavily dependent upon the level of residential housing expenditures, including the repair and remodeling market.

We own a 50 percent interest in each of two joint ventures: Del-Tin Fiber LLC, which produces MDF 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.

We have designated approximately 173,000 acres of our timberland near Atlanta, Georgia, as high-value with the potential for real estate development. We intend to create the infrastructure on this high-value land that will allow us over time to realize value from these lands through sale, joint venture, or development.

Financial Services. We operate a savings bank and an insurance agency and engage in real estate development.

Savings Bank. Guaranty is a federally-chartered stock savings bank that conducts its business through banking centers in Texas and California and lends in diverse geographic markets. Our 95 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. Our 46 California banking centers are concentrated in Southern California and the Central Valley. We provide deposit products to the general public, invest in single-family adjustable-rate mortgages and mortgage-backed securities, lend money for the construction of real estate projects and the financing of business operations, and provide a variety of other financial products to consumers and businesses.

Our primary financial services revenues are interest earned on loans and securities, as well as fees received in connection with loans and deposit services. Our major financial services expenses are interest paid on consumer deposits and other borrowings and personnel costs. Like other savings institutions, this business segment is 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. We primarily seek assets with interest rates that adjust periodically rather than assets with long-term fixed rates.

Guaranty is required to maintain minimum capital levels in accordance with regulations of the Office of Thrift Supervision (“OTS”) established to ensure capital adequacy of savings institutions. We believe that as

of year-end 2004, Guaranty met or exceeded all of these capital adequacy requirements. To remain in the lowest tier of Federal Deposit Insurance Corporation insurance premiums, Guaranty must meet a leverage capital ratio of at least five percent of adjusted total assets. At year-end 2004, the leverage capital ratio was 6.89 percent of adjusted total assets.

As we previously disclosed, an internal investigation revealed that Guaranty’s mortgage origination operation failed to file certain statutory reports on a timely basis and may have violated applicable laws and regulations. We reported our findings and corrective actions to the Office of Thrift Supervision (OTS). After the OTS reviewed the findings and corrective actions and conducted its own examination, it and Guaranty entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist for Affirmative Relief (Consent Order). Guaranty agreed to the issuance of the Consent Order, without admitting or denying any wrongdoing or relevant findings, in the interest of addressing the matters subject to the review and avoiding the cost and disruptions associated with possible administrative or judicial proceedings regarding those matters. Under the Consent Order, Guaranty agreed, among other things, to take certain actions primarily related to its repositioned mortgage origination activities, including strengthening its regulatory compliance controls and management, enhancing its suspicious activity reporting and regulatory training programs, and implementing improved risk assessment and loan application register programs. No financial penalties were included in the Consent Order.

Guaranty is in the process of completing implementation of these corrective actions and expects to have them in place by first quarter-end 2005. As described below, Guaranty has substantially completed the repositioning of its mortgage origination activities including the sale and closure of its retail mortgage origination outlets and has sold its third-party mortgage servicing portfolio.

The Consent Order has no material on-going impact on the operations of Guaranty or its ability to pay dividends to the parent company.

Through subsidiaries of Guaranty, we act as agent in the sale of commercial and personal lines of property, casualty, life, and group health insurance products. We also administer the marketing and distribution of several mortgage-related personal life, accident, and health insurance programs. In addition, we sell annuities primarily to customers of Guaranty.

Mortgage Banking. Through the end of 2004, we operated a mortgage banking business through subsidiaries of Guaranty that originated, warehoused, and serviced FHA, VA, and conventional mortgage loans primarily on single-family residential property. Most of these loans were sold to Guaranty or in the secondary markets by delivering whole loans to third parties or through delivery into a pool of mortgage loans being securitized into a mortgage-backed security. We produced $6.8 billion in mortgage loans during 2004.

We repositioned our mortgage origination activities and sold our third party mortgage-servicing portfolio to reduce costs and exposure to changing market conditions, including a slow-down in refinancing activity. While we will still originate mortgage loans for our own portfolio and, to a lesser extent, for sale to others, we will limit our product offerings and reposition our retail origination activities. We will continue to originate loans through brokers and correspondent networks and in certain retail channels, including the retail branches of Guaranty. In addition, we have discontinued our loan servicing operations and outsource the servicing on all mortgage loans we own. These actions affected over 1,500 employees and resulted in the closure or sale of over 100 of our mortgage origination outlets.

Real Estate. We are involved in the development of over 60 residential subdivisions in Texas, California, Colorado, Florida, Georgia, Missouri, Tennessee, and Utah. We also own, either directly or through joint venture interests, 16 commercial properties.

Other Information. On February 4, 2005, we announced that we had received notice that Carl Icahn and Icahn Partners Master Fund LP have each made a filing under the Hart-Scott-Rodino Antitrust Improvements Act for clearance to acquire more than $100 million, but less than $500 million, of our common stock. On February 17, 2005, Icahn Partners LP and Icahn Partners Master Fund LP, entities affiliated with Carl Icahn, provided notice of their intention to nominate three individuals for election to the Company’s Board of Directors at the Annual Meeting of Stockholders to be held on May 6, 2005. The notice stated that these funds beneficially own approximately 2.13% of the outstanding Common Stock of the Company. Except for these notices, we have not had any contact with Mr. Icahn or these funds.

Raw Materials

Our main raw material resource is wood fiber. We own or lease approximately two million acres of timberland located in Texas, Louisiana, Georgia, and Alabama. In 2004, wood fiber required for our corrugated packaging and forest products operations was supplied from these lands and as a by-product of our solid wood operations to the extent shown below:


	Percentage
	Supplied
Raw Material	Internally

Sawtimber		59	%
Pine Pulpwood		42	%

The balance of our wood fiber requirements for these operations was purchased from numerous landowners and other timber owners, as well as other producers of wood by-products.

Linerboard and corrugating medium are the principal materials used to make corrugated boxes. Our mills at Rome, Georgia; Bogalusa, Louisiana; and Orange, Texas, only manufacture linerboard. Our Ontario, California, and Maysville, Kentucky, mills are traditionally linerboard mills, but can manufacture corrugating medium. Our New Johnsonville, Tennessee, mill only manufactures corrugating medium. The principal raw material used by the Rome, Georgia; Orange, Texas; and Bogalusa, Louisiana, mills is virgin fiber. The Ontario, California, and Maysville, Kentucky, mills use only recycled fiber. The mill at New Johnsonville, Tennessee, uses a combination of virgin and recycled fiber. In 2004, recycled fiber represented approximately 36 percent of the total fiber needs of our containerboard operations. The price of recycled fiber fluctuates due to normal supply and demand for the raw material and for the finished product. We purchase recycled fiber on the open market from numerous suppliers. Price fluctuations reflect the competitiveness of these markets. We generally produce more linerboard and less corrugating medium than is converted at our box plants. The deficit of corrugating medium is filled through open market purchases and/or trades, and we sell any excess linerboard in the open market.

In 2004, we began a capital project at our Rome, Georgia, mill that will enable it to also use recycled fiber as a raw material. This project should be completed in 2005. Upon completion, the Rome mill will be able to use recycled fiber for approximately ten percent of its raw material requirements.

We obtain gypsum for our wallboard operations in Fletcher, Oklahoma, from one outside source through a long-term purchase contract. At our 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. We have 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 our West Memphis plant. The joint venture gypsum wallboard plant in McQueeney, Texas, primarily uses gypsum obtained from its own quarry and gypsum acquired from the same source that supplies the Fletcher, Oklahoma, plant.

We believe the sources outlined above will be sufficient to supply our raw material needs for the foreseeable future.

Energy

Electricity and steam requirements at our 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 other 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, we were able to generate approximately 70 percent of our energy requirements at our mills in Rome, Georgia; Bogalusa, Louisiana; and Orange, Texas, during 2004. In some cases where natural gas or fuel oil is used, our facilities possess a dual capacity enabling the use of either fuel as a source of energy.

The natural gas needed to run our 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, primarily on a

firm basis with a few operations on an interruptible basis, at rates favorable to spot market rates. Natural gas prices rose during 2004. We cannot predict future prices for natural gas.

In an effort to reduce our exposure to changing prices for natural gas, we have capital projects in progress at our Bogalusa, Rome, and Orange mills that will modify existing boilers to allow us to significantly increase the use of wood bark and waste fuel instead of natural gas for steam generation. These projects will enable us to reduce our natural gas usage by at least 20 percent, are estimated to cost approximately $41 million, and should be completed in the latter part of 2005.

Employees

We have approximately 16,000 employees. Approximately 6,000 of our employees are covered by collective bargaining agreements. These agreements generally run for a term of three to six years and have varying expiration dates. The following table summarizes certain information about collective bargaining agreements that cover a significant number of employees:


Location	Bargaining Unit(s)	Employees Covered	Expiration Dates

Linerboard Mill, Orange, Texas	Paper, Allied-Industrial, Chemical and Energy Workers Intl. (“PACE”), Local 1398, and PACE, Local 391	219 Hourly Production Employees and 109 Hourly Maintenance Employees		July 31, 2005
Linerboard Mill, Bogalusa, Louisiana	PACE, Local 189, International Brotherhood of Electrical Workers (“IBEW”), Local 1077, and Office and Professional Employees International Union (“OPEIU”), Local 89	243 Hourly Production Employees, 124 Hourly Maintenance Employees, 28 Electrical Maintenance Employees, and 9 Office Employees	August 1, 2006 (PACE and IBEW), and October 11, 2006 (OPEIU)
Linerboard Mill, Rome, Georgia	PACE, Local 804, IBEW, Local 613, United Association of Journeymen & Apprentices of the Plumbing & Pipefitting Industry of the U.S. and Canada, Local 72, and International Association of Machinists & Aerospace Workers, Local 414	267 Hourly Production Employees, 36 Electrical Maintenance Employees, and 122 Hourly Maintenance Employees		July 31, 2006
Evansville, Indiana, Louisville, Kentucky, and Middletown, Ohio, Box Plants (“Northern Multiple”)	PACE, Local 1046, PACE, Local 1737, and PACE, Local 114, respectively	108, 102, and 97 Hourly Production Employees, respectively		April 30, 2008
Rome, Georgia, and Orlando, Florida, Box Plants (“Southern Multiple”)	PACE Local 838 and PACE Local 834, respectively	123 and 96 Hourly Production Employees, respectively		December 1, 2008

We have additional collective bargaining agreements with employees at various other manufacturing facilities. These agreements each cover a relatively small number of employees and are negotiated on an individual basis at each such facility.

We consider our relations with our employees to be good.

Environmental Protection

Our operations are subject to federal, state, and local provisions regulating discharges 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), requires us to invest substantial funds to modify facilities to assure compliance with applicable environmental regulations. Capital expenditures directly related to environmental compliance totaled $11 million in 2004. This amount does not include capital expenditures for environmental control facilities made as a part of major mill modernizations and expansions or capital expenditures made for another purpose that have an indirect benefit on environmental compliance.

We are committed to protecting the health and welfare of our employees, the public, and the environment and strive to maintain compliance with all state and federal environmental regulations in a manner that is also cost effective. When we construct new facilities or modernize existing facilities, we generally use state of the art technology for air and water emissions. This forward-looking approach is intended to minimize the effect 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. We expect the prominence of environmental regulation and compliance to continue for the foreseeable future. Given these uncertainties, we currently estimate that capital expenditures for environmental purposes during the period 2005 through 2007 will average $9 million each year, excluding expenditures related to the Maximum Achievable Control Technology (MACT) programs and landfill closures discussed below. 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 (“EPA”) issued extensive regulations governing air and water emissions from the pulp and paper industry (“Cluster Rule”). Compliance with the MACT phases of the Cluster Rule will be required at certain intervals through 2007.

MACT I Standard


	•	The first phase of MACT I covered the Hazardous Air Pollutant (“HAP”) emissions from Low Volume High Concentration Sources and pulp mill foul condensate streams at three containerboard mills. Compliance was required by April 2002, and we spent approximately $15 million to meet the requirements of this rule.

