-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NWRPMDP2VBc1dt+m6qYHnvJzscLfSrItKHJgQM+K4c/rNnS3znSsq7PpQz/Sc4HN 49E3valw8ir2sIoyoAz8mw== 0000950134-01-001917.txt : 20010307 0000950134-01-001917.hdr.sgml : 20010307 ACCESSION NUMBER: 0000950134-01-001917 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010305 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLE INLAND INC CENTRAL INDEX KEY: 0000731939 STANDARD INDUSTRIAL CLASSIFICATION: PAPERBOARD MILLS [2631] IRS NUMBER: 751903917 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-08634 FILM NUMBER: 1561160 BUSINESS ADDRESS: STREET 1: 303 S TEMPLE DR STREET 2: P.O. DRAWER N CITY: DIBOLL STATE: TX ZIP: 75941 BUSINESS PHONE: 9368295511 MAIL ADDRESS: STREET 1: 303 SOUTH TEMPLE DR CITY: DIBOLL STATE: TX ZIP: 75941 10-K405 1 d84570e10-k405.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 30, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 001-08634 TEMPLE-INLAND INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 75-1903917 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
1300 MOPAC EXPRESSWAY SOUTH AUSTIN, TEXAS 78746 (Address of principal executive offices, including Zip code) Registrant's telephone number, including area code: (512) 434-8000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $1.00 Par Value per Share, New York Stock Exchange non-cumulative The Pacific Exchange Preferred Share Purchase Rights New York Stock Exchange The Pacific Exchange
Securities registered Pursuant to Section 12(g) of the Act: NONE --------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing sales price of the Common Stock on the New York Stock Exchange on February 28, 2001, was $1,556,825,328. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant (as indicated in Item 12) are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant. As of February 28, 2001, 49,260,508 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive proxy statement to be prepared in connection with the Annual Meeting of Shareholders to be held May 4, 2001, are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS INTRODUCTION Temple-Inland Inc. ("Temple-Inland" or the "Company") is a holding company that conducts all of its operations through its subsidiaries. The business of Temple-Inland is divided among three groups: - the Paper Group, which manufactures corrugated packaging products, - the Building Products Group, which manufactures a wide range of building products and manages the Company's forest resources of approximately 2.2 million acres of timberland in Texas, Louisiana, Georgia, and Alabama, and - the Financial Services Group, which consists of savings bank, mortgage banking, real estate, and insurance brokerage activities. The Paper Group, which is operated by Inland Paperboard and Packaging, Inc. ("Inland"), is a vertically integrated corrugated packaging operation that consists of: - four linerboard mills, - one corrugating medium mill, - 41 box plants, and - eight specialty converting plants. The Building Products Group is operated by Temple-Inland Forest Products Corporation ("Temple-Inland FPC") and manufactures a wide range of building products including: - lumber, - plywood, - particleboard, - medium density fiberboard, - gypsum wallboard, and - fiberboard. The Financial Services Group is operated by subsidiaries of Temple-Inland Financial Services Inc. ("Financial Services") and consists of: - savings bank, - mortgage banking, - real estate, and - insurance brokerage activities. The Company's savings bank, Guaranty Bank ("Guaranty"), conducts its business through 154 banking centers in Texas and California. Mortgage banking is conducted through Temple-Inland Mortgage Corporation ("Temple-Inland Mortgage"), a subsidiary of Guaranty that arranges financing of single-family mortgage loans (primarily Fannie Mae, FHLMC, and GNMA), securitizes the loans, and sells the loans into the secondary market. Real estate operations include development of residential subdivisions, as well as the management and sale of income producing properties. Insurance brokerage activities include selling a full range of insurance products. Temple-Inland is a Delaware corporation that was organized in 1983. Its principal operating subsidiaries include: - Inland Paperboard and Packaging, Inc., 1 3 - Temple-Inland Forest Products Corporation, - Temple-Inland Financial Services Inc., - Guaranty Bank, and - Temple-Inland Mortgage Corporation. Temple-Inland's principal executive offices are located at 1300 MoPac Expressway South, Austin, Texas 78746. Its telephone number is (512) 434-8000. Additional information about the Company may be obtained from Temple-Inland's home page on the Internet, the address of which is http://www.temple-inland.com. FINANCIAL INFORMATION The results of operations including information regarding the principal business segments are shown in the financial statements of the Company and the notes thereto contained in Item 8 of this Annual Report on Form 10-K. Certain statistical information concerning revenues and unit sales by product line is contained in Item 7 of this Annual Report on Form 10-K. NARRATIVE DESCRIPTION OF THE BUSINESS Temple-Inland is a holding company that conducts all of its operations through its subsidiaries. The business of Temple-Inland is divided among three groups: - the Paper Group, which provided 49 percent of Temple-Inland's consolidated net revenues for 2000; - the Building Products Group, which provided 19 percent of Temple-Inland's consolidated net revenues for 2000; and - the Financial Services Group, which provided 32 percent of Temple-Inland's consolidated net revenues for 2000. The following chart presents the ownership structure for the significant subsidiaries of Temple-Inland. It does not contain all the subsidiaries of Temple-Inland, many of which are dormant or immaterial special-purpose entities. A complete list of the subsidiaries of Temple-Inland is filed as an exhibit to this annual report on Form 10-K. All subsidiaries shown are 100 percent owned by their immediate parent company listed in the chart. 2 4 TEMPLE-INLAND INC. SELECTED SUBSIDIARY CHART [SELECTED SUBSIDIARY CHART] Paper Group. The Paper Group manufactures containerboard that it converts into a complete line of corrugated packaging and point-of-purchase displays. Approximately 20 percent of the containerboard produced by the Paper Group in 2000 was sold in the domestic and export markets. The Paper Group converted the remainder, and containerboard purchased in the domestic markets, into corrugated containers at its box plants. The Paper Group's nationwide network of box plants produces a wide range of products from commodity brown boxes to intricate die cut containers that can be printed with multi-color graphics. Even though the corrugated box business is characterized by commodity pricing, each order for each customer is a custom order. The Paper Group's corrugated boxes are sold to a variety of customers in the food, paper, glass containers, chemical, appliance, and plastics industries, among others. The Paper Group's corrugated packaging operation also manufactures litho-laminate corrugated packaging, high graphics folding cartons, and bulk containers constructed of multi-wall corrugated board for extra strength, which are used for bulk shipments of various materials. The Paper Group serves about 7,000 customers with approximately 9,000 shipping destinations. The largest single customer accounted for approximately 4 percent, and the ten largest customers accounted for approximately 27 percent, of the 2000 corrugated packaging revenues. Costs of freight and customer service requirements necessitate the location of box plants relatively close to customers. Each plant tends to service a market within a 150-mile radius of the plant. Sales of corrugated shipping containers closely track changing population patterns and other demographics. Historically, there has been a correlation between the demand for containers and containerboard and real growth in the United States gross domestic product, particularly the non-durable goods segment. As e-commerce develops, the demand for corrugated packaging could improve as the shipment of products ordered on-line increases. During 1999, the Company announced it had entered into a joint venture to form a new company, Premier Boxboard Limited LLC, to own and operate Inland's containerboard mill in Newport, Indiana. In the summer of 2000, the joint venture completed a 14-month, $70 million project to modify the mill to produce 3 5 lightweight gypsum facing paper. The conversion will increase the amount of corrugating medium purchased by the company while diversifying its product lines. During a transition period, the mill may produce both gypsum facing paper and corrugating medium. For a period of twelve months following the conversion, the Paper Group is obligated to purchase, at market rates, all of the medium produced by the venture that meets the Paper Group's specifications. Building Products Group. The Building Products Group produces a wide variety of building products, such as lumber, plywood, particleboard, medium density fiberboard, gypsum wallboard, and fiberboard. The Building Products Group also manages the Company's 2.2 million acres of timberland, which are located in Texas, Louisiana, Georgia, and Alabama. The group sells building products throughout the continental United States and in Canada, with the majority of sales occurring in the southern United States. No significant sales are generated under long-term contracts. Sales of most of these products are made by account managers and representatives to distributors, retailers, and original equipment manufacturer accounts. Approximately 78 percent of particleboard sales are to commercial fabricators, such as manufacturers of cabinets and furniture. The ten largest customers accounted for approximately 28 percent of the Building Products Group's 2000 sales. The building products business is heavily dependent upon the level of residential housing expenditures, including the repair and remodeling market. The Building Products Group is a 50 percent owner in two joint ventures: Del-Tin Fiber LLC, which produces medium density fiberboard at a facility in Arkansas; and Standard Gypsum LP, which produces gypsum wallboard at a plant and related quarry in Texas and a plant in Tennessee. During 2000, the Company decided to exit the fiber-cement business by acquiring a controlling interest in its Fortra Fiber-Cement LLC joint venture, which produced fiber-cement products at a plant in Texas, and leasing its facility to a third party. During 1998, the Company announced its intention to change the focus of the operations at its plywood plant. This plant will continue to produce veneer products, and a state-of-the-art sawmill is being added to the site. This change, which should be completed in the first half of 2001, will permit the Building Products Group to optimize the use of available sawtimber and produce a higher value product. Financial Services Group. The Financial Services Group operates a savings bank and engages in mortgage banking, real estate, and insurance brokerage activities. Savings Bank. Guaranty is a federally-chartered stock savings bank that conducts its business through 154 banking centers. The 110 Texas banking centers are concentrated in the metropolitan areas of Houston, Dallas/Fort Worth, San Antonio, and Austin, as well as the central and eastern regions of the state. The 44 California banking centers are concentrated in Southern California and the Central Valley. The primary activities of Guaranty include attracting savings deposits from the general public, investing in loans secured by mortgages on residential real estate, lending for the construction of real estate projects, and providing a variety of loan products to consumers and businesses. Guaranty also provides leasing and secured financing of industrial equipment, since acquiring American Finance Group, Inc. during 2000, and asset-based lending, since acquiring Fidelity Funding, Inc. in 1999. Guaranty derives its income primarily from interest earned on real estate mortgages, commercial and business loans, consumer loans, and investment securities, as well as fees received in connection with loans and deposit services. Its major expense is interest paid on consumer deposits and other borrowings. The operations of Guaranty, like those of other savings institutions, are significantly influenced by general economic conditions; the monetary, fiscal, and regulatory policies of the federal government; and the policies of financial institution regulatory authorities. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for mortgage financing and for other types of loans as well as market conditions. Guaranty primarily seeks assets with interest rates that adjust periodically rather than assets with long-term fixed rates. In addition to other minimum capital standards, regulations of the Office of Thrift Supervision ("OTS") established to ensure capital adequacy of savings institutions currently require savings institutions to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to adjusted 4 6 tangible assets. Management of Guaranty believes that as of year end, Guaranty met all capital adequacy requirements. In order to remain in the lowest tier of Federal Deposit Insurance Corporation insurance premiums, Guaranty must meet a leverage capital ratio of at least 5 percent of adjusted total assets. At year end 2000, Guaranty had a leverage capital ratio of 7.77 percent of adjusted total assets. Mortgage Banking. The mortgage banking operation of the Financial Services Group is headquartered in Austin, Texas, and originates, warehouses, and services FHA, VA, and conventional mortgage loans primarily on single family residential property. The mortgage banking operation originates mortgage loans for sale into the secondary market through 60 offices located throughout the United States. The Company typically retains the servicing rights on these loans, but periodically sells some portion of its servicing to third parties. Servicing operations are centralized in Austin, Texas. At the end of 2000, the mortgage banking operation was servicing $19.5 billion in mortgage loans, including loans serviced for affiliates. The mortgage banking operation produced $2.1 billion in mortgage loans during 2000. Real Estate. The Financial Services Group is involved in the development of 40 residential subdivisions in Texas, California, Colorado, Florida, Georgia, Missouri, Tennessee, and Utah. Real estate activities also include ownership of 12 commercial properties, including properties owned by subsidiaries through joint venture interests. Insurance Brokerage. Subsidiaries of the Financial Services Group are engaged in the brokerage of commercial and personal lines of property, casualty, life, and group health insurance products. One of these subsidiaries is an insurance agency that administers the marketing and distribution of several mortgage-related personal life, accident, and health insurance programs. This agency also acts as a risk manager of Temple-Inland. An affiliate of the insurance agency sells annuities through Guaranty. 5 7 Statistical Disclosures. The following tables present various statistical and financial information for the Financial Services Group. The following schedule presents the average balances, interest income/expense, and rates earned or paid by major balance sheet category for the years 1998 through 2000: AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST SPREAD
2000 1999 1998 --------------------------- --------------------------- --------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ------ ------- -------- ------ ------- -------- ------ (DOLLARS IN MILLIONS) ASSETS Interest-earning assets: Interest-earning deposits in other banks............................... $ 35 $ 2 7.15% $ 27 $ 1 5.36% $ 26 $ 1 5.27% Mortgage-backed and other securities.......................... 3,011 197 6.55% 2,347 126 5.36% 2,606 150 5.76% Securities purchased under agreements to resell, agency discount notes, federal funds sold, and commercial paper............................... 75 5 6.32% 66 3 4.94% 61 3 5.47% Loans receivable and mortgage loans held for sale (1)................... 10,377 884 8.52% 9,482 705 7.43% 7,701 583 7.57% Other................................... 16 1 4.03% 10 1 4.98% 13 1 4.80% ------- ------ ------- ---- ------- ---- Total interest-earning assets... 13,514 $1,089 8.06% 11,932 $836 7.01% 10,407 $738 7.09% ====== ==== ==== Cash.................................... 122 102 100 Allowance for loan losses............... (121) (105) (90) Other assets............................ 1,076 1,069 924 ------- ------- ------- Total assets.................... $14,591 $12,998 $11,341 ======= ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY Interest-bearing liabilities: Deposits: Interest-bearing demand............. $ 2,294 $ 93 4.04% $ 1,851 $ 56 3.04% $ 1,177 $ 27 2.31% Savings deposits.................... 189 4 1.94% 215 5 2.17% 215 5 2.25% Time deposits....................... 6,993 396 5.67% 6,052 318 5.25% 5,866 325 5.55% ------- ------ ------- ---- ------- ---- Total interest-bearing deposits...................... 9,476 493 5.20% 8,118 379 4.66% 7,258 357 4.92% Advances from the Federal Home Loan Bank................................ 2,511 159 6.35% 2,683 139 5.19% 1,892 106 5.63% Securities sold under repurchase agreements.......................... 484 32 6.51% 112 5 4.98% 349 20 5.62% Other borrowings...................... 217 16 7.34% 217 14 6.35% 203 11 5.53% ------- ------ ------- ---- ------- ---- Total interest-bearing liabilities................... 12,688 $ 700 5.52% 11,130 $537 4.83% 9,702 $494 5.10% ====== ==== ==== Noninterest-bearing demand deposits... 132 111 63 Other liabilities..................... 465 620 726 Stock issued by subsidiaries.......... 230 227 197 Shareholder's equity.................. 1,076 910 653 ------- ------- ------- Total liabilities and shareholder's equity.......... $14,591 $12,998 $11,341 ======= ======= ======= Net interest income............. $ 389 $299 $244 ====== ==== ==== Net yield on interest-earning assets........................ 2.88% 2.50% 2.34% ==== ==== ====
- --------------- (1) Nonaccruing loans are included in average loans receivable. 6 8 The following table provides an analysis of the changes in net interest income attributable to changes in volume of interest-earning assets or interest-bearing liabilities and to changes in rates earned or paid: VOLUME/RATE VARIANCE ANALYSIS(1)
2000 COMPARED WITH 1999 1999 COMPARED WITH 1998 --------------------------- --------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO --------------------------- --------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL -------- ------ ------- -------- ------ ------- (IN MILLIONS) Interest income: Interest-earning deposits in other banks...... $ -- $ 1 $ 1 $ -- $ -- $ -- Mortgage-backed and other securities.......... 40 31 71 (14) (10) (24) Securities purchased under agreements to resell, agency discount notes, federal funds sold, and commercial paper........... 1 1 2 -- -- -- Loans receivable and mortgage loans held for sale....................................... 70 109 179 133 (11) 122 ---- ---- ---- ---- ---- ---- Total interest income................. $111 $142 $253 $119 $(21) $ 98 ==== ==== ==== ==== ==== ==== Interest expense: Deposits: Interest-bearing demand deposits......... $ 15 $ 22 $ 37 $ 19 $ 10 $ 29 Savings deposits......................... -- (1) (1) Time deposits............................ 52 26 78 10 (17) (7) ---- ---- ---- ---- ---- ---- Total interest on deposits............ 67 47 114 29 (7) 22 Advances from the Federal Home Loan Bank...... (9) 29 20 41 (8) 33 Securities sold under repurchase agreements... 24 3 27 (12) (3) (15) Other borrowings.............................. -- 2 2 1 2 3 ---- ---- ---- ---- ---- ---- Total interest expense................ $ 82 $ 81 $163 $ 59 $(16) $ 43 ==== ==== ==== ==== ==== ==== Net interest income............................. $ 29 $ 61 $ 90 $ 60 $ (5) $ 55 ==== ==== ==== ==== ==== ====
- --------------- (1) The change in interest income and expense due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The following table sets forth the carrying amount of mortgage-backed and other securities as of the dates indicated: TYPES OF INVESTMENTS
AT YEAR END ------------------------ 2000 1999 1998 ------ ------ ------ (IN MILLIONS) Held-to-Maturity: Mortgage-backed securities............................... $ 864 $1,061 $1,413 Available-for-Sale: Mortgage-backed securities............................... 2,237 1,256 892 Debt securities U.S. government....................................... -- 7 -- Corporate............................................. 3 2 3 Equity securities, primarily Federal Home Loan Bank Stock.......................... 175 166 177 ------ ------ ------ $3,279 $2,492 $2,485 ====== ====== ======
7 9 The table below sets forth the maturities of mortgage-backed and other securities as of year end 2000: MATURITY DISTRIBUTION OF MORTGAGE-BACKED AND OTHER SECURITIES
MATURING ----------------------------------------------------------------- VARIABLE/NO WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS MATURITY TOTAL -------------- -------------- -------------- -------------- -------------- CARRYING AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD VALUE ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- -------- (DOLLARS IN MILLIONS) Held-to-Maturity: Mortgage-backed securities............... $-- -- $-- -- $-- -- $-- -- $ 864 6.05% $ 864 Available-for-Sale: Mortgage-backed securities............... -- -- -- -- -- -- -- -- 2,237 6.98% 2,237 Debt securities U.S. Government.......... -- -- -- -- -- -- -- -- -- -- -- Corporate................ 1 6.58% 1 6.20% 1 6.97% -- -- 3 Equity securities, primarily Federal Home Loan Bank Stock.................. -- -- -- -- -- -- -- -- 175 6.55% 175 --- --- --- --- ------ ------ $-- $ 1 $ 1 $ 1 $3,276 $3,279 === === === === ====== ======
The following table shows the loan distribution for the Financial Services Group: TYPES OF LOANS
AT YEAR END ------------------------------------------- 2000 1999 1998 1997 1996 ------- ------ ------ ------ ------ (IN MILLIONS) Real estate mortgage............................. $ 3,618 $3,763 $4,105 $3,997 $3,784 Construction and development (including residential)................................... 4,007 3,253 2,210 1,379 1,013 Commercial and business.......................... 1,681 1,265 1,031 582 284 Consumer and other............................... 1,215 1,121 827 565 393 Premiums, discounts and deferred fees, net....... 8 7 15 19 8 ------- ------ ------ ------ ------ 10,529 9,409 8,188 6,542 5,482 Less: Allowance for loan losses................. (118) (113) (87) (91) (68) ------- ------ ------ ------ ------ $10,411 $9,296 $8,101 $6,451 $5,414 ======= ====== ====== ====== ======
8 10 The table below presents the maturity distribution of loans (excluding real estate mortgage and consumer and other loans) outstanding at year-end 2000, based on scheduled repayments. The amounts due after one year, classified according to the sensitivity to changes in interest rates, are also provided. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
MATURING ------------------------------------ WITHIN 1 1 TO 5 AFTER 5 YEAR YEARS YEARS TOTAL -------- ------ ------- ------ (IN MILLIONS) Construction and development (including residential)........ $3,692 $314 $ 1 $4,007 Commercial and business..................................... 1,123 431 127 1,681 ------ ---- ---- ------ $4,815 $745 $128 $5,688 ====== ==== ==== ====== Loans maturing after 1 year with: Fixed interest rates...................................... $ -- $160 $115 $ 275 Variable interest rates................................... -- 585 13 598 ------ ---- ---- ------ $ -- $745 $128 $ 873 ====== ==== ==== ======
Loans accounted for on a nonaccrual basis, accruing loans that are contractually past due 90 days or more, and restructured or other potential problem loans were less than 2 percent of total loans at each year end in the five-year period ended December 31, 2000. The aggregate amounts and the interest income foregone on such loans are immaterial. The recorded investment in impaired loans was $5.6 million at December 31, 2000, and $78.9 million at December 31, 1999, with a related allowance for loan losses of $2.9 million and $34.3 million, respectively. The average recorded investment in impaired loans during the years ended December 31, 2000 and 1999, was approximately $44.8 million and $34.3 million, respectively. The related amount of interest income recognized for the years ended December 31, 2000 and 1999, on impaired loans was immaterial. 9 11 The following tables summarize activity in the allowance for loan losses and show the allocation of the allowance for loan losses by loan type: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
2000 1999 1998 1997 1996 ---- ----- ---- ---- ----- (DOLLARS IN MILLIONS) Balance at beginning of year..................... $113 $ 87 $91 $68 $ 66 Charge-offs: Real estate mortgage........................... (22) (16) (6) (5) (6) Commercial and business........................ (11) (7) -- (1) (3) Consumer and other............................. (4) (2) (2) (2) (4) ---- ----- --- --- ----- (37) (25) (8) (8) (13) Recoveries: Real estate mortgage........................... -- -- 3 1 2 Commercial and business........................ -- -- -- -- -- Consumer and other............................. 1 1 -- 1 1 ---- ----- --- --- ----- 1 1 3 2 3 ---- ----- --- --- ----- Net charge-offs............................. (36) (24) (5) (6) (10) Additions charged to operations.................. 39 38 1 (2) 13 Additions related to bulk purchases of loans, net of adjustments................................. 2 12(a) -- 31(b) (1) ---- ----- --- --- ----- Balance at end of year........................... $118 $ 113 $87 $91 $ 68 ==== ===== === === ===== Ratio of net charge-offs during the year to average loans outstanding during the year...... .35% .26% .07% .10% .20% ==== ===== === === =====
- --------------- (a) Principally related to the loan portfolio from the acquisition of Hemet Federal Savings and Loan Association. (b) Principally related to the loan portfolio from the acquisition of Stockton Savings Bank, F.S.B. 10 12 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (DOLLARS IN MILLIONS)
AT YEAR END ----------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 ----------------------- ----------------------- ----------------------- ----------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF AMOUNT OF LOANS TO AMOUNT OF LOANS TO AMOUNT OF LOANS TO AMOUNT OF LOANS TO ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS --------- ----------- --------- ----------- --------- ----------- --------- ----------- Real estate mortgage...... $ 26 34% $ 60 40% $36 50% $46 61% Construction and development.............. 30 38% 24 35% 17 27% 15 21% Commercial and business... 31 16% 12 13% 14 13% 4 9% Consumer and other........ 5 12% 5 12% 3 10% 3 9% Unallocated............... 26 -- 12 -- 17 -- 23 -- ---- --- ---- --- --- --- --- --- $118 100% $113 100% $87 100% $91 100% ==== === ==== === === === === === AT YEAR END ----------------------- 1996 ----------------------- PERCENT OF AMOUNT OF LOANS TO ALLOWANCE TOTAL LOANS --------- ----------- Real estate mortgage...... $42 69% Construction and development.............. 8 19% Commercial and business... 1 5% Consumer and other........ 4 7% Unallocated............... 13 -- --- --- $68 100% === ===
The amount charged to operations and the related balance in the allowance for loan losses are based on periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including without limitation, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. Additional information regarding the allowance for doubtful accounts is contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in this Annual Report on Form 10-K. Deposits. The average amount of deposits and the average rates paid on noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits, and time deposits are presented on the schedule of average balance sheets and analysis of net interest spread of the Financial Services Group on page 6 hereof. The amount of time deposits of $100,000 or more and related maturities at year end 2000, are disclosed in Note E to Financial Services Group Summarized Financial Statements on page 53 of this Annual Report on Form 10-K. Return on Equity and Assets. The following table shows operating and capital ratios of the Financial Services Group for each of the last three years: OPERATING AND CAPITAL RATIOS
2000 1999 1998 ------ ------ ------ Return on average assets.................................. 1.01% 0.93% 1.12% Return on average equity.................................. 13.64% 13.29% 19.48% Dividend payout ratio..................................... 74.92% 57.85% 47.17% Equity to assets ratio.................................... 7.38% 7.00% 5.76%
11 13 Short-term borrowings. The following table shows short-term borrowings outstanding for the Financial Services Group: SHORT-TERM BORROWINGS (IN MILLIONS)
WEIGHTED MAXIMUM AVERAGE WEIGHTED AVERAGE AMOUNT AMOUNT AVERAGE INTEREST OUTSTANDING OUTSTANDING INTEREST RATE BALANCE AT RATE AT DURING THE DURING THE DURING THE YEAR END YEAR END YEAR YEAR YEAR ---------- -------- ----------- ----------- ------------- 2000 Securities sold under agreements to repurchase....................... $ 595 6.6% $ 898 $ 484 6.5% Short-term FHLB advances........... $2,742 6.4% $2,911 $2,306 6.4% 1999 Securities sold under agreements to repurchase....................... -- -- $ 223 $ 112 5.0% Short-term FHLB advances........... $2,151 5.7% $3,431 $2,683 5.2% 1998 Securities sold under agreements to repurchase....................... -- -- $1,255 $ 349 5.6% Short-term FHLB advances........... $2,252 4.9% $2,290 $1,382 5.4%
- --------------- Note: Certain short-term FHLB advances and securities sold under agreements to repurchase generally mature within 30 days of the transaction date. Average borrowings during the year were calculated based on daily balances. Discontinued Operations. The Company's bleached paperboard operation produced various grades and weights of coated and uncoated bleached paperboard for use in high-quality printing and publishing applications, greeting cards, office supplies, and foodware. In December 1999, the Company sold its bleached paperboard business, including the mill located in Evadale, Texas, to Westvaco Corporation for approximately $658 million, including adjustments for working capital. As part of the transaction, the Company entered into a long-term agreement with Westvaco to provide fiber to the Evadale mill at market rates. Revenues for 2000 from this agreement were $49 million. The eucalyptus fiber project in Mexico, which was to be a source of hardwood fiber to the bleached paperboard mill, is expected to be sold during 2001 at a price that approximates its carrying value. RAW MATERIALS The Company's main resource is timber, with approximately 2.2 million acres of owned and leased timberland located in Texas, Louisiana, Alabama, and Georgia. In 2000, wood fiber required for the Company's paper and wood products operations was produced from these lands and as a by-product of its solid wood operations to the extent shown on the following chart: WOOD FIBER REQUIREMENTS
PERCENTAGE SUPPLIED RAW MATERIALS INTERNALLY - ------------- ---------- Sawtimber................................................. 63% Pine Pulpwood............................................. 65% Hardwood Pulpwood......................................... 37%
