-----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, ITblBSFffFWF+T0RjmzqhB7va+QP/t5PMmdI72N4ukG/9SSX2Og8Fu+d2cuBcC/+ vTbq5/MK8o5WXz+a/cUv3g== 0000950134-98-002769.txt : 19980401 0000950134-98-002769.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950134-98-002769 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980103 FILED AS OF DATE: 19980331 SROS: NYSE SROS: PCX 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: SEC FILE NUMBER: 001-08634 FILM NUMBER: 98582010 BUSINESS ADDRESS: STREET 1: 303 S TEMPLE DR STREET 2: PO DRAWER N CITY: DIBOLL STATE: TX ZIP: 75941 BUSINESS PHONE: 4098297729 MAIL ADDRESS: STREET 1: 303 SOUTH TEMPLE DR CITY: DIBOLL STATE: TX ZIP: 75941 10-K 1 FORM 10-K FOR FISCAL YEAR END JANUARY 3, 1998 1 ================================================================================ 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 JANUARY 3, 1998 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 1-8634 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.)
303 SOUTH TEMPLE DRIVE DIBOLL, TEXAS 75941 (Address of principal executive offices, including Zip code) Registrant's telephone number, including area code: (409) 829-5511 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK, $1.00 PAR VALUE PER SHARE, NEW YORK STOCK EXCHANGE NON-CUMULATIVE PACIFIC STOCK EXCHANGE PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE PACIFIC STOCK 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 March 4, 1998, was $2,130,569,842. 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 March 4, 1998, 56,048,867 shares of Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the indicated part or parts of this report: (a)Pages 25-34, 47, 49, and 50-61 of the Annual Report to Shareholders for the fiscal year ended January 3, 1998 -- Parts I and II. (b)The Company's definitive proxy statement, dated March 30, 1998, in connection with the Annual Meeting of Stockholders to be held May 1, 1998 -- Part III. ================================================================================ 2 PART I ITEM 1. BUSINESS INTRODUCTION: Temple-Inland Inc. (the "Company") is a holding company that conducts all of its operations through its subsidiaries. The Company holds interests in corrugated packaging, bleached paperboard, building products, timber and timberlands, and financial services. The Company's Paper Group consists of the corrugated packaging and bleached paperboard operations. The corrugated packaging operation is vertically integrated and consists of four linerboard mills, three corrugating medium mills, 39 box plants, and nine specialty converting plants. In February 1998, the Company announced its intention to close, during the second quarter of 1998, one of its corrugating medium mills and one of its box plants, both located in Newark, California. The bleached paperboard operation consists of one large mill located in Evadale, Texas. The Company's Building Products Group manufactures a wide range of building products including lumber, plywood, particleboard, gypsum wallboard, and fiberboard. Forest resources include approximately 2.2 million acres of timberland in Texas, Louisiana, Georgia, and Alabama. The Company's Financial Services Group consists of savings bank activities, mortgage banking, real estate development, and insurance brokerage. The Company is a Delaware corporation that was organized in 1983. Its principal subsidiaries include Inland Paperboard and Packaging, Inc. ("Inland"), Temple-Inland Forest Products Corporation ("Temple-Inland FPC"), Temple-Inland Financial Services Inc. ("Financial Services"), Guaranty Federal Bank, F.S.B. ("Guaranty"), and Temple-Inland Mortgage Corporation ("Temple-Inland Mortgage"). The Company's principal executive offices are located at 303 South Temple Drive, Diboll, Texas 75941. Its telephone number is (409) 829-5511. 1 3 FINANCIAL INFORMATION: The results of operations including information regarding the principal business segments are shown in the following table: TEMPLE-INLAND INC. BUSINESS SEGMENTS
FOR THE YEAR ----------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN MILLIONS) Revenues Paper.................................... $2,062.9 $2,082.3 $2,198.4 $1,740.7 $1,571.2 Building products........................ 617.3 562.6 532.9 575.5 497.5 Other activities......................... -- -- -- 19.2 58.4 -------- -------- -------- -------- -------- Manufacturing net sales.......... 2,680.2 2,644.9 2,731.3 2,335.4 2,127.1 Financial services....................... 945.2 815.4 764.3 631.4 635.1 -------- -------- -------- -------- -------- Total revenues................... $3,625.4 $3,460.3 $3,495.6 $2,966.8 $2,762.2 ======== ======== ======== ======== ======== Income before taxes Paper.................................... $ (39.0) $ 113.0 356.6 $ 73.7 $ 5.6 Building products........................ 