	•	The second phase of MACT I covered HAP emissions from High Volume Low Concentration sources at three containerboard mills. Compliance is required by April 2006, and we estimate capital expenditures to be approximately $7 million to meet these requirements.

The MACT II Standard is for the control of HAP emissions from pulp and paper mill combustion sources. Compliance was required by April 2004 and applies to three containerboard mills. The total expenditures to comply with this standard associated with the reporting and record keeping activities for monitoring HAP emissions were $115,000.

On September 13, 2004, EPA published the Boiler MACT. This regulation affects industrial boilers and process heaters burning all fuel types with the exception of small gas-fired units. However, large existing gas fired units and liquid fuel (oil) fired units need only submit an initial notification. Affected units with emission standards include new gas-fired and liquid fuel units and all large solid fuel units at major sources for HAPs. Compliance methods vary from verification by testing that the affected unit does not emit a regulated amount of HAPs to adding additional control equipment. Compliance is required by September 2007. We have 11 boilers at nine containerboard and forest products facilities that are now being evaluated to determine appropriate compliance measures and costs.

The Plywood and Composite Wood Panel (PCWP) MACT standards were published July 30, 2004, and also limit emissions of HAPs. The rule offers several options for compliance including emission control device performance, production based emission limits, emission averaging, and a low risk subcategory. The initial notices of applicability were filed prior to the January 26, 2005 deadline, with PCWP MACT compliance

required by October 1, 2007. We have 12 forest products facilities affected by the regulation. These are now being evaluated to determine appropriate compliance measures. Capital expenditures are estimated at $14 million.

We use company-owned landfills for disposal of non-hazardous waste at three containerboard mills and two forest products facilities. Based on third-party cost estimates, we expect to spend, on an undiscounted basis, $23 million over the next 25 years to ensure proper closure of these landfills. We are remediating a former creosote treating facility and one on-site location obtained in the Gaylord acquisition. We expect the additional cost to remediate these sites on an undiscounted basis will be $15 million.

In addition to these capital expenditures, we spend a significant amount on ongoing maintenance costs to continue compliance with environmental regulations. We do not believe, however, that these capital expenditures or maintenance costs will have a material adverse effect on our earnings. In addition, expenditures for environmental compliance should not have a material effect on our competitive position, because other companies are also subject to these regulations.

Competition

We operate in highly competitive industries. The commodity nature of our manufactured products gives us little control over market pricing or market demand for our products. The level of competition in a given product or market may be affected by economic factors, including interest rates, housing starts, home repair and remodeling activities, and the strength of the dollar, as well as other market factors including supply and demand for these products, geographic location and the operating efficiencies of competitors. Our competitive position is influenced by varying factors 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 approximately 1,400 box plants in the United States. Our box plants accounted for approximately 12.4 percent of total industry shipments during 2004, making us the third largest producer of corrugated packaging in the United States. Although corrugated packaging is dominant in the national distribution process, our products also compete with various other packaging materials, including products made of paper, plastics, wood, and metals.

In building products markets, we compete with many companies that are substantially larger and have greater resources in the manufacturing of building products.

Our savings bank competes with commercial banks, savings and loan associations, mortgage banks, and other lenders. We also compete with real estate investment and management companies in our real estate activities and with insurance agencies in our property, casualty, life, and health insurance activities. The financial services industry is a highly competitive business, and a number of entities with which we compete 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:


Name	Age		Office

Kenneth M. Jastrow, II		57	Chairman of the Board and Chief Executive Officer
M. Richard Warner		53	President
J. Patrick Maley III		43	Executive Vice President
Bart J. Doney		55	Group Vice President
Kenneth R. Dubuque		56	Group Vice President
Jack C. Sweeny		58	Group Vice President
Doyle R. Simons		41	Executive Vice President
Randall D. Levy		53	Chief Financial Officer
Louis R. Brill		63	Chief Accounting Officer and Vice President
Scott Smith		50	Chief Information Officer
J. Bradley Johnston		49	Chief Administrative Officer and General Counsel
Leslie K. O’Neal		49	Vice President, Assistant General Counsel and Secretary
David W. Turpin		54	Treasurer

Kenneth M. Jastrow, II became Chairman of the Board and Chief Executive Officer on January 1, 2000. Mr. Jastrow previously served in various capacities since 1991, including President, Chief Operating Officer, Chief Financial Officer, and Group Vice President. He also serves as Chairman of the Board of Financial Services, Chairman of the Board of Guaranty, and a Director of TIN Inc.

M. Richard Warner was named President in November 2003. Mr. Warner was Vice President from June 1994 to November 2003 and was Chief Administrative Officer from May 1999 to November 2003. Mr. Warner also served as General Counsel from June 1994 to August 2002, as Vice Chairman of Guaranty from 1990 to 1991, and as Treasurer and Chief Accounting Officer of the Company from 1986 to 1990.

J. Patrick Maley III became Executive Vice President — Paper in November 2004 following his appointment as Group Vice President in May 2003. Prior to joining the Company, Mr. Maley served in various capacities from 1992 to 2003 at International Paper, including director of manufacturing for the containerboard and kraft division, mill manager of the Androscoggin coated paper mill in Jay, Maine; staff manufacturing services director of the containerboard and kraft division; and segment general manager of the container business.

Bart J. Doney became Group Vice President in February 2000. Mr. Doney has served as Executive Vice President of our Corrugated Packaging group 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 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.

Jack C. Sweeny became Group Vice President in May 1996. He also serves as Executive Vice President of our Forest Products group. From November 1982 through May 1996, Mr. Sweeny served in various capacities in our Forest Products Group.

Doyle R. Simons was named Executive Vice President in February 2005 following his service as Chief Administrative Officer since November 2003. Mr. Simons served as Vice President, Administration from November 2000 to November 2003 and Director of Investor Relations from 1994 through 2003.

Randall D. Levy became Chief Financial Officer in May 1999. Mr. Levy joined Guaranty in 1989 serving in various capacities, including Treasurer and most recently as Chief Operating Officer from 1994 through 1999.

Louis R. Brill became Vice President and Controller in December 1999 and was named Chief Accounting Officer in May 2000. Before joining us in 1999, Mr. Brill was a partner of Ernst & Young LLP for 25 years.

Scott Smith became Chief Information Officer 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. Mr. Smith also served in various capacities at Guaranty since 1999, including Chief Financial Officer from June 2001 until December 2002.

J. Bradley Johnston became General Counsel in August 2002 and was also named Chief Administrative Officer in February 2005. Prior to that, Mr. Johnston served as General Counsel of Guaranty from January 1995 through May 1999, as General Counsel of Financial Services from May 1997 through July 2002 and Chief Administrative Officer of Financial Services and Guaranty from May 1999 through July 2002.

Leslie K. O’Neal was named Vice President in August 2002 and became Secretary in February 2000 after serving as Assistant Secretary since 1995. Ms. O’Neal also serves as Assistant General Counsel, a position she has held since 1985, and as Secretary of various subsidiaries.

David W. Turpin became Treasurer 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.

The Board of Directors annually elects officers to serve until their successors have been elected and have qualified or as otherwise provided in our Bylaws.


Item 2.	*Properties*

We own and operate manufacturing facilities throughout the United States, four converting plants in Mexico, an MDF plant in Canada, and a box plant in Puerto Rico. Additional descriptions of selected properties are set forth in the following charts:

Containerboard Mills


		Number of		Annual		2004
Location	Product	Machines		Capacity		Production

				(In tons)
Ontario, California	Linerboard		1		335,730		338,605
Rome, Georgia	Linerboard		2		758,960		728,993
Orange, Texas	Linerboard		2		681,990		677,760
Bogalusa, Louisiana	Linerboard		2		866,360		855,860
Maysville, Kentucky	Linerboard		1		425,980		424,704
New Johnsonville, Tennessee	Medium		1		321,290		315,996

					3,390,310		3,341,918

Newport, Indiana*	Medium and gypsum facing paper		1		278,225		263,709


*	The table shows the full capacity of this facility that is owned by a joint venture in which we own a 50 percent interest. In 2004, we purchased 100,604 tons of medium from the venture.

Corrugated Packaging Plants*


		Corrugator
Location		Size

Phoenix, Arizona		98”
Fort Smith, Arkansas		87”
Fort Smith, Arkansas⁽¹⁾***		None
Antioch, California		78”
Bell, California		97”
Buena Park, California⁽¹⁾		85”
City of Industry, California**		87” and 98”


		Corrugator
Location		Size

El Centro, California⁽¹⁾		87”
Gilroy, California⁽¹⁾		87”
Gilroy, California⁽¹⁾***		110”
Ontario, California		87”
Santa Fe Springs, California		97”
Santa Fe Springs, California**		87” 87” and 78”
Santa Fe Springs, California***		None
Tracy, California**		87” and 87”
Union City, California⁽¹⁾***		None
Wheat Ridge, Colorado		87”
Newark, Delaware		87”
Orlando, Florida		98”
Tampa, Florida⁽¹⁾		78”
Atlanta, Georgia		87”
Rome, Georgia		98”
Carol Stream, Illinois		87”
Chicago, Illinois		87”
Chicago, Illinois***		None
Elgin, Illinois		78”
Elgin, Illinois***		None
Crawfordsville, Indiana		98”
Evansville, Indiana		98”
Indianapolis, Indiana		87”
St. Anthony, Indiana***		None
Tipton, Indiana⁽¹⁾***		110”
Garden City, Kansas		98”
Kansas City, Kansas		87”
Louisville, Kentucky		98”
Bogalusa, Louisiana		97”
Minden, Louisiana		98”
Minneapolis, Minnesota		87”
St. Louis, Missouri		87”
St. Louis, Missouri***		98”
Milltown, New Jersey⁽¹⁾***		None
Spotswood, New Jersey		87”
Binghamton, New York		87”
Buffalo, New York***		None
Scotia, New York***		None
Utica, New York***		None
Warren County, North Carolina		98”
Madison, Ohio***		None
Marion, Ohio		87”
Middletown, Ohio		98”
Streetsboro, Ohio		98”
Biglerville, Pennsylvania		98”
Hazleton, Pennsylvania		98”


		Corrugator
Location		Size

Kennett Square, Pennsylvania***		None
Littlestown, Pennsylvania***		None
Scranton, Pennsylvania		68”
Vega Alta, Puerto Rico		87”
Lexington, South Carolina		98”
Ashland City, Tennessee⁽¹⁾***		None
Elizabethton, Tennessee⁽¹⁾***		None
Dallas, Texas		98”
Edinburg, Texas		87”
San Antonio, Texas		98”
San Antonio, Texas***		None
Petersburg, Virginia		87”
San Jose Iturbide, Mexico		98”
Monterrey, Mexico		87”
Los Mochis, Sinaloa, Mexico		80”
Guadalajara, Mexico⁽¹⁾***		None


*	The annual capacity of the box plants 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.

**	These plants each contain more than one corrugator.

***	Sheet or sheet feeder plants.


⁽¹⁾	Leased facilities.

Additionally, we own a graphics resource center in Indianapolis, Indiana, that has a 100” preprint press, and a fulfillment center in Gettysburg, Pennsylvania. We lease 50 warehouses located throughout much of the United States. Our Tru-Tech^tm tear-resistant and waterproof paper packaging product is manufactured at a plant we own in Linden, New Jersey.

Forest Products


		Rated Annual
Description	Location	Capacity

		(In millions of
		board feet)
Lumber	Diboll, Texas		181	*
Lumber	Pineland, Texas		310	**
Lumber	Buna, Texas		198
Lumber	Rome, Georgia		147
Lumber	DeQuincy, Louisiana		198


	*	Includes separate finger jointing capacity of 10 million board feet.