The balance of the wood fiber required for these operations was purchased from numerous landowners and other lumber companies. 12 14 Linerboard and corrugating medium are the principal materials used by Inland to make corrugated boxes. The mills at Rome, Georgia, and Orange, Texas, are solely linerboard mills. The Ontario, California, and Maysville, Kentucky, mills are traditionally linerboard mills, but can be used to manufacture corrugating medium. The New Johnsonville, Tennessee, mill is solely a corrugating medium mill. The principal raw material used by the Rome, Georgia, and Orange, Texas, mills is virgin fiber. The Ontario, California, and Maysville, Kentucky, mills use only old corrugated containers ("OCC"). The mill at New Johnsonville, Tennessee, uses a combination of virgin fiber and OCC. In 2000, OCC represented approximately 41 percent of the total fiber needs of the Company's containerboard operations. The price of OCC may exhibit volatility due to normal supply and demand fluctuations for the raw material and for the finished product. OCC is purchased by the Company and its competitors on the open market from numerous suppliers. Price fluctuations reflect the competitiveness of these markets. The Company's historical grade patterns produce more linerboard and less corrugating medium than is converted at the Company's box plants. The deficit of corrugating medium is obtained through open market purchases and trades and the excess linerboard is sold in the open market. The conversion of the Newport mill for the production of gypsum facing paper will require the Company to buy increasing amounts of corrugating medium. Temple-Inland FPC obtains the gypsum for its wallboard operations in Fletcher, Oklahoma, from one outside source through a long-term purchase contract. At its gypsum wallboard plant in West Memphis, Arkansas, and the joint venture gypsum wallboard plant in Cumberland City, Tennessee, synthetic gypsum is used as a raw material. Synthetic gypsum is a by-product of coal-burning electrical power plants. The Company has entered into a long-term supply agreement for synthetic gypsum produced at a Tennessee Valley Authority electrical plant located adjacent to the Cumberland City plant. Synthetic gypsum acquired pursuant to this agreement supplies all the synthetic gypsum required by the Cumberland City plant and the West Memphis plant. In the opinion of management, the sources outlined above will be sufficient to supply the Company's raw material needs for the foreseeable future. ENERGY Electricity and steam requirements at the Company's manufacturing facilities are either supplied by a local utility or generated internally through the use of a variety of fuels, including natural gas, fuel oil, coal, wood bark, and in some instances, waste products resulting from the manufacturing process. By utilizing these waste products and other wood by-products as a biomass fuel to generate electricity and steam, the Company was able to generate approximately 60 percent of its energy requirements at its mills in Rome, Georgia, and Orange, Texas, during 2000. In most cases where natural gas or fuel oil is used as a fuel, the Company's facilities possess a dual capacity enabling the use of either fuel as a source of energy. The natural gas needed to run the Company's natural gas fueled power boilers, package boilers, and turbines is acquired pursuant to a multiple vendor solicitation process that provides for the purchase of gas on an interruptible basis at rates that historically have been favorable to spot market rates. Energy costs began rising during the second quarter of 2000. This trend continued through the remainder of 2000 and into the first quarter of 2001. In some instances, the Company elected to curtail production at certain of its manufacturing facilities rather than pay the significantly higher energy prices. The Company expects this trend of higher energy costs to continue into the foreseeable future. Accordingly, the Company is exploring alternative arrangements and fuel sources in an effort to contain energy costs. EMPLOYEES At December 30, 2000, the Company and its subsidiaries had approximately 14,800 employees. Approximately 4,400 of these employees are covered by collective bargaining agreements. These agreements generally run for a term of three to six years and have varying expiration dates. The following table 13 15 summarizes certain information about the collective bargaining agreements that cover a significant number of employees:
LOCATION BARGAINING UNIT(S) EMPLOYEES COVERED EXPIRATION DATES - -------- ------------------ ----------------- ---------------- Linerboard Mill, Paper, Allied-Industrial, 235 hourly Production Employees July 31, 2005 Orange, Texas Chemical and Energy Workers and 116 hourly Maintenance Intl. ("PACE"), Local 1398, and Employees PACE, Local 391 Linerboard Mill, PACE, Local 804, International 319 hourly Production Employees, July 31, 2006 Rome, Georgia Brotherhood of Electrical 36 Electrical Maintenance Workers ("IBEW"), Local 613, Employees, and 166 hourly United Association of Journeymen Maintenance Employees & Apprentices of the Plumbing & Pipefitting Industry of the U.S. and Canada, Local 72, and International Association of Machinists & Aerospace Workers, Local 414 Evansville, Indiana, PACE, Local 1046, PACE, Local 109, 107, and 111 hourly April 30, 2002 Louisville, Kentucky, 1737,and PACE, Local 114, Production Employees, and Middletown, Ohio, respectively respectively Box Plants ("Northern Multiple") Rome, Georgia, and PACE Local 838 and PACE Local 150 and 105 hourly Production December 1, 2003 Orlando, Florida, Box 834, respectively Employees, respectively Plants ("Southern Multiple")
The Company has additional collective bargaining agreements with the employees of various of its other box plants, mills, and building products plants. These agreements each cover a relatively small number of employees and are negotiated on an individual basis at each such facility. The Company considers its relations with its employees to be good. ENVIRONMENTAL PROTECTION The operations conducted by the subsidiaries of the Company are subject to federal, state, and local provisions regulating the discharge of materials into the environment and otherwise related to the protection of the environment. Compliance with these provisions, primarily the Federal Clean Air Act, Clean Water Act, Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"), and Resource Conservation and Recovery Act ("RCRA"), has required the Company to invest substantial funds to modify facilities to assure compliance with applicable environmental regulations. Capital expenditures directly related to environmental compliance totaled approximately $19 million during 2000. This amount does not include capital expenditures for environmental control facilities made as part of major mill modernizations and expansions or capital expenditures made for another purpose that have an indirect benefit on environmental compliance. The Company is committed to protecting the health and welfare of its employees, the public, and the environment and strives to maintain compliance with all state and federal environmental regulations in a manner that is also cost effective. In the construction of new facilities and the modernization of existing facilities, the Company has used state of the art technology for its air and water emissions. These forward-looking programs are intended to minimize the impact that changing regulations have on capital expenditures for environmental compliance. Future expenditures for environmental control facilities will depend on new laws and regulations and other changes in legal requirements and agency interpretations thereof, as well as technological advances. The Company expects the prominence of environmental regulation to continue for the foreseeable future. Given these uncertainties, the Company currently estimates that capital expenditures for environmental purposes 14 16 during the period 2001 through 2003 will average approximately $9 million each year. The estimated expenditures could be significantly higher if more stringent laws and regulations are implemented. On April 15, 1998, the U.S. Environmental Protection Agency (the "EPA") issued extensive regulations governing air and water emissions from the pulp and paper industry (the "Cluster Rule"). Compliance with various phases of the Cluster Rule will be required at certain intervals over the next few years. According to the EPA, the technology standards in the Cluster Rule will cut the industry's toxic air pollutant emissions by almost 60 percent and provides incentives for individual mills to adopt technologies that will lead to further reductions in toxic pollutant discharges. The estimated capital expenditures disclosed above do not include expenditures that may be needed to comply with the Cluster Rule. The Company has incurred approximately $11 million toward Cluster Rule compliance through the end of 2000, excluding such expenditures related to discontinued operations, and expects that additional expenditures related to Cluster Rule compliance will be approximately $2 million by the initial compliance deadline of April 15, 2001. Not included in the phase I Cluster Rule was the Maximum Achievable Control Technology ("MACT") II Standard for the control of hazardous air pollutant emissions from pulp and paper mill combustion sources. Final promulgation of the MACT II Standard occurred on December 15, 2000, and applies to two kraft mills operated by the Company. Preliminary estimates indicate that the Company could be required to make total capital expenditures for monitoring both particulate matter ("PM") and gaseous hazardous air pollutants ("HAPs") associated with the reporting and record-keeping activities of the rule of up to $2 million over the next few years. Future national emission standards for HAPs will apply to facilities that are major sources in the plywood and composite wood products ("PCWP") industry. The proposed standard would limit emissions of HAPs including acetaldehyde, acrolein, formaldehyde, methanol, phenol, and other HAPs. EPA estimates that implementation of the proposed standards would reduce HAP emissions from the PCWP source category industry-wide by approximately 11,000 tons per year. In addition, the proposed standards would reduce emissions of volatile organic compounds ("VOCs") industry-wide by approximately 27,000 tons per year. The estimated capital costs of these proposed standards for the Company are approximately $25 million over the next five years. In addition to these capital expenditures, the Company incurs significant ongoing maintenance costs to maintain compliance with environmental regulation. The Company, however, does not believe that these capital expenditures or maintenance costs will have a material adverse effect on the earnings of the Company. In addition, expenditures for environmental compliance should not have a material impact on the competitive position of the Company, because other companies are also subject to these regulations. COMPETITION All of the industries in which the Company operates are highly competitive. The level of competition in a given product or market may be affected by the strength of the dollar and other market factors including geographic location, general economic conditions, and the operating efficiencies of competitors. Factors influencing the Company's competitive position vary depending on the characteristics of the products involved. The primary factors are product quality and performance, price, service, and product innovation. The corrugated packaging industry is highly competitive with almost 1,500 box plants in the United States. Box plants operated by Inland and its subsidiaries accounted for approximately 8 percent of total industry shipments during 2000. Although corrugated packaging is dominant in the national distribution process, Inland's products also compete with various other packaging materials, including products made of paper, plastics, wood, and metals. In the building materials markets, the Building Products Group competes with many companies that are substantially larger and have greater resources in the manufacturing of building materials. The Financial Services Group competes with commercial banks, savings and loan associations, mortgage banks, and other lenders in its mortgage banking and savings bank activities, and with real estate investment 15 17 and management companies in its real estate activities. The financial services industry is a highly competitive business, and a number of entities with which the Company competes have greater resources. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages, and titles of the persons who serve as executive officers of the Company:
NAME AGE OFFICE - ---- --- ------ Kenneth M. Jastrow, II......... 53 Chairman of the Board and Chief Executive Officer William B. Howes............... 63 Executive Vice President Harold C. Maxwell.............. 60 Executive Vice President Bart J. Doney.................. 51 Group Vice President Kenneth R. Dubuque............. 52 Group Vice President James C. Foxworthy............. 49 Group Vice President Dale E. Stahl.................. 53 Group Vice President Jack C. Sweeny................. 54 Group Vice President M. Richard Warner.............. 49 Chief Administrative Officer, Vice President, and General Counsel Randall D. Levy................ 49 Chief Financial Officer Louis R. Brill................. 59 Vice President, Chief Accounting Officer Scott Smith.................... 46 Chief Information Officer Doyle R. Simons................ 37 Vice President -- Administration David W. Turpin................ 50 Treasurer Leslie K. O'Neal............... 45 Assistant General Counsel and Secretary
Kenneth M. Jastrow, II became Chairman of the Board and Chief Executive Officer of the Company on January 1, 2000. Mr. Jastrow previously served the Company in various capacities since 1991, including Chief Financial Officer and Group Vice President. He also serves as Chairman of the Board and Chief Executive Officer of Financial Services, Chairman of the Board of Guaranty, and a Director of each of Temple-Inland FPC and Inland. William B. Howes, who was named Executive Vice President and a Director in August 1996, became a Group Vice President of the Company and the Chairman of the Board and Chief Executive Officer of Inland in July 1993 after serving as the President and Chief Operating Officer of Inland since April 1992. From August 1990 until April 1992, Mr. Howes was the Executive Vice President of Inland. Harold C. Maxwell became Executive Vice President of the Company in February 2000 after serving as Group Vice President since May 1989. In March 1998, Mr. Maxwell was named Chairman of the Board, President, and Chief Executive Officer of Temple-Inland FPC after having served as Group Vice President -- Building Products of Temple-Inland FPC since November 1982. Bart J. Doney became Group Vice President of the Company in February 2000. Mr. Doney has served Inland as Executive Vice President, Packaging since June 1998, Senior Vice President from 1996 until 1998, and Vice President, Sales and Administration, Containerboard Division from 1990 to 1996. Kenneth R. Dubuque became Group Vice President of the Company in February 2000. In October 1998, Mr. Dubuque was named President and Chief Executive Officer of Guaranty. From 1996 until 1998, Mr. Dubuque served as Executive Vice President and Manager -- International Trust and Investment of Mellon Bank Corporation. From 1991 until 1996, he served as Chairman, President and Chief Executive Officer of the Maryland, Virginia, and Washington, D.C., operating subsidiary of Mellon Bank Corporation. James C. Foxworthy became Group Vice President of the Company in February 2000. Mr. Foxworthy also serves as Executive Vice President, Paperboard of Inland, a position he has held since June 1998. From 1995 until 1998, he served as Senior Vice President of Inland. 16 18 Dale E. Stahl became Group Vice President of the Company in July 2000. Mr. Stahl served as President and Chief Operating Officer of Gaylord Container Corporation for twelve years prior to joining the Company. Jack C. Sweeny became a Group Vice President of the Company in May 1996. He also serves as Executive Vice President, Forest/Solid Wood and a Director of Temple-Inland FPC. From November 1982 through May 1996, Mr. Sweeny served as Vice President -- Operations of the Building Products Division of Temple-Inland FPC. M. Richard Warner became Vice President and General Counsel of the Company in June 1994 and was named Chief Administrative Officer in May 1999. Randall D. Levy became Chief Financial Officer of the Company in May 1999. Mr. Levy joined Guaranty in 1989 serving in various capacities, including Treasurer and most recently as Chief Operating Officer from 1994 to 1999. Louis R. Brill became Vice President, Controller of the Company in December 1999 and was named Chief Accounting Officer in May 2000. Before joining the Company in 1999, Mr. Brill was a partner of Ernst & Young LLP for 25 years. Scott Smith became Chief Information Officer of the Company in February 2000. Prior to that, Mr. Smith was Treasurer of Guaranty from November 1993 to December 1999 and Chief Information Officer of Financial Services from August 1995 to June 1999. Doyle R. Simons became Vice President -- Administration in November 2000. Mr. Simons has served as the Director of Investor Relations for the Company since 1994. David W. Turpin became Treasurer of the Company in June 1991. Mr. Turpin also serves as the Executive Vice President and Chief Financial Officer of Lumbermen's Investment Corporation, a real estate subsidiary of the Company. Leslie K. O'Neal became Secretary of the Company in February 2000 after serving as Assistant Secretary since 1995. Ms. O'Neal also serves as Assistant General Counsel of the Company, a position she has held since 1985. Ms. O'Neal also serves as Secretary of various subsidiaries of the Company. Officers are elected at the Company's Annual Meeting of Directors to serve until their successors have been elected and have qualified or as otherwise provided in the Company's Bylaws. ITEM 2. PROPERTIES The Company owns and operates manufacturing facilities throughout the United States, three box plants and a sheet plant in Mexico, and box plants in Chile and Puerto Rico. Additional descriptions as of year-end of selected properties are set forth in the following charts: CONTAINERBOARD MILLS
RATED NO. OF ANNUAL 2000 LOCATION PRODUCT MACHINES CAPACITY PRODUCTION - -------- ------- -------- -------- ---------- (IN TONS) Ontario, California........................ Linerboard 1 330,000 278,000 Rome, Georgia.............................. Linerboard 2 810,000 730,000 Orange, Texas.............................. Linerboard 2 580,000 530,000 Maysville, Kentucky........................ Linerboard 1 405,000 390,000 New Johnsonville, Tennessee................ Medium 1 265,000 249,000
During 2000, the Company transferred its Newport, Indiana, mill to a joint venture in which Inland owns a 50 percent interest. The joint venture completed converting this mill to produce gypsum wallboard facing paper in the third quarter. Prior to the transfer, the mill produced 120,000 tons of corrugating medium. The mill now has a rated annual capacity to produce 264,000 tons of gypsum facing paper per year, production of 17 19 which will begin during 2001. For a period of twelve months following the conversion, the Paper Group is obligated to purchase, at market rates, all of the medium produced by the venture that meets the Paper Group's specifications. During 2000, the Company purchased 72,000 tons of medium from this venture. CORRUGATED CONTAINER PLANTS*
DATE CORRUGATOR ACQUIRED OR LOCATION SIZE CONSTRUCTED - -------- ---------- ----------- Fort Smith, Arkansas........................................ 87inches 1978 Fort Smith, Arkansas(1)***.................................. None 1996 Bell, California............................................ 97inches 1974 El Centro, California(1).................................... 87inches 1990 Ontario, California......................................... 87inches 1985 Santa Fe Springs, California................................ 97inches 1973 Tracy, California**......................................... 87inches 1979 Wheat Ridge, Colorado....................................... 87inches 1970 Orlando, Florida............................................ 98inches 1955 87inches & Rome, Georgia**............................................. 98inches 1955 Chicago, Illinois........................................... 87inches 1958 Crawfordsville, Indiana..................................... 98inches 1972 Evansville, Indiana......................................... 98inches 1938 Garden City, Kansas......................................... 96inches 1981 Kansas City, Kansas......................................... 87inches 1981 Louisville, Kentucky........................................ 92inches 1958 Minden, Louisiana........................................... 98inches 1978 Minneapolis, Minnesota...................................... 87inches 1959 Hattiesburg, Mississippi.................................... 87inches 1965 St. Louis, Missouri......................................... 87inches 1963 Milltown, New Jersey(1)***.................................. None 1999 Spotswood, New Jersey....................................... 87inches 1964 Middletown, Ohio............................................ 98inches 1929 Streetsboro, Ohio........................................... 98inches 1997 Biglerville, Pennsylvania................................... 98inches 1932 Hazleton, Pennsylvania...................................... 98inches 1976 Vega Alta, Puerto Rico...................................... 87inches 1977 Lexington, South Carolina................................... 98inches 1973 Rock Hill, South Carolina................................... 87inches 1972 Elizabethton, Tennessee..................................... 98inches 1982 Elizabethton, Tennessee(1)***............................... None 1990 Ashland City, Tennessee(1)***............................... None 1998 Dallas, Texas............................................... 98inches 1962 Edinburg, Texas............................................. 87inches 1988 Petersburg, Virginia........................................ 87inches 1991 Petersburg, Virginia(1)***.................................. None 1998 San Jose Iturbide, Guanajuato, Mexico....................... 87inches 1994 Monterrey, Leon, Mexico..................................... 87inches 1994 Los Mochis, Sinaloa, Mexico................................. 80inches 1997 Guadalajara, Jalisco, Mexico(1)***.......................... None 2000 Santiago, Chile............................................. 87inches 1995
- --------------- * The annual capacity of Inland's box plants is not given because such annual capacity is a function of the product mix, customer requirements and the type of converting equipment installed and operating at each plant, each of which varies from time to time. ** The Tracy, California, and Rome, Georgia, plants each contain two corrugators. *** Sheet plants. (1) Leased facilities. 18 20 Additionally, Inland owns a fulfillment center in Gettysburg, Pennsylvania, a graphics resource center in Indianapolis, Indiana, that has a 100inches preprint press, and also leases 50 warehouses located throughout much of the United States. Inland owns specialty converting plants in Santa Fe Springs, California; Harrington, Delaware; Indianapolis, Indiana; Leominster, Massachusetts; and Linden, New Jersey, and leases specialty converting plants in Buena Park, Santa Fe Springs, and Ontario, California; and Rural Hall, North Carolina. BUILDING PRODUCTS
RATED ANNUAL DESCRIPTION LOCATION CAPACITY - ----------- -------- --------------- (IN MILLIONS OF BOARD FEET) Lumber........................... Diboll, Texas 150* Lumber........................... Pineland, Texas 95** Lumber........................... Buna, Texas 170 Lumber........................... Rome, Georgia 115 Lumber........................... DeQuincy, Louisiana 145
- --------------- * Includes separate finger jointing capacity of 10 million board feet. ** During the first half of 2001, this facility will be replaced with a state-of-the-art sawmill.
RATED ANNUAL DESCRIPTION LOCATION CAPACITY - ----------- -------- --------------- (IN MILLIONS OF SQUARE FEET) Fiberboard....................... Diboll, Texas 460 Particleboard.................... Monroeville, Alabama 150 Particleboard.................... Thomson, Georgia 145 Particleboard.................... Diboll, Texas 140 Particleboard.................... Hope, Arkansas 220 Particleboard(1)................. Mt. Jewett, Pennsylvania 200 Plywood.......................... Pineland, Texas 265** Gypsum Wallboard................. West Memphis, Arkansas 400 Gypsum Wallboard................. Fletcher, Oklahoma 466 Gypsum Wallboard*................ McQueeney, Texas 380 Gypsum Wallboard*................ Cumberland City, Tennessee 700 Medium Density Fiberboard........ Clarion, Pennsylvania 135 Medium Density Fiberboard........ Pembroke, Ontario, Canada 135 Medium Density Fiberboard*....... El Dorado, Arkansas 150 Medium Density Fiberboard(1)..... Mt. Jewett, Pennsylvania 100
- --------------- * The table shows the full capacity of this facility that is owned by a joint venture in which a subsidiary of the Company has a 50 percent interest. ** As part of the Company's plans for the Pineland complex, which are expected to be completed in the first half of 2001, this facility will be limited to the production of veneer. (1) Leased facilities. 19 21 TIMBER AND TIMBERLANDS* (IN ACRES) Pine Plantations............................ 1,403,338 Natural Pine................................ 125,394 Hardwood.................................... 124,588 Special Use/Non-Forested.................... 495,011 ---------- Total............................. 2,148,331 ==========
- --------------- * Includes approximately 268,729 acres of leased land. In the opinion of management, the Company's plants, mills, and manufacturing facilities are suitable for their purpose and adequate for the Company's business. Through its subsidiaries, the Company owns certain of the office buildings in which various of its corporate offices are headquartered. This includes approximately 150,000 square feet of space in Diboll, Texas, approximately 130,000 square feet in Indianapolis, Indiana, and approximately 445,000 square feet of office space in Austin, Texas. The Company also owns approximately 381,000 mineral acres in Texas and Louisiana. Revenue from lease and production activities on these acres totaled $8.3 million in 2000. Additionally, the Company owns approximately 395,830 mineral acres in Alabama and Georgia, which produced no lease or production revenue in 2000. At year end 2000, property and equipment having a net book value of approximately $58.4 million were subject to liens in connection with $86.2 million of debt. ITEM 3. LEGAL PROCEEDINGS GENERAL The Company and its subsidiaries are involved in various legal proceedings that have arisen from time to time in the ordinary course of business. In the opinion of the Company's management, such proceedings will not be material to the business or financial condition of the Company and its subsidiaries. ENVIRONMENTAL The facilities of the Company are periodically inspected by environmental authorities and must file periodic reports on the discharge of pollutants with these authorities. Occasionally, one or more of these facilities may have operated in violation of applicable pollution control standards, which could subject the facilities to fines or penalties in the future. Management believes that any fines or penalties that may be imposed as a result of these violations will not have a material adverse effect on the Company's earnings or competitive position. No assurance can be given, therefore, that any fines levied against the Company in the future for any such violations will not be material. Under CERCLA, liability for the cleanup of a Superfund site may be imposed on waste generators, site owners and operators, and others regardless of fault or the legality of the original waste disposal activity. While joint and several liability is authorized under CERCLA, as a practical matter, the cost of cleanup is generally allocated among the many waste generators. Subsidiaries of the Company are parties to nine proceedings relating to the cleanup of hazardous waste sites under CERCLA and similar state laws, excluding sites to which the Company's records disclose no involvement or as to which the Company's potential liability has finally been determined. The subsidiaries have conducted investigations of the sites and in certain instances believe that there is no basis for liability and have so informed the governmental entities. The internal investigations of the remaining sites reveal that the portion of the remediation costs for these sites to be allocated to the Company is approximately $2 million and will have no material impact on the Company. There can be no assurance that subsidiaries of the Company will not be named as potentially responsible 20 22 parties at additional Superfund sites in the future or that the costs associated with the remediation of those sites would not be material. All litigation has an element of uncertainty and the final outcome of any legal proceeding cannot be predicted with any degree of certainty. With these limitations in mind, the Company presently believes that any ultimate liability from the legal proceedings discussed herein would not have a material adverse effect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of its shareholders during the fourth quarter of its last fiscal year. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Common Stock of the Company is traded on the New York Stock Exchange and The Pacific Exchange. The table below sets forth the high and low sales price for the Common Stock during each fiscal quarter in the two most recent fiscal years.
2000 1999 ------------------------- ------------------------ PRICE RANGE PRICE RANGE ------------------------- ------------------------ HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS ----- ----- --------- ----- ---- --------- First Quarter...................... 67 11/16 43 3/4 $0.32 $67 3/ 56 7/16 $0.32 Second Quarter..................... 57 1/2 40 15/16 $0.32 77 1/ 61 3/8 $0.32 Third Quarter...................... 47 5/8 37 1/16 $0.32 73 7/1 58 $0.32 Fourth Quarter..................... 55 1/2 34 5/8 $0.32 66 1/1 53 5/8 $0.32 ----- ----- For the Year....................... 67 11/16 34 5/8 $1.28 77 1/ 53 5/8 $1.28
SHAREHOLDERS The Company's stock transfer records indicated that as of February 28, 2001, there were approximately 5,900 holders of record of the Common Stock. DIVIDEND POLICY As indicated above, the Company paid quarterly dividends during each of the two most recent fiscal years in the amounts shown. On February 2, 2001, the Board of Directors declared a quarterly dividend on the Common Stock of $0.32 per share payable on March 15, 2001, to shareholders of record on March 1, 2001. The quarterly dividend has been $0.32 per share since the dividend paid September 13, 1996. The Board will review its dividend policy periodically, and the declaration of dividends will necessarily depend upon earnings and financial requirements of the Company and other factors within the discretion of its Board of Directors. 21 23 ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR --------------------------------------------------- 2000 1999 1998 1997 1996 ------- ------- ------- ------- ------- Revenues(a) Paper.......................... $ 2,089 $ 1,869 $ 1,707 $ 1,768 $ 1,830 Building Products.............. 828 823 660 662 604 Financial Services............. 1,369 1,116 1,036 923 800 ------- ------- ------- ------- ------- Total revenues......... $ 4,286 $ 3,808 $ 3,403 $ 3,353 $ 3,234 ======= ======= ======= ======= ======= Segment Operating Income Paper.......................... $ 205 $ 103 $ 39 $ (54) $ 120 Building Products.............. 68 174 112 131 102 Financial Services............. 189 138 154 132 63(b) ------- ------- ------- ------- ------- Segment operating income............... $ 462 $ 415 $ 305 $ 209 $ 285 ======= ======= ======= ======= ======= Income from continuing operations..................... $ 195(c) $ 191 $ 88(d) $ 59 $ 155 Discontinued operations.......... -- (92) (21) (8) (22) Cumulative effect of accounting change......................... -- -- (3) -- -- ------- ------- ------- ------- ------- Net income............. $ 195 $ 99 $ 64 $ 51 $ 133 ======= ======= ======= ======= ======= Capital expenditures: Manufacturing.................. $ 223 $ 178 $ 157 $ 213 $ 250 Financial Services............. 34 26 39 18 15 Depreciation and depletion: Manufacturing.................. 198 200 192 187 178 Financial Services............. 18 17 14 13 12 Earnings per share -- continuing operations: Basic.......................... 3.83 3.45 1.60 1.05 2.79 Diluted........................ 3.83 3.43 1.59 1.04 2.79 Earnings per share -- net income(e): Basic.......................... 3.83 1.79 1.16 0.91 2.39 Diluted........................ 3.83 1.78 1.15 0.90 2.39 Dividends per common share....... 1.28 1.28 1.28 1.28 1.24 Weighted average shares outstanding: Basic.......................... 50.9 55.6 55.8 56.0 55.5 Diluted........................ 50.9 55.8 55.9 56.2 55.6 Common shares outstanding at year end............................ 49.2 54.2 55.6 56.3 55.4 At year end Total assets..................... $18,142 $16,186 $15,868 $14,257 $12,858 Long-term debt: Parent company................. 1,381 1,253 1,501 1,356 1,440 Financial Services............. 210 212 210 167 133 Stock issued by subsidiaries..... 306 226 225 150 -- Shareholders' equity............. 1,833 1,927 1,998 2,045 2,015 Ratio of total debt to total capitalization -- parent company........................ 43% 39% 43% 40% 42%
- --------------- (a) Restated to reflect the reclassification of shipping and handling costs from revenues to cost of sales. (b) 1996 includes a one-time assessment of $44 million to recapitalize the Savings Association Insurance Fund. (c) 2000 includes a pre-tax special charge of $15 million. (d) 1998 includes a pre-tax special charge of $47 million. (e) 1998 includes a $.06 per share charge from cumulative effect of accounting change. 1999, 1998, 1997, and 1996 include a loss from discontinued operation of $1.65, $.38, $.14 and $.40 per share, respectively. 22 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. The actual results achieved by Temple-Inland may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include general economic, market, or business conditions; the opportunities (or lack thereof) that may be presented to and pursued by Temple-Inland and its subsidiaries; the availability and price of raw materials used by Temple-Inland and its subsidiaries; competitive actions by other companies; changes in laws or regulations; and other factors, many of which are beyond the control of Temple-Inland and its subsidiaries. SUMMARY Consolidated revenues were $4.3 billion in 2000, $3.8 billion in 1999 and $3.4 billion in 1998. Segment operating income was $462 million in 2000, $415 million in 1999 and $305 million in 1998. Income from continuing operations was $195 million in 2000, $191 million in 1999 and $88 million in 1998. Income from continuing operations per diluted share was $3.83 in 2000, $3.43 in 1999 and $1.59 in 1998. The year 2000 results include a $15 million special charge related to the decision to exit the fiber-cement business. The year 1998 results include a $47 million special charge related to work force reductions and asset impairment. BUSINESS SEGMENTS The Company manages its operations through three business segments: Paper, Building Products and Financial Services. A summary of the results of operations by business segment follows.
