-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IQqqjHoVsvtjnMOn/K9uakXfsOpff739hItdODegUBmwj7UxtxftW95WnalzxV1g zLx5y20e3bpAiXJxxstNhA== 0000731939-03-000046.txt : 20031112 0000731939-03-000046.hdr.sgml : 20031111 20031112061339 ACCESSION NUMBER: 0000731939-03-000046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030927 FILED AS OF DATE: 20031112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLE INLAND INC CENTRAL INDEX KEY: 0000731939 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631] IRS NUMBER: 751903917 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08634 FILM NUMBER: 03990231 BUSINESS ADDRESS: STREET 1: 1300 MOPAC EXPRESSWAY SOUTH CITY: AUSTIN STATE: TX ZIP: 78746 BUSINESS PHONE: 5124345800 MAIL ADDRESS: STREET 1: 1300 MOPAC EXPRESSWAY SOUTH CITY: AUSTIN STATE: TX ZIP: 78746 10-Q 1 tin3d200310q.txt TEMPLE-INLAND FORM 10-Q FOR 9/27/2003 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 27, 2003 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period From to Commission File Number 001-08634 Temple-Inland Inc. (Exact name of registrant as specified in its charter) Delaware 75-1903917 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1300 South MoPac Expressway, Austin, Texas 78746 (Address of principal executive offices, including Zip Code) (512) 434-5800 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of common shares outstanding Class as of September 27, 2003 Common Stock (par value $1.00 per share) 54,268,508 Page 1 of 90 The Exhibit Index is page 50. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SUMMARIZED STATEMENTS OF INCOME PARENT COMPANY (TEMPLE-INLAND INC.) Unaudited
Third Quarter First Nine Months ------------- ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in millions) NET REVENUES $ 878 $ 874 $ 2,602 $ 2,542 COSTS AND EXPENSES Cost of sales 797 782 2,393 2,234 Selling and administrative 70 74 220 226 Other (income) expense 15 -- 45 6 ----- ----- ----- ----- 882 856 2,658 2,466 ----- ----- ----- ----- (4) 18 (56) 76 FINANCIAL SERVICES EARNINGS 48 44 129 108 ----- ----- ----- ----- OPERATING INCOME 44 62 73 184 Interest expense (33) (36) (103) (97) Other expense (8) -- (8) (11) ----- ----- ----- ----- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES 3 26 (38) 76 Income tax (expense) benefit (6) (11) 173 (30) ----- ----- ----- ----- INCOME (LOSS) FROM CONTINUING OPERATIONS (3) 15 135 46 Discontinued operations -- -- 1 (1) ----- ----- ----- ----- INCOME (LOSS) BEFORE ACCOUNTING CHANGE (3) 15 136 45 Effect of accounting change -- -- (1) (11) ----- ----- ----- ----- NET INCOME (LOSS) $ (3) $ 15 $ 135 $ 34 ===== ===== ===== =====
See the notes to consolidated financial statements. 2 3 SUMMARIZED BALANCE SHEETS PARENT COMPANY (TEMPLE-INLAND INC.) Unaudited
Third Quarter Year-End 2003 2002 ---- ---- (in millions) ASSETS Current Assets Cash and cash equivalents $ 14 $ 17 Receivables, net of allowances of $14 in 2003 399 352 and $13 in 2002 Inventories: Work in process and finished goods 83 69 Raw materials and supplies 242 269 ----- ----- Total inventories 325 338 ----- ----- Prepaid expenses and other 56 50 ----- ----- Total current assets 794 757 ----- ----- Investment in Financial Services 1,139 1,178 Property and Equipment: Land and buildings 618 638 Machinery and equipment 3,518 3,412 Construction in progress 62 92 Less allowances for depreciation (2,249) (2,101) ----- ----- 1,949 2,041 Timber and timberlands - less depletion 494 508 ----- ----- Total property and equipment 2,443 2,549 Goodwill 239 249 Assets of Discontinued Operations 25 78 Other Assets 146 146 ----- ----- TOTAL ASSETS $ 4,786 $ 4,957 ===== ===== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 205 $ 188 Employee compensation and benefits 60 67 Accrued interest 26 30 Accrued property taxes 29 28 Other accrued expenses 131 133 Liabilities of discontinued operations 20 28 Current portion of long-term debt 4 8 ----- ----- Total current liabilities 475 482 Long-Term Debt 1,743 1,883 Deferred Income Taxes 67 245 Postretirement Benefits 146 147 Pension Liability 173 142 Other Long-Term Liabilities 136 109 ----- ----- Total Liabilities 2,740 3,008 Shareholders' Equity 2,046 1,949 ----- ----- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,786 $ 4,957 ===== =====
See the notes to consolidated financial statements. 3 4 SUMMARIZED STATEMENTS OF CASH FLOW PARENT COMPANY (TEMPLE-INLAND INC.) Unaudited
First Nine Months ----------------- 2003 2002 ---- ---- (in millions) CASH PROVIDED BY (USED FOR) OPERATIONS Net income $ 135 $ 34 Adjustments: Depreciation, depletion and amortization 174 164 Depreciation of leased property 2 2 Non-cash stock based compensation 22 1 Non-cash pension and postretirement expense 41 18 Cash contribution to pension and postretirement plans (11) (11) Other non-cash charges (credits) (133) 17 Deferred income taxes 10 25 Unremitted earnings from Financial Services (83) (108) Dividends from Financial Services 120 100 Working capital changes, net (27) (57) Net assets of discontinued operations (1) 16 Loss from discontinued operations (1) 1 Cumulative effect of accounting change 1 11 Other 15 39 ----- ----- 264 252 ----- ----- CASH PROVIDED BY (USED FOR) INVESTING Capital expenditures (96) (81) Sales of non-strategic assets and operations 36 33 Acquisition of Gaylord, net of cash acquired -- (569) Other acquisitions and joint ventures (7) (40) Other -- (3) ----- ----- (67) (660) ----- ----- CASH PROVIDED BY (USED FOR) FINANCING Payments of debt (169) (310) Cash dividends paid to shareholders (55) (50) Bridge financing facility -- 880 Payment of bridge financing facility -- (880) Payment of assumed Gaylord bank debt -- (285) Sale of common stock -- 215 Sale of Upper DECSSM -- 345 Sale of Senior Notes -- 496 Other additions to debt 24 31 Other -- (22) ----- ----- (200) 420 ----- ----- Effect of exchange rate changes on cash -- (1) Net increase (decrease) in cash (3) 11 Cash at beginning of period 17 3 ----- ----- Cash at end of period $ 14 $ 14 ===== =====
See the notes to consolidated financial statements. 4 5 SUMMARIZED STATEMENTS OF INCOME FINANCIAL SERVICES Unaudited
Third Quarter First Nine Months ------------- ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in millions) INTEREST INCOME Loans and loans held for sale $ 129 $ 143 $ 393 $ 431 Securities available-for-sale 16 25 54 83 Securities held-to-maturity 33 28 109 55 Other earning assets 1 1 3 3 ----- ----- ----- ----- Total interest income 179 197 559 572 INTEREST EXPENSE Deposits 43 58 145 181 Borrowed funds 41 44 130 113 ----- ----- ----- ----- Total interest expense 84 102 275 294 ----- ----- ----- ----- NET INTEREST INCOME 95 95 284 278 Provision for loan losses (13) (8) (44) (37) ----- ----- ----- ----- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 82 87 240 241 ----- ----- ----- ----- NONINTEREST INCOME Loan servicing fees 8 10 24 32 Amortization and impairment of servicing rights (12) (20) (53) (37) Loan origination and marketing 71 53 225 134 Real estate operations 14 13 34 35 Insurance commissions and fees 12 14 33 38 Service charges on deposits 9 8 26 22 Operating lease income 3 2 8 8 Other 8 6 29 21 ----- ----- ----- ----- Total noninterest income 113 86 326 253 ----- ----- ----- ----- NONINTEREST EXPENSE Compensation and benefits 85 75 258 218 Loan servicing and origination 5 2 12 4 Real estate operations, other than compensation 9 9 24 24 Insurance operations, other than 3 5 10 11 compensation Occupancy 8 8 25 25 Data processing 7 6 20 24 Other 30 24 88 80 ----- ----- ----- ----- Total noninterest expense 147 129 437 386 ----- ----- ----- ----- INCOME BEFORE TAXES 48 44 129 108 Income tax (expense) benefit (17) 7 (46) -- ----- ----- ----- ----- NET INCOME $ 31 $ 51 $ 83 $ 108 ===== ===== ===== =====
See the notes to consolidated financial statements. 5 6 SUMMARIZED BALANCE SHEETS FINANCIAL SERVICES Unaudited
Third Quarter Year-End 2003 2002 ---- ---- (in millions) ASSETS Cash and cash equivalents $ 456 $ 438 Loans held for sale 621 1,088 Loans receivable, net of allowance for losses of $130 in 2003 and $132 in 2002 9,321 9,668 Securities available-for-sale 1,491 1,926 Securities held-to-maturity 4,805 3,915 Real estate 278 249 Premises and equipment, net 167 157 Accounts, notes and accrued interest receivable 132 159 Goodwill 148 148 Mortgage servicing rights 88 105 Other assets 245 163 ------ ------ TOTAL ASSETS $ 17,752 $ 18,016 ====== ====== LIABILITIES AND SHAREHOLDER'S EQUITY Deposits $ 8,945 $ 9,203 Federal Home Loan Bank advances 3,506 3,386 Securities sold under repurchase agreements 2,183 2,907 Obligations to settle trade date securities 963 369 Other liabilities 500 487 Other borrowings 211 181 Preferred stock issued by subsidiaries 305 305 ------ ------ TOTAL LIABILITIES 16,613 16,838 ------ ------ SHAREHOLDER'S EQUITY 1,139 1,178 ------ ------ TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 17,752 $ 18,016 ====== ======
See the notes to consolidated financial statements. 6 7 SUMMARIZED STATEMENTS OF CASH FLOWS FINANCIAL SERVICES Unaudited
First Nine Months 2003 2002 ---- ---- (in millions) CASH PROVIDED BY (USED FOR) OPERATIONS Net income (loss) $ 83 $ 108 Adjustments: Amortization and accretion 70 38 Depreciation 18 18 Depreciation of leased assets 6 8 Provision for loan losses 44 37 Deferred income taxes (12) 2 Originations of loans held for sale (11,144) (5,403) Sales of loans held for sale 11,611 5,386 Collections on loans serviced for others, net (24) (78) Originated mortgage servicing rights (38) (34) Other (3) 17 ------ ------ 611 99 ------ ------ CASH PROVIDED BY (USED FOR) INVESTING Purchases of securities available-for-sale (17) (22) Principal payments and maturities of securities available-for-sale 452 573 Purchases of securities held-to-maturity (2,008) (2,599) Principal payments and maturities of securities held-to-maturity 1,706 191 Loans originated or acquired, net of collections 198 1 Sale of mortgage servicing rights -- 33 Sale of loans 41 11 Acquisitions, net of cash acquired (1) 358 Capital expenditures (25) (11) Other 10 3 ------ ------ 356 (1,462) ------ ------ CASH PROVIDED BY (USED FOR) FINANCING Net increase (decrease) in deposits (234) (272) Securities sold under repurchase agreements and short-term borrowings, net (241) (685) Additions to debt and long-term FHLB advances 282 2,335 Payments of debt and long-term FHLB advances (647) (232) Dividends paid to parent company (120) (100) Purchase of deposits -- 104 Other 11 -- ------ ------ (949) 1,150 ------ ------ Net increase (decrease) in cash and cash equivalents 18 (213) Cash and cash equivalents at beginning of period 438 587 ------ ------ Cash and cash equivalents at end of period $ 456 $ 374 ====== ======
See the notes to consolidated financial statements. 7 8 CONSOLIDATED STATEMENTS OF INCOME TEMPLE-INLAND INC. AND SUBSIDIARIES Unaudited
Third Quarter First Nine Months ------------- ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in millions, except per share amounts) REVENUES Manufacturing $ 878 $ 874 $ 2,602 $ 2,542 Financial Services 292 283 885 825 ----- ----- ----- ----- 1,170 1,157 3,487 3,367 ----- ----- ----- ----- COSTS AND EXPENSES Manufacturing 882 856 2,658 2,466 Financial Services 244 239 756 717 ----- ----- ----- ----- 1,126 1,095 3,414 3,183 ----- ----- ----- ----- OPERATING INCOME 44 62 73 184 Parent company interest (33) (36) (103) (97) Other expense (8) -- (8) (11) ----- ----- ----- ----- INCOME (LOSS) BEFORE TAXES 3 26 (38) 76 Income tax (expense) benefit (6) (11) 173 (30) ----- ----- ----- ----- INCOME (LOSS) FROM CONTINUING OPERATIONS (3) 15 135 46 Discontinued operations -- -- 1 (1) ----- ----- ----- ----- INCOME (LOSS) BEFORE ACCOUNTING CHANGE (3) 15 136 45 Effect of accounting change -- -- (1) (11) ----- ----- ----- ----- NET INCOME (LOSS) $ (3) $ 15 $ 135 $ 34 ===== ===== ===== ===== EARNINGS (LOSS) PER SHARE Basic: Income (loss) from continuing operations $ (0.06) $ 0.28 $ 2.49 $ 0.89 Discontinued operations -- -- 0.01 (0.02) Effect of accounting change -- -- (0.01) (0.21) ----- ----- ----- ----- Net income (loss) $ (0.06) $ 0.28 $ 2.49 $ 0.66 ===== ===== ===== ===== Diluted: Income (loss) from continuing operations $ (0.06) $ 0.28 $ 2.49 $ 0.89 Discontinued operations -- -- 0.01 (0.02) Effect of accounting change -- -- (0.01) (0.21) ----- ----- ----- ----- Net income (loss) $ (0.06) $ 0.28 $ 2.49 $ 0.66 ===== ===== ===== ===== DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.34 $ 0.32 $ 1.02 $ 0.96 ===== ===== ===== =====
See the notes to consolidated financial statements. 8 9 CONSOLIDATING BALANCE SHEETS TEMPLE-INLAND INC. AND SUBSIDIARIES Third Quarter 2003 Unaudited