**	Includes separate stud mill capacity of 110 million board feet.


		Rated Annual
Description	Location	Capacity

		(In millions of
		square feet)
Fiberboard	Diboll, Texas		460
Particleboard	Monroeville, Alabama		160
Particleboard	Thomson, Georgia		150
Particleboard	Diboll, Texas		150
Particleboard	Hope, Arkansas		200
Particleboard⁽¹⁾⁽²⁾	Mt. Jewett, Pennsylvania		200
Gypsum Wallboard	West Memphis, Arkansas		440
Gypsum Wallboard	Fletcher, Oklahoma		460
Gypsum Wallboard*	McQueeney, Texas		400
Gypsum Wallboard*	Cumberland City, Tennessee		700
Medium Density Fiberboard	Pembroke, Ontario, Canada		135
Medium Density Fiberboard*	El Dorado, Arkansas		150
Medium Density Fiberboard⁽¹⁾	Mt. Jewett, Pennsylvania		120


*	The table shows the full capacity of this facility that is owned by a joint venture in which we own a 50 percent interest.


⁽¹⁾	Leased facilities.

⁽²⁾	Due to poor demand, we indefinitely curtailed production at this facility during 2003.

Timber and Timberland*

(In acres)


Pine Plantations			1,292,822
Natural Pine			78,147
Hardwood			115,513
Special Use/Non-Forested			550,859

Total			2,037,341


*	Includes approximately 230,000 acres of leased land.

We believe our plants, mills, and manufacturing facilities are suitable for their purposes and adequate for our business.

In 2001, we conducted a major study of our forests, which led to the following classifications: strategic timberland, non-strategic timberland, and high-value land with real estate development potential. Based on the study, 1,800,000 acres was identified as strategic, 110,000 acres as non-strategic, and 160,000 acres as high-value with the potential for real estate development. We continue to review our forest holdings to determine opportunities for maximizing the value of these lands.

Since completion of this study, we have sold 97,130 acres of non-strategic land and 11,200 acres of high-value land, including 8,500 acres and 2,900 acres, respectively, during 2004. In addition, we reclassified some of our remaining acreage. At year-end 2004, we held 35,000 acres of non-strategic land, which will be sold over time, 173,000 acres of high-value land, and 1,830,000 acres of strategic timberland. The 1,830,000 acres of strategic timberland are important to our converting operations and play a key role in our competitiveness and ability to meet environmental certification requirements relating to sound forest management techniques and chain of custody. We intend to create the infrastructure on the 173,000 acres of high-value land that will allow us over time to realize value from these lands through sale, joint venture, or development.

In connection with our timber holdings, we also own mineral rights on 388,000 acres in Texas and Louisiana and 351,000 acres in Alabama and Georgia. We do not derive a material amount of revenue from these mineral rights.

We also own certain office buildings, including approximately 445,000 square feet of office space in Austin, Texas, and 150,000 square feet of space in Diboll, Texas. In connection with our project to relocate our corrugated packaging operation to Austin, Texas, our office building in Indianapolis, Indiana (approximately 130,000 square feet) is now held for sale.

At year-end 2004, property and equipment having a net book value of $7 million were subject to liens in connection with $45 million of debt.


Item 3.	*Legal Proceedings*

General

We are involved in various legal proceedings that have arisen from time to time in the ordinary course of business. All litigation has an element of uncertainty and the final outcome of any legal proceeding cannot be predicted with any degree of certainty. In our opinion, the possibility of a material loss from any of these proceedings is considered to be remote, and we do not expect that the effect of these proceedings will be material to our financial position, results of operations, or cash flow. Set forth below is a discussion of our most significant litigation matters, including environmental litigation.

Antitrust Litigation

On May 14, 1999, Inland and Gaylord were named as defendants in a consolidated class action complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit, captioned Winoff Industries, Inc. v. Stone Container Corporation, MDL No. 1261 (E.D. Pa.), named Inland, Gaylord, and eight other linerboard manufacturers as defendants. The complaint alleged that the defendants, during the period from October 1, 1993, through November 30, 1995, conspired to limit the supply of linerboard, and that the purpose and effect of the alleged conspiracy was artificially to increase prices of corrugated containers. Inland and Gaylord executed a settlement agreement on April 11, 2003, with the representatives of the class, which received final approval by the trial court. Gaylord and Inland paid a total of $8 million into escrow to fulfill the terms of the class action settlement.

Prior to the deadline for potential class members to “opt-out” of the class action lawsuit, over 100 companies and their named subsidiaries advised the court of their opt-out election. As a result of the opt-outs, we received a refund of $800,000 from the original class action settlement amount. Twelve individual complaints containing allegations similar to those in the class action have been filed by certain of these opt-out plaintiffs and over 3,000 of their named subsidiaries against the original defendants in the class action. We believe that the plaintiffs’ allegations in the opt-out litigation have no merit and are vigorously defending against the suits.

Bogalusa Litigation

On October 15, 2003, a release of nitrogen dioxide and nitrogen oxide took place at our linerboard mill in Bogalusa, Louisiana. The ensuing investigation indicated the emission resulted from a combination of unusual operating events and conditions between the Kraft mill and the Gaylord Chemical facility. Based upon the Company’s investigation, the total amount of released nitrogen oxide and nitrogen dioxide is believed to be no more than twenty pounds. The gaseous release dispersed in the atmosphere. The mill followed appropriate protocols for handling this type of event, notifying the Louisiana Department of Environmental Quality, the U.S. Environmental Protection Agency and local law enforcement officials. The federal and state environmental agencies have analyzed the reports prepared by the company and have not indicated that they will take any action against the company.

To date the company has been served with seven lawsuits seeking damages for various personal injuries allegedly caused by either exposure to the released gas or fears of exposure. These seven lawsuits have been consolidated but retain their individual status for trial purposes. One of these cases has been filed as a purported class action in Washington Parish, Louisiana. The company intends to vigorously defend against these allegations as well as contest the proposed certification as a class action. Our internal analysis of the accident is continuing.

Other

In 1988, we formed Guaranty (then known as Guaranty Federal Savings Bank) to acquire substantially all the assets and deposit liabilities of three thrift institutions from the Federal Savings and Loan Insurance Corporation, as receiver of those institutions. In connection with the acquisition, the government entered into an assistance agreement with us in which various tax benefits were promised. In 1993, Congress enacted narrowly targeted legislation to eliminate a portion of the promised tax benefits. We filed suit against the United States in the U.S. Court of Federal Claims alleging, among other things, that the 1993 legislation breached our contract and that we are entitled to monetary damages. This lawsuit is currently in the discovery and motion stage and is not expected to be resolved for several years. We cannot predict the likely outcome of this litigation.

Environmental

Our facilities are periodically inspected by environmental authorities. We are required to file with these authorities periodic reports on the discharge of pollutants. Occasionally, one or more of these facilities may operate in violation of applicable pollution control standards, which could subject the company to fines or penalties. We believe that any fines or penalties that may be imposed as a result of these violations will not have a material adverse effect on our earnings or competitive position. No assurance can be given, however, that any fines levied 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. We are named as a potentially responsible party in six proceedings relating to the cleanup of hazardous waste sites under CERCLA and similar state laws, excluding sites for which our records disclose no involvement or for which our potential liability has been finally determined. In all but one of these sites, we are either designated as a de minimus potentially responsible party or believe our financial exposure is insignificant. We have conducted investigations of all six sites, and currently estimate that the remediation costs to be allocated to us are $2 million and should not have a material effect on our earnings or competitive position. There can be no assurance that we will not be named as a potentially responsible party at additional Superfund sites in the future or that the costs associated with the remediation of those sites would not be material.


Item 4.	*Submission of Matters to a Vote of Security Holders*

We did not submit any matter to a vote of our shareholders during the fourth quarter of our fiscal year ended January 1, 2005.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*

Market Information

Our Common Stock is traded on the New York Stock Exchange and The Pacific Exchange. The table below sets forth the high and low sales price for our Common Stock during each fiscal quarter in the two most recent fiscal years.


	2004							2003

	Price Range							Price Range

	High		Low		Dividends			High		Low		Dividends

First Quarter	$	66.49	$	57.60	$	0.36		$	49.17	$	36.86	$	0.34
Second Quarter	$	69.40	$	59.52	$	0.36		$	48.06	$	37.06	$	0.34
Third Quarter	$	70.02	$	64.36	$	0.36		$	52.50	$	42.11	$	0.34
Fourth Quarter	$	69.18	$	57.25	$	1.36	*	$	62.86	$	47.89	$	0.34
For the Year	$	70.02	$	57.25	$	2.44		$	62.86	$	36.86	$	1.36


*	Includes special dividend of $1.00 per share paid December 15, 2004.

On February 4, 2005, we announced a two-for-one stock split to be effected in the form of a stock dividend for shareholders of record on March 1, 2005. For every one share of our common stock held on the record date, the holder will receive one additional share. The additional shares resulting from the split will be distributed on April 1, 2005.

Shareholders

Our stock transfer records indicated that as of March 1, 2005, there were approximately 5,000 holders of record of our Common Stock.

Dividend Policy

As indicated above, we paid quarterly dividends during each of the two most recent fiscal years in the amounts shown. On February 4, 2005, the Board of Directors declared a quarterly dividend on our Common Stock of $0.45 per share payable on March 15, 2005, to shareholders of record on March 1, 2005. The Board periodically reviews the dividend policy, and the declaration of dividends will necessarily depend upon our earnings and financial requirements and other factors within the discretion of the Board.

Issuer Purchases of Equity Securities

On February 4, 2005, we announced that our Board of Directors authorized the repurchase of up to six million shares of our common stock (twelve million shares after a two-for-one stock split also announced on that day). The repurchases will be accomplished from time to time through open market or privately negotiated transactions. Purchases we make under this program will be reported in our Quarterly Reports on Form 10-Q.

Other

See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for disclosure regarding securities authorized for issuance under equity compensation plans.


Item 6.	*Selected Financial Data*


		For the Year

		2004			2003^(a)			2002^(b)			2001^(b)			2000

		(Dollars in millions, except per share)
Revenues:
	Corrugated packaging	$	2,736		$	2,700		$	2,587		$	2,082		$	2,092
	Forest products		971			801			787			726			836
	Financial services		1,043			1,152			1,144			1,297			1,308

Total revenues		$	4,750		$	4,653		$	4,518		$	4,105		$	4,236

Segment Operating Income:
	Corrugated packaging	$	105		$	11		$	78		$	107		$	207
	Forest products		215			67			49			13			77
	Financial services		207			186			171			184			189

Segment operating income^(c)			527			264			298			304			473
Expenses not allocated to segments
	General and administrative		(93	)		(80	)		(34	)		(30	)		(33	)
	Other operating income (expense)^(d)		(76	)		(138	)		(13	)		1			(15	)
	Other non-operating income (expense)^(d)		—			(8	)		(11	)		—			—
	Parent company interest		(125	)		(135	)		(133	)		(98	)		(105	)

Income (loss) before taxes			233			(97	)		107			177			320
Income (taxes) benefit^(e)			(71	)		194			(42	)		(66	)		(125	)

Income from continuing operations			162			97			65			111			195
Discontinued operations^(f)			3			—			(1	)		—			—
Effect of accounting change^(g)			—			(1	)		(11	)		(2	)		—

Net income		$	165		$	96		$	53		$	109		$	195

Diluted earnings per share:
	Income from continuing operations	$	2.87		$	1.78		$	1.25		$	2.26		$	3.83
	Discontinued operations		0.05			—			(0.02	)		—			—
	Effect of accounting change		—			(0.01	)		(0.21	)		(0.04	)		—

Net income		$	2.92		$	1.77			1.02			2.22		$	3.83

Dividends per common share^(h)		$	2.44		$	1.36		$	1.28		$	1.28		$	1.28
Average diluted shares outstanding			56.2			54.2			52.4			49.3			50.9
Common shares outstanding at year-end			56.1			54.6			53.8			49.3			49.2
Depreciation and amortization:
	Parent company^(c)	$	223		$	238		$	224		$	188		$	201
	Financial services		31			32			36			40			30
Capital expenditures:
	Parent company	$	223		$	137		$	112		$	184		$	223
	Financial services		41			33			16			26			34
At Year-End
	Total Assets:
	Parent company	$	4,875		$	4,826		$	4,971		$	4,121		$	4,011
	Financial services		16,450			17,661			18,016			15,738			15,324
Long-term debt:
	Parent company	$	1,485		$	1,611		$	1,883		$	1,339		$	1,381
	Financial services		2,868			3,408			3,322			992			222
Preferred stock issued by subsidiaries		$	305		$	305		$	305		$	305		$	305
Shareholders’ equity		$	2,092		$	1,968		$	1,949		$	1,896		$	1,833
Ratio of total debt to total capitalization — parent company			42%			45%			49%			41%			43	%


	Throughout Selected Financial Data and Management’s Discussion and Analysis of Financial Condition and Results of Operations, we refer to parent company financial information, which includes only Temple-Inland and our manufacturing subsidiaries with our financial services subsidiaries reported on the equity method.