FOR THE YEAR ------------------------ 2000 1999 1998 ------ ------ ------ (IN MILLIONS) REVENUES Paper...................................................... $2,089 $1,869 $1,707 Building Products.......................................... 828 823 660 Financial Services......................................... 1,369 1,116 1,036 ------ ------ ------ Total revenues................................... $4,286 $3,808 $3,403 ====== ====== ====== INCOME BEFORE TAXES Paper...................................................... $ 205 $ 103 $ 39 Building Products.......................................... 68 174 112 Financial Services......................................... 189 138 154 ------ ------ ------ Segment operating income................................. 462 415 305 Corporate expense.......................................... (33) (30) (28) Special charge............................................. (15) -- (47) Parent company interest.................................... (104) (95) (78) Other...................................................... 10 16 6 ------ ------ ------ Income from continuing operations before taxes........... 320 306 158 Income taxes............................................... (125) (115) (70) ------ ------ ------ Income from continuing operations........................ $ 195 $ 191 $ 88 ====== ====== ======
Each of these business segments is affected by the factors of supply and demand and changes in domestic and global economic conditions. These conditions include, but are not limited to, changes in interest rates, new housing starts, home repair and remodeling activities, and the strength of the U.S. dollar, some or all of which may have varying degrees of impact on the business segments. 23 25 The Paper Group The Paper Group manufactures containerboard that it converts into a complete line of corrugated packaging and point of purchase displays. The Paper Group operations consist of four linerboard mills, one corrugating medium mill, 41 box plants, eight specialty-converting plants and an interest in a gypsum facing paper joint venture, which for some time also may continue to produce corrugating medium. The Paper Group's facilities are located throughout the United States and in Chile, Mexico and Puerto Rico. The Paper Group's revenues were $2.1 billion in 2000, $1.9 billion in 1999 and $1.7 billion in 1998. Compared with the preceding year, average domestic box prices were up 17 percent in 2000, 3 percent in 1999 and 7 percent in 1998. Domestic box shipments were 2.0 million tons in 2000, 2.1 million tons in 1999 and 2.0 million tons in 1998. The increases in prices in 2000 and 1999 and the decrease in shipments in 2000 were due in part to an upgrading and realignment of the customer base as part of the Paper Group's ongoing revenue enhancement initiatives. A slowing of demand beginning in the second quarter 2000 and continuing throughout the year also contributed to the decrease in box shipments in 2000. Compared with the preceding year, average linerboard prices were up 20 percent in 2000, 6 percent in 1999 and 12 percent in 1998. Compared with the third quarter 2000, fourth quarter 2000 revenues were down slightly with average box prices and linerboard prices about even and box and linerboard shipments down slightly. During the first quarter 2001, this trend of lower box and linerboard shipments continued. This trend, coupled with a decrease in the published price for linerboard during January 2001, may result in downward pressure on box prices. Production, distribution and administrative costs were $1.9 billion in 2000, $1.8 billion in 1999 and $1.7 billion in 1998. Costs for 2000 were up due to higher energy and old corrugated containers (OCC) costs coupled with increased outside purchases of corrugating medium. Energy costs, principally natural gas, began to rise during the second quarter 2000 and continued to rise throughout the year. During 2000, energy costs were up $10 million compared with 1999. OCC accounted for about 41 percent of the Paper Group's fiber requirements in 2000 and 46 percent in 1999 and 1998. OCC costs rose dramatically during the first quarter 2000, but began to decline near the end of the second quarter 2000 and continued to decline throughout the year. OCC costs averaged $107 per ton in 2000, $89 per ton in 1999 and $85 per ton in 1998. OCC costs averaged $139 per ton in second quarter 2000, $91 per ton in third quarter 2000 and $74 per ton in fourth quarter 2000. Year-end OCC prices were $67 per ton in 2000, $99 per ton in 1999 and $85 per ton in 1998. OCC costs remained at these levels early in 2001. However, OCC costs traditionally rise as box demand improves. Outside purchases of corrugating medium increased in 2000 due to the conversion of the Newport, Indiana, joint venture corrugating medium mill. Mill production was 2.3 million tons in 2000, 2.7 million tons in 1999 and 2.5 million tons in 1998. Of the mill production, 20 percent in 2000, 20 percent in 1999 and 13 percent in 1998 was sold in the domestic and export markets. The Paper Group's converting operations used the remainder of the mill production. The decrease in production was due to curtailments throughout the year and the conversion of the Newport, Indiana, corrugating medium mill during the third quarter 2000. Production was curtailed by 315,000 tons in 2000 due to market, maintenance and operational factors. During the fourth quarter 2000, production was curtailed by 135,000 tons including a shut down of the Ontario, California, mill for most of December 2000. The Ontario mill was shut down due to higher energy prices and weaker box demand. The mill resumed production in January 2001. Year-end 2000 inventories were down about 60,000 tons compared with year-end 1999, as the Paper Group continues to improve the balance between its supply and the demand of its customers. Production curtailments were minimal during 1999 and 1998. The Paper Group's joint venture conversion of its Newport, Indiana, mill to enable it to produce lightweight gypsum facing paper was completed during the third quarter 2000 with start-up efforts continuing through fourth quarter 2000. For both start-up and market reasons, the venture did not produce significant 24 26 volumes of gypsum facing paper during fourth quarter 2000. This conversion reduced the Paper Group's annualized productive capacity by 285,000 tons. The mill remains capable of producing corrugating medium, and for a period of twelve months after the conversion of the mill, the Paper Group is obligated to purchase, at market rates, the medium produced by the venture that meets the Paper Group's specifications. During the third and fourth quarters 2000, the Paper Group purchased 72,000 tons of medium from the venture. The Paper Group has undertaken a number of initiatives to enhance return on investment. An important and ongoing initiative is the design and installation of new information systems, portions of which were installed during the fourth quarter 2000. It is anticipated that the remainder will be installed during 2001 and 2002. Other initiatives include the December 1999 sale of the discontinued bleached paperboard operation, which resulted in a $71 million loss; the 1998 closing and dismantling of the Newark, California, mill and the subsequent sale of the land, which resulted in a $13 million gain; and the sale of the Argentine operation and domestic workforce reductions, which resulted in a $37 million special charge in 1998. Operating income was $205 million in 2000, $103 million in 1999 and $39 million, excluding the $37 million special charge, in 1998. The Building Products Group The Building Products Group produces a variety of building products including lumber, plywood, particleboard, fiberboard, medium density fiberboard (MDF) and gypsum wallboard. The Building Products Group operations consist of 19 facilities, including interests in a gypsum joint venture and an MDF joint venture, and two facilities, a particleboard plant and a medium density fiberboard plant, operated under long-term lease agreements that began during December 1999. The Building Products Group operates throughout the United States and in Canada and manages the company's 2.2 million acres of owned and leased forestlands located in Texas, Louisiana, Georgia and Alabama. The Building Products Group's revenues were $828 million in 2000, $823 million in 1999 and $660 million in 1998. Average prices for lumber, plywood, particleboard and gypsum began to decline during the first quarter 2000 and continued to fall throughout the year. Average MDF prices rose slightly during 2000 due to improved product mix. Average prices for all products manufactured by the Building Products Group were higher during 1999 compared with 1998. For the year 2000, shipments of lumber, particleboard and MDF were up compared with 1999 due to a full year's operation of the Diboll sawmill and the Mt. Jewett particleboard and MDF facilities. Other revenues were up in 2000 due to deliveries under the long-term fiber supply agreement entered into in connection with the sale of the bleached paperboard mill in December 1999. Compared with the third quarter 2000, fourth quarter 2000 revenues were down 20 percent with average prices and shipments down for all products. During the first quarter 2001, these trends of lower prices and shipments continued. Production, distribution and administrative costs were $760 million in 2000, $649 million in 1999 and $548 million in 1998. Cost of sales for 2000 were up due to additional manufacturing facilities, higher energy costs, and $13 million of operating losses from the fiber-cement joint venture, which the group exited in the third quarter 2000. Energy costs, principally natural gas, began to rise during the second quarter 2000 and continued to rise throughout the year. During 2000, energy costs were up approximately $7 million compared with 1999. During the third quarter 2000, the Building Products Group completed the assessment of its fiber-cement joint venture and decided to exit this business by assuming control of the joint venture and leasing most of its production assets to a third party. As a result, a $15 million special charge was recognized that included $11 million for assets excluded from the lease agreement that will be disposed of and $4 million for other costs. Following a six-month rental ramp-up period, the lease agreement provides for payments of $3.4 million per year over the balance of the 19 1/2-year lease term. Beginning in the third quarter 2000 and continuing through the balance of the year, production was curtailed in all product lines due to market conditions. For the fourth quarter 2000, production averaged from a low of 54 percent to a high of 76 percent of capacity in the various product lines. In early 2001, further production curtailments were announced including a temporary shut down of the MDF joint venture plant in El Dorado, Arkansas, due to market conditions, higher energy prices and reconstruction of the plant's heat 25 27 energy system. The plant is anticipated to resume production in June 2001 following completion of the reconstruction project. Production levels in 2001 will depend on demand levels for the various products. Production curtailments were minimal during 1999 and 1998. Operating income was $68 million, excluding the $15 million special charge, in 2000, $174 million in 1999 and $112 million, excluding a $10 million special charge for asset impairment, in 1998. The Financial Services Group The Financial Services Group operates a savings bank and engages in mortgage banking, insurance brokerage and real estate activities. The savings bank, Guaranty Bank (Guaranty), conducts business through banking centers in Texas and California. The primary business of Guaranty includes providing deposit products to the general public, investing in single-family adjustable-rate mortgages, lending for the construction of real estate projects and the financing of business operations, and providing a variety of other financial products to consumers and businesses. During 2000, Guaranty acquired American Finance Group, Inc. (AFG), a commercial finance company engaged in leasing and secured financing of a variety of types of equipment. During 1999, Guaranty acquired Hemet Federal Savings and Loan Association (Hemet) and also acquired the assets of Fidelity Funding Inc. (Fidelity), an asset based lending company. Hemet operated 18 branches in the Southern California markets of Riverside County, Palm Springs and northern San Diego County. During February 2001, Guaranty acquired an asset based loan portfolio and two production offices for approximately $300 million in cash. The mortgage banking operation arranges mortgage financing of single-family homes, securitizes the mortgage loans, sells the resulting securities in the secondary market and services mortgage loans for Guaranty and unrelated third parties. The insurance brokerage operation sells a full range of insurance products. The real estate operations include the development of residential subdivisions and multi-family housing and the management and sale of income producing properties. The real estate operations are principally located in Texas, Colorado, Florida, Tennessee and California. The Financial Services Group revenues, consisting of interest and noninterest income, were $1.4 billion in 2000, $1.1 billion in 1999 and $1.0 billion in 1998. Selected financial information for the Financial Services Group follows:
FOR THE YEAR --------------------- 2000 1999 1998 ----- ----- ----- (IN MILLIONS) OPERATING INCOME Net interest income......................................... $ 389 $ 299 $ 244 Provision for loan losses................................... (39) (38) (1) Noninterest income.......................................... 280 280 298 Noninterest expense......................................... (423) (388) (373) Minority interest........................................... (18) (15) (14) ----- ----- ----- Total............................................. $ 189 $ 138 $ 154 ===== ===== ===== BY ACTIVITY Savings Bank................................................ $ 168 $ 109 $ 113 Mortgage Banking............................................ 11 19 22 Real Estate................................................. 3 4 13 Insurance Brokerage......................................... 7 6 6 ----- ----- ----- Total............................................. $ 189 $ 138 $ 154 ===== ===== =====
OPERATIONS Net interest income was $389 million in 2000, $299 million in 1999 and $244 million in 1998. The increases in net interest income in each successive year were primarily the result of growth in average earning 26 28 assets and a change in the mix of earning assets. Average earning assets were $13.5 billion in 2000, compared with $11.9 billion in 1999 and $10.4 billion in 1998. The provision for loan losses was $39 million in 2000, $38 million in 1999 and $1 million in 1998. The increase in the provision in 1999 compared with 1998 was the result of growth, a change in the mix of the loan portfolio and a decline in asset quality related to several mortgage warehouse loans. Noninterest income, which consists primarily of income from real estate and insurance activities, loan related fees and service charges on deposits, was $280 million in 2000, unchanged from 1999, and was $298 million in 1998. The 2000 noninterest income was affected by increases in real estate and insurance activities and the savings bank's focus on fee-based products such as operating leases through the AFG acquisition, alternative investments and cash management services. However, these increases were offset by a decline in noninterest income from mortgage banking activities due to the impact of the higher interest rate environment on mortgage financing and refinancing activities. The decrease in noninterest income in 1999 compared with 1998 was primarily the result of the sale of a large commercial property in 1998. Noninterest expense, which consists primarily of compensation and benefits, occupancy and data processing was $423 million in 2000, $388 million in 1999 and $373 million in 1998. Approximately $25 million of the increase in noninterest expense in 2000 compared with 1999 was the result of the Hemet, Fidelity and AFG acquisitions. After adjusting for the impact of these acquisitions, noninterest expense increased $10 million, or 3 percent, in 2000 compared with 1999. Approximately $9 million of the increase in noninterest expense in 1999 compared with 1998 was the result of the Hemet and Fidelity acquisitions. EARNING ASSETS Interest income from earning assets is the main source of income for the Financial Services Group. Average earning assets totaled $13.5 billion in 2000, $11.9 billion in 1999 and $10.4 billion in 1998. A portion of the increase in average earning assets was the result of the Hemet and Fidelity acquisitions, which occurred in mid-1999. In addition, the AFG acquisition in 2000 increased average earning assets. The remainder of the increases in earning assets was due to internally generated growth, primarily in construction and development loans and in commercial and business loans, resulting in a change in the mix of average loans and improved spreads. Loan demand remained strong throughout 2000. Average loans receivable and mortgage loans held for sale totaled $10.4 billion in 2000, $9.5 billion in 1999 and $7.7 billion in 1998. Average loans receivable and mortgage loans held for sale as a percentage of average earning assets were 77 percent in 2000, compared with 79 percent in 1999 and 74 percent in 1998. During 2000, the Financial Services Group continued to securitize portions of the mortgage loans held in its portfolio, ending the year with $689 million in securitized mortgage loans. Average loans receivable, mortgage loans held for sale and securitized mortgage loans as a percentage of average earning assets were 82 percent in 2000, 85 percent in 1999 and 81 percent in 1998. The Financial Services Group's lending activities are subject to underwriting standards and liquidity considerations. The Financial Services Group continued to increase the size and alter the mix of the loan portfolio through increased construction and development lending, and commercial and business loans and the introduction of new products. These changes to the loan portfolio provide further product and geographic diversification. Specific underwriting criteria for each type of loan are outlined in a credit policy approved by the Board of Directors of Guaranty. In general, commercial loans are evaluated based on cash flow, collateral, market conditions, prevailing economic trends, leverage capacity of the borrower and capital and investment in a particular property, if applicable. Most small business and consumer loans are underwritten using credit-scoring models that consider factors including payment capacity, credit history and collateral. In addition, market conditions and economic trends are considered. The credit policy, including the underwriting criteria for loan categories, is reviewed on a regular basis and adjusted when warranted. 27 29 Average mortgage-backed and other securities totaled $3.0 billion in 2000, $2.3 billion in 1999 and $2.6 billion in 1998. The increase in average mortgage-backed and other securities in 2000 was the result of purchases of $1.0 billion offset by maturities and prepayments. The decrease in average mortgage-backed and other securities in 1999 was primarily the result of maturities and prepayments on mortgage-backed securities. ASSET QUALITY Several key measures are used to evaluate and monitor the asset quality of the Financial Services Group. These measures include the level of loan delinquencies, nonperforming loans, nonperforming assets and net loan charge-offs compared to average loans and are summarized in the following table.
AT YEAR END --------------------------- 2000 1999 1998 ------- ------- ------- (IN MILLIONS) Accruing loans past due 30-89 days..................... $ 170 $ 95 $ 131 Accruing loans past due 90 days or more................ 6 6 9 ------- ------- ------- Accruing loans past due 30 days or more.............. $ 176 $ 101 $ 140 ======= ======= ======= Nonaccrual loans....................................... $ 65 $ 85 $ 48 Restructured loans..................................... -- -- -- ------- ------- ------- Nonperforming loans.................................. 65 85 48 Foreclosed property.................................... 3 8 15 ------- ------- ------- Nonperforming assets................................. $ 68 $ 93 $ 63 ======= ======= ======= Allowance for loan losses.............................. $ 118 $ 113 $ 87 Net charge-offs........................................ $ 36 $ 24 $ 5 Nonperforming loan ratio............................... 0.62% 0.90% 0.58% Nonperforming asset ratio.............................. 0.65% 0.99% 0.77% Allowance for loan losses/total loans.................. 1.12% 1.20% 1.06% Allowance for loan losses/nonperforming loans.......... 179.73% 133.52% 180.79% Net loans charged off/average loans.................... 0.35% 0.26% 0.07%
Accruing delinquent loans past due 30 days or more were 1.67 percent of total loans at year-end 2000, 1.07 percent at year-end 1999 and 1.71 percent at year-end 1998. Accruing delinquent loans past due 90 days or more were 0.06 percent of total loans at year-end 2000, 0.07 percent at year-end 1999 and 0.10 percent at year-end 1998. Nonperforming loans consist of nonaccrual loans (loans on which interest income is not currently recognized) and restructured loans (loans with below market interest rates or other concessions due to deteriorated financial condition of the borrower). Interest payments received on nonperforming loans are applied to reduce principal if there is doubt as to the collectibility of contractually due principal and interest. The level of nonperforming loans declined in both dollars and as a percent of total loans in 2000 compared with 1999, while the allowance for loan losses as a percent of nonperforming loans increased. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is comprised of specific allowances (assessed for loans that have known credit weaknesses), general allowances and an unallocated allowance. Management continuously evaluates the allowance for loan losses to ensure the level is adequate to absorb losses inherent in the loan portfolio. The allowance is increased by charges to income and by the portion of the purchase price related to credit risk on bulk purchases of loans and by acquisitions, and decreased by charge-offs, net of recoveries. Specific allowances are established based on a thorough review of the financial condition of the borrower, general economic conditions affecting the borrower, collateral values and other factors. General allowances are established based on historical loss trends and management's judgment concerning those trends and other relevant factors, including delinquency rates, current economic conditions, loan size, industry competition and 28 30 consolidation, and the effect of government regulation. The unallocated allowance is established for inherent loss exposures that are not yet specifically identified in the loan and lease portfolio. The evaluation of the appropriate level of unallocated allowance considers current risk factors that may not be reflected in historical factors used to determine the specific and general allowances. These factors include inherent delays in obtaining information and the volatility of economic conditions. The allowance for loan losses by loan type and related loan balance follows:
AT YEAR END --------------------------------------------------------------- 2000 1999 1998 ------------------- ------------------- ------------------- ALLOWANCE ALLOWANCE ALLOWANCE LOAN FOR LOAN LOAN FOR LOAN LOAN FOR LOAN BALANCE LOSSES BALANCE LOSSES BALANCE LOSSES ------- --------- ------- --------- ------- --------- (IN MILLIONS) Real estate mortgage................ $ 3,618 $ 26 $3,763 $ 60 $4,105 $36 Construction and development (including residential)........... 4,007 30 3,253 24 2,210 17 Commercial and business............. 1,681 31 1,265 12 1,031 14 Consumer and other.................. 1,215 5 1,121 5 827 3 Premiums, discounts and deferred fees, net......................... 8 -- 7 -- 15 -- Unallocated......................... -- 26 -- 12 -- 17 ------- ---- ------ ---- ------ --- Total............................... $10,529 $118 $9,409 $113 $8,188 $87 ======= ==== ====== ==== ====== ===
The decrease in allowance for loan losses during 2000 was primarily the result of net charge-offs. The increase during 1999 was the result of the change in the mix of the loan portfolio, the Hemet acquisition and a decline in asset quality. The allowance allocated to the real estate mortgage portfolio decreased $34 million in 2000, primarily due to the charge-off of mortgage warehouse loans for which provision had previously been made. The allowance allocated to the commercial and business portfolio increased $19 million in 2000 due to provisions recorded relating to several large syndicated commercial loans. The increase in the unallocated allowance in 2000 is reflective of the slowing economic activity and an increase in the size of the loan portfolio. While the Financial Services Group considers the allowance for loan losses to be adequate based on information currently available, adjustments to the allowance may be necessary due to changes in economic conditions, assumptions as to future delinquencies or loss rates and intent with regard to asset disposition options. In addition, regulatory authorities periodically review the allowance for loan losses as a part of their examination process. Based on their review, the regulatory authorities may require adjustments to the allowance for loan losses based on their judgment about the information available to them at the time of their review. FUNDING SOURCES Deposits are the Financial Services Group's primary funding source. Guaranty offers a variety of deposit products designed to attract and retain customers. Average deposits totaled $9.6 billion in 2000, $8.2 billion in 1999 and $7.3 billion in 1998. Growth in average deposits totaled $1.4 billion or 17 percent in 2000 and $908 million or 12 percent in 1999. A portion of the increase in both 2000 and 1999 was the result of the Hemet acquisition, which occurred in mid-1999. The remainder of the increase was the result of internally generated growth through new products and marketing campaigns. Borrowings are another source of funding. The Financial Services Group's borrowings consist primarily of advances from the Federal Home Loan Bank and securities sold under repurchase agreements. Average borrowings were $3.2 billion in 2000, $3.0 billion in 1999 and $2.4 billion in 1998. The increase in average borrowings in both 2000 and 1999 resulted from funding needs as average earning asset growth outpaced average deposit growth. 29 31 MORTGAGE BANK ACTIVITIES Higher interest rates during 2000 resulted in a significant industry wide reduction in mortgage refinancing activity, contributing to a reduction in both mortgage loan origination volume and prepayments. Mortgage origination volume was $2.1 billion in 2000, $3.7 billion in 1999 and $6.1 billion in 1998. Mortgage servicing portfolio runoff was 13.9 percent in 2000, 21.0 percent in 1999 and 28.9 percent in 1998. The mortgage servicing portfolio was $19.5 billion at year-end 2000 and $22.2 billion at year-end 1999. The decline in mortgage origination volume and servicing has necessitated staff reductions, branch closures and consolidations. The workforce engaged in mortgage bank activities was reduced by about 200 during 2000. Corporate, Interest and Other Parent company interest expense was $104 million in 2000, $95 million in 1999 and $78 million in 1998. Parent company interest expense for 1999 and 1998 was reduced by $28 million each year to reflect an allocation of parent company debt to the bleached paperboard operation, which was sold at year-end 1999. The changes in parent company interest expense were due to fluctuating debt levels and interest rates. Pension Credits Non-cash pension credits were $9 million in 2000, $1 million in 1999 and $9 million in 1998. The increase in 2000 reflects cumulative performance of the pension plan assets in 1999 that resulted in an excess of plan assets over liabilities at year-end 1999. Based upon the actuarial valuation as of year-end 2000, the pension credit for 2001 will approximate $19 million, due mainly to continued better than expected performance of the pension plan assets in 2000. Income Taxes The effective tax rate was 39 percent in 2000, 38 percent in 1999 and 44 percent in 1998. The difference between the effective tax rate and the statutory rate is due to state income taxes, nondeductible goodwill amortization and losses in certain foreign operations for which no financial benefit was recognized. The 1999 effective tax rate reflects a one time, two percent financial benefit realized as the result of the sale of the Argentine operation. The 1998 effective tax rate reflects the effects of lower overall earnings and larger losses in foreign operations for which no financial benefit was recognized. Average Shares Outstanding Average diluted shares outstanding were 50.9 million in 2000, down nine percent due mainly to the effects of share repurchases under the stock repurchase programs authorized during the fourth quarter 1999 and the third quarter 2000. Average diluted shares outstanding were 55.8 million in 1999 and 55.9 million in 1998. CAPITAL RESOURCES AND LIQUIDITY FOR THE YEAR 2000 The consolidated net assets invested in the Financial Services Group are subject, in varying degrees, to regulatory rules and regulations. Accordingly, parent company and the Financial Services Group capital resources and liquidity are discussed separately. Parent Company OPERATING ACTIVITIES Cash from operations was $372 million, up 17 percent. The increase was due to more efficient use of working capital and an increase in the dividends received from the Financial Services Group. Depreciation and amortization was $201 million, about equal to last year. 30 32 INVESTING ACTIVITIES Capital expenditures were $223 million, up 25 percent. About half of this increase was due to a $20 million increase in expenditures for information technology and systems. Capital expenditures are expected to approximate $200 million for 2001. Capital contributions to the Financial Services Group were $10 million. Dividends received from the Financial Services Group were $110 million. FINANCING ACTIVITIES In the fourth quarter 1999, the Board of Directors authorized the repurchase of up to 6.0 million shares of the company's common stock. This repurchase was completed during the third quarter 2000. In August 2000, the Board of Directors authorized the repurchase of an additional 2.5 million shares. During the year, 5.1 million shares were repurchased at a cost of $250 million. At year-end 2000, an aggregate of 6.75 million shares had been repurchased since the inception of these programs at a cost of $350 million. In the third quarter 2000, new bank credit facilities were arranged including a three year revolving credit agreement and a five year term loan. These facilities may be used to refund the $202 million of long-term debt scheduled to mature in 2001 or to fund other needs. Dividends paid were $65 million or $1.28 per share. As required by its joint venture agreement, the company contributed its Newport, Indiana, medium mill and associated debt of $50 million to the venture to maintain its 50 percent ownership interest. In connection with assuming control of the fiber-cement joint venture, the company obtained control over $53 million of assets that were subject to $53 million of debt. A majority of these assets were subsequently leased to a third party. CASH EQUIVALENTS At year-end 1999, $50 million of the proceeds from the sale of the bleached paperboard operation was temporarily invested in cash equivalents. These were used during the year in investing and financing activities. OTHER The parent company has sufficient liquidity and capital resources to meet its anticipated needs. The Financial Services Group The principal sources of cash for the Financial Services Group are operating cash flows, deposits and borrowings. The Financial Services Group uses these funds to invest in earning assets, generally loans and securities. OPERATING ACTIVITIES Cash provided by operations was $217 million, down 43 percent. The decrease in the change in mortgage loans held for sale was partially offset by an increase in earnings and a decrease in the change in cash for mortgage loans serviced for others. INVESTING ACTIVITIES Loans and securities increased $1.8 billion. The increase in loans and securities was primarily attributable to increased construction and development and commercial and business lending activities and purchases of securities. Capital expenditures were $34 million, and cash paid for acquisitions was $20 million. 31 33 FINANCING ACTIVITIES Deposits increased $857 million, and borrowings increased $1.1 billion. Borrowings consist primarily of advances from the Federal Home Loan Bank and securities sold under repurchase agreements and resulted from funding needs as the growth in earning assets outpaced the growth in deposits. A subsidiary of the savings bank that qualifies as a real estate investment trust (REIT) sold $80 million of preferred stock during December 2000 in a private placement. At year-end 2000, an aggregate of $305 million of subsidiary preferred stock was outstanding. Dividends, net of capital contributions, paid to the parent company totaled $100 million. CASH EQUIVALENTS Cash equivalents increased $87 million to $320 million. OTHER The Financial Services Group has sufficient liquidity and capital resources to meet its anticipated needs. At year end, the savings bank exceeded all applicable regulatory capital requirements. The parent company expects to maintain the savings bank's capital at a level that exceeds the minimum required for designation as "well capitalized" under the capital adequacy regulations of the Office of Thrift Supervision. From time to time, the parent company may make capital contributions to the savings bank or receive dividends from the savings bank. During the year, the parent company contributed $10 million to the savings bank and received $110 million in dividends from the savings bank. Selected financial and regulatory capital data for the savings bank follows:
AT YEAR END ------------------- 2000 1999 ------- ------- (IN MILLIONS) Balance sheet data Total assets.............................................. $14,885 $12,892 Total deposits............................................ 10,088 9,329 Shareholder's equity...................................... 931 857
SAVINGS REGULATORY BANK ACTUAL MINIMUM ----------- ---------- Regulatory capital ratios Tangible capital.......................................... 7.8% 2.0% Leverage capital.......................................... 7.8% 4.0% Risk-based capital........................................ 10.3% 8.0%
Of the $305 million in subsidiary preferred stock outstanding at year-end 2000, $288 million qualifies as regulatory capital. The remaining $17 million is available for inclusion in regulatory capital as the savings bank increases its total non-preferred core capital. ENVIRONMENTAL MATTERS The company is committed to protecting the health and welfare of its employees, the public and the environment, and strives to maintain compliance with all state and federal environmental regulations. When constructing new facilities or modernizing existing facilities, the company uses state of the art technology for controlling air and water emissions. These forward-looking programs should minimize the effect that changing regulations have on capital expenditures for environmental compliance. The company has been designated as a potentially responsible party at nine Superfund sites, excluding sites as to which the company's records disclose no involvement or as to which the company's potential 32 34 liability has been finally determined. In addition, other claims and proceedings have been asserted against the company seeking remediation of alleged environmental impairments at four facilities. At year end 2000, the company estimated that the undiscounted total costs it could probably incur for the remediation and toxic tort actions at Superfund sites and other sites to be about $4 million, which has been accrued. The company utilized landfill operations to dispose of non-hazardous waste at three paperboard and two building product mill operations. At year-end 2000, the company estimated that the undiscounted total costs it could probably incur to ensure proper closure of these landfills over the next twenty-five years to be about $15 million, which is being accrued over the estimated lives of the landfills. On April 15, 1998, the U.S. Environmental Protection Agency (EPA) issued the Cluster Rule regulations governing air and water emissions from the pulp and paper industry. The company has spent approximately $11 million toward Cluster Rule compliance through 2000, and will expend an additional $2 million to satisfy requirements relating to the initial compliance deadline of April 15, 2001. Future expenditures for environmental control facilities will depend on additional Maximum Available Control Technology (MACT) II regulations for hazardous air pollutants relating to pulp mill combustion sources and the upcoming plywood and composite wood products MACT proposal, as well as changing laws and regulations and technological advances. Given these uncertainties, the company estimates that capital expenditures for environmental purposes during the period 2001 through 2003 will average approximately $9 million each year. EFFECTS OF INFLATION Inflation has had minimal effects on operating results the last three years, except for the increase in energy costs during 2000. During 2000, energy costs were up approximately $17 million compared with 1999. Energy costs began rising during the second quarter 2000 and have continued to rise throughout the year. In some instances, the company elected to curtail production at certain of its manufacturing facilities rather than pay significantly higher energy prices. The company expects this trend of higher energy costs to continue. The company is exploring alternative arrangements and fuel sources in an effort to contain energy costs. The parent company's fixed assets, including timber and timberlands, are reflected at their historical costs. At current replacement costs, depreciation expense and the cost of timber harvested would be significantly higher than amounts reported. NEW ACCOUNTING PRONOUNCEMENTS AND PROSPECTIVE CHANGES IN ESTIMATES During 2000, the company adopted the consensus of the Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs. This consensus stated that shipping and handling costs could not be offset against related revenues. Shipping and handling costs have been reclassified and are now included as a component of cost of sales instead of as a reduction of revenue. This reclassification had no effect on net income. Beginning January 2001, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement requires that derivative instruments be recognized on the balance sheet at fair value with the changes in their fair value reflected in net income or other comprehensive income, depending upon the classification of the derivative instrument. The company uses derivative instruments to hedge risks, including those associated with changes in product pricing, manufacturing cost and interest rates. The company does not use derivatives for trading purposes. The cumulative effect of adoption will be to reduce first quarter 2001 net income by $2 million. Additionally, as permitted by this Statement, the Financial Services Group changed the designation of its portfolio of held-to- maturity securities, which are carried at unamortized cost, to available-for-sale, which are carried at fair value. As a result, the carrying value of these securities was adjusted to their fair value with a corresponding after tax reduction of $16 million in other comprehensive income, a component of shareholders' equity. Beginning January 2001, the company began computing depreciation of certain production equipment using revised useful lives. These revisions ranged from a reduction of several years to a lengthening of up to 33 35 five years and were based on an assessment performed by the manufacturing groups, which indicated that revisions of the estimated useful lives of certain production equipment were warranted. The maximum estimated useful lives for production equipment is 25 years. As a result of this change in the estimated useful lives, the company expects to reduce its annual depreciation expense between $25 million to $30 million per year beginning in 2001 and continuing for several years thereafter. STATISTICAL AND OTHER DATA(A)
