-----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, J/IyQLnip9AY4HUUUvZke3CbWSvSbyqH/n9KIoU/0j10XgSAa7wR/AnD3US/yg74 PDT7Zab65MTIIKiLCVyjGw== 0000950134-02-001650.txt : 20020414 0000950134-02-001650.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950134-02-001650 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011229 FILED AS OF DATE: 20020227 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08634 FILM NUMBER: 02560537 BUSINESS ADDRESS: STREET 1: TEMPLE-INLAND INC. STREET 2: 1300 MOPAC EXPRESSWAY SOUTH CITY: AUSTIN STATE: TX ZIP: 78746 BUSINESS PHONE: 5124348000 MAIL ADDRESS: STREET 1: TEMPLE-INLAND INC. STREET 2: 1300 MOPAC EXPRESSWAY SOUTH CITY: AUSTIN STATE: TX ZIP: 78746 10-K 1 d94481e10-k.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 29, 2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (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 29, 2001 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) 434-5800 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $1.00 Par Value per Share, 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. [ ] 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 25, 2002, was $1,711,179,826. 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 25, 2002, 49,371,261 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 3, 2002, are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 2.1 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, - 53 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, - 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 152 banking centers in Texas and California. Mortgage banking is conducted through Guaranty Residential Lending, Inc. ("Residential Lending"), a subsidiary of Guaranty that arranges financing of single-family mortgage loans (primarily Fannie Mae, Freddie Mac, and Ginnie Mae), 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 subsidiaries include - Inland Paperboard and Packaging, Inc., 1 - Temple-Inland Forest Products Corporation, - Temple-Inland Financial Services Inc., - Guaranty Bank, and - Guaranty Residential Lending, Inc. Temple-Inland's principal executive offices are located at 1300 MoPac Expressway South, Austin, Texas 78746. Its telephone number is (512) 434-5800. Additional information about the Company may be obtained from Temple-Inland's home page on the Internet, the address of which is http://www.templeinland.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 50 percent of Temple-Inland's consolidated net revenues for 2001; - the Building Products Group, which provided 17 percent of Temple-Inland's consolidated net revenues for 2001; and - the Financial Services Group, which provided 33 percent of Temple-Inland's consolidated net revenues for 2001. 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 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 TEMPLE-INLAND INC. SELECTED SUBSIDIARY CHART [TEMPLE-INLAND SUBSID. CHART] Paper Group. The Paper Group manufactures containerboard that it converts into a complete line of corrugated packaging and point-of-purchase displays. Approximately 17 percent of the containerboard produced by the Paper Group in 2001 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 also manufactures a tear-resistant and water proof paper packaging product under the name Tru-Tech(TM). In the corrugated packaging operation, the Paper Group serves about 7,000 customers with approximately 9,000 shipping destinations. The largest single customer accounted for approximately five percent and the ten largest customers accounted for approximately 25 percent of the 2001 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. 3 Sales of corrugated shipping containers 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. The Paper Group is a 50 percent owner in Premier Boxboard Limited LLC, a joint venture that produces light-weight gypsum facing paper and corrugating medium at a plant in Newport, Indiana. During May 2001, the Paper Group purchased the converting operations of Chesapeake Corporation and Elgin Corrugated Box Company for an aggregate purchase price of $135 million. These operations consist of 11 corrugated converting plants in eight states. The Paper Group acquired two additional converting plants through its purchase of assets from ComPro Packaging LLC in October 2001 for approximately $9 million. These acquisitions will increase integration for the Paper Group. The Company and Gaylord Container Corporation ("Gaylord") have signed a definitive merger agreement pursuant to which Temple-Inland began cross-conditional tender offers for all of Gaylord's outstanding shares and outstanding 9 3/8% Senior Notes due 2007 (the "9 3/8% Senior Notes"), 9 3/4% Senior Notes due 2007 (the "9 3/4% Senior Notes"), and 9 7/8% Senior Subordinated Notes due 2008 (the "9 7/8% Senior Subordinated Notes" and, collectively with the 9 3/8% Senior Notes and the 9 3/4% Senior Notes, the "Notes"). Certain outstanding bank debt and other senior secured debt obligations of Gaylord will be paid or otherwise satisfied. Assuming that all shares and all Notes are tendered, the total consideration for the transaction, excluding any related transaction fees, expenses, and severance amounts, is approximately $847 million, consisting of $1.17 per share, or approximately $65 million, to purchase the outstanding shares of Gaylord, and approximately $782 million to acquire all the Notes and to satisfy the bank debt and other senior secured debt obligations. This transaction is contingent upon, among other things: (i) at least two-thirds of the outstanding shares of Gaylord being validly tendered and not withdrawn prior to the expiration date of the offer, and (ii) at least 90% in aggregate principal amount outstanding of each of the 9 3/8% Senior Notes and the 9 3/4% Senior Notes being validly tendered and not withdrawn prior to the expiration of the offer and (iii) at least 82.6% in aggregate principal amount outstanding of the 9 7/8% Senior Subordinated Notes being validly tendered and not withdrawn prior to the expiration of the offer. The transaction is also subject to regulatory approval and satisfaction or waiver of customary closing conditions. Temple-Inland has received a financing commitment from Citibank, N.A. to fund its offer for all outstanding shares of Gaylord, to acquire all the Notes, to satisfy the bank debt and other senior secured debt obligations, and to pay costs and expenses associated with the transaction. The tender offers for the outstanding stock and for the Notes are scheduled to expire on February 28, 2002, but may be extended by Temple-Inland under certain conditions. Late in 2001, the Paper Group indefinitely suspended operating the number two machine at its Orange, Texas, mill. Building Products Group. The Building Products Group produces lumber, particleboard, medium density fiberboard, gypsum wallboard, and fiberboard. The Building Products Group also manages the Company's 2.1 million acres of timberland, which are located in Texas, Louisiana, Georgia, and Alabama. The group sells building products throughout the continental United States and in Canada, with the majority of sales occurring in the southern United States. No significant sales are generated under long-term contracts. Sales of most of these products are made by account managers and representatives to distributors, retailers, and original equipment manufacturer accounts. Approximately 84 percent of particleboard sales are to commercial fabricators, such as manufacturers of cabinets and furniture. The ten largest customers accounted for approximately 30 percent of the Building Products Group's 2001 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. 4 During 2001, the Company completed modifications to its facility in Pineland, Texas. This facility now includes a state-of-the-art sawmill and produces veneer products. This change completes the exit from plywood production and permits 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 152 banking centers. The 108 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 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. Guaranty derives its income primarily from interest earned on real estate mortgages, commercial and business loans, consumer loans, and investment securities, as well as fees received in connection with loans and deposit services. Its major expense is interest paid on consumer deposits and other borrowings. The operations of Guaranty, like those of other savings institutions, are significantly influenced by general economic conditions; the monetary, fiscal, and regulatory policies of the federal government; and the policies of financial institution regulatory authorities. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for mortgage financing and for other types of loans as well as market conditions. Guaranty primarily seeks assets with interest rates that adjust periodically rather than assets with long-term fixed rates. In addition to other minimum capital standards, regulations of the Office of Thrift Supervision ("OTS") established to ensure capital adequacy of savings institutions currently require savings institutions to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to adjusted tangible assets. Management of Guaranty believes that as of year end, Guaranty met all capital adequacy requirements. In order to remain in the lowest tier of Federal Deposit Insurance Corporation insurance premiums, Guaranty must meet a leverage capital ratio of at least 5 percent of adjusted total assets. At year end 2001, Guaranty had a leverage capital ratio of 7.82 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 120 offices located throughout the United States. The Company typically retains the servicing rights on approximately one-third of the loans it originates and sells the remainder to third parties. Servicing operations are centralized in Austin, Texas. At the end of 2001, the mortgage banking operation was servicing $11.4 billion in mortgage loans. The mortgage banking operation produced $7.6 billion in mortgage loans during 2001. Real Estate. The Financial Services Group is involved in the development of 48 residential subdivisions in Texas, California, Colorado, Florida, Georgia, Missouri, Tennessee, and Utah. Real estate activities also include ownership of ten 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 the risk manager of Temple-Inland. An affiliate of the insurance agency sells annuities through Guaranty. 5 RAW MATERIALS The Company's main raw material resource is timber, with approximately 2.1 million acres of owned and leased timberland located in Texas, Louisiana, Alabama, and Georgia. In 2001, 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................................................... 67% Pine Pulpwood............................................... 62%
The balance of the wood fiber required for these operations was purchased from numerous landowners and other lumber companies. 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 2001, OCC represented approximately 38 percent of the total fiber needs of the Company's containerboard operations. The price of OCC may exhibit volatility due to normal supply and demand fluctuations for the raw material and for the finished product. OCC is purchased by the Company and its competitors on the open market from numerous suppliers. Price fluctuations reflect the competitiveness of these markets. The Company's historical grade patterns produce more linerboard and less corrugating medium than is converted at the Company's box plants. The deficit of corrugating medium is obtained through open market purchases and/or trades and the excess linerboard is sold in the open market. Temple-Inland FPC obtains the gypsum for its wallboard operations in Fletcher, Oklahoma, from one outside source through a long-term purchase contract. At its gypsum wallboard plant in West Memphis, Arkansas, and the joint venture gypsum wallboard plant in Cumberland City, Tennessee, synthetic gypsum is used as a raw material. Synthetic gypsum is a by-product of coal-burning electrical power plants. The Company has entered into a long-term supply agreement for synthetic gypsum produced at a Tennessee Valley Authority electrical plant located adjacent to the Cumberland City plant. Synthetic gypsum acquired pursuant to this agreement 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 63 percent of its energy requirements at its mills in Rome, Georgia, and Orange, Texas, during 2001. 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. 6 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 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 half of 2001. In some instances, the Company elected to take downtime at certain of its manufacturing facilities rather than pay the significantly higher energy prices. The Company continues to explore alternative arrangements and fuel sources in an effort to contain energy costs. The Paper Group is a party to a long-term power purchase agreement with Southern California Edison ("Edison"). Under this agreement, the Paper Group sold to Edison a portion of its electrical generating capacity from a co-generation facility operated in connection with its Ontario, California, mill. Edison was to pay the Paper Group for its committed generating capacity and for electricity generated and sold to Edison. During the fourth quarter 2000 and the first quarter 2001, the Ontario mill generated and delivered electricity to Edison but was not paid. During April 2001, the Paper Group notified Edison that the long-term power purchase agreement was cancelled because of Edison's material breach of the agreement. Edison has contested the right of the Paper Group to terminate the power purchase agreement. It has also asserted that it is entitled to recover a portion of the payments it made during the term of the agreement from the Paper Group. The parties are currently in litigation to determine, among other matters, whether the agreement has been terminated and whether the Paper Group may sell its excess generating capacity to third parties. The Paper Group continues to provide power to Edison and has received some payments from Edison. The Company does not believe that the resolution of these matters will have a material adverse effect on its consolidated operations or financial position. EMPLOYEES At December 29, 2001, the Company and its subsidiaries had approximately 16,500 employees. Approximately 4,200 of these employees are covered by collective bargaining agreements. These agreements generally run for a term of three to six years and have varying expiration dates. The following table summarizes certain information about the collective bargaining agreements that cover a significant number of employees:
LOCATION BARGAINING UNIT(S) EMPLOYEES COVERED EXPIRATION DATES - -------- ------------------ ----------------- ---------------- Linerboard Mill, Orange, Paper, 168 Hourly Production July 31, 2005 Texas Allied-Industrial, Employees and 116 Hourly Chemical and Energy Maintenance Employees Workers Intl. ("PACE"), Local 1398, and PACE, Local 391 Linerboard Mill, Rome, PACE, Local 804, 317 Hourly Production July 31, 2006 Georgia International Employees, 39 Electrical Brotherhood of Maintenance Employees, and Electrical Workers 161 Hourly Maintenance ("IBEW"), Local 613, Employees United Association of Journeymen & Apprentices of the Plumbing & Pipefitting Industry of the U.S. and Canada, Local 72, and International Association of Machinists & Aerospace Workers, Local 414
7
LOCATION BARGAINING UNIT(S) EMPLOYEES COVERED EXPIRATION DATES - -------- ------------------ ----------------- ---------------- Evansville, Indiana, PACE, Local 1046, PACE, 101, 106, and 110 Hourly April 30, 2002 Louisville, Kentucky, Local 1737,and PACE, Production Employees, and Middletown, Ohio, Local 114, respectively respectively Box Plants ("Northern Multiple") Rome, Georgia, and PACE Local 838 and PACE 132 and 106 Hourly December 1, 2003 Orlando, Florida, Box Local 834, respectively Production Employees, Plants ("Southern respectively 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 $17 million during 2001. 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 during the period 2002 through 2004 will average approximately $12 million each year, excluding expenditures related to the programs discussed below. The estimated expenditures could be significantly higher if more stringent laws and regulations are implemented. On April 15, 1998, the U.S. Environmental Protection Agency (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. The estimated capital expenditures disclosed above include expenditures needed to comply with the Cluster Rule. The Company has incurred approximately $15 million toward Cluster Rule compliance through the end of 2001, excluding such expenditures related to discontinued operations. Future expenditures related to Cluster Rule compliance are not expected to be material. 8 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 for the Company of these proposed standards are approximately $25 million over the next five years. The Company utilizes landfill operations to dispose of non-hazardous waste at three paperboard and two building products mill operations. At year-end 2001, the Company estimated the undiscounted total costs it could probably incur to ensure proper closure of these landfills over the next 25 years to be about $14 million, which is being accrued over the estimated lives of the landfills. 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 eight percent of total industry shipments during 2001. Although corrugated packaging is dominant in the national distribution process, Inland's products also compete with various other packaging materials, including products made of paper, plastics, wood, and metals. In the building materials markets, the Building Products Group competes with many companies that are substantially larger and have greater resources in the manufacturing of building materials. The Financial Services Group competes with commercial banks, savings and loan associations, mortgage banks, and other lenders in its mortgage banking and savings bank activities, and with real estate investment and management companies in its real estate activities. The financial services industry is a highly competitive business, and a number of entities with which the Company competes have greater resources. 9 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, 54 Chairman of the Board and Chief Executive Officer II.................... William B. Howes........ 64 Executive Vice President Harold C. Maxwell....... 61 Executive Vice President Bart J. Doney........... 52 Group Vice President Kenneth R. Dubuque...... 53 Group Vice President James C. Foxworthy...... 50 Group Vice President Dale E. Stahl........... 54 Group Vice President Jack C. Sweeny.......... 55 Group Vice President M. Richard Warner....... 50 Chief Administrative Officer, Vice President, and General Counsel Randall D. Levy......... 50 Chief Financial Officer Louis R. Brill.......... 60 Vice President and Chief Accounting Officer Scott Smith............. 47 Chief Information Officer Doyle R. Simons......... 38 Vice President -- Administration David W. Turpin......... 51 Treasurer Leslie K. O'Neal........ 46 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 President, Chief Operating Officer, Chief Financial Officer, and Group Vice President. He also serves as Chairman of the Board of Financial Services, Chairman of the Board of Guaranty, and a Director of 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 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 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. Dale E. Stahl became Group Vice President of the Company in July 2000 and serves as the President and Chief Executive Officer of Inland. Mr. Stahl served as President and Chief Operating Officer of Gaylord Container Corporation for twelve years prior to joining the Company in 2000. 10 Jack C. Sweeny became a Group Vice President of the Company in May 1996. He also serves as President and Chief Operating Officer and a Director of Temple-Inland FPC. From November 1982 through May 1996, Mr. Sweeny served as a Vice President of Temple-Inland FPC and as Executive Vice President from May 1996 to February 2002. M. Richard Warner became Vice President and General Counsel of the Company in June 1994 and was named Chief Administrative Officer in May 1999. Randall D. Levy became Chief Financial Officer of the Company in May 1999. Mr. Levy joined Guaranty in 1989 serving in various capacities, including Treasurer and most recently as Chief Operating Officer since 1994. Louis R. Brill became Vice President and 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. Mr. Smith also serves as the Chief Financial Officer of Guaranty. 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, five converting plants in Mexico, and a box plant in Puerto Rico. Additional descriptions as of year-end of selected properties are set forth in the following charts: CONTAINERBOARD MILLS
RATED NUMBER OF ANNUAL LOCATION PRODUCT MACHINES CAPACITY PRODUCTION - -------- ------- --------- -------- ---------- (IN TONS) Ontario, California........... Linerboard 1 330,000 247,000 Rome, Georgia................. Linerboard 2 810,000 670,000 Orange, Texas................. Linerboard 2 580,000 569,000 Maysville, Kentucky........... Linerboard 1 405,000 399,000 New Johnsonville, Tennessee... Medium 1 265,000 255,000 Newport, Indiana*............. Medium and gypsum facing paper 1 246,000 199,000
- --------------- * 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. 11 CORRUGATED CONTAINER PLANTS*
DATE CORRUGATOR ACQUIRED OR LOCATION SIZE CONSTRUCTED - -------- ---------- ----------- Fort Smith, Arkansas........................................ 87inches 1977 Fort Smith, Arkansas(1)***.................................. None 1996 Bell, California............................................ 97inches 1972 El Centro, California(1).................................... 87inches 1990 Ontario, California......................................... 87inches 1985 Santa Fe Springs, California................................ 97inches 1972 Tracy, California**......................................... 87inches 1986 Wheat Ridge, Colorado....................................... 87inches 1977 Orlando, Florida............................................ 98inches 1955 87inches & Rome, Georgia**............................................. 98inches 1955 Chicago, Illinois........................................... 87inches0 1957 Elgin, Illinois............................................. 78inches0 2001 Elgin, Illinois............................................. None 2001 Crawfordsville, Indiana..................................... 98inches 1971 Evansville, Indiana......................................... 98inches 1938 St. Anthony, Indiana***..................................... None 2001 Garden City, Kansas......................................... 96inches 1981 Kansas City, Kansas......................................... 87inches 1981 Louisville, Kentucky........................................ 92inches 1958 Louisville, Kentucky........................................ 87inches 2001 Minden, Louisiana........................................... 98inches 1986 Minneapolis, Minnesota...................................... 87inches 1986 Hattiesburg, Mississippi.................................... 87inches 1965 St. Louis, Missouri......................................... 87inches 1963 Milltown, New Jersey(1)***.................................. None 2000 Spotswood, New Jersey....................................... 87inches 1963 Binghamton, New York........................................ 87inches 2001 Buffalo, New York***........................................ None 2001 Scotia, New York***......................................... None 2001 Utica, New York***.......................................... None 2001 Warren County, North Carolina............................... 98inches 2001 Madison, Ohio............................................... None 2001 Middletown, Ohio............................................ 98inches 1930 Streetsboro, Ohio........................................... 98inches 1997 Biglerville, Pennsylvania................................... 98inches 1955 Hazleton, Pennsylvania...................................... 98inches 1976 Littlestown, Pennsylvania***................................ None 2001 Scranton, Pennsylvania...................................... 63inches 2001 Vega Alta, Puerto Rico...................................... 87inches 1971 Lexington, South Carolina................................... 98inches 1978 Rock Hill, South Carolina................................... 87inches 1972 Ashland City, Tennessee(1)***............................... None 1999
12
DATE CORRUGATOR ACQUIRED OR LOCATION SIZE CONSTRUCTED - -------- ---------- ----------- Elizabethton, Tennessee..................................... 98inches 1982 Elizabethton, Tennessee(1)***............................... None 1990 Dallas, Texas............................................... 98inches 1962 Edinburg, Texas............................................. 87inches 1988 Petersburg, Virginia........................................ 87inches 1991 Petersburg, Virginia(1)***.................................. None 1998 San Jose Iturbide, Mexico................................... 87inches 1994 Monterrey, Mexico........................................... 87inches 1993 Los Mochis, Sinaloa, Mexico................................. 80inches 1995 Guadalajara, Mexico(1)***................................... None 2000 Tiajuana, Mexico***......................................... None 2001
- --------------- * 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. Additionally, Inland owns a fulfillment center in Gettysburg, Pennsylvania, a graphics resource center in Indianapolis, Indiana, that has a 100" preprint press and also leases 50 warehouses located throughout much of the United States. Inland owns specialty converting plants in Santa Fe Springs, California; Harrington, Delaware; Indianapolis, Indiana; and Linden, New Jersey, and leases specialty converting plants in Buena Park, Santa Fe Springs, Ontario, and Union City, California. BUILDING PRODUCTS
RATED ANNUAL DESCRIPTION LOCATION CAPACITY - ----------- ------------------- --------------- (IN MILLIONS OF BOARD FEET) Lumber..................................................... Diboll, Texas 181* Lumber..................................................... Pineland, Texas 200 Lumber..................................................... Buna, Texas 198 Lumber..................................................... Rome, Georgia 147 Lumber..................................................... DeQuincy, Louisiana 198
- --------------- * Includes separate finger jointing capacity of 10 million board feet. 13
RATED ANNUAL DESCRIPTION LOCATION CAPACITY - ----------- -------------------------- --------------- (IN MILLIONS OF SQUARE FEET) Fiberboard.......................................... Diboll, Texas 460 Particleboard....................................... Monroeville, Alabama 145 Particleboard....................................... Thomson, Georgia 145 Particleboard....................................... Diboll, Texas 145 Particleboard....................................... Hope, Arkansas 220 Particleboard(1).................................... Mt. Jewett, Pennsylvania 200 Gypsum Wallboard.................................... West Memphis, Arkansas 440 Gypsum Wallboard.................................... Fletcher, Oklahoma 460 Gypsum Wallboard*................................... McQueeney, Texas 400 Gypsum Wallboard*................................... Cumberland City, Tennessee 700 Medium Density Fiberboard........................... 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. (1) Leased facilities. TIMBER AND TIMBERLANDS* (IN ACRES) Pine Plantations............................................ 1,301,851 Natural Pine................................................ 107,586 Hardwood.................................................... 121,115 Special Use/Non-Forested.................................... 530,369 --------- Total....................................................... 2,060,921 =========
- --------------- * Includes approximately 231,394 acres of leased land. During 2001, the Company completed a major study of its forests, which led to the following classifications: strategic timberland, non-strategic timberland, and high-value land (with real estate development potential). Based on the study, 1,800,000 acres has been identified as strategic, 110,000 acres as non-strategic, and 160,000 acres as high-value with the potential for real estate development. During the year, the Company sold 78,000 acres of non-strategic land. The remaining non-strategic land will be sold over time. A group of real estate professionals has been assembled in Atlanta, Georgia, to manage the 160,000 acres of high-value land. The remaining 1,800,000 acres of strategic timberland are important to the Company's converting operations and play a key role in the Company's competitiveness and ability to meet environmental certification requirements relating to sound forest management techniques and chain of custody. 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, 14 approximately 130,000 square feet in Indianapolis, Indiana, and 445,000 square feet of office space in Austin, Texas. The Company also owns 388,000 mineral acres in Texas and Louisiana. Revenue from lease and production activities on these acres totaled $10.5 million in 2001. Additionally, the Company owns 395,830 mineral acres in Alabama and Georgia, which produced no lease or production revenue in 2001. At year end 2001, property and equipment having a net book value of approximately $14 million were subject to liens in connection with $46 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, the effect of such proceedings will not be material to the business or financial condition of the Company and its subsidiaries. On May 14, 1999, Inland was named as a defendant in a Consolidated Class Action Complaint that alleged a civil violation of Section 1 of the Sherman Act. The suit, captioned Winoff Industries, Inc. v. Stone Container Corporation, MDL No. 1261 (E.D. Pa.), names Inland and nine other linerboard manufacturers as defendants. The complaint alleges that the defendants, during the period from October 1, 1993, through November 30, 1995, conspired to limit the supply of linerboard, and that the purpose and effect of the alleged conspiracy was artificially to increase prices of corrugated containers. The plaintiffs have moved to certify a class of all persons in the United States who purchased corrugated containers directly from any defendant during the above period, and seek treble damages and attorneys' fees on behalf of the purported class. The Court granted plaintiffs' motion on September 4, 2001, but modified the proposed class to exclude those purchasers whose prices were "not tied to the price of linerboard." The defendants have filed a petition, currently pending before the Court of Appeals for the Third Circuit, seeking leave to appeal the Court's ruling. The case is currently set for trial in January 2003. The Company believes that the plaintiffs' allegations have no merit and intends to defend against the suit vigorously. The Company does not believe that the outcome of this litigation should have a material adverse effect on its financial position, results of operations, or cash flow. 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, however, 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 indicate that the portion of the remediation costs for these sites to be allocated to the Company are approximately $2 million and should not have a material impact on the Company. There can be no assurance that subsidiaries of the Company will not be named as potentially responsible parties at additional Superfund sites in the future or that the costs associated with the remediation of those sites would not be material. 15 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 in 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.