^(a)		The 2003 year, which ended on January 3, 2004, had 53 weeks. The extra week did not have a material effect on earnings or financial position. As a result of the consolidation of our administrative functions and adoption of a shared services concept, beginning 2004, we changed the way we allocate cost to the business segments. The effect of this change was to increase segment operating income and to increase unallocated expenses by a like amount. The year 2003 amounts have been reclassified to reflect this change as follows:


		For the Year 2003

		Originally						As
		Reported			Reclassifications			Reclassified

		(In millions)
Segment operating income
	Corrugated packaging	$	(14	)	$	25		$	11
	Forest products		57			10			67
	Financial services		186			—			186

Segment operating income			229			35			264
Unallocated expenses			(326	)		(35	)		(361	)

Income (loss) before taxes		$	(97	)	$	—		$	(97	)


	It was not practical to reclassify years prior to 2003.


^(b)		In 2002, we acquired Gaylord Container Corporation (March), a box plant in Puerto Rico (March), certain assets of Mack Packaging Group, Inc. (May), and Fibre Innovations LLC (November). Also in May 2002, we sold 4.1 million shares of common stock, $345 million of Upper DECS^SM units, and $500 million of Senior Notes due 2012. In the aggregate, these transactions significantly increased the assets and operations of our corrugated packaging segment and changed our capital structure. Unaudited pro forma information for 2002 assuming these acquisitions and related financing transactions had occurred at the beginning of 2002 follows: total revenues $4,461 million, income from continuing operations $54 million, and income from continuing operations, per diluted share $1.03. We derived this pro forma information by adjusting for the effects of the purchase price allocations and financing transactions described above and the reclassification of the discontinued operations. The pro forma information does not reflect the effects of capacity closures, cost savings or other synergies realized. These pro forma results are not necessarily an indication of what actually would have occurred if the acquisitions and financing transactions had been completed at the beginning of 2002 and are not intended to be indicative of future results.

		In 2001, we acquired the corrugated packaging operations of Chesapeake Corporation and Elgin Corrugated Box Company (May), and ComPro Packaging LLC (October). Unaudited pro forma results of operations, assuming these acquisitions had been effected as of the beginning of 2001, would not have been materially different from what we reported.

^(c)		We changed the estimated useful lives of certain production equipment beginning 2001. As a result, segment operating income in 2001 includes a $27 million reduction in depreciation expense compared with 2000. Of this amount, $20 million applies to corrugated packaging and $7 million applies to forest products.

^(d)		Other operating income (expense) includes (i) in 2004, a $27 million charge associated with converting and production facility closures, an $11 million charge related to consolidation and supply chain initiatives, a $34 million charge associated with the repositioning of the mortgage origination and servicing activities, $1 million of income related to the collection of notes previously written-off, and $5 million of other; (ii) in 2003, a $48 million charge associated with consolidation and supply chain initiatives, a $41 million charge associated with production and converting facility closures, a $42 million charge associated with write-downs including specialty packaging operations and the sale of a facility lease, a $5 million charge associated with financial services workforce reductions, and $2 million of other charges; (iii) in 2002, a $6 million charge related to promissory notes previously sold with recourse in connection with the 1998 sale of our Argentine box plant, and a $7 million charge related to financial services severance and write-off of technology investments; (iv) in 2001, a $20 million gain from the sale of non-strategic timberland and $19 million in losses from the disposition of under-performing assets and other charges; and (v) in 2000, a $15 million loss from our decision to exit the fiber cement business.

		Other non-operating income (expense) includes (i) in 2004, a $2 million premium related to the early redemption of debt, offset by $2 million of interest and other income; (ii) in 2003, an $8 million charge associated with early redemption and refinancing of $150 million of 8.25% Debentures; and (iii) in 2002, an $11 million write-off of unamortized financing fees in connection with the early repayment of a bridge financing facility.

^(e)		Income taxes includes one-time tax benefits related to the resolution and settlement of prior years’ tax examinations (i) in 2004, $20 million and (ii) in 2003, $165 million.

^(f)		Discontinued operations include in 2004, 2003, and 2002 the non-strategic operations obtained in the Gaylord acquisition including the retail bag business, which was sold in May 2002; the multi-wall bag business and kraft paper

mill, which were sold in January 2003; the chemical business; and in 2004, the resolution and settlement of environmental and other indemnifications we provided in the 1999 sale of the bleached paperboard operation.

^(g) Effect of accounting change includes (i) in 2003, Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, which resulted in an after tax charge of $1 million or $0.01 per share for the cumulative effect of adoption; (ii) in 2002, SFAS No. 142, Goodwill and Other Intangible Assets, which resulted in an after tax charge of $11 million or $0.22 per share; and (iii) in 2001, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which resulted in an after tax charge of $2 million or $0.04 per diluted share. As a result of the adoption of SFAS No. 142 in 2002, year 2002 and thereafter amounts are not comparable to prior years due to the amortization of goodwill and trademarks in the prior years. In 2003, we also voluntarily adopted the prospective transition method of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, which decreased 2003 net income by $1 million or $0.03 per share.

^(h) Includes a $1.00 per share special dividend in December 2004.


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results 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 us; the availability and price of raw materials we use; competitive actions by other companies; changes in laws or regulations or actions or restrictions of regulators; and the accuracy of our judgments and estimates concerning the integration of acquired operations and our consolidation and supply chain initiatives; and other factors, many of which are beyond our control.

Results of Operations for the Years 2004, 2003 and 2002

Summary

Our mission is to be the best by consistently exceeding customer expectations, maximizing asset utilization, lowering operating costs and improving efficiency. We are a market-driven, customer-focused company.

Our three key strategies are:


	•	Focusing on corrugated packaging from an integrated platform, which eliminates downtime and lowers costs through improved asset utilization,

	•	maximizing the value of our timberland through accelerated fiber growth that is aligned with well-located converting operations and developing significant real estate opportunities on high-value land, and

	•	realizing earnings and cash flow from financial services, which is a low-cost, low-risk provider of financial services.

Actions we took in 2004 to implement our key strategies included:


	•	We closed five corrugated packaging converting facilities and sold our specialty packaging operations and our Clarion, Pennsylvania MDF facility to reduce costs and improve asset utilization. These actions affected over 800 employees.

	•	We are modifying and enhancing two of our linerboard mills to increase mill reliability and reduce reliance on natural gas as an energy source.

	•	We repositioned our mortgage origination activities and sold our third-party mortgage servicing portfolio to reduce costs and exposure to changing market conditions, including a slow-down in refinancing activity. While we will still originate mortgage loans for our own portfolio and, to a lesser extent, for sale to others, we will limit our product offerings and reposition our retail origination activities. These actions affected over 1,500 employees and resulted in the sale or closure of over 100 of our mortgage origination outlets.

A summary of our consolidated results follows:


	For the Year

	2004		2003		2002

	(In millions, except per share)
Consolidated revenues	$	4,750	$	4,653	$	4,518
Income from continuing operations		162		97		65
Income from continuing operations per diluted share		2.87		1.78		1.25

Significant items affecting income from continuing operations included:


	•	In 2004, we began to see the benefits in our manufacturing operations of our initiatives to lower cost and improve asset utilization and operating efficiencies. In addition, market demand strengthened, resulting in higher prices for most of our forest products, and prices for corrugated packaging began to improve in the second quarter of the year. Our financial services operations benefited from improved asset quality, which resulted in a recovery of previously provided provisions for loan losses. This was partially offset by declining mortgage origination activities. Actions taken to lower cost and improve asset utilization and operating efficiencies resulted in charges and expenses of $76 million, principally related to the converting and production facility closures and the repositioning of our mortgage origination activities and sale of our third-party mortgage servicing portfolio. We also recognized a one-time tax benefit of $20 million resulting from the settlement of prior years’ tax examinations.

	•	In 2003, weak industry box demand and lower prices, continued excess capacity in most of our forest products, and higher energy and pension costs negatively affected our manufacturing revenues and earnings. The negative effect was partially offset by improvements in financial services earnings. Actions taken to lower cost and improve asset utilization and operating efficiencies resulted in charges and expenses of $138 million principally related to the sale or closure of under-performing assets and the consolidation of administrative functions. We also recognized a one-time tax benefit of $165 million resulting from the resolution and settlement of prior years’ tax examinations.

	•	In 2002, anemic growth of the U.S. economy coupled with industry over-capacity for most forest products negatively affected our revenues and earnings. We grew our corrugated packaging operations by acquiring Gaylord, which we began consolidating in March, and we also acquired a box plant in Puerto Rico in March, certain assets of Mack Packaging Group, Inc. in May, and Fibre Innovations LLC in November. In May, we sold 4.1 million shares of common stock, $345 million of Upper DECS^SM units, and $500 million of Senior Notes. In the aggregate, these acquisitions and financing transactions significantly increased the assets and operations of our corrugated packaging segment and changed our capital structure.

Business Segments

We manage our operations through three business segments:


	•	Corrugated packaging,

	•	Forest products, and

	•	Financial services.

Our operations are affected to varying degrees by supply and demand factors and economic conditions including changes in interest rates, new housing starts, home repair and remodeling activities, loan collateral values, particularly real estate, and the strength of the U.S. dollar. Given the commodity nature of our manufactured products, we have little control over market pricing or market demand.

Corrugated Packaging

We manufacture linerboard and corrugating medium that we convert into corrugated packaging and sell in the open market. Our corrugated packaging segment revenues are principally derived from the sale of corrugated packaging products and, to a lesser degree, from the sale of linerboard in the domestic and export markets.

A summary of our corrugated packaging results follows:


	For the Year

	2004		2003		2002

	(In millions)
Revenues	$	2,736	$	2,700	$	2,587
Segment operating income		105		11		78

Due to the integration of the operations we acquired in 2002, we cannot readily quantify the effect of these acquisitions on our 2002 operating income, but we believe it was significant. The acquired operations contributed $654 million in revenues in 2002.

Corrugated packaging shipments began to improve in second half 2003 and that trend continued in 2004. As a result of this improved demand and a generally improving U.S. economy, the price of linerboard increased by $45 in March 2004 with a corresponding increase in corrugated packaging prices effective April 2004. In June 2004, the price of linerboard increased another $50 per ton with a corresponding increase in corrugated packaging prices effective July 2004.


	Year over Year
	Increase (Decrease)

	2004			2003			2002

Corrugated packaging
Average prices		0	%		(1	%)		(5	%)
Shipments, average week^(a)		6	%		(1	%)		(2	%)
Industry shipments, average week^(b)		3	%		0	%		0	%
Linerboard
Average prices		11	%		(1	%)		(7	%)
Shipments, tons^(a)		(44	%)		17	%		(9	%)


^(a)	2002 shipments are pro forma to reflect the acquisition of Gaylord.

^(b)	Source: Fibre Box Association

About one percentage point of the 2004 increase in corrugated packaging shipments is attributable to growth in our converting operations in Mexico.

Linerboard sales and shipments to third parties were down because more of our production was used in our converting facilities, which is consistent with our strategy to convert more of the linerboard we produce in our own converting facilities.

We lowered cost and improved operating efficiency and asset utilization by closing eight converting facilities, five in 2004 and three in 2003. In addition we are spending capital on our mills to increase mill reliability and increase energy efficiency by lowering natural gas usage.