FOR THE YEAR --------------------------- 2000 1999 1998 ------- ------- ------- (IN MILLIONS) REVENUES Paper Group............................................ $ 2,089 $ 1,869 $ 1,707 ------- ------- ------- Building Products Group Pine lumber.......................................... $ 218 $ 239 $ 219 Plywood.............................................. 52 70 63 Particleboard........................................ 230 189 158 Medium density fiberboard............................ 90 66 10 Gypsum wallboard..................................... 98 162 130 Fiberboard........................................... 67 75 69 Other................................................ 73 22 11 ------- ------- ------- Total Building Products...................... $ 828 $ 823 $ 660 ======= ======= ======= Financial Services Group Savings bank......................................... $ 1,121 $ 841 $ 743 Mortgage banking..................................... 92 131 153 Real estate.......................................... 117 111 107 Insurance brokerage.................................. 39 33 33 ------- ------- ------- Total Financial Services..................... $ 1,369 $ 1,116 $ 1,036 ======= ======= ======= UNIT SALES Paper Group Corrugated packaging, thousands of tons(b)........... 2,685 2,802 2,519 Building Products Group Pine lumber, mbf..................................... 666 618 603 Plywood, msf......................................... 258 296 289 Particleboard, msf................................... 676 574 518 Medium density fiberboard, msf....................... 244 187 35 Gypsum wallboard, msf................................ 678 890 858 Fiberboard, msf...................................... 368 439 423 Financial Services Group Assets at year end Savings bank......................................... $14,885 $12,892 $11,947 Mortgage banking..................................... 319 363 442 Real estate.......................................... 321 313 295 Insurance brokerage.................................. 42 33 32 Eliminations......................................... (243) (280) (340) ------- ------- ------- Total Financial Services assets.............. $15,324 $13,321 $12,376 ======= ======= ======= Equity at year end Savings bank......................................... $ 931 $ 857 $ 559 Mortgage banking..................................... 78 90 84 Real estate.......................................... 56 54 48 Insurance brokerage.................................. 28 22 17 ------- ------- ------- Total Financial Services equity.............. $ 1,093 $ 1,023 $ 708 ======= ======= =======
- --------------- (a) Revenues and unit sales do not include joint venture operations. (b) Includes boxes sold and open market sales of linerboard. 34 36 ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK The Company is subject to interest rate risk from the utilization of financial instruments such as adjustable-rate debt and other borrowings, as well as the lending and deposit-gathering activities of the Financial Services Group. The following table illustrates the estimated effect on pre-tax income of immediate, parallel and sustained shifts in interest rates for the subsequent 12-month period at year-end 2000, with comparative information at year-end 1999:
INCREASE/(DECREASE) IN INCOME BEFORE TAXES CHANGE IN ------------------- INTEREST RATES 2000 1999 - -------------- ------ ------ (IN MILLIONS) +2%......................................................... $ (7) $ (1) +1%......................................................... $ (1) $ -- 0.......................................................... $ -- $ -- - -1%......................................................... $ (1) $ (1) - -2%......................................................... $(13) $(16)
The change in exposure to interest rate risk from year-end 1999 is primarily due to increases in the Company's adjustable-rate debt obligations and growth in the Financial Services Group loan and mortgage-backed securities portfolios, funded by short-term borrowings and growth in deposits. The operations of the Financial Services Group's savings bank are subject to interest rate risk to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. Because approximately 89 percent of the savings bank's assets at year-end 2000 have adjustable rates, this risk is significantly mitigated. However, the savings bank is also subject to prepayment risk inherent in a portion of its single-family adjustable-rate mortgage-backed assets. A substantial portion of the savings bank's investment in adjustable-rate mortgage-backed assets have annual and lifetime caps that subject the savings bank to interest rate risk should rates rise above certain levels. From time to time, to optimize net interest income while maintaining acceptable levels of interest rate and liquidity risk, the savings bank may enter into various interest rate contracts to better match assets and liabilities. Additionally, the fair value of the Financial Services Group's mortgage servicing rights (estimated at $305 million at year-end 2000) is also affected by changes in interest rates. The Company estimates that a 1 percent decline in interest rates from current levels would decrease the fair value of the mortgage servicing rights by approximately $48 million. 35 37 FOREIGN CURRENCY RISK The Company's exposure to foreign currency fluctuations on its financial instruments is not material because most of these instruments are denominated in U.S. dollars. COMMODITY PRICE RISK From time to time, the Company uses commodity derivative instruments to mitigate its exposure to changes in product pricing and manufacturing costs. These instruments cover a small portion of the Company's volume and range in duration from three months to three years. Based on the fair value of these instruments at year-end 2000, the potential loss in fair value resulting from a hypothetical 10 percent change in the underlying commodity prices would not be significant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Parent Company (Temple-Inland Inc.) Summarized Statements of Income -- for the years 2000, 37 1999, and 1998......................................... Summarized Balance Sheets at year end 2000 and 1999....... 38 Summarized Statements of Cash Flows -- for the years 2000, 39 1999, and 1998......................................... Notes to the Parent Company (Temple-Inland Inc.) 40 Summarized Financial Statements........................ Financial Services Group Summarized Statements of Income -- for the years 2000, 45 1999, and 1998......................................... Summarized Balance Sheets at year end 2000 and 1999....... 46 Summarized Statements of Cash Flows -- for the years 2000, 47 1999, and 1998......................................... Notes to Financial Services Group Summarized Financial 48 Statements............................................. Temple-Inland Inc. and Subsidiaries Consolidated Statements of Income -- for the years 2000, 59 1999, and 1998......................................... Consolidating Balance Sheets at year end 2000 and 1999.... 60 Consolidated Statements of Cash Flows -- for the years 62 2000, 1999, and 1998................................... Consolidated Statements of Shareholders' Equity -- for the 63 years 2000, 1999, and 1998............................. Notes to Consolidated Financial Statements................ 64 Management's Report on Financial Statements................. 75 Report of Independent Auditors.............................. 76
36 38 PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED STATEMENTS OF INCOME
FOR THE YEAR ------------------------ 2000 1999 1998 ------ ------ ------ (IN MILLIONS) NET REVENUES................................................ $2,917 $2,692 $2,367 COSTS AND EXPENSES Cost of sales............................................. 2,441 2,180 1,982 Selling and administrative................................ 236 265 262 Special charge............................................ 15 -- 47 ------ ------ ------ 2,692 2,445 2,291 ------ ------ ------ 225 247 76 FINANCIAL SERVICES EARNINGS................................. 189 138 154 ------ ------ ------ OPERATING INCOME............................................ 414 385 230 Interest -- net........................................... (104) (95) (78) Other..................................................... 10 16 6 ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE TAXES.............. 320 306 158 Income taxes.............................................. (125) (115) (70) ------ ------ ------ INCOME FROM CONTINUING OPERATIONS........................... 195 191 88 Discontinued operations................................... -- (92) (21) ------ ------ ------ INCOME BEFORE ACCOUNTING CHANGE............................. 195 99 67 Effect of accounting change............................... -- -- (3) ------ ------ ------ NET INCOME.................................................. $ 195 $ 99 $ 64 ====== ====== ======
See the notes to the parent company summarized financial statements. 37 39 PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED BALANCE SHEETS
AT YEAR END ----------------- 2000 1999 ------- ------- (IN MILLIONS) ASSETS Current Assets Cash...................................................... $ 2 $ 51 Receivables, less allowances of $10 in 2000 and $9 in 1999................................................... 320 328 Inventories: Work in process and finished goods..................... 61 71 Raw material........................................... 192 216 ------- ------- 253 287 Prepaid expenses and other................................ 25 16 ------- ------- Total current assets.............................. 600 682 ------- ------- Investment in Temple-Inland Financial Services.............. 1,093 1,023 Property and Equipment Land and buildings........................................ 452 464 Machinery and equipment................................... 2,734 2,743 Construction in progress.................................. 160 102 Less allowances for depreciation.......................... (1,822) (1,759) ------- ------- 1,524 1,550 Timber and timberlands -- less depletion.................. 503 502 ------- ------- Total property and equipment...................... 2,027 2,052 Other Assets................................................ 227 184 ------- ------- Total Assets...................................... $ 3,947 $ 3,941 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable.......................................... $ 112 $ 156 Accrued expenses and other................................ 127 186 Employee compensation and benefits........................ 62 38 Current portion of long-term debt......................... 2 1 ------- ------- Total current liabilities......................... 303 381 Long-Term Debt.............................................. 1,381 1,253 Deferred Income Taxes....................................... 276 226 Postretirement Benefits..................................... 142 143 Other Liabilities........................................... 12 11 Shareholders' Equity........................................ 1,833 1,927 ------- ------- Total Liabilities and Shareholders' Equity........ $ 3,947 $ 3,941 ======= =======
See the notes to the parent company summarized financial statements. 38 40 PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED STATEMENTS OF CASH FLOWS
FOR THE YEAR --------------------- 2000 1999 1998 ----- ----- ----- (IN MILLIONS) CASH PROVIDED BY (USED FOR) OPERATIONS Net income................................................ $ 195 $ 99 $ 64 Adjustments: Loss on disposal of discontinued operation............. -- 77 -- Cumulative effect of accounting change................. -- -- 3 Special charge......................................... 15 -- 47 Depreciation and depletion............................. 198 200 192 Deferred taxes......................................... 52 10 17 Unremitted earnings from financial services............ (147) (121) (127) Dividends from financial services...................... 110 70 44 Receivables............................................ 9 (74) (11) Inventories............................................ 16 (4) 2 Accounts payable and accrued expenses.................. (84) 42 (16) Change in net assets of discontinued operation......... -- 23 63 Other.................................................. 8 (4) 14 ----- ----- ----- 372 318 292 ----- ----- ----- CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures...................................... (223) (178) (157) Proceeds from sale of discontinued operations............. -- 576 -- Proceeds from sale of property and equipment.............. 17 55 6 Acquisitions, net of cash acquired, and joint ventures.... (18) (49) (123) Capital contributions to financial services............... (10) (279) (44) ----- ----- ----- (234) 125 (318) ----- ----- ----- CASH PROVIDED BY (USED FOR) FINANCING Additions to debt......................................... 260 312 319 Payments of debt.......................................... (134) (560) (175) Purchase of stock for treasury............................ (250) (100) (48) Cash dividends paid to shareholders....................... (65) (71) (71) Other..................................................... 2 12 3 ----- ----- ----- (187) (407) 28 ----- ----- ----- Net increase (decrease) in cash and cash equivalents........ (49) 36 2 Cash and cash equivalents at beginning of year.............. 51 15 13 ----- ----- ----- Cash and cash equivalents at end of year.................... $ 2 $ 51 $ 15 ===== ===== =====
See the notes to the parent company summarized financial statements. 39 41 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The summarized financial statements include the accounts of Temple-Inland Inc. and its manufacturing subsidiaries (the parent company). The net assets invested in Temple-Inland Financial Services are subject, in varying degrees, to regulatory rules and restrictions. Accordingly, the investment in Temple-Inland Financial Services is reflected in the summarized financial statements on the equity basis. Related earnings, however, are presented before tax to be consistent with the consolidated financial statements. All material intercompany amounts and transactions have been eliminated. These financial statements should be read in conjunction with the Temple-Inland Inc. consolidated financial statements and the Temple-Inland Financial Services summarized financial statements. Certain amounts have been reclassified to conform to the current year's classifications. Inventories Inventories are stated at the lower of cost or market. The cost of inventories amounting to $93 million at year-end 2000 and $85 million at year-end 1999 was determined by the last-in, first-out method (LIFO). The cost of the remaining inventories was determined principally by the average cost method, which approximates the first-in, first-out method (FIFO). If the FIFO method of accounting had been applied to those inventories that were determined by the LIFO method, inventories would have been $28 million and $21 million more than reported at year-end 2000 and 1999, respectively. Property and Equipment Property and equipment are stated at cost minus allowances for depreciation and depletion. Depreciation is generally provided on the straight-line method based on estimated useful lives as follows:
ESTIMATED USEFUL CLASSIFICATION LIVES - -------------- --------- Buildings............................................ 15 to 40 years Machinery and equipment: Manufacturing and production equipment............. 3 to 25 years Transportation equipment........................... 3 to 10 years Office and other equipment......................... 2 to 10 years
Certain machinery and production equipment is depreciated based on operating hours or units of production because depreciation occurs primarily through use rather than through elapsed time. The parent company has completed an assessment of the estimated useful lives of certain production equipment and believes that a revision of these estimated useful lives is warranted. Accordingly, beginning January 2001, the parent company will begin computing depreciation of certain production equipment using revised estimated useful lives. These revisions ranged from a reduction of several years to a lengthening of up to five years. As a result of this change in estimated useful lives, the parent company expects to reduce its annual depreciation expense between $25 million to $30 million per year for the next several years. Timber and timberlands are stated at cost, minus accumulated cost of timber harvested. Cost attributed to standing timber is charged against income as timber is harvested at rates determined annually, based on the relationship of unamortized timber costs to the estimated volume of recoverable timber. The costs of seedlings and reforestation of timberlands are capitalized. 40 42 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) The cost of additions and betterments is capitalized, and the cost of maintenance and repairs is expensed. Start-Up Costs and Cumulative Effect of Accounting Change Effective with the beginning of the year 1998, start-up costs are expensed as incurred, instead of being deferred and amortized over a five-year period. The cumulative effect of applying this change was a charge of $3 million, net of tax benefit of $2 million, and was recognized as of the beginning of the year 1998. Environmental Liabilities When environmental assessments or cleanups are probable and the costs can be reasonably estimated, remediation liabilities are recorded on an undiscounted basis and are adjusted as further information develops or circumstances change. The estimated undiscounted cost to close and remediate company-operated landfills are accrued over the estimated useful life of the landfill. Revenue Recognition Revenue is recognized upon passage of title to the customer. New Accounting Pronouncements During the fourth quarter 2000, the parent company adopted the consensus of the Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs, that shipping and handling costs cannot be netted against revenues. Accordingly, for all periods presented, shipping and handling costs have been reclassified and are now included as a component of costs of sales instead of as a reduction of revenues. This reclassification had no effect on net income. 41 43 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) NOTE B -- LONG-TERM DEBT Long-term debt consists of the following:
AT YEAR END --------------- 2000 1999 ------ ------ (IN MILLIONS) Commercial paper, other short-term borrowings, and borrowing under bank credit agreements -- average interest rate was 6.55% in 2000 and 5.71% in 1999........................... $ 90 $ -- 9.0% Notes payable due 2001................................. 200 200 8.125% to 8.38% Notes payable due 2006...................... 100 100 7.25% Notes payable due 2004................................ 100 100 8.25% Debentures due 2022................................... 150 150 6.75% Notes payable due 2009................................ 300 300 Private placement debt -- 6.59% to 7.02% notes due 2000 through 2007.............................................. 118 188 Revenue bonds due 2007 through 2028 -- average interest rate was 4.77% in 2000 and 4.58% in 1999....................... 114 119 Term note due 2005 -- average interest rate was 7.89% in 2000...................................................... 100 -- Other indebtedness due through 2006 -- average interest rate was 7.11% in 2000 and 5.96% in 1999....................... 111 97 ------ ------ 1,383 1,254 Less: Current portion of long-term debt......................... (2) (1) ------ ------ $1,381 $1,253 ====== ======
At year-end 2000, the parent company had credit agreements with banks totaling $738 million with final maturities at various dates in 2002 and 2003 that support commercial paper and other short-term borrowings. Commercial paper and other short-term borrowings totaling $90 million and current maturities of medium-term notes totaling $200 million are classified as long-term debt in accordance with the parent company's intent and ability to refinance such obligations on a long-term basis. Stated maturities of the parent company's long-term debt during the next five years are as follows (in millions): 2001 -- $202; 2002 -- $68; 2003 -- $159; 2004 -- $101; 2005 -- $139; 2006 and thereafter -- $714. Capitalized construction period interest in 2000, 1999 and 1998 was $4 million, $2 million and $1 million, respectively, and is deducted from interest expense. Parent company interest paid during 2000, 1999 and 1998 was $108 million, $117 million and $101 million, respectively. NOTE C -- JOINT VENTURES The parent company's significant joint venture investments at year-end 2000 are: Del-Tin Fiber LLC -- a 50 percent owned venture that produces medium density fiberboard in El Dorado, Arkansas. Standard Gypsum LP -- a 50 percent owned venture that produces gypsum wallboard at facilities in McQueeney, Texas, and Cumberland City, Tennessee. Premier Boxboard Ltd. -- a 50 percent owned venture that produces corrugating medium and gypsum facing paper in Newport, Indiana. 42 44 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) Combined summarized financial information for these joint ventures follows:
AT YEAR END ------------- 2000 1999 ----- ----- (IN MILLIONS) Current assets.............................................. $ 35 $ 33 Total assets................................................ 379 213 Current liabilities......................................... 16 20 Long-term debt.............................................. 225 145 Equity...................................................... 138 48
FOR THE YEAR ------------------ 2000 1999 1998 ---- ---- ---- (IN MILLIONS) Net revenues................................................ $152 $86 $46 Operating income............................................ 4 9 1 Net income (loss)........................................... (9) 1 (2) Parent company's equity in net income (loss)................ (2) (1) 1
The parent company provides marketing and management services to these ventures. Fees for such services aggregated $5 million, $3 million, and $2 million during 2000, 1999 and 1998, respectively, and are reported as a reduction of cost of sales and selling expense. The parent company purchases, at market rates, finished products from these joint ventures. These purchases aggregated $29 million during 2000. In connection with the operations of these joint ventures, the parent company has guaranteed certain obligations and letters of credit aggregating $94 million at year-end 2000. Near the end of second quarter 2000, the parent company transferred ownership of its corrugating medium mill in Newport, Indiana, and associated debt of $50 million to Premier Boxboard Ltd. This was done as part of its agreement to maintain a 50 percent interest in the venture. The fair value of the assets contributed exceeded their carrying value. This difference will be recognized in earnings over the life of the venture. In the third quarter 2000, the venture completed its conversion of the mill so that it could produce lightweight gypsum facing paper as well as corrugating medium. For a period of twelve months after the transfer, the parent company is obligated to purchase, at market rates, all of the corrugating medium produced by the venture that meets the parent company's specifications. During the third quarter 2000, the Parent Company decided to exit its fiber-cement joint venture. See Note D for information about this transaction and a related special charge. Operating losses of this venture were $13 million for the nine months ended September 2000 and $14 million for the year 1999. NOTE D -- SPECIAL CHARGES AND DISCONTINUED OPERATIONS During the third quarter 2000, the parent company decided to exit its fiber-cement joint venture by assuming control and leasing most of the venture's assets to a third party. As a result, the parent company obtained control over $53 million of assets, which were subject to $53 million of liabilities, and recorded a $15 million special charge that includes $11 million for assets excluded from the lease agreement that will be disposed of and $4 million of other costs. Following a six-month ramp-up period, the lease agreement provides for payments of $3.4 million per year over the balance of the 19 1/2 year lease term. During the third quarter of 1999, the parent company decided to discontinue its bleached paperboard operation. Accordingly, the results of the bleached paperboard operation have been classified as discontinued operations, and prior periods have been restated. The bleached paperboard mill was sold in December 1999 for approximately $576 million in cash and the assumption of $82 million of debt. The eucalyptus fiber project in 43 45 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) Mexico, which was to be a source of hardwood fiber for the bleached paperboard mill, is expected to be sold during 2001 at a price that approximates its carrying value. Information related to the discontinued operations follows:
FOR THE YEAR ------------- 1999 1998 ----- ----- (IN MILLIONS) Revenues.................................................... $381 $376 Loss from operations........................................ (21) (21) Loss on disposal............................................ (71) --
Interest expense of $28 million per year was allocated to the discontinued operations, based on debt allocated to the operations. The loss from operations is net of income tax benefits of $13 million in both 1999 and 1998. The loss on disposal is net of income tax benefits of $44 million. Included in the loss on disposal are estimated operating losses of the eucalyptus fiber project through the anticipated date of disposal of $2 million. In connection with the sale of the bleached paperboard mill, the parent company has agreed, subject to certain limitations, to indemnify the purchaser from certain liabilities and contingencies associated with the company's operation and ownership of the mill. The parent company does not believe that the resolution of these matters will have a material adverse effect on its operations or financial position. During the fourth quarter of 1998, the parent company recorded a special charge of $47 million. The charge included $13 million related to work force reductions in the Paper Group, $24 million related to asset impairments principally related to the Paper Group's Argentine operation, and $10 million of asset impairments related to the Building Products Group. Substantially all of the charge for work force reductions was utilized or paid in 1999. The Argentine operation was sold during the second quarter of 1999, for its carrying value. The sale proceeds included $1 million in cash and $11 million in promissory notes. The promissory notes were subsequently sold with recourse. Of the remaining $14 million in asset impairments, $8 million was for manufacturing assets abandoned in 1998, and $6 million was for property and equipment still in use. NOTE E -- COMMITMENTS The parent company leases timberlands, equipment and facilities under operating lease agreements. Future minimum rental commitments under non-cancelable operating leases having a remaining term in excess of one year, exclusive of related expenses are as follows (in millions): 2001 -- $29; 2002 -- $24; 2003 -- $21; 2004 -- $19; 2005 -- $17; 2006 and thereafter -- $272. Total rent expense was $46 million, $34 million and $30 million during 2000, 1999 and 1998, respectively. In connection with its joint venture operations, the parent company has guaranteed certain obligations and letters of credit aggregating $94 million at year-end 2000. The parent company has unconditional purchase obligations, principally for gypsum and timber, aggregating $36 million at year-end 2000. 44 46 FINANCIAL SERVICES GROUP SUMMARIZED STATEMENTS OF INCOME
FOR THE YEAR -------------------- 2000 1999 1998 ------ ---- ---- (IN MILLIONS) Interest Income Loans receivable and mortgage loans held for sale......... $ 884 $705 $583 Mortgage-backed and other securities available-for-sale... 143 64 62 Mortgage-backed and other securities held-to-maturity..... 54 62 88 Other earning assets...................................... 8 5 5 ------ ---- ---- Total interest income............................. 1,089 836 738 ------ ---- ---- Interest Expense Deposits.................................................. 493 379 357 Borrowed funds............................................ 207 158 137 ------ ---- ---- Total interest expense............................ 700 537 494 ------ ---- ---- Net Interest Income......................................... 389 299 244 Provision for loan losses................................. (39) (38) (1) ------ ---- ---- Net Interest Income After Provision For Loan Losses......... 350 261 243 ------ ---- ---- Noninterest Income Loan origination, marketing and servicing fees, net....... 84 115 135 Other..................................................... 196 165 163 ------ ---- ---- Total noninterest income.......................... 280 280 298 ------ ---- ---- Noninterest Expense Compensation and benefits................................. 177 166 174 Other..................................................... 246 222 199 ------ ---- ---- Total noninterest expense......................... 423 388 373 ------ ---- ---- Income Before Taxes And Minority Interest................... 207 153 168 Minority interest in income of consolidated subsidiaries.... (18) (15) (14) ------ ---- ---- Income Before Taxes......................................... 189 138 154 Income Taxes................................................ (42) (17) (27) ------ ---- ---- Net Income.................................................. $ 147 $121 $127 ====== ==== ====
See the notes to Financial Services Group summarized financial statements. 45 47 FINANCIAL SERVICES GROUP SUMMARIZED BALANCE SHEETS
AT YEAR END ----------------- 2000 1999 ------- ------- (IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 320 $ 233 Mortgage loans held for sale................................ 232 252 Loans receivable, net of allowance for loan losses of $118 in 2000 and $113 in 1999.................................. 10,411 9,296 Mortgage-backed and other securities available-for-sale..... 2,415 1,431 Mortgage-backed and other securities held-to-maturity....... 864 1,061 Other assets................................................ 1,082 1,048 ------- ------- Total Assets...................................... $15,324 $13,321 ======= ======= LIABILITIES Deposits.................................................... $ 9,828 $ 9,027 Federal Home Loan Bank advances............................. 2,869 2,403 Securities sold under repurchase agreements................. 595 -- Other borrowings............................................ 210 212 Other liabilities........................................... 423 430 Stock issued by subsidiaries................................ 306 226 ------- ------- Total Liabilities................................. 14,231 12,298 ------- ------- Shareholder's Equity........................................ 1,093 1,023 ------- ------- Total Liabilities and Shareholder's Equity........ $15,324 $13,321 ======= =======
See the notes to the Financial Services Group summarized financial statements. 46 48 FINANCIAL SERVICES GROUP SUMMARIZED STATEMENTS OF CASH FLOWS
FOR THE YEAR --------------------------- 2000 1999 1998 ------- ------- ------- (IN MILLIONS) CASH PROVIDED BY (USED FOR) OPERATIONS Net income................................................ $ 147 $ 121 $ 127 Adjustments: Amortization, depreciation and accretion............... 52 62 108 Mortgage loans held for sale........................... 20 369 (183) Collections and remittances on loans serviced for others, net.......................................... (32) (251) 129 Other.................................................. 30 82 (86) ------- ------- ------- 217 383 95 ------- ------- ------- CASH PROVIDED BY (USED FOR) INVESTMENTS Purchases of securities available-for-sale................ (1,036) (294) (208) Maturities of securities available-for-sale............... 338 279 300 Sales of securities available-for-sale.................... -- 145 53 Maturities and redemptions of securities held-to-maturity....................................... 192 351 349 Loans originated or acquired, net of principal collected.............................................. (1,506) (1,163) (1,852) Sales of loans............................................ 253 299 16 Acquisitions, net of cash acquired of $10 in 2000 and $29 in 1999................................................ (20) (108) -- Capital expenditures...................................... (34) (26) (39) Other..................................................... (59) (17) 12 ------- ------- ------- (1,872) (534) (1,369) ------- ------- ------- CASH PROVIDED BY (USED FOR) FINANCING Net increase (decrease) in deposits....................... 857 808 (36) Securities sold under repurchase agreements and short-term borrowings, net........................................ 1,071 (121) 788 Additions to debt......................................... 37 35 770 Payments of debt.......................................... (178) (775) (251) Sale of stock by subsidiaries............................. 80 1 75 Capital contributions from parent company................. 10 279 44 Dividends paid to parent company.......................... (110) (70) (44) Other..................................................... (25) (2) (18) ------- ------- ------- 1,742 155 1,328 ------- ------- ------- Net increase in cash and cash equivalents................... 87 4 54 Cash and cash equivalents at beginning of year.............. 233 229 175 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 320 $ 233 $ 229 ======= ======= =======