Parent Financial Company Services Consolidated ------- -------- ------------ (in millions) ASSETS Cash and cash equivalents $ 14 $ 456 $ 470 Loans held for sale -- 621 621 Loans receivable, net -- 9,321 9,321 Securities available-for-sale -- 1,491 1,491 Securities held-to-maturity -- 4,805 4,805 Trade receivables, net 399 -- 399 Inventories 325 -- 325 Property and equipment, net 2,443 167 2,610 Goodwill 239 148 387 Other assets 227 743 925 Investment in Financial Services 1,139 -- -- ------ ------ ------ TOTAL ASSETS $ 4,786 $ 17,752 $ 21,354 ====== ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ -- $ 8,945 $ 8,945 Federal Home Loan Bank advances -- 3,506 3,506 Securities sold under repurchase agreements -- 2,183 2,183 Obligations to settle trade date securities -- 963 963 Other liabilities 611 500 1,087 Long-term debt 1,743 211 1,954 Deferred income taxes 67 -- 46 Postretirement benefits 146 -- 146 Pension liability 173 -- 173 Preferred stock issued by subsidiaries -- 305 305 ------ ------ ------ TOTAL LIABILITIES $ 2,740 $ 16,613 $ 19,308 ------ ------ ------ SHAREHOLDERS' EQUITY Preferred stock - par value $1 per share: authorized 25,000,000 shares; none issued -- Common stock - par value $1 per share: authorized 200,000,000 shares; issued 61,389,552 shares including shares held in the treasury 61 Additional paid-in capital 371 Accumulated other comprehensive loss (143) Retained earnings 2,080 ------ 2,369 Cost of shares held in the treasury: 7,121,044 shares (323) ------ TOTAL SHAREHOLDERS' EQUITY 2,046 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,354 ======
See the notes to consolidated financial statements. 9 10 CONSOLIDATING BALANCE SHEETS TEMPLE-INLAND INC. AND SUBSIDIARIES Year-End 2002 Unaudited
Parent Financial Company Services Consolidated ------- -------- ------------ (in millions) ASSETS Cash and cash equivalents $ 17 $ 438 $ 455 Loans held for sale -- 1,088 1,088 Loans receivable, net -- 9,668 9,668 Securities available-for-sale -- 1,926 1,926 Securities held-to-maturity -- 3,915 3,915 Trade receivables 352 -- 352 Inventories 338 -- 338 Property and equipment, net 2,549 157 2,706 Goodwill 249 148 397 Other assets 274 676 915 Investment in Financial Services 1,178 -- -- ----- ------ ------ TOTAL ASSETS $ 4,957 $ 18,016 $ 21,760 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits $ -- $ 9,203 $ 9,203 Federal Home Loan Bank advances -- 3,386 3,386 Securities sold under repurchase -- 2,907 2,907 Obligations to settle trade date securities -- 369 369 Other liabilities 591 487 1,052 Long-term debt 1,883 181 2,064 Deferred income taxes 245 -- 236 Postretirement benefits 147 -- 147 Pension liability 142 -- 142 Preferred stock issued by subsidiaries -- 305 305 ------ ------ ------ TOTAL LIABILITIES $ 3,008 $ 16,838 $ 19,811 ------ ------ ------ SHAREHOLDERS' EQUITY Preferred stock - par value $1 per share: authorized 25,000,000 shares; none issued -- Common stock - par value $1 per share: authorized 200,000,000 shares; issued 61,389,552 shares including shares held in the treasury 61 Additional paid-in capital 368 Accumulated other comprehensive loss (136) Retained earnings 2,000 ------ 2,293 Cost of shares held in the treasury: 7,583,293 shares (344) ------ TOTAL SHAREHOLDERS' EQUITY 1,949 ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,760 ======
See the notes to consolidated financial statements. 10 11 CONSOLIDATED STATEMENT OF CASH FLOWS TEMPLE-INLAND INC. AND SUBSIDIARIES Unaudited
First Nine Months ----------------- 2003 2002 ---- ---- (in millions) CASH PROVIDED BY (USED FOR) OPERATIONS Net income (loss) $ 135 $ 34 Adjustments: Depreciation, depletion and amortization 192 182 Depreciation on leased property 8 10 Provision for loan losses 44 37 Deferred taxes (2) 27 Other non-cash charges (133) 17 Amortization and accretion of financial instruments 70 38 Originations of loans held for sale (11,144) (5,403) Sales of loans held for sale 11,611 5,386 Working capital changes, net (27) (57) Collections on loans serviced for others, net (24) (78) Originated mortgage servicing rights (38) (34) Net assets of discontinued operations (1) 16 Loss from discontinued operations (1) 1 Cumulative effect of accounting change 1 11 Other 64 64 ------ ------ 755 251 ------ ------ CASH PROVIDED BY (USED FOR) INVESTING Capital expenditures (121) (92) Sale of non-strategic assets and operations 36 33 Purchases of securities available-for-sale (17) (22) Principal payments and maturities of securities available-for-sale 452 573 Purchases of securities held-to-maturity (2,008) (2,599) Principal payments and maturities and redemptions of securities held-to-maturity 1,706 191 Sale of mortgage servicing rights -- 33 Loans originated or acquired, net of principal collected 198 1 Proceeds from sale of loans 41 11 Acquisitions, net of cash acquired (8) (251) Other 10 -- ------ ------ 289 (2,122) ------ ------ CASH PROVIDED BY (USED FOR) FINANCING Net increase (decrease) in deposits (234) (272) Additions to debt 306 2,366 Payments of debt (816) (542) Repurchase agreements and short-term borrowings, net (241) (685) Cash dividends paid to shareholders (55) (50) Bridge financing facility -- 880 Payment of bridge financing facility -- (880) Payment of assumed Gaylord bank debt -- (285) Sale of common stock, Upper DECS, and Senior Notes -- 1,056 Purchase of deposits -- 104 Other 11 (22) ------ ------ (1,029) 1,670 ------ ------ Effect of exchange rate changes on cash -- (1) ------ ------ Net increase (decrease) in cash and cash equivalents 15 (202) Cash and cash equivalents at beginning of period 455 590 ------ ------ Cash and cash equivalents at end of period $ 470 $ 388 ====== ======
See the notes to consolidated financial statements. 11 12 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Therefore, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal accruals) considered necessary for a fair presentation have been included. Interim operating results are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the financial statements and footnotes included in the Annual Report on Form 10-K of Temple-Inland Inc. (the "Company") for the fiscal year ended December 28, 2002. The consolidated financial statements include the accounts of the Company and its manufacturing and financial services subsidiaries. The consolidated net assets invested in financial services activities are subject, in varying degrees, to regulatory rules and restrictions including restrictions on the payment of dividends to the Company. Accordingly, included as an integral part of the consolidated financial statements are separate summarized financial statements for the Company's manufacturing and financial services subsidiaries. The Parent Company (Temple-Inland Inc.) summarized financial statements include the accounts of the Company and its manufacturing subsidiaries (the parent company). The net assets invested in Financial Services are reflected in the summarized financial statements using the equity method. Related earnings, however, are presented before tax to be consistent with the consolidated financial statements. These financial statements should be read in conjunction with the Company's consolidated financial statements and the Financial Services summarized financial statements. All material intercompany amounts and transactions have been eliminated. Certain amounts have been reclassified to conform to current year's classifications. 13 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE B - EARNINGS PER SHARE Denominators used in computing per share amounts follow:
Third First Nine Quarter Months ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- (in millions) Denominator for basic earnings per share: Weighted average common shares outstanding 54.2 53.7 54.1 51.8 Dilutive effect of: Equity purchase contracts -- -- -- -- Stock options 0.1 -- -- 0.1 ---- ---- ---- ---- Denominator for diluted earnings per share 54.3 53.7 54.1 51.9 ==== ==== ==== ====
NOTE C - COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of:
Third First Nine Quarter Months ------------ ------------ 2003 2002 2003 2002 ---- ---- ---- ---- (in millions) Net income (loss) $ (3) $ 15 $ 135 $ 34 Other comprehensive income (loss), net of taxes: Unrealized gains (losses) on: Available-for-sale securities (2) 1 (1) -- Derivative instruments -- (2) (1) (2) Foreign currency translation adjustments (3) (1) (5) (7) ---- ---- ---- ---- Other comprehensive income (loss) (5) (2) (7) (9) ---- ---- ---- ---- Comprehensive income (loss) $ (8) $ 13 $ 128 $ 25 ==== ==== ==== ====
At third quarter-end 2003, the aggregate fair value of all derivative instruments was a $9 million liability, consisting of an $8 million liability for an interest rate swap derivative and a $1 million liability related to linerboard and OCC derivatives. There was no ineffective portion of derivatives charged to earnings in third quarter 2003 or in first nine months 2003 and amounts reclassified from other comprehensive income into earnings were not material. NOTE D - SEGMENT INFORMATION The Company has three reportable segments: Corrugated Packaging, Building Products, and Financial Services. The Company evaluates performance based, in part, on operating income before other (income) expense, unallocated general and administrative expenses, parent company interest, and income taxes. Other (income) expense includes gain or loss on sale of assets, asset impairments and expenses associated with consolidation and supply chain initiatives and facility closures. 14 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Unallocated General and Administrative and Other Corrugated Building Financial (Income) For third quarter 2003 Packaging Products Services Expense Total - ---------------------- --------- -------- -------- -------------- --------- (in millions) Revenues from external customers $ 667 211 292 -- $ 1,170 Depreciation, depletion and amortization $ 40 16 8 2 $ 66 Operating income (loss) $ -- 22 49 (27) $ 44 Financial Services, net interest income $ -- -- 95 -- $ 95 Capital expenditures $ 27 8 14 3 $ 52 - ---------------------------------------------------------------------------------------------- For first nine months 2003 or at third quarter end 2003 - ---------------------- (in millions) Revenues from external customers $ 2,019 583 885 -- $ 3,487 Depreciation, depletion and amortization $ 123 48 24 5 $ 200 Operating income (loss) $ (3) 25 132 (81) $ 73 Financial Services, net interest income $ -- -- 284 -- $ 284 Total assets $ 2,427 1,104 17,752 71 $21,354 Capital expenditures $ 68 23 25 5 $ 121 Goodwill $ 239 -- 148 -- $ 387 - ---------------------------------------------------------------------------------------------- For third quarter 2002 - ---------------------- (in millions) Revenues from external $ 672 202 283 -- $ 1,157 Depreciation, depletion and amortization $ 38 16 9 3 $ 66 Operating income (loss) $ 14 12 44 (8) $ 62 Financial Services, net interest income $ -- -- 95 -- $ 95 Capital expenditures $ 19 7 4 3 $ 33 - ---------------------------------------------------------------------------------------------- For first nine months 2002 or at third quarter end 2002 - --------------------- (in millions) Revenues from external $ 1,932 610 825 -- $ 3,367 Depreciation, depletion and amortization $ 115 46 26 5 $ 192 Operating income (loss) $ 65 43 115 (39) $ 184 Financial Services, net interest income $ -- -- 278 -- $ 278 Total assets $ 2,681 1,188 17,830 46 $21,745 Capital expenditures $ 49 27 11 5 $ 92 Goodwill $ 177 -- 141 -- $ 318 - ---------------------------------------------------------------------------------------------- Includes other (income) expenses for third quarter 2003 of $16 million, which consists of $3 million related to converting and production facility closures and $13 million related to consolidation and supply chain initiatives. Of these amounts, $1 million applies to Building Products, $4 million to Corrugated Packaging, and $1 million to Financial Services. Includes other (income) expense for first nine months 2003 of $48 million, which consists of $10 million related to converting and production facility closures, $39 million related to consolidation and supply chain initiatives and other income of $1 million related to the collection of notes previously written- off. Of these amounts, $13 million applies to Building Products, $11 million to Corrugated Packaging and $3 million to Financial Services. 15 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Includes other expenses of $13 million, of which $7 million is related to severance and write-off of technology investments, which applies to Financial Services, and $6 million related to the repurchase of notes sold with recourse, which applies to Corrugated Packaging. Includes depreciation and amortization of premises, equipment and leased assets.