2001 2000 --------------------------------- -------------------------------- PRICE RANGE PRICE RANGE -------------------- --------------- HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS ------ ------ --------- ---- --- --------- First Quarter.................. $57.38 $40.35 $0.32 $67 11/16 $43 3/4 $0.32 Second Quarter................. $56.80 $41.95 $0.32 $57 1/2 $40 15/16 $0.32 Third Quarter.................. $62.15 $43.90 $0.32 $47 5/8 $37 1/16 $0.32 Fourth Quarter................. $59.55 $45.68 $0.32 $55 1/2 $34 5/8 $0.32 ----- ----- For the Year................... $62.15 $40.35 $1.28 $67 11/16 $34 5/8 $1.28 ===== =====
SHAREHOLDERS The Company's stock transfer records indicated that as of February 25, 2002, there were approximately 5,560 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 1, 2002, the Board of Directors declared a quarterly dividend on the Common Stock of $0.32 per share payable on March 15, 2002, to shareholders of record on March 1, 2002. 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. 16 ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEAR ----------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- (IN MILLIONS EXCEPT PER SHARE) Revenues Paper..................................................... $ 2,082 $ 2,092 $ 1,869 $ 1,707 $ 1,768 Building Products......................................... 726 836 837 660 662 Financial Services........................................ 1,364 1,369 1,116 1,036 923 ------- ------- ------- ------- ------- Total revenues.............................................. $ 4,172 $ 4,297 $ 3,822 $ 3,403 $ 3,353 ======= ======= ======= ======= ======= Segment Operating Income Paper..................................................... $ 107 $ 207 $ 104 $ 39 $ (53) Building Products......................................... 13 77 189 118 136 Financial Services........................................ 184 189 138 154 132 ------- ------- ------- ------- ------- Segment operating income(a)................................. 304 473 431 311 215 Corporate expenses.......................................... (30) (33) (30) (28) (25) Other income (expense)(b)................................... 1 (15) -- (47) -- Parent company interest..................................... (98) (105) (95) (78) (82) ------- ------- ------- ------- ------- Income before taxes......................................... 177 320 306 158 108 Income taxes................................................ (66) (125) (115) (70) (49) ------- ------- ------- ------- ------- Income from continuing operations........................... 111 195 191 88 59 Discontinued operations(c).................................. -- -- (92) (21) (8) Effect of accounting change................................. (2) -- -- (3) -- ------- ------- ------- ------- ------- Net income.................................................. $ 109 $ 195 $ 99 $ 64 $ 51 ======= ======= ======= ======= ======= Diluted earnings per share Income from continuing operations......................... $ 2.26 $ 3.83 $ 3.43 $ 1.59 $ 1.04 Discontinued operations................................... -- -- (1.65) (0.38) (0.14) Effect of accounting change............................... (.04) -- -- (0.06) -- ------- ------- ------- ------- ------- Net income................................................ $ 2.22 $ 3.83 $ 1.78 $ 1.15 $ 0.90 ======= ======= ======= ======= ======= Dividends per common share.................................. $ 1.28 $ 1.28 $ 1.28 $ 1.28 $ 1.28 Average diluted shares outstanding:......................... 49.3 50.9 55.8 55.9 56.2 Common shares outstanding at year end....................... 49.3 49.2 54.2 55.6 56.3 Depreciation and depletion: Manufacturing(a).......................................... $ 182 $ 198 $ 200 $ 192 $ 187 Financial Services........................................ 23 18 17 14 13 Capital expenditures: Manufacturing............................................. $ 182 $ 223 $ 178 $ 157 $ 213 Financial Services........................................ 26 34 26 39 18 At Year End Total assets Parent company............................................ $ 4,121 $ 4,011 $ 4,005 $ 4,308 $ 4,170 Financial Services........................................ 15,738 15,324 13,321 12,376 10,772 Long-term debt: Parent company............................................ $ 1,339 $ 1,381 $ 1,253 $ 1,501 $ 1,356 Financial Services........................................ 214 210 212 210 167 Stock issued by subsidiaries................................ $ 306 $ 306 $ 226 $ 225 $ 150 Shareholders' equity........................................ $ 1,896 $ 1,833 $ 1,927 $ 1,998 $ 2,045 Ratio of total debt to total capitalization -- parent company................................................... 41% 43% 39% 43% 40%
- --------------- (a) Segment operating income for 2001 includes a $27 million reduction in depreciation expense resulting from a change in the estimated useful lives of certain production equipment. Of this amount $20 million, applies to the Paper Group and $7 million applies to the Building Products Group. (b) Other income (expense) includes (i) in 2001, a $20 million gain from the sale of non-strategic timberlands and $15 million in losses from the disposition of under performing assets; (ii) in 2000, a $15 million loss from the decision to exit the fiber cement business; and (iii) in 1998, a $24 million loss from the disposition of the Argentine operations and $23 million in losses and charges related to other under performing assets. (c) Represents the bleached paperboard operations sold in 1999 and includes a loss on disposal of $71 million. 17 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. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2001, 2000 AND 1999 SUMMARY Consolidated revenues were $4.2 billion in 2001, $4.3 billion in 2000 and $3.8 billion in 1999. Income from continuing operations was $111 million in 2001, $195 million in 2000, and $191 million in 1999. Income from continuing operations per diluted share was $2.26 in 2001, $3.83 in 2000, and $3.43 in 1999. BUSINESS SEGMENTS Temple-Inland manages its operations through three business segments: Paper, Building Products and Financial Services. Each of these business segments is affected by the factors of supply and demand and changes in domestic and global economic conditions. These conditions include changes in interest rates, new housing starts, home repair and remodeling activities, and the strength of the U.S. dollar, some or all of which may have varying degrees of impact on the business segments. As used herein the term "parent company" refers to Temple-Inland and its manufacturing business segments, Paper and Building Products with the Financial Services Group reported on the equity method. CRITICAL ACCOUNTING POLICIES In preparing the financial statements, Temple-Inland follows generally accepted accounting policies, which in many cases require Temple-Inland to make assumptions, estimates and judgments that affect the amounts reported. Many of these policies are relatively straightforward. There are, however, a few policies that are critical because they are important in determining the financial condition and results and they are difficult to apply. Within the parent company, they include asset impairments and pension accounting and within the Financial Services Group, they include the allowance for loan losses and mortgage servicing rights. The difficulty in applying these policies arises from the assumptions, estimates and judgments that have to be made currently about matters that are inherently uncertain, such as future economic conditions, operating results and valuations as well as management intentions. As the difficulty increases, the level of precision decreases, meaning that actual results can and probably will be different from those currently estimated. Temple-Inland bases its assumptions, estimates and judgments on a combination of historical experiences and other reasonable factors. Measuring assets for impairments requires estimating intentions as to holding periods, future operating cash flows and residual values of the assets under review. Changes in management intentions, market conditions or operating performance could indicate that impairment charges might be necessary. The expected long-term rate of return on pension plan assets is an important assumption in determining pension expense. In selecting that rate, consideration is given to both historical returns and future returns over the next quarter century. Differences between actual and expected returns will adjust future pension expense. Allowances for loan losses are based on loan classifications, historical experiences and evaluations of future cash flows and collateral values and are subject to regulatory scrutiny. Changes in general economic conditions or loan specific circumstances will inevitably change those evaluations. Measuring for impairment and amortizing mortgage servicing rights is largely dependent upon the speed at which loans are repaid and market rates of return. Changes in interest rates will affect both of these variables and could indicate that impairments or adjustments of the rate of amortization might be necessary. 18 THE PAPER GROUP The Paper Group manufactures linerboard and corrugating medium that it converts into a complete line of corrugated and specialty packaging. The Paper Group operations consist of 4 linerboard mills, 1 corrugating medium mill, 53 converting plants, 8 specialty-converting plants and an interest in a gypsum facing paper joint venture. The Paper Group's facilities are located throughout the United States and in Mexico and Puerto Rico. During 2001, the Paper Group completed the acquisition of the corrugated packaging operations of Chesapeake Corporation, Elgin Corrugated Box Company and ComPro Packaging LLC. These operations consist of 13 corrugated converting plants in eight states. These acquired operations did not contribute significantly to the Paper Group's 2001 operating income. During January 2002, the parent company initiated a tender offer to acquire Gaylord Container Corporation. The transaction is contingent on several matters including the tender of at least two-thirds of the outstanding shares and at least 90 percent in aggregate principal amount of the senior notes and 82.6 percent of the senior subordinated notes. The tender is scheduled to expire on February 28, 2002, and will be funded from a bank financing commitment. The Paper Group's revenues come principally from the sales of corrugated packaging products and to a lesser degree from the sales of linerboard in the domestic and export markets. The Paper Group's revenues were $2.1 billion in 2001, $2.1 billion in 2000 and $1.9 billion in 1999. While revenues were flat in 2001 and up 12 percent in 2000, the mix of revenues is changing. Corrugated packaging revenues represent 93 percent of total revenues in 2001 and 91 percent in 2000 and 1999. In 2001, the corrugated packaging revenues derived from the acquired corrugated packaging operations, approximately $100 million, were offset by declines in domestic shipments due to the weakening economy. Average box prices were up 2 percent, and box shipments were unchanged. Excluding the acquired corrugated packaging operations, average box prices would have been up 1 percent, and shipments would have been down 3 percent. Revenues and volumes were also affected by the poor performance of the specialty packaging operations. Until the economy improves, box shipments will likely remain weak, and box prices will likely trend downward. The changes in revenues in 2000 and 1999 were due to increases in average box prices, up 17 percent in 2000 and 3 percent in 1999 with essentially no change in volumes. The decrease in linerboard revenues in 2001 was due to lower prices, down 7 percent, and lower shipments, down 14 percent. The weakening economy softened the market for domestic linerboard while increased offshore capacity and a strong U.S. dollar continued to affect export markets. Until the economy improves, the downward trend in the domestic linerboard market will probably continue. It is likely that the downward trend in export demand will continue during 2002 due to significant new offshore capacity. The changes in revenues in 2000 and 1999 were due to increases in average prices, up 20 percent in 2000 and 6 percent in 1999, with volumes down 10 percent in 2000 and up 61 percent in 1999. Costs, which include production, distribution and administrative costs, were $2.0 billion in 2001, $1.9 billion in 2000 and $1.8 billion in 1999. The change in costs in 2001 was due to the acquired corrugated packaging operations and higher costs for energy, principally natural gas, up $30 million, labor and benefit costs, up $19 million, and new technology systems, up $14 million. Costs were also affected by the poor performance of the specialty packaging operations. Partially offsetting these increases were lower OCC costs, down $35 million, and lower depreciation expense, down $20 million. The changes in costs in 2000 were due to higher energy costs, up $10 million, and higher OCC costs coupled with increased outside purchases of corrugating medium. Energy costs began to rise during the second quarter 2000 and continued to rise through the second quarter 2001. Energy costs peaked during the second quarter 2001 and began to decline the remainder of 2001 reaching more normalized levels by year-end 2001. OCC represented 38 percent, 41 percent and 46 percent of the fiber requirements during the last three years. OCC prices began to decline near the end of the second quarter 2000 and continued to decline through the second quarter 2001. OCC prices have remained relatively constant since then. OCC costs averaged $69 per ton in 2001, $107 per ton in 2000 and $89 per ton in 1999. Year-end OCC prices were $53 per ton in 2001, $67 per ton in 2000 and $99 per ton in 1999. The reduction in depreciation expense was due to the lengthening of estimated useful lives of certain production equipment beginning January 2001. 19 Mill production was 2.1 million tons in 2001, 2.3 million tons in 2000 and 2.7 million tons in 1999. Of the mill linerboard production, 83 percent in 2001 and 80 percent in 2000 and 1999 was used by the corrugated packaging operations; the remainder was sold in the domestic and export markets. Production was affected by curtailments due to market, maintenance and operational factors in 2001 and 2000 and by the conversion of the Newport medium mill (285,000-ton annual capacity) in 2000. Production curtailments totaled 327,000 tons in 2001 and 315,000 tons in 2000. Production curtailments were minimal in 1999. The No. 2 paper machine (220,000-ton annual capacity) at the Orange, Texas linerboard mill was shut down for an indefinite period in December 2001 due to weak market conditions. Absent an improvement in market conditions, it is likely that the Paper Group will continue to curtail production in 2002. The joint venture conversion of the Newport mill to enable it to produce lightweight gypsum facing paper was completed during third quarter 2000. Start-up and production issues coupled with weak market conditions have hampered this venture. Consequently, the mill continues to produce some corrugating medium, a large portion of which was purchased by the Paper Group, 159,400 tons in 2001 and 72,000 tons in 2000. The joint venture expects to have the production issues resolved during the first quarter 2002; however, it is uncertain when market conditions for gypsum-facing paper will improve. The Paper Group is continuing its efforts to enhance return on investment, including reviewing operations that are unable to meet return objectives and determining appropriate courses of actions. During 2001, the Paper Group sold its corrugated packaging operation in Chile at a loss of $5 million. The Paper Group also restructured and downsized its specialty packaging operations at a loss of $4 million and recognized an impairment charge of $4 million related to its interest in a glass bottling venture operation in Puerto Rico. These losses are included in other expenses. Other initiatives included the December 1999 sale of the bleached paperboard operation, which resulted in a loss on disposal of $71 million. The Paper Group's operating income was $107 million in 2001, $207 million in 2000 and $104 million in 1999. THE BUILDING PRODUCTS GROUP The Building Products Group manufactures a variety of building products including lumber, particleboard, medium density fiberboard (MDF) and gypsum wallboard. The Building Products Group operations consist of 19 facilities including a particleboard plant and an MDF plant operated under long-term operating lease agreements and interests in a gypsum joint venture and an MDF joint venture. The Building Products Group operates in the United States and Canada and manages the company's 2.1 million acres of owned and leased timberlands located in Texas, Louisiana, Georgia and Alabama. The Building Products Group's revenues were $726 million in 2001, $836 million in 2000 and $837 million in 1999. Average prices for lumber, particleboard, and gypsum fell during 2001. During 2001, prices for lumber were down 5 percent, particleboard down 14 percent and gypsum down 39 percent while prices for MDF were up 4 percent due to improved product mix. For 2001, shipments of lumber were up 15 percent, particleboard down 14 percent, gypsum down 13 percent and MDF up 5 percent. Lumber shipments were up primarily due to the new Pineland sawmill, which began operations in second quarter 2001. Particleboard shipments were down due to the explosion at the Mount Jewett facility, which closed the facility for about five months during 2001 and weaker market conditions. Other revenue includes sales of small tracts of high-value use timberlands ($18 million in 2001, $11 million in 2000 and $14 million in 1999) and deliveries under a long-term fiber supply agreement entered into in connection with the 1999 sale of the bleached paperboard operations. The lumber, particleboard and gypsum markets continue to be affected by over capacity and weak demand. It is likely that these conditions will continue for much of 2002. The MDF markets could also be affected by new industry capacity coming on line in 2002. Costs, which include production, distribution and administrative costs, were $713 million in 2001, $759 million in 2000 and $648 million in 1999. The change in costs in 2001 was due to lower production volumes, lower depreciation expense and the disposition of the fiber cement venture during the third quarter 2000 offset by higher energy costs, principally natural gas. Fiber costs were relatively unchanged. Depreciation expense was reduced by $7 million due to the lengthening of estimated useful lives of certain production 20 equipment beginning January 2001. Energy costs were up $8 million. Energy costs peaked during the second quarter 2001 and began to decline during the remainder of 2001 reaching more normalized levels by year-end 2001. The change in costs in 2000 was due to additional manufacturing facilities, an increase in energy costs, up $7 million, and $13 million of operating losses from the fiber cement venture. Production was curtailed due to market conditions to varying degrees in most product lines beginning the third quarter 2000 and continuing through year-end 2001. For 2001, production averaged from a low of 66 percent to a high of 77 percent of capacity in the various product lines. Production curtailments were minimal in 1999. The Building Products Group's joint venture operations also experienced production curtailments during 2001 due to market conditions. During the first quarter 2001, the MDF joint venture in El Dorado, Arkansas was shut down due to market conditions, higher energy prices and reconstruction of the heat energy system of the plant. Production at this facility resumed in the second quarter 2001. Absent an improvement in market conditions, it is likely that the Building Products Group and its joint venture operations will continue to curtail production to varying degrees in the various product lines in 2002. The Building Products Group is continuing its efforts to enhance return on investment, including reviewing operations that are unable to meet return objectives and determining appropriate courses of action. During 2001, the Building Products Group performed a review of its 600,000 acres of timberlands in Georgia and Alabama and identified approximately 110,000 acres of non-strategic fee and leased timberlands. During September 2001, approximately 78,000 acres of these non-strategic timberlands were sold for $54 million resulting in a gain of $20 million, which is included in other income. The remaining non-strategic timberlands will be sold over time. This review also identified approximately 160,000 acres of timberlands in Georgia that will be converted over time to higher value use. In addition, the Building Products Group is addressing production cost issues at its MDF facilities. The Building Products Group's operating income was $13 million in 2001, $77 million in 2000 and $189 million in 1999. THE FINANCIAL SERVICES GROUP The Financial Services Group operates a savings bank and engages in mortgage banking, real estate and insurance brokerage activities. The savings bank, Guaranty Bank (Guaranty), primarily conducts business through banking centers in Texas and California. The mortgage banking operation originates single family mortgages and services them for Guaranty and unrelated third parties. Real estate operations include the development of residential subdivisions and multi-family housing and the management and sale of income producing properties, which are principally located in Texas, Colorado, Florida, Tennessee and California. The insurance brokerage operation sells a range of insurance products. During 2001, the Financial Services Group acquired an asset-based loan portfolio and two mortgage production operations. During 2000, the Financial Services Group acquired American Finance Group, Inc. (AFG), a commercial finance company engaged in leasing and secured lending. During 1999, the Financial Services Group acquired Hemet Federal Savings and Loan Association (Hemet) and the assets of Fidelity Funding Inc. (Fidelity), an asset-based lender. 21 Operations The Financial Services Group revenues, consisting of interest and noninterest income, were $1.4 billion in 2001, $1.4 billion in 2000 and $1.1 billion in 1999. Selected financial information for the Financial Services Group follows:
FOR THE YEAR --------------------- 2001 2000 1999 ----- ----- ----- (IN MILLIONS) Net interest income......................................... $ 426 $ 389 $ 299 Provision for loan losses................................... (46) (39) (38) Noninterest income.......................................... 363 280 280 Noninterest expense......................................... (540) (423) (388) Minority interest........................................... (19) (18) (15) ----- ----- ----- Operating income............................................ $ 184 $ 189 $ 138 ===== ===== =====
Net interest income was $426 million in 2001, $389 million in 2000, and $299 million in 1999. The increases in net interest income are primarily due to growth and changes in the mix of average earning assets and interest-bearing liabilities. The changes in the net yield are primarily due to changes in the mix of the assets and liabilities and the timing of their repricing to market rates. The following table presents average balances, interest income and expense, and rates by major balance sheet categories:
FOR THE YEAR --------------------------------------------------------------------------------------- 2001 2000 1999 --------------------------- --------------------------- --------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------- -------- ------ ------- -------- ------ ------- -------- ------ ($ IN MILLIONS) ASSETS Cash equivalents and securities................... $ 3,164 $ 195 6.16% $ 3,137 $ 205 6.53% $ 2,450 $131 5.35% Loans and mortgage loans held for sale(1).................. 11,166 806 7.22% 10,377 884 8.52% 9,482 705 7.43% ------- ------ ------- ------ ------- ---- Total interest-earning assets..................... 14,330 $1,001 6.99% 13,514 $1,089 8.06% 11,932 $836 7.01% Other assets................... 1,048 1,077 1,066 ------- ------- ------- Total assets............... $15,378 $14,591 $12,998 ======= ======= ======= LIABILITIES AND EQUITY Deposits: Interest-bearing demand........ $ 2,838 $ 77 2.72% $ 2,294 $ 93 4.04% $ 1,851 $ 56 3.04% Savings deposits............... 172 3 1.89% 189 4 1.94% 215 5 2.17% Time deposits.................. 5,990 319 5.32% 6,993 396 5.67% 6,052 318 5.25% ------- ------ ------- ------ ------- ---- Total interest-bearing deposits................... 9,000 399 4.44% 9,476 493 5.20% 8,118 379 4.66% Advances from FHLBs............ 3,412 139 4.08% 2,511 159 6.35% 2,683 139 5.19% Securities sold under repurchase agreements........ 594 23 3.84% 484 32 6.51% 112 5 4.98% Other borrowings............... 235 14 5.91% 217 16 7.34% 217 14 6.35% ------- ------ ------- ------ ------- ---- Total interest-bearing liabilities.............. 13,241 $ 575 4.34% 12,688 $ 700 5.52% 11,130 $537 4.83% Other liabilities.............. 687 597 731 Stock issued by subsidiaries... 308 230 227 Shareholder's equity........... 1,142 1,076 910 ------- ------- ------- Total liabilities and equity... $15,378 $14,591 $12,998 ======= ======= ======= Net interest income.......... $ 426 $ 389 $299 ====== ====== ==== Net yield on interest-earning assets..................... 2.97% 2.88% 2.51%
- --------------- (1) Nonaccruing loans are included in loans and mortgage loans held for sale. 22 A portion of the increase in average interest-earning assets in 2001 was the result of the first quarter 2001 acquisition of an asset-based lending portfolio and the first quarter 2000 acquisition of AFG. The remainder of the increase in 2001 was due to internally generated growth, primarily in construction and development loans, mortgage warehouse loans, commercial and business loans and mortgage loans held for sale. A portion of the increase in average interest-earning assets in 2000 was the result of the first quarter 2000 acquisition of AFG and the mid-1999 acquisitions of Hemet and Fidelity. The remainder of the increase in 2000 was due to internally generated growth, primarily in construction and development loans and commercial and business loans and purchases of mortgage-backed securities. As a percentage of average earning assets, loans, which include loans and mortgage loans held for sale, were 78 percent in 2001, 77 percent in 2000 and 79 percent in 1999. The decline in average interest-bearing deposits in 2001 was the result of very competitive markets. Despite paying rates for new deposits at a historically high spread, non-renewed maturing deposits exceeded new deposits during 2001. A portion of the increase in average interest-bearing deposits in 2000 was the result of the mid-1999 acquisition of Hemet. The remainder of the increase was the result of internally generated growth through new product offerings and marketing campaigns. See Note G to the Financial Services Group Summarized Financial Statements for further information regarding deposits. The increase in average borrowings in 2001 resulted from the competitive deposit market and the growth in average earning assets. The increase in average borrowings in 2000 resulted from the growth in average earning assets outpacing the growth in average interest-bearing deposits. The following table presents the changes in net interest income attributable to changes in volume and rates of interest-earning assets and interest-bearing liabilities.