131.1 102.0 67.0 138.8 102.4 Other activities......................... -- -- -- 1.5 (1.9) -------- -------- -------- -------- -------- Operating profit................. 92.1 215.0 423.6 214.0 106.1 Financial services....................... 132.1 63.1(a) 98.1 56.3 67.5 -------- -------- -------- -------- -------- 224.2 278.1 521.7 270.3 173.6 Corporate expense........................ (24.6) (17.2) (21.7) (13.7) (11.2) Parent company interest -- net........... (110.3) (109.6) (72.7) (67.1) (69.4) Other income............................. 5.7 4.6 3.7 3.8 3.2 -------- -------- -------- -------- -------- Income before taxes.............. $ 95.0 $ 155.9 $ 431.0 $ 193.3 $ 96.2 ======== ======== ======== ======== ========
- --------------- (a) Includes SAIF assessment of $43.9 million. For more information with respect to identifiable assets, capital expenditures, depreciation, and depletion on a business segment basis, see pages 32-33 and 59 of the Company's 1997 Annual Report to Shareholders, which are incorporated herein by reference. 2 4 The following table shows the revenues of the Company: REVENUES
FOR THE YEAR ---------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN MILLIONS) Paper Corrugated packaging(a)...................... $1,694.0 $1,760.6 $1,910.3 $1,499.2 $1,306.9 Bleached paperboard.......................... 366.0 300.5 249.0 217.4 228.7 Pulp and other............................... 2.9 21.2 39.1 24.1 35.6 -------- -------- -------- -------- -------- 2,062.9 2,082.3 2,198.4 1,740.7 1,571.2 -------- -------- -------- -------- -------- Building products Pine lumber.................................. 262.1 217.4 190.1 211.9 176.0 Fiber products............................... 66.2 73.3 59.7 66.3 62.9 Particleboard................................ 125.0 112.2 99.1 103.0 81.3 Plywood...................................... 55.2 52.1 49.3 56.8 54.0 Gypsum wallboard............................. 104.6 90.2 83.1 74.3 53.3 Retail distribution(b)....................... 4.2 17.1 51.3 58.4 60.0 Other........................................ -- .3 0.3 4.8 10.0 -------- -------- -------- -------- -------- 617.3 562.6 532.9 575.5 497.5 -------- -------- -------- -------- -------- Other activities(c)............................ -- -- -- 19.2 58.4 -------- -------- -------- -------- -------- Manufacturing net sales...................... 2,680.2 2,644.9 2,731.3 2,335.4 2,127.1 Financial services............................. 945.2 815.4 764.3 631.4 635.1 -------- -------- -------- -------- -------- Total revenues....................... $3,625.4 $3,460.3 $3,495.6 $2,966.8 $2,762.2 ======== ======== ======== ======== ========
- --------------- (a) Reclassified to include revenues from Temple-Inland Food Service Corporation ("Food Service") for 1996, 1995, 1994, and 1993. In the fourth quarter of 1997, the Company sold substantially all of the assets of Food Service, a subsidiary that manufactured and marketed paper products for the food service industry. Related revenues were $66.3 million, $84.1 million, $80.9 million, $57.9 million, and $54.2 million for 1997, 1996, 1995, 1994, and 1993, respectively. (b) In October 1995, the Company sold the largest two of its five retail distribution outlets. Two more of these retail distribution outlets were sold during December 1996, and the final outlet was sold during 1997. (c) Includes the revenues from subsidiaries engaged in commercial, industrial, and public works contracting until their operations were terminated in 1993 and the revenues from subsidiaries engaged in the construction and maintenance of electrical distribution facilities until their operations were terminated in 1994. 3 5 The following table shows the rated annual capacities of the production facilities for, and unit sales of, the principal manufactured products. ANNUAL CAPACITIES/UNIT SALES
RATED ANNUAL CAPACITY AT UNIT SALES JANUARY 3, ----------------------------------------- 1998 1997 1996 1995 1994 1993 ---------- ----- ----- ----- ----- ----- (IN THOUSANDS OF TONS) Paper Corrugated packaging.................. (a) 2,769 2,435 2,333 2,492 2,394 Bleached paperboard................... (b) 635 524 400 430 426 Pulp.................................. (b) 2 100 99 87 134 (IN MILLIONS OF BOARD FEET) Building products Pine lumber........................... 675 639 605 582 583 552 (IN MILLIONS OF SQUARE FEET) Fiber products........................ 460 402 457 422 441 440 Particleboard(c)...................... 610 470 399 329 347 319 Plywood............................... 265 281 259 217 260 265 Gypsum wallboard...................... 866 843 838 813 796 782