NOTE E - CONTINGENCIES There are pending against the Company and its subsidiaries lawsuits, claims and environmental matters arising in the regular course of business. The resolution of these matters is not expected to have a material adverse effect on the Company's operations or financial position. NOTE F - ACQUISITIONS The Company acquired effective control of Gaylord Container Corporation on February 28, 2002. The Company acquired a box plant in Puerto Rico during March 2002, two converting operations of Mack Packaging Group, Inc. during May 2002, and Fibre Innovations LLC during November 2002. The results of the acquired operations have been included in the Company's income statement since the dates of acquisition. The following parent company unaudited pro forma information assumes these acquisitions and related financing occurred at the beginning of 2002 (in millions except per share): First Nine Months 2002 ---------------------- (in millions, except per share) Net revenues $ 2,865 Income from continuing operations $ 35 Per diluted share Income from continuing operations $ 0.67 NOTE G - DISCONTINUED OPERATIONS At third quarter-end 2003, discontinued operations consist of Gaylord's chemical business and accruals related to the 1999 sale of the bleached paperboard operations. At third quarter-end 2003, the assets and liabilities of discontinued operations includes $10 million of working capital, $16 million of property and equipment, and $20 million of environmental and other long- term accruals. Revenues from discontinued operations for third quarter 2003 were $3 million and for first nine months 2003 were $15 million. 16 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NOTE H - OTHER OPERATING (INCOME) EXPENSE Other operating (income) expense consists of:
Third Quarter First Nine Months -------------- ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in millions) Expenses associated with consolidation and supply chain initiatives $ 12 $ -- $ 36 $ -- Loss on closure of production and converting facilities 3 -- 10 -- (Income) loss related to collection of notes that were written off in 2002 -- -- (1) 6 ---- ---- ---- ---- Total $ 15 $ -- $ 45 $ 6 ==== ==== ==== ====
Expenses related to initiatives to relocate the Corrugated Packaging operations, consolidate administrative functions, and effect improvements in supply chain management consist principally of relocation costs and fees paid to third party consultants. Losses on closure of production and converting facilities consist principally of severance and asset impairments. In September 2003, the Company announced the indefinite shutdown of its Clarion, Pennsylvania medium density fiberboard plant. In connection with this shutdown the Company incurred and paid $1 million in involuntary employee termination liabilities. During third quarter 2003, the Company paid $1 million in severance related to the previously announced closure of three box plants. In addition, the Company incurred and paid $1 million in severance related to workforce reductions at its Rome, Georgia mill. A summary of the activity related to all facility closure accruals for third quarter 2003 follow:
Beginning End of of Period Additions Cash Payments Period --------- --------- ------------- ------ Involuntary employee terminations $ 1 $ 2 $ (3) $ -- Contract termination penalties 6 -- -- 6 Environmental compliance 12 -- -- 12 Demolition 12 -- (1) 11 ---- ---- ---- ---- Total $ 31 $ 2 $ (4) $ 29 ==== ==== ==== ====
NOTE I - INCOME TAX In second quarter 2003, the Internal Revenue Service concluded its examination of the Company's tax returns through 17 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 1996, including matters related to net operating losses and minimum tax credit carryforwards, which resulted from certain deductions following the 1988 acquisition of Guaranty Bank and for which no financial accounting benefit had been recognized. Also, the Company 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 are no longer required. Accordingly, during second quarter 2003, the Company recorded a one-time benefit of $165 million, or $3.05 per diluted share. Of this one-time benefit, $26 million represents expected cash refunds of previously paid taxes plus related interest, of which $21 million was received in third quarter 2003. The remainder is a non-cash benefit. During third quarter 2003, the Company lowered the estimated effective tax rate for the year 2003 from 35 percent to 20 percent due to changes in estimates of income and expenses. As a result, during third quarter 2003 the Company reduced its previously recorded tax benefits for the first six months 2003 by $6 million. NOTE J - FINANCING TRANSACTIONS During third quarter 2003, the Company redeemed its $150 million 8.25% debentures due 2022. The Company paid a $6 million call premium and wrote off $2 million of unamortized financing costs all of which are included in other expense. The redemption of the debentures was funded from borrowings under the Company's accounts receivable securitization program. NOTE K - NEW ACCOUNTING PRONOUNCEMENTS Stock-Based Compensation Beginning January 2003, the Company voluntarily adopted the prospective transition method of accounting for stock-based compensation contained in Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure, an amendment of FASB Statement No. 123. The principal effect of adopting the prospective transition method is that the fair value of stock options granted in 2003 and thereafter is charged to expense over the option vesting period. As a result of the adoption of this prospective transition method, third quarter 2003 net income was decreased by $3 million or $0.05 per share. Prior to 2003, the Company used the intrinsic value method in accounting for its stock-based compensation. As a result, no stock-based compensation expense related to stock options is reflected in prior years' net income, as all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Therefore, the cost 18 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) related to stock-based compensation recognized in net income for third quarter 2003 and 2002 is less than would have been recognized if the fair value method had been applied to all stock options granted since 1995. The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all stock options granted since 1995.
Third Quarter First Nine Months ------------- ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in millions) Net income (loss), as reported $ (3) $ 15 $ 135 $ 34 Add: Stock-based compensation expense, net of related tax effects, included in the determination of reported net income 8 -- 18 2 Deduct: Total stock-based compensation expense, net of related tax effects, determined under the fair value based method for all awards (11) (2) (26) (8) ---- ---- ---- ---- Pro forma net income (loss) $ (6) $ 13 $ 127 $ 28 ==== ==== ==== ==== Earnings per share: Basic, as reported $(0.06) $ 0.28 $ 2.49 $ 0.66 Basic, pro forma $(0.11) $ 0.25 $ 2.35 $ 0.54 Diluted, as reported $(0.06) $ 0.28 $ 2.49 $ 0.66 Diluted, pro forma $(0.11) $ 0.25 $ 2.35 $ 0.54
Asset Retirement Obligations Beginning January 2003, the Company was required to adopt SFAS No. 143, Accounting for Asset Retirement Obligations. The statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated 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 to increase first quarter net loss by $1 million or $0.01 per share for the cumulative effect of adoption. Liabilities and Equity Instruments During third quarter 2003, the Company was required to adopt SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The effect on earnings and financial position of adopting this statement was not material. 19 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Other Pronouncements During fourth quarter 2003, the Company will be required to begin applying FASB Interpretation No. 46, Consolidation of Variable Interest Entities to its variable interest entities created prior to February 1, 2003. It is anticipated that the effect on earnings and financial position of applying this interpretation will not be material. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The actual results achieved by the Company may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include general economic, market, or business conditions; the opportunities or lack thereof that may or may not be presented to and pursued; availability and price of raw materials used; competitive actions by other companies; changes in laws or regulations; the accuracy of certain judgments and estimates concerning the integration of acquired operations; the accuracy of certain judgments and estimates concerning the consolidation and supply chain initiatives; and other factors, many of which are beyond the control of the Company. Results of Operations Business Segments The Company manages its operations through three business segments, Corrugated Packaging, Building Products, and Financial Services. Each of these business segments is affected by the factors of supply and demand and changes in domestic and global economic conditions. These conditions include changes in interest rates, new housing starts, home repair and remodeling activities, and the strength of the U.S. dollar, some or all of which may have varying degrees of impact on the business segments. As used herein, the term "parent company" refers to the financial statements of the Company and its manufacturing business segments, Corrugated Packaging and Building Products, with Financial Services reflected on the equity method. The Company evaluates performance based, in part, on operating income before other (income) expense, unallocated general and administrative expenses, parent company interest, and income taxes. Other (income) expense includes gain or loss on sale of assets, asset impairment and expenses associated with consolidation and supply chain initiatives and facility closure accruals. 21 Summary A summary of the results of operations by business segment follows:
Third Quarter First Nine Months ------------- ----------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in millions, except per share) Revenues Corrugated Packaging $ 667 $ 672 $ 2,019 $ 1,932 Building Products 211 202 583 610 Financial Services 292 283 885 825 ----- ----- ----- ----- Total revenues $ 1,170 $ 1,157 $ 3,487 $ 3,367 ===== ===== ===== ===== Segment Operating Income Corrugated Packaging $ -- $ 14 $ (3) $ 65 Building Products 22 12 25 43 Financial Services 49 44 132 115 ----- ----- ----- ----- Total segment operating income 71 70 154 223 Unallocated general and administrative expenses (11) (8) (33) (26) Parent company interest (33) (36) (103) (97) Other income (expense) (24) -- (56) (24) ----- ----- ----- ----- Income (loss) before taxes 3 26 (38) 76 Income tax (expense) benefit (6) (11) 173 (30) ----- ----- ----- ----- Income (loss) from continuing operations (3) 15 135 46 Discontinued operations -- -- 1 (1) Effect of accounting change -- -- (1) (11) ----- ----- ----- ----- Net income (loss) $ (3) $ 15 $ 135 $ 34 ===== ===== ===== ===== Diluted earnings per share Income (loss) from continuing operations $ (0.06) $ 0.28 $ 2.49 $ 0.89 Discontinued operations -- -- 0.01 (0.02) Effect of accounting change -- -- (0.01) (0.21) ----- ----- ----- ----- Net income (loss) $ (0.06) $ 0.28 $ 2.49 $ 0.66 ===== ===== ===== ===== Average diluted shares outstanding 54.3 53.7 54.1 51.9 Other income (expense) for third quarter 2003 includes, $3 million related to converting and production facility closures, $13 million related to consolidation and supply chain initiatives and $8 million related to the early redemption of debentures. Of these amounts, $1 million applies to Building Products, $2 million to Corrugated Packaging, and $1 million to Financial Services. Other income (expense) for first nine months 2003 includes $10 million related to converting and production facility closures, $39 million related to consolidation and supply chain initiatives and $8 million related to the early redemption of debentures and other income of $1 million related to the collection of notes previously written-off. Of these amounts, $3 million applies to Building Products, $11 million to Corrugated Packaging and $3 million to Financial Services. Other income (expense) for first nine months 2002 includes $7 million related to severance and write-off of technology investments, $6 million related to the repurchase of notes sold with recourse and $11 million related to the early repayment of a bridge financing facility and other borrowings. Of these amounts, $6 million applies to Corrugated Packaging and $7 million to Financial Services. 22 Includes for third quarter 2003, a $6 million reduction in previously recorded tax benefits for first six months 2003 related to a decrease in the effective tax rate for the year 2003 and, for first nine months 2003, a one-time tax benefit of $165 million.