Fluctuations in our significant cost and expense components included:


	Year over Year
	Increase (Decrease)

	2004			2003			2002

	(In millions)
Wood fiber	$	(7	)	$	30		$	63
Recycled fiber		27			(11	)		26
Energy, principally natural gas		7			51			(32	)
Depreciation		(8	)		12			39
Pension and postretirement		5			23			20

Our wood, recycled fiber and energy costs fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate during 2005.

The decrease in depreciation in 2004 was principally due to the sale or closure of converting facilities. The increase in depreciation in 2002 was principally due to the facilities we acquired in 2002.

Information about our converting facilities and mills follows:


	For the Year

	2004			2003			2002

Number of converting facilities (at year-end)		69			74			77
Mill capacity, in million tons		3.4			3.3			3.3
Mill production, in million tons		3.3			3.2			3.1
Percent mill production used internally		90	%		82	%		84	%
Percent of total fiber requirements sourced from recycled fiber		36	%		34	%		42	%
Corrugating medium purchases from our Premier Boxboard Limited LLC joint venture, in thousand tons		100			157			169

Forest Products

We own or lease two million acres of timberland in Texas, Louisiana, Georgia, and Alabama. We grow timber, cut the timber and convert it into products. We intend to create the infrastructure necessary for real estate development of our designated high-value timberland in Georgia, principally near Atlanta. We manufacture lumber, particleboard, gypsum wallboard, fiberboard and medium density fiberboard (MDF). Our forest products segment revenues are principally derived from the sales of these products and, to a lesser degree, from sales of fiber and high-value lands. We also own 50 percent interests in a gypsum wallboard joint venture and in an MDF joint venture.

A summary of our forest products results follows:


	For the Year

	2004		2003		2002

	(In millions)
Revenues	$	971	$	801	$	787
Segment operating income		215		67		49

As a result of industry capacity closures and the strong housing and remodeling markets, product prices and shipments began to improve in the second half of 2003 and that trend continued in 2004.


		Year over Year
		Increase (Decrease)

		2004		2003			2002

Lumber:
	Average prices		16%		3%			(6%	)
	Shipments		7%		13%			5%
Particleboard:
	Average prices		28%		(3%	)		(13%	)
	Shipments		0%		(8%	)		12%
Gypsum:
	Average prices		26%		2%			25%
	Shipments		19%		(5%	)		16%
MDF:
	Average prices		15%		(4%	)		3%
	Shipments		3%		(20%	)		11%

Comparisons of MDF and particleboard shipments are affected by the indefinite closure of our Clarion MDF facility in third quarter 2003 and the sale of this facility in second quarter 2004 and by the indefinite closure of our Mt. Jewett particleboard facility in second quarter 2003.

Segment operating income includes our share of gypsum and MDF joint ventures’ operating income: $21 million in 2004; $2 million in 2003; and a loss of $1 million in 2002. The joint ventures’ operating results generally fluctuate in relation to the price and shipment changes noted above.

At year-end 2004, our high-value timberland principally consisted of about 173,000 acres located in Georgia, principally near Atlanta. Information regarding our high-value land sales follows:


		Year

		2004		2003		2002

		(Dollars in millions)
High-value land:
	Acres sold		2,919		2,436		5,846
	Profit included in segment operating income	$	19	$	12	$	16

Fluctuations in our significant cost and expense components included:


	Year over Year
	Increase (Decrease)

	2004			2003			2002

	(In millions)
Wood fiber	$	37		$	(19	)	$	9
Energy, principally natural gas		5			7			(12	)
Pension and postretirement		(1	)		3			4

Our goal is to increase our use of wood fiber from our timberland and reduce our reliance on outside purchases. Our outside purchases of fiber and energy costs fluctuate based on the market prices we pay for these commodities. It is likely that these costs will continue to fluctuate during 2005.

Information about our timber harvest and converting and manufacturing facilities follows:


			For the Year

			2004			2003			2002

Timber harvest, in million tons:
	Sawtimber			2.5			2.4			2.4
	Pulpwood			3.4			4.1			3.8

		Total		5.9			6.5			6.2

Number of converting and manufacturing facilities (at year-end)				18			19			19
Average operating rates for all product lines:
	High			91	%		86	%		93	%
	Low			62	%		60	%		74	%
Average operating rates for all product lines excluding sold or closed facilities:
	High			95	%		93	%		93	%
	Low			85	%		72	%		74	%

In 2003 and 2002, we curtailed production in most product lines to varying degrees due to market conditions. Our joint venture operations also experienced production curtailments in 2003 and 2002 due to market conditions.

Financial Services

We own a savings bank, Guaranty Bank, and an insurance agency and engage in real estate development activities. In late 2004, we repositioned our mortgage origination activities and sold our third-party mortgage servicing portfolio. Guaranty makes up the predominant amount of our financial services segment operating income, revenues, assets, and liabilities. In general, we gather funds from depositors, borrow money, and invest the resulting cash in loans and securities.

We focus our investing and deposit gathering activities in areas that promote a relatively stable source of earnings. We attempt to minimize the potential effect of interest rate and credit quality cycles by investing principally in residential housing assets and maintaining an asset and liability profile that is relatively insensitive to movements in interest rates. In general, we do not purchase or write derivative financial instrument contracts other than short-term contracts to hedge mortgage loans that we intend to sell.

We focus our loan portfolio on products with collateral and rate characteristics that we have significant experience managing and principally invest in assets with variable rates or that reprice in three to five years. Our deposit gathering activities are focused in two primary markets, Texas and California, both of which offer substantial opportunity for cost-effective growth. Limiting the markets and products in which we participate and avoiding complex financial instruments allows us to limit our infrastructure costs; however, we do incur substantial costs to operate in a regulated environment and comply with the extensive laws and regulations to which Guaranty is subject.

A summary of our financial services results follows:


	For the Year

	2004		2003		2002

	(In millions)
Net interest income	$	401	$	377	$	374
Segment operating income		207		186		171

Improvements in our net interest income and lower loan loss provisions were partially offset by declining values of our mortgage servicing rights, which we sold in late 2004, and losses from mortgage origination activities, prior to the completion of our repositioning of these activities in late 2004.


	Net Interest Income and Earning Assets and Deposits

In 2004, our interest rate spread improved, partially due to repricing of maturing certificates of deposit at lower market rates. In addition, we have continued our strategy of investing in residential housing loans, principally single-family loans with fixed interest rates for the first three to five years and adjustable rates thereafter. On average in 2004, we increased transaction accounts and decreased certificates of deposit. In general, transaction accounts cost us less than certificates of deposit. As we are currently positioned, if interest rates remain relatively stable, it is likely that our net interest income will remain near its current level. However, if interest rates change significantly, it is likely that our net interest income will decline.

In 2003, our net interest spread decreased as a result of declining interest rates and continued strong competition for attracting deposits.

Information concerning our interest rate spread follows:


		For the Year

		2004					2003					2002

		Average		Yield/			Average		Yield/			Average		Yield/
		Balance		Rate			Balance		Rate			Balance		Rate

		(Dollars in millions)
Earning assets		$	15,995		4.49	%	$	16,853		4.32	%	$	15,746		4.92	%
Interest-bearing liabilities			15,099		2.10	%		15,370		2.29	%		14,205		2.82	%

	Interest rate spread				2.39	%				2.03	%				2.10	%

The following table summarizes the composition of our earning assets and deposits:


		At Year-End

		2004			2003			2002

		(In millions)
Residential housing assets (loans and securities)		$	12,389		$	13,492		$	12,783
Other earning assets			3,015			3,010			4,185

	Total earning assets	$	15,404		$	16,502		$	16,968

Residential housing assets as a percentage of earning assets			80	%		82	%		75	%
Transaction accounts		$	5,137		$	5,115		$	3,945
Certificates of deposit			3,827			3,583			5,258

	Total deposits	$	8,964		$	8,698		$	9,203

The decrease in earning assets was principally due to a decrease in single-family mortgage-backed securities resulting from reduced purchases coupled with prepayments related to refinancing activity and a decrease in multifamily and senior housing construction loans and commercial real estate loans resulting from repayments. We expect this trend of repayments of commercial real estate loans to continue in early 2005, but expect to begin to see increased funding on new loan commitments beginning in late 2005. As a result of the repositioning of our mortgage activities, we anticipate a substantial decrease in our mortgage loans held for sale beginning in early 2005.

We experienced growth in other important components of our earning assets in 2004, including $334 million in longer term multifamily and senior housing term loans. Additionally loans to oil and gas producers and other participants in energy production and distribution activities, increased $245 million in 2004.

Asset Quality and Allowance for Loan Losses

A summary of various asset quality measures we monitor follows:


		At Year-End

		2004			2003			2002

		(Dollars in millions)
Non-performing loans		$	50		$	65		$	126
Restructured operating lease assets			37			40			—
Foreclosed real estate			4			26			6

	Non-performing assets	$	91		$	131		$	132

Non-performing loans as a percentage of total loans			0.51	%		0.71	%		1.28	%
Non-performing assets ratio			0.93	%		1.42	%		1.34	%
Allowance for loan losses/ non-performing loans			170	%		172	%		105	%
Allowance for loan losses/ total loans			0.88	%		1.22	%		1.34	%

We stop accruing interest on loans when we believe it is probable we will not collect all contractually due principal and interest. We apply interest payments received on nonaccrual loans to reduce principal. Interest income we would have recognized on nonaccrual loans had they been performing in accordance with their contractual terms was not significant in any individual year. However, in 2004, we recognized $6 million in interest income as a result of payoffs received on loans for which we had previously applied interest payments received to reduce the carrying amount.

At year-end 2004, we held a direct-financing lease that had characteristics indicating potential problems. The lease has a carrying value of $16 million and is secured by equipment used to manufacture original-equipment automotive parts. The lessee is currently performing in accordance with the contractual terms, which have not been modified, but we have concerns about the lessee’s ability to continue to comply with contractual terms because, in February 2005, the lessee filed for bankruptcy protection.

Virtually all of our commercial real estate loans are collateralized and performing in accordance with contractual terms. However, the borrowers on approximately $190 million of our senior housing and commercial real estate loans have completed construction and are nearing maturity of automatic or subsequently approved extensions. We underwrote most of these loans with the expectation that the borrowers would secure permanent financing or sell the collateral before or upon maturity of our loan. Some of the borrowers with completed projects have not been able to achieve the lease-up schedules originally anticipated. Although the current real estate environment is improving and we continue to receive a large number of payoffs on real estate loans, it is likely that we will extend some of these loans further. We typically require loans to be current on all interest and other contractual payments to grant such extensions. Additionally, we generally require substantial third-party guarantee or other credit support. However, for some loans, permanent financing may be difficult for the borrowers to secure, and collateral sales may require longer marketing periods or may not be possible. In 2004, we foreclosed and sold collateral securing four real estate loans, resulting in charge-offs and subsequent asset write-downs of $9 million. It is possible that we will have to foreclose on additional commercial real estate loans in the future.

We believe our allowance for loan losses is sufficient to cover probable losses. Factors that influence our judgments regarding the adequacy of the allowance for loan losses and the amounts charged to expense include:


	•	conditions affecting borrower liquidity and collateral values for impaired loans,

	•	risk characteristics for groups of loans that are not considered individually impaired but we believe have probable potential losses,

	•	risk characteristics for homogeneous pools of loans, and

	•	other risk factors that we believe are not apparent in historical information.