- --------------- (a) The annual capacity of the 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 rated annual capacity of Inland's corrugating medium mills is approximately 615,000 tons per year, including the 70,000 tons of capacity at the Newark, California, mill, which the Company intends to close during the second quarter of 1998. The rated annual capacity of the linerboard mills is approximately 2.2 million tons per year. (b) The annual capacity of the four paper machines in operation at the paperboard and pulp mill is approximately 690,000 tons, which excludes the capacity of a cylinder machine at the mill that the Company decided to shut down late in 1993 due to market conditions for the grade it produced. Such capacity may vary to some degree, depending on product mix. (c) The annual capacity for the particleboard plants includes the rated annual capacity of the Hope, Arkansas, plant, which began operations late in 1995 but did not reach full production until the fourth quarter of 1996. The capacity figures for 1996 reflect the increase at the Monroeville, Alabama, plant that resulted from a renovation of this facility during 1996. The 1997 figures reflect an increase at the Diboll, Texas, and Thomson, Georgia, plants due to similar renovations during 1997. NARRATIVE DESCRIPTION OF THE BUSINESS: The business of the Company is divided among three groups: (1) the Paper Group, which consists of the corrugated packaging and bleached paperboard operations, (2) the Building Products Group, and (3) the Financial Services Group. In the year ended January 3, 1998, the Paper Group, Building Products Group, and Financial Services Group provided 57 percent, 17 percent, and 26 percent, respectively, of the total consolidated net revenues of the Company. Paper Group. This group is composed of two operations: corrugated packaging and bleached paperboard. (i) Corrugated Packaging. The corrugated packaging operation of the Company manufactures containerboard that it converts into a complete line of corrugated packaging and point-of-purchase displays. Approximately 84 percent of the containerboard produced by Inland in 1997 was converted into corrugated containers at its box plants. The Company's nationwide network of box plants produces a wide range of 4 6 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. Inland's corrugated boxes are sold to a variety of customers in the food, paper, glass containers, chemical, appliance, and plastics industries, among others. As of January 3, 1998, about 47 percent of the Company's box shipments were sold directly for use in the food industry, including beverage containers. The Company also manufactures litho-laminate corrugated packaging and high graphics folding cartons. Other products manufactured by the Company include bulk containers constructed of multi-wall corrugated board for extra strength, which are used for bulk shipments of various materials, paper sealing tape, and other tape specialties. In the corrugated packaging operation, the Company services about 6,800 customers with approximately 11,000 shipping destinations. The largest single customer accounted for approximately four percent and the 10 largest customers accounted for approximately 26 percent of the 1997 corrugated packaging revenues. Costs of freight and customer service requirements necessitate the location of box plants relatively close to customers. Each plant tends to service a market within a 150-mile radius of the plant. Sales of corrugated shipping containers closely track changing population patterns and other demographics. Historically, there has been a correlation between the demand for containers and containerboard and real growth in the United States gross domestic product, particularly the non-durable goods segment. (ii) Bleached Paperboard. The bleached paperboard operation of the Company produces various grades and weights of coated and uncoated bleached paperboard, bleached linerboard, and bleached bristols. These materials are used by other paper companies and by manufacturers that buy paper in roll lots and convert it into such items as paper cups, plates, file folders, folding cartons, paperback book covers, and various other packaging and convenience products. Bleached paperboard products are sold to a large number of customers. Sales to the largest customer of this operation, with whom the Company has a long-standing relationship, accounted for approximately 12 percent of bleached paperboard sales in 1997. This level of sales is consistent with sales to this customer over the past several years. Although the loss of this customer could have a material adverse effect on this operation, it would not have a material adverse effect on the Company taken as a whole . This customer is also a customer of the corrugated packaging operation, but sales to this customer represent less than four percent of the total sales of the corrugated packaging operation. The 