2001 COMPARED WITH 2000 2000 COMPARED WITH 1999 INCREASE (DECREASE) DUE TO(1) INCREASE (DECREASE) DUE TO(1) ----------------------------- ------------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------- ------ ------ -------- ------ ------- (IN MILLIONS) Interest income: Cash equivalents and securities...... $ 2 $ (12) $ (10) $ 41 $ 33 $ 74 Loans and mortgage loans held for sale............................... 64 (142) (78) 70 109 179 ---- ----- ----- ---- ---- ---- Total interest income......... $ 66 $(154) $ (88) $111 $142 $253 Interest expense: Deposits: Demand and savings deposits..... $ 18 $ (35) $ (17) $ 15 $ 21 $ 36 Time deposits................... (54) (23) (77) 52 26 78 ---- ----- ----- ---- ---- ---- Total interest on deposits.... (36) (58) (94) 67 47 114 Advances from FHLBs.................. 47 (67) (20) (9) 29 20 Securities sold under repurchase agreements......................... 6 (15) (9) 24 3 27 Other borrowings..................... -- (2) (2) -- 2 2 ---- ----- ----- ---- ---- ---- Total interest expense........ $ 17 $(142) $(125) $ 82 $ 81 $163 ---- ----- ----- ---- ---- ---- Net interest income.................. $ 49 $ (12) $ 37 $ 29 $ 61 $ 90 ==== ===== ===== ==== ==== ====
- --------------- (1) The change in interest income and expense due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. The provision for loan losses was $46 million in 2001, $39 million in 2000 and $38 million in 1999. The increase in 2001 was primarily the result of a decline in asset quality related to loans in the construction and development (senior housing) and commercial and business (asset-based) portfolios. Loan growth and a change in the mix of the loan portfolio affected both 2000 and 1999. 23 Noninterest income includes service charges, fees, and the revenues from mortgage banking, real estate and insurance activities. Noninterest income was $363 million in 2001 and $280 million in 2000 and in 1999. The growth in noninterest income in 2001 was due to increased mortgage banking and insurance revenues and fee-based products. Mortgage banking revenues were up almost 200 percent due to acquisitions and the high level of refinance activity resulting from low interest rates. This was partially offset by a reduction in servicing revenues due to the sale of $8.6 billion in loans during the second quarter 2001 and an increase in amortization expense and impairment reserves due to the high level of prepayments. In 2000, the growth in fee-based products was offset by declines in mortgage banking revenues due to the impact of the higher interest rate environment on mortgage financing and refinancing activities. Noninterest expense includes compensation and benefits, real estate operations, occupancy and data processing expenses. Noninterest expense was $540 million in 2001, $423 million in 2000 and $388 million in 1999. The growth in noninterest expense in 2001 was primarily due to the acquired mortgage banking production operations and asset-based portfolios and expenses associated with new product offerings. The growth in noninterest expense in 2000 was primarily due to the acquired savings bank operation. Earning Assets Securities, which include mortgage-backed and other securities, were $3.4 billion at year-end 2001, $3.3 billion at year-end 2000 and $2.5 billion at year-end 1999. Purchases and securitizations totaling $948 million offset payments received on securities in 2001. The increase in 2000 was the result of purchases of $1.0 billion partially offset by maturities and prepayments. See Note D to the Financial Services Group Summarized Financial Statements for further information regarding securities. Mortgage loans held for sale were $958 million at year-end 2001, $232 million at year-end 2000 and $252 million at year-end 1999. The increase at year-end 2001 resulted from the growth in the mortgage production operations due to acquisitions and high refinancing activities due to the lower interest rate environment. Loans were $10.0 billion at year-end 2001, $10.5 billion at year-end 2000 and $9.4 billion at year-end 1999. The following table summarizes the composition of the loan portfolio.
AT YEAR-END ------------------------------------------- 2001 2000 1999 1998 1997 ------ ------- ------ ------ ------ (IN MILLIONS) Real estate mortgage............................. $2,872 $ 3,600 $3,763 $4,133 $4,036 Construction and development(1).................. 4,234 4,007 3,253 2,210 1,379 Commercial and business.......................... 2,116 1,681 1,265 1,031 582 Consumer and other, net.......................... 764 1,224 1,128 844 585 ------ ------- ------ ------ ------ 9,986 10,512 9,409 8,218 6,582 Less allowance for loan losses................... (139) (118) (113) (87) (91) ------ ------- ------ ------ ------ $9,847 $10,394 $9,296 $8,131 $6,491 ====== ======= ====== ====== ======
- --------------- (1) Includes residential construction The Financial Services Group continued to alter the mix of the loan portfolio through increased lending in the construction and development, mortgage warehouse, and commercial and business areas and the introduction of new products. These changes to the loan portfolio provide further product and geographic diversification. Lending activities are subject to underwriting standards and liquidity considerations. Specific underwriting criteria for each type of loan are outlined in a credit policy approved by the Board of Directors of the savings bank. In general, commercial loans are evaluated based on cash flow, collateral, market conditions, prevailing economic trends, character and 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, 24 market conditions, economic trends and the character of the borrower are considered. The credit policy, including the underwriting criteria for loan categories, is reviewed on a regular basis and adjusted when warranted. Construction and development and commercial and business loans by maturity date at year-end 2001 follow:
CONSTRUCTION AND DEVELOPMENT COMMERCIAL AND BUSINESS -------------------------- -------------------------- VARIABLE RATE FIXED RATE VARIABLE RATE FIXED RATE TOTAL ------------- ---------- ------------- ---------- ------ (IN MILLIONS) Due within one year................... $2,598 $ 90 $ 613 $ 42 $3,343 After one but within five years....... 1,525 21 839 368 2,753 After five years...................... -- -- 99 155 254 ------ ---- ------ ---- ------ $4,123 $111 $1,551 $565 $6,350 ------ ---- ------ ---- ------
Asset Quality Several important measures are used to evaluate and monitor asset quality. They include the level of loan delinquencies, nonperforming loans and assets and net loan charge-offs compared to average loans.
AT YEAR-END ---------------------------- 2001 2000 1999 ------ ------- ------- ($ IN MILLIONS) Accruing loans past due 30-89 days.......................... $ 107 $ 170 $ 95 Accruing loans past due 90 days or more..................... -- 6 6 ------ ------- ------- Accruing loans past due 30 days or more................... $ 107 $ 176 $ 101 ====== ======= ======= Nonaccrual loans............................................ $ 166 $ 65 $ 85 Restructured loans.......................................... -- -- -- ------ ------- ------- Nonperforming loans....................................... 166 65 85 Foreclosed property......................................... 2 3 8 ------ ------- ------- Nonperforming assets...................................... $ 168 $ 68 $ 93 ====== ======= ======= Allowance for loan losses................................... $ 139 $ 118 $ 113 Net charge-offs............................................. $ 27 $ 36 $ 24 Nonperforming loan ratio.................................... 1.67% 0.62% 0.90% Nonperforming asset ratio................................... 1.68% 0.65% 0.99% Allowance for loan losses/total loans....................... 1.39% 1.12% 1.20% Allowance for loan losses/nonperforming loans............... 83.73% 179.73% 133.52% Net loans charged off/average loans......................... 0.25% 0.35% 0.26%
Accruing delinquent loans past due 30 days or more were 1.10 percent of total loans at year-end 2001, 1.67 percent at year-end 2000 and 1.07 percent at year-end 1999. There were no accruing delinquent loans past due 90 days or more at year-end 2001. Accruing delinquent loans past due 90 days or more were 0.06 percent at year-end 2000 and 0.07 percent at year-end 1999. 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 the 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. Nonperforming loans increased in 2001 due to loans in the construction and development (senior housing) and commercial and business (asset-based) portfolios. One of the asset-based loans was affected by the events of September 11, 2001, and is currently being restructured. This increase in nonperforming loans resulted in a 25 decline in the allowance as a percent of nonperforming loans; 83.73 percent at year-end 2001 compared with 179.73 percent at year-end 2000. The allowance as a percent of total loans increased to 1.39 percent at year-end 2001 compared with 1.12 percent at year-end 2000. Nonperforming loans declined in both dollars and as a percent of total loans in 2000; the allowance as a percent of nonperforming loans increased in 2000. 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 as of the most recent five year-ends. The aggregate amounts and the interest income foregone on such loans are immaterial. The investment in impaired loans was $66 million at year-end 2001 and $6 million at year-end 2000, with a related allowance for loan losses of $28 million and $3 million, respectively. The average investment in impaired loans during 2001 and 2000 was $37 million and $45 million, respectively. The related amount of interest income recognized on impaired loans for 2001 and 2000 was immaterial. Allowance for Loan Losses The allowance for loan losses is comprised of specific allowances, general allowances and an unallocated allowance. Management continuously evaluates the allowance for loan losses to ensure the level is adequate to absorb losses inherent in the loan portfolio. The allowance is increased by charges to income and by the portion of the purchase price related to credit risk on loans acquired through bulk purchases and acquisitions, and decreased by charge-offs, net of recoveries. Specific allowances are based on a thorough review of the financial condition of the borrower, general economic conditions affecting the borrower, collateral values and other factors. General allowances are based on historical loss trends and management's judgment concerning those trends and other relevant factors, including delinquency rates, current economic conditions, loan size, industry competition and consolidation, and the effect of government regulation. The unallocated allowance provides for inherent loss exposures not yet identified. The evaluation of the appropriate level of unallocated allowance considers current risk factors that may not be apparent in historical factors used to determine the specific and general allowances. These factors include inherent delays in obtaining information and the volatility of economic conditions. Changes in the allowance for loan losses were:
FOR THE YEAR ------------------------------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- ($ IN MILLIONS) Balance at beginning of year................... $118 $113 $ 87 $ 91 $ 68 Charge-offs: Real estate mortgage...................... -- (22) (16) (6) (5) Commercial and business................... (28) (11) (7) -- (1) Consumer and other........................ (3) (4) (2) (2) (2) ---- ---- ---- ---- ---- (31) (37) (25) (8) (8) Recoveries: Real estate mortgage...................... 3 -- -- 3 1 Consumer and other........................ 1 1 1 -- 1 ---- ---- ---- ---- ---- 4 1 1 3 2 ---- ---- ---- ---- ---- Net charge-offs......................... (27) (36) (24) (5) (6) Additions charged to operations................ 46 39 38 1 (2) Acquisitions and bulk purchases of loans, net of adjustments............................... 2 2 12 -- 31 ---- ---- ---- ---- ---- Balance at end of year......................... $139 $118 $113 $ 87 $ 91 ==== ==== ==== ==== ==== Ratio of net charge-offs during the year to average loans outstanding during the year.... .25% .35% .26% .07% .10%
26 An analysis of the allocation of the allowance for loan losses follows. Allocation of a portion of the allowance does not preclude its availability to absorb losses in other categories of loans.