The following table summarizes changes in the allowance for loan losses:


		For the Year

		2004			2003			2002

		(Dollars in millions)
Balance at beginning of year		$	111		$	132		$	139
	Net charge-offs		(7	)		(64	)		(47	)
	Provision (credit) for loan losses		(12	)		43			40
	Transfer to reserve for loan commitments		(7	)		—			—

Balance at end of year		$	85		$	111		$	132

Net charge-offs as a percentage of average loans outstanding			0.07	%		0.66	%		0.48	%

The overall credit quality of our loans improved in 2004 because a number of large loans with previously identified weaknesses were paid in full or otherwise resolved, or in some cases we foreclosed on the underlying collateral. As a result of the significant decline in non-performing loans and other loans identified with weaknesses in our internal grading system, we recorded a credit to provision expense in 2004. Of this credit provision, $3 million related to paid-in-full real estate construction loans, $4 million related to paid-in-full commercial and business loans, $3 million related to upgrades of previously classified loans as a result of improving borrower and collateral characteristics, and $2 million related to improvements in identified industry and economic trends and conditions.

Charge-offs in 2004 related principally to foreclosed real estate loans and several smaller asset-based lending loans. Charge-offs in 2003 related principally to two commercial real estate loans, two commercial and business loans, restructured aircraft leases, and several asset-based lending loans. Charge-offs in 2002 related principally to two senior housing loans, two commercial and business loans, and several asset-based lending and leasing loans.

In 2003, we restructured two leveraged direct financing leases on cargo aircraft in which we are the lessor. Due to a reduction in the lease payments, we reclassified the leases as operating leases, recorded the aircraft in our balance sheet and wrote them down to fair value. We are depreciating the aircraft over their remaining expected useful lives. The carrying value of the aircraft was $36 million at year-end 2004. The lessee entered

into bankruptcy protection in 2004, during which time we agreed to a further reduction in lease payments. The lessee subsequently emerged from bankruptcy protection and continues to make lease payments in accordance with the terms. Although the lessee continues to make the contractual lease payments, it has not operated out of bankruptcy for a sufficient time for us to determine whether it will likely be able to continue to make payments for the remaining five years of the lease term. The 2004 reduction in lease payments did not give rise to an impairment charge.

Repositioning of Mortgage Origination Activities and Sale of Third-Party Mortgage Servicing

In third quarter 2004, we announced our intentions to reposition our mortgage origination activities and sell our third-party mortgage servicing portfolio to reduce costs and our exposure to changing market conditions, including a slow-down in refinancing activity. While we will still originate mortgage loans for our own portfolio and, to a lesser extent, for sale to others, we intend to limit our product offerings and reposition our retail origination activities. We will continue to originate loans through brokers and correspondent networks and in certain retail channels, including the retail branches of Guaranty.

At year-end 2004, we had substantially completed the repositioning of the mortgage origination activities and sold our third-party mortgage servicing portfolio. As a result of these actions, we incurred $34 million in charges and expenses, including $9 million of severance, $11 million related to the closure of facilities, and an $11 million loss on the sale of the third-party mortgage servicing portfolio.

Non-Interest Income and Non-Interest Expenses

Fluctuations in our non-interest income and expense components included:


		Year over Year
		Increase (Decrease)

		2004			2003		2002

		(In millions)
Noninterest income:
	Loan origination and sale of loans	$	(128	)	$	58	$	80
	Servicing rights amortization and impairment		(19	)		—		13
	Real estate operations		4			15		(9	)

The decrease in loan origination and sale of loans was due principally to the decline in mortgage loan origination activity as refinancing slowed considerably in 2004 and to the sale and closure of many of our mortgage loan origination branches in late 2004. The changes in servicing rights amortization and impairment were principally due to fluctuations in mortgage interest rates and the decision to sell the third-party mortgage servicing portfolio. As mortgage interest rates rise, mortgage origination activity and servicing rights amortization and impairment generally decline, and as mortgage interest rates decline, mortgage loan origination activity and servicing rights amortization and impairment generally increase. The repositioning of our mortgage origination activities and the sale of our third-party mortgage servicing portfolio will substantially reduce future loan origination and sale of loans income and servicing rights amortization and impairment. At year-end 2004, we had no remaining mortgage servicing rights on our balance sheet.


		Year over Year
		Increase (Decrease)

		2004			2003		2002

		(In millions)
Noninterest expense:
	Compensation and benefits	$	(57	)	$	25	$	54
	Real estate operations		(10	)		9		1

A significant portion of our compensation expense was related to our mortgage loan origination activity and was directly variable with origination activities. The repositioning of our mortgage origination activities will substantially reduce these costs, as well as make our compensation costs less sensitive to mortgage loan origination volume. Real estate operations expense increased in 2003 and then decreased in 2004 because a multifamily housing development partnership that we consolidate completed construction in 2003 and began

operating the property while marketing it for sale. The partnership sold the property in 2004. Real estate operations revenues, however, did not decline in 2004 because revenues from lot sales increased.

Information regarding our mortgage loan origination activities follows:


	For the Year

	2004			2003			2002

	(Dollars in millions)
Loans originated and retained	$	1,617		$	2,089		$	1,253
Loans originated for sale to third parties	$	5,227		$	10,813		$	9,503
Gains on loan sales as a percent of originations		2.04	%		2.08	%		1.94	%
Value of mortgage servicing rights retained	$	19		$	44		$	43

In the past, we retained the rights to service some of the loans we sold to third parties, but did not retain any other interests in those loans. In the future, we do not anticipate retaining a significant amount of mortgage servicing rights on loans we sell to third parties.

For additional statistical and financial information about our financial services segment, see Statistical Data at the end of this item.

Expenses Not Allocated to Segments

Unallocated expenses represent expenses managed on a company-wide basis and include corporate general and administrative expense; other operating and non-operating income (expense); and parent company interest expense.

The change in general and administrative expenses in 2004 and 2003 was principally due to increases in stock-based compensation and pension costs and, in 2004, to $3 million in expenses related to our assessment of internal controls over financial reporting mandated by the Sarbanes-Oxley Act of 2002. We started expensing stock options using the fair value method in 2003, and we used treasury stock to fund our 401(k) matching contributions in 2004 and 2003. Stock-based compensation was $35 million in 2004, $30 million in 2003, and $13 million in 2002.

Other operating income (expense) consists of:


	•	In 2004, $42 million, including an $11 million charge associated with consolidation of administrative functions and supply chain initiatives, $27 million related to closure or sale of converting facilities and non-strategic assets and $4 million of other charges. Of these amounts, $19 million applies to corrugated packaging, $12 million to forest products, and $11 million is unallocated. In addition, financial services recognized a $34 million charge related to the repositioning of the mortgage origination activities and the third-party mortgage servicing portfolio.

	•	In 2003, $133 million, including a $48 million charge associated with consolidation of administrative functions and supply chain initiatives, $83 million related to the closure or sale of converting and production facilities and non-strategic assets and $2 million of other charges. Of these amounts, $70 million applies to corrugated packaging, $24 million to forest products and $39 million is unallocated. In addition, financial services recognized a $5 million charge associated with workforce reductions.

	•	In 2002, $6 million related to the repurchase of notes sold with recourse, which applies to corrugated packaging. In addition, financial services recognized a $7 million charge related to severance and write-off of technology investments.

The consolidation of our administrative functions has been completed, but we expect the improvements in supply chain to be ongoing. The repositioning of our mortgage origination activities and third party mortgage servicing portfolio is essentially completed. We will continue our efforts to enhance return on investment by lowering cost, improving operating efficiencies and increasing asset utilization. As a result, we will continue to review operations that are unable to meet return objectives and determine appropriate courses of action, including consolidating and closing converting facilities and selling under-performing assets.

Other non-operating income (expense) includes call premiums and write-offs of unamortized financing fees related to early repayments of borrowings of $2 million in 2004, $8 million in 2003 and $11 million in 2002, and $2 million of interest income in 2004.

The change in parent company interest expense was due to reductions in long-term debt and lower interest rates. At year-end 2004, we had $1,437 million of debt with fixed interest rates that averaged 7.38 percent and $51 million of debt with variable interest rates that averaged 3.71 percent. This compares with $1,584 million of debt with fixed interest rates that averaged 7.45 percent and $31 million of debt with variable interest rates that averaged 3.04 percent at year-end 2003.

Income Taxes

Our effective tax rate was a tax expense of 31 percent in 2004, a tax benefit of 200 percent in 2003, and a tax expense of 39 percent in 2002. These rates reflect one-time benefits of eight percent in 2004 and 170 percent in 2003 resulting from the resolution of tax examinations and claims discussed below. Other differences between the effective tax rate and the statutory rate are due to state income taxes, nondeductible items, foreign operating losses, and other items for which we recognize no financial benefit until realized.

In 2004, the Internal Revenue Service concluded its examination of our tax returns for the years 1997 through 2000, and we resolved several state income tax examinations. In 2003, the Internal Revenue Service concluded its examination of our tax returns through 1996, including matters related to net operating losses and minimum tax credit carryforwards, which resulted from certain deductions following the 1988 acquisition of Guaranty and for which no financial accounting benefit had been recognized. Also in 2003, we resolved certain state tax refund claims for the years 1991 through 1994. As a result, valuation allowances and tax accruals previously provided for these matters were no longer required, and in fourth quarter 2004 we recognized a one-time benefit of $20 million or $0.34 per diluted share, and in second quarter 2003 we recognized a one-time benefit of $165 million or $3.04 per diluted share. Of these one-time benefits, $20 million represents cash refunds of previously paid taxes plus related interest in 2004 and $26 million in 2003. The remainder was a non-cash benefit.

Based on our current expectations of income and expense, it is likely that our 2005 effective tax rate will approximate 39 percent. We do not expect the American Jobs Creation Act of 2004 to affect our 2005 effective tax rate significantly.

Average Shares Outstanding

The changes in average diluted shares outstanding in 2003 and 2002 were primarily the result of our May 2002 sale of 4.1 million shares of common stock. The change in 2004 was primarily the result of exercise of employee stock options. The dilutive effect of our outstanding stock options and equity purchase contracts was not significant.

The expected settlement of our equity purchase contracts in May 2005 will result in the issuance of between 5.5 million and 6.6 million shares of our stock, and we will receive $345 million in cash.

On February 4, 2005, we announced that our Board of Directors approved (i) a repurchase program of up to six million shares, or over 10%, of our common stock; and (ii) a 2-for-1 stock split to be distributed on April 1, 2005.

Capital Resources and Liquidity for the Year 2004

We discuss our capital resources and liquidity for Temple-Inland and our manufacturing subsidiaries, which we refer to as the parent company, and our financial services subsidiaries separately in order for the reader to better understand our different businesses and because almost all of the net assets invested in financial services are subject, in varying degrees, to regulatory rules and regulations including restrictions on the payment of dividends to the parent company.

Sources and Uses of Cash

Consolidated cash from operations was $460 million in 2004, $910 million in 2003, and $263 million in 2002. Consolidated cash from operations represents the sum of parent company and financial services cash

from operations, less the dividends from financial services, which are eliminated upon consolidation. Dividends received from financial services were $105 million in 2004, $166 million in 2003, and $125 million in 2002.


	Parent Company Sources and Uses of Cash


			For the Year

			2004			2003			2002

			(In millions)
We received cash from
	Operations		$	439		$	225		$	240
	Dividends from financial services^(a)			105			166			125
	Working capital changes			(128	)		25			22

		From operations		416			416			387
	Sale of non-strategic assets			66			69			39
	Exercise of options and in 2002 the sale of common stock			62			13			219
	Borrowings for acquisitions			—			—			841

Total sources				544			498			1,486
We used cash to
	Reduce debt and other obligations			(191	)		(276	)		(643	)
	Pay dividends to shareholders			(136	)		(73	)		(67	)
	Reinvest in the business through
		Capital expenditures		(223	)		(137	)		(112	)
		Joint ventures and in 2002 acquisitions		(5	)		(9	)		(650	)

Total uses				(555	)		(495	)		(1,472	)

Change in cash and cash equivalents			$	(11	)	$	3		$	14


^(a)	Dividends we receive from financial services are eliminated in the consolidated statements of cash flows.

We operate in cyclical industries and our operating cash flows vary accordingly. Our principal operating cash requirements are for compensation, wood and recycled fiber, energy, interest and taxes. In 2004, we experienced improved pricing and shipments for most of our products compared with decreases experienced during most of 2003. The dividends we receive from financial services are dependent on its level of earnings and capital needs and are subject to regulatory approval and restrictions. It is likely that dividends from financial services will be substantially less in 2005 than in 2004 because of an anticipated increase in its capital requirements to support growth in its earning assets.