10 largest customers accounted for approximately 57 percent of bleached paperboard sales in 1997. During 1997, sales were made to customers in 43 states, Mexico, and Puerto Rico, as well as to independent distributors through which this operation's products were exported to Asia, Japan, Central America, and South America. Contracts specifying annual tonnage quantities are maintained with several major customers. Demand for bleached paperboard products generally correlates with real growth in retail sales of non-durable packaged products in the United States, as well as the level of fast food restaurant activity for food service grades, including cup and plate. Demand is also affected by inventory levels maintained by paperboard converters as well as a number of other factors, including changes in industry production capacity and the strength of international markets. Substantially all of the assets of Temple-Inland Food Service Corporation ("Food Service") were sold to a third party during 1997. Food Service was an integrated paper converter formed by the Company to manufacture and market paper containers and products primarily for the food service industry. Its products included paper plates and bowls, clamshells, carrying trays and boxes, nested food trays, fry cartons, and pails. These products were sold to the fast food industry, retail consumer stores, and restaurants and cafeterias for use in food service. The Company determined that Food Service was not a good strategic fit and would be better served as part of an organization committed to those product lines. The Company continues to manufacture bleached paperboard grades for conversion to paper cups and plates by outside customers. 5 7 Building Products Group. The Building Products Group produces a wide variety of building products, such as lumber, plywood, particleboard, gypsum wallboard, hardboard siding, and fiberboard sheathing. Sales of building products are concentrated 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 O.E.M. (original equipment manufacturer) accounts. Almost 78 percent of particleboard sales are to commercial fabricators, such as manufacturers of cabinets and furniture. The 10 largest customers accounted for approximately 23 percent of the Building Products Group's 1997 sales. The building products business is heavily dependent upon the level of residential housing expenditures, including the repair and remodeling market. During 1996, the Company completed an upgrade to its particleboard plant in Monroeville, Alabama. Similar renovation projects were completed at the Diboll, Texas, and Thomson, Georgia, particleboard plants during 1997. The Building Products Group is a 50 percent owner in three joint ventures. One of these joint ventures is currently scheduled to begin producing medium density fiberboard in the second quarter of 1998 at a facility under construction in Arkansas. Another of these joint ventures is expected to begin producing cement fiberboard in the third quarter of 1998 at a plant under construction in Texas. The third joint venture was the acquisition of an existing facility for the production of gypsum wallboard and a related quarry. This joint venture also began construction after year end of a wallboard plant to be located in Tennessee, completion of which is anticipated by 2000. Financial Services Group. The Financial Services Group operates a savings bank and engages in mortgage banking, real estate development, and insurance activities. (i) Savings Bank. Guaranty is a federally-chartered stock savings bank operated by the Company through its financial services subsidiaries. Guaranty conducts its business in Texas through 110 banking centers located primarily in the eastern third of Texas, including Houston, Dallas, San Antonio, and Austin. Following the Company's acquisition of California Financial Holding Company ("CFHC") in the second quarter of 1997, Guaranty operates an additional 25 branches in the Central Valley of California. The primary activities of Guaranty include attracting savings deposits from the general public, investing in loans secured by mortgages on residential real estate, lending for the construction of real estate projects, and providing a variety of loan products to consumers and businesses. Guaranty 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 the interest it pays on consumer deposits and other borrowings. The operations of Guaranty, like those of other savings institutions, are significantly influenced by general economic conditions, by the monetary, fiscal, and regulatory policies of the federal government, and by 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. During the second quarter of 1997, the Company completed its acquisition of CFHC, the parent corporation of Stockton Savings