For third quarter 2003 and 2002 Corrugated Packaging Corrugated Packaging revenues were $667 million in third quarter 2003 compared with $672 million in third quarter 2002. Revenues from sales of corrugated packaging represented 93 percent of segment revenues for third quarter 2003 and 94 percent for third quarter 2002. The remaining revenues are derived from sales of linerboard. The change in revenues was principally due to changes in average prices and shipments: Third Quarter 2003 versus Third Quarter 2002 Increase (Decrease) in ------------------------------- Average Prices Shipments -------------- --------- Corrugated packaging (1%) -- Linerboard (1%) 18% Compared with second quarter 2003, revenues were down $18 million. Average corrugated packaging prices were down one percent while shipments were down two percent. Average linerboard prices were down two percent while shipments were up three percent. Corrugated packaging markets continue to be adversely affected by the weak manufacturing economy. Linerboard markets continue to be adversely affected by both the weak manufacturing economy and increased offshore capacity, partially offset by a weaker U.S. dollar. Costs, which include production, selling, distribution, and administrative costs, were $667 million in third quarter 2003 compared with $658 million in third quarter 2002. Significant changes within the principal components of costs in 2003 include: - higher energy costs, up $9 million, - higher pension costs, up $6 million, and - lower OCC costs due to lower prices and a decrease in OCC purchases, down $16 million. Average OCC prices were $90 per ton during third quarter 2003 compared with $122 per ton during third quarter 2002. It is likely that OCC costs will continue to fluctuate during 2003. Mill production was: - 808,000 tons in third quarter 2003, - 864,000 tons in third quarter 2002, and - 819,000 tons in second quarter 2003. 23 Mill production data is not comparable due to the effect of the shutdown of the Antioch, California mill completed during September 2002. The percentage of mill production used by Corrugated Packaging operations was: - 81 percent in third quarter 2003, - 85 percent in third quarter 2002, and - 82 percent in second quarter 2003. The remainder was sold in the domestic and export markets. Excluding routine maintenance, production downtime was minimal in third quarter 2003 and second quarter 2003 and 94,000 tons in third quarter 2002 due to market and operational reasons. Production downtime may occur in future quarters. Market conditions continue to be weak for lightweight gypsum facing paper. As a result, the Company's Premier Boxboard joint venture continues to produce both gypsum facing paper and corrugating medium. The Company purchased 45,000 tons of corrugating medium from the joint venture in third quarter 2003. It is uncertain when market conditions for lightweight gypsum facing paper will improve. The Company is continuing its efforts to enhance return on investment within Corrugated Packaging. These efforts include reviewing operations that are unable to meet return objectives and determining appropriate courses of action including the possible consolidation and closure of converting facilities. During third quarter 2003, the Company paid $1 million of severance to employees affected by the previously announced closure of its converting facilities in Hattiesburg, Mississippi, Elizabethton, Tennessee, and Tijuana, Mexico. In addition, the Company incurred and paid $1 million in severance related to workforce reductions at its Rome, Georgia mill. These costs are included in other operating (income) expense and excluded from segment operating income. Fourth quarter earnings for corrugated packaging will likely be adversely affected by the annual maintenance outages at the Bogalusa, Louisiana and Rome, Georgia linerboard mills and a 14 week fourth quarter with seven additional days of fixed costs and, due to holiday schedules, only one additional day of sales revenue from the converting operations. Corrugated Packaging operated at break even in third quarter 2003 compared with operating income of $14 million in third quarter 2002. 24 Building Products Building Products revenues were $211 million in third quarter 2003 compared with $202 million in third quarter 2002. The change in revenues in 2003 was principally due to changes in average prices and shipments as follows: Third Quarter 2003 versus Third Quarter 2002 Increase (Decrease) in ------------------------------- Average Prices Shipments -------------- --------- Lumber 10% 12% Particleboard (4%) (9%) Gypsum 3% (4%) MDF (7%) (30%) Other revenues include sales of high-value and non-strategic timberlands. These sales contributed $2 million in operating income in third quarter 2003 compared with $1 million in third quarter 2002 and $5 million in second quarter 2003. Compared with second quarter 2003, revenues were up $19 million. Average prices were up eight percent for lumber and three percent for gypsum, while average prices were down one percent for particleboard and flat for MDF. Shipments were up five percent for lumber, six percent for particleboard and 13 percent for gypsum, while average shipments were down 11 percent for MDF. Costs, which include production, selling, distribution, and administrative costs, were $189 million in third quarter 2003 compared with $190 million in third quarter 2002. Production averaged from a low of 52 percent to a high of 93 percent of capacity in the various product lines. Production average was negatively affected by the indefinite shutdowns of the Clarion, Pennsylvania MDF facility during third quarter 2003 and the Mt. Jewett, Pennsylvania particleboard facility during second quarter 2003, neither of which had any third quarter production. Production was curtailed to varying degrees in all product lines in third quarter 2003 to match customer demand. The Company's joint venture operations also experienced production curtailments in third quarter 2003. Production may be curtailed in future quarters to match customer demand. The Company's Del-Tin Fiber LLC MDF joint venture in El Dorado, Arkansas continues to experience production and cost issues. In January 2003, Deltic Timber Corporation, the partner in this venture, announced its intention to exit this business upon the earliest, reasonable opportunity provided by the market. It is uncertain what effects Deltic Timber's decision will have on the joint venture or its operations. The venture had net losses of $4 million in each of third quarter 2003 and third quarter 2002, of which the Company's share was $2 million for 25 each period. In third quarter 2003, the Company and Deltic Timber Corporation each contributed $2 million in cash to the venture. The Company is continuing its efforts to enhance return on investment within Building Products. These efforts include reviewing operations that are unable to meet return objectives and determining appropriate courses of action including the possible closure of production facilities. The Company is continuing to address market and production issues at its MDF facilities, including the Del-Tin Fiber MDF joint venture. During third quarter 2003, the Company announced the indefinite shutdown of its Clarion, Pennsylvania medium density fiberboard plant. In addition, the Company announced the indefinite shutdown of its Mt. Jewett, Pennsylvania particleboard plant in second quarter 2003 due to market issues. In connection with these shutdowns, the Company incurred and paid $1 million in involuntary employee termination liabilities. These costs are included in other operating (income) expense and excluded from segment operating income. Building Products had income of $22 million in third quarter 2003 compared with $12 million in third quarter 2002. Financial Services Financial Services revenues, consisting of interest and non- interest income, were $292 million in third quarter 2003 compared with $283 million in third quarter 2002. Operations Selected financial information for Financial Services follows: Second Third Quarter Quarter ------------- ------- 2003 2002 2003 ---- ---- ---- (in millions) Net interest income $ 95 $ 95 $ 94 Provision for loan losses (13) (8) (20) Noninterest income 113 86 118 Noninterest expense (146) (129) (148) ---- ---- ---- Segment operating income 49 44 44 Severance (1) -- (2) ---- ---- ---- Operating income $ 48 $ 44 $ 42 ==== ==== ==== Net interest income in third quarter 2003 was similar to third quarter 2002 and second quarter 2003; however, the following changes in the components of net interest income occurred: - average earning assets, principally securities, increased five percent compared with third quarter 2002, but 26 - the net interest spread declined due to the lower interest rate environment combined with an asset sensitive position. In general, increases in interest rates increase Financial Services' net interest income. However, Financial Services' net interest income is not as sensitive to changes in interest rates at third quarter-end 2003 as it was at year-end 2002 principally due to: - a change in the mix of earning assets achieved by increasing single-family mortgage loans and securities, the interest rates on which generally are fixed for the first three to five years and then reset annually thereafter, and decreasing commercial real estate loans, the interest rates on which generally reset every 30 to 90 days, and - a shift in deposits achieved by decreasing certificates of deposits and increasing money market accounts. If interest rates rise for the remainder of 2003, then it is likely that net interest income would be positively affected. If interest rates again decline, it is likely that net interest income will be adversely affected. The provision for loan losses was $13 million in third quarter 2003 compared with $8 million in third quarter 2002. The provision for third quarter 2003 related principally to commercial real estate loans and asset-based commercial and business loans. The provision for third quarter 2002 related principally to asset-based commercial and business loans and senior housing residential loans. Noninterest income includes revenues from mortgage banking, real estate, and insurance activities. Noninterest income was $113 million in third quarter 2003 compared with $86 million in third quarter 2002. The change in noninterest income in 2003 was principally due to: - an increase in mortgage banking loan originations and related gain on sale of loans, up $18 million, - an increase in mortgage servicing rights amortization, up $6 million, and - a reversal of mortgage servicing rights valuation allowance in third quarter 2003 of $7 million compared with an increase in the mortgage servicing rights valuation allowance of $7 million in third quarter 2002. Noninterest expense was $146 million in third quarter 2003 compared with $129 million in third quarter 2002. The change in noninterest expense in 2003 was principally due to higher costs associated with the mortgage banking operations, primarily employee compensation and other origination expenses associated with higher origination volume. 27 See Mortgage Banking Activities for further information regarding mortgage-banking operations. Earning Assets Earning assets include cash equivalents, mortgage loans held for sale, securities, and loans. At third quarter-end 2003, cash equivalents, mortgage loans held for sale, securities, and residential housing loans constituted 81 percent of total earning assets compared with 74 percent at third quarter-end 2002. The increased percentage in 2003 is a result of efforts to change the earning asset mix by increasing residential earning assets. Securities, which include mortgage-backed and other securities, were $6.3 billion at third quarter-end 2003 compared with $5.8 billion at third quarter-end 2002. The increase was primarily a result of purchasing mortgage-backed securities as part of the efforts to increase residential housing assets. Loans were $9.5 billion at third quarter-end 2003 compared with $9.9 billion at third quarter-end 2002 and $9.7 billion at second quarter-end 2003. The following table summarizes the composition of the loan portfolio:
Second Third Quarter-End Quarter-End ----------------- 2003 2002 2003 ---- ---- ---- (in millions) Single-family mortgage $ 3,089 $ 2,100 $ 2,892 Single-family mortgage warehouse 395 454 502 Single-family construction 1,054 1,090 1,065 Multifamily and senior housing 1,831 1,891 1,865 ----- ----- ----- Total residential housing 6,369 5,535 6,324 Commercial real estate 1,175 2,310 1,393 Commercial and business 1,142 1,076 1,178 Asset based lending & leasing 595 749 634 Consumer and other 170 215 182 ----- ----- ----- Total loans 9,451 9,885 9,711 Less allowance for loan losses (130) (141) (117) ----- ----- ----- Loans receivable, net $ 9,321 $ 9,744 $ 9,594 ===== ===== =====
The size of the total loan portfolio decreased $434 million over the past year, and the composition of the portfolio has changed due to efforts to increase residential housing assets. As a result, residential housing loans represent 67 percent of the loan portfolio at third quarter-end 2003 compared with 56 percent at third quarter-end 2002 and 65 percent at second quarter-end 2003. 28 Asset Quality Several key measures are used to evaluate and monitor asset quality. These measures include the level of loan delinquencies, nonperforming loans, assets, and allowance coverage.
Second Third Quarter-End Quarter-End ----------------- 2003 2002 2003 ---- ---- ---- (in millions) Accruing loans past due 30 - 89 days $ 63 $ 116 $ 48 Accruing loans past due 90 days or more 1 9 -- ------ ----- ------ Accruing loans past due 30 days or more $ 64 $ 125 $ 48 ====== ===== ====== Nonaccrual loans $ 76 $ 109 $ 69 Nonaccrual restructured loans 10 -- 10 ------ ----- ------ Nonperforming loans 86 109 79 Foreclosed property 12 8 12 Restructured operating leases 41 -- 42 ------ ----- ------ Nonperforming assets $ 139 $ 117 $ 133 ====== ===== ====== Restructured loans - performing $ 3 $ -- $ -- Allowance for loan losses $ 130 $ 141 $ 117 Nonperforming loan ratio 0.91% 1.11% 0.81% Nonperforming asset ratio 1.46% 1.19% 1.37% Allowance for loan losses/total loans 1.38% 1.42% 1.21% Allowance for loan losses/nonperforming loans 152% 129% 149%
The change in the level of nonaccrual loans at third quarter- end 2003 compared with third quarter-end 2002 was principally due to $21 million in payoffs and paydowns of senior housing and asset-based lending loans, a $10 million commercial office building foreclosure, and $34 million in charge-offs of previously reserved loans. These decreases were partially offset by new nonaccrual loans, principally asset-based lending, senior housing, and commercial and business loans. The restructured operating leases added in 2003 relate to the restructuring of two leveraged, direct financing leases on cargo aircraft totaling $33 million. Due to a reduction in the lease payments in the restructuring, the leases were reclassified as operating leases. As a result, $27 million in leverage was removed, and the assets were written down to estimated fair market value. The restructured operating leases will be classified as nonperforming until such time as the lessee has evidenced the ability to continue to perform under the terms of the restructured leases. Both the asset-based lending and leasing portfolios and commercial real estate loan portfolio will likely continue to be adversely affected by the weak economy. 29 Allowance for Loan Losses The allowance for loan losses is comprised of: - reserves for impaired loans in accordance with SFAS No. 114, - reserves allocated to defined groups of loans that are not considered individually impaired under SFAS No. 114, and - other reserves for unidentified incurred losses inherent in the portfolio that are not allocated to defined groups of loans. Management evaluates the allowance for loan losses at each period end to ensure the level is adequate to absorb losses inherent in the loan portfolio. The allowance is increased by charges to income and decreased by charge-offs, net of recoveries. Changes in the allowance for loan losses were:
Second Third Quarter Quarter --------------- 2003 2002 2003 ---- ---- ---- (in millions) Balance at beginning of period $ 117 $ 135 $ 122 Charge-offs: Total residential housing -- -- -- Commercial real estate (1) -- (7) Commercial and business -- -- (4) Asset based lending and leasing (1) (5) (17) Consumer and other (1) (1) (1) ----- ----- ----- Total charge-offs (3) (6) (29) ----- ----- ----- Recoveries: Total residential housing -- 4 4 Commercial real estate -- -- -- Commercial and business -- -- -- Asset based lending and leasing 3 -- -- Consumer and other -- -- -- ----- ----- ----- Total recoveries 3 4 4 ----- ----- ----- Net charge-offs -- (2) (25) Provision for loan losses 13 8 20 ----- ----- ----- Balance at end of period $ 130 $ 141 $ 117 ===== ===== ===== Annualized net charge-offs as a percentage of average loans outstanding -- 0.1% 1.0%
Third quarter 2003 recoveries related principally to two loans in the asset-based lending portfolio. Third quarter 2002 charge-offs related principally to two asset-based lending and leasing credits, offset principally by one recovery related to a previously charged off senior housing loan. Second quarter 2003 charge-offs related principally to several asset-based commercial and business loans and a commercial real estate loan secured by an office building. 30 Mortgage Banking Activities Mortgage loan originations were $3.7 billion in third quarter 2003 compared with $2.9 billion in third quarter 2002. The high level of mortgage loan originations during third quarter 2003 was due to continued high refinance activity resulting from the low interest rate environment. In third quarter 2003, the savings bank retained $600 million in loans originated by the mortgage banking operations, compared with $327 million in third quarter 2002. The change in loans originated for the savings bank in third quarter 2003 was the result of continued efforts to increase the level of adjustable-rate single-family mortgage assets in the loan portfolio. In third quarter 2003, the mortgage banking operations sold $3.5 billion in loans to secondary markets by delivering loans to third parties or by delivering loans into mortgage-backed securities that were purchased by third parties. Of the loans sold in third quarter 2003, the only retained interest was mortgage servicing rights of $19 million relating to $1.7 billion of loans. The following table provides information regarding the mortgage servicing portfolio:
Second Quarter- Third Quarter-End End ----------------- 2003 2002 2003 ---- ---- ---- (in millions) Outstanding balance of loans serviced for: Third parties $ 8.5 $ 9.4 $ 8.4 Savings bank 2.5 1.0 1.9 ----- ----- ----- Total mortgage servicing portfolio $ 11.0 $ 10.4 $ 10.3 Annualized runoff rate 55% 36% 53%
The decrease in the balance of loans serviced for third parties at third quarter-end 2003 compared with third quarter-end 2002 was principally due to significant repayments on loans, partially offset by new loan originations for which servicing was retained. The increased runoff rate was due to the lower interest rate environment in 2003. As a result of the high runoff rates, amortization of mortgage servicing rights increased in third quarter 2003; however, because interest rates increased near the end of third quarter 2003, and prepayments slowed, the value of the mortgage servicing rights increased, and $7 million in impairment valuation allowance was reversed. The following table provides information regarding charges for amortization and impairment of mortgage servicing rights: 31
Second Third Quarter Quarter ---------------- 2003 2002 2003 ---- ---- ---- (in millions) Amortization $ 19 $ 13 $ 19 Impairment (recovery) (7) 7 5 ----- ----- ----- $ 12 $ 20 $ 24 ===== ===== ===== Valuation allowance at end of period $ 15 $ 12 $ 22
In 2003 and 2002, the mortgage banking operations were significantly affected by the refinancing activity associated with the declining interest rate environment. If interest rates remain constant or increase, the level of mortgage originations, mortgage servicing rights amortization, and the impairment valuation allowance will likely decline. However, if interest rates again decline in 2003, the level of mortgage originations and the level of mortgage servicing rights amortization and impairment will likely increase. In third quarter 2003, interest rates increased somewhat. Accordingly, the level of mortgage loan originations declined substantially near the end of third quarter 2003 and has remained at lower levels in October 2003. As a result of the decline in mortgage originations, it is likely that loan origination and marketing income and variable production costs, including commission costs, will be lower during fourth quarter 2003. Unallocated General and Administrative Expenses, Interest and Other (Income) Expense Unallocated general and administrative expenses were $11 million in third quarter 2003 compared with $8 million in third quarter 2002. The change in 2003 was principally due to an increase in pension and stock-based compensation costs. Parent company interest expense was $33 million in third quarter 2003 compared with $36 million in third quarter 2002. The average interest rate on borrowings was 6.9 percent in third quarter 2003 compared with 7.0 percent in third quarter 2002. Long-term debt was reduced by $70 million during third quarter 2003. In addition, the Company used borrowings under its accounts receivable securitization program to redeem its $150 million 8.25% debentures due 2022. As a result, the Company paid a $6 million call premium and wrote off $2 million of unamortized financing costs, all of which are included in other expense. The Company's accounts receivable securitization program currently bears interest at a rate of 1.1 percent per annum. Other operating (income) expense for third quarter 2003 includes $13 million in expenses related to initiatives to relocate the Corrugated Packaging operations, consolidate administrative functions and effect improvements in supply chain 32 management. These expenses consist principally of relocation and severance expenses and fees paid to third party consultants. In the remainder of 2003, the Company expects to incur an additional $5 million to $10 million in relocation, severance, benefits, and other expenses related to these initiatives. The Company expects the benefits from these initiatives to begin to be realized in 2004. Pension Expense Non-cash pension expenses were $11 million in third quarter 2003 compared with $2 million in third quarter 2002. The change in 2003 was principally due to previously disclosed changes in the assumed discount rate, a decrease in the expected rate of return on plan assets to 8.5 percent, and an increase in the recognition of the accumulated decline in the fair value of plan assets. Income Taxes The effective tax rate includes federal and state income taxes and the effects of non-deductible items. During third quarter 2003, the Company lowered the estimated effective tax rate from 35 percent to 20 percent due to changes in the estimates of income and expenses for the year 2003. As a result, during third quarter 2003 the Company reduced, by $6 million, its previously recorded tax benefits for the first six months 2003. Average Shares Outstanding Average shares outstanding were 54.3 million in third quarter 2003 compared with 53.7 million in third quarter 2002. The dilutive effect of stock options and equity purchase contracts was not significant in any of the periods presented. For first nine months 2003 and 2002 Corrugated Packaging The Company acquired effective control of Gaylord Container Corporation and began consolidating the results of Gaylord in March 2002. The Company also acquired a box plant in Puerto Rico in March 2002, the converting facilities of Mack Packaging Group in May 2002, and Fibre Innovations LLC in November 2002. As a result, the 2003 financial information for Corrugated Packaging is not comparable to prior periods. Corrugated Packaging revenues were $2,019 million for first nine months 2003 compared with $1,932 million for first nine months 2002. Revenues from sales of corrugated packaging represented 93 percent of segment revenues for first nine months 2003 and 94 percent of revenues for first nine months 2002. The remaining revenues are derived from sales of linerboard. The 33 change in revenues was principally due to changes in average prices and shipments: First Nine Months 2003 versus First Nine Months 2002 Increase (Decrease) in --------------------------------- Average Prices Shipments(a) -------------- ------------ Corrugated packaging (1%) 2% Linerboard 1% 15% (a) 2002 shipments have been adjusted for the effect of acquisitions. Costs, which include production, selling, distribution, and administrative costs, were $2,022 million for first nine months 2003 compared with $1,867 million for first nine months 2002. The change in costs in 2003 was principally due to: - the inclusion of the acquired operations, - higher energy costs, up $43 million, - higher pension costs, up $20 million, and - lower OCC costs due to lower prices and a decrease in OCC purchases, down $24 million. Average OCC prices were $89 per ton for first nine months 2003 compared with $101 per ton for first nine months 2002. Mill production was: - 2,390,000 tons for first nine months 2003 and - 2,335,000 tons for first nine months 2002. Mill production data is not comparable due to the effect of the consolidation of Gaylord, which began on March 1, 2002, and Antioch shutdown completed September 2002. The percentage of mill production used by Corrugated Packaging operations was: - 82 percent for first nine months 2003 and - 84 percent for first nine months 2002. The remainder was sold in the domestic and export markets. Excluding routine maintenance, production downtime was minimal for first nine months 2003 and 301,000 tons for first nine months 2002 due to market, mix and operational reasons. Production downtime may occur in future quarters. Market conditions continue to be weak for lightweight gypsum facing paper. As a result, the Company's Premier Boxboard joint venture continues to produce both gypsum facing paper and corrugating medium. The Company purchased 118,000 tons of corrugating medium from the joint venture during first nine months 2003, compared with 134,000 tons in first nine months 2002. 34 Corrugated Packaging had a $3 million operating loss for first nine months 2003 compared with income of $65 million for first nine months 2002. Building Products Building Products revenues were $583 million for first nine months 2003 compared with $610 million for first nine months 2002. The change in revenues in 2003 was principally due to lower average prices and shipments in most product lines as follows: First Nine Months 2003 versus First Nine Months 2002 Increase (Decrease) in -------------------------------- Average Prices Shipments -------------- --------- Lumber (3%) 11% Particleboard (5%) (11%) Gypsum (1%) (7%) MDF (3%) (24%) Other revenues include sales of high-value timberlands. These sales contributed $8 million in operating income for first nine months 2003 compared with $11 million for first nine months 2002. Costs, which include production, selling, distribution, and administrative costs, were $558 million for first nine months 2003 compared with $567 million for first nine months 2002. The change in costs in 2003 was principally due to lower production volumes partially offset by: - higher energy costs, up $6 million, and - higher pension costs, up $3 million. Production averaged from a low of 45 percent to a high of 95 percent of capacity in the various product lines. Production was curtailed to varying degrees in all product lines for first nine months 2003 to match customer demand. The Company's joint venture operations also experienced production curtailments in first nine months 2003. Building Products had operating income of $25 million for first nine months 2003 compared with $43 million for first nine months 2002. Financial Services Financial Services revenues, consisting of interest and non- interest income, were $885 million for first nine months 2003 compared with $825 million for first nine months 2002. Operations Selected financial information for Financial Services follows: 35
First Nine Months ----------------- 2003 2002 ---- ---- (in millions) Net interest income $ 284 $ 278 Provision for loan losses (44) (37) Noninterest income 326 253 Noninterest expense (434) (379) ----- ----- Segment operating income 132 115 Severance and asset write-offs (3) (7) ----- ----- Operating income $ 129 $ 108 ===== =====
Net interest income was $284 million for first nine months 2003 compared with $278 million for first nine months 2002. The change was principally due to: - average earning assets, principally securities,increased 11 percent compared with first nine months 2002, but - the net interest spread declined due to the lower interest rate environment combined with an asset sensitive position. The provision for loan losses was $44 million for first nine months 2003 compared with $37 million for first nine months 2002. The provision for first nine months 2003 related principally to commercial real estate loans, the restructured aircraft leases, and asset-based commercial and business loans. The provision for first nine months 2002 related principally to senior housing residential and commercial and business loans. Noninterest income includes revenues from mortgage banking and real estate and insurance activities. Noninterest income was $326 million for first nine months 2003 compared with $253 million for first nine months 2002. The change in noninterest income in 2003 was principally due to: - an increase in mortgage banking loan originations and related gain on sale of loans, up $91 million, - an increase in mortgage servicing rights amortization, up $16 million, and - no net change in the mortgage servicing rights valuation allowance in first nine months 2003 compared with an increase in the mortgage servicing rights valuation allowance of $5 million in first nine months 2002. Noninterest expense was $434 million for first nine months 2003 compared with $379 million for first nine months 2002. The change in noninterest expense in 2003 was principally due to higher costs associated with the mortgage banking operations, primarily employee compensation and other origination expenses associated with higher origination volume. See Mortgage Banking Activities for further information regarding mortgage-banking operations. 36 Allowance for Loan Losses Changes in the allowance for loan losses were:
First Nine Months ----------------- 2003 2002 ---- ---- (in millions) Balance at beginning of period $ 132 $ 139 Charge-offs: Total residential housing -- (11) Commercial real estate (8) -- Commercial and business (5) (5) Asset based lending and leasing (38) (24) Consumer and other (2) (1) ----- ----- Total charge-offs (53) (41) ----- ----- Recoveries: Total residential housing 4 5 Commercial real estate -- -- Commercial and business -- -- Asset based lending and leasing 3 1 Consumer and other -- -- ----- ----- Total recoveries 7 6 ----- ----- Net charge-offs (46) (35) Provision for loan losses 44 37 ----- ----- Balance at end of period $ 130 $ 141 ===== ===== Net charge-offs (annualized) as a percentage of average loans outstanding 0.62% 0.49%
Charge-offs for first nine months 2003 related principally to a commercial real estate loan secured by an office building, two commercial and business loans, two restructured aircraft leases, and several asset-based lending loans. Charge-offs for first nine months 2002 related principally to two senior housing loans, one commercial and business loan, and several asset-based lending and leasing credits. Mortgage Banking Activities Mortgage loan originations were $11.1 billion for first nine months 2003 compared with $6.7 billion for first nine months 2002. The high level of mortgage loan originations for first nine months 2003 was due to continued refinance activity resulting from the low interest rate environment. For first nine months 2003, the savings bank retained $1.6 billion in loans originated by the mortgage banking operations, compared with $637 million for first nine months 2002. The significant increase in loans originated for the savings bank for first nine months 2003 was the result of continued efforts to increase the level of adjustable-rate single-family mortgage assets in the loan portfolio. 37 For first nine months 2003, the mortgage banking operations sold $10.0 billion in loans to secondary markets by delivering loans to third parties or by delivering loans into mortgage- backed securities that were purchased by third parties. Of the loans sold during first nine months 2003, the only retained interest was mortgage servicing rights of $38 million relating to $3.5 billion of loans. The outstanding balance of loans in the mortgage servicing portfolio decreased at an annualized rate of 50 percent during first nine months 2003 compared with an annualized rate of 29 percent during first nine months 2002. The increased runoff rate was due to the lower interest rate environment in 2003. As a result of the high runoff rates, amortization of mortgage servicing rights increased for first nine months 2003. However, because interest rates increased near the end of first nine months 2003 and prepayments slowed, the value of the mortgage servicing rights increased and $7 million in impairment valuation allowance was reversed. The following table provides information regarding charges for amortization and impairment of recorded mortgage servicing rights: First Nine Months ----------------- 2003 2002 ---- ---- (in millions) Amortization $ 53 $ 31 Impairment -- 6 ----- ----- $ 53 $ 37 ===== ===== Unallocated General and Administrative Expenses, Interest and Other (Income) Expense Unallocated general and administrative expenses were $33 million for first nine months 2003 compared with $26 million for first nine months 2002. The change in 2003 was principally due to an increase in pension and stock-based compensation costs. Parent company interest expense was $103 million for first nine months 2003 compared with $97 million for first nine months 2002. The change was principally due the full effect of interest expense on debt related to the acquisition of Gaylord. Long-term debt was reduced by $145 million in first nine months 2003. The average interest rate on borrowings was 7.0 percent for first nine months 2003 compared with 6.2 percent for first nine months 2002. Other operating expenses for first nine months 2003 include $39 million in expenses related to initiatives to relocate the Corrugated Packaging operations, consolidate administrative functions and effect improvements in supply chain management. 38 These expenses consist principally of relocation and severance expenses and fees paid to third party consultants. Pension Expense Non-cash pension expenses were $32 million for first nine months 2003 compared with $7 million for first nine months 2002. Income Taxes In second quarter 2003, the Internal Revenue Service concluded its examination of the Company's 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 Bank and for which no financial accounting benefit had been recognized. Also, the Company 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 are no longer required. Accordingly, during second quarter 2003, the Company recorded a one-time benefit of $165 million, or $3.05 per diluted share. Of this one-time benefit, approximately $26 million represents expected cash refunds of previously paid taxes plus related interest, of which $21 million was received in third quarter 2003. The remainder is a non-cash benefit. Excluding the second quarter 2003 one-time tax benefit described above, the effective tax rate for 2003 is expected to be 20 percent based on current estimates of income and expenses for the year 2003. Average Shares Outstanding Average shares outstanding were 54.1 million for first nine months 2003 compared with 51.9 million for first nine months 2002. The change in 2003 was principally due to the May 2002 sale of 4.1 million shares of common stock. The dilutive effect of stock options and equity purchase contracts was not significant in any of the periods presented. Capital Resources and Liquidity The consolidated 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. Accordingly, parent company and Financial Services capital resources and liquidity are discussed separately. 39 For first nine months 2003 Parent Company Operating Activities Cash provided by operations was $264 million. Income for first nine months 2003 included $106 million of depreciation and other non-cash charges and credits. Dividends received from Financial Services were $120 million. Working capital needs increased $27 million, principally due to a seasonal increase in receivables. Investing Activities Investing activities used $67 million. Capital expenditures were $96 million. Capital expenditures are expected to approximate $150 million in 2003 or about 63 percent of expected annual depreciation and depletion for 2003. Proceeds from the sale of non-strategic assets acquired in connection with the acquisition of Gaylord were $36 million. Financing Activities Financing activities used $200 million. Debt and other borrowings were reduced by $145 million. Cash dividends paid to shareholders were $55 million or $1.02 per share. Liquidity and Off Balance Sheet Financing Arrangements The parent company's sources of short-term funding are its operating cash flows, which include dividends received from Financial Services, and its existing credit arrangements. The parent company operates in cyclical industries, and its operating cash flows vary accordingly. The dividends received from the savings bank are subject to regulatory approval and restrictions. At third quarter-end 2003, the parent company had $555 million in unused borrowing capacity under its revolving credit agreements and $180 million under its accounts receivable securitization program, which matures in April 2006. During September 2003, the accounts receivable securitization program was increased from $200 million to $250 million. At third quarter- end 2003, the parent company was in compliance with all of the terms and conditions of its credit agreements and accounts receivable securitization program. During fourth quarter 2003, $20 million in revolving credit agreements expire, all of which are unused at third quarter-end 2003; however, any borrowings outstanding at the end of the revolving period would not mature until two years after the revolving period ends. During third quarter 2003, $83 million of tax exempt bonds were converted from variable interest rate modes to fixed rate 40 interest modes, and remarketed to investors at par. The bonds, which have a weighted average remaining term of 12.4 years, were issued with a weighted average interest rate of 5.82 percent. In addition, the Company, redeemed all of the 8.25% Debentures payable 2022. The principal amount of $150 million and the call premium of $6 million were funded by draws on the accounts receivable securitization program. On October 1, 2003, the Company repaid at maturity a $61 million term loan with funds provided from the accounts receivable securitization program. Financial Services The principal sources of cash for Financial Services are operating cash flows, deposits, and borrowings. Financial Services uses these funds to invest in earning assets, generally loans and securities. Operating Activities Cash provided by operations was $611 million. Income for first nine months 2003 included $70 million of amortization and other non-cash charges. Investing Activities Cash provided by investing activities was $356 million. Principal payments and maturities of securities, net of purchases, provided $133 million and loan originations, net of collections, provided $198 million. Financing Activities Cash used for financing activities was $949 million. Borrowings decreased $840 million, principally due to repayments of FHLB advances and a decrease in deposits. In addition, $120 million in dividends were paid to the parent company. Cash Equivalents Cash equivalents were $456 million at third quarter-end 2003 compared with $438 million at year end 2002. Other Financial Services' short-term funding needs are met through operating cash flows, attracting new retail deposits, increased borrowings, and converting assets to cash through sales or reverse repurchase agreements. Assets that can be converted to cash include short-term investments, mortgage loans held for sale, and securities. At third quarter-end 2003, Financial Services had available liquidity of $2.6 billion. The manner in 41 which Financial Services meets its funding needs can affect its asset sensitive position. For example, increased term borrowings at fixed rates would increase asset sensitivity. At third quarter-end 2003, commitments to originate single- family residential mortgage loans totaled $0.9 billion and commitments to sell single-family residential mortgage loans totaled $0.9 billion. At third quarter-end 2003, the savings bank exceeded all applicable regulatory capital requirements. The parent company expects to maintain the savings bank capital at a level that exceeds the minimum required for designation as "well capitalized." As a result, the Company could make capital contributions to the savings bank, if necessary. During third quarter 2003, the Company made no capital contributions to the savings bank. Selected consolidated financial and regulatory capital data for the savings bank follows:
Third Quarter- Year-End End 2003 2002 -------- ------ (dollars in millions) Balance sheet data Total assets $ 17,323 $ 17,634 Total deposits 8,945 9,203 Shareholder's equity 984 1,025
Savings Regulatory For Categorization Bank Minimum as "Well Capitalized" ------- ---------- --------------------- Regulatory capital ratios: Tangible capital 6.36% 2.00% N/A Leverage capital 6.36% 4.00% 5.00% Tier 1 risk-based capital 9.74% 4.00% 6.00% Total risk-based capital 11.19% 8.00% 10.00%
Energy and the Effects of Inflation Energy costs, principally natural gas, were $63 million in third quarter 2003 compared with $53 million in third quarter 2002 and $69 million in second quarter 2003. It is likely that energy costs will continue to fluctuate during 2003. Litigation and Related Matters There are pending against the Company and its subsidiaries lawsuits, claims and environmental matters arising in the regular course of business. The resolution of these matters is not expected to have a material adverse effect on the Company's operations or financial position. For further information on pending legal proceedings, see Part II, Item 1. 42 Accounting Policies New Accounting Standards Adopted Stock-Based Compensation Beginning January 2003, the Company voluntarily adopted the prospective transition method of accounting for stock-based compensation contained in SFAS No. 148, Accounting for Stock- Based Compensation-Transition and Disclosure, an amendment of FASB Statement No. 123. The principal effect of adopting the prospective transition method is that the fair value of stock options granted in 2003 and thereafter are charged to expense over the option vesting period. As a result of the adoption of this prospective transition method, third quarter 2003 net income was decreased by $3 million or $0.05 per share. Prior to 2003, the Company used the intrinsic value method in accounting for its stock-based compensation. As a result, no stock-based compensation expense is reflected in prior years' net income, as all stock options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Therefore, the cost related to stock-based compensation recognized in net income for first quarter 2003 and 2002 is less than would have been recognized if the fair value method had been applied to all stock options granted since 1995. Asset Retirement Obligations Beginning January 2003, the Company was required to adopt SFAS No. 143, Accounting for Asset Retirement Obligations. The statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated 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 to increase first quarter net loss by $1 million or $0.01 per share for the cumulative effect of adoption. Liabilities and Equity Instruments During third quarter 2003, the Company was required to adopt SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The effect on earnings or financial position of adopting this statement was not material. Other Pronouncements During fourth quarter 2003, the Company will be required to begin applying FASB Interpretation No. 46, Consolidation of 43 Variable Interest Entities to its variable interest entities created prior to February 1, 2003. It is anticipated that the effect on earnings or financial position of applying this interpretation will not be material. Critical Accounting Policies In third quarter 2003, there were no significant changes in critical accounting policies from those disclosed in the Company's Form 10-K for the year 2002. Statistical and other data
First Nine Third Quarter Months ------------- ------------- 2003 2002 2003 2002 ---- ---- ---- ---- (in millions) Revenues Corrugated Packaging Corrugated packaging $ 617 $ 629 $ 1,877 $ 1,809 Linerboard 50 43 142 123 ----- ----- ----- ----- Total Corrugated Packaging $ 667 $ 672 $ 2,019 $ 1,932 ===== ===== ===== ===== Building Products Lumber $ 73 $ 59 $ 193 $ 177 Particleboard 38 43 113 133 Medium density fiberboard 21 32 70 91 Gypsum wallboard 19 19 53 58 Fiberboard 20 18 51 52 Other 40 31 103 99 ----- ----- ----- ----- Total Building Products $ 211 $ 202 $ 583 $ 610 ===== ===== ===== ===== Unit sales Corrugated Packaging Corrugated packaging, thousands of tons 793 795 2,382 2,263 Linerboard, thousands of tons 150 127 421 367 ----- ----- ----- ----- Total, thousands of tons 943 922 2,803 2,630 ===== ===== ===== ===== Building Products Lumber, mbf 227 203 641 578 Particleboard, msf 149 164 444 501 Medium density fiberboard, msf 51 73 172 225 Gypsum wallboard, msf 165 171 472 510 Fiberboard, msf 123 106 312 312 Revenues and unit sales do not include joint venture operations.