See the notes to the Financial Services Group summarized financial statements. 47 49 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Temple-Inland Financial Services Group (group) summarized financial statements include savings bank, mortgage banking, real estate and insurance brokerage operations. All material intercompany amounts and transactions have been eliminated. Certain amounts have been reclassified to conform to the current year's classification. These financial statements should be read in conjunction with the Temple-Inland Inc. (the company) consolidated financial statements. Mortgage Loans Held for Sale Mortgage loans originated and held for sale are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. Loans Receivable and Allowance for Loan Losses Loans receivable are stated at unpaid net principal balances minus any allowance for loan losses. Interest on loans receivable is credited to income as earned. The accrual of interest ceases when collection of principal or interest becomes doubtful. When interest accrual ceases, uncollected interest previously credited to income is reversed. Certain loan fees and direct loan origination costs are deferred. These net fees or costs, as well as premiums and discounts on loans, are amortized to income using the interest method over the remaining period to contractual maturity and adjusted for anticipated prepayments. Any unamortized loan fees or costs, premiums, or discounts are taken to income in the event a loan is sold or repaid. The allowance for loan losses is increased by charges to income and by the portion of the purchase price related to credit risk on bulk purchases of loans and on acquisitions. The allowance is decreased by charge-offs, net of recoveries. Management's periodic evaluation of the adequacy of the allowance is based on the group's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers' ability to repay, estimated value of any underlying collateral, and current economic conditions. Loans receivable are assigned a rating to distinguish levels of credit risk and loan quality. These risk ratings are categorized as pass or criticized grade with the resultant allowance for loan losses based on this distinction. Certain loan portfolios are considered to be performance based and are graded by analyzing performance through assessment of delinquency status. The allowance for loan losses is comprised of specific allowances for criticized graded loans, general allowances for pass graded loans and an unallocated allowance based on analysis of other economic factors. Specific allowances established on the outstanding principal balance of criticized graded loans range from 5 percent to 40 percent on Substandard classified loans, 35 percent to 70 percent on Doubtful classified loans and 100 percent on Loss classified loans. These allowance percentages are based in part on estimated cash flows to be received on the loans or estimated market values of the underlying collateral. The group uses general allowances for pools of loans with relatively similar risks based on management's assessment of homogenous attributes, such as product types, markets, aging and collateral. The group uses information on historic trends in delinquencies, charge-offs and recoveries to identify unfavorable trends. The analysis considers adverse trends in the migration of classifications to be an early warning of potential problems that would indicate a need to increase loss allowances over historic levels. The unallocated allowance for loan losses is determined based on management's assessment of general economic conditions as well as specific economic factors in individual markets. The evaluation of the appropriate level of unallocated allowance considers current risk factors that may not be reflected in the historical trends used to determine the allowance on criticized and pass graded loans. These factors may include inherent delays in obtaining information regarding a borrower's financial condition or changes in their 48 50 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) unique business conditions; the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends; volatility of economic conditions affecting the identification and estimation of losses for larger non-homogeneous loans; and the sensitivity of assumptions used to establish general allowances for homogenous groups of loans. In addition, the unallocated allowance recognizes that ultimate knowledge of the loan portfolios may be incomplete. Mortgage-Backed and Other Securities The group determines the appropriate classification of mortgage-backed and other securities at the time of purchase and confirms the designation of these debt securities as of each balance sheet date. Debt securities are classified as held-to-maturity and stated at amortized cost when the group has both the intent and ability to hold the securities to maturity. Otherwise, debt securities and marketable equity securities are classified as available-for-sale and are stated at fair value with any unrealized gains and losses, net of tax, reported as a component of shareholder's equity. The cost of securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts by a method that approximates the interest method over the estimated lives of the securities. Should any such assets be sold, gains and losses are recognized based on the specific-identification method. Derivative Financial Instruments The operations of Guaranty Bank (Guaranty) are subject to the risk of interest rate fluctuations to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. To maintain acceptable levels of interest rate and liquidity risk, Guaranty from time to time enters into various types of interest rate contracts for purposes other than trading. The net amount payable or receivable on interest rate contracts is recorded as an adjustment to interest income or expense. Premiums paid for interest rate contracts, net of premiums received for those sold, are included in the carrying value of the related interest-earning assets or interest-bearing liabilities, and amortized as an adjustment to the yield of the designated assets or liabilities over the contract periods. Real Estate Real estate consists primarily of land and commercial properties held for development and sale, although certain properties are held for the production of income. Interest on indebtedness and property taxes during the development period, as well as improvements and other development costs, are generally capitalized. The cost of land sales is determined using the relative sales value method. Real estate also includes properties acquired through loan foreclosure. Real estate held for future development and real estate projects being developed are evaluated for impairment in accordance with the recognition and measurement provisions governing long-lived assets to be held and used in operations. Real estate projects that are substantially completed and ready for their intended use are measured at the lower of carrying amount or estimated fair value minus the cost to sell in accordance with the provisions governing long-lived assets that are to be disposed of. Mortgage Loan Servicing Rights The group allocates a portion of the cost of originating a mortgage loan to the mortgage servicing right based on its fair value relative to the loan as a whole. Capitalized mortgage loan servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. The fair market value of originated mortgage servicing rights is estimated using buyers' quoted prices for servicing rights with similar attributes, 49 51 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) such as loan type, size, escrow and geographic location. Purchased mortgage servicing rights are recorded at cost. To evaluate possible impairment of mortgage servicing rights, the portfolio is periodically stratified based on the predominant risk characteristics and the capitalized basis of each stratum is compared to fair value. Predominant risk characteristics considered include loan type and interest rate. Should the net capitalized mortgage servicing rights exceed fair value, impairment is recognized through a valuation allowance. Amortization expense and changes to the valuation allowance are included in loan origination, marketing and servicing fees, net, in the summarized statements of income. Income Taxes The group is included in the consolidated income tax return filed by the parent company. Under an agreement with the parent company, the group provides a current income tax provision that takes into account the separate taxable income of the group. Deferred income taxes are recorded by the group. NOTE B -- ACQUISITIONS On March 1, 2000, the group acquired all of the outstanding stock of American Finance Group, Inc. (AFG) for $32 million cash. AFG, an industrial and commercial equipment leasing and financing operation, had total assets (primarily financing leases, loans, and equipment under operating leases) of $161 million and total liabilities (primarily debt) of $132 million, of which $128 million was repaid after acquisition. The excess of the purchase price over the fair value of the identifiable net assets acquired of $1 million is being amortized on the straight-line method over 10 years. On June 29, 1999, the group acquired all of the outstanding stock of HF Bancorp, Inc., the parent company of Hemet Federal Savings & Loan Association (Hemet) for $119 million cash. Hemet had total assets of $1.2 billion (primarily loans and securities) and total liabilities of $1.1 billion (primarily deposits). The excess of the purchase price over the fair value of the identifiable net assets acquired of $40 million is being amortized on the straight-line method over 25 years. On June 11, 1999, the group acquired the assets of Fidelity Funding, Inc. (Fidelity) for $18 million in cash. Fidelity, an asset based lending operation, had assets (primarily loans) of $111 million. The excess of the purchase price over the fair value of the identifiable net assets acquired of $18 million is being amortized on the straight-line method over 10 years. The acquisitions were accounted for under the purchase method of accounting and, accordingly, the acquired assets and liabilities were adjusted to their estimated fair values at the date of the acquisitions. The operating results of the acquisitions are included in the accompanying summarized financial statements from the acquisition dates. The unaudited pro forma results of operations, assuming the acquisitions had been effected as of the beginning of the applicable fiscal year, would not have been materially different from those reported. 50 52 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) NOTE C -- LOANS RECEIVABLE The outstanding principal balances of loans receivable consists of the following:
AT YEAR END ---------------- 2000 1999 ------- ------ (IN MILLIONS) Real estate mortgage........................................ $ 3,618 $3,763 Construction and development................................ 4,007 3,253 Commercial and business..................................... 1,681 1,265 Consumer and other.......................................... 1,215 1,121 Premiums, discounts and deferred fees, net.................. 8 7 ------- ------ 10,529 9,409 Less: Allowance for loan losses........................... (118) (113) ------- ------ $10,411 $9,296 ======= ======
Real estate mortgages are primarily single-family adjustable-rate loans secured by properties located throughout the United States, primarily in California and Texas. Construction and development loans consist primarily of office, multi-family, retail, industrial and assisted living properties and are predominantly located in Texas, California, Florida, Georgia, Colorado, Illinois and Arizona. Commercial and business loans include working capital, equipment financing and other business loans primarily in Texas. Consumer and other loans include a variety of products and are primarily secured by real estate and automobiles. At year-end 2000, the group had unfunded commitments on outstanding loans totaling approximately $4.7 billion. In addition, at year-end 2000, the group had issued letters of credit totaling approximately $148 million. The portion of these amounts to be ultimately funded is uncertain. Activity in the allowance for loan losses was as follows:
FOR THE YEAR ------------------ 2000 1999 1998 ---- ---- ---- (IN MILLIONS) Balance, beginning of year.................................. $113 $ 87 $91 Provision for loan losses................................. 39 38 1 Additions related to acquisitions and bulk purchases of loans............................ 2 12 -- Charge-offs, net of recoveries............................ (36) (24) (5) ---- ---- --- Balance, end of year........................................ $118 $113 $87 ==== ==== ===
51 53 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) NOTE D -- MORTGAGE-BACKED AND OTHER SECURITIES The amortized cost and fair values of mortgage-backed and other securities consists of the following:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ---------- (IN MILLIONS) AT YEAR-END 2000 Available-for-sale Mortgage-backed securities: FNMA certificates........................ $1,876 $19 $ (2) $1,893 FHLMC certificates....................... 89 2 -- 91 GNMA certificates........................ 133 -- -- 133 Collateralized mortgage obligations...... 112 -- (2) 110 Private issuer pass-through securities... 10 -- -- 10 ------ --- ---- ------ 2,220 21 (4) 2,237 Debt securities: Corporate securities..................... 3 -- -- 3 Equity securities, primarily Federal Home Loan Bank stock.......................... 175 -- -- 175 ------ --- ---- ------ $2,398 $21 $ (4) $2,415 ====== === ==== ====== Held-to-maturity Mortgage-backed securities: FNMA certificates........................ $ 555 $-- $(17) $ 538 FHLMC certificates....................... 105 -- (3) 102 Collateralized mortgage obligations...... 104 -- (3) 101 Private issuer pass-through securities... 100 -- (3) 97 ------ --- ---- ------ $ 864 $-- $(26) $ 838 ====== === ==== ====== AT YEAR-END 1999 Available-for-sale Mortgage-backed securities: FNMA certificates........................ $ 963 $ 2 $(15) $ 950 FHLMC certificates....................... 84 -- (1) 83 GNMA certificates........................ 96 -- -- 96 Collateralized mortgage obligations...... 120 -- (3) 117 Private issuer pass-through securities... 12 -- (2) 10 ------ --- ---- ------ 1,275 2 (21) 1,256 Debt securities: US Government............................ 7 -- -- 7 Corporate securities..................... 2 -- -- 2 Equity securities, primarily Federal Home Loan Bank Stock.......................... 166 -- -- 166 ------ --- ---- ------ $1,450 $ 2 $(21) $1,431 ====== === ==== ====== Held-to-maturity Mortgage-backed securities: FNMA certificates........................ $ 647 $-- $(31) $ 616 FHLMC certificates....................... 125 -- (6) 119 Collateralized mortgage obligations...... 131 -- (6) 125 Private issuer pass-through securities... 158 -- (9) 149 ------ --- ---- ------ $1,061 $-- $(52) $1,009 ====== === ==== ======
52 54 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) The amortized cost and estimated fair value by maturity of mortgage-backed and other securities are shown in the following table. Securities are classified according to their contractual maturities without consideration of principal amortization, potential prepayments or call options. Accordingly, actual maturities may differ from contractual maturities.
AT YEAR END 2000 ------------------ AMORTIZED FAIR COST VALUE --------- ------ (IN MILLIONS) Due in 1 year or less....................................... $ -- $ -- Due after 1 year through 5 years............................ 3 1 Due after 5 years through 10 years.......................... 118 116 Due after 10 years.......................................... 3,141 3,136 ------ ------ Total mortgage-backed and other securities........ $3,262 $3,253 ====== ======
The mortgage loans underlying mortgage-backed securities have adjustable interest rates and generally have contractual maturities ranging from 15 to 40 years with principal and interest installments due monthly. The actual maturities of mortgage-backed securities may differ from the contractual maturities of the underlying loans because issuers or mortgagors may have the right to call or prepay their securities or loans. Certain mortgage-backed and other securities are guaranteed directly or indirectly by the U.S. government or its agencies. Other mortgage-backed securities not guaranteed by the U.S. government or its agencies are senior subordinated securities considered investment grade quality by third-party rating agencies. The collateral underlying these securities is primarily residential properties located in California. The group securitized and continued to hold $297 million and $217 million of mortgage loans previously held in the loan portfolio during 2000 and 1999, respectively. The transfer to mortgage-backed securities was recorded at the carrying value of the mortgage loans at the time of securitization. The market value of the securities generated through these securitization activities are obtained through active market quotes. The group held $689 million and $601 million in such securities at year-end 2000 and 1999, respectively. NOTE E -- DEPOSITS Deposits consists of the following:
2000 1999 -------------------- -------------------- AVERAGE AVERAGE STATED RATE AMOUNT STATED RATE AMOUNT ----------- ------ ----------- ------ (IN MILLIONS) Noninterest bearing demand................... -- $ 302 -- $ 329 Interest bearing demand...................... 4.36% 2,504 3.46% 2,035 Savings deposits............................. 1.83% 167 1.96% 214 Time deposits................................ 6.13% 6,855 5.36% 6,449 ------ ------ $9,828 $9,027 ====== ======
53 55 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) Scheduled maturities of time deposits at year-end 2000 are as follows:
$100,000 OR LESS THAN MORE $100,000 TOTAL ----------- --------- ------ (IN MILLIONS) 3 months or less....................................... $ 547 $1,651 $2,198 Over 3 through 6 months................................ 307 1,485 1,792 Over 6 through 12 months............................... 344 1,549 1,893 Over 12 months......................................... 175 797 972 ------ ------ ------ $1,373 $5,482 $6,855 ====== ====== ======
At year-end 2000, time deposits maturity dates were as follows (in millions): 2001 -- $5,883; 2002 -- $619; 2003 -- $182; 2004 -- $83; 2005 -- $86; 2006 and thereafter -- $2. NOTE F -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements were delivered to brokers/dealers who retained such securities as collateral for the borrowings and have agreed to resell the same securities back to Guaranty at the maturities of the agreements. The agreements generally mature within 30 days. Information concerning borrowings under repurchase agreements is summarized as follows:
FOR THE YEAR -------------- 2000 1999 ----- ----- (IN MILLIONS) Average daily balance....................................... $484 $112 Maximum month-end balance................................... $898 $223
There were $595 million of securities sold under repurchase agreements outstanding at year-end 2000 and no securities sold under repurchase agreements at year-end 1999. At year-end 2000, the fair value of securities sold under repurchase agreements was $623 million of FNMA certificates and $19 million of FHLMC certificates. NOTE G -- FEDERAL HOME LOAN BANK ADVANCES Pursuant to collateral agreements with the Federal Home Loan Bank of Dallas (FHLB), advances are secured by a blanket floating lien on Guaranty's assets and by securities on deposit at the FHLB. The weighted average interest rate of FHLB advances was 6.37 percent and 5.75 percent at year-end 2000 and 1999, respectively. At year-end 2000, the advances had maturity dates as follows (in millions): 2001 -- $2,857 and 2003 -- $12. 54 56 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) NOTE H -- OTHER BORROWINGS Other borrowings, which represent borrowings of non-savings bank entities, consists of the following:
AT YEAR END -------------- 2000 1999 ----- ----- (IN MILLIONS) Long-term debt with an average rate of 7.91% and 6.75% during 2000 and 1999, respectively, due through 2001...... $168 $175 Long-term debt at various rates which approximate prime, secured primarily by real estate.......................... 42 37 ---- ---- $210 $212 ==== ====
At year-end 2000, a non-savings bank subsidiary had a $210 million credit facility, which expires in 2001, with $42 million remaining unused. At year-end 2000, maturities of other borrowings are as follows (in millions): 2001 -- $170; 2002 -- $2; 2003 -- $2; 2004 -- $2; 2005 -- $2; 2006 and thereafter -- $32. NOTE I -- PREFERRED STOCK ISSUED BY SUBSIDIARIES Guaranty has two subsidiaries that qualify as real estate investment trusts, Guaranty Preferred Capital Corporation (GPCC) and Guaranty Preferred Capital Corporation II (GPCC II). Both are authorized to issue floating rate and fixed rate preferred stock. These preferred stocks have a liquidation preference of $1,000 per share, dividends that are non-cumulative and payable when declared, and are convertible into Guaranty preferred stock upon the occurrence of certain regulatory events. In 1997, GPCC issued an aggregate of 150,000 shares of floating rate preferred stock for an aggregate consideration of $150 million cash. GPCC issued an additional 75,000 shares in 1998 for an aggregate consideration of $75 million cash. Within ten years of issuance, at the option of GPCC, these shares may be redeemed in whole or in part for $1,000 per share cash. At inception in December 2000, GPCC II issued 35,000 shares of floating rate preferred stock and 45,000 shares of 9.15 percent fixed rate preferred stock for an aggregate consideration of $80 million cash. Prior to May 2007, at the option of GPCC II, these shares may be redeemed in whole or in part for $1,000 per share cash plus, under certain circumstances, a make-whole premium. NOTE J -- MORTGAGE LOAN SERVICING The group services mortgage loans that are owned primarily by independent investors. The group serviced approximately 209,600 and 241,400 mortgage loans aggregating $19.5 billion and $22.2 billion as of year-end 2000 and 1999, respectively. The group is required to advance, from group funds, escrow and foreclosure costs on loans it services. The majority of these advances are recoverable, except for certain amounts for loans serviced for GNMA. A reserve has been established for unrecoverable advances. Market risk is assumed related to the disposal of certain foreclosed VA loans. No significant losses were incurred during 2000, 1999 or 1998 in connection with this risk. 55 57 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) Capitalized mortgage loan servicing rights, net of accumulated amortization, were as follows:
PURCHASED ORIGINATED LOAN LOAN SERVICING SERVICING RIGHTS RIGHTS TOTAL --------- ---------- ----- (IN MILLIONS) FOR THE YEAR 2000 Balance, beginning of year............................... $155 $113 $268 Additions.............................................. 4 12 16 Amortization expense................................... (20) (14) (34) Sales.................................................. (1) (3) (4) ---- ---- ---- Subtotal............................................ $138 $108 246 Valuation allowance................................. -- ---- Balance, end of year..................................... $246 ==== FOR THE YEAR 1999 Balance, beginning of year............................... $142 $ 89 $231 Additions.............................................. 42 55 97 Amortization expense................................... (29) (20) (49) Sales.................................................. -- (11) (11) ---- ---- ---- Subtotal............................................ $155 $113 268 Valuation allowance................................. (1) ---- Balance, end of year..................................... $267 ====
Amortization expense related to mortgage loan servicing rights totaled $34 million, $49 million and $56 million for 2000, 1999 and 1998, respectively. The valuation allowance was reduced $1 million in 2000 and $16 million in 1999 by a credit to operations and increased $17 million in 1998 by a charge to operations. The estimated fair value of the capitalized mortgage servicing rights at year-end 2000 was approximately $305 million. Fair value was determined utilizing market-driven assumptions for prepayment speeds, discount rates and other variables. NOTE K -- INTEREST RATE RISK MANAGEMENT Guaranty is a party to various interest rate corridor agreements, which reduce the impact of increases in interest rates on its investments in adjustable-rate mortgage-backed securities that have lifetime interest rate caps. Under these agreements with notional amounts totaling $213 million and $291 million at year end 2000 and 1999, respectively, Guaranty simultaneously purchased and sold caps whereby it receives interest if the variable rate based on FHLB Eleventh District Cost of Funds (EDCOF) Index (5.61 percent at year-end 2000) exceeds an average strike rate of 8.81 percent and pays interest if the same variable rate exceeds a strike rate of 11.75 percent. These agreements mature through 2003. Guaranty is also a party to an interest rate cap agreement to reduce the impact of interest rate increases on certain adjustable rate investments with lifetime caps. Under this agreement, with a notional amount of $29 million, Guaranty would receive payments if the EDCOF exceeds the strike rate of 10 percent. This agreement matures in 2004. The amounts subject to credit risk are the streams of payments receivable by Guaranty under the terms of the contracts not the notional amounts used to express the volumes of these transactions. Guaranty minimizes its exposure to credit risk by entering into contracts with major U.S. securities firms. 56 58 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) The mortgage banking operation enters into forward sales commitments to deliver mortgage loans to third parties. These forward sales commitments hedge volatility of interest rates between the time a mortgage loan commitment is made and the subsequent funding and sale of the loan to a third party. NOTE L -- COMMITMENTS The group leases equipment and facilities under various operating lease agreements. Future minimum rental payments, net of related sublease income and exclusive of related expenses, under non-cancelable operating leases with a remaining term in excess of one year are as follows (in millions): 2001 -- $11; 2002 -- $9; 2003 -- $8; 2004 -- $6; 2005 -- $5; 2006 and thereafter -- $6. Total rent expense under these lease agreements was $15 million, $14 million and $15 million for 2000, 1999 and 1998, respectively. At year-end 2000, the group had commitments to originate or purchase loans totaling approximately $1.0 billion and commitments to sell mortgage loans of approximately $251 million. To the extent mortgage loans at the appropriate rates are not available to fulfill the sales commitments, the group is subject to market risk resulting from interest rate fluctuations. NOTE M -- REGULATORY CAPITAL MATTERS Guaranty is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Guaranty's financial statements. The payment of dividends from Guaranty is subject to proper regulatory notification. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Guaranty must meet specific capital guidelines that involve quantitative measures of Guaranty's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At year-end 2000, Guaranty met all of its capital adequacy requirements. At year-end 2000, the most recent notification from regulators categorized Guaranty as "well capitalized." The following table sets forth Guaranty's actual capital amounts and ratios along with the minimum capital amounts and ratios Guaranty must maintain in order to meet capital adequacy requirements and to be categorized as "well capitalized." No amounts were deducted from capital for interest-rate risk at year-end 2000 or 1999.
AT YEAR END 2000 -------------------------------------------------------------- FOR CAPITAL ADEQUACY ACTUAL REQUIREMENTS ------------------ ----------------------------------------- AMOUNT RATIO AMOUNT RATIO ------ ----- ------------------ ------------------- (DOLLARS IN MILLIONS) Total Risk-Based Ratio (Risk-based capital/Total risk-weight assets)............................ $1,283 10.29% > or = $ 998 > or = 8.00% Tier 1 (Core) Risk-Based Ratio (Core capital/Total risk-weight assets)............................ $1,153 9.24% > or = $ 499 > or = 4.00% Tier 1 (Core) Leverage Ratio (Core capital/Adjusted tangible assets)............................ $1,153 7.77% > or = $ 593 > or = 4.00% Tangible Ratio (Tangible equity/Tangible assets)............ $1,153 7.77% > or = $ 297 > or = 2.00% AT YEAR END 2000 ------------------------------------------- FOR CATEGORIZATION AS "WELL CAPITALIZED" ------------------------------------------- AMOUNT RATIO -------------------- -------------------- (DOLLARS IN MILLIONS) Total Risk-Based Ratio (Risk-based capital/Total risk-weight assets)............................ > or = $ 1,247 > or = 10.00% Tier 1 (Core) Risk-Based Ratio (Core capital/Total risk-weight assets)............................ > or = $ 748 > or = 6.00% Tier 1 (Core) Leverage Ratio (Core capital/Adjusted tangible assets)............................ > or = $ 742 > or = 5.00% Tangible Ratio (Tangible equity/Tangible assets)............ Not applicable
57 59 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
AT YEAR END 1999 -------------------------------------------------------------- FOR CAPITAL ADEQUACY ACTUAL REQUIREMENTS ------------------ ----------------------------------------- AMOUNT RATIO AMOUNT RATIO ------ ----- ------------------ ------------------- (DOLLARS IN MILLIONS) Total Risk-Based Ratio (Risk-based capital/Total risk-weight assets)............................ $1,139 10.33% > OR = $ 882 > OR = 8.00% Tier 1 (Core) Risk-Based Ratio (Core capital/Total risk-weight assets)............................ $1,058 9.60% > OR = $ 441 > OR = 4.00% Tier 1 (Core) Leverage Ratio (Core capital/Adjusted tangible assets)............................ $1,058 8.22% > OR = $ 515 > OR = 4.00% Tangible Ratio (Tangible equity/Tangible assets)............ $1,058 8.22% > OR = $ 257 > OR = 2.00% AT YEAR END 1999 ------------------------------------------- FOR CATEGORIZATION AS "WELL CAPITALIZED" ------------------------------------------- AMOUNT RATIO -------------------- -------------------- (DOLLARS IN MILLIONS) Total Risk-Based Ratio (Risk-based capital/Total risk-weight assets)............................ > OR = $ 1,102 > OR = 10.00% Tier 1 (Core) Risk-Based Ratio (Core capital/Total risk-weight assets)............................ > OR = $ 661 > OR = 6.00% Tier 1 (Core) Leverage Ratio (Core capital/Adjusted tangible assets)............................ > OR = $ 643 > OR = 5.00% Tangible Ratio (Tangible equity/Tangible assets)............ Not applicable
58 60 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ------------------------ 2000 1999 1998 ------ ------ ------ REVENUES Manufacturing............................................. $2,917 $2,692 $2,367 Financial Services........................................ 1,369 1,116 1,036 ------ ------ ------ 4,286 3,808 3,403 ------ ------ ------ COSTS AND EXPENSES Manufacturing............................................. 2,677 2,445 2,244 Special charge............................................ 15 -- 47 Financial Services........................................ 1,180 978 882 ------ ------ ------ 3,872 3,423 3,173 ------ ------ ------ OPERATING INCOME............................................ 414 385 230 Parent Company interest................................... (104) (95) (78) Other..................................................... 10 16 6 ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE TAXES.............................................. 320 306 158 Income taxes.............................................. (125) (115) (70) ------ ------ ------ INCOME FROM CONTINUING OPERATIONS........................... 195 191 88 Discontinued operation.................................... -- (92) (21) ------ ------ ------ INCOME BEFORE ACCOUNTING CHANGE............................. 195 99 67 Effect of accounting change............................... -- -- (3) ------ ------ ------ NET INCOME.................................................. $ 195 $ 99 $ 64 ====== ====== ====== EARNINGS PER SHARE Basic: Income from continuing operations...................... $ 3.83 $ 3.45 $ 1.60 Discontinued operation................................. -- (1.66) (.38) Effect of accounting change............................ -- -- (.06) ------ ------ ------ Net income............................................. $ 3.83 $ 1.79 $ 1.16 ====== ====== ====== Diluted: Income from continuing operations...................... $ 3.83 $ 3.43 $ 1.59 Discontinued operation................................. -- (1.65) (.38) Effect of accounting change............................ -- -- (.06) ------ ------ ------ Net income............................................. $ 3.83 $ 1.78 $ 1.15 ====== ====== ======
See the notes to the consolidated financial statements. 59 61 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS
AT YEAR END 2000 ---------------------------------- PARENT FINANCIAL COMPANY SERVICES CONSOLIDATED ------- --------- ------------ (IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 2 $ 320 $ 322 Mortgage loans held for sale................................ -- 232 232 Loans receivable, net....................................... -- 10,411 10,411 Mortgage-backed and other securities available-for-sale..... -- 2,415 2,415 Mortgage-backed and other securities held-to-maturity....... -- 864 864 Trade and other receivables................................. 320 -- 309 Inventories................................................. 253 -- 253 Property and equipment...................................... 2,027 157 2,184 Other assets................................................ 252 925 1,152 Investment in Financial Services............................ 1,093 -- -- ------ ------- ------- Total assets...................................... $3,947 $15,324 $18,142 ====== ======= ======= LIABILITIES Deposits.................................................... $ -- $ 9,828 $ 9,828 Federal Home Loan Bank advances............................. -- 2,869 2,869 Securities sold under repurchase agreements................. -- 595 595 Other liabilities........................................... 315 423 706 Long-term debt.............................................. 1,381 210 1,591 Deferred income taxes....................................... 276 -- 272 Postretirement benefits..................................... 142 -- 142 Stock issued by subsidiaries................................ -- 306 306 ------ ------- ------- Total liabilities................................. $2,114 $14,231 $16,309 ------ ------- ------- SHAREHOLDERS' EQUITY Preferred stock -- par value $1 per share: authorized 25,000,000 shares; none issued............................ -- Common stock -- par value $1 per share: authorized 200,000,000 shares; issued 61,389,552 shares, including shares held in the treasury............................... 61 Additional paid-in capital.................................. 365 Accumulated other comprehensive income (loss)............... (8) Retained earnings........................................... 1,968 ------- 2,386 Cost of shares held in the treasury: 12,215,499 shares...... (553) ------- Total shareholders' equity........................ 1,833 ------- Total liabilities and shareholders' equity.................. $18,142 =======
See the notes to the consolidated financial statements. 60 62 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS
AT YEAR END 1999 ---------------------------------- PARENT FINANCIAL COMPANY SERVICES CONSOLIDATED ------- --------- ------------ (IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 51 $ 233 $ 284 Mortgage loans held for sale................................ -- 252 252 Loans receivable, net....................................... -- 9,296 9,296 Mortgage-backed and other securities available-for-sale..... -- 1,431 1,431 Mortgage-backed and other securities held-to-maturity....... -- 1,061 1,061 Trade and other receivables................................. 328 -- 319 Inventories................................................. 287 -- 287 Property and equipment...................................... 2,052 145 2,197 Other assets................................................ 200 903 1,059 Investment in Financial Services............................ 1,023 -- -- ------ ------- ------- Total assets...................................... $3,941 $13,321 $16,186 ====== ======= ======= LIABILITIES Deposits.................................................... $ -- $ 9,027 $ 9,027 Federal Home Loan Bank advances............................. -- 2,403 2,403 Other liabilities........................................... 392 430 799 Long-term debt.............................................. 1,253 212 1,465 Deferred income taxes....................................... 226 -- 196 Postretirement benefits..................................... 143 -- 143 Stock issued by subsidiaries................................ -- 226 226 ------ ------- ------- Total liabilities................................. $2,014 $12,298 $14,259 ====== ======= ======= SHAREHOLDERS' EQUITY Preferred stock -- par value $1 per share: authorized 25,000,000 shares; none issued............................ -- Common stock -- par value $1 per share: authorized 200,000,000 shares; issued 61,389,552 shares, including shares held in the treasury............................... 61 Additional paid-in capital.................................. 364 Accumulated other comprehensive income (loss)............... (31) Retained earnings........................................... 1,838 ------- 2,232 Cost of shares held in the treasury: 7,177,592 shares....... (305) ------- Total shareholders' equity........................ 1,927 ------- Total liabilities and shareholders' equity.................. $16,186 =======