AT YEAR-END --------------------------------------------------------------------------------------------- 2001 2000 1999 1998 --------------------- --------------------- --------------------- --------------------- CATEGORY CATEGORY CATEGORY CATEGORY AS A % OF AS A % OF AS A % OF AS A % OF TOTAL TOTAL TOTAL TOTAL ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS --------- --------- --------- --------- --------- --------- --------- --------- ($ IN MILLIONS) Real estate mortgage........ $ 14 29% $ 26 34% $ 60 40% $36 50% Construction and development............... 62 42% 30 38% 24 35% 17 27% Commercial and business..... 36 21% 31 16% 12 13% 14 13% Consumer and other.......... 3 8% 5 12% 5 12% 3 10% Unallocated................. 24 -- 26 -- 12 -- 17 -- ---- --- ---- --- ---- --- --- --- Total....................... $139 100% $118 100% $113 100% $87 100% ==== === ==== === ==== === === === AT YEAR-END --------------------- 1997 --------------------- CATEGORY AS A % OF TOTAL ALLOWANCE LOANS --------- --------- ($ IN MILLIONS) Real estate mortgage........ $46 61% Construction and development............... 15 21% Commercial and business..... 4 9% Consumer and other.......... 3 9% Unallocated................. 23 -- --- --- Total....................... $91 100% === ===
The allowance allocated to real estate mortgage was down in 2001 due to a reduction in loans outstanding and improved credit quality and down in 2000 due to charge-offs of loans previously provided for. The amount allocated to construction and development was up in 2001 and 2000 due to loans in the senior housing industry. The amount allocated to commercial and business loans was up in 2001 due to the growth in asset-based lending partially offset by charge-offs of syndicated loans previously provided for. The decrease in the unallocated allowance in 2001 was the result of a more mature construction and development portfolio reducing construction period and lease-up risk. The unallocated amount was up in 2000 as a reflection of slowing economic activity and an increase in the size of the loan portfolio. The allowance for loan losses is considered adequate based on information currently available. However, adjustments to the allowance may be necessary due to changes in economic conditions, assumptions as to future delinquencies or loss rates and intent as 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. Mortgage Banking Activities Mortgage loan originations were $7.6 billion in 2001, $2.1 billion in 2000 and $3.7 billion in 1999. The record production in 2001 was due to the acquisition of production operations in the upper mid-west and mid-Atlantic regions and the high level of refinance activity resulting from the low interest rate environment. Higher interest rates during 2000 resulted in a significant reduction in mortgage refinancing activity, contributing to a reduction in mortgage loan originations. Mortgage servicing portfolio runoff was 26.1 percent in 2001, 13.9 percent in 2000 and 21.0 percent in 1999. The changes in the runoff rates are due to the lower interest rate environments in 2001 and 1999, leading to high levels of refinancing, and a relatively higher interest rate environment in 2000 resulting in low levels of refinancing. The mortgage-servicing portfolio was $11.4 billion at year-end 2001 and $19.5 billion at year-end 2000. The decrease was due to the sale of $8.6 billion in servicing during the second quarter 2001 and the accelerated runoff rate. The accelerated runoff rate was due to prepayments in the lower rate environment, partially offset by the retention of servicing on a portion of the mortgage loans originated. Other Matters The Financial Services Group is continuing its efforts to enhance return on investment, including reviewing operations that are unable to meet return objectives and determining appropriate courses of action. During January and February 2002, a plan was enacted to exit certain businesses and product delivery methods that were not expected to meet return objectives in the near term. This action resulted in a reduction in force and the write-off of certain technology investments; however, the ongoing cost savings from these actions is anticipated to exceed significantly the related severance and write-off expenses. During 2001, the 27 Financial Services Group completed acquisitions that significantly increased its mortgage production capacity. In addition, the mortgage loan-servicing portfolio was reduced by approximately 40 percent during the year through a bulk sale of servicing and an increase in the sale of servicing with loan production. The acquisitions and change in the size of the servicing portfolio were designed to reposition the mortgage banking operations to be more of a production operation and to minimize impairment risk associated with mortgage servicing rights. CORPORATE, INTEREST AND OTHER INCOME/EXPENSE Corporate expenses were $30 million in 2001, $33 million in 2000 and $30 million in 1999. The decrease in 2001 was primarily due to reduced pension costs. Parent company interest expense was $98 million in 2001, $105 million in 2000 and $95 million in 1999. The average interest rate on borrowings was 6.3 percent in 2001 and 7.2 percent in 2000. In addition, during 2001, debt was reduced $43 million. Parent company interest expense for 1999 was reduced $28 million to reflect an allocation of parent company debt to the discontinued bleached paperboard operation, which was sold at year-end 1999. Other income/expense primarily consists of gains and losses on the sale or disposition of under-performing and non-strategic assets. For 2001, it includes a $20 million gain on the sale of non-strategic timberlands and $13 million of losses related to under-performing assets. It also includes a $4 million fair value adjustment of an interest rate swap agreement before its designation as a cash flow hedge. For 2000, other income/expense consists of a $15 million charge related to the decision to exit the fiber cement business. PENSION CREDITS Non-cash pension credits were $18 million in 2001, $9 million in 2000, $1 million in 1999. The increase in the pension credit in 2001 and 2000 reflects the cumulative better than expected performance of the pension plan assets through year-end 2000 and 1999. Based upon the actuarial valuation as of year-end 2001, the pension credit will revert to a pension expense of approximately $5 million for 2002. This is due mainly to less than expected performance of the pension plan assets through year-end 2001. INCOME TAXES The effective tax rate was 37 percent in 2001, 39 percent in 2000 and 38 percent in 1999. 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 2001 rate reflects a one time, 3 percent, financial benefit realized from the sale of the corrugated packaging operation in Chile. AVERAGE SHARES OUTSTANDING Average diluted shares outstanding were 49.3 million in 2001, 50.9 million in 2000 and 55.8 million in 1999. The decreases of 3 percent in 2001 and 9 percent in 2000 were due mainly to the effects of share repurchases under the stock repurchase programs authorized during the fourth quarter 1999 and the third quarter 2000. CAPITAL RESOURCES AND LIQUIDITY FOR THE YEAR 2001 The consolidated net assets invested in the Financial Services Group are subject, in varying degrees, to regulatory rules and regulations including restrictions on the payment of dividends to the parent company. Accordingly, the parent company and the Financial Services Group capital resources and liquidity are discussed separately. 28 PARENT COMPANY OPERATING ACTIVITIES Cash from operations was $346 million, down 10 percent. The decrease was due to lower earnings offset in part by better use of working capital and an increase in dividends received from the Financial Services Group. Dividends received from the Financial Services Group totaled $124 million in 2001 and $110 million in 2000. Depreciation and amortization was $186 million, down $16 million. The decrease was due to the revisions in the estimated useful lives of certain production equipment, which reduced depreciation by $27 million, partially offset by an increase in amortization of new technology systems and new capital additions. INVESTING ACTIVITIES Capital expenditures were $184 million, down 17 percent. Capital expenditures are expected to approximate $140 million for 2002. Cash proceeds from the sale of 78,000 acres of non-strategic timberland were $54 million. Cash used to acquire three corrugated packaging operations totaled $144 million and $15 million was invested in existing building products joint ventures. There were no capital contributions to the Financial Services Group during 2001. FINANCING ACTIVITIES Long-term debt was reduced by $43 million, including a $25 million non-cash reduction arising from the sale of the corrugated packaging operation in Chile. During 2001, $200 million of 9.0 percent term notes were repaid using $100 million of short-term borrowings and $100 million from an existing three-year revolving credit agreement. In the fourth quarter 2001, a wholly-owned and consolidated subsidiary established a new $200 million trade receivable backed revolving credit due in November 2002. Under this agreement, the subsidiary purchases, on an ongoing basis, substantially all of the parent company's trade receivables. As the parent company requires funds, the subsidiary draws under its revolving credit agreement, pledges the trade receivables as collateral and remits the proceeds to the parent company. In case of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary's assets before distributions back to the parent company. At year-end 2001, the subsidiary owned $248 million of trade receivables against which it had borrowed $70 million of the $168 million currently available to borrow under the agreement. Cash dividends paid to shareholders were $63 million or $1.28 per share. There were no treasury stock purchases during 2001 under the August 2000 Board of Directors authorization to repurchase 2.5 million shares. To date a total of 750,000 shares had been repurchased under this authorization at a cost of $31 million. LIQUIDITY AND OFF BALANCE SHEET FINANCING ARRANGEMENTS The following table summarizes the parent company's contractual cash obligations at year-end 2001:
PAYMENT DUE OR EXPIRATION BY YEAR --------------------------------------- TOTAL 2002 2003-4 2005-6 2007+ ------ ---- ------ ------ ----- (IN MILLIONS) Long-term debt................................. $1,339 $107 $323 $294 $615 Capital leases................................. 188 -- -- -- 188 Operating leases............................... 317 42 49 35 191 Purchase obligations........................... 77 3 6 68 -- ------ ---- ---- ---- ---- Total................................... $1,921 $152 $378 $397 $994 ====== ==== ==== ==== ====
29 The parent company's sources of short-term funding are its operating cash flows, which include dividends received from the Financial Services Group, and its existing credit arrangements. The parent company operates in cyclical industries, and its operating cash flows vary accordingly. The dividends received from the Financial Services Group are subject to regulatory approval and restrictions. At year-end 2001, the parent company had $505 million in unused borrowing capacity under its existing credit agreements. Most of the credit agreements contain terms and conditions customary for such agreements including minimum levels of interest coverage and limitations on leverage. At year-end 2001, the parent company complied with all the terms and conditions of its credit agreements. Of the current credit agreements, $75 million in lines of credit and the $200 million receivable securitization program could not be accessed if the long-term debt of the parent company was rated below "investment grade" by rating agencies. Several supply and lease agreements include similar rating requirements, which if activated would result in a variety of remedies including restructuring of the agreements. The long-term debt of the parent company is currently rated BBB and Baa2 by the rating agencies. Because of the announced tender offer for Gaylord Container Corporation and its related financing commitment of $900 million, the current debt rating is being reviewed by the rating agencies. The following table summarizes the parent company's commercial commitments at year-end 2001:
EXPIRING BY YEAR -------------------------------------- TOTAL 2002 2003-4 2005-6 2007+ ----- ---- ------ ------ ----- (IN MILLIONS) Joint venture guarantees......................... $105 $28 $-- $10 $67 Performance bonds and recourse obligations....... 105 35 58 -- 12 ---- --- --- --- --- Total....................................... $210 $63 $58 $10 $79 ==== === === === ===
Approximately $17 million in joint venture guarantees, letters of credit and recourse obligations include rating requirements, which if activated would result in acceleration. Of the recourse obligations, $6 million relate to receivables arising from the 1998 sale of the operations in Argentina, which were subsequently sold with recourse. It is possible that the currency crisis in Argentina will have some affect on the borrower's ability to repay these notes, which could lead to these notes being repurchased by the parent company. The parent company is a participant in three joint ventures engaged in manufacturing and selling of paper and building materials. The joint venture partner in each of these ventures is a publicly held company. At year-end 2001, these ventures had $215 million in long-term debt of which the parent company had guaranteed obligations and letters of credit aggregating $105 million. The parent company has no unconsolidated special purpose entities. The parent company has an interest rate and several commodity derivative instruments outstanding at year-end 2001. The interest rate instrument expires in 2008 and the majority of the commodity instruments expire in the third quarter 2002. These instruments are non-exchange traded and are valued using either third-party resources or models. At year-end 2001, the fair value of these instruments is a negative $5 million. Adjustments in their fair value are recorded in other comprehensive income, a component of shareholders' equity. The preferred stock issued by subsidiaries of Guaranty Bank is automatically exchanged into preferred stock of Guaranty Bank upon the occurrence of certain regulatory events or administrative actions. If such exchange occurs, each preferred share is automatically surrendered to the parent company in exchange for senior notes of the parent company. At year-end 2001, the outstanding preferred stock issued by these subsidiaries totaled $305 million. THE FINANCIAL SERVICES GROUP OPERATING ACTIVITIES Cash used by operations in 2001 was $397 million compared with cash provided by operations of $217 million in 2000. Higher earnings and an increase in the change in cash for mortgage loans serviced for 30 others were more than offset by a $673 million increase in mortgage loans held for sale. Mortgage loans held for sale were $958 million at year-end 2001. INVESTING ACTIVITIES Loans and securities decreased $750 million due primarily to a decrease in mortgage assets resulting from the high level of prepayments in the lower interest rate environment. Cash proceeds from the sale of mortgage servicing rights totaled $143 million. During 2001, servicing rights on $8.6 billion in mortgage loans were sold to mitigate exposure to changes in the valuation of mortgage servicing rights in the lower interest rate environment. Cash paid for acquisitions of mortgage production operations and an asset-based lending portfolio was $364 million. Capital expenditures were $26 million. FINANCING ACTIVITIES Borrowings increased $1.1 billion during 2001. Borrowings consist primarily of long- and short-term advances from Federal Home Loan Banks and securities sold under repurchase agreements and resulted from funding needs as deposits declined $766 million and earning assets grew slightly. The decline in deposits was due to competitive market conditions. Dividends paid to the parent company totaled $124 million. CASH EQUIVALENTS Cash equivalents were $587 million, an increase of $267 million. This increase was primarily the result of proceeds received on the sale of mortgage loans on the last day of 2001, which were used in January 2002 to reduce borrowings. LIQUIDITY, OFF BALANCE SHEET FINANCING ARRANGEMENTS AND CAPITAL ADEQUACY The following table summarizes the Financial Services Group's contractual cash obligations at year-end 2001:
PAYMENTS DUE OR EXPIRATION BY YEAR ------------------------------------------- TOTAL 2002 2003-4 2005-6 2007+ ------- ------- ------ ------ ----- (IN MILLIONS) Deposits.................................. $ 9,030 $ 6,726 $1,945 $357 $ 2 FHLB advances............................. 3,435 2,816 249 232 138 Repurchase agreements..................... 1,107 1,107 -- -- -- Other borrowings.......................... 214 174 6 4 30 Preferred stock issued by subsidiaries.... 305 -- -- -- 305 Operating leases.......................... 60 17 25 12 6 ------- ------- ------ ---- ---- Total................................ $14,151 $10,840 $2,225 $605 $481 ======= ======= ====== ==== ====
The Financial Services Group's short-term funding needs are met through operating cash flows, attracting new retail and wholesale deposits, increased borrowings and converting assets to cash through sales or reverse repurchase agreements. Assets that can be converted to cash include short-term investments, mortgage loans held for sale and securities available-for-sale. At year-end 2001, the Financial Services Group had available liquidity of $2.0 billion. The maturities of deposits in the above table are based on contractual maturities and repricing periods. Most of the deposits that are shown to mature in 2002 are comprised of transaction deposit accounts and short-term (less than one year) certificates of deposit, most of which have historically renewed at maturity. 31 In the normal course of business, the Financial Services Group enters into commitments to extend credit including loans, leases, and letters of credit. These commitments generally require collateral upon funding and as such carry substantially the same risk as loans. In addition, the commitments normally include provisions that under certain circumstances allow the Financial Services Group to exit the commitment. At year-end 2001, loan, lease and letter of credit commitments totaled $5.0 billion with expiration dates primarily within the next three years. In addition, at year-end 2001, commitments to originate single-family residential mortgage loans totaled $985 million and commitments to sell single-family residential mortgage loans totaled $1.1 billion. At year-end 2001, the savings bank met or 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 2001, the parent company received $124 million in dividends from the savings bank. At year-end 2001, preferred stock of subsidiaries was outstanding with a liquidation preference of $305 million. These preferred stocks are automatically exchanged into $305 million in savings bank preferred stock if federal banking regulators determine that the savings bank is or will become undercapitalized in the near term or upon the occurrence of certain administrative actions. If such an exchange occurs, the parent company must issue senior notes in exchange for the savings bank preferred stock in an amount equal to the liquidation preference of the preferred stock exchanged. Selected financial and regulatory capital data for the savings bank follows:
AT YEAR-END ----------------- 2001 2000 ------- ------- (IN MILLIONS) Balance sheet data Total assets.............................................. $15,251 $14,885 Total deposits............................................ 9,369 10,088 Shareholder's equity...................................... 954 931
SAVINGS BANK REGULATORY FOR CATEGORIZATION AS ACTUAL MINIMUM "WELL CAPITALIZED" ------- ---------- --------------------- Regulatory capital ratios Tangible capital.............................. 7.8% 2.0% N/A Leverage capital.............................. 7.8% 4.0% 5.0% Risk-based capital............................ 10.7% 8.0% 10.0%
Of the subsidiary preferred stock, $298 million qualifies as core (leverage) capital and the remainder qualifies as Tier 2 (supplemental risk-based) capital. ENVIRONMENTAL MATTERS Temple-Inland 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, Temple-Inland 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. Temple-Inland has been designated as a potentially responsible party at nine Superfund sites, excluding sites as to which Temple-Inland's records disclose no involvement or as to which Temple-Inland's potential liability has been finally determined. At year-end 2001, Temple-Inland estimated the undiscounted total costs it could incur for the remediation and toxic tort actions at Superfund sites to be about $2 million, which 32 has been accrued. Temple-Inland also utilizes landfill operations to dispose of non-hazardous waste at three paperboard and two building product mill operations. At year-end 2001, Temple-Inland estimated that the undiscounted total costs it could incur to ensure proper closure of these landfills over the next twenty-five years to be about $14 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 for the pulp and paper industry. Temple-Inland has spent approximately $15 million toward Cluster Rule compliance through the end of 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 (estimated at $2 million) and the upcoming plywood and composite wood products MACT proposal (estimated at $12 million), as well as changing laws and regulations and technological advances. Given these uncertainties, Temple-Inland estimates that capital expenditures for environmental purposes excluding the MACT rules during the period 2002 through 2004 will average approximately $12 million each year. ENERGY AND THE EFFECTS OF INFLATION Inflation has had minimal effects on operating results the last three years except for the increase in energy costs during 2001 and 2000. Energy costs were up $38 million in 2001 and $17 million in 2000. Energy costs began to rise during the second quarter 2000 and continued to rise through the second quarter 2001. Energy costs peaked during the second quarter 2001 and began to decline during the remainder of 2001 reaching more normalized levels by year-end 2001. In some instances, Temple-Inland elected to take downtime at certain of its manufacturing facilities rather than pay significantly higher energy prices. The Paper Group is a party to a long-term power purchase contract agreement with Southern California Edison (Edison). Under this agreement, the Paper Group sold to Edison a portion of its electrical generating capacity from a co-generation facility operated in connection with its Ontario mill. Edison was to pay the Paper Group for its committed generating capacity and for electricity generated and sold by Edison. During the fourth quarter 2000 and the first quarter 2001, the Ontario mill generated and delivered electricity to Edison but was not paid. During the second quarter 2001, the Paper Group notified Edison that the long-term power purchase agreement was cancelled because of Edison's material breach of the agreement. Edison contested the right of the Paper Group to terminate the agreement. It has also asserted that it is entitled to recover a portion of the payments it made during the term of the agreement from the Paper Group. The parties are currently in litigation to determine, among other matters, whether the agreement has been terminated and whether the Paper Group may sell its excess generating capacity to third parties. The Paper Group continues to provide power to Edison and has received some payments from Edison. Temple-Inland does not believe that the resolution of these matters will have a material adverse effect on its consolidated operations or financial position. 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 or timberlands sold would be significantly higher than amounts reported. NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ESTIMATE Beginning January 2001, Temple-Inland adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This statement requires that derivative instruments be included 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. Temple-Inland uses to a limited degree, derivative instruments to hedge risks, including those associated with changes in product pricing, manufacturing cost and interest rates. Temple-Inland does not use derivatives for trading purposes. The cumulative effect of adoption was to reduce 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 33 adjusted to their fair value with a corresponding after tax reduction in other comprehensive income, a component of shareholders' equity, of $16 million. Beginning January 2001, the parent 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 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 these revisions, 2001 depreciation expense was reduced by $27 million. Temple-Inland adopted Statement of Financial Accounting Standards No. 141, Business Combinations, on June 30, 2001. This Statement requires business combinations to be accounted for using the purchase method. Beginning January 2002, Temple-Inland adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under this Statement, amortization of goodwill is precluded and goodwill is periodically measured for impairment. The effect of not amortizing goodwill during 2001 would have been to increase operating income by $11 million and net income by $9 million or $0.18 per diluted share. While Temple-Inland has not yet determined the amount of goodwill impairment to be recognized during the first quarter 2002 upon adoption of this new statement, it is likely that up to $20 million of goodwill associated with pre-2001 specialty packaging acquisitions may be impaired. Under the new rules, impairment is measured based upon the present value of future operating cash flows while under the old rules impairment was measured based upon undiscounted future operating cash flows. Temple-Inland will be required to adopt Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, beginning 2003. The company has not yet determined the effect on earnings or financial position of adopting this statement. In addition, Temple-Inland will be required to adopt Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets beginning 2002. While Temple-Inland has not yet determined the effect on earnings or financial position of adopting this statement, it is likely that the effect of adoption will not be material. 34 STATISTICAL AND OTHER DATA (A)