Note: Data for Corrugated Packaging for first nine months 2003 is not comparable due to the effect of acquisitions completed in 2002. 44 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Company's current level of interest rate risk with respect to financial instruments is primarily due to an asset sensitive position within Financial Services and, to a lesser degree, variable rate debt at the parent company. The following table illustrates the estimated effect on pre- tax income of immediate, parallel and sustained shifts in interest rates for the subsequent 12-month period at third quarter-end 2003, with comparative information at year-end 2002. The estimated effect takes into account the effects of changing prepayment speeds, repricing characteristics and average balances over the next 12 months. The simultaneous nature of these effects may result in non-symmetrical pre-tax impacts on income across shifts in interest rates or comparisons across reporting periods. Increase (decrease) in Income Before Taxes (In millions) Third Quarter End 2003 Year-end 2002 ------------- ------------- Change in Interest Parent Financial Parent Financial Rates Company Services Company Services --------- ------- --------- ------- --------- +2% $ (4) $ 33 $ (3) $ 40 +1% $ (2) $ 38 $ (2) $ 34 0 $ -- $ -- $ -- $ -- -1% $ 2 $ (21) $ 2 $ (29) Due to the current low levels of interest rates, the two percent decrease in interest rates is not presented. The Parent Company's long-term debt is sensitive to changes in interest rates. Interest rate changes would impact the Parent Company's long-term debt due to differences in market interest rates and the rates at inception of the debt agreements. The analysis used to calculate the effect of changes in interest rates was based on actual debt balances at quarter end, reduced for contractual payments, which were assumed to be replaced with variable rate debt. Financial Services is subject to interest rate risk from financial instruments to the extent that the interest-earning assets and interest-bearing liabilities repay or reprice at different times or in differing amounts or both. Financial Services is currently in an asset sensitive position whereby the rate and paydown characteristics of its assets are more responsive to changes in market interest rates than are its liabilities. In an asset sensitive position, earnings will 45 generally be positively affected in a rising rate environment, but generally be negatively affected in a falling rate environment. Overall, Financial Services' interest rate sensitivity decreased at third quarter-end 2003 compared with year-end 2002, primarily because of changes in the earning asset mix, changes in the deposit base, and interest rate increases in third quarter 2003. The commercial real estate portfolio, which tends to reprice frequently, decreased $700 million, while the mortgage loan portfolio, which generally reprice after three to five years, increased $600 million. Additionally, approximately $600 million of deposits have shifted from certificates of deposit to money market deposit accounts, which generally reprice more frequently. However, because of current market pricing of these accounts, the sensitivity amounts for third quarter-end 2003 anticipate only limited repricing sensitivity of these accounts in the -1% and +1% scenarios. The fair value of mortgage servicing rights (estimated at $88 million at third quarter-end 2003) is also affected by changes in interest rates, primarily long-term fixed mortgage rates. The Company estimates that a one percent decline in long- term fixed mortgage rates from current levels would decrease the fair value of the mortgage servicing rights by approximately $24 million. Foreign Currency Risk In third quarter 2003, there were no significant changes in foreign currency risk from that disclosed in the Company's Form 10-K for the year 2002. Commodity Price Risk In third quarter 2003, there were no significant changes in commodity price risk from that disclosed in the Company's Form 10-K for the year 2002. ITEM 4. CONTROLS AND PROCEDURES (a)Evaluation of disclosure controls and procedures The Company's chief executive officer and its chief financial officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a- 15(e)) as of end of the period covered by this Quarterly Report on Form 10-Q, have concluded that the Company's disclosure controls and procedures are adequate and effective to ensure that the information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, 46 and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms. (b) Changes in internal control over financial reporting. There were no changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. The information set forth in Note E to Notes to Consolidated Financial Statements in Part I of this report is incorporated by reference thereto. Antitrust Action As has been previously disclosed, on May 14, 1999, Inland Paperboard and Packaging, Inc. ("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.), names Inland, Gaylord, and eight other linerboard manufacturers as defendants. There have been no material developments in this matter since the Company filed its Quarterly Report on Form 10-Q for second quarter 2003, with the exception that the court's order approving the fairness of the settlement agreement has become final and there are now 12 opt-out cases, which the Company continues to defend vigorously. The Company continues to believe the likelihood of a material loss from these actions to be remote and does not believe that the outcome of these actions should have a material adverse effect on its financial position, results of operations, or cash flow. Gaylord Chemical Corporation As has been previously disclosed, on October 23, 1995, a rail tank car of nitrogen tetroxide exploded at the Bogalusa, Louisiana plant of Gaylord Chemical Corporation, a wholly-owned, independently-operated subsidiary of Gaylord Container Corporation. Following the explosion, more than 160 lawsuits were filed against Gaylord, Gaylord Chemical, and third parties alleging personal injury, property damage, economic loss, related injuries and fear of injuries. There have been no material developments in this matter since the Company filed its Quarterly Report on Form 10-Q for second quarter 2003 other than the trial of the Louisiana class action is currently in process and is expected to be submitted to the jury in mid-November. 47 The Company continues to believe the likelihood of a material loss from these actions to be remote and does not believe that the outcome of these actions should have a material adverse effect on its financial position, results of operations, or cash flow. Other Inland was served with an administrative complaint filed by the U.S. Environmental Protection Agency under the Clean Water Act alleging that its box plant in Crawfordsville, Indiana exceeded its permit limits for suspended solids and BOD and that it failed to make timely reports of its sampling results and failed to follow proper sampling protocols at various times between 1999 and 2002. The served complaint appears to call for a penalty that could exceed $100,000. The permit exceedences were recognized by the city at the time, which imposed a surcharge on the plant. Inland intends to engage in negotiations to determine whether the penalty can be reduced based on the city's surcharges and other defenses. On October 15, 2003, a release of what is suspected to have been nitrogen dioxide and nitrogen oxide took place at Gaylord's linerboard mill lift station and sewer system in Bogalusa, Louisiana. 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 and was not observed beyond the fence- line. The mill followed appropriate protocols for handling this type event, notifying the Louisiana Department of Environmental Quality, the U.S. Environmental Protection Agency and local law enforcement officials. The environmental agencies and the Company are currently investigating the incident. Although the investigations are not complete, the Company believes the likelihood of a material loss from this incident to be remote and does not believe that the outcome should have a material adverse effect on its financial position, results of operations, or cash flow. The Ontario Ministry of Environment filed an enforcement action alleging that air emissions from the MDF plant at Pembroke, Ontario, Canada adversely impact surrounding property owners. Trial of the matter is currently ongoing and is expected to continue with sporadic testimony and trial dates through the first quarter of 2004. Fines and penalties assessed in the matter could exceed $100,000, but are not expected to have a material adverse effect on the Company's financial position, results of operations, or cash flow. Item 2. Changes in Securities and Use of Proceeds. None. 48 Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 10.1 - Employment Agreement with J. Patrick Maley, effective June 1, 2003. 10.2 - Separation Agreement and Release of Claims with Dale E. Stahl, dated August 15, 2003. 31.1 - Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 - Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K During the quarter ended June 28, 2003, the Company filed the following Current Reports on Form 8-K: 1. Current Report on Form 8-K dated July 23, 2003, reporting under Item 9 and 12 a press release issued by the Company announcing earnings for the period ended June 28, 2003. 2. Current Report on Form 8-K dated July 25, 2003, reporting under Item 5 a press release issued by the Company announcing the resignation of Dale Stahl as an executive officer of the 49 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TEMPLE-INLAND INC. (Registrant) Dated: November 10, 2003 By /s/ Louis R. Brill ---------------------------- Louis R. Brill Chief Accounting Officer 50 INDEX TO EXHIBITS Exhibit No. Description Page No. - ----------- ----------- -------- 10.1 Employment Agreement with J. 51 Patrick Maley, effective June 1, 2003 10.2 Separation Agreement and Release 80 of Claims with Dale E. Stahl, dated August 15, 2003 31.1 Certification of Chief Executive 85 Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial 87 Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive 89 Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 32.2 Certification of Chief Financial 90 Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 EX-10 3 tinqex10maley.txt MALEY EMPLOYMENT AGREEMENT Inland Paperboard and Packaging, Inc. 4030 Vincennes Road Indianapolis, IN 46268-0937 Phone 317.879.4277 Fax 317.879.4370 e-mail dstahl@iccnet.com Dale E. Stahl [INLAND LOGO] President and Chief Executive Officer April 10, 2003 PRIVATE & CONFIDENTIAL Mr. J. Patrick Maley 1782 Percy Place Collierville, Tennessee 38017 Dear Pat: I am extremely pleased to offer you the position of Executive Vice President, Paperboard Group for Inland Paperboard and Packaging, Inc. ("Inland") reporting to me. You will also serve as a Group Vice President for Temple-Inland Inc. (together with Inland, the "Company"). In this position, you will serve as an elected officer of the corporation with all appropriate responsibilities and privileges, pending approval of the Board of Directors. Following are the key elements of our offer, all subject to continued employment, acceptable performance, and compliance with the Company's standard policies: 1. Employment. Your employment will be subject to and conditioned upon your furnishing employment documentation required by law and completing our normal background procedures required of salaried employees under the Company's normal hiring practices. Your employment will commence on or about June 1, 2003. You agree to devote your full time, attention, skill and energy to the business and affairs of the Company, and to use your best efforts to promote the success of the Company. Except for the Change in Control Agreement described in paragraph 7, below, your employment with the Company will at all times be "at- will" and may be terminated by you or the Company at any time without regard to this Agreement. 2. Salary. Your starting annual salary will be $300,000, paid in accord with normal payroll procedures for Inland executive managers. You will be eligible for a base pay review at the 2 Mr. J. Patrick Maley Page 2 April 10, 2003 February Board meeting each year. All payments are subject to all applicable tax withholdings and deductions. 3. Management Incentive. In this position, you will participate in the Inland Incentive Bonus Plan. You are eligible for up to 100% of your annual base salary in the event that Inland achieves an 18.5% return on investment. The Management Incentive approach is a schedule of payouts based on Inland return on investment. Once a minimum five percent ROI has been achieved for this position the plan pays 5.4x the ROI, for example: 5% ROI = 27.0% of base pay incentive award 10% ROI = 54.0% of base pay incentive award 18.5% ROI = 100% of base pay incentive award 20% ROI = 108% of base pay incentive award The last example reflects the fact that the plan is uncapped. The target incentive is defined as 100% of base pay. For 2003, you shall participate on a pro-rata basis dependent on your employment date, but in no event will you receive a bonus for 2003 of less than $150,000. All payments are subject to all applicable tax withholding and deductions. 4. Stock Options. We will recommend to the Board of Directors that you receive 20,000 shares of non-qualified options. The price of these options will be established by averaging the daily high and low trading price on the date of the grant. The grant will vest over four years at a rate of 25% per year with a 10- year period of exercise. You will be eligible for future stock option grants in the discretion of the Board's Compensation Committee commensurate with your position and the overall long term incentive approach. For example, the position this year would have received 10,000 shares of non-qualified options. 5. Restricted Stock. We will also recommend to the Board that you receive 5,000 shares of Restricted Stock. This grant will vest after six years. You will also be eligible for future restricted stock grants as the Compensation Committee may approve in its discretion as a key element of our overall long-term incentive approach. For example, the position would have received a grant of 3,500 shares of Restrict Stock this year. 3 Mr. J. Patrick Maley Page 3 April 10, 2003 6. Prior Obligations. You have disclosed to the Company the "Agreement Concerning: Confidential Information" you signed while employed by International Paper Company ("IP"), dated May 4, 1992 (the "IP Agreement"). You have not signed a covenant not to compete or other non-compete agreement with IP, nor have you signed such an agreement in favor of any other company that is presently in effect. Neither Inland nor the Company has in the past asked you to disclose any confidential information covered under the scope of your IP Agreement, nor will Inland or the Company do so in the future, and of course, you would not do so under any circumstances. Should IP make a threat or claim, or bring a lawsuit, against you either during or after your employment with Inland, alleging either a breach of your IP Agreement, or alleging misuse of IP confidential information, in connection with your Inland employment, the Company agrees to indemnify, defend, and hold you harmless from any and all costs, expenses, claims or damages, including your reasonable legal fees and reasonable expenses in connection with any such action by IP. 7. Severance. At the time your employment starts, you and the Company will enter into a written change in control agreement, in the form of the attached EXHIBIT "A," which provides that in the event of a change in control of the corporation and loss of position (as defined therein) you will receive certain payments as well as the vesting of all options and/or restricted stock. If you are involuntarily terminated for any reason during your first 24 months of employment for any reason other than a change in control as defined in EXHIBIT "A," you will receive your base salary and all benefits for the greater of (i)12 months, or (ii) the balance of the 24- month period. To the extent not prohibited by law, the following payments will not be refundable by you to the extent paid by the Company, nor withheld from you to the extent due from the Company, in the event of termination of your employment: (a) any severance payments called for under this Paragraph 7; (b) the moving allowance of $10,000.00 and the relocation bonus of $150,000.00 referred to in Paragraph 12, below; and (c) the first year bonus of $150,000.00 referred to in Paragraph 3, above. The Company agrees not to assert any counterclaims, cross-claims, or other legal attacks against any of these payments. In the event of termination of your employment, you will be allowed to exercise any vested stock options after termination in accord with the terms of the stock option plan. The Company will pay your reasonable legal fees and 4 Mr. J. Patrick Maley Page 4 April 10, 2003 reasonable expenses arising out of any action by you for breach of its obligations under this Paragraph 7. 8. Vacation. You will be eligible for four weeks of paid vacation annually. 9. Supplemental Retirement Plan. As a designated key executive you shall participate in the Temple-Inland supplemental retirement plan. The primary purpose of the plan is to restore those benefits earned but not payable under the Pension Plan because of governmental limits. Details will be provided. 10. Directors and Officers Liability Insurance. As an officer of the corporation, you will be covered by the Directors and Officers liability insurance in effect. 11. Benefits. You will be eligible to participate in all standard Inland benefits including medical, dental, life and disability coverage as well as the Pension Plan and the Savings Plan. (Applicable information is enclosed.) 12. Relocation. Your relocation to the Austin area will be addressed under the terms of the Inland relocation policy. Included in this comprehensive policy are all reasonable and customary costs associated with the sale of your current residence and the purchase of a new residence in the Austin area. Pre-paid interest or "points" are not included. We will also pay the reasonable costs associated with the disposition of your additional five-acre property if you choose to dispose of it in the reasonably near future. A process will be completed that will provide you guaranteed selling prices for both your residence and the property. An additional feature provides a special bonus if you sell either property on your own. All household goods will be relocated. 5 Mr. J. Patrick Maley Page 5 April 10, 2003 We provide a lump sum moving allowance. This allowance is to cover expenses related to your relocation such as interim living, trips home, house hunting trips and family relocation travel. Your lump sum moving allowance will be $10,000. In addition to the moving allowance, you will also receive a relocation bonus in the amount of $150,000 (taxable), immediately upon your employment. 