Bank, F.S.B. ("Stockton") headquartered in Stockton, California. CFHC stockholders received total consideration of approximately $143.4 million, or $30 per share, consisting of a combination of the common stock of the Company and cash. The operations of Stockton were subsequently merged into Guaranty. During 1996, Congress adopted legislation to recapitalize the Savings Association Insurance Fund ("SAIF"). This legislation imposed a one-time special assessment on SAIF members equal to 65.7 basis points of insured deposits, or approximately $44 million in the case of Guaranty. Under this legislation, Guaranty will not currently be required to pay any deposit insurance premiums, but will be required to pay 6 8 approximately 6.5 basis points on insured deposits to fund certain Financial Corporation (FICO) bond obligations. Based on the current level of Guaranty's deposits, this legislation has reduced assessments by approximately $10 million. The House and Senate are also discussing additional legislative proposals, including changes to tax laws, related to the thrift industry. At this time, the Company is not able to predict if any of these proposals will be adopted or, if adopted, the ultimate impact they might have on the Company. In addition to other minimum capital standards, regulations of the Office of Thrift Supervision of the Department of the Treasury (the "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 believes that as of year end, Guaranty met all of its capital adequacy requirements. In order to obtain the lowest level of FDIC insurance premiums, Guaranty must meet a leverage capital ratio of at least 5 percent of adjusted total assets. At year end, Guaranty had a leverage capital ratio of 5.48 percent of adjusted total assets. For additional information regarding regulatory capital requirements, see Note M to Financial Services Group Summarized Financial Statements on page 49 of the Company's 1997 Annual Report to Shareholders, which is incorporated herein by reference. Guaranty must meet or exceed certain regulatory requirements to continue its current activities and to take certain deductions under the Internal Revenue Code. At year end, Guaranty met or exceeded these regulatory requirements and intends to continue meeting or exceeding these regulatory requirements. (ii) Mortgage Banking. Temple-Inland Mortgage, a wholly-owned subsidiary of Guaranty, headquartered in Austin, Texas, originates, warehouses, and services FHA, VA, and conventional mortgage loans primarily on single family residential property. Temple-Inland Mortgage originates mortgage loans for sale into the secondary market. It typically retains the servicing rights on these loans, but periodically sells some portion of its servicing to third parties. During 1997, Temple-Inland Mortgage expanded its operations in the Midwest by acquiring Knutson Mortgage Corporation of Minneapolis, a full-service mortgage bank with a loan servicing portfolio of approximately $6 billion. At year end, Temple-Inland Mortgage was servicing $26.1 billion in mortgage loans, including loans serviced for affiliates and approximately $1.6 billion in mortgages serviced for a third party. Temple-Inland Mortgage produced $3.2 billion in mortgage loans during 1997 compared with $1.9 billion during 1996. (iii) Real Estate Development and Income Properties. Subsidiaries of Financial Services are involved in the development of 34 residential subdivisions in Texas, Arizona, California, Colorado, Florida, Georgia, Missouri, Tennessee, and Utah. The real estate group of the Company also owns 18 commercial properties, including properties owned by joint ventures in which subsidiaries of Financial Services are venture partners. (iv) Insurance. Subsidiaries of Financial Services are engaged in the brokerage 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 management department of the Company. An affiliate of the agency sells annuities through banks and savings banks, including Guaranty. (v) Statistical Disclosures. The following tables present various statistical and financial information for the Financial Services Group. 7 9 The following schedule presents the average balances, interest income/expense, and rates earned or paid by major balance sheet category for the years 1995 through 1997: AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST SPREAD