FOR THE YEAR ------------------------ 2001 2000 1999 ------ ------ ------ ($ IN MILLIONS) Revenues Paper Group Corrugated packaging...................................... $1,935 $1,902 $1,692 Linerboard................................................ 147 190 177 ------ ------ ------ Total Paper............................................ $2,082 $2,092 $1,869 ====== ====== ====== Building Products Group Pine lumber............................................... $ 228 $ 218 $ 239 Particleboard............................................. 175 230 189 Medium density fiberboard................................. 98 90 66 Gypsum wallboard.......................................... 56 98 162 Fiberboard................................................ 63 67 75 Other..................................................... 106 133 106 ------ ------ ------ Total Building Products................................ $ 726 $ 836 $ 837 ====== ====== ====== Financial Services Group Savings bank.............................................. $1,042 $1,121 $ 841 Mortgage banking.......................................... 153 92 131 Real estate............................................... 117 117 111 Insurance brokerage....................................... 52 39 33 ------ ------ ------ Total Financial Services............................... $1,364 $1,369 $1,116 ====== ====== ====== Unit sales Paper Group Corrugated packaging, thousands of tons................... 2,214 2,217 2,284 Linerboard, thousands of tons............................. 404 468 518 ------ ------ ------ Total, thousands of tons............................... 2,618 2,685 2,802 ====== ====== ====== Building Products Group Pine lumber, mbf.......................................... 728 666 618 Particleboard, msf........................................ 582 676 574 Medium density fiberboard, msf............................ 256 244 187 Gypsum wallboard, msf..................................... 586 678 890 Fiberboard, msf........................................... 385 368 439 Financial Services Group Segment operating income Savings bank.............................................. $ 166 $ 168 $ 109 Mortgage banking.......................................... 4 11 19 Real estate............................................... 4 3 4 Insurance brokerage....................................... 10 7 6 ------ ------ ------ Total Financial Services operating income.............. $ 184 $ 189 $ 138 ====== ====== ====== OPERATING RATIOS Return on average assets.................................. 1.08% 1.01% 0.93% Return on average equity.................................. 14.55% 13.64% 13.29% Dividend pay-out ratio.................................... 74.62% 74.92% 57.85% Equity to asset ratio at year-end......................... 7.43% 7.38% 7.00% Equity at year end Savings bank.............................................. $ 954 $ 931 $ 857 Mortgage banking.......................................... 91 78 90 Real estate............................................... 66 56 54 Insurance brokerage....................................... 31 28 22 ------ ------ ------ Total Financial Services equity........................ $1,142 $1,093 $1,023 ====== ====== ======
- --------------- (a) Revenues and unit sales do not include joint venture operations. 35 ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK INTEREST RATE RISK Temple-Inland is subject to interest rate risk from the utilization of financial instruments such as adjustable-rate debt and other borrowings, as well as the lending and deposit-gathering activities of the Financial Services Group. The following table illustrates the estimated impact on pre-tax income of immediate, parallel and sustained shifts in interest rates for the subsequent 12-month period at year-end 2001, with comparative information at year-end 2000:
INCREASE (DECREASE) IN INCOME BEFORE TAXES CHANGE IN -------------------- INTEREST RATES 2001 2000 - -------------- ------ ------ (IN MILLIONS) +2%......................................................... $ 2 $(7) +1%......................................................... $ 8 $(1) 0.......................................................... $-- $-- - -1%......................................................... $(6) $(1)
The change in exposure to interest rate risk from year-end 2000 is primarily due to changes in the composition of assets and liabilities in the Financial Services Group. 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. Since year-end 2000, the duration of the liabilities has lengthened while the duration of the assets has shortened. The lengthened duration of liabilities is the result of significant originations in longer- term fixed rate certificates of deposit. The shortened duration of assets is the result of composition changes caused by increased prepayments on the mortgage and mortgage-backed securities portfolios, stemming from the lower interest rate environment, and the growth in the loan portfolio. Additionally, the fair value of the Financial Services Group's mortgage servicing rights (estimated at $178 million at year-end 2001) is also affected by changes in interest rates. Temple-Inland estimates that a 1 percent decline in interest rates from current levels would decrease the fair value of the mortgage servicing rights by approximately $37 million. FOREIGN CURRENCY RISK The Company's exposure to foreign currency fluctuations on its financial instruments is not material because most of these instruments are denominated in U.S. dollars. COMMODITY PRICE RISK 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 2001, the potential loss in fair value resulting from a hypothetical 10 percent change in the underlying commodity prices would not be significant. 36 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS PAGE - ----------------------------- ---- Parent Company (Temple-Inland Inc.) Summarized Statements of Income -- for the years 2001, 2000, and 1999......................................... 38 Summarized Balance Sheets at year end 2001 and 2000....... 39 Summarized Statements of Cash Flows -- for the years 2001, 2000, and 1999......................................... 40 Notes to the Parent Company (Temple-Inland Inc.) Summarized Financial Statements........................ 41 Financial Services Group Summarized Statements of Income -- for the years 2001, 2000, and 1999......................................... 47 Summarized Balance Sheets at year end 2001 and 2000....... 48 Summarized Statements of Cash Flows -- for the years 2001, 2000, and 1999......................................... 49 Notes to Financial Services Group Summarized Financial Statements............................................. 50 Temple-Inland Inc. and Subsidiaries Consolidated Statements of Income -- for the years 2001, 2000, and 1999......................................... 62 Consolidated Statements of Cash Flows -- for the years 2001, 2000, and 1999................................... 63 Consolidating Balance Sheets at year end 2001 and 2000.... 64 Consolidated Statements of Shareholders' Equity -- for the years 2001, 2000, and 1999............................. 66 Notes to Consolidated Financial Statements................ 67 Management Report on Financial Statements................... 81 Report of Independent Auditors.............................. 82
37 PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED STATEMENTS OF INCOME
FOR THE YEAR ------------------------ 2001 2000 1999 ------ ------ ------ (IN MILLIONS) NET REVENUES................................................ $2,808 $2,928 $2,706 COSTS AND EXPENSES Cost of sales.......................................... 2,457 2,441 2,216 Selling and administrative............................. 261 236 227 Other (income) expense................................. (1) 15 -- ------ ------ ------ 2,717 2,692 2,443 ------ ------ ------ 91 236 263 FINANCIAL SERVICES EARNINGS................................. 184 189 138 ------ ------ ------ OPERATING INCOME............................................ 275 425 401 Interest............................................... (98) (105) (95) ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE TAXES.............................................. 177 320 306 Income taxes........................................... (66) (125) (115) ------ ------ ------ INCOME FROM CONTINUING OPERATIONS........................... 111 195 191 Discontinued operations................................ -- -- (92) ------ ------ ------ INCOME BEFORE ACCOUNTING CHANGE............................. 111 195 99 Effect of accounting change............................ (2) -- -- ------ ------ ------ NET INCOME.................................................. $ 109 $ 195 $ 99 ====== ====== ======
See the notes to the Parent Company summarized financial statements. 38 PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED BALANCE SHEETS
AT YEAR-END ----------------- 2001 2000 ------- ------- (IN MILLIONS) ASSETS CURRENT ASSETS Cash...................................................... $ 3 $ 2 Receivables, less allowances of $11 in 2001 and $10 in 2000................................................... 288 294 Inventories: Work in process and finished goods..................... 53 61 Raw materials and supplies............................. 205 192 ------- ------- 258 253 Prepaid expenses and other................................ 73 51 ------- ------- Total current assets................................... 622 600 ------- ------- INVESTMENT IN TEMPLE-INLAND FINANCIAL SERVICES.............. 1,142 1,093 ------- ------- PROPERTY AND EQUIPMENT Land and buildings........................................ 490 452 Machinery and equipment................................... 2,926 2,734 Construction in progress.................................. 89 160 Less allowances for depreciation.......................... (1,935) (1,822) ------- ------- 1,570 1,524 Timber and timberlands -- less depletion.................. 515 567 ------- ------- Total property and equipment........................... 2,085 2,091 GOODWILL.................................................... 62 22 OTHER ASSETS................................................ 210 205 ------- ------- TOTAL ASSETS................................................ $ 4,121 $ 4,011 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.......................................... $ 149 $ 112 Employee compensation and benefits........................ 60 62 Accrued interest.......................................... 20 24 Accrued property taxes.................................... 23 24 Other accrued expenses.................................... 94 70 Current portion of long-term debt......................... 1 2 ------- ------- Total current liabilities.............................. 347 294 LONG-TERM DEBT.............................................. 1,339 1,381 ------- ------- DEFERRED INCOME TAX......................................... 310 276 ------- ------- POSTRETIREMENT BENEFITS..................................... 142 142 ------- ------- OTHER LONG-TERM LIABILITIES................................. 87 85 ------- ------- SHAREHOLDERS' EQUITY........................................ 1,896 1,833 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 4,121 $ 4,011 ======= =======
See the notes to the Parent Company summarized financial statements. 39 PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED STATEMENTS OF CASH FLOWS
FOR THE YEAR --------------------- 2001 2000 1999 ----- ----- ----- (IN MILLIONS) CASH PROVIDED BY (USED FOR) OPERATIONS Net income.................................................. $ 109 $ 195 $ 99 Adjustments: Depreciation and depletion................................ 182 198 200 Amortization of goodwill.................................. 4 3 3 Deferred taxes............................................ 35 52 10 Unremitted earnings from financial services............... (166) (147) (121) Dividends from financial services......................... 124 110 70 Receivables............................................... 24 5 (71) Inventories............................................... 33 16 (4) Prepaid expenses and other................................ (22) (5) (12) Accounts payable and accrued expenses..................... 35 (82) 40 Change in net assets of discontinued operation............ -- -- 23 Loss on disposal of discontinued operation................ -- -- 77 Other..................................................... (12) 39 19 ----- ----- ----- 346 384 333 ----- ----- ----- CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures...................................... (184) (223) (178) Proceeds from sale of discontinued operations............. -- -- 576 Sale of timberland, property and equipment and other assets................................................. 74 5 40 Acquisitions, net of cash acquired, and joint ventures.... (160) (18) (49) Capital contributions to financial services............... -- (10) (279) ----- ----- ----- (270) (246) 110 ----- ----- ----- CASH PROVIDED BY (USED FOR) FINANCING Additions to debt......................................... 272 260 312 Payments of debt.......................................... (290) (134) (560) Purchase of stock for treasury............................ -- (250) (100) Cash dividends paid to shareholders....................... (63) (65) (71) Other..................................................... 6 2 12 ----- ----- ----- (75) (187) (407) ----- ----- ----- Net increase (decrease) in cash and cash equivalents........ 1 (49) 36 Cash and cash equivalents at beginning of year.............. 2 51 15 ----- ----- ----- Cash and cash equivalents at end of year.................... $ 3 $ 2 $ 51 ===== ===== =====
See the notes to the Parent Company summarized financial statements. 40 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 including restrictions on the payment of dividends to the parent company. 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 Group 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 $99 million at year-end 2001 and $93 million at year-end 2000 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 $22 million and $28 million more than reported at year-end 2001 and 2000, respectively. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and depletion. Included in property and equipment are $147 million of assets that are subject to capital leases. Depreciation, which includes amortization of assets subject to capital leases, 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 15 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 completed an assessment of the estimated useful lives of certain production equipment, which resulted in a revision of estimated useful lives. These revisions ranged from a reduction of several years to a lengthening of up to five years. Accordingly, beginning January 2001, the parent company began computing depreciation of certain production equipment using revised estimated useful lives. As a result of these revisions in estimated useful lives, year 2001 depreciation expense was reduced by $27 million and year 2001 net income was increased by $16 million or $0.33 per diluted share. 41 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) Timber and timberlands are stated at cost, less 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. The basis of timberland sold is determined by the area method. The basis of timber sold is determined by the average cost method. The cost of significant additions and betterments is capitalized, and the cost of maintenance and repairs is expensed. 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. NOTE B -- LONG-TERM DEBT Long-term debt consists of the following:
AT YEAR-END --------------- 2001 2000 ------ ------ (IN MILLIONS) Commercial paper, other short-term borrowings and borrowing under bank credit agreements -- average interest rate was 4.57% in 2001 and 6.55% in 2000........................... $ 27 $ 90 Trade Receivable Facility, due 2002 -- average interest rate was 2.06% in 2001......................................... 70 -- 9.0% Notes payable due 2001................................. -- 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 -- 6.72% to 7.02% notes due 2002 through 2007.............................................. 118 118 Revenue bonds due 2007 through 2024 -- average interest rate was 3.70% in 2001 and 4.77% in 2000....................... 115 114 Term note due 2005 -- average interest rate was 5.38% in 2001 and 7.89% in 2000.................................... 100 100 Term note due 2006 -- average interest rate was 4.50% in 2001...................................................... 102 -- Other indebtedness due through 2006 -- average interest rate was 5.10% in 2001 and 7.11% in 2000....................... 158 111 ------ ------ 1,340 1,383 Less: Current portion of long-term debt......................... (1) (2) ------ ------ $1,339 $1,381 ====== ======
42 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) The parent company has various debt arrangements, which are subject to conditions and covenants customary for such agreements, including levels of interest coverage and limitations on leverage of the parent company. At year-end 2001, the parent company was in compliance with all such conditions and covenants. At year-end 2001, the parent company had credit agreements with banks totaling $591 million with final maturities at various dates through 2004 that support commercial paper and other short-term borrowings. Commercial paper and other short-term borrowings totaling $27 million, trade receivable facility debt of $70 million and current maturities of medium-term notes totaling $30 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): 2002 -- $107; 2003 -- $202; 2004 -- $121; 2005 -- $159; 2006 -- $135; 2007 and thereafter --$615. During 2001, a wholly owned subsidiary of the parent company established a $200 million trade receivable backed revolving credit arrangement due in November 2002. Under this arrangement, the subsidiary purchases, on an on-going basis, substantially all of the parent company's trade receivables. As the parent company requires funds, the subsidiary draws under its revolving credit arrangement, pledges the trade receivables as collateral and remits the proceeds to the parent company. In the event of liquidation of the subsidiary, its creditors would be entitled to satisfy their claims from the subsidiary's assets prior to distributions back to the parent company. At year-end 2001, the subsidiary owned $248 million in trade receivables against which it had borrowed $70 million of the $168 million currently available under the revolving credit agreement. This subsidiary is included in the parent company's summarized financial statements. In addition to above, at year-end 2001, property and equipment having a net book value of approximately $14 million were subject to liens in connection with $46 million of debt. Capitalized construction period interest in 2001, 2000 and 1999 was $4 million, $4 million and $2 million, respectively, and is deducted from interest expense. Parent company interest paid during 2001, 2000 and 1999 was $103 million, $108 million and $117 million, respectively. NOTE C -- JOINT VENTURES The parent company's significant joint venture investments at year-end 2001 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 McQueeny, Texas, and Cumberland City, Tennessee; and, Premier Boxboard Ltd. -- a 50 percent owned venture that produces gypsum facing paper and corrugating medium in Newport, Indiana. The joint venture partner in each of these ventures is an unrelated publicly held company. Combined summarized financial information for these joint ventures follows:
AT YEAR-END ------------- 2001 2000 ----- ----- (IN MILLIONS) Current assets.............................................. $ 31 $ 35 Total assets................................................ 372 379 Current liabilities......................................... 14 16 Long-term debt.............................................. 215 225 Equity...................................................... 142 138 Parent company's investment in joint ventures............... 27 21
43 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ------------------ 2001 2000 1999 ---- ---- ---- (IN MILLIONS) Net revenues................................................ $150 $152 $86 Operating income (loss)..................................... (11) 4 9 Net income (loss)........................................... (24) (9) 1 Parent company's equity in net income (loss)................ (7) (2) (1)
The parent company provides marketing and management services to these ventures. Fees for such services aggregated $5 million, $5 million, and $3 million during 2001, 2000 and 1999, respectively, and are reported as a reduction of cost of sales and selling expense. The parent company purchases, at market rates, finished products from one of these joint ventures. These purchases aggregated $58 million and $29 million during 2001 and 2000, respectively. The investment in these joint ventures is included in other assets and the equity in the net loss of these ventures in included in cost of sales. During 2001, the parent company contributed $15 million to these ventures and received a $1 million dividend. Near the end of the 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 by $55 million. This difference is being recognized in earnings at the rate of $5.5 million per year. At year-end 2001, the unamortized difference was $47 million. 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 corrugated medium. NOTE D -- ACQUISITIONS AND DISPOSITIONS During January 2002, the parent company initiated a tender offer to acquire Gaylord Container Corporation. The transaction is contingent on several matters including the tender of at least two-thirds of outstanding shares and at least 90% in aggregate principal amount of the senior notes and 82.6 percent of the senior subordinated notes. The tender is scheduled to expire on February 28, 2002 and will be funded from a bank financing commitment. At its latest year-end, September 2001, Gaylord had total assets of $1 billion and a deficit in stockholders' equity of $114 million. For the year-ended September 2001, Gaylord had total revenues of $1.1 billion, operating income of $45 million and a net loss of $27 million. During May 2001, the parent company completed the acquisitions of the corrugated packaging operations of Chesapeake Corporation and Elgin Corrugated Box Company. These operations consist of 11 corrugated converting plants in eight states. The aggregate purchase price of $135 million was allocated to the acquired assets and liabilities based on their fair values with $36 million allocated to goodwill. During October 2001, the parent company completed the acquisition of Compro Packaging. These operations consist of two corrugated converting plants. The aggregate purchase price of $9 million was allocated to the acquired assets and liabilities based on fair values with $9 million allocated to goodwill. The operating results of these packaging operations are included in the accompanying summarized financial statements from their acquisition dates. The unaudited pro forma results of operations, assuming these acquisitions had been effected as of the beginning of the applicable fiscal year, would not have been materially different from those reported. 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 Mexico, which was to be a source of hardwood fiber for the bleached paperboard mill, was sold during 2001 at 44 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) a price that approximated its carrying value. For the year 1999, the discontinued operation reported revenues of $381 million, loss from operations of $21 million and a loss on disposal of $71 million. Interest expense of $28 million was allocated to the discontinued operations, based on debt allocated to the operations. The loss from operations is net of income tax benefits of $13 million in 1999. The loss on disposal is net of income tax benefits of $44 million. Included in the loss on disposal were estimated operating losses of the Eucalyptus fiber project through the anticipated date of disposal of $2 million. NOTE E -- OTHER (INCOME) EXPENSE
FOR THE YEAR ------------------- 2001 2000 1999 ---- ---- ----- (IN MILLIONS) Gain on sale of non-strategic timberland, cash proceeds were $54 million............................................... $(20) $-- $ -- Loss on disposition of box plant in Chile and other under performing assets......................................... 9 -- -- Loss on unsecured receivables in Argentina.................. 2 -- -- Fair value adjustment on an interest rate swap agreement.... 4 -- -- Impairment loss on an interest in a bottling venture in Puerto Rico............................................... 4 -- -- Loss on exit of fiber cement business....................... -- 15 -- ---- --- ----- $ (1) $15 $ -- ==== === =====
In connection with the 2001 sale of a box plant in Chile, the parent company also recognized a one-time benefit of $8 million, which is reflected as a reduction of income tax expense. In connection with its decision to exit the fiber cement business, the parent company retained $53 million of assets that are leased to a third party. The lease agreement provides for payments of $3.4 million per year and expires in 2020. At year-end 2001, these assets have a carrying amount of $47 million and are included in other assets. NOTE F -- COMMITMENTS AND CONTINGENCIES 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): 2002 -- $42; 2003 -- $27; 2004 -- $22; 2005 -- $19; 2006 -- $16; 2007 and thereafter -- $191. Total rent expense was $49 million, $46 million and $34 million during 2001, 2000, and 1999, respectively. The parent company also leases two manufacturing facilities under capital lease agreements with municipalities, which expire in 2022 and 2025. These capital lease obligations total $188 million and have been offset by the purchase by the parent company of an equal amount of bonds issued by these municipalities which are funded with identical terms and secured by the payments due under the capital lease obligations. At year-end 2001, the parent company has unconditional purchase obligations, principally for gypsum and timber, aggregating $16 million that will be paid over the next 5 years. The parent company also has acquired rights to timber and timberlands under agreements, which require the parent company to pay the owners $61 million in 2006; this obligation is included in other long-term liabilities. In connection with its joint venture operations, the parent company has guaranteed obligations and letters of credit aggregating $105 million at year-end 2001. The preferred stock issued by subsidiaries of Guaranty Bank is automatically exchanged into preferred stock of Guaranty Bank upon the occurrence of certain regulatory events or administrative actions. If such 45 NOTES TO THE PARENT COMPANY (TEMPLE-INLAND INC.) SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) exchange occurs, each preferred share is automatically surrendered to the parent company in exchange for senior notes of the parent company. At year-end 2001, the outstanding preferred stock issued by these subsidiaries totals $305 million. See Note K of the Financial Services Group summarized financial statements for further information. The parent company has $75 million in lines of credit and a $200 million receivable securitization program, which could not be accessed and $17 million in joint venture guarantees, letters of credit and recourse obligations which would be accelerated if the parent company was rated below "investment grade" by rating agencies. Several supply and lease agreements include similar rating requirements, which if activated would result in a variety of remedies including restructuring of the agreements. In connection with the 1999 sale of the bleached paperboard mill, the parent company agreed, subject to certain limitations, to indemnify the purchaser from certain liabilities including environmental liabilities and contingencies associated with the parent company's operation and ownership of the mill. In connection with the 1998 sale of its Argentina box plant, the parent company received $11 million in secured promissory notes, which were subsequently sold with recourse to a financial institution. At year-end 2001, the amounts due under these notes totaled $6 million. During 2001, the parent company also sold, with recourse to financial institutions, $6 million of other notes receivable. 46 FINANCIAL SERVICES GROUP SUMMARIZED STATEMENTS OF INCOME