Working capital is subject to cyclical operating needs, the timing of collection of receivables and the payment of payables and expenses and to a lesser extent to seasonal fluctuations in our operations.

In 2004 and late 2003, many of our employees took advantage of the increasing spread between the market price of our common stock and the exercise price of employee stock options and exercised their stock options. As a result, we issued 1,179,784 shares of common stock in 2004 and 264,372 shares in 2003 to employees exercising options. We sold 4,140,000 shares of common stock in 2002 in conjunction with the acquisition of Gaylord.

Debt reductions in 2004 included $100 million of 7.25% notes, $44 million of 9.38% to 9.88% notes, and $64 million of other long-term liabilities, principally timber rights purchase obligations. Debt reductions in 2003 included $150 million of 8.25% debentures.

We paid cash dividends to shareholders of $2.44 in 2004 (including a $1.00 per share special dividend in December 2004), $1.36 in 2003, and $1.28 in 2002.

Capital expenditures were 100% of depreciation in 2004 and 58% in 2003. Capital expenditures are expected to approximate $223 million in 2005, 98% of expected 2005 depreciation. Most of the 2004 and planned 2005 expenditures relate to initiatives to increase reliability and efficiency at our linerboard mills.


	Financial Services Sources and Uses of Cash


			For the Year

			2004			2003			2002

			(In millions)
We received cash from
	Operations		$	161		$	266		$	297
	Changes in loans held for sale, and other			(12	)		394			(296	)

		From operations		149			660			1
	Sale of non-strategic assets and mortgage servicing rights			14			—			36

Total sources				163			660			37
We used cash to
	Pay dividends to the parent company^(a)			(105	)		(166	)		(125	)
	Change in deposits and borrowings			(707	)		(449	)		1,546
	Reinvest in the business through
		Loans and securities, net of payments		461			(99	)		(1,957	)
		Capital expenditure, acquisitions and other uses		172			(5	)		350

Total uses				(179	)		(719	)		(186	)

Change in cash and cash equivalents			$	(16	)	$	(59	)	$	(149	)


^(a)	Dividends we pay to the parent company are eliminated in the consolidated statements of cash flows.

Our principal operating cash requirements are for compensation, interest, and taxes. Changes in loans held for sale are subject to the timing of the origination and subsequent sale of the loans and the level of refinancing activity. As a result of the repositioning of our mortgage origination activities in late 2004, it is likely that the cash flow related to these activities will decrease substantially in 2005, following positive cash flow in early 2005 from the sale of loans originated in 2004.

The changes in deposits and borrowings and the amounts invested in loans, including loans held for sale, and securities generally move in tandem because we use deposits and borrowings to finance these investments. Fluctuations over the last several years are principally due to the changes in the volume of refinancing activities, and in 2002, were also a result of a mortgage-backed security investment initiative.

It is likely that we will increase our earning assets in 2005, which in turn will increase our capital requirements. We expect the increase in capital can be achieved from normal operations. As a result, it is likely that we will pay substantially lower dividends to the parent company in 2005 than in 2004. Additionally, in early 2005, we completed the acquisition of an insurance agency for $18 million cash. This acquisition will not materially affect our financial position, results of operations, or liquidity.

Liquidity and Contractual Obligations

Almost all of the net assets invested in financial services are subject, in varying degrees, to regulatory rules and restrictions including restrictions on the payment of dividends to the parent company. As a result, all consolidated assets are not available to satisfy all consolidated liabilities. For the reader to better understand this and our different businesses, we discuss our contractual obligations for the parent company and financial

services separately. At year-end 2004, our consolidated contractual obligations separated between the parent company and financial services consist of:


			Payments Due or Expiring by Year

			Total			2005			2006-7			2008-9			Thereafter

			(In millions)
Parent Company
Long-term debt			$	1,488		$	41		$	541		$	332		$	574
Contractual interest payments on long-term debt				81			2			29			7			43
Capital lease obligations				543			15			30			30			468
	Less, related municipal bonds we own			(543	)		(15	)		(30	)		(30	)		(468	)
Operating leases				293			39			58			44			152
Purchase obligations				272			54			104			99			15
Other long-term liabilities				6			1			1			1			3

	Total parent company		$	2,140		$	137		$	733		$	483		$	787

Financial Services
Transaction and savings deposit accounts			$	5,137		$	5,137		$	—		$	—		$	—
Certificates of deposit				3,827			2,142			1,353			330			2
FHLB borrowings, repurchase agreements and other borrowings				5,710			3,587			1,651			372			100
Preferred stock issued by subsidiaries				305			—			305			—			—
Contractual interest				423			177			170			45			31
Operating leases				69			14			21			16			18

	Total financial services		$	15,471		$	11,057		$	3,500		$	763		$	151

		Total consolidated	$	17,611		$	11,194		$	4,233		$	1,246		$	938


	Parent Company Liquidity and Contractual Obligations

Our sources of short-term funding are our operating cash flows, dividends received from financial services, and borrowings under our existing accounts receivable securitization program and committed credit agreements. At year-end 2004, we had $9 million in cash and cash equivalents and $774 million in unused borrowing capacity. Our contractual obligations due in 2005 will likely be repaid from our operating cash flow or from our unused borrowing capacity.

We had $225 million available under our $250 million accounts receivable securitization program that expires in 2006. Under this program, a wholly-owned subsidiary purchases, on an on-going basis, substantially all of our trade receivables. As we need funds, the subsidiary draws under its revolving credit agreement, pledges the trade receivables as collateral, and remits the proceeds to us. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary’s pledged receivables prior to distributions back to us. We included this subsidiary in our parent company and consolidated financial statements.

We have $549 million available, out of a total of $590 million, under committed credit agreements. This includes a $400 million credit agreement of which $200 million expires in 2006 and $200 million in 2007. The remaining $190 million of credit agreements expire at varying dates in 2005 and 2006.

Our debt agreements, accounts receivable securitization program, and credit agreements contain terms, conditions and financial covenants customary for such agreements including minimum levels of interest coverage and limitations on leverage. At year-end 2004, we complied with the terms, conditions and financial covenants. None are restricted as to availability based on our long-term debt ratings.

In February 2005, we effected a successful remarketing of our $345 million 6.42% senior notes payable in 2007. The interest rate on these notes is now 5.003 percent. We expect to settle the related equity purchase contracts in May 2005. At that time, we will issue common stock in exchange for $345 million in cash. The actual number of shares we will issue will be based on the average market price of our stock, subject to a floor of $52, in which case we would issue 6.6 million shares (before taking into account the stock split discussed below), and a ceiling of $63.44, in which case we would issue 5.4 million shares (before taking into account the stock split discussed below).

On February 4, 2005, our Board of Directors increased the quarterly dividend rate to $0.45 per share from $0.36 per share; authorized the repurchase of up to six million shares of common stock and declared a two-for-one stock split to be distributed on April 1, 2005. At that time, per share and share information will be restated to reflect the stock split.

In the 1990s, we entered into two sale-lease back transactions of production facilities with municipalities. We entered into these transactions to mitigate property and similar taxes associated with these facilities. The municipalities purchased the mills from us for $188 million, our carrying value, and we leased the facilities back from the municipalities under lease agreements, which expire in 2022 and 2025. Concurrently, we purchased $188 million of interest bearing bonds issued by these municipalities. The bond terms are identical to the lease terms, are secured by payments under the capital lease obligations, and the municipalities are obligated only to the extent the underlying lease payments are made by us. The interest rate implicit in the leases is the same as the interest rate on the bonds. As a result, the present value of the capital lease obligations is $188 million, the same as the principal amount of the bonds. Since there is no legal right of offset, the $188 million of bonds are included in other assets and the $188 million present value of the capital lease obligations are included in other long-term liabilities. There is no net effect from these transactions as we are in substance both the obligor on, and the holder of, the bonds.

Operating leases represent pre-tax obligations and include $179 million for the lease of particleboard and MDF facilities in Mt. Jewett Pennsylvania, which expire in 2019. The rest of our operating lease obligations are for timberland, facilities and equipment.

Purchase obligations are pre-tax, market priced obligations principally for gypsum and timber used in our manufacturing and converting processes and for major committed capital expenditures.

We have other long-term liabilities, principally defined benefit pension and postretirement medical obligations and deferred income taxes, that are not included in the table because they do not have scheduled maturities. At year-end 2004, the pre-tax pension liability was $289 million and the pre-tax postretirement medical liability was $143 million. See Pension, Postretirement Medical and Health Care Matters for information about our pension and postretirement plans. We do not expect any significant changes in our deferred tax liability in 2005. However, it is possible that by the end of 2005 we will have used all our alternative minimum tax credit carryforwards. As a result, it is possible that in 2006 and thereafter, we will pay federal income taxes at a 35% rate as compared with the 20% rate we have paid for a number of years. While we have not completed the analysis of the repatriation of foreign earnings provisions of the American Jobs Creation Act of 2004, it is likely that any foreign earnings we would repatriate would not be significant.

We have interest rate and commodity derivative instruments outstanding at year-end 2004. The interest rate instrument expires in 2008 and the majority of the commodity instruments expire in 2005. These instruments are non-exchange traded and are valued using either third-party resources or models. At year-end 2004, the aggregate fair value of all derivatives was a $5 million liability of which $5 million relates to the interest rate swap and an insignificant asset relates to the two commodity instruments.


	Financial Services Liquidity and Contractual Obligations

Our sources of short-term funding are our operating cash flows, new deposits, borrowings under our existing agreements and, if necessary, sales of assets. Assets that can be readily converted to cash, or against which we can readily borrow, include short-term investments, loans, mortgage loans held for sale, and securities. At year-end 2004, we had available liquidity of $3 billion. Our contractual obligations due in 2005 will likely be repaid from operating cash flow and retention of our deposit customers.

Our transaction and savings deposit accounts are shown as maturing in 2005. These accounts do not have a contractual maturity, but rather, are due on demand. Most of the certificates of deposit that mature in 2005 are short-term (one year or less) and a high percentage of the depositors have historically renewed at maturity, although they have no contractual obligation to do so.

Unless renegotiated, the terms of the preferred stock issued by subsidiaries make it likely that we will redeem the preferred stock in 2007 at the liquidation preference amount of $305 million.

Loans and securities aggregating $8.8 billion are pledged as collateral on FHLB borrowings. Based upon this collateral, we have the ability to borrow an additional $1.7 billion from the FHLB, which is included in our available liquidity. Operating lease obligations are principally for facilities and equipment.

Off-Balance Sheet Arrangements


	Parent Company

It is not our practice to enter into off-balance sheet arrangements. From time to time, however, we do so to facilitate our operating activities. At year-end 2004, our off-balance sheet arrangements consisted of:


		Expiring by Year

		Total		2005		2006-7		2008-9		Thereafter

		(In millions)
Joint venture guarantees		$	108	$	28	$	15	$	15	$	50
Performance bonds and recourse obligations			105		74		26		5		—

	Total	$	213	$	102	$	41	$	20	$	50

We participate in three joint ventures engaged in manufacturing and selling paper and forest products. Our partner in each of these ventures is a publicly-held company unrelated to us. At year-end 2004, these ventures had $108 million in long-term debt, of which we had guaranteed debt service obligations and letters of credit aggregating $108 million. Our joint venture partners have provided similar guarantees and letters of credit. Generally we would be called upon to fund the guarantees due to the lack of specific performance by the joint ventures, such as non-payment of debt.

Performance bonds are primarily for workers’ compensation and general liability claims.

We have also guaranteed the repayment of $20 million of borrowings by a financial services subsidiary. In addition, preferred stock issued by two subsidiaries of Guaranty is automatically exchanged into preferred stock of Guaranty upon the occurrence of certain regulatory events or administrative actions. If such exchange occurs, these preferred shares are automatically surrendered to us in exchange for our senior notes, which may be redeemed by us. At year-end 2004, the outstanding preferred stock issued by these two subsidiaries totaled $305 million.