YEAR END 1997 YEAR END 1996 YEAR END 1995 ------------------------------ ------------------------------ ------------------------------ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE --------- --------- ------ --------- --------- ------ --------- --------- ------ (DOLLARS IN MILLIONS) ASSETS Interest-earning assets: Interest-earning deposits in other banks...................... $ 71.0 $ 4.1 5.71% $ 32.1 $ 2.1 6.42% $ 41.4 $ 2.4 5.90% Mortgage-backed and investment securities...... 2,802.2 161.3 5.75% 3,208.5 183.5 5.72% 3,650.4 208.6 5.72% Securities purchased under agreements to resell, agency discount notes, federal funds sold, and commercial paper........... 332.9 18.3 5.51% 339.4 18.4 5.41% 324.2 19.1 5.88% Loans receivable and mortgage loans held for sale(1)..... 6,618.4 524.9 7.93% 5,258.4 426.1 8.10% 4,490.2 368.6 8.21% Covered assets............... -- -- -- -- -- -- 298.5 18.3 6.14% Other........................ 6.9 .4 6.22% 26.0 .7 2.91% 25.6 1.9 7.42% --------- ------ -------- ------ -------- ------ Total interest-earning assets............... 9,831.4 $709.0 7.21% 8,864.4 $630.8 7.12% 8,830.3 $618.9 7.01% ====== ====== ====== Cash........................... 100.1 90.6 90.2 Other FSLIC receivables........ -- .8 (10.7) Other assets................... 785.6 586.0 537.3 --------- -------- -------- Total assets........... $10,717.1 $9,541.8 $9,447.1 ========= ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Interest-bearing liabilities: Deposits: Interest-bearing demand.... $ 1,099.6 $ 26.4 2.40% $1,087.2 $ 26.1 2.41% $1,212.7 $ 29.9 2.47% Savings deposits........... 212.4 4.7 2.22% 184.6 4.2 2.28% 216.2 4.9 2.25% Time deposits.............. 5,416.4 300.1 5.54% 5,013.6 278.0 5.54% 5,037.6 278.1 5.52% --------- ------ -------- ------ -------- ------ Total interest-bearing deposits............. 6,728.4 331.2 4.92% 6,285.4 308.3 4.91% 6,466.5 312.9 4.84% Advances from the Federal Home Loan Bank............. 1,276.6 79.0 6.19% 629.1 34.0 5.41% 383.6 21.7 5.66% Securities sold under repurchase agreements...... 1,297.2 67.9 5.24% 1,484.3 83.5 5.62% 1,490.3 92.1 6.18% Other borrowings............. 147.7 10.1 6.82% 131.9 9.5 7.24% 95.9 7.2 7.49% --------- ------ -------- ------ -------- ------ Total interest-bearing liabilities.......... 9,449.9 $488.2 5.17% 8,530.7 $435.3 5.10% 8,436.3 $433.9 5.14% ====== ====== ====== Noninterest-bearing demand..... 61.1 46.4 79.3 Other liabilities.............. 475.6 361.8 331.3 Preferred Stock issued by subsidiary................... 90.4 -- -- Shareholder's equity........... 640.1 602.9 600.2 --------- -------- -------- Total liabilities and shareholder's equity............... $10,717.1 $9,541.8 $9,447.1 ========= ======== ======== Net interest income.... $220.8 $195.5 $185.0 ====== ====== ====== Net yield on interest-earning assets............... 2.25% 2.20% 2.10% ===== ===== =====
- --------------- (1) Nonaccruing loans are included in the average of loans receivable. 8 10 The following table provides an analysis of the changes in net interest income attributable to changes in volume of interest-earning assets or interest-bearing liabilities and to changes in rates earned or paid: VOLUME/RATE VARIANCE ANALYSIS
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995 ------------------------------- ----------------------------- INCREASE (DECREASE) DUE TO(1) INCREASE (DECREASE) DUE TO(1) ------------------------------- ----------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL -------- ------- -------- ------- ------- ------- (IN MILLIONS) Interest income: Interest-earning deposits in other banks............................ $ 2.2 $(0.2) $ 2.0 $ (.5) $ .2 $ (.3) Mortgage-backed and investment securities....................... (23.3) 1.1 (22.2) (25.3) .2 (25.1) Securities purchased under agreements to resell, agency discount notes, federal funds sold, and commercial paper....... (0.4) 0.3 (0.1) .9 (1.6) (.7) Loans receivable and mortgage loans held for sale.................... 108.0 (9.2) 98.8 62.3 (4.8) 57.5 Covered assets...................... -- -- -- (18.3) -- (18.3) Other............................... (0.8) 0.5 (0.3) -- (1.2) (1.2) ------ ----- ------ ------ ------ ------ Total interest income....... $ 85.7 $(7.5) $ 78.2 $ 19.1 $ (7.2) $ 1.9 ====== ===== ====== ====== ====== ====== Interest expense: Deposits: Interest-bearing demand.......... $ 0.3 $ -- $ 0.3 $ (3.1) $ (.7) $ (3.8) Savings deposits................. 0.6 (0.1) 0.5 (.8) .1 (.7) Time deposits.................... 22.3 (0.2) 22.1 (1.3) 1.2 (.1) ------ ----- ------ ------ ------ ------ Total interest on deposits.................. 23.2 (0.3) 22.9 (5.2) .6 (4.6) Advances from the Federal Home Loan Bank............................. 39.4 5.5 44.9 13.3 (1.0) 12.3 Securities sold under repurchase agreements....................... (10.0) (5.5) (15.5) (0.4) (8.2) (8.6) Other borrowings.................... 1.1 (0.5) 0.6 2.5 (.2) 2.3 ------ ----- ------ ------ ------ ------ Total interest expense...... $ 53.7 $(0.8) $ 52.9 $ 10.2 $ (8.8) $ 1.4 ====== ===== ====== ====== ====== ====== Net interest income (expense)....... $ 32.0 $(6.7) $ 25.3 $ 8.9 $ 1.6 $ 10.5 ====== ===== ====== ====== ====== ======