FOR THE YEAR ---------------------- 2001 2000 1999 ------ ------ ---- (IN MILLIONS) INTEREST INCOME Loans receivable and mortgage loans held for sale......... $ 806 $ 884 $705 Mortgage-backed and other securities available-for-sale... 188 143 64 Mortgage-backed and other securities held-to-maturity..... 2 54 62 Other earning assets...................................... 5 8 5 ------ ------ ---- Total interest income............................. 1,001 1,089 836 ------ ------ ---- INTEREST EXPENSE Deposits.................................................. 399 493 379 Borrowed funds............................................ 176 207 158 ------ ------ ---- Total interest expense............................ 575 700 537 ------ ------ ---- NET INTEREST INCOME......................................... 426 389 299 Provision for loan losses................................. (46) (39) (38) ------ ------ ---- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......... 380 350 261 ------ ------ ---- NONINTEREST INCOME Loan origination, marketing and servicing fees, net....... 139 84 115 Real estate and other..................................... 224 196 165 ------ ------ ---- Total noninterest income.......................... 363 280 280 ------ ------ ---- NONINTEREST EXPENSE Compensation and benefits................................. 247 165 166 Real estate and other..................................... 293 258 222 ------ ------ ---- Total noninterest expense......................... 540 423 388 ------ ------ ---- INCOME BEFORE TAXES AND MINORITY INTEREST................... 203 207 153 Minority interest in income of consolidated subsidiaries.... (19) (18) (15) ------ ------ ---- INCOME BEFORE TAXES......................................... 184 189 138 Income taxes................................................ (17) (42) (17) ------ ------ ---- INCOME BEFORE ACCOUNTING CHANGE............................. 167 147 121 Effect of accounting change................................. (1) -- -- ------ ------ ---- NET INCOME.................................................. $ 166 $ 147 $121 ====== ====== ====
See the notes to Financial Services Group summarized financial statements. 47 FINANCIAL SERVICES GROUP SUMMARIZED BALANCE SHEETS
AT YEAR-END ----------------- 2001 2000 ------- ------- (IN MILLIONS) ASSETS Cash and cash equivalents................................... $ 587 $ 320 Mortgage loans held for sale................................ 958 232 Loans receivable, net of allowance for loan losses of $139 in 2001 and $118 in 2000.................................. 9,847 10,394 Mortgage-backed and other securities available-for-sale..... 2,599 2,415 Mortgage-backed and other securities held-to-maturity....... 775 864 Mortgage servicing rights................................... 156 246 Real estate................................................. 240 233 Goodwill.................................................... 124 120 Other assets................................................ 452 500 ------- ------- TOTAL ASSETS................................................ $15,738 $15,324 ======= ======= LIABILITIES Deposits.................................................... $ 9,030 $ 9,828 Federal Home Loan Bank advances............................. 3,435 2,869 Securities sold under repurchase agreements................. 1,107 595 Other borrowings............................................ 214 210 Other liabilities........................................... 504 423 Stock issued by subsidiaries................................ 306 306 ------- ------- TOTAL LIABILITIES........................................... 14,596 14,231 ------- ------- SHAREHOLDER'S EQUITY........................................ 1,142 1,093 ------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................. $15,738 $15,324 ======= =======
See the notes to the Financial Services Group summarized financial statements. 48 FINANCIAL SERVICES GROUP SUMMARIZED STATEMENTS OF CASH FLOWS
FOR THE YEAR --------------------------- 2001 2000 1999 ------- ------- ------- (IN MILLIONS) CASH PROVIDED BY (USED FOR) OPERATIONS Net income................................................ $ 166 $ 147 $ 121 Adjustments: Amortization, depreciation and accretion depreciation and accretion........................................ 79 59 62 Provision for loan losses.............................. 46 39 38 Originations of loans held for sale.................... (7,605) (2,129) (3,691) Sales of loans held for sale........................... 6,932 2,149 4,060 Collections on loans serviced for others, net.......... 104 (32) (251) Originated mortgage servicing rights................... (102) (12) (54) Other.................................................. (17) (4) 98 ------- ------- ------- (397) 217 383 ------- ------- ------- CASH PROVIDED BY (USED FOR) INVESTMENTS Purchases of securities available-for-sale................ (48) (1,036) (294) Maturities of securities available-for-sale............... 865 338 279 Sales of securities available-for-sale.................... -- -- 145 Purchases of securities held-to-maturity.................. (778) -- -- Maturities and redemptions of securities held-to-maturity....................................... 3 192 351 Loans originated or acquired, net of principal collected.............................................. 262 (1,512) (1,163) Sale of mortgage servicing rights......................... 143 -- -- Sales of loans............................................ 446 259 299 Acquisitions, net of cash acquired of $10 in 2000......... (364) (20) (108) Capital expenditures...................................... (26) (34) (26) Other..................................................... 17 (59) (17) ------- ------- ------- 520 (1,872) (534) ------- ------- ------- CASH PROVIDED BY (USED FOR) FINANCING Net increase (decrease) in deposits....................... (766) 857 808 Securities sold under repurchase agreements and short-term borrowings, net........................................ 316 1,071 (121) Additions to debt......................................... 803 37 35 Payments of debt.......................................... (37) (178) (775) Sale of stock by subsidiaries............................. -- 80 1 Capital contributions from parent company................. -- 10 279 Dividends paid to parent company.......................... (124) (110) (70) Other..................................................... (48) (25) (2) ------- ------- ------- 144 1,742 155 ------- ------- ------- Net increase in cash and cash equivalents................... 267 87 4 Cash and cash equivalents at beginning of year.............. 320 233 229 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 587 $ 320 $ 233 ======= ======= =======
See the notes to the Financial Services Group summarized financial statements. 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. The assets and operations of this group are subject, in varying degrees, to regulatory rules and restrictions, including restriction on the payment of dividends to the parent company. 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. DERIVATIVE FINANCIAL INSTRUMENTS Beginning January 2001, the group adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The cumulative effect of adopting this statement was to reduce 2001 net income by $1 million. This loss resulted from recording the fair value of derivative instruments that do not qualify for hedge accounting treatment. As permitted by this statement, the group reassessed the classification of its mortgage-backed and other securities. As a result of that reassessment, on January 1, 2001, the group transferred $864 million in mortgage-backed securities from held-to-maturity to available-for-sale. This transfer resulted in a $16 million after-tax reduction in other comprehensive income, a component of shareholders' equity. MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. Prior to January 1, 2001, mortgage loans held for sale were carried at the lower of cost or market in the aggregate. Net unrealized losses were recognized in a valuation allowance by charges to income. Effective January 1, 2001, in connection with the adoption of FAS No. 133, the carrying value of mortgage loans held for sale that have been designated with an effective fair-value hedge, is adjusted for changes in fair value after the date of hedge designation, based on sale commitments or current market quotes. Fair value adjustments and realized gains and losses are classified as noninterest income. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans receivable are stated at unpaid net principal balances less 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 have affected the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. Loans receivable are assigned a risk rating to distinguish levels of credit risk and loan quality. These risk ratings are categorized as pass or criticized grade with the resultant allowance for loan losses based on this 50 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) 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 impaired loans, general allowances for pass graded loans and pools of criticized loans with common risk characteristics and an unallocated allowance based on analysis of other economic factors. Specific allowances on impaired loans are measured by comparing the basis in the loan to: 1) estimated present value of total expected future cash flows, discounted at the loan's effective rate, or 2) the loan's observable market price, or 3) the fair value of the collateral if the loan is collateral dependent. 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 unique business conditions; the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends; volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous loans; and the sensitivity of assumptions used to establish general allowances for 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. 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 51 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) 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 SERVICING RIGHTS The group allocates a portion of the cost of originating a mortgage loan to the mortgage servicing right based on its fair value relative to the loan as a whole. Capitalized mortgage loan servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. The fair market value of originated mortgage servicing rights is estimated using buyers' quoted prices for servicing rights with similar attributes, such as loan type, size, escrow and geographic location. Purchased mortgage servicing rights are recorded at cost. To evaluate possible impairment of mortgage servicing rights, the portfolio is periodically stratified based on 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 capitalized mortgage servicing rights, net, exceed fair value, impairment is recognized through a valuation allowance. Amortization expense and changes to the valuation allowance are included in loan origination, marketing and servicing fees, net, in the summarized statements of income. 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 During the third quarter 2001, the group acquired mortgage loan production and processing offices for $63 million cash. The excess of the purchase price over the fair value of the identifiable net assets acquired was $8 million. This goodwill is not being amortized but will be periodically assessed for impairment. On February 1, 2001, the group acquired certain assets (primarily asset-based loans), totaling $300 million, from FINOVA Capital Corporation (FINOVA) for $301 million cash. The excess of the purchase price over the fair value of the net identifiable assets acquired of $1 million was being amortized on the straight-line method over 10 years. 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 was 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 was 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 was being amortized on the straight-line method over 10 years. 52 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) The FINOVA acquisition and all acquisitions in 2000 and 1999 were accounted for as purchase business combinations in accordance with Accounting Principles Board Opinion No. 16, Business Combinations. The amortization of goodwill associated with these acquisitions will cease beginning January 1, 2002 and the remaining goodwill will be periodically assessed for impairment. 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. NOTE C -- LOANS RECEIVABLE The outstanding principal balances of loans receivable consists of the following:
AT YEAR-END ---------------- 2001 2000 ------ ------- (IN MILLIONS) Real estate mortgage........................................ $2,872 $ 3,600 Construction and development(a)............................. 4,234 4,007 Commercial and business..................................... 2,116 1,681 Consumer and other.......................................... 764 1,216 Premiums, discounts and deferred fees, net.................. -- 8 ------ ------- 9,986 10,512 Less: Allowance for loan losses........................... (139) (118) ------ ------- $9,847 $10,394 ====== =======
- --------------- (a) Includes residential construction. Real estate mortgages are primarily single-family adjustable-rate loans secured by properties located primarily in California and Texas. Construction and development loans consist primarily of office, multi-family, retail, industrial, residential and senior housing properties and are predominantly located in Texas, California, Florida, Georgia, Colorado, Illinois and Arizona. Commercial and business loans include working capital, equipment financing, asset-based loans and other business loans. Consumer and other loans include a variety of products and are primarily secured by real estate. The recorded investment in impaired loans was $66 million at year-end 2001 and $6 million at year-end 2000, with a related allowance for loans losses of $28 million and $3 million, respectively. The average recorded investment in impaired loans during the years ended 2001 and 2000 was approximately $37 million and $45 million, respectively. The related amount of interest income recognized on impaired loans for the years ended 2001 and 2000 was immaterial. At year-end 2001, the group had unfunded commitments on outstanding loans totaling approximately $4.8 billion and commitments to originate loans of $304 million. In addition, at year-end 2001, the group had issued letters of credit totaling $197 million. The portion of these amounts to be ultimately funded is uncertain. 53 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) Activity in the allowance for loan losses was as follows:
FOR THE YEAR ------------------ 2001 2000 1999 ---- ---- ---- (IN MILLIONS) Balance, beginning of year.................................. $118 $113 $ 87 Provision for loan losses................................. 46 39 38 Additions related to acquisitions and bulk purchases of loans.................................................. 2 2 12 Charge-offs, net of recoveries............................ (27) (36) (24) ---- ---- ---- Balance, end of year........................................ $139 $118 $113 ==== ==== ====
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 2001 AVAILABLE-FOR-SALE Mortgage-backed securities: U.S. Government and agency............... $2,292 $35 $ (8) $2,319 Private issuer pass-through securities... 72 -- (1) 71 ------ --- ---- ------ 2,364 35 (9) 2,390 Debt securities: Corporate securities..................... 3 -- -- 3 Equity securities, primarily Federal Home Loan Bank stock.......................... 206 -- -- 206 ------ --- ---- ------ $2,573 $35 $ (9) $2,599 ====== === ==== ====== HELD-TO-MATURITY Mortgage-backed securities: U.S. Government and agency............... $ 775 $-- $ (8) $ 767 ------ --- ---- ------ $ 775 $-- $ (8) $ 767 ====== === ==== ====== AT YEAR-END 2000 AVAILABLE-FOR-SALE Mortgage-backed securities: U.S. Government and agency............... $2,210 $21 $ (4) $2,227 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: U.S. Government and agency............... $ 764 $-- $(23) $ 741 Private issuer pass-through securities... 100 -- (3) 97 ------ --- ---- ------ $ 864 $-- $(26) $ 838 ====== === ==== ======
54 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) The average yield on available-for-sale mortgage-backed, debt and equity securities for 2001 was 5.72 percent, 6.73 percent and 4.49 percent, respectively. The average yield on held-to-maturity mortgage-backed securities for 2001 was 5.34 percent. At year-end 1999, the carrying values of available-for- sale mortgage-backed securities, debt securities and equity securities were $1.3 billion, $9 million, and $166 million, respectively. The carrying value of held to maturity mortgage-backed securities at year-end 1999 was $1.1 billion. 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. Virtually all mortgage-backed and other securities held at year-end 2001 were classified as variable/no maturity. 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 securities 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 $123 million and $297 million of mortgage loans previously held in the loan portfolio, during 2001 and 2000, 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 $614 million and $689 million in such securities at year-end 2001 and 2000, respectively. NOTE E -- REAL ESTATE Real estate is summarized as follows (in millions):
2001 2000 ---- ---- Real estate held for development and sale and income producing properties...................................... $260 $249 Foreclosed real estate...................................... 2 3 ---- ---- 262 252 Accumulated depreciation.................................... (19) (16) Valuation allowance......................................... (3) (3) ---- ---- Real estate, net............................................ $240 $233 ==== ====
55 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) NOTE F -- PROPERTY AND EQUIPMENT Property and equipment, included in other assets, are summarized as follows:
AT YEAR-END ESTIMATED -------------- USEFUL LIVES 2001 2000 ------------- ------ ----- (IN MILLIONS) Cost: Land.................................................. $ 22 $ 22 Buildings............................................. 10 - 40 years 110 107 Leasehold improvements................................ 5 - 20 years 24 22 Furniture, fixtures and equipment..................... 3 - 10 years 117 94 ----- ---- 273 245 Less accumulated depreciation and amortization.......... (107) (87) ----- ---- $ 166 $158 ===== ====
NOTE G -- DEPOSITS Deposits consists of the following:
2001 2000 ---------------- ---------------- AVERAGE AVERAGE STATED STATED RATE AMOUNT RATE AMOUNT ------- ------ ------- ------ ($ IN MILLIONS) Noninterest-bearing demand......................... $ 443 $ 302 Interest-bearing demand............................ 1.36% 2,602 4.36% 2,504 Savings deposits................................... 1.63% 186 1.83% 167 Time deposits...................................... 4.11% 5,799 6.13% 6,855 ------ ------ $9,030 $9,828 ====== ======
Scheduled maturities of time deposits at year-end 2001 are as follows:
$100,000 OR LESS THAN MORE $100,000 TOTAL ----------- --------- ------ (IN MILLIONS) 3 months or less....................................... $296 $1,004 $1,300 Over 3 through 6 months................................ 275 968 1,243 Over 6 through 12 months............................... 176 776 952 Over 12 months......................................... 191 2,113 2,304 ---- ------ ------ $938 $4,861 $5,799 ==== ====== ======
At year-end 2001, time deposits maturity dates were as follows (in millions):2002 -- $3,495; 2003 -- $1,703; 2004 -- $242; 2005 -- $139; 2006 -- $218; 2007 and thereafter -- $2. NOTE H -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements were delivered to brokers/dealers who retained such securities as collateral for the borrowings and have agreed to resell the same securities back to the group at the maturities of the agreements. The agreements generally mature within 30 days. 56 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) Information concerning borrowings under repurchase agreements is summarized as follows:
2001 2000 1999 ---- ---- ---- ($ IN MILLIONS) At year-end: Balance................................................... $1,107 $595 -- Weighted average interest rate............................ 1.9% 6.5% -- For the year: Average daily balance..................................... $ 594 $484 $112 Maximum month-end balance................................. $1,107 $898 $223 Weighted average interest rate............................ 3.9% 6.5% 5.0%
At year-end 2001, the fair value of securities sold under repurchase agreements was $782 million for FNMA certificates and $344 million for FHLMC certificates. NOTE I -- FEDERAL HOME LOAN BANK ADVANCES Pursuant to collateral agreements with the Federal Home Loan Bank of Dallas (FHLB), advances are secured by a blanket floating lien on the savings bank's (Guaranty) assets and by securities on deposit at the FHLB. Information concerning short-term Federal Home Loan Bank Advances is summarized as follows:
2001 2000 1999 ------ ------ ------ ($ IN MILLIONS) At year-end: Balance.................................................. $2,657 $2,869 $2,151 Weighted average interest rate........................... 2.0% 6.4% 5.7% For the year: Average daily balance.................................... $3,367 $2,306 $2,683 Maximum month-end balance................................ $3,930 $2,911 $3,431 Weighted average interest rate........................... 4.1% 6.4% 5.2%
In addition to short-term advances, at year-end 2001, $778 million in long-term amortizing fixed-rate advances were outstanding. These advances had a weighted average interest rate of 4.3 percent at year-end 2001. At year-end 2001, the short and long-term advances had maturity dates as follows (in millions): 2002 -- $2,816; 2003 -- $145; 2004 -- $104; 2005 -- $81; 2006 -- $151; 2007 and thereafter -- $138. NOTE J -- OTHER BORROWINGS Other borrowings, which represent borrowings of non-savings bank entities, consists of the following:
AT YEAR-END ------------- 2001 2000 ----- ----- (IN MILLIONS) Long-term debt with an average rate of 5.57% and 7.91% during 2001 and 2000, respectively, due through 2002...... $171 $168 Long-term debt at various rates which approximate prime, secured primarily by real estate.......................... 43 42 ---- ---- $214 $210 ==== ====
57 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) At year-end 2001, a non-savings bank subsidiary had a $210 million credit facility, which expires in 2002, with $39 million remaining unused. At year-end 2001, maturities of other borrowings are as follows (in millions): 2002 -- $174; 2003 -- $3; 2004 -- $3; 2005 -- $2; 2006 -- $2; 2007 and thereafter -- $30. NOTE K -- 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 automatically exchanged into Guaranty preferred stock, with similar terms and conditions, if federal banking regulators determine that Guaranty is, or will become, undercapitalized in the near term or an administrative body takes an action that will prevent GPCC or GPCC II from paying full quarterly dividends or redeeming any preferred stock. If such an exchange occurs, the parent company must issue its senior notes in exchange for the Guaranty preferred stock in an amount equal to the liquidation preference of the preferred stock exchanged. The terms and conditions of the senior notes are similar to those of the Guaranty preferred stock exchanged except that the rate on the senior notes received by the former GPCC preferred stockholders is fixed instead of floating. At year-end 2001, the liquidation preference of the outstanding preferred stock issued by the Guaranty subsidiaries totals $305 million. 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. The weighted average rate paid to preferred shareholders was 5.82 percent and 7.94 percent during 2001 and 2000, respectively. 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. The weighted average rate paid to floating rate preferred shareholders was 6.83 percent during 2001. 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 L -- MORTGAGE LOAN SERVICING The group services mortgage loans that are owned primarily by independent investors. The group serviced approximately 129,700 and 209,600 mortgage loans aggregating $11.6 billion and $19.5 billion as of year-end 2001 and 2000, 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 2001, 2000 or 1999 in connection with this risk. 58 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 2001 Balance, beginning of year............................... $138 $108 $ 246 Additions.............................................. 2 101 103 Amortization expense................................... (17) (23) (40) Sales.................................................. (73) (74) (147) ---- ---- ----- Subtotal............................................ $ 50 $112 162 Valuation allowance................................. (6) ----- Balance, end of year..................................... $ 156 ===== 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 =====
Amortization expense related to mortgage loan servicing rights totaled $40 million, $34 million and $49 million for 2001, 2000 and 1999, respectively. The valuation allowance was increased $6 million in 2001 by a charge to operations and reduced $1 million in 2000 and $16 million in 1999 by a credit to operations. The estimated fair value of the capitalized mortgage servicing rights at year-end 2001 was approximately $173 million. Fair value was determined utilizing market-driven assumptions for prepayment speeds, discount rates and other variables. NOTE M -- 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 $167 million and $213 million at year-end 2001 and 2000, respectively, Guaranty simultaneously purchased and sold caps whereby it receives interest if the variable rate based on the FHLB Eleventh District Cost of Funds (EDCOF) Index (3.37 percent at year-end 2001) 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 did not receive or pay any amounts under this agreement in 2001, 2000 or 1999. 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. Guaranty did not receive or pay any amounts under this agreement in 2001, 2000 or 1999. 59 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) These corridor and cap agreements do not qualify for hedge accounting and are therefore recorded at fair value with changes in their fair value recorded in income. The amounts related to these agreements 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. 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. During the time these forward sale commitments are hedging a mortgage loan commitment, both commitments are considered derivative financial instruments and are recorded at fair value with changes in their fair value recorded in income. Upon origination of a mortgage loan, the forward sale commitment is designated as a fair-value hedge of the mortgage loan held for sale and changes in the fair value of both the forward sale commitment and the mortgage loan held for sale are recorded in income. At year-end 2001, the mortgage banking operation had commitments to originate or purchase mortgage loans totaling approximately $681 million and commitments to sell mortgage loans of approximately $1.1 billion. 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 N -- 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): 2002 -- $17; 2003 -- $14; 2004 -- $11; 2005 -- $9; 2006 -- $3; 2007 and thereafter -- $6. Total rent expense under these lease agreements was $19 million, $15 million and $14 million for 2001, 2000 and 1999, respectively. NOTE O -- 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 such as unfunded loan commitments, 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 2001, Guaranty met or exceeded all of its capital adequacy requirements. 60 FINANCIAL SERVICES GROUP NOTES TO SUMMARIZED FINANCIAL STATEMENTS -- (CONTINUED) At year-end 2001, 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 2001 or 2000.