12. Financial Planning. Financial planning as well as income tax planning and preparation is currently provided to senior officers of the Company and you are eligible to participate on the same terms as the other officers as long as such services are provided. Pat, if there are any questions or if we've missed something, please give us a call immediately. Our intent is clearly to make the transition to Inland and the Austin area a positive experience for you and your family. As we have discussed, Pat, I feel this is a great opportunity for you and the right move for Inland. We feel the opportunities which exist within this organization are superior to those in most other companies as a result of the environment we provide our executives. To indicate your acceptance of these employment terms, please sign the enclosed copy of this letter and return it to me. Sincerely, /s/ Dale E. Stahl /s/ J. Patrick Maley - --------------------- ------------------------ Dale E. Stahl J. Patrick Maley President and CEO April 15, 2003 ------------------------ Date 6 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated June 1, 2003 (the "Effective Date"), is made by and between Temple- Inland Inc., a Delaware corporation ("Temple- Inland"), and J. Patrick Maley (the "Executive"). WHEREAS, Temple-Inland considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of Temple-Inland and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, Temple-Inland and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on the Effective Date and shall continue in effect through the second anniversary of the Effective Date; provided, however, that commencing on the first anniversary of the Effective Date, and on each anniversary of the Effective Date thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to each such date, the Company or the Executive shall have given notice not to extend the Term; and provided, further, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than 36 months beyond the month in which such Change in Control occurred. 7 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 8 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by 3 9 the Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to two (2) times the sum of (i) the Executive's highest base salary as in effect during the three- year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the two-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third- party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the two-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost immediately prior to the Date of Termination or, if 4 10 more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) twenty-four (24) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 11 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the two (2) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three- year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the 6 12 Executive for the uncompleted period under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post- retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within two (2) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the two-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the 7 13 Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all 8 14 "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, 9 15 plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross- Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross- Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 10 16 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 11 17 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of an instrument executed by the Chief Executive Officer of Temple-Inland Inc. (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Chief Executive Officer) finding that, in the good faith opinion of the Chief Executive Officer, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, 12 18 order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 13 19 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple- Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: 14 20 To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 15 21 U.S.C. sec. 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. 16 22 (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Chief Executive Officer of Temple-Inland, which demand specifically identifies the manner in which the Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination 17 23 for election by the Company's shareholders was approved or recommended by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: (A) substantially all of the Company's assets, or 18 24 (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple- Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either 19 25 Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: 20 26 (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or 21 27 (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax- qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax- qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 22 28 (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. 23 29 IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By:/s/ Kenneth M. Jastrow, II --------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and CEO EXECUTIVE /s/ J. Patrick Maley ------------------------------ J. Patrick Maley 24 EX-10 4 tinqex10stahl.txt STAHL SEPARATION AGREEMENT Separation Agreement and Release of Claims This Agreement is entered into between Dale E. Stahl ("Mr. Stahl") and Inland Paperboard and Packaging, Inc. (together with its parent and affiliated entities, the "Company"). In consideration of their mutual promises set forth below, the parties agree to the following terms: 1. Separation Date. The parties agree that Mr. Stahl's employment with the Company will terminate effective with the close of business on August 31, 2003 (the "Separation Date"). Between the time he receives this Agreement and the Separation Date, Mr. Stahl shall continue to receive his full regular salary and benefits. During that time Mr. Stahl will assist the Company in the transition of management duties and responsibilities and perform such other responsibilities as may be requested by Company. On or before the Separation Date, Mr. Stahl shall return to the Company all property of any nature belonging to the Company except for the equipment described in Section 3.e hereof. 2. Certification of Voluntary Agreement. Mr. Stahl acknowledges and agrees: (a) that his decision to sign this Agreement is completely voluntary and not coerced; (b) that he is not required to sign this Agreement, and that no one has pressured him to do so; and (c) that he has consulted with attorneys or other advisors about his decision to sign this Agreement to the extent he wished to do so. 3. Enhanced Severance Pay and Benefits. In lieu of any right to severance pay under normal Company policy, Mr. Stahl will receive the following pay and benefits that are beyond anything required under normal policy: a. Lump Sum Severance Payment. Mr. Stahl will receive a lump sum severance payment in the gross amount of four hundred twenty- five thousand dollars ($425,000.00), which is equal to twelve months of his regular base salary, less normal tax withholdings. b. COBRA Payment. Mr. Stahl will receive an additional lump sum payment in the gross amount that will produce a net after tax payment of twelve thousand eight hundred ninety-one dollars and seventy-two cents ($12,891.72), which represents the estimated premiums at the current charge to continue his group family medical and dental coverage at existing levels under the federal law known as "COBRA" for one year. However, it will be Mr. Stahl's sole responsibility to apply for any COBRA continuation benefits for himself and/or his family and to make the required contributions on a timely basis. c. Retirement. Mr. Stahl will be credited with benefits under the Company's nonqualified supplemental executive retirement plans (the "SERP") which provide a total combined retirement benefit under all qualified defined benefit retirement plans maintained or contributed to by the Company (including the plans 2 maintained or contributed to by Gaylord Container Corporation and Inland Paperboard and Packaging, Inc.) and under the SERP (together, the "Retirement Plans") equal to a monthly single life annuity benefit of eleven thousand dollars ($11,000) assuming Mr. Stahl retires August 31, 2003 (the "Retirement Benefit"). The Retirement Benefit will be paid for the life of Mr. Stahl; provided, however, that he may extend such payment beyond his life by choosing one of the alternate payment forms available under the Retirement Plans with the applicable adjustments provided under the Retirement Plans for such extended payment schedule. If Mr. Stahl chooses to begin drawing his benefit on a date later than September 1, 2003, the Retirement Benefit will be actuarially adjusted to reflect the postponed commencement of the Retirement Benefit using the applicable adjustments provided under the Retirement Plans. d. Stock Plans. Mr. Stahl's Temple-Inland Inc. stock options, including any vested options, are hereby forfeited in their entirety and Mr. Stahl shall have no further rights under the Temple-Inland Inc. stock option plans or any stock option agreements. Mr. Stahl's eight thousand five hundred (8,500) shares of Temple-Inland Inc. restricted stock will vest in full on the Separation Date. Mr. Stahl shall have the right at his election to receive such shares in kind, or to receive their fair market value in cash on the Separation Date, in either case less normal tax withholdings. The fair market value shall be determined by averaging the highest sale price per share and the lowest sale price per share for Temple-Inland Inc. common stock on the New York Stock Exchange on the Separation Date. e. Computer and Blackberry. Mr. Stahl shall have the right to keep the Company personal computer and Blackberry handheld wireless communication device ("Blackberry") he is currently using; provided, however, that prior to the Separation Date he will transfer to the Company all Company data and files stored on such personal computer, the Blackberry, or in any other form and further provided that after the Separation Date Mr. Stahl shall be solely responsible for paying any access, telephone, or usage fees for such devices. Mr. Stahl will receive the payments described in (a) and (b) above within seven (7) business days of the date he returns this Agreement signed by him to Richard Warner, or on the Separation Date, whichever comes later. Mr. Stahl will receive the shares or the cash described in item (d) above within seven (7) days of notifying the Company of his choice of payment form. If the Company has not received instructions from Mr. Stahl by September 30, 2003, the Company shall withhold shares to pay the tax withholdings and send the balance of the shares in kind to Mr. Stahl within seven (7) days after September 30, 2003. Page 2 of 5 3 4. Mr. Stahl's Release of Claims. In exchange for the additional pay and benefits described above, Mr. Stahl hereby waives and releases all claims (known and unknown) which he has or might have against the Company, its officers, directors, employees, agents, and parent or affiliate companies, arising out of his employment with the Company or its termination. This waiver and release of claims is full and complete, and includes without limitation: (a) any claims of employment discrimination, harassment, or wrongful termination arising under Title VII of the 1964 Civil Rights Act, the Americans With Disabilities Act, the Age Discrimination in Employment Act, or similar state or local employment discrimination laws; (b) claims for breach of contract, whether express or implied; (c) claims alleging tort or other wrongful conduct under common law; and (d) claims for additional compensation in any form, including salary, bonus or incentive compensation, sick leave benefits, vacation benefits, compensatory time, severance pay, or otherwise. Mr. Stahl understands that he is releasing claims he may not know about. This is his knowing and voluntary intent, even though he recognizes that some day he might learn that facts he currently believes to be true are untrue, and even though he might then regret having signed this Agreement. Nevertheless, he is assuming that risk and agrees that this release shall remain effective in all respects in any such case. Notwithstanding the general terms of this release of claims, it is agreed that the scope of this release does not waive any of Mr. Stahl's rights as a terminating employee to: (1) convert any health or welfare benefits under an employee benefit plan to the extent the plan allows conversion; or (2) maintain his group health coverage in force as provided by COBRA (if he so elects). 5. The Company's Release of Claims. The Company hereby waives and releases all claims (known and unknown) that it has or might have against Mr. Stahl arising out of his employment with the Company or its termination. The Company further agrees to indemnify Mr. Stahl for claims made against him in his capacity as an officer, director, or employee of the Company to the fullest extent permitted by the Company's charter and bylaws and the laws of the applicable jurisdiction and to the same extent Mr. Stahl would be indemnified if he were still a senior executive officer of the Company; it being the intention of the Company that Mr. Stahl receive no less indemnification at the time(s) of any such claims than its then current senior executive officers would receive at such time(s). 6. OWBPA Disclosure. With specific reference to compliance with the requirements of the Older Workers Benefits Protection Act (29 U.S.C. 626(f)), the Company advises Mr. Stahl that: (a) this Agreement contains a release of claims under the Age Discrimination in Employment Act, 29 U.S.C. 621 et seq.; (b) he should consult with an attorney with respect to the matters contained in this Agreement; (c) he has been given a period of at Page 3 of 5 4 least twenty-one (21) days from his receipt of this Agreement to decide whether to accept this offer, and may accept this offer at any point during that time; and (d) he may revoke this Agreement any time during a period of up to seven (7) days from the date he tenders this signed Agreement to the Company. Once this 7-day revocation period has expired, the release shall be final and irrevocable. 7. Resignation as Officer. Mr. Stahl resigns his position as President and Chief Executive Officer of Inland Paperboard and Packaging, Inc. and any positions he holds with its affiliates effective July 25, 2003. 8. No Admission of Fault. Nothing in this Agreement implies, or is intended to imply, that the Company has acted improperly or violated any laws related to Mr. Stahl's employment. The parties stipulate that the Company is entering into this Agreement in order to avoid the costs and uncertainties of any potential claims that Mr. Stahl may now or later believe to exist. 9. No Disparagement. Mr. Stahl shall not in any way disparage the Company, its operations, management, products, customers, or employees. The Company shall not in any way disparage Mr. Stahl. With respect to both parties, this includes, without limitation, verbal or written statements to third parties, public statements in speeches or writings, and communications with the Company's customers or competitors. These representations by Mr. Stahl and the Company are a material inducement to each other to enter into this Agreement and to pay or accept the separation and benefits described above. 10. Confidential Information. Mr. Stahl promises not to disclose any confidential information or trade secrets about the Company, its services, or its customers that he learned while employed by the Company, without prior specific approval from the Company. 11. No Future Employment. The separation of Mr. Stahl's employment with the Company is intended to be permanent, and he agrees not to apply for or otherwise seek employment with the Company, or its parent, subsidiaries, affiliates, successors or assigns. 12. Complete Agreement. This Agreement contains all of the terms, promises, representations, and understandings made between the parties. Mr. Stahl agrees that no threats, promises, representations, or other inducements have been made to him which caused him to sign this Agreement, other than the representations expressly set out in this Agreement. 13. Other Terms. The terms and conditions of this Agreement shall be maintained in confidence by both parties, except to the extent disclosure is required by law. This Agreement shall be interpreted under the laws of the United States and the State of Indiana. Any dispute arising out of the application, interpretation, or enforcement of this Agreement, and any dispute Page 4 of 5 5 involving a claim purportedly released herein, shall be submitted under the Company's RESOLVE program applicable to employment disputes. This Agreement shall be binding on each party's successors and assigns. INLAND PAPERBOARD AND PACKAGING, INC. /s/ Dale E. Stahl BY:/s/Kenneth M. Jastrow, II - ---------------------- ------------------------------- Dale E. Stahl Kenneth M. Jastrow, II TITLE: Chairman DATED: August 15, 2003 DATED: August 13, 2003 Page 5 of 5 EX-31 5 tinqex31ceo.txt 302 CERTIFICATE OF CEO Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) I, Kenneth M. Jastrow, II, Chief Executive Officer of Temple- Inland Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Temple- Inland Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 2 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2003 /s/ Kenneth M. Jastrow, II ------------------------------- Kenneth M. Jastrow, II Chief Executive Officer EX-31 6 tinqex31cfo.txt 302 CERTIFICATE OF CFO Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) I, Randall D. Levy, Chief Financial Officer of Temple-Inland Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Temple- Inland Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in the report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 2 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 10, 2003 /s/ Randall D. Levy ---------------------------- Randall D. Levy Chief Financial Officer EX-32 7 tinqex32ceo.txt 906 CERTIFICATE OF CEO Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Kenneth M. Jastrow, II, Chief Executive Officer of Temple- Inland Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that this Quarterly Report on Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Temple-Inland Inc. /s/ Kenneth M. Jastrow, II ----------------------------- Kenneth M. Jastrow, II November 10, 2003 EX-32 8 tinqex32cfo.txt 906 CERTIFICATE OF CFO Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Randall D. Levy, Chief Financial Officer of Temple-Inland Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that this Quarterly Report on Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Temple-Inland Inc. /s/ Randall D. Levy ----------------------------- Randall D. Levy November 10, 2003 -----END PRIVACY-ENHANCED MESSAGE-----