	Financial Services

We enter into commitments to extend credit for loans, leases, and letters of credit in the normal course of our business. These commitments carry substantially the same risk as loans. We generally require collateral upon funding of these commitments, the receipt of which provides assets that generally increase our liquidity by increasing our borrowing capacity. These commitments normally include provisions allowing us to exit the

commitment under certain circumstances. At year-end 2004, our off-balance sheet unfunded arrangements consist of:


		Expiring by Year

		Total		2005		2006-7		2008-9		Thereafter

		(In millions)
Single-family mortgage loans		$	290	$	290	$	—	$	—	$	—
Unused lines of credit			1,907		410		658		771		68
Unfunded portion of loan commitments			3,048		1,973		974		101		—
Other loan commitments			579		144		231		195		9
Letters of credit			370		158		69		135		8

	Total	$	6,194	$	2,975	$	1,932	$	1,202	$	85

Capital Adequacy and Other Regulatory Matters

At year-end 2004, Guaranty met or exceeded all applicable regulatory capital requirements. We expect to maintain Guaranty’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 (OTS). From time to time, the parent company may make capital contributions to or receive dividends from Guaranty.

Selected financial and regulatory capital data for Guaranty and its consolidated subsidiaries follows:


		At Year-End

		2004		2003

		(In millions)
Balance sheet data:
	Total assets	$	16,065	$	17,247
	Total deposits		8,964		8,698
	Shareholder’s equity		997		999


					Regulatory			For Categorization as
		Actual			Minimum			“Well Capitalized”

Regulatory capital ratios:
	Tangible capital		6.89	%		2.00	%		N/A
	Leverage capital		6.89	%		4.00	%		5.00	%
	Risk-based capital		10.83	%		8.00	%		10.00	%

At year-end 2004, Guaranty had outstanding preferred stock of subsidiaries with a carrying amount and liquidation value of $305 million. This preferred stock will be automatically exchanged into Guaranty preferred stock if the OTS determines Guaranty is or will become undercapitalized in the near term or upon the occurrence of certain administrative actions. If such an exchange were to occur, the parent company must issue senior notes in exchange for the Guaranty preferred stock in an amount equal to the liquidation preference of the preferred stock exchanged. With respect to certain of these shares, the parent company has the option to issue senior notes or purchase the shares. At year-end 2004, $274 million of the subsidiary preferred stock qualifies as core capital and the remainder qualifies as Tier 2 capital.

As we previously disclosed, an internal investigation revealed that Guaranty’s mortgage origination operation failed to file certain statutory reports on a timely basis and may have violated applicable laws and regulations. We reported our findings and corrective actions to the OTS. After the OTS reviewed the findings and corrective actions and conducted its own examination, it and Guaranty entered into a Stipulation and Consent to the Issuance of an Order to Cease and Desist for Affirmative Relief (Consent Order). Guaranty agreed to the issuance of the Consent Order, without admitting or denying any wrongdoing or relevant findings, in the interest of addressing the matters subject to the review and avoiding the cost and disruptions associated with possible administrative or judicial proceedings regarding those matters. Under the Consent Order, Guaranty agreed, among other things, to take certain actions primarily related to its repositioned mortgage origination activities, including strengthening its regulatory compliance controls and management,

enhancing its suspicious activity reporting and regulatory training programs, and implementing improved risk assessment and loan application register programs. No financial penalties were included in the Consent Order.

Guaranty is in the process of completing implementation of these corrective actions and expects to have them in place by first quarter-end 2005. As described earlier, Guaranty has substantially completed the repositioning of its mortgage origination activities including the sale and closure of its retail mortgage origination outlets and has sold its third-party mortgage servicing portfolio.

The Consent Order has no material on-going impact on the operations of Guaranty or its ability to pay dividends to the parent company. We have not incurred any material financial loss as a result of this matter and have no reason to believe that the matters addressed in the Consent Order will result in any material loss to Guaranty.

Accounting Policies


	Critical Accounting Estimates

In preparing our financial statements, we follow generally accepted accounting principles, which in many cases require us to make assumptions, estimates and judgments that affect the amounts reported. Our significant accounting policies are included in Note 1 to the consolidated financial statements and Note A to the summarized financial statements of the parent company and financial services. Many of these principles are relatively straightforward. There are, however, a few accounting policies that are critical because they are important in determining our financial condition and results, and they are difficult for us to apply. Within the parent company, they include asset impairments and pension accounting, and within financial services, they include the allowance for loan losses and, through 2004, mortgage servicing rights. The difficulty in applying these policies arises from the assumptions, estimates and judgments that we have to make currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations, as well as our intentions. As the difficulty increases, the level of precision decreases, meaning actual results can and probably will be different from those currently estimated. We base our assumptions, estimates and judgments on a combination of historical experiences and other factors that we believe are reasonable. We have discussed the selection and disclosure of these critical accounting estimates with our Audit Committee.


	•	Measuring assets for impairment requires estimating intentions as to holding periods, future operating cash flows and residual values of the assets under review. Changes in our intentions, market conditions or operating performance could require us to revise the impairment charges we previously provided.

	•	The expected long-term rate of return on pension plan assets is an important assumption in determining pension expense. In selecting that rate, currently 8.50 percent, consideration is given to both historical returns and future returns over the next quarter century. The actual rate of return on plan assets for the last ten years was 10.33 percent. Differences between actual and expected returns will affect future pension expense. For example, a 50 basis point change in the estimated expected rate of return would affect annual pension costs by $4 million. In addition, a 50 basis point change in the discount rate would affect the funded status by $74 million and annual pension costs by $7 million.

	•	Allowances for loan losses are based on historical experiences and evaluations of future cash flows and collateral values and are subject to regulatory scrutiny. Changes in general economic conditions or loan specific circumstances will inevitably change those evaluations.

	•	Measuring for impairment and amortizing mortgage servicing rights is largely dependent on our assumptions about the speed at which loans are repaid and market rates of return. Changes in interest rates affect both of these variables. As a result of the sale of our third-party mortgage servicing portfolio, beginning in 2005, accounting for mortgage servicing rights will no longer be considered a critical accounting policy.


	New Accounting Pronouncements Adopted

We have adopted a number of new accounting pronouncements; the more significant are described below. Unless noted otherwise, the effect on earnings or financial position of adopting the pronouncement was not material.


	Year 2004


	•	Financial Accounting Standards Board (FASB) Staff Position, No. 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This staff position provided guidance on accounting for the effects of this act on postretirement plans that provide prescription drug benefits.

	•	FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities an interpretation of ARB No. 51. This interpretation provides guidance for determining whether an entity is a variable interest entity and which beneficiary of the variable interest entity, if any, should consolidate the variable interest entity (the primary beneficiary).

	•	Securities and Exchange Commission Staff Accounting Bulletin No. 105, Application of Accounting Principle to Loan Commitments. This bulletin applies to loan commitments issued after March 2004 and accounted for as derivative instruments and it precludes the recognition of an asset at the inception of the loan commitment.


	Year 2003


	•	SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123. We voluntarily began expensing stock options beginning with options granted in 2003. The effect of expensing stock options granted in 2003 was to reduce 2003 net income by $1 million or $0.03 per share.

	•	SFAS No. 143, Accounting for Asset Retirement Obligations. This statement requires the recognition of legal obligations associated with the retirement of long-lived assets at their fair value and to allocate that fair value to expense over the useful life of the asset. The effect of adopting this statement was to increase property, plant and equipment by $3 million, recognize an asset retirement obligation liability of $4 million, and reduce 2003 net income by $1 million or $0.01 per share for the cumulative effect of adoption.

	•	SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement requires classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. Provisions of this statement addressing the accounting for certain mandatorily redeemable non-controlling interests have been deferred indefinitely pending further FASB action. The deferred provisions would principally affect the way we account for minority interests in partnerships we control; the classification of such interests as liabilities, which we presently do; and accounting for changes in the fair value of the minority interest by a charge to earnings, which we currently do not do. While the effect of the deferred provisions would be dependent on the changes in the fair value of the partnerships’ net assets, it is possible that the future effects could be significant. Because the minority interests are not readily marketable, it is difficult to determine their fair value; however, we believe the difference between the carrying value of the minority interests and their estimated fair value was not significant at year-end 2004 and 2003.

	•	SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. This statement provides for the disclosure of additional information about pension and postretirement plans.


	Year 2002


	•	SFAS No. 142, Goodwill and Other Intangible Assets. This statement provided new guidance for goodwill and other indefinitely lived assets including precluding the amortization of goodwill. The effect of adopting this statement was to reduce 2002 net income by $11 million or $0.22 per diluted share for an $18 million goodwill impairment associated with corrugated packaging pre-2001 acquisitions.


	Pending Accounting Pronouncements

In November and December 2004, the FASB issued SFAS No. 151, Inventory Cost, an amendment of ARB No. 43, Chapter 4, which clarifies accounting for abnormal inventory costs and allocation of fixed production overhead costs; SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, which provides an exception for exchanges that do not have commercial substance; and SFAS No. 123 (revised December 2004), Share Based Payment, which requires that the cost of all employee stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on their estimated fair value. SFAS No. 151 and No. 153 will be effective for us beginning 2006 while SFAS No. 123R will be effective for us beginning third quarter 2005.

We have not yet completed our analysis of these pronouncements to determine what effects, if any, their adoption will have on our earnings or financial position. However, the effects of SFAS No. 123R will be somewhat mitigated because we are already charging to expense over their vesting period the fair value of employee stock options granted in 2003 and 2004. Our best estimate is that the effect on earnings and earnings per share of adopting SFAS No. 123R would approximate those disclosed in Note 1 to the consolidated financial statements, Stock-Based Compensation. In addition, this statement requires that any tax benefits we realize as a result of the exercise of employee stock options be reflected as a financing cash flow instead of an operating cash flow. We recognized a $5 million benefit in 2004 and less than a $1 million benefit in 2003 and 2002, which are included in our operating cash flow.


	Change in Method of Accounting for Inventories Beginning 2005

Beginning first quarter 2005, we will change our method of accounting for our corrugated packaging inventories from the LIFO method to the average cost method, which approximates FIFO. As a result of our ongoing efforts to reduce cost permanently and increase asset utilization, we believe the average cost method is preferable because it will: (i) increase the transparency of our financial reporting through a more balanced income statement and balance sheet presentation; (ii) result in the valuation of all of our inventories at current cost in our financial statements; and (iii) conform all of our inventories to a single method of accounting.

As a result of this change, we expect that our January 2005 balance sheet will reflect an increase in inventories of $27 million, an increase in income tax liability of $11 million and an increase in retained earnings of $16 million. In addition, as required by generally accepted accounting principles, we will retrospectively apply the average cost method to our prior years’ income statements and segment operating results, the expected effect of which is summarized as follows:

Corrugated Packaging

Income From

Segment Operating Income

Continuing Operations

Per Diluted Share

Retrospective

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		mill, which were sold in January 2003; the chemical business; and in 2004, the resolution and settlement of environmental and other indemnifications we provided in the 1999 sale of the bleached paperboard operation.

^(g)		Effect of accounting change includes (i) in 2003, Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, which resulted in an after tax charge of $1 million or $0.01 per share for the cumulative effect of adoption; (ii) in 2002, SFAS No. 142, Goodwill and Other Intangible Assets, which resulted in an after tax charge of $11 million or $0.22 per share; and (iii) in 2001, SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, which resulted in an after tax charge of $2 million or $0.04 per diluted share. As a result of the adoption of SFAS No. 142 in 2002, year 2002 and thereafter amounts are not comparable to prior years due to the amortization of goodwill and trademarks in the prior years. In 2003, we also voluntarily adopted the prospective transition method of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123, which decreased 2003 net income by $1 million or $0.03 per share.

^(h)		Includes a $1.00 per share special dividend in December 2004.