FOR CAPITAL ADEQUACY FOR CATEGORIZATION AS ACTUAL REQUIREMENTS "WELL CAPITALIZED" -------------- --------------------- ---------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- --------- --------- ---------- --------- (DOLLARS IN MILLIONS) AT YEAR-END 2001: Total Risk-Based Ratio (Risk- based capital/Total risk-weight assets)........ $1,327 10.71% +/-$992 +/-8.00% +/-$1,240 +/-10.00% Tier 1(Core) Risk-Based Ratio (Core capital/Total risk-weight assets)........ $1,192 9.62% +/-$496 +/-4.00% +/-$744 +/- 6.00% Tier 1(Core)Leverage Ratio Core capital/Adjusted tangible assets)........... $1,192 7.82% +/-$610 +/-4.00% +/-$762 +/-5.00% Tangible Ratio (Tangible equity/Tangible assets).... $1,192 7.82% +/-$305 +/-2.00% N/A N/A At year-end 2000: Total Risk-Based Ratio (Risk- based capital/Total risk-weight assets)........ $1,283 10.29% +/-$998 +/-8.00% +/-$1,247 +/-10.00% Tier 1(Core) Risk-Based Ratio (Core capital/Total risk-weight assets)........ $1,153 9.24% +/-$499 +/-4.00% +/-$748 +/- 6.00% Tier 1(Core)Leverage Ratio Core capital/Adjusted tangible assets)........... $1,153 7.77% +/-$593 +/-4.00% +/-$742 +/- 5.00% Tangible Ratio (Tangible equity/Tangible assets).... $1,153 7.77% +/-$297 +/-2.00% N/A N/A
61 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ------------------------ 2001 2000 1999 ------ ------ ------ REVENUES Manufacturing............................................. $2,808 $2,928 $2,706 Financial Services........................................ 1,364 1,369 1,116 ------ ------ ------ 4,172 4,297 3,822 ------ ------ ------ COSTS AND EXPENSES Manufacturing............................................. 2,717 2,692 2,443 Financial Services........................................ 1,180 1,180 978 ------ ------ ------ 3,897 3,872 3,421 ------ ------ ------ OPERATING INCOME............................................ 275 425 401 Parent company interest................................... (98) (105) (95) ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE TAXES.............. 177 320 306 Income taxes.............................................. (66) (125) (115) ------ ------ ------ INCOME FROM CONTINUING OPERATIONS........................... 111 195 191 Discontinued operation.................................... -- -- (92) ------ ------ ------ INCOME BEFORE ACCOUNTING CHANGE............................. 111 195 99 Effect of accounting change............................... (2) -- -- ------ ------ ------ NET INCOME.................................................. $ 109 $ 195 $ 99 ====== ====== ====== EARNINGS PER SHARE BASIC: Income from continuing operations...................... $ 2.26 $ 3.83 $ 3.45 Discontinued operation................................. -- -- (1.66) Effect of accounting change............................ (.04) -- -- ------ ------ ------ Net income............................................. $ 2.22 $ 3.83 $ 1.79 ====== ====== ====== DILUTED: Income from continuing operations...................... $ 2.26 $ 3.83 $ 3.43 Discontinued operation................................. -- -- (1.65) Effect of accounting change............................ (.04) -- -- ------ ------ ------ Net income............................................. $ 2.22 $ 3.83 $ 1.78 ====== ====== ======
See the notes to the consolidated financial statements. 62 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR --------------------------- 2001 2000 1999 ------- ------- ------- (IN MILLIONS) CASH PROVIDED BY (USED FOR) OPERATIONS Net income................................................ $ 109 $ 195 $ 99 Adjustments: Depreciation and depletion............................. 205 216 217 Amortization of goodwill............................... 11 9 8 Provision for loan losses.............................. 46 39 38 Deferred taxes......................................... 29 57 14 Amortization and accretion of financial instruments.... 39 28 40 Originations of loans held for sale.................... (7,605) (2,129) (3,691) Sales of loans held for sale........................... 6,932 2,149 4,060 Receivables............................................ 24 5 (71) Inventories............................................ 33 16 (4) Accounts payable and accrued expenses.................. 35 (82) 40 Collections and remittances on loans serviced for others, net.......................................... 104 (32) (251) Change in net assets of discontinued operations........ -- -- 23 Loss on disposal of discontinued operation............. -- -- 77 Originated mortgage servicing rights................... (102) (12) (54) Other.................................................. (35) 32 101 ------- ------- ------- (175) 491 646 ------- ------- ------- CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures................................... (210) (257) (204) Proceeds from sale of discontinued operations.......... -- -- 576 Sale of timberland property and equipment and other assets............................................... 102 10 40 Purchase of securities available-for-sale.............. (48) (1,036) (294) Maturities of securities available-for-sale............ 865 338 279 Proceeds from sale of securities available-for-sale.... -- -- 145 Purchase of securities held-to-maturity................ (778) -- -- Sale of mortgage servicing rights...................... 143 -- -- Maturities and redemptions of securities held-to-maturity..................................... 3 192 351 Loans originated or acquired, net of principal collected............................................ 262 (1,512) (1,163) Proceeds from sale of loans............................ 446 259 299 Acquisitions, net of cash acquired, and joint ventures............................................. (524) (38) (157) Other.................................................. (11) (64) (17) ------- ------- ------- 250 (2,108) (145) ------- ------- ------- CASH PROVIDED BY (USED FOR) FINANCING Additions to debt......................................... 1,075 297 347 Payments of debt.......................................... (327) (312) (1,335) Securities sold under repurchase agreements and short-term borrowings, net........................................ 316 1,071 (121) Net increase (decrease) in deposits....................... (766) 857 808 Purchase of stock for treasury............................ -- (250) (100) Cash dividends paid to shareholders....................... (63) (65) (71) Proceeds from sale of subsidiary preferred stock.......... -- 80 1 Other..................................................... (42) (23) 10 ------- ------- ------- 193 1,655 (461) ------- ------- ------- Net increase in cash and cash equivalents................... 268 38 40 Cash and cash equivalents at beginning of year.............. 322 284 244 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 590 $ 322 $ 284 ======= ======= =======
See the notes to the consolidated financial statements. 63 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATING BALANCE SHEETS
AT YEAR-END 2001 ---------------------------------- PARENT FINANCIAL COMPANY SERVICES CONSOLIDATED ------- --------- ------------ (IN MILLIONS) ASSETS Cash and cash equivalents................................. $ 3 $ 587 $ 590 Mortgage loans held for sale.............................. -- 958 958 Loans and leases receivable, net.......................... -- 9,847 9,847 Mortgage-backed and other securities available-for-sale... -- 2,599 2,599 Mortgage-backed and other securities held-to-maturity..... -- 775 775 Trade receivables......................................... 288 -- 288 Inventories............................................... 258 -- 258 Property and equipment.................................... 2,085 166 2,251 Goodwill.................................................. 62 124 186 Other assets.............................................. 283 682 935 Investment in Financial Services.......................... 1,142 -- -- ------ ------- ------- TOTAL ASSETS...................................... $4,121 $15,738 $18,687 ====== ======= ======= LIABILITIES Deposits.................................................. $ -- $ 9,030 $ 9,030 Federal Home Loan Bank advances........................... -- 3,435 3,435 Securities sold under repurchase agreements............... -- 1,107 1,107 Other liabilities......................................... 434 504 914 Long-term debt............................................ 1,339 214 1,553 Deferred income taxes..................................... 310 -- 304 Postretirement benefits................................... 142 -- 142 Stock issued by subsidiaries.............................. -- 306 306 ------ ------- ------- TOTAL LIABILITIES................................. $2,225 $14,596 $16,791 ------ ------- ------- 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................................ 367 Accumulated other comprehensive income (loss)............. (1) Retained earnings......................................... 2,014 ------- 2,441 Cost of shares held in the treasury: 12,030,402 shares.... (545) ------- TOTAL SHAREHOLDERS' EQUITY........................ 1,896 ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $18,687 =======
See the notes to the consolidated financial statements. 64 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 and leases receivable, net.......................... -- 10,394 10,394 Mortgage-backed and other securities available-for-sale... -- 2,415 2,415 Mortgage-backed and other securities held-to-maturity..... -- 864 864 Trade receivables......................................... 294 -- 294 Inventories............................................... 253 -- 253 Property and equipment.................................... 2,091 158 2,249 Goodwill.................................................. 22 120 142 Other assets.............................................. 256 821 1,041 Investment in Financial Services.......................... 1,093 -- -- ------ ------- ------- TOTAL ASSETS...................................... $4,011 $15,324 $18,206 ====== ======= ======= LIABILITIES Deposits.................................................. $ -- $ 9,828 $ 9,828 Federal Home Loan Bank advances........................... -- 2,869 2,869 Securities sold under repurchase agreements............... -- 595 595 Other liabilities......................................... 379 423 770 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.................................... $2,178 $14,231 $16,373 ------ ------- ------- 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.................. $18,206 =======
See the notes to the consolidated financial statements. 65 TEMPLE-INLAND INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED OTHER COMPREHENSIVE COMMON PAID-IN INCOME RETAINED TREASURY STOCK CAPITAL (LOSS) EARNINGS STOCK TOTAL ------ ------- ------------- -------- -------- ------ (IN MILLIONS) 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-based compensation................. -- 1 -- -- -- 1 Stock issued for stock plans - 57,999 shares................................. -- -- -- -- 2 2 Stock acquired for treasury - 5,095,906 shares................................. -- -- -- -- (250) (250) --- ---- ---- ------ ----- ------ BALANCE AT YEAR-END 2000................. $61 $365 $ (8) $1,968 $(553) $1,833 === ==== ==== ====== ===== ====== Comprehensive income Net income............................. -- -- -- 109 -- 109 Other comprehensive income Unrealized gains on securities...... -- -- 7 -- -- 7 Minimum pension liability........... -- -- (1) -- -- (1) Foreign currency translation adjustment........................ -- -- 1 -- -- 1 ------ TOTAL COMPREHENSIVE INCOME............. -- -- -- -- -- 116 ------ Dividends paid on common stock -- $1.28 per share.............................. -- -- -- (63) -- (63) Stock-based compensation................. -- 3 -- -- -- 3 Stock issued for stock plans - 185,097 shares................................. -- (1) -- -- 8 7 --- ---- ---- ------ ----- ------ BALANCE AT YEAR-END 2001................. $61 $367 $ (1) $2,014 $(545) $1,896 === ==== ==== ====== ===== ======
See the notes to the consolidated financial statements. 66 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 including restrictions on the payment of the dividends to the parent company. 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, 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. FINANCIAL INSTRUMENTS The company has, where appropriate, estimated the fair value of financial instruments. These fair value amounts may be significantly affected by the assumption used, including the discount rate and estimates of 67 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) cash flow. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. Where these estimates approximate carrying value, no separate disclosure of fair value is shown. DERIVATIVES The company uses, to a limited degree, derivative instruments to mitigate its exposure to risk, including those associated with changes in product pricing, manufacturing costs and interest rates related to borrowings and investments in securities, as well as mortgage production activities. Changes in the fair value of derivative instruments designated as cash flow hedges are deferred and recorded in other comprehensive income. These deferred gains or losses are recognized in income when the transactions being hedged are completed. The ineffective portion of these hedges, which is not material, is recognized in income. Changes in the fair value of derivative instruments designated as fair value hedges are recognized in income, as are changes in the fair value of the hedged item. Changes in the fair value of derivative instruments that are not designated as hedges for accounting purposes are recognized in income. The company does not use derivatives for trading purposes. LONG-LIVED ASSETS Impairment losses are recognized on assets held for use when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets' carrying amount. Assets held for disposal are recorded at the lower of carrying value or estimated fair value less costs to sell. CAPITALIZED SOFTWARE The company capitalizes purchased software costs as well as the direct costs, both internal and external, associated with software developed for internal use. Such costs are amortized using the straight-line method over estimated useful lives of three to seven years. Costs capitalized were $48 million in 2001, $58 million in 2000 and $31 million in 1999. Amortization of these costs were $13 million in 2001, $8 million in 2000 and $6 million in 1999. NEW ACCOUNTING PRONOUNCEMENTS Derivatives Beginning January 2001, the company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. The cumulative effect of adopting this statement was to reduce 2001 income by $2 million, or $0.04 per diluted share, and other comprehensive income, a component of shareholders' equity, by $4 million. As permitted by this statement, the company also changed the designation of its January 2001 portfolio of held-to-maturity securities, which were carried at unamortized cost, to available-for-sale, which are carried at fair value. As a result, the $864 million carrying value of these securities was adjusted to their fair value with a corresponding after-tax reduction of $16 million in other comprehensive income. Business Combinations The company adopted Statement of Financial Accounting Standards No. 141, Business Combinations, on June 30, 2001. This Statement requires business combinations to be accounted for using the purchase method. Goodwill The company will be required to adopt Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, beginning 2002. Under this statement, amortization of goodwill would be precluded and goodwill would be periodically measured for impairment. The effect of not amortizing goodwill 68 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) during the year 2001 would be to increase operating income by $11 million and net income by $9 million or $0.18 per diluted share. While the company has not yet determined the effect of earnings or financial position of adopting this statement, it is possible that some portion of the existing goodwill at the parent company may be impaired. Other Recently Issued Standards The company will be required to adopt Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations, beginning 2003 and Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, beginning 2002. The company has not yet determined the effect on earnings or financial position of adopting these statements. NOTE 2 -- TAXES ON INCOME Taxes on income from continuing operations consisted of the following:
FOR THE YEAR ------------------ 2001 2000 1999 ---- ---- ---- (IN MILLIONS) Current tax provision: U.S. Federal.............................................. $27 $ 44 $ 89 State and other........................................... 9 14 12 --- ---- ---- 36 58 101 --- ---- ---- Deferred tax provision: U.S. Federal.............................................. 28 66 14 State and other........................................... 2 1 -- --- ---- ---- 30 67 14 --- ---- ---- Provision for income taxes.................................. $66 $125 $115 === ==== ====
Earnings or losses from operations consisted of the following:
FOR THE YEAR ------------------ 2001 2000 1999 ---- ---- ---- (IN MILLIONS) Earnings (Losses): U.S. ..................................................... $173 $319 $311 Non-U.S. ................................................. 4 1 (5) ---- ---- ---- $177 $320 $306 ==== ==== ====
69 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 ------------------ 2001 2000 1999 ---- ---- ---- (IN PERCENTAGES) Taxes on income at statutory rate........................... 35% 35% 35% State net of federal benefit................................ 3 3 3 Foreign operations.......................................... -- -- 1 Sale of foreign subsidiary.................................. (3) -- (2) Goodwill.................................................... 1 1 1 Other....................................................... 1 -- -- ---- ---- ---- 37% 39% 38% ==== ==== ====
Significant components of the company's consolidated deferred tax assets and liabilities are as follows:
AT YEAR-END ------------- 2001 2000 ----- ----- (IN MILLIONS) DEFERRED TAX LIABILITIES: Depreciation.............................................. $ 274 $ 259 Timber and timberlands.................................... 36 37 Pensions.................................................. 41 33 Mortgage servicing rights................................. 25 36 Asset leasing............................................. 29 9 Other..................................................... 32 32 ----- ----- Total deferred tax liabilities.................... 437 406 ----- ----- DEFERRED TAX ASSETS: Alternative minimum tax credits........................... 111 142 Net operating loss carryforwards.......................... 18 20 OPEB obligations.......................................... 56 55 Bad debt reserve.......................................... 49 33 Other..................................................... 57 44 ----- ----- Total deferred tax assets......................... 291 294 VALUATION ALLOWANCE......................................... (158) (160) ----- ----- Net deferred tax liability.................................. $ 304 $ 272 ===== =====
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 the sale of a foreign subsidiary, partially offset by the increased foreign net operating losses, the future realization of which is not assured. The company has foreign net operating loss carryforwards of $53 million that will expire from the year 2005 through the year 2011. 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. 70 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 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 $29 million, $88 million and $72 million during 2001, 2000 and 1999, 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 -------------------------------------- 2001 2000 ----------------- ------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------- (IN MILLIONS) FINANCIAL ASSETS Loans receivable................................ $9,847 $9,883 $10,394 $10,397 Securities held-to-maturity..................... 775 767 864 838 Mortgage servicing rights....................... 156 173 246 305 FINANCIAL LIABILITIES Deposits........................................ $9,030 $9,091 $ 9,828 $ 9,835 FHLB advances................................... 3,435 3,426 2,869 2,869 Fixed-rate long-term debt....................... 811 815 1,009 993 OTHER OFF-BALANCE SHEET INSTRUMENTS Commitments to extend credit.................... $ -- $ 2 $ -- $ 3
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. All other financial instruments are excluded from the above table because they are either carried at fair value or have fair values that approximate their carrying amount due to their short-term nature. The fair value of mortgage-backed and other securities held-to-maturity 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. At year-end 2001, the company has guaranteed certain joint venture obligations principally related to fixed-rate debt instruments totaling $50 million and sold with recourse promissory notes totaling $12 million. It is not practicable to estimate the fair value of these guarantees or contingencies. 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 71 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 annual measurement date of the benefit obligations, fair value of plan assets and the funded status of employee benefit plans is September 30. At year-end 2001 and 2000, the pension plan assets included company stock with market values of $18 million (3 percent of plan assets) and $14 million (2 percent of plan assets), respectively. The company also provides defined contribution plans for substantially all employees. Expense for company matching contributions under these plans was approximately $22 million in 2001, $19 million in 2000 and $18 million in 1999. 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. 72 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The change in benefit obligation, plan assets and the funded status of employee benefit plans follows:
AT YEAR-END ----------------------------------- POSTRETIREMENT PENSION BENEFITS BENEFITS ----------------- --------------- 2001 2000 2001 2000 ------- ------- ------ ------ (IN MILLIONS) Benefit obligation at beginning of year.............. $ 614 $ 582 $ 141 $ 111 Service cost......................................... 16 15 4 3 Interest cost........................................ 45 42 10 8 Plan amendments...................................... 8 6 -- -- Actuarial (gain) loss................................ -- 4 13 30 Benefits paid........................................ (39) (35) (14) (12) Retiree contributions................................ -- -- 1 1 ----- ----- ----- ----- Benefit obligation at end of the year................ $ 644 $ 614 $ 155 $ 141 ----- ----- ----- ----- Fair value of plan assets at beginning of year....... $ 838 $ 711 $ -- $ -- Actual return........................................ (125) 158 -- -- Benefits paid........................................ (39) (35) -- -- Plan amendments...................................... 7 -- -- -- Contributions........................................ 1 4 -- -- ----- ----- ----- ----- Fair value of plan assets at end of year............. $ 682 $ 838 $ -- $ -- ----- ----- ----- ----- Funded status........................................ $ 38 $ 224 $(155) $(141) Unrecognized net loss/(gain)......................... 45 (160) 20 6 Prior service costs not yet recognized............... 13 11 (7) (7) Special termination benefits......................... (1) -- -- -- Intangible asset..................................... (3) (1) -- -- Accumulated other comprehensive income............... (8) (6) -- -- ----- ----- ----- ----- Prepaid (accrued) benefit cost....................... $ 84 $ 68 $(142) $(142) ===== ===== ===== =====
The net prepaid benefit cost of $84 million at year-end 2001 is comprised of pension plans with prepaid benefit cost totaling $109 million and accrued benefit liabilities totaling $25 million. For plans with accumulated benefit obligations in excess of plan assets, accumulated benefit obligation and fair value of plan assets were $75 million and $51 million, respectively. For plans with projected benefit obligations in excess of plan assets, projected benefit obligation and fair value of plan assets were $477 million and $412 million, respectively. Significant assumptions used for the employee benefit plans follow:
FOR THE YEAR --------------------------------------------- PENSION BENEFITS POSTRETIREMENT BENEFITS ------------------ ------------------------ 2001 2000 1999 2001 2000 1999 ---- ---- ---- ------ ------ ------ Weighted average assumptions: Discount rate................................. 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% Expected long-term rate of return............. 9.00% 9.00% 9.00% -- -- -- Rate of compensation increase................. 4.75% 4.75% 4.00% -- -- --
73 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A 9 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 4.5 percent for 2008 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 ------------------ ------------------------ 2001 2000 1999 2001 2000 1999 ---- ---- ---- ------ ------ ------ (IN MILLIONS) CHARGES (CREDITS) Service cost -- benefits earned during the period...................................... $ 16 $ 15 $ 17 $ 4 $ 3 $ 3 Interest cost on projected benefit obligation.................................. 45 42 39 10 8 8 Expected return on plan assets................ (74) (62) (54) -- -- -- Net amortization and deferral................. (5) (4) (3) (1) (1) (1) ---- ---- ---- --- --- --- Net periodic benefit cost (credit)(a)......... $(18) $ (9) $ (1) $13 $10 $10 ==== ==== ==== === === ===
- --------------- (a) In addition to the above, in 2001 the company recognized an additional $.4 million expense relating to pension benefits and $.3 million relating to postretirement benefits from the restructuring of certain of the Building Products operations. In 2000, the company recognized an additional $.3 million expense relating to postretirement benefits for special termination benefits resulting from the restructuring of certain of the Building Products operations. 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. 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 2001.................................................... $ 1 $ (1) Effect on Postretirement benefit obligation at year-end 2001.................................................... $12 $(10)
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. 74 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of stock option activity follows:
FOR THE YEAR ------------------------------------------------------------ 2001 2000 1999 ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- -------- ------- -------- ------- -------- (SHARES IN THOUSANDS) Outstanding beginning of year.......... 2,756 $ 53 1,974 $ 53 1,892 $ 51 Granted........................... 1,088 51 971 55 455 61 Exercised......................... (141) 48 (88) 48 (315) 47 Forfeited......................... (119) 53 (101) 54 (58) 53 ------ ------ ------ ------ ------ ------ Outstanding end of year................ 3,584 $ 53 2,756 $ 54 1,974 $ 53 ====== ====== ====== ====== ====== ====== Options exercisable.................... 1,078 $ 51 896 $ 50 691 $ 49 ====== ====== ====== ====== ====== ====== Weighted average fair value of options granted during the year.............. $16.05 $16.63 $23.06 ====== ====== ======
Exercise prices for options outstanding at year-end 2001 range from $27 to $75. The weighted average remaining contractual life of these options is eight years. An additional 1,664,552, 755,956 and 1,727,156 shares of common stock were available for grants at year-end 2001, 2000 and 1999, respectively. Under the 1993 restricted stock plan, at year-end 2001, awards of 39,116 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 2001, awards of 118,580 shares of restricted common stock were outstanding and an additional 171,250 shares were available for grants. The fair value of the options granted in 2001, 2000 and 1999 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
FOR THE YEAR -------------------------------- 2001 2000 1999 --------- -------- --------- Expected dividend yield.............................. 2.4% 2.7% 2.0% Expected stock price volatility...................... 29.3% 29.7% 29.4% Risk-free interest rate.............................. 5.1% 5.1% 6.8% 8.0 Expected life of options............................. 8.0 years years 8.0 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 $105 million and $2.12 per diluted share in 2001; $189 million and $3.71 per diluted share in 2000; and $96 million and $1.73 per diluted share in 1999. 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. 75 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 ------------------ 2001 2000 1999 ---- ---- ---- Numerators for basic and diluted earnings per share: Income from continuing operations......................... $111 $195 $191 Discontinued operation.................................... -- -- (92) Effect of accounting change............................... (2) -- -- ---- ---- ---- Net income............................................. $109 $195 $ 99 ---- ---- ---- Denominator for earnings per share: Weighted average shares outstanding -- basic.............. 49.3 50.9 55.6 Dilutive effect of stock options.......................... -- -- .2 ---- ---- ---- Weighted average shares outstanding -- diluted............ 49.3 50.9 55.8 ---- ---- ----
NOTE 8 -- ACCUMULATED OTHER COMPREHENSIVE INCOME The components of other comprehensive income are as follows:
UNREALIZED GAINS (LOSSES) CURRENCY ON AVAILABLE- MINIMUM TRANSLATION DERIVATIVE FOR-SALE PENSION ADJUSTMENTS INSTRUMENTS SECURITIES LIABILITY TOTAL ----------- ----------- -------------- --------- ----- (IN MILLIONS) Balance at year-end 1999............ $(16) $ -- $(13) $(2) $(31) Changes during the year........... -- -- 36 (3) 33 Deferred taxes on changes......... 2 -- (13) 1 (10) ---- ------ ---- --- ---- Net change for the year...... 2 -- 23 (2) 23 ---- ------ ---- --- ---- Balance at year-end 2000............ $(14) $ -- $ 10 $(4) $ (8) Effect of adopting FAS No 133: Unrealized losses on held-to- maturity securities re-designated as available-for-sale securities................... -- -- (24) -- (24) Unrealized losses on derivative instruments classified as cash flow hedges............. -- (7) -- -- (7) Deferred taxes on above........ -- 3 8 -- 11 Changes during the year........... 1 7 34 (2) 40 Deferred taxes on changes......... -- (3) (11) 1 (13) ---- ------ ---- --- ---- Net change for the year...... 1 -- 7 (1) 7 ==== ====== ==== === ==== Balance at year-end 2001............ $(13) $ -- $ 17 $(5) $ (1) ==== ====== ==== === ====
NOTE 9 -- CONTINGENCIES There are pending against the company and its subsidiaries lawsuits, claims and environmental matters arising in the regular course of business. The outcome of individual matters cannot be predicted with certainty. 76 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. NOTE 10 -- SEGMENT INFORMATION The company has three reportable segments: paper, building products and financial services. The Paper Group manufactures containerboard and corrugated packaging. The Building Products Group manufactures a variety of building materials and manages the company's timber resources. The Financial Services Group operates a savings bank and engages in mortgage banking, real estate and insurance brokerage activities. These segments are managed as separate business units. The company evaluates performance based on operating income before other income/expense, 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, other income (expense) and discontinued operations.