- --------------- (1) The change in interest income and expense due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. 9 11 The following table sets forth the carrying amount of mortgage-backed and investment securities as of the dates indicated: TYPES OF INVESTMENTS
AT YEAR END -------------------------------- 1997 1996 1995 -------- -------- -------- (IN MILLIONS) Held-to-Maturity: Mortgage-backed securities.................................. $1,768.3 $2,083.7 $2,412.8 Debt securities U.S. Government securities (including agencies)........... -- -- .3 Corporate securities...................................... -- -- -- Other..................................................... -- -- .1 -------- -------- -------- -- -- .4 -------- -------- -------- Available-for-Sale: Mortgage-backed securities.................................. 948.1 643.9 949.6 Debt securities Corporate bonds........................................... 3.0 3.0 1.4 Equity securities Federal Home Loan Bank Stock.............................. 85.7 52.6 57.7 Other..................................................... .5 .3 1.7 -------- -------- -------- 86.2 52.9 59.4 -------- -------- -------- $2,805.6 $2,783.5 $3,423.6 ======== ======== ========
The table below sets forth the maturities of mortgage-backed and investment securities as of year end 1997: MATURITY DISTRIBUTION OF MORTGAGE-BACKED AND INVESTMENT SECURITIES
MATURING ----------------------------------------------------------------- VARIABLE/NO WITHIN 1 YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS MATURITY TOTAL -------------- -------------- -------------- -------------- ---------------- CARRYING AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD VALUE ------ ----- ------ ----- ------ ----- ------ ----- -------- ----- -------- (DOLLARS IN MILLIONS) Held-to-Maturity: Mortgage-backed securities............... $ -- -- $ -- -- $ -- -- $ -- -- $1,768.3 5.61% $1,768.3 Available-for-Sale: Mortgage-backed securities............... -- -- -- -- -- -- -- -- 948.1 7.40% 948.1 Debt securities Corporate securities..... -- -- -- -- 2.0 6.34% 1.0 5.79% -- -- 3.0 Equity securities Federal Home Loan Bank stock.................. -- -- -- -- -- -- -- -- 85.7 6.00% 85.7 Other.................... -- -- -- -- -- -- -- -- .5 -- .5 ------ ------ ---- ---- -------- -------- -- -- -- -- -- -- -- 86.2 86.2 ------ ------ ---- ---- -------- -------- $ -- $ -- $2.0 $1.0 $2,802.6 $2,805.6 ====== ====== ==== ==== ======== ========
10 12 The following table shows the loan distribution for Financial Services: TYPES OF LOANS
AT YEAR END -------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN MILLIONS) Real estate mortgage................... $4,414.1 $4,198.5 $3,720.0 $3,137.5 $2,302.9 Construction and development (including residential)......................... 2,975.1 2,152.4 1,500.6 1,022.6 643.7 Commercial and business................ 1,253.0 658.8 406.3 229.0 80.7 Consumer and other..................... 590.2 467.2 416.0 366.0 404.1 -------- -------- -------- -------- -------- 9,232.4 7,476.9 6,042.9 4,755.1 3,431.4 Less: Unfunded portion of loans............ 2,709.7 2,002.8 1,211.8 1,027.7 614.0 Unearned discounts................... -- -- -- .6 3.0 Unamortized purchase discounts....... (21.3) (11.8) (1.8) (5.1) 8.9 Net deferred fees.................... 2.0 3.6 3.0 3.2 2.2 Allowance for loan losses............ 91.1 68.4 65.5 53.9 47.9 -------- -------- -------- -------- -------- 2,781.5 2,063.0 1,278.5 1,080.3 676.0 -------- -------- -------- -------- -------- $6,450.9 $5,413.9 $4,764.4 $3,674.8 $2,755.4 ======== ======== ======== ======== ========
The table below presents the maturity distribution of loans (excluding real estate mortgage and consumer loans) outstanding at year end 1997, based on scheduled repayments. The amounts due after one year, classified according to the sensitivity to changes in interest rates, are also provided. MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
MATURING ------------------------------------------- WITHIN 1 1 TO 5 AFTER 5 YEAR YEARS YEARS TOTAL -------- -------- ------- -------- (IN MILLIONS) Construction and development (including residential)............................. $1,790.1 $1,185.0 $ -- $2,975.1 Commercial and business.................... 577.1 542.9 133.0 1,253.0 -------- -------- ------ -------- $2,367.2 $1,727.9 $133.0 $4,228.1 ======== ======== ====== ======== Loans maturing after 1 year with: Variable interest rates.................. $1,704.9 $102.8 $1,807.7 ======== ====== ========
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 two percent of total loans during 1997, 1996, 1995, 1994, and 1993. The aggregate amounts and the interest income foregone on such loans, therefore, are immaterial and are not disclosed. 11 13 The following tables summarize activity in the allowance for loan losses and show the allocation of the allowance for loan losses by loan type: ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