See the notes to the consolidated financial statements. 61 63 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR --------------------------- 2000 1999 1998 ------- ------- ------- (IN MILLIONS) CASH PROVIDED BY (USED FOR) OPERATIONS Net income................................................ $ 195 $ 99 $ 64 Adjustments: Loss on disposal of discontinued operation............. -- 77 -- Cumulative effect of accounting change................. -- -- 3 Special charge......................................... 15 -- 47 Depreciation and depletion............................. 216 217 206 Amortization of goodwill............................... 9 8 7 Deferred taxes......................................... 57 14 18 Amortization and accretion on financial instruments.... 28 40 90 Mortgage loans held for sale........................... 20 369 (183) Receivables............................................ 9 (74) (11) Inventories............................................ 16 (4) 2 Accounts payable and accrued expenses.................. (84) 42 (16) Collections and remittances on loans serviced for others, net.......................................... (32) (251) 129 Change in net assets of discontinued operations........ -- 23 63 Other.................................................. 30 71 (76) ------- ------- ------- 479 631 343 ------- ------- ------- CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures...................................... (257) (204) (196) Proceeds from sale of discontinued operations............. -- 576 -- Proceeds from sale of property and equipment.............. 22 55 28 Purchase of securities available-for-sale................. (1,036) (294) (208) Maturities of securities available-for-sale............... 338 279 300 Proceeds from sale of securities available-for-sale....... -- 145 53 Maturities and redemptions of securities held-to-maturity....................................... 192 351 349 Loans originated or acquired, net of principal collected on loans............................................... (1,506) (1,163) (1,852) Proceeds from sale of loans............................... 253 299 16 Acquisitions, net of cash acquired, and joint ventures.... (38) (157) (123) Other..................................................... (64) (17) (10) ------- ------- ------- (2,096) (130) (1,643) ------- ------- ------- CASH PROVIDED BY (USED FOR) FINANCING Additions to debt......................................... 297 347 1,089 Payments of debt.......................................... (312) (1,335) (426) Securities sold under repurchase agreements and short-term borrowings, net........................................ 1,071 (121) 788 Net increase (decrease) in deposits....................... 717 808 (36) Purchase of deposits...................................... 140 -- -- Purchase of stock for treasury............................ (250) (100) (48) Cash dividends paid to shareholders....................... (65) (71) (71) Proceeds from sale of subsidiary preferred stock.......... 80 1 75 Other..................................................... (23) 10 (15) ------- ------- ------- 1,655 (461) 1,356 ------- ------- ------- Net increase in cash and cash equivalents................... 38 40 56 Cash and cash equivalents at beginning of year.............. 284 244 188 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 322 $ 284 $ 244 ======= ======= =======
See the notes to the consolidated financial statements. 62 64 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCK CAPITAL INCOME (LOSS) EARNINGS STOCK TOTAL ------ ------- ------------- -------- -------- ------ (IN MILLIONS) Balance at year end 1997....................... $61 $356 $(20) $1,817 $(169) $2,045 --- ---- ---- ------ ----- ------ Comprehensive income Net income................................... -- -- -- 64 -- 64 Other comprehensive income Unrealized gains on securities............. -- -- 5 -- -- 5 Minimum pension liability.................. -- -- (2) -- -- (2) ------ Total comprehensive income................... -- -- -- -- -- 67 ------ Dividends paid on common stock -- $1.28 per share........................................ -- -- -- (71) -- (71) Stock issued for stock plans -- 134,430 shares....................................... -- 1 -- -- 4 5 Stock acquired for treasury -- 850,558 shares....................................... -- -- -- -- (48) (48) --- ---- ---- ------ ----- ------ Balance at year end 1998....................... $61 $357 $(17) $1,810 $(213) $1,998 --- ---- ---- ------ ----- ------ Comprehensive income Net income................................... -- -- -- 99 -- 99 Other comprehensive income Unrealized losses on securities............ -- -- (15) -- -- (15) Foreign currency translation adjustment.... -- -- 1 -- -- 1 ------ Total comprehensive income................... -- -- -- -- 85 ------ Dividends paid on common stock -- $1.28 per share........................................ -- -- -- (71) -- (71) Stock issued for stock plans -- 256,599 shares....................................... -- 7 -- -- 8 15 Stock acquired for treasury -- 1,649,052 shares....................................... -- -- -- -- (100) (100) --- ---- ---- ------ ----- ------ Balance at year end 1999....................... $61 $364 $(31) $1,838 $(305) $1,927 --- ---- ---- ------ ----- ------ Comprehensive income Net income................................... -- -- -- 195 -- 195 Other comprehensive income Unrealized gains on securities............. -- -- 23 -- -- 23 Minimum pension liability.................. -- -- (2) -- -- (2) Foreign currency translation adjustment.... -- -- 2 -- -- 2 ------ Total comprehensive income................... -- -- -- -- -- 218 ------ Dividends paid on common stock -- $1.28 per share........................................ -- -- -- (65) -- (65) Stock issued for stock plans -- 57,999 shares....................................... -- 1 -- -- 2 3 Stock acquired for treasury -- 5,095,906 shares....................................... -- -- -- -- (250) (250) --- ---- ---- ------ ----- ------ Balance at year end 2000....................... $61 $365 $ (8) $1,968 $(553) $1,833 === ==== ==== ====== ===== ======
See the notes to the consolidated financial statements. 63 65 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Temple-Inland Inc. and its manufacturing and financial services subsidiaries (the company). Investments in joint ventures and other subsidiaries in which the company has between a 20 percent and 50 percent equity ownership are reflected using the equity method. All material intercompany amounts and transactions have been eliminated. Certain amounts have been reclassified to conform to current year's classifications. The consolidated net assets invested in financial services activities are subject, in varying degrees, to regulatory rules and restrictions. Accordingly, included as an integral part of the consolidated financial statements are separate summarized financial statements and notes for the company's manufacturing and financial services groups, as well as the significant accounting policies unique to each group. The preparation of the consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the amounts reported in the financial statements and accompanying notes, including disclosures related to contingencies. Actual results could differ from these estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and other short-term liquid instruments with original maturities of three months or less. Translation of International Currencies Balance sheets of the company's international operations where the functional currency is other than the U.S. dollar are translated into U.S. dollars at year-end exchange rates. Adjustments resulting from financial statement translation are reported as a component of shareholders' equity. For other international operations where the functional currency is the U.S. dollar, inventories and property, plant and equipment values are translated at the historical rate of exchange, while other assets and liabilities are translated at year-end exchange rates. Translation adjustments for these operations are included in earnings and are not material. Income and expense items are translated into U.S. dollars at average rates of exchange prevailing during the year. Gains and losses resulting from foreign currency transactions are included in earnings and are not material. Income Taxes Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes computed using current tax rates. Stock Based Compensation The company uses the intrinsic value method in accounting for its stock based employee compensation plans. Long-Lived Assets Impairment losses are recognized on assets held for use when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets' carrying amount. Assets held for disposal are recorded at the lower of carrying value or estimated fair value less costs to sell. 64 66 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Capitalized Software The company capitalizes purchased software costs as well as the direct costs, both internal and external, associated with software developed for internal use. Such costs are amortized using the straight-line method over estimated useful lives of three to seven years. Costs capitalized were $58 million in 2000, $31 million in 1999 and $10 million in 1998. Amortization of these costs was $8 million in 2000, $6 million in 1999 and $3 million in 1998. New Accounting Pronouncements The company will be required to adopt Statement of Financial Accounting Standards No. 133, Accounting for Derivatives Instruments and Hedging Activities, beginning 2001. This statement will require derivative positions to be recognized in the balance sheet at fair value. The effect of adopting this statement will not materially affect the company's earnings or financial position. As permitted by this statement, the company will change the designation of its portfolio of held-to-maturity securities, which are carried at unamortized cost, to available-for-sale, which are carried at fair value. As a result, the carrying value of these securities will be adjusted to their fair value with a corresponding after tax reduction of $16 million in other comprehensive income, a component of shareholders' equity. NOTE 2 -- TAXES ON INCOME Taxes on income from continuing operations consisted of the following:
FOR THE YEAR ------------------ 2000 1999 1998 ---- ---- ---- (IN MILLIONS) Current tax provision: U.S. Federal.............................................. $ 44 $ 89 $ 38 State and other........................................... 14 12 10 ---- ---- ---- 58 101 48 ---- ---- ---- Deferred tax provision: U.S. Federal.............................................. 66 14 21 State and other........................................... 1 -- 1 ---- ---- ---- 67 14 22 ---- ---- ---- Provision for income taxes.................................. $125 $115 $ 70 ==== ==== ====
Earnings or losses from operations consisted of the following:
FOR THE YEAR ------------------ 2000 1999 1998 ---- ---- ---- (IN MILLIONS) Earnings (Losses): U.S. ..................................................... $319 $311 $189 Non-U.S. ................................................. 1 (5) (31) ---- ---- ---- $320 $306 $158 ==== ==== ====
65 67 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The difference between the consolidated effective income tax rate and the federal statutory income tax rate include the following:
FOR THE YEAR ------------------ 2000 1999 1998 ---- ---- ---- (IN MILLIONS) Taxes on income at statutory rate........................... $112 $107 $ 56 State net of federal benefit................................ 9 8 6 Foreign operations.......................................... 1 3 6 Sale of foreign subsidiary.................................. -- (7) -- Goodwill.................................................... 2 2 1 Other....................................................... 1 2 1 ---- ---- ---- $125 $115 $ 70 ==== ==== ====
Significant components of the company's consolidated deferred tax assets and liabilities are as follows:
AT YEAR END ------------- 2000 1999 ----- ----- (IN MILLIONS) Deferred Tax Liabilities: Depreciation.............................................. $ 270 $ 254 Timber and timberlands.................................... 37 37 Pensions.................................................. 33 26 Originated mortgage servicing rights...................... 36 38 Other..................................................... 32 34 ----- ----- Total deferred tax liabilities.................... 408 389 ----- ----- Deferred Tax Assets: Alternative minimum tax credits........................... 142 185 Net operating loss carryforwards.......................... 20 12 OPEB obligations.......................................... 55 56 Bad debt reserve.......................................... 33 27 Other..................................................... 46 67 ----- ----- Total deferred tax assets......................... 296 347 Valuation allowance......................................... (160) (154) ----- ----- Net deferred tax liability.................................. $ 272 $ 196 ===== =====
The valuation allowance represents accruals for deductions and credits that are uncertain and, accordingly, have not been recognized for financial reporting purposes. The change in the valuation allowance is primarily the result of increased foreign net operating losses, the future realization of which is not assured. The company has domestic net operating loss carryforwards of $1 million that expire in 2005. In addition, the company has foreign net operating loss carryforwards of $39 million that will expire from the year 2005 through the year 2011 and $16 million that may be carried forward indefinitely. Alternative minimum tax credits may be carried forward indefinitely. In accordance with generally accepted accounting principles, the company has not provided deferred taxes on approximately $31 million of pre-1988 tax bad debt reserves. In 1999, the Internal Revenue Service (IRS) concluded its examination of the company's consolidated tax returns for the years 1987 through 1992. As a result of this examination, the company agreed to pay approximately $36 million in taxes and interest for those years, of which $19 million was paid in 1999 and the remainder in 2000. The IRS is currently examining the company's consolidated tax returns for the years 1993 66 68 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) through 1996. The resolution of these examinations is not expected to have a material adverse impact on the company's financial condition or results of operations. Cash income tax payments, net of refunds received, including the payments related to the IRS exam were $88 million, $72 million and $39 million during 2000, 1999 and 1998, respectively. NOTE 3 -- FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and the estimated fair values of financial instruments were as follows:
AT YEAR END -------------------------------------- 2000 1999 ------------------ ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------ (IN MILLIONS) Financial assets Loans receivable................................ $10,411 $10,414 $9,296 $9,248 Mortgage-backed and other securities............ 3,279 3,253 2,492 2,440 Financial liabilities Deposits........................................ 9,828 9,835 9,027 8,987 FHLB advances................................... 2,869 2,869 2,403 2,403 Total debt...................................... 1,593 1,577 1,466 1,443 Off-balance-sheet instruments Interest rate contracts......................... -- (2) -- 2 Commodity futures contracts..................... -- (3) -- -- Commitments to extend credit.................... -- 3 -- 2
Differences between fair value and carrying amounts are primarily due to instruments that provide fixed interest rates or contain fixed interest rate elements. Inherently, such instruments are subject to fluctuations in fair value due to subsequent movements in interest rates. The fair value of cash and cash equivalents, trade and other receivables, trade payables, securities sold under agreements to repurchase and mortgage loans held for sale consistently approximate the carrying amount due to their short-term nature and are excluded from the above table. The fair value of mortgage-backed and other securities and off-balance-sheet instruments are based on quoted market prices. Other financial instruments are valued using discounted cash flows. The discount rates used represent current rates for similar instruments. The company has guaranteed certain joint venture obligations principally related to variable-rate debt instruments at year-end 2000. It is not practicable to estimate the fair value of these guarantees. NOTE 4 -- SHAREHOLDER RIGHTS PLAN The company has a Shareholder Rights Plan in which one-half of a preferred stock purchase right (Right) was declared as a dividend for each common share outstanding. Each Right entitles shareholders to purchase, under certain conditions, one one-hundredth of a share of newly issued Series A Junior Participating Preferred Stock at an exercise price of $200. Rights will be exercisable only if a person or group acquires beneficial ownership of 20 percent or more of the company's common shares or commences a tender or exchange offer, upon consummation of which such person or group would beneficially own 25 percent or more of the company's common shares. The company will generally be entitled to redeem the Rights at $.01 per Right at any time until the 10th business day following public announcement that a 20 percent position has been acquired. The Rights will expire on February 20, 2009. 67 69 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 5 -- EMPLOYEE BENEFIT PLANS The company has pension plans covering substantially all employees. Plans covering salaried and nonunion hourly employees provide benefits based on compensation and years of service, while union hourly plans are based on negotiated benefits and years of service. The company's policy is to fund amounts on an actuarial basis in order to accumulate assets sufficient to meet the benefits to be paid in accordance with the requirements of ERISA. Contributions to the plans are made to trusts for the benefit of plan participants. The company provides, as a postretirement benefit, medical and insurance coverage to eligible salaried and hourly employees who reach retirement age while employed by the company. The change in benefit obligation, plan assets and the funded status of employee benefit plans follows:
AT YEAR END ----------------------------------- POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------- -------------- 2000 1999 2000 1999 ------- ------ ----- ----- (IN MILLIONS) Benefit obligation at beginning of year.................... $ 582 $597 $ 111 $ 133 Service cost............................................... 15 17 3 3 Interest cost.............................................. 42 39 8 8 Change in assumptions...................................... -- (50) -- -- Plan amendments............................................ 6 3 -- (2) Actuarial (gain)/loss...................................... 4 4 30 (21) Termination benefits....................................... -- -- -- -- Benefits paid.............................................. (35) (28) (12) (11) Retiree contributions...................................... -- -- 1 1 ----- ---- ----- ----- Benefit obligation at end of the year...................... $ 614 $582 $ 141 $ 111 ----- ---- ----- ----- Fair value of plan assets at beginning of year............. $ 711 $616 $ -- $ -- Actual return.............................................. 158 122 -- -- Benefits paid.............................................. (35) (28) -- -- Contributions.............................................. 4 1 -- -- ----- ---- ----- ----- Fair value of plan assets at end of year................... $ 838 $711 $ -- $ -- ----- ---- ----- ----- Funded status.............................................. $ 224 $129 $(141) $(111) Unrecognized net loss/(gain)............................... (160) (69) 6 (24) Prior service costs not yet recognized..................... 11 5 (7) (8) Unrecognized net transition obligation/(asset)............. -- (4) -- -- Additional minimum liability............................... (7) (4) -- -- ----- ---- ----- ----- Prepaid (accrued) benefit cost............................. $ 68 $ 57 $(142) $(143) ===== ==== ===== =====
The net prepaid benefit cost of $68 million at year-end 2000 is comprised of pension plans with prepaid benefit cost totaling $90 million and accrued benefit liability totaling $22 million. Amounts applicable to the company's pension plans with accumulated benefit obligations in excess of plan assets are as follows:
AT YEAR END ------------- 2000 1999 ----- ----- (IN MILLIONS) Projected benefit obligation................................ $20 $16 Accumulated benefit obligation.............................. $17 $14 Fair value of plan assets................................... $-- $--
68 70 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant assumptions used for the employee pension plans follow:
FOR THE YEAR ------------------------------------------------ PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------ ------------------------ 2000 1999 1998 2000 1999 1998 ---- ---- ---- ------ ------ ------ Weighted average assumptions: Discount rate............................ 7.50% 7.50% 6.75% 7.50% 7.50% 6.75% Expected long-term rate of return........ 9.00% 9.00% 9.00% -- -- -- Rate of compensation increase............ 4.75% 4.75% 4.00% -- -- --
A 7.75 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 6 percent for 2010 and remain at that level thereafter. Net periodic benefit cost (credit) for pension and postretirement plans include the following:
FOR THE YEAR ------------------------------------------------ PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------ ------------------------ 2000 1999 1998 2000 1999 1998 ---- ---- ---- ------ ------ ------ (IN MILLIONS) Charges (Credits) Service cost -- benefits earned during the period................................... $ 15 $ 17 $ 15 $ 3 $ 3 $ 3 Interest cost on projected benefit obligation............................... 42 39 37 8 8 8 Expected return on plan assets............. (62) (54) (56) -- -- -- Net amortization and deferral.............. (4) (3) (5) (1) (1) (1) ---- ---- ---- ---- ---- ---- Net periodic benefit cost (credit)(a)...... $ (9) $ (1) $ (9) $ 10 $ 10 $ 10 ==== ==== ==== ==== ==== ====
- --------------- (a) In addition to the above, in 2000 the company recognized an additional $.3 million expense relating to postretirement benefits for special termination benefits resulting from restructuring of the Pineland operation. In 1999 the company recognized an additional $4 million credit relating to pension benefits and a $2 million credit relating to postretirement benefits for curtailments resulting from the sale of the bleached paperboard operation. In 1998, the company recognized an additional $3 million credit relating to pension benefits and a $1 million credit relating to postretirement benefits for curtailments resulting from employee terminations. Assumed health care cost trend rates have a significant effect on the amounts reported for the postretirement benefits. A one percentage point change in assumed health care cost trend rates would have the following effects:
1 PERCENTAGE 1 PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- (IN MILLIONS) Effect on total of service and interest cost components in 2000.................................................... $ 1 $(1) Effect on postretirement benefit obligation at year-end 2000.................................................... $11 $(9)
NOTE 6 -- STOCK OPTION PLANS The company has established stock option plans for key employees and directors. The plans provide for the granting of nonqualified stock options and/or incentive stock options, and prior to 1994, of stock appreciation rights with all or part of any options so granted. Options granted after 1995 generally have a ten-year term and become exercisable in steps from one to five years. 69 71 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of stock option activity follows:
FOR THE YEAR ------------------------------------------------------------ 2000 1999 1998 ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- (SHARES IN THOUSANDS) Outstanding beginning of year...... 1,974 $53 1,892 $51 1,430 $47 Granted.......................... 971 55 455 61 654 56 Exercised........................ (88) 48 (315) 47 (139) 38 Forfeited........................ (101) 54 (58) 53 (53) 50 ------ ------ ------ Outstanding end of year............ 2,756 $54 1,974 $53 1,892 $51 ====== ====== ====== Weighted average fair value of options granted during the year............................. $16.63 $23.06 $17.68
Options exercisable at year end were (in thousands): 2000-896; 1999-691; and 1998-737. The weighted average exercise price for options exercisable was $50 per share and $49 per share for year-end 2000 and 1999, respectively. Exercise prices for options outstanding at year-end 2000 range from $27 to $75. The weighted average remaining contractual life of these options is eight years. An additional 755,956 and 1,727,156 shares of common stock were available for grants at year-end 2000 and 1999, respectively. Under the 1993 restricted stock plan, at year-end 2000, awards of 56,248 shares of restricted common stock were outstanding. The 1997 restricted stock plan provided for a maximum of 300,000 shares of restricted common stock to be reserved for awards. Under this plan, at year-end 2000, awards of 54,000 shares of restricted common stock were outstanding and an additional 244,950 shares were available for grants. The fair value of the options granted in 2000, 1999 and 1998 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
FOR THE YEAR --------------------------------- 2000 1999 1998 --------- --------- --------- Expected dividend yield.............................. 2.7% 2.0% 2.0% Expected stock price volatility...................... 29.7% 29.4% 28.7% Risk-free interest rate.............................. 5.1% 6.8% 4.8% Expected life of options............................. 8.0 years 8.0 years 7.0 years
Assuming that the company had accounted for its employee stock options using the fair value method and amortized such to expense over the options vesting period, pro forma net income and diluted earnings per share would have been $189 million and $3.71 per diluted share in 2000; $96 million and $1.73 per diluted share in 1999; and $62 million and $1.10 per diluted share in 1998. The pro forma disclosures may not be indicative of future amounts due to changes in subjective input assumptions and because the options vest over several years with additional future option grants expected. 70 72 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- EARNINGS PER SHARE Numerators and denominators used in computing earnings per share are as follows:
FOR THE YEAR --------------------- 2000 1999 1998 ----- ----- ----- (IN MILLIONS) Numerators for basic and diluted earnings per share: Income from continuing operations......................... $ 195 $ 191 $ 88 Discontinued operation.................................... (92) (21) Effect of accounting change............................... -- -- (3) ----- ----- ----- Net income........................................ $ 195 $ 99 $ 64 ===== ===== ===== Denominator for basic earnings per share: Weighted average shares outstanding....................... 50.9 55.6 55.8 Dilutive effect of stock options.......................... -- .2 .1 ----- ----- ----- Denominator for diluted earnings per share................ 50.9 55.8 55.9 ===== ===== =====
NOTE 8 -- ACCUMULATED OTHER COMPREHENSIVE INCOME The components of other comprehensive income are as follows:
UNREALIZED CURRENCY GAINS ON MINIMUM TRANSLATION AVAILABLE-FOR PENSION ADJUSTMENTS SALE SECURITIES LIABILITY TOTAL ----------- --------------- --------- ----- (IN MILLIONS) Balance at year end 1998.......................... $(17) $ 2 $(2) $(17) Unrealized gains on available-for-sale securities................................... -- (22) -- (22) Deferred taxes relating to unrealized gains on available-for-sale securities................ -- 7 -- 7 Foreign currency translation adjustments........ 1 -- -- 1 ---- ---- --- ---- Balance at year-end 1999.......................... (16) (13) (2) (31) Unrealized gains available-for-sale securities................................... -- 36 -- 36 Deferred taxes relating to unrealized gains on available-for-sale securities................ -- (13) -- (13) Minimum pension liability....................... -- -- (3) (3) Deferred taxes relating to minimum pension liability.................................... -- -- 1 1 Deferred taxes relating to foreign currency translation adjustment....................... 2 -- -- 2 ---- ---- --- ---- Balance at year-end 2000.......................... $(14) $ 10 $(4) $ (8) ==== ==== === ====
NOTE 9 -- CONTINGENCIES There are pending against the company and its subsidiaries lawsuits, claims and environmental matters arising in the regular course of business. In the opinion of management, recoveries and claims, if any, by plaintiffs or claimants resulting from the foregoing litigation will not have a material adverse effect on its operations or the financial position of the company. 71 73 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- SEGMENT INFORMATION The company has three reportable segments: paper, building products and financial services. The paper segment manufactures containerboard and corrugated packaging. The building products segment manufactures a variety of building materials and manages the company's timber resources. The financial services segment operates a savings bank and engages in mortgage banking, real estate and insurance brokerage activities. All prior periods have been restated to reflect the discontinued operations of the bleached paperboard operation. These segments are managed as separate business units. The company evaluates performance based on operating income before special charges, corporate expenses and income taxes. Parent company interest expense is not allocated to the business segments. The accounting policies of the segments are the same as those described in the accounting policy notes to the financial statements. Corporate and other includes corporate expenses, special charges and discontinued operations.
CORPORATE BUILDING FINANCIAL AND OTHER PAPER PRODUCTS SERVICES ELIMINATIONS TOTAL ------ -------- --------- ------------ ------- (IN MILLIONS) For the year or at year-end 2000: Revenues from external customers....... $2,089 $ 828 $ 1,369 $ -- $ 4,286 Depreciation, depletion and amortization........................ 131 63 24 7 225 Operating income....................... 205 68 189 (48)(a) 414 Financial Services net interest income.............................. -- -- 389 -- 389 Total assets........................... 1,589 1,199 15,324 30 18,142 Investment in equity method investees........................... 4 33 27 -- 64 Capital expenditures................... 115 87 34 21 257 ------------------------------------------------------ For the year or at year-end 1999: Revenues from external customers....... $1,869 $ 823 $ 1,116 $ -- $ 3,808 Depreciation, depletion and amortization........................ 138 59 22 6 225 Operating income....................... 103 174 138 (30) 385 Financial Services net interest income.............................. -- -- 299 -- 299 Total assets........................... 1,676 1,090 13,321 99 16,186 Investment in equity method investees........................... 8 27 14 -- 49 Capital expenditures................... 80 92 26 6 204 ------------------------------------------------------ For the year or at year-end 1998: Revenues from external customers....... $1,707 $ 660 $ 1,036 $ -- $ 3,403 Depreciation, depletion and amortization........................ 138 53 18 4 213 Operating income....................... 39 112 154 (75)(b) 230 Financial Services net interest income.............................. -- -- 244 -- 244 Total assets........................... 1,728 1,043 12,376 721(c) 15,868 Investment in equity method investees........................... 8 29 3 -- 40 Capital expenditures................... 79 73 39 5 196 ------------------------------------------------------
- --------------- (a) Includes a special charge of $15 million applicable to the building products segment. (b) Includes a special charge of $47 million of which $37 million applies to the paper segment and $10 million applies to the building products segment. (c) Includes net assets of discontinued operations. 72 74 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table includes revenues and property and equipment based on the location of the operation: GEOGRAPHIC INFORMATION
FOR THE YEAR ------------------------ 2000 1999 1998 ------ ------ ------ (IN MILLIONS) Revenues from external customers United States............................................ $4,122 $3,672 $3,286 Canada................................................... 33 27 4 Mexico................................................... 106 82 68 South America............................................ 25 27 45 ------ ------ ------ Total............................................ $4,286 $3,808 $3,403 ====== ====== ======
AT YEAR END ------------------------ 2000 1999 1998 ------ ------ ------ Property and Equipment United States............................................ $2,069 $2,090 $2,115 Canada................................................... 63 61 56 Mexico................................................... 34 28 27 South America............................................ 18 18 40 ------ ------ ------ Total............................................ $2,184 $2,197 $2,238 ====== ====== ======
NOTE 11 -- SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Selected quarterly financial results for the years 2000 and 1999 are summarized below. Quarterly financial results have been restated to reflect the reclassification of shipping and handling costs.
2000 -------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Total revenues.................................... $1,066 $1,096 $1,081 $1,043 Manufacturing net revenues........................ 757 753 734 673 Manufacturing gross profit........................ 148 140 107 81 Financial Services operating income before taxes........................................... 35 48 50 56 Income from continuing operations................. 55 62 43(a) 35 Net income........................................ 55 62 43(a) 35 Earnings per Share: Basic: Income from continuing operations............ $ 1.04 $ 1.20 $ .87 $ .72 Net income................................... 1.04 1.20 .87 .72 Diluted: Income from continuing operations............ $ 1.04 $ 1.20 $ .87 $ .72 Net income................................... 1.04 1.20 .87 .72
- --------------- (a) Includes a $15 million special charge related to the discontinued fiber-cement operation. 73 75 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 ----------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Total revenues..................................... $ 880 $ 937 $ 988 $1,003 Manufacturing net revenues......................... 622 675 701 694 Manufacturing gross profit......................... 101 128 143 140 Financial Services operating income before taxes... 27 34 41 36 Income from continuing operations.................. $ 26 $ 48 $ 60 $ 57 Discontinued operations............................ (7) (7) (80) 2 ----- ----- ------ ------ Net income......................................... $ 19 $ 41 $ (20) $ 59 ===== ===== ====== ====== Earnings per Share: Basic: Income from continuing operations............. $ .47 $ .88 $ 1.07 $ 1.03 Discontinued operations....................... (.13) (.14) (1.43) .04 ----- ----- ------ ------ Net income.................................... $ .34 $ .74 $ (.36) $ 1.07 ===== ===== ====== ====== Diluted: Income from continuing operations............. $ .46 $ .87 $ 1.07 $ 1.03 Discontinued operations....................... (.13) (.13) (1.43) .04 ----- ----- ------ ------ Net income.................................... $ .33 $ .74 $ (.36) $ 1.07 ===== ===== ====== ======
74 76 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS Management has prepared and is responsible for the company's financial statements, including the notes thereto. They have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgments and estimates by management. All financial information in this annual report is consistent with that in the financial statements. The company maintains internal accounting control systems and related policies and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and properly recorded, and that accounting records may be relied upon for the preparation of financial statements and other financial information. The design, monitoring and revision of internal accounting control systems involve, among other things, management's judgment with respect to the relative cost and expected benefits of specific control measures. The company also maintains an internal auditing function that evaluates and formally reports on the adequacy and effectiveness of internal accounting controls, policies and procedures. The company's financial statements have been examined by Ernst & Young LLP, independent auditors, who have expressed their opinion with respect to the fairness of the presentation of the statements. The Audit Committee of the Board of Directors, composed solely of outside directors, meets with the independent auditors and internal auditors to evaluate the effectiveness of the work performed by them in discharging their respective responsibilities and to assure their independent and free access to the committee. Kenneth M. Jastrow, II Chairman and Chief Executive Officer Louis R. Brill Vice President, Chief Accounting Officer 75 77 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Temple-Inland Inc.: We have audited the accompanying consolidated balance sheets of Temple-Inland Inc. and subsidiaries as of December 30, 2000 and January 1, 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 30, 2000. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Temple-Inland Inc. and subsidiaries at December 30, 2000 and January 1, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 30, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Austin, Texas January 31, 2001 76 78 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has had no changes in or disagreements with its independent auditors to report under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference from the Company's definitive proxy statement, involving the election of directors, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K (the "Definitive Proxy Statement"). Information required by this item concerning executive officers is included in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's Definitive Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's Definitive Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's Definitive Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of Report. 1. FINANCIAL STATEMENTS The financial statements of the Company and its consolidated subsidiaries are included in Part II, Item 8 of this Annual Report on Form 10-K. 2. FINANCIAL STATEMENT SCHEDULE The following Financial Statement Schedule of the Company required by Regulation S-X and excluded from the Annual Report to Shareholders for the year ended December 30, 2000, is filed herewith at the page indicated.