CORPORATE, BUILDING FINANCIAL OTHER AND PAPER PRODUCTS SERVICES ELIMINATIONS TOTAL ------ -------- --------- ------------ ------- (IN MILLIONS) FOR THE YEAR OR AT YEAR-END 2001: Revenues from external customers............. $2,082 $ 726 $ 1,364 $ -- $ 4,172 Depreciation, depletion and amortization..... 120 61 30 5 216 Operating income(a).......................... 107 13 184 (29)(b) 275 Financial Services net interest income....... -- -- 426 -- 426 Total assets................................. 1,717 1,196 15,738 36 18,687 Investment in equity method investees........ 3 34 22 -- 59 Capital expenditures......................... 107 71 26 4 208 ------------------------------------------------------ FOR THE YEAR OR AT YEAR-END 2000: Revenues from external customers............. $2,092 $ 836 $ 1,369 $ -- $ 4,297 Depreciation, depletion and amortization..... 131 63 24 7 225 Operating income............................. 207 77 189 (48)(c) 425 Financial Services net interest income....... -- -- 389 -- 389 Total assets................................. 1,589 1,263 15,324 30 18,206 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 $ 837 $ 1,116 $ -- $ 3,822 Depreciation, depletion and amortization..... 138 59 22 6 225 Operating income............................. 104 189 138 (30) 401 Financial Services net interest income....... -- -- 299 -- 299 Total assets................................. 1,676 1,154 13,321 99 16,250 Investment in equity method investees........ 8 27 14 -- 49 Capital expenditures......................... 80 92 26 6 204 ------------------------------------------------------
77 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - --------------- (a) Operating income includes $27 million reduction in depreciation expense resulting from a change in the estimated useful lives of certain production equipment, of which $20 million applies to the paper segment and $7 million applies to the building products segment. (b) Includes other expense of $19 million, of which $15 million applies to the paper segment and $4 million to corporate, and other income of $20 million, which applies to the building products segment. (c) Includes other expense of $15 million, which applies to the building products segment. The following table includes revenues and property and equipment based on the location of the operation:
GEOGRAPHIC INFORMATION 2001 2000 1999 - ---------------------- ------ ------ ------ (IN MILLIONS) FOR THE YEAR Revenues from external customers United States............................................ $4,009 $4,133 $3,686 Mexico................................................... 114 106 82 Canada................................................... 34 33 27 South America............................................ 15 25 27 ------ ------ ------ Total.................................................... $4,172 $4,297 $3,822 ====== ====== ====== AT YEAR-END Property and Equipment United States............................................ $2,142 $2,133 $2,154 Mexico................................................... 46 34 28 Canada................................................... 63 63 61 South America............................................ -- 18 18 ------ ------ ------ Total.................................................... $2,251 $2,248 $2,261 ====== ====== ======
78 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11 -- SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Selected quarterly financial results for the years 2001 and 2000 are summarized below.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) 2001 Total revenues................................... $1,053 $1,062 $1,057 $1,000 Manufacturing net revenues....................... 681 719 736 672 Manufacturing gross profit....................... 69 96 108 78 Financial Services operating income before taxes.......................................... 45 46 43 50 Income before accounting change.................. $ 12 $ 29 $ 44(a) $ 26 Effect of accounting change...................... (2) -- -- -- ------ ------ ------ ------ Net income....................................... $ 10 $ 29 $ 44 $ 26 ====== ====== ====== ====== Earnings per Share: Basic: Income before accounting change............. $ .24 $ .58 $ .90 $ .54 Effect of accounting change................. (.04) -- -- -- ------ ------ ------ ------ Net income.................................. $ .20 $ .58 $ .90 $ .54 ====== ====== ====== ====== Diluted: Income before accounting change............. $ .24 $ .58 $ .90 $ .54 Effect of accounting change................. (.04) -- -- -- ------ ------ ------ ------ Net income.................................. $ .20 $ .58 $ .90 $ .54 ====== ====== ====== ======
- --------------- (a) Includes a $20 million pre-tax gain from sale of non-strategic timberlands; a $3 million pre-tax loss related to the disposal of two specialty packaging operations; a $4 million impairment pre-tax charge related to an interest in a glass bottling venture in Puerto Rico; a $4 million pre-tax loss related to the sale of a box plant in Chile; and a $4 million pre-tax charge related to the fair value adjustment of an interest rate swap agreement. In connection with the sale of the box plant in Chile, a one-time tax benefit of $8 million was recognized. 79 TEMPLE-INLAND INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) 2000 Total revenues........................................... $1,067 $1,100 $1,086 $1,044 Manufacturing net revenues............................... 758 757 739 674 Manufacturing gross profit............................... 137 132 119 99 Financial Services operating income before taxes......... 35 48 50 56 Net income............................................... 55 62 43(a) 35 Earnings per Share: Basic: Net income.......................................... $ 1.04 $ 1.20 $ .87 $ .72 Diluted: Net income.......................................... $ 1.04 $ 1.20 $ .87 $ .72
- --------------- (a) Includes a $15 million pre-tax charge related to the discontinued fiber-cement operation. NOTE 12 -- OTHER INFORMATION Allowance for doubtful accounts were $11 million at year-end 2001, $10 million at year-end 2000 and $9 million at year-end 1999. The provision for bad debts was $8 million in 2001, $6 million in 2000 and $5 million in 1999. Bad debt charge-offs, net of recoveries were $7 million in 2001, $5 million in 2000 and $6 million in 1999. The unrealized gain (loss) on available-for-sale mortgage-backed securities was an unrealized gain of $26 million and $17 million at year-end 2001 and 2000, respectively, and an unrealized loss of $19 million at year-end 1999. The unrealized gain increased by $9 million and $36 million for the years 2001 and 2000, respectively, and decreased by $22 million for the year 1999. 80 MANAGEMENT REPORT ON FINANCIAL STATEMENTS Management has prepared and is responsible for the company's financial statements, including the notes thereto. They have been prepared in accordance with generally accepted accounting principles and necessarily include amounts based on judgments and estimates by management. All financial information in this annual report is consistent with that in the financial statements. The company maintains internal accounting control systems and related policies and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and properly recorded, and that accounting records may be relied upon for the preparation of financial statements and other financial information. The design, monitoring and revision of internal accounting control systems involve, among other things, management's judgment with respect to the relative cost and expected benefits of specific control measures. The company also maintains an internal auditing function that evaluates and formally reports on the adequacy and effectiveness of internal accounting controls, policies and procedures. The company's financial statements have been examined by Ernst & Young LLP, independent auditors, who have expressed their opinion with respect to the fairness of the presentation of the statements. The Audit Committee of the Board of Directors, composed solely of outside directors, meets with the independent auditors and internal auditors to evaluate the effectiveness of the work performed by them in discharging their respective responsibilities and to assure their independent and free access to the committee. KENNETH M. JASTROW, II Chairman of the Board and Chief Executive Officer LOUIS R. BRILL Chief Accounting Officer 81 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 29, 2001 and December 30, 2000, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 29, 2001. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Temple-Inland Inc. and subsidiaries at December 29, 2001 and December 30, 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 29, 2001, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivative instruments and hedging activities. Ernst & Young LLP Austin, Texas January 25, 2002 82 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 All schedules are omitted as the required information is either inapplicable or the information is presented in the Consolidated Financial Statements and notes thereto in Item 8 above. 83 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(13) 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(8), and as amended by Third Supplemental Indenture dated as of May 9, 1991(9) 4.03 -- Form of Fixed-rate Medium Term Note, Series D, of the Company(10) 4.04 -- Form of Floating-rate Medium Term Note, Series D, of the Company(10) 4.05 -- Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, dated February 16, 1989(6) 4.06 -- Rights Agreement, dated February 20, 1999, between the Company and First Chicago Trust Company of New York, as Rights Agent(7) 4.07 -- Form of 7.25% Note due September 15, 2004, of the Company(11) 4.08 -- Form of 8.25% Debenture due September 15, 2022, of the Company(11) 4.09 -- Form of Fixed-rate Medium Term Note, Series F, of the Company(15) 4.10 -- Form of Floating-rate Medium Term Note, Series F, of the Company(15) 10.01* -- Temple-Inland Inc. 1993 Stock Option Plan(12) 10.02* -- Temple-Inland Inc. 1993 Restricted Stock Plan(12) 10.03* -- Temple-Inland Inc. 1997 Stock Option Plan(14), as amended May 7, 1999(16) 10.04* -- Temple-Inland Inc. 1997 Restricted Stock Plan(14) 10.05* -- Employment Agreement dated July 1, 2000, between Inland Paperboard and Packaging, Inc. and Dale E. Stahl(18) 10.06* -- Change in Control Agreement dated October 2, 2000, between the Company and Kenneth M. Jastrow, II(18) 10.07* -- Change in Control Agreement dated October 2, 2000, between the Company and William B. Howes(18) 10.08* -- Change in Control Agreement dated October 2, 2000, between the Company and Harold C. Maxwell(18) 10.09* -- Change in Control Agreement dated October 2, 2000, between the Company and Bart J. Doney(18) 10.10* -- Change in Control Agreement dated October 2, 2000, between the Company and Kenneth R. Dubuque(18) 10.11* -- Change in Control Agreement dated October 2, 2000, between the Company and James C. Foxworthy(18) 10.12* -- Change in Control Agreement dated October 2, 2000, between the Company and Dale E. Stahl(18) 10.13* -- Change in Control Agreement dated October 2, 2000, between the Company and Jack C. Sweeny(18) 10.14* -- Change in Control Agreement dated October 2, 2000, between the Company and M. Richard Warner(18) 10.15* -- Change in Control Agreement dated October 2, 2000, between the Company and Randall D. Levy(18) 10.16* -- Change in Control Agreement dated October 2, 2000, between the Company and Louis R. Brill(18)
84
EXHIBIT NUMBER EXHIBIT - ------- ------- 10.17* -- Change in Control Agreement dated October 2, 2000, between the Company and Scott Smith(18) 10.18* -- Change in Control Agreement dated October 2, 2000, between the Company and Doyle R. Simons(18) 10.19* -- Change in Control Agreement dated October 2, 2000, between the Company and David W. Turpin(18) 10.20* -- Change in Control Agreement dated October 2, 2000, between the Company and Leslie K. O'Neal(18) 10.21* -- Temple-Inland Inc. 2001 Stock Incentive Plan(17) 10.22* -- Temple-Inland Inc. Stock Deferral and Payment Plan (as amended and restated effective February 2, 2001(17) 10.23* -- Temple-Inland Inc. Directors' Fee Deferral Plan(17) 10.24* -- Temple-Inland Inc. Supplemental Executive Retirement Plan(19) 10.25 -- Agreement and Plan of Merger, dated January 21, 2002, among the Company, Temple-Inland Acquisition Corporation, and Gaylord Container Corporation(20) 10.25 -- Commitment Letter, dated September 26, 2001, among the Company, Salomon Smith Barney Inc., and Citibank, N.A., as amended by Amendment Letter dated November 30, 2001, and Amendment Letter dated January 21, 2002(20) 10.26 -- Stockholders Agreement, dated January 21, 2002, among the Company, Temple-Inland Acquisition Corporation, and certain stockholders of Gaylord Container Corporation(20) 10.27 -- Stock Option Agreement, dated January 21, 2002, between the Company and Gaylord Container Corporation(20) 21 -- Subsidiaries of the Company(21) 23 -- Consent of Ernst & Young LLP(21)
- --------------- * 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 Form 8-K filed with the Commission on December 27, 1990. (9) Incorporated by reference to Registration Statement No. 33-40003 on Form S-3 filed by the Company with the Commission. (10) Incorporated by reference to Registration Statement No. 33-43978 on Form S-3 filed by the Company with the Commission. 85 (11) Incorporated by reference to Registration Statement No. 33-50880 on Form S-3 filed by the Company with the Commission. (12) 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. (13) Incorporated by reference to the Company's Form 10-K for the year ended January 2, 1993. (14) 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. (15) Incorporated by reference to the Company's Form 8-K filed with the Commission on June 2, 1998. (16) 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 (17) Incorporated by reference to the Company's Definitive Proxy Statement in connection with the Annual Meeting of Shareholders held May 4, 2001, and filed with the Commission on March 23, 2001 (18) Incorporated by reference to the Company's Form 10-K for the year ended December 30, 2000. (19) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 2001. (20) Incorporated by reference to the Schedule TO filed by the Company on January 22, 2002, in connection with the proposed acquisition of Gaylord Container Corporation. (21) 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 29, 2001. 86 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 February 27, 2002. TEMPLE-INLAND INC. (Registrant) By: /s/ KENNETH M. JASTROW, II ------------------------------------ Kenneth M. Jastrow, II Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ KENNETH M. JASTROW, II Director, Chairman of the Board, February 27, 2002 ------------------------------------------------ and Chief Executive Officer Kenneth M. Jastrow, II /s/ RANDALL D. LEVY Chief Financial Officer February 27, 2002 ------------------------------------------------ Randall D. Levy /s/ LOUIS R. BRILL Vice President and Chief February 27, 2002 ------------------------------------------------ Accounting Officer Louis R. Brill /s/ AFSANEH MASHAYEKHI BESCHLOSS Director February 27, 2002 ------------------------------------------------ Afsaneh Mashayekhi Beschloss /s/ ROBERT CIZIK Director February 27, 2002 ------------------------------------------------ Robert Cizik /s/ ANTHONY M. FRANK Director February 27, 2002 ------------------------------------------------ Anthony M. Frank /s/ JAMES T. HACKETT Director February 27, 2002 ------------------------------------------------ James T. Hackett /s/ WILLIAM B. HOWES Director February 27, 2002 ------------------------------------------------ William B. Howes /s/ BOBBY R. INMAN Director February 27, 2002 ------------------------------------------------ Bobby R. Inman
87
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ JAMES A. JOHNSON Director February 27, 2002 ------------------------------------------------ James A. Johnson /s/ W. ALLEN REED Director February 27, 2002 ------------------------------------------------ W. Allen Reed /s/ HERBERT A. SKLENAR Director February 27, 2002 ------------------------------------------------ Herbert A. Sklenar /s/ ARTHUR TEMPLE III Director February 27, 2002 ------------------------------------------------ Arthur Temple III /s/ CHARLOTTE TEMPLE Director February 27, 2002 ------------------------------------------------ Charlotte Temple /s/ LARRY E. TEMPLE Director February 27, 2002 ------------------------------------------------ Larry E. Temple
88 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT - ------- ------- 21 -- Subsidiaries of the Company 23 -- Consent of Ernst & Young LLP
EX-21 3 d94481ex21.txt SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF TEMPLE-INLAND INC. All Subsidiaries are wholly-owned unless noted otherwise.
JURISDICTION OF SUBSIDIARY NAME INCORPORATION - --------------- --------------- Inland Container Corporation I Delaware Inland Paperboard and Packaging, Inc. Delaware El Morro Corrugated Box Corporation Delaware El Morro Corrugated Box Corporation Puerto Rico Georgia Kraft Company Delaware Sabine River & Northern Railroad Company Texas InBoxed.com Inc. Delaware Inland Argentina, Inc. Delaware Inland Argentina, S.A. Argentina Inland Chile I, Inc. Delaware Inland Chile II, Inc. Delaware Inland Container FSC, Inc. Virgin Islands Inland International Holding Company Delaware CLS, S.A. de C.V. Tijuana, Baja California Crockett Baja, S.A. de C.V. Tijuana, Baja California Inland Corrugados de Mexico, S.A. de C.V. Mexico City, D.F. Grupo Inland, S.A. de C.V. Mexico City, D.F. Inland Corrugados de Monterrey, S.A. de C.V. Mexico City, D.F. Inland Paper Company, Inc. Indiana Premier Boxboard Limited LLC (50%) Delaware Temple-Inland Land Corporation Nevada Temple-Inland Land and Timber Inc. Delaware Temple-Inland Acquisition Corporation Delaware Temple-Inland Forest Products Corporation Delaware Del-Tin Fiber, L.L.C. (50%) Arkansas Eastex Incorporated Texas Evadale Realty Company Delaware Bestile Manufacturing Company California Inland Eastex (Nevada) Inc. Nevada Inland Eastex Extrusion Company Delaware Planfosur S. de R.L. de C.V. Mexico Plantaciones Forestales del Sureste, S.A. de C.V. Mexico 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. (50%) Delaware Templar Essex Inc Delaware Temple Associates, Inc. Texas Temple Gypsum Company Nevada Temple Industries Inc. Texas Temple Lumber Company Texas Temple-Inland Financial Services Inc. Delaware Guaranty Holdings Inc. I Delaware Guaranty Bank Federal 501 Weber Bldg., Inc. California American Finance Group, Inc. Delaware AFG Acquisition Corporation Delaware First Hemet Corporation California
Page 1 EXHIBIT 21 SUBSIDIARIES OF TEMPLE-INLAND INC. All Subsidiaries are wholly-owned unless noted otherwise.
JURISDICTION OF SUBSIDIARY NAME INCORPORATION - --------------- --------------- Guaranty Advisors Texas Guaranty Business Credit Corporation Delaware Guaranty Group, Inc. Texas MBHC Inc. Nevada Guaranty Residential Lending, Inc. 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 TMF Holding Inc. Delaware Temple-Inland Properties Inc. Delaware LIC Investments Inc. Delaware IBHC Inc. Delaware Lumbermen's Investment Corporation Delaware FirstLand Investment Corporation Texas Guaranty Insurance Managers, Inc. Texas Guaranty Associates, Inc. Texas Guaranty Insurance Services, Inc. Texas Insurance Marketplace Agency, Inc. Texas J.E.C. Insurance Services, Inc. California Premium Acceptance Corporation Texas The Insurance Marketplace, Inc. Texas LIC Financial Corporation Delaware LIC Ventures Inc. Delaware Onion Creek Wastewater Corporation Texas Sabine Investment Company Delaware Double Horn Water Supply Corporation, Inc. Texas Sabine Real Estate Company Delaware Sunbelt Insurance Company Texas Stanford Realty Advisors, Inc. Delaware Temple-Inland Capital Inc. Delaware Temple-Inland Life Inc. Nevada Temple-Inland Insurance Corporation Delaware EB Holdings, Inc. Delaware Top of Westgate, Inc. Texas CCA Hospitality, Inc. Texas Temple-Inland Realty Inc. Delaware Temple-Inland Food Service Corporation Delaware Temple-Inland Forest Products International Inc. Delaware Temple Pembroke Inc. New Brunswick Temple-Inland Recaustisizing Company Delaware Temple-Inland Recovery Company Delaware Temple-Inland Stores Company Delaware Temple-Inland Trading Company Delaware Texas South-Eastern Railroad Company Texas The Angelina Free Press, Inc. Texas Topaz Oil Company Texas Temple-Inland Resource Company Nevada Temple-Inland Funding Corporation Nevada
Page 2 EX-23 4 d94481ex23.txt CONSENT OF ERNST & YOUNG LLP 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 25, 2002, 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 29, 2001.
REGISTRATION STATEMENT NO. PURPOSE ------------- ------- 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 February 26, 2002
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