AT YEAR END -------------------------------------------- 1997 1996 1995 1994 1993 ----- ----- ----- ----- ----- (DOLLARS IN MILLIONS) Balance at beginning of year.................... $68.4 $65.5 $53.9 $47.9 $20.8 Charge-offs: Real estate mortgages......................... (4.8) (5.8) (3.9) (4.4)(b) (.7) Construction and development.................. (.1) (.1) -- -- -- Commercial.................................... (.9) (2.9) (.7) (1.1) -- Consumer and other............................ (2.0) (4.4) (5.0) (4.7)(b) (1.8) ----- ----- ----- ----- ----- (7.8) (13.2) (9.6) (10.2) (2.5) Recoveries: Real estate mortgages......................... .9 2.1 1.1 .6 .2 Commercial.................................... -- -- .5 .1 -- Consumer and other............................ .9 .9 .8 1.4 .6 ----- ----- ----- ----- ----- 1.8 3.0 2.4 2.1 .8 ----- ----- ----- ----- ----- Net charge-offs....................... (6.0) (10.2) (7.2) (8.1)(b) (1.7) Additions charged to operations................. (1.7) 13.8 14.6 6.5 4.8 Additions related to bulk purchases of loans, net of adjustments............................ 30.4(a) (.7) 4.2 7.6 24.0(b) ----- ----- ----- ----- ----- Balance at end of year.......................... $91.1 $68.4 $65.5 $53.9 $47.9 ===== ===== ===== ===== ===== Ratio of net charge-offs during the year to average loans outstanding during the year..... .10% .20% .16% .27% .10% ===== ===== ===== ===== =====
- --------------- (a) Principally related to the loan portfolio from the acquisition of Stockton Savings Bank, F.S.B. (b) Principally related to the loan portfolio from the acquisition of American Federal Bank, F.S.B. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (DOLLARS IN MILLIONS)
AT YEAR END ------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 ---------------------- ---------------------- ---------------------- ---------------------- PERCENT OF PERCENT OF PERCENT OF PERCENT OF LOANS TO LOANS TO LOANS TO LOANS TO AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS --------- ---------- --------- ---------- --------- ---------- --------- ---------- Real estate mortgage........... $58.0 48% $59.6 56% $57.9 61% $46.1 66% Construction and development........ 25.1 32% 1.9 29% 1.7 25% 1.4 21% Commercial and business........... 4.1 14% 2.5 9% 1.0 7% 1.5 5% Consumer and other... 3.9 6% 4.4 6% 4.9 7% 4.9 8% ----- ---- ----- ---- ----- ---- ----- ---- $91.1 100% $68.4 100% $65.5 100% $53.9 100% ===== ==== ===== ==== ===== ==== ===== ==== AT YEAR END ---------------------- 1993 ---------------------- PERCENT OF LOANS TO AMOUNT OF TOTAL ALLOWANCE LOANS --------- ---------- Real estate mortgage........... $39.4 67% Construction and development........ 1.0 19% Commercial and business........... 1.1 2% Consumer and other... 6.4 12% ----- ---- $47.9 100% ===== ====
The amount charged to operations and the related balance in the allowance for loan losses are based on periodic evaluations of the loan portfolio by management. These evaluations consider several factors, including without limitation, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and current economic conditions. 12 14 Deposits. The average amount of deposits and the average rates paid on noninterest-bearing demand deposits, interest-bearing demand deposits, savings deposits, and time deposits are presented on the schedule of average balance sheets and analysis of net interest spread of the Financial Services Group on page 8 hereof. The amount of time deposits of $100,000 or more and related maturities at year end 1997, are disclosed in Note F to Financial Services Group Summarized Financial Statements on page 47 of the Company's 1997 Annual Report. Return on Equity and Assets. The following table shows operating and capital ratios of the Financial Services Group for each of the last three years: OPERATING AND CAPITAL RATIOS
YEAR END -------------------------- 1997 1996 1995 ------- ------- ------ Return on average assets................................ 1.04% .41%* .75% Return on average equity................................ 17.41% 6.43%* 11.79% Dividend payout ratio................................... 246.72% 128.96%* 70.66% Equity to assets ratio.................................. 5.97% 6.32% 6.35%
- --------------- * Includes SAIF assessment of $43.9 million. If the SAIF assessment is excluded from 1996, the operating and capital ratios for 1996 would have been .74%, 11.63%, and 70.48% for return on average assets, return on average equity, and dividend payout ratio, respectively. Short-term borrowings. The following table shows short-term borrowings outstanding for the Financial Services Group at the end of the reported period: SHORT TERM BORROWINGS (IN MILLIONS)
WEIGHTED WEIGHTED