PAGE ITEM NUMBER ---- ------ Temple-Inland Inc. and Subsidiaries Schedule II -- Valuation and Qualifying Accounts.......... 84
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are inapplicable and, therefore, have been omitted. 77 79 3. EXHIBITS
EXHIBIT NUMBER EXHIBIT ------- ------- 3.01 -- Certificate of Incorporation of the Company(1), as amended effective May 4, 1987(2), as amended effective May 4, 1990(3) 3.02 -- By-laws of the Company as amended and restated May 3, 1991(17) 4.01 -- Form of Specimen Common Stock Certificate of the Company(4) 4.02 -- Indenture dated as of September 1, 1986, between the Registrant and Chemical Bank, as Trustee(5), as amended by First Supplemental Indenture dated as of April 15, 1988, as amended by Second Supplemental Indenture dated as of December 27, 1990(11), and as amended by Third Supplemental Indenture dated as of May 9, 1991(12) 4.03 -- Form of Specimen Medium-Term Note of the Company(5) 4.04 -- Form of Fixed-rate Medium Term Note, Series B, of the Company(11) 4.05 -- Form of Floating-rate Medium Term Note, Series B, of the Company(11) 4.06 -- Form of 9% Note due May 1, 2001, of the Company(14) 4.07 -- Form of Fixed-rate Medium Term Note, Series D, of the Company(13) 4.08 -- Form of Floating-rate Medium Term Note, Series D, of the Company(13) 4.09 -- Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, dated February 16, 1989(6) 4.10 -- Rights Agreement, dated February 20, 1999, between the Company and First Chicago Trust Company of New York, as Rights Agent(7) 4.11 -- Form of 7.25% Note due September 15, 2004, of the Company(15) 4.12 -- Form of 8.25% Debenture due September 15, 2022, of the Company(15) 4.13 -- Form of Fixed-rate Medium Term Note, Series F, of the Company(22) 4.14 -- Form of Floating-rate Medium Term Note, Series F, of the Company(22) 10.01* -- Temple-Inland Inc. Incentive Stock Plan(1), as amended May 6, 1988(8), as amended February 7, 1992(17) 10.02* -- Form of Incentive Shares Agreement(9) 10.03 -- Assistance Agreement dated September 30, 1988, among the Federal Savings and Loan Insurance Corporation; Guaranty Federal Savings Bank, Dallas, Texas; Guaranty Holdings Inc. I; Guaranty Holdings Inc. II; Temple-Inland Inc.; Mason Best Company; and Trammell Crow Ventures 3, Ltd.(10) 10.04* -- Temple-Inland Inc. 1993 Stock Option Plan(16) 10.05* -- Temple-Inland Inc. 1993 Restricted Stock Plan(16) 10.06 -- Stock Purchase Agreement and Agreement and Plan of Reorganization by and among Guaranty, Guaranty Holdings Inc. I ("GHI"), Lone Star Technologies, Inc. ("LST"), and LSST Financial Services Corporation ("LSST Financial"), dated as of February 16, 1993(18) 10.07 -- First Amendment to Stock Purchase agreement and Agreement and Plan of Reorganization by and among Guaranty, GHI, LST and LSST Financial, dated as of April 2, 1993(18) 10.08 -- Second Amendment to Stock Purchase Agreement and Agreement and Plan of Reorganization by and among Guaranty, GHI, LST and LSST Financial, dated as of August 31, 1993(18)
78 80
EXHIBIT NUMBER EXHIBIT ------- ------- 10.09 -- Third Amendment to Stock Purchase Agreement and Agreement and Plan of Reorganization by and among Guaranty, GHI, LST and LSST Financial, dated as of September 30, 1993(18) 10.10 -- Holdback Escrow Agreement by and among LST, Guaranty, and Bank One, Texas, N.A. dated as of November 12, 1993(18) 10.11 -- Termination Agreement by and among Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund, Guaranty Federal Bank, F.S.B., Guaranty Holdings Inc. I, and Temple-Inland Inc., dated as of October 31, 1995(19) 10.12 -- GFB Tax Agreement by and among Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund, Guaranty Federal Bank, F.S.B., Guaranty Holdings Inc. I, and Temple-Inland Inc., dated as of October 31, 1995(19) 10.13 -- Termination Agreement by and among Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund, Guaranty Federal Bank, F.S.B., the surviving institution resulting from the merger of American Federal Bank, F.S.B. with and into Guaranty, which subsequently became the successor-in-interest to LSST Financial Services Corporation, Guaranty Holdings Inc. I, and Temple-Inland Inc., dated as of October 31, 1995(19) 10.14 -- AFB Tax Agreement by and among Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund, Guaranty Federal Bank, F.S.B., the surviving institution resulting from the merger of American Federal Bank, F.S.B. with and into Guaranty, which subsequently became the successor-in-interest to LSST Financial Services Corporation, Guaranty Holdings Inc. I, and Temple-Inland Inc., dated as of October 31, 1995(19) 10.15 -- Agreement and Plan of Merger by and among Temple-Inland Inc., California Financial Holding Company, Guaranty Federal Bank, F.S.B., and Stockton Savings Bank, F.S.B., dated as of December 8, 1996(20) 10.16* -- Temple-Inland Inc. 1997 Stock Option Plan(21), as amended May 7, 1999(25) 10.17* -- Temple-Inland Inc. 1997 Restricted Stock Plan(21) 10.18 -- Agreement and Plan of Merger by and among Temple-Inland Inc., HF Bancorp, Inc., Guaranty Federal Bank, F.S.B., and Hemet Federal Savings and Loan Association, dated as of November 14, 1998(23) 10.19 -- Asset Purchase Agreement dated October 3, 1999, by and among Westvaco Corporation and Temple-Inland Forest Products Corporation, Inland Eastex Extrusion Company, Temple-Inland Recaustisizing Company, Temple-Inland Recovery Company, Temple-Inland Stores Company(24) 10.20* -- Temple-Inland Inc. Stock Deferral and Payment Plan(26) 10.21* -- Employment Agreement dated July 1, 2000, between Inland Paperboard and Packaging, Inc. and Dale E. Stahl(27) 10.22* -- Change in Control Agreement dated October 2, 2000, between the Company and Kenneth M. Jastrow, II(27) 10.23* -- Change in Control Agreement dated October 2, 2000, between the Company and William B. Howes(27) 10.24* -- Change in Control Agreement dated October 2, 2000, between the Company and Harold C. Maxwell(27)
79 81
EXHIBIT NUMBER EXHIBIT ------- ------- 10.25* -- Change in Control Agreement dated October 2, 2000, between the Company and Bart J. Doney(27) 10.26* -- Change in Control Agreement dated October 2, 2000, between the Company and Kenneth R. Dubuque(27) 10.27* -- Change in Control Agreement dated October 2, 2000, between the Company and James C. Foxworthy(27) 10.28* -- Change in Control Agreement dated October 2, 2000, between the Company and Dale E. Stahl(27) 10.29* -- Change in Control Agreement dated October 2, 2000, between the Company and Jack C. Sweeny(27) 10.30* -- Change in Control Agreement dated October 2, 2000, between the Company and M. Richard Warner(27) 10.31* -- Change in Control Agreement dated October 2, 2000, between the Company and Randall D. Levy(27) 10.32* -- Change in Control Agreement dated October 2, 2000, between the Company and Louis R. Brill(27) 10.33* -- Change in Control Agreement dated October 2, 2000, between the Company and Scott Smith(27) 10.34* -- Change in Control Agreement dated October 2, 2000, between the Company and Doyle R. Simons(27) 10.35* -- Change in Control Agreement dated October 2, 2000, between the Company and David W. Turpin(27) 10.36* -- Change in Control Agreement dated October 2, 2000, between the Company and Leslie K. O'Neal(27) 21 -- Subsidiaries of the Company(27) 23 -- Consent of Ernst & Young LLP(27)
- --------------- * Management contract or compensatory plan or arrangement. (1) Incorporated by reference to Registration Statement No. 2-87570 on Form S-1 filed by the Company with the Commission. (2) Incorporated by reference to Post-effective Amendment No. 2 to Registration Statement No. 2-88202 on Form S-8 filed by the Company with the Commission. (3) Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement No. 33-25650 on Form S-8 filed by the Company with the Commission. (4) Incorporated by reference to Registration Statement No. 33-27286 on Form S-8 filed by the Company with the Commission. (5) Incorporated by reference to Registration Statement No. 33-8362 on Form S-1 filed by the Company with the Commission. (6) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1988. (7) Incorporated by reference to the Company's Registration Statement on Form 8A filed with the Commission on February 19, 1999. (8) Incorporated by reference to the Company's Definitive Proxy Statement filed with the Commission on March 18, 1988. 80 82 (9) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1983. (10) Incorporated by reference to the Company's Form 8-K filed with the Commission on October 14, 1988. (11) Incorporated by reference to the Company's Form 8-K filed with the Commission on December 27, 1990. (12) Incorporated by reference to Registration Statement No. 33-40003 on Form S-3 filed by the Company with the Commission. (13) Incorporated by reference to Registration Statement No. 33-43978 on Form S-3 filed by the Company with the Commission. (14) Incorporated by reference to the Company's Form 8-K filed with the Commission on May 2, 1991. (15) Incorporated by reference to Registration Statement No. 33-50880 on Form S-3 filed by the Company with the Commission. (16) Incorporated by reference to the Company's Definitive Proxy Statement in connection with the Annual Meeting of Shareholders held May 6, 1994, and filed with the Commission on March 21, 1994. (17) Incorporated by reference to the Company's Form 10-K for the year ended January 2, 1993. (18) Incorporated by reference to the Company's Form 8-K filed with the Commission on November 24, 1993. (19) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (20) Incorporated by reference to Registration Statement on Form S-4 (No. 333-21937) filed by the Company with the Commission. (21) Incorporated by reference to the Company's Definitive Proxy Statement in connection with the Annual Meeting of Shareholders held May 2, 1997, and filed with the Commission on March 17, 1997. (22) Incorporated by reference to the Company's Form 8-K filed with the Commission on June 2, 1998. (23) Incorporated by reference to Registration Statement on Form S-4 (No. 333-71699) filed by the Company with the Commission. (24) Incorporated by reference to the Company's Form 8-K filed with the Commission on October 6, 1999. (25) Incorporated by reference to the Company's Definitive Proxy Statement in connection with the Annual Meeting of Shareholders held May 7, 1999, and filed with the Commission on March 26, 1999. (26) Incorporated by reference to Registration Statement on Form S-8 (No. 333-33702) filed by the Company with the Commission. (27) Filed herewith. (b) Reports on Form 8-K. The Company did not file any Current Reports on Form 8-K during the fourth quarter of the fiscal year ended December 30, 2000. 81 83 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned thereunto authorized, on March 2, 2001. TEMPLE-INLAND INC. (Registrant) By: /s/ KENNETH M. JASTROW, III ---------------------------------- Kenneth M. Jastrow, II Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ KENNETH M. JASTROW, II Director, Chairman of the March 2, 2001 - ----------------------------------------------------- Board, and Chief Executive Kenneth M. Jastrow, II Officer /s/ RANDALL D. LEVY Chief Financial Officer March 2, 2001 - ----------------------------------------------------- Randall D. Levy /s/ LOUIS R. BRILL Vice President, Chief March 2, 2001 - ----------------------------------------------------- Accounting Officer Louis R. Brill /s/ ROBERT CIZIK Director March 2, 2001 - ----------------------------------------------------- Robert Cizik /s/ ANTHONY M. FRANK Director March 2, 2001 - ----------------------------------------------------- Anthony M. Frank /s/ JAMES T. HACKETT Director March 2, 2001 - ----------------------------------------------------- James T. Hackett /s/ WILLIAM B. HOWES Director March 2, 2001 - ----------------------------------------------------- William B. Howes /s/ BOBBY R. INMAN Director March 2, 2001 - ----------------------------------------------------- Bobby R. Inman /s/ JAMES A. JOHNSON Director March 2, 2001 - ----------------------------------------------------- James A. Johnson
82 84
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ W. ALLEN REED Director March 2, 2001 - ----------------------------------------------------- W. Allen Reed /s/ HERBERT A. SKLENAR Director March 2, 2001 - ----------------------------------------------------- Herbert A. Sklenar /s/ WALTER P. STERN Director March 2, 2001 - ----------------------------------------------------- Walter P. Stern /s/ ARTHUR TEMPLE III Director March 2, 2001 - ----------------------------------------------------- Arthur Temple III /s/ CHARLOTTE TEMPLE Director March 2, 2001 - ----------------------------------------------------- Charlotte Temple /s/ LARRY E. TEMPLE Director March 2, 2001 - ----------------------------------------------------- Larry E. Temple
83 85 SCHEDULE II TEMPLE-INLAND INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)
CHARGED BALANCE AT CHARGED TO TO OTHER BALANCE BEGINNING OF COSTS AND ACCOUNTS- DEDUCTIONS- AT END PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD ------------ ---------- --------- ----------- --------- For the year 2000: Deducted from related asset accounts: Allowance for doubtful accounts....... $ 9 $ 6 $-- $ 5(a) $ 10 Allowance for loan losses............. 113 39 2(b) 36(a) 118 Allowance for unrealized losses on available-for-sale securities....... 19 -- -- 35(c) (16) Allowance for mortgage servicing rights.............................. 1 -- -- 1(a) -- ---- ---- --- ---- ---- Totals........................... $142 $ 45 $ 2 $ 77 $112 ==== ==== === ==== ==== For the year 1999: Deducted from related asset accounts: Allowance for doubtful accounts....... $ 10 $ 5 $-- $ 6(a) $ 9 Allowance for loan losses............. 87 38 12(b) 24(a) 113 Allowance for unrealized losses on available-for-sale securities....... (3) -- -- (22)(c) 19 Allowance for mortgage servicing rights.............................. 17 (16) -- -- 1 ---- ---- --- ---- ---- Totals........................... $111 $ 27 $12 $ 8 $142 ==== ==== === ==== ==== For the year 1998: Deducted from related asset accounts: Allowance for doubtful accounts....... $ 7 $ 5 -- $ 2(a) $ 10 Allowance for loan losses............. 91 1 -- 5(a) 87 Allowance for unrealized losses on available-for-sale securities....... 5 1 -- 9(c) (3) Allowance for mortgage servicing rights.............................. -- 17 -- -- 17 ---- ---- --- ---- ---- Totals........................... $103 $ 24 $-- $ 16 $111 ==== ==== === ==== ====
- --------------- (a) Uncollectible accounts written off, net of recoveries. (b) Additions related to acquisitions and bulk purchases of loans, net of adjustments. (c) Net increase (decrease) in market value of available-for-sale securities. 84 86 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT PAGE NO. ------- ------- -------- 10.21* -- Employment Agreement dated July 1, 2000, between Inland Paperboard and Packaging, Inc. and Dale E. Stahl 10.22* -- Change in Control Agreement dated October 2, 2000, between the Company and Kenneth M. Jastrow, II 10.23* -- Change in Control Agreement dated October 2, 2000, between the Company and William B. Howes 10.24* -- Change in Control Agreement dated October 2, 2000, between the Company and Harold C. Maxwell 10.25* -- Change in Control Agreement dated October 2, 2000, between the Company and Bart J. Doney 10.26* -- Change in Control Agreement dated October 2, 2000, between the Company and Kenneth R. Dubuque 10.27* -- Change in Control Agreement dated October 2, 2000, between the Company and James C. Foxworthy 10.28* -- Change in Control Agreement dated October 2, 2000, between the Company and Dale E. Stahl 10.29* -- Change in Control Agreement dated October 2, 2000, between the Company and Jack C. Sweeny 10.30* -- Change in Control Agreement dated October 2, 2000, between the Company and M. Richard Warner 10.31* -- Change in Control Agreement dated October 2, 2000, between the Company and Randall D. Levy 10.32* -- Change in Control Agreement dated October 2, 2000, between the Company and Louis R. Brill 10.33* -- Change in Control Agreement dated October 2, 2000, between the Company and Scott Smith 10.34* -- Change in Control Agreement dated October 2, 2000, between the Company and Doyle R. Simons 10.35* -- Change in Control Agreement dated October 2, 2000, between the Company and David W. Turpin 10.36* -- Change in Control Agreement dated October 2, 2000, between the Company and Leslie K. O'Neal 21 -- Subsidiaries of the Company 23 -- Consent of Ernst & Young LLP
- --------------- * Management contract or compensatory plan or arrangement. EX-10.21 2 d84570ex10-21.txt EMPLOYMENT AGREEMENT-DALE E. STAHL 1 EXHIBIT 10.21 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into by and between Inland Paperboard and Packaging, Inc., a Delaware corporation (the "Company") and Dale E. Stahl (the "Employee"), effective as of July 1, 2000. WHEREAS, the Company and the Employee desire to set forth the terms and conditions of the Employee's employment with the Company in writing; NOW, THEREFORE, in consideration of the above recitals and the mutual promises and conditions contained below, the parties hereby agree as follows: 1. EMPLOYMENT: The Employee's employment shall be subject to and conditioned upon Employee's furnishing documentation required by law and providing appropriate background information as required of salaried employees under the Company's normal hiring practices. Employee's employment with the Company shall commence as of July 1, 2000 ("Employment Date"). 2. TITLE AND DUTIES: During the term of this Agreement, the Employee shall be employed by the Company as its President and Chief Operating Officer. Employee shall also serve as Group Vice President-Paper of the Company's parent, Temple-Inland Inc. ("Temple-Inland"). The Employee agrees to devote his full time, attention, skill and energy to the business and affairs of the Company and Temple-Inland, and will use his best efforts to promote the success of the Company and Temple-Inland. 3. NO INCONSISTENT OBLIGATIONS: The Employee affirms that he is not bound by any contract or agreement with any other person or entity which would be violated by his employment with the Company under the terms and conditions of this Agreement. 4. COMPENSATION: During the term of this Agreement, the Company shall pay the Employee no less than the following amounts:
SALARY MINIMUM BONUS TOTAL CASH Year 1 $325,000 $275,000 $600,000 Year 2 $350,000 $275,000 $625,000
The Employee's compensation shall be paid according to the Company's normal pay/bonus cycle for executive officers; provided, however, that the bonus payable in February 2001 shall be a prorata amount based on Employee's length of service between the Employment Date and the initial bonus payment date. All payments shall be subject to all applicable tax withholding and deductions. 1 2 5. BENEFITS: a. BENEFIT PLANS: The Employee shall be eligible to participate in the Company's health and welfare benefit plans, retirement plan, 401(k) plan and any other benefit plans provided to other salaried employees from time to time during his employment according to the terms set forth in such plans. b. VACATION: The Employee shall be eligible for four weeks paid vacation and the Company's normal paid holidays, as provided to other salaried employees from time to time during the term of employment. c. STOCK OPTIONS: Effective on July 3, 2000, Employee shall be granted an option to purchase 25,000 shares of Temple-Inland Inc. common stock at fair market value on the date of such grant as determined under the Temple-Inland Inc. Stock Option Plan. Thereafter, Employee shall be eligible to be considered for additional stock option grants as a Tier I employee beginning in 2001. Employee understands and agrees that the Temple-Inland Inc. Management Development and Executive Compensation Committee has full and complete discretion to award options to employees and, other than the initial grant described above, no subsequent grants are guaranteed to be awarded or to be awarded in any particular amount. 6. RELOCATION EXPENSES: The Company shall reimburse the Employee for all reasonable and customary expenses incurred by the Employee in relocating his principal residence to Indianapolis, Indiana under the Company's standard relocation policy; provided, that the Employee shall submit to the Company a normal expense voucher which will be subject to the approval of the Company. Employee shall complete his relocation no later than December 31, 2000. 7. CHANGE IN CONTROL: In the event Employee's employment by the Company is terminated or Employee resigns for Good Reason, as defined below, within two (2) years following any Change in Control, Employee shall be paid the Compensation Amount in a lump sum within thirty (30) days of the date of such termination or resignation. In the event Company or Temple-Inland adopts a change in control plan or provisions for senior management, Employee shall receive the benefits of such plan or provisions if they provide a greater cash payment to Employee, but shall not receive both the payment under the Agreement and the payment under such new plan or provisions. This item 7 shall survive the termination of this Agreement. For purposes of this Agreement: a. CHANGE IN CONTROL: "Change in Control" means (i) a merger or consolidation to which the Company or Temple-Inland is a party and for which the approval of any shareholders of the Company or Temple-Inland is required; (ii) any "person" (as such term is used in Sections 13(d) and 2 3 14(d)(2) of the Securities Exchange Act of 1934, as amended) becoming the beneficial owner, directly or indirectly, of securities representing 25% or more of the combined voting power of the Company's or Temple-Inland's then outstanding securities; (iii) a sale or transfer of substantially all of the assets of the Company or Temple-Inland; or (iv) a liquidation or reorganization of the Company or Temple-Inland. b. COMPENSATION AMOUNT: "Compensation Amount" means the gross amount of cash required to provide a net payment after federal, state and local taxes to Employee equal to two (2) times his annual cash compensation (salary and minimum bonus) as set forth in item 3 above. c. GOOD REASON: "Good Reason" means a substantial reduction in the Employee's duties as set forth in item 2 above, a reduction in Employee's annual cash compensation as set forth in item 4 above or a failure to pay such compensation within seven (7) days of the date such compensation is due, a substantial reduction in Employee's benefits as set forth in item 4(a) above, or the relocation of Employee's principal place of employment to a location more than 15 miles from Indianapolis, Indiana. 8. TERMINATION OF AGREEMENT: a. TERM: Except for the covenants set out in sections 7, 9 and 10, which shall survive, this Agreement shall terminate upon the earliest to occur of the following: i. 24 months from the Employment Date; ii. the Employee's death, resignation or retirement; iii. immediately and without prior notice upon Disability of the Employee (as defined below); or iv. immediately and without prior notice upon the determination of the Company to terminate the Employee's employment, with or without cause, for any reason. b. DEFINITION OF DISABILITY: The Employee will be deemed to have a "disability" if, for physical or mental reasons, the Employee is unable to perform the essential functions of the Employee's duties under this Agreement for one-hundred-twenty (120) consecutive days, or one-hundred-eighty (180) days during any twelve month period, as determined in accordance with this Section 8(b). The disability of the Employee will be determined by a physician selected by written agreement of the Company and the Employee upon the request of either party by notice to the other. If the Company and the Employee cannot agree on the selection of a physician, each of them will select a physician and the two physicians will select a third physician who will determine whether the 3 4 Employee has a disability. The determination of the physician selected under this Section 8(b) will be binding on both parties. The Employee must submit to a reasonable number of examinations by the physician making the determination of disability under this Section 8(b), and the Employee hereby authorizes the disclosure and release to the Company of such determination and all supporting medical records. If the Employee is not legally competent, the Employee's legal guardian or duly authorized attorney-in-fact will act in the Employee's stead, under this Section 8(b), for the purposes of submitting the Employee to the examinations, and providing the authorization of disclosure, required under this Section 8(b). c. TERMINATION PAY: In the event that the Employee's employment with the Company is terminated for any reason other than (i) a Change in Control, (ii) the Employee's resignation, (iii) retirement, (iv) disability, or (v) willful misconduct (including, but not limited to, dishonesty, fraud, embezzlement, gross insubordination, gross misconduct and the like), the Employee shall be entitled to receive a severance payment in a gross amount (less applicable tax withholdings) equal to the projected two-year cash compensation set forth above of $1,225,000 reduced by all cash compensation paid to Employee up to and including the date of termination. d. EMPLOYMENT-AT-WILL: If the Employee remains employed by the Company at the termination of this Agreement pursuant to item 8.(a)(i) hereof, his employment shall be at-will and may be terminated by either the Employee or the Company thereafter without regard to this Agreement except as set forth in item 7 hereof. 9. NON-DISCLOSURE COVENANT: a. The Employee acknowledges that: i. During the Agreement the Employee will be afforded access to trade secrets and confidential business information, including but not limited to: corporate planning; production; distribution or marketing processes; manufacturing techniques; customer lists or customer leads; marketing information or procedures; development or environmental work; work in process; financial statements or notes, schedules or supporting financial data; or any other secret or confidential matter relating to the products, sales or business of the Company or Temple-Inland, including plans for expansion to new products, areas and markets; new product development budgets and forecasts, together with all written and graphic materials relating thereto (collectively "Confidential Information"); 4 5 ii. Public disclosure of such Confidential Information could have an adverse effect on the Company and its business or Temple-Inland and its business; iii. The Employee's covenants in this Section 9 are a material inducement for the Company to enter into this Agreement and to allow the Employee access to the Confidential Information; and iv. The provisions of this Section 9 are reasonable and necessary to prevent improper use of Confidential Information. b. At all times during the term of this Agreement and thereafter, the Employee shall hold in strictest confidence and not disclose, directly or indirectly, to any person, firm or corporation, without the express written prior authorization of the Company or Temple-Inland, any Confidential Information. 10. CONFIDENTIALITY: The parties agree that this Agreement is of a confidential nature and that neither the existence of this Agreement nor its terms shall be disclosed except (i) to consultants, advisors and affiliates (who shall be informed of and be bound by the terms of this Section 10), (ii) as required by securities laws or other law, or (iii) to the Internal Revenue Service in connection with an audit of any of the Company's or the Employee's tax returns. 11. GOVERNING LAW: This Agreement will be governed by the laws of the United States and the State of Indiana, as applicable, without regard to conflicts of laws principles. 12. MISCELLANEOUS: a. The parties agree that the covenants and other terms contained in this Agreement are reasonable in all respects. b. The parties agree that each and every paragraph, sentence, term and provision of this Agreement shall be considered severable and that, in the event a court or other tribunal finds any paragraph, sentence, term or provision to be invalid or unenforceable, the validity, enforceability, operation or effect of the remaining paragraphs, sentences, terms or provisions shall not be affected. c. The failure of either party to insist in any one or more instances upon performance of any of the provisions of the Agreement or to pursue their rights thereunder, shall not be construed as a waiver of any such provisions or the relinquishment of any rights. d. Any notices, requests or other communications required hereunder shall be in writing and shall be personally delivered or, if mailed, by first class mail 5 6 If to the Company, to: Inland Paperboard and Packaging, Inc. 4030 Vincennes Road Indianapolis, Indiana 46268 Attn: Steven L. Householder If to the Employee, to: Dale E. Stahl 4030 Vincennes Road Indianapolis, Indiana 46268 e. This Agreement represents the sole and entire agreement among the Employee and the Company relating to the Employee's employment and supersedes all prior promises, contracts and agreements of any kind, whether written or oral, express or implied, as well as any negotiations and/or discussions between the parties hereto. Any amendment to this Agreement must be in writing and signed by duly authorized representatives of each of the parties hereto and must expressly state that it is the intention of each of the parties hereto to amend this Agreement. f. Except for the rights of the Company or Temple-Inland set forth in Sections 9 and 10, this Agreement is for the benefit of, and may be enforced only by, the Company and the Employee and their respective assignees, heirs and personal representatives, and is not for the benefit of, and may not be enforced by, any other person or entity. This Agreement shall be binding upon the successors and assigns of the Company. Dated: ------------------------ ----------------------------------- Dale E. Stahl Dated: INLAND PAPERBOARD AND PACKAGING, ------------------------ INC. BY: -------------------------------- 6 EX-10.22 3 d84570ex10-22.txt CHANGE IN CONTROL AGREEMENT-KENNETH M. JASTROW II 1 EXHIBIT 10.22 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Kenneth M. Jastrow, II (the "Executive"). WHEREAS, Temple-Inland considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of Temple-Inland and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, Temple-Inland and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on the Effective Date and shall continue in effect through the second anniversary of the Effective Date; provided, however, that commencing on the first anniversary of the Effective Date, and on each anniversary of the Effective Date thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to each such date, the Company or the Executive shall have given notice not to extend the Term; and provided, further, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than 36 months beyond the month in which such Change in Control occurred. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third- party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. and their respective direct or indirect subsidiaries (or any respective successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., 19 20 except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 20 21 Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 21 22 Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 22 23 thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ----------------------------------- Name: Title: EXECUTIVE -------------------------------------- Kenneth M. Jastrow, II 24 EX-10.23 4 d84570ex10-23.txt CHANGE IN CONTROL AGREEMENT-WILLIAM B. HOWES 1 EXHIBIT 10.23 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and William B. Howes (the "Executive"). WHEREAS, Temple-Inland considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of Temple-Inland and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, Temple-Inland and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on the Effective Date and shall continue in effect through the second anniversary of the Effective Date; provided, however, that commencing on the first anniversary of the Effective Date, and on each anniversary of the Effective Date thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to each such date, the Company or the Executive shall have given notice not to extend the Term; and provided, further, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than 36 months beyond the month in which such Change in Control occurred. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third-party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and cir- 11 12 cumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, or (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the 19 20 Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the 20 21 Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service 21 22 with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 22 23 (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. 23 24 IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ---------------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------------- William B. Howes Tier I: Paper 24 EX-10.24 5 d84570ex10-24.txt CHANGE IN CONTROL AGREEMENT-HAROLD C. MAXWELL 1 EXHIBIT 10.24 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Harold C. Maxwell (the "Executive"). WHEREAS, Temple-Inland considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of Temple-Inland and its stockholders; and WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, Temple-Inland and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on the Effective Date and shall continue in effect through the second anniversary of the Effective Date; provided, however, that commencing on the first anniversary of the Effective Date, and on each anniversary of the Effective Date thereafter, the Term shall automatically be extended for one additional year unless, not later than 90 days prior to each such date, the Company or the Executive shall have given notice not to extend the Term; and provided, further, that if a Change in Control shall have occurred during the Term, the Term shall expire no earlier than 36 months beyond the month in which such Change in Control occurred. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third-party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) for so long as the Executive is employed in the Company's Building Products Group (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation (or any successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation 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., 19 20 except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 20 21 Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 21 22 Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 22 23 thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ---------------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------------- Harold C. Maxwell 24 EX-10.25 6 d84570ex10-25.txt CHANGE IN CONTROL AGREEMENT-BART J. DONEY 1 EXHIBIT 10.25 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Bart J. Doney (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third- party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long- term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, or (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the 19 20 Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to 20 21 the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service 21 22 with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 22 23 (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. 23 24 IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ---------------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------------- Bart J. Doney 24 EX-10.26 7 d84570ex10-26.txt CHANGE IN CONTROL AGREEMENT-KENNETH R. DUBUQUE 1 EXHIBIT 10.26 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Kenneth R. Dubuque (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third- party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) for so long as the Executive is employed in the Company's Financial Services Group (i) substantially all of the Company's ownership interest in Guaranty Federal Bank, F.S.B. (or any successor thereto) or (ii) substantially all of the assets of Guaranty Federal Bank, F.S.B. 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., 19 20 except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 20 21 Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive 21 22 was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 22 23 thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ---------------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------------- Kenneth R. Dubuque 24 EX-10.27 8 d84570ex10-27.txt CHANGE IN CONTROL AGREEMENT-JAMES C. FOXWORTHY 1 EXHIBIT 10.27 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and James C. Foxworthy (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three- year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third-party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then sub section (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, or (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the 19 20 Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the 20 21 Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service 21 22 with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 22 23 (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. 23 24 IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ----------------------------------------- Name: Kenneth M. Jastrow, II. Title: Chairman and Chief Executive Officer EXECUTIVE -------------------------------------------- James C. Foxworthy 24 EX-10.28 9 d84570ex10-28.txt CHANGE IN CONTROL AGREEMENT-DALE E. STAHL 1 EXHIBIT 10.28 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Dale E. Stahl (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third-party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, or (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the 19 20 Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the 20 21 Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service 21 22 with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. 22 23 (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. 23 24 IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ---------------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------------- Dale E. Stahl Tier I: Paper 24 EX-10.29 10 d84570ex10-29.txt CHANGE IN CONTROL AGREEMENT-JACK C. SWEENY 1 EXHIBIT 10.29 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Jack C. Sweeny (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third- party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) for so long as the Executive is employed in the Company's Building Products Group (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation (or any successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation 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., 19 20 except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 20 21 Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 21 22 Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 22 23 thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: -------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ----------------------------------- Jack C. Sweeny 24 EX-10.30 11 d84570ex10-30.txt CHANGE IN CONTROL AGREEMENT-M. RICHARD WARNER 1 EXHIBIT 10.30 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and M. Richard Warner (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third- party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. and their respective direct or indirect subsidiaries (or any respective successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., 19 20 except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 20 21 Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 21 22 Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 22 23 thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: --------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------ M. Richard Warner 24 EX-10.31 12 d84570ex10-31.txt CHANGE IN CONTROL AGREEMENT-RANDALL D. LEVY 1 EXHIBIT 10.31 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Randall D. Levy (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third-party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit other wise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent other wise 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 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then sub section (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforce able by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. and their respective direct or indirect subsidiaries (or any respective successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by share holders of the Company in substantially the same proportions as their owner ship of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., 19 20 except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in 20 21 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: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 21 22 Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 22 23 thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ---------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------- Randall D. Levy 24 EX-10.32 13 d84570ex10-32.txt CHANGE IN CONTROL AGREEMENT-LOUIS R. BRILL 1 EXHIBIT 10.32 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Louis R. Brill (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third-party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit other wise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent other wise 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 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then sub section (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 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 8 9 to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and cir- 11 12 cumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforce able by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. and their respective direct or indirect subsidiaries (or any respective successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by share holders of the Company in substantially the same proportions as their owner ship of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., 19 20 except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 20 21 Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the Execu- 21 22 tive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supple mental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 22 23 thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ----------------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE -------------------------------------------- Louis R. Brill 24 EX-10.33 14 d84570ex10-33.txt CHANGE IN CONTROL AGREEMENT-SCOTT SMITH 1 EXHIBIT 10.33 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Scott Smith (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (3) times the sum of (i) the Executive's highest base salary as in effect during the three-year period ending immediately prior to the Date of Termination and (ii) the Executive's target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). The amount payable pursuant to this Section 6.1(A) shall be reduced by the amount of any cash severance or salary continuation benefit paid or payable to the Executive under any other plan, policy or program of the Company or any written employment agreement between the Executive and the Company. (B) For the three-year period immediately following the Date of Termination, the Company shall arrange to provide the Executive and his dependents life, short-term disability, long-term disability, travel accident, accidental death and dismemberment, medical, dental and other health and welfare benefits substantially similar to those provided to the Executive and his dependents immediately prior to the Date of Termination or, if more favorable to the Executive, those provided to the Executive and his dependents immediately prior to the first occurrence of an event or circumstance constituting Good Reason, at no greater cost to the Executive than the cost to the Executive immediately prior to such date or occurrence; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health and welfare benefits shall be provided through a third- party insurer. To the extent that health and welfare benefits of the same type are received by or made available to the Executive during the three-year period following the Executive's Date of Termination (which such benefits received by or made available to the Executive shall be reported by the Executive to the insurance company or other appropriate party in accordance with any applicable coordination of benefits provisions), the benefits otherwise receivable by the Executive pursuant to this Section 6.1(B) shall be made secondary to such benefits; provided, however, that the Company shall reimburse the Executive for the excess, if any, of the cost of such benefits to the Executive over such cost 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) thirty-six (36) additional months of service credit thereunder and had been credited during such period with compensation at the highest rate in effect during the three-year period ending immediately prior to the Date of Termination. (E) Notwithstanding any provision of any Pension Plan or deferred compensation plan to the contrary, and except to the extent otherwise provided in Section 6.1(F), in lieu of any other benefit under a supplemental, excess benefit or deferred compensation plan, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) the actuarial equivalent of the aggregate benefit which the Executive had accrued under the terms of all supplemental and excess benefit plans and (ii) the actuarial equivalent of the deferred compensation otherwise payable to the Executive, in either case without regard to any amendment to any such plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder. For purposes of this Section 6.1(E), "actuarial equivalent" shall be determined (x) using the same assumptions utilized under the applicable plan (or if there is no provision for such assumptions, under the Company's tax-qualified Pension Plan in which the Executive participates) immediately prior to the Date of Termination or, if more favorable to the Executive, immediately prior to the first occurrence of an event or circumstance constituting Good Reason, (y) taking into account any early retirement subsidies associated with the applicable benefit, and (z) on the basis of a straight life annuity (or other default form of benefit) commencing at the date (but in no event earlier than the third anniversary of the Date of Termination) as of which the actuarial equivalent of such annuity or other form of benefit is greatest. 5 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the three (3) years immediately following the Date of Termination, determined (x) as if the Executive made the maximum permissible contributions thereto during such period, (y) as if the Executive earned compensation during such period at a rate equal to the Executive's highest rate of compensation (as defined in the Pension Plan) during the three-year period ending immediately prior to the Date of Termination, and (z) without regard to any amendment to the Pension Plan made subsequent to a Change in Control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of benefits thereunder, and (ii) the excess, if any, of (x) the Executive's account balance under the Pension Plan as of the Date of Termination over (y) the portion of such account balance that is nonforfeitable under the terms of the Pension Plan. (G) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the sum of (i) any unpaid incentive compensation which has been allocated or awarded to the Executive for a completed annual bonus cycle preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the continued employment of the Executive to a subsequent date, (ii) if the Date of Termination occurs before the end of the first six months in the then-current annual bonus cycle under the applicable plan, a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period, and (iii) if the Date of Termination occurs after the end of the first six months in the then-current annual bonus cycle but before the end of such annual bonus cycle under the applicable plan, the full aggregate value of all contingent incentive compensation awards to the Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within three (3) years after the Date of Termination, the Company shall provide such post-retirement health care or life insurance benefits to the Executive and the Executive's dependents commencing on the later of (i) the date on which such coverage would have first become available and (ii) the date on which benefits described in subsection (B) of this Section 6.1 terminate. (I) The Company shall reimburse the Executive for expenses incurred for outplacement services suitable to the Executive's position for a period of one (1) year following the Date of Termination (or, if earlier, until the first acceptance by the Executive of an offer of employment) in an amount not exceeding 15% of the sum of the Executive's highest annual base rate of salary as in effect during the three-year period ending immediately prior to the Date of Termination, and the greatest target annual bonus pursuant to any annual bonus or incentive plan maintained by the Company in respect of the fiscal year in which occurs the Date of Termination (or, if higher, in respect of any of the three preceding fiscal years). (J) For the three-year period immediately following the Date of Termination, the Company shall provide the Executive with his customary perquisites (such as any use of a Company provided automobile, club membership fee reimbursements, income tax preparation and financial advisory services) in each case on the same terms and conditions that were applicable immediately prior to the Date of Termination or, if more favorable, immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any payment or benefit received or to be received by the Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such 30 day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination (which, in the case of a termination by the Company, shall not be less than 30 days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than 15 days nor more than 60 days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 12 13 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Temple-Inland, Temple-Inland will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Temple-Inland to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Temple-Inland would be required to perform it if no such succession had taken place. Failure of Temple-Inland to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 13 14 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address of the Executive as maintained from time to time on the payroll system of the Company and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: Temple-Inland Inc. 303 South Temple Drive Diboll, Texas 75941 Attention: M. Richard Warner 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by the Executive or the Company; provided, however, that this Agreement shall supersede any agreement setting forth the terms and conditions of the 14 15 Executive's employment with the Company only in the event that the Executive's employment with the Company is terminated on or following a Change in Control, by the Company other than for Cause or by the Executive other than for Good Reason. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Texas without regard to its principles of conflicts of law. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 15 16 12. Validity. 12.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. 16 17 (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to act, on the Executive's part shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Board by clear and convincing evidence that Cause exists. (G) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clauses (a), (b) or (c) of paragraph (III) below; (II) within any twenty-four (24) month period, the following individuals cease for any reason to constitute a majority of the number of directors then serving on the Board: individuals who, on the Effective Date, constitute the Board and any new director (other than a director whose initial 17 18 assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: 18 19 (A) substantially all of the Company's assets, (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. and their respective direct or indirect subsidiaries (or any respective successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., 19 20 except that in determining under Section 15(G) hereof whether or not any Change in Control of the Company has occurred, Company shall include any successor to Temple-Inland Inc.'s business and/or assets which assumes and agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 20 21 Control under the circumstances described in clauses (i) and (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VI) below to a "Change in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 21 22 Executive was participating immediately prior to the Change in Control, the taking of any other action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 22 23 thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ----------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE -------------------------------------- Scott Smith 24 EX-10.34 15 d84570ex10-34.txt CHANGE IN CONTROL AGREEMENT-DOYLE R. SIMONS 1 EXHIBIT 10.34 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Doyle R. Simons (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 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 2 3 to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to 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 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) 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 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the 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 Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within 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 Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of 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, 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 12 13 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 14 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 15 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 15 16 with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. 16 17 (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 17 18 election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: (A) substantially all of the Company's assets, 18 19 (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. and their respective direct or indirect subsidiaries (or any respective successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., 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 19 20 agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 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 20 21 Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 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 21 22 benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 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 22 23 temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ---------------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------------- Doyle R. Simons Tier II: Corporate 24 EX-10.35 16 d84570ex10-35.txt CHANGE IN CONTROL AGREEMENT-DAVID W. TURPIN 1 EXHIBIT 10.35 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and David W. Turpin (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to 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 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) 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 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the 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 Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within 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 Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and 11 12 circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of 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, 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 12 13 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 14 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 15 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 15 16 with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. 16 17 (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 17 18 election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: (A) substantially all of the Company's assets, 18 19 (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. and their respective direct or indirect subsidiaries (or any respective successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., 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 19 20 agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 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 20 21 Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 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 21 22 benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 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 22 23 temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: -------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------ David W. Turpin 24 EX-10.36 17 d84570ex10-36.txt CHANGE IN CONTROL AGREEMENT-LESLIE K. O'NEAL 1 EXHIBIT 10.36 CHANGE IN CONTROL AGREEMENT THIS AGREEMENT, dated October 2, 2000 (the "Effective Date"), is made by and between Temple-Inland Inc., a Delaware corporation ("Temple-Inland"), and Leslie K. O'Neal (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. 2 3. Company's Covenants Summarized. In order to induce the Executive to remain in the employ of the Company and in consideration of the Executive's covenants set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in Section 9.1 hereof, no Severance Payments shall be payable under this Agreement unless there shall have been (or, under the terms of the second sentence of Section 6.1 hereof, there shall be deemed to have been) a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii) the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any compensation or benefit plan, program or arrangement maintained by the Company during such period (other than any disability plan), until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the highest rate in effect during the three-year period ending immediately prior 2 3 to the Date of Termination together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's compensation and benefit plans, programs or arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement, insurance and other compensation or benefit plans, programs and arrangements as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the occurrence of the first event or circumstance constituting Good Reason. 6. Severance Payments. 6.1 If the Executive's employment is terminated following a Change in Control and within two (2) years after a Change in Control, other than (A) by the Company for Cause, (B) by reason of death or Disability, or (C) by the Executive without Good Reason, then the Company shall pay the Executive the amounts, and provide the Executive the benefits, described in this Section 6.1 ("Severance Payments") and Section 6.2, in addition to any payments and benefits to which the Executive is entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control (whether or not a Change in Control ever occurs) and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, or (ii) the Executive terminates his employment for Good Reason prior to a Change in Control (whether or not a Change in Control ever occurs) and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person. For purposes of any determination regarding the applicability of the immediately preceding sentence, any position taken by the 3 4 Executive shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that such position is not correct. (A) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to 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 4 5 immediately prior to the Date of Termination or, if more favorable to the Executive, the first occurrence of an event or circumstance constituting Good Reason. (C) Each option held by the Executive to purchase shares of common stock of Temple-Inland outstanding as of the Date of Termination shall be treated in accordance with the applicable terms of any plan (including any underlying agreement) pursuant to which it was granted. (D) For purposes of determining the amount of any benefit payable to the Executive and the Executive's right to any benefit otherwise payable under a Pension Plan, the Executive shall be treated as if he had accumulated (after the Date of Termination) 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 6 (F) In addition to the benefits to which the Executive is entitled under any defined contribution Pension Plan, the Company shall pay the Executive a lump sum amount, in cash, equal to the sum of (i) the amount that would have been contributed thereto by the Company on the Executive's behalf during the 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 Executive for the uncompleted period 6 7 under any such plan assuming the achievement, at the target level (or if higher, at the then projected actual final level), of the individual and corporate performance goals established with respect to such award. (H) If the Executive would have become entitled to benefits under the Company's post-retirement health care or life insurance plans, as in effect immediately prior to the Date of Termination or, if more favorable to the Executive, as in effect immediately prior to the first occurrence of an event or circumstance constituting Good Reason, had the Executive's employment terminated at any time within 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 Executive in connection with a Change in Control or the termination of the Executive's employment (whether pursuant to the terms of this Agreement or 7 8 any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments and benefits, including the Severance Payments, being hereinafter called "Total Payments") will be subject (in whole or part) to the Excise Tax, then, subject to the provisions of subsection (B) of this Section 6.2, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income tax which could be obtained from deduction of such state and local taxes. (B) In the event that the amount of the Total Payments does not exceed 110% of the largest amount that would result in no portion of the Total Payments being subject to the Excise Tax (the "Safe Harbor"), then subsection (A) of this Section 6.2 shall not apply and the noncash Severance Payments shall first be reduced (if necessary, to zero), and the cash Severance Benefits shall thereafter be reduced (if necessary, to zero) so that the amount of the Total Payments is equal to the Safe Harbor; provided, however, that the Executive may elect to have the cash Severance Payments reduced (or eliminated) prior to any reduction of the noncash Severance Payments. (C) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, unless in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent auditor (the "Auditor"), such other payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(l) of the Code shall be treated as subject 8 9 to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. Prior to the payment date set forth in Section 6.3 hereof, the Company shall provide the Executive with its calculation of the amounts referred to in this Section 6.2(C) and such supporting materials as are reasonably necessary for the Executive to evaluate the Company's calculations. If the Executive disputes the Company's calculations (in whole or in part), the reasonable opinion of Tax Counsel with respect to the matter in dispute shall prevail. (D) (I) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the Gross-Up Payment, the amount of the reduction in the Severance Payments, plus interest on the amount of such repayments at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (II) In the event that (1) amounts are paid to the Executive pursuant to Section 6.2(A), (2) there is a Final Determination that the Excise Tax is less than the amount taken into account hereunder in calculating the Gross-Up Payment, and (3) after giving effect to such Final Determination, the Severance Payments are not to be reduced pursuant to Section 6.2(B), the Executive shall repay to the Company, within five (5) business days following the date of the Final Determination, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive), to the extent that such repayment results in a reduction in the Excise Tax and a dollar-for-dollar reduction in the Executive's taxable income and wages for purposes of federal, state and local income and employment taxes, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 9 10 (III) Except as otherwise provided in clause (IV) below, in the event there is a Final Determination that the Excise Tax exceeds the amount taken into account hereunder in determining the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall pay to the Executive, within five (5) business days following the date of the Final Determination, the sum of (1) a Gross-Up Payment in respect of such excess and in respect of any portion of the Excise Tax with respect to which the Company had not previously made a Gross-Up Payment, including a Gross-Up Payment in respect of any Excise Tax attributable to amounts payable under clauses (2) and (3) of this paragraph (III) (plus any interest, penalties or additions payable by the Executive with respect to such excess and such portion), (2) if Severance Payments were reduced pursuant to Section 6.2(B) but after giving effect to such Final Determination, the Severance Payments should not have been reduced pursuant to Section 6.2(B), the amount by which the Severance Payments were reduced pursuant to Section 6.2(B), and (3) interest on such amounts at 120% of the rate provided in section 1274(b)(2)(B) of the Code. (IV) In the event that (1) Severance Payments were reduced pursuant to Section 6.2(B) and (2) the aggregate value of Total Payments which are considered "parachute payments" within the meaning of section 280G(b)(2) of the Code is subsequently redetermined in a Final Determination, but such redetermined value still does not exceed 110% of the Safe Harbor, then, within five (5) business days following such Final Determination, (x) the Company shall pay to the Executive the amount (if any) by which the reduced Severance Payments (after taking the Final Determination into account) exceeds the amount of the reduced Severance Payments actually paid to the Executive, plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code, or (y) the Executive shall pay to the Company the amount (if any) by which the reduced Severance Payments actually paid to the Executive exceeds the amount of the reduced Severance Payments (after taking the Final Determination into account), plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. 6.3 The payments provided in subsections (A), (E), (F) and (G) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, 10 11 the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the 30th day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1. Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and cir- 11 12 cumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. For purposes of this Agreement, any purported termination of the Executive's employment shall be presumed to be other than for Cause unless the Notice of Termination includes a copy of 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, 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 12 13 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 14 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 15 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 15 16 with 12 U.S.C. Section 1828(k) and FDIC Regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments. 12.2 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes. All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Board and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Board a decision of the Board within 60 days after notification by the Board that the Executive's claim has been denied. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (B) "Auditor" shall have the meaning set forth in Section 6.2 hereof. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of Temple-Inland Inc. 16 17 (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 17 18 election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; (III) there is consummated a merger, consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or any recapitalization of the Company (for purposes of this paragraph (III), a "Business Event") unless, immediately following such Business Event (a) the directors of the Company immediately prior to such Business Event continue to constitute at least a majority of the board of directors of the Company, the surviving entity or any parent thereof, (b) the voting securities of the Company outstanding immediately prior to such Business Event continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least 60% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such Business Event, or (c) no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company or such surviving entity or any parent thereof (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity or any parent thereof (except to the extent such ownership existed prior to the Business Event); (IV) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company; (V) there is consummated an agreement for the sale, disposition or long-term lease by the Company of: (A) substantially all of the Company's assets, 18 19 (B) (i) substantially all of the Company's ownership interest in Inland Paperboard and Packaging, Inc. (or any successor thereto) or (ii) substantially all of the assets of Inland Paperboard and Packaging, Inc. and its direct or indirect subsidiaries (or any successor or successors thereto), or (C) (i) substantially all of the Company's ownership interest in Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. (or any respective successor thereto) or (ii) substantially all of the assets of Temple-Inland Forest Products Corporation or Guaranty Federal Bank, F.S.B. and their respective direct or indirect subsidiaries (or any respective successor or successors thereto), other than such a sale, disposition or lease to an entity, at least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale or disposition; or (VI) any other event that the Board, in its sole discretion, determines to be a Change in Control for purposes of this Agreement. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Company" shall mean, unless the context clearly requires otherwise, Temple-Inland Inc., a Delaware corporation, and any of its Affiliates that actually employ the Executive; provided, that (I) for purposes of Sections 15(G) and 15(U) hereof, Company shall mean Temple-Inland Inc., 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 19 20 agrees to perform this Agreement by operation of law or otherwise, (II) unless the context clearly requires otherwise, references to the Company in a capacity of employer shall mean Temple-Inland Inc. or any of its Affiliates, whichever actually employs the Executive, and (III) where the Agreement requires the Company to make a payment to the Executive or to take some other action, either Temple-Inland, Inc. shall do so or it shall cause any of its Affiliates that actually employ the Executive to do so. (J) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (K) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of six consecutive months, the Company shall have given the Executive a Notice of Termination for Disability, and, within 30 days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (L) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (M) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (N) "Executive" shall mean the individual named in the first paragraph of this Agreement. (O) "Final Determination" means a final determination by the Internal Revenue Service or, if such determination is appealed, a final determination by any court of competent jurisdiction. (P) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in 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 20 21 Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (IV), or (V) below, such act or failure to act is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties substantially inconsistent with the Executive's status as a senior executive officer of the Company or a material adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control (including, as applicable and without limitation, the Executive ceasing to be an executive officer of a public company); (II) a substantial reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location more than 50 miles from the Executive's principal place of employment immediately prior to the Change in Control or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven days of the date such compensation is due; (V) the failure by the Company to continue to provide the Executive with benefits substantially similar to the material benefits enjoyed by the Executive under any of the Company's executive compensation (including bonus, equity or incentive compensation), pension, savings, life insurance, medical, health and accident, or disability plans in which the 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 21 22 benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VI) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless the Company establishes to the Board by clear and convincing evidence that Good Reason does not exist. (Q) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (R) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (S) "Pension Plan" shall mean any tax-qualified, supplemental or excess benefit pension plan maintained by the Company and any other plan or agreement entered into between the Executive and the Company which is designed to provide the Executive with supplemental retirement benefits, and any tax-qualified, supplemental or excess defined contribution plan maintained by the Company and any other defined contribution plan or agreement entered into between the Executive and the Company. (T) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) 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 tempo- 22 23 rarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company. (U) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of either the then outstanding shares of common stock of the Company or the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (V) "Retirement" shall be deemed the reason for the termination by the Executive of the Executive's employment if such employment is terminated in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. (W) "Severance Payments" shall have the meaning set forth in Section 6.1 hereof. (X) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. 23 24 (Y) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (Z) "Total Payments" shall mean those payments so described in Section 6.2 hereof. IN WITNESS WHEREOF, the parties have duly executed this Agreement to be effective as of the Effective Date. TEMPLE-INLAND INC. By: ---------------------------------------- Name: Kenneth M. Jastrow, II Title: Chairman and Chief Executive Officer EXECUTIVE ------------------------------------------- Leslie K. O'Neal Tier II: Corporate 24 EX-21 18 d84570ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF TEMPLE-INLAND INC. Name (Jurisdiction of Incorporation) All Subsidiaries are wholly-owned unless noted otherwise. INLAND CONTAINER CORPORATION I (DELAWARE) Inland Paperboard and Packaging, Inc.(Delaware) El Morro Corrugated Box Corporation (Delaware) El Morro Corrugated Box Corporation (Puerto Rico)(100%) Georgia Kraft Company (Delaware) Sabine River & Northern Railroad Company (Texas) Inland Argentina, Inc. (Delaware) Inland Argentina, S.A. (Argentina) Inland Chile I, Inc. (Delaware) Manufacturas y Embalajes Inland Chile Limitada (90%; 10% Inland Chile II)(Chile) Inland Chile II, Inc. (Delaware) Inland Container FSC, Inc. (U.S. Virgin Islands) Inland International Holding Company (Delaware) Inland Corrugados de Mexico, S.A. de C.V. (Mexico) Inland Corrugados de Guanajato, S.A. de C.V. (Mexico) Inland Corrugados de Monterrey, S.A. de C.V. (Mexico) Inland Corrugados de Sinaloa, S.A. de C.V. (Mexico) Inland Paper Company, Inc. (Indiana) Wesland Container LLC (Arkansas) (50%) TEMPLE-INLAND FOREST PRODUCTS CORPORATION (DELAWARE) The Angelina Free Press, Inc. (Texas) Del-Tin Fiber L.L.C. (Arkansas) (50%) Eastex Incorporated (Texas) Evadale Realty Company (Delaware) Bestile Manufacturing Company (California) Fortra Fiber-Cement L.L.C. (Delaware)(50%) Inland Eastex Extrusion Company (Delaware) Inland Eastex (Nevada) Inc. (Nevada) Inland Eastex LP (Delaware) (99% LP Interest - Temple-Inland FPC owns 1% GP Interest) Sabine Investment Company of Texas, Inc. (Texas) Scotch Investment Company (Texas) Scotch Properties Management Inc. (Delaware) Southern Pine Lumber Company (Texas) Southern Pine Plywood Co. (Texas) Standard Gypsum L.P. (Delaware)(50%) Templar Essex Inc. (Delaware) Temple Associates, Inc. (Texas) Temple Gypsum Company (Nevada ) Temple Industries, Inc. (Texas) Temple-Inland Food Service Corporation (Delaware) 2 SUBSIDIARIES OF TEMPLE-INLAND INC. Name (Jurisdiction of Incorporation) All Subsidiaries are wholly-owned unless noted otherwise. Temple-Inland Forest Products International Inc. (Delaware) Planfosur S. de R.L. de C.V. (Mexico) (51%; 49% owned by Temple-Inland FPC) Plantaciones Forestales del Sureste, S.A. de C.V. (Mexico) Temple Engineered Lumber Products Inc. (Yukon, Canada) Temple Pembroke Inc. (New Brunswick, Canada) 507789 N.B. Inc. (New Brunswick, Canada) Temple-Inland Recaustisizing Company (Delaware) Temple-Inland Recovery Company (Delaware) Temple-Inland Stores Company (Delaware) Temple-Inland Trading Company (Delaware) Temple Lumber Company (Texas) Texas Southeastern Railroad Company (Texas) Topaz Oil Company (Texas) TEMPLE-INLAND FINANCIAL SERVICES INC. (DELAWARE) (100% FULLY OWNED SUBSIDIARY OF TEMPLE-INLAND FPC) Guaranty Holdings Inc. I (Delaware) Guaranty Bank (Federal) American Finance Group (Delaware) AFG Acquisition Corporation (Delaware) First Hemet Corporation (Delaware) Guaranty Advisors (Texas) Guaranty Business Credit Corporation (Delaware) Guaranty Group Inc. (Texas) MBHC Inc. (Nevada) Temple-Inland Mortgage Corporation (Nevada) Participation Purchase Corporation (Nevada) RWHC Inc.(Nevada) Guaranty Preferred Capital Corporation (Nevada) Guaranty Preferred Capital Corporation II (Nevada) Stockton Financial Corporation (California) Stockton Service Corporation (California) 501 Weber Bldg., Inc. (California) TMF Holding Inc. (Delaware) Temple-Inland Properties Inc. (Delaware) Stanford Realty Advisors, Inc. (Delaware) LIC Investments Inc. (Delaware) IBHC Inc. (Delaware) HBW Holdings, Inc. (Texas ) (36.3%) Lumbermen's Investment Corporation (Delaware) CNB/LIC Investors Limited Partnership (98.4%) LIC Financial Corporation (Delaware)(100%) 3 SUBSIDIARIES OF TEMPLE-INLAND INC. Name (Jurisdiction of Incorporation) All Subsidiaries are wholly-owned unless noted otherwise. LIC Ventures, Inc. (100%)(Delaware) Onion Creek Wastewater Corporation (Texas) Olympia Joint Venture (San Antonio)(50%) Sabine Investment Company (Delaware) Double Horn Water Supply Corporation, Inc. (Texas) Sunbelt Insurance Company (Texas) Timberline Insurance Managers, Inc. (Texas) The Insurance Marketplace, Inc. (Texas) Premium Acceptance Corporation (Texas) Temple-Inland Capital Inc. (Delaware) Temple-Inland Life Inc. (Nevada) Temple-Inland Insurance Corporation (Delaware) EB Holdings Inc. (Delaware) Temple-Inland Realty Inc. (Delaware) TEMCO Associates (Georgia) (50%) TEMPLE-INLAND RESOURCE COMPANY (NEVADA) EX-23 19 d84570ex23.txt CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in each of the following Registration Statements of Temple-Inland Inc. and in each related Prospectus of our report dated January 31, 2001, with respect to the consolidated financial statements and schedules of Temple-Inland Inc. included in this Annual Report (Form 10-K) for the year ended December 30, 2000.
REGISTRATION STATEMENT NO. PURPOSE ------------- ------- No. 2-88202 Post-Effective Amendment Number 3 on Form S-8 No. 33-23132 Registration Statement on Form S-8 No. 33-25650 Post-Effective Amendment Number 1 on Form S-8 No. 33-27286 Post-Effective Amendment Number 1 on Form S-8 No. 33-32124 Post-Effective Amendment Number 2 on Form S-8 No. 33-43802 Registration Statement on Form S-8 No. 33-48034 Registration Statement on Form S-8 No. 33-54388 Registration Statement on Form S-8 No. 33-63104 Registration Statement on Form S-8 No. 333-27469 Registration Statement on Form S-8 No. 333-52189 Registration Statement on Form S-3 No. 333-33702 Registration Statement on Form S-8
/s/ ERNST & YOUNG LLP Austin, Texas March 2, 2001 -----END PRIVACY-ENHANCED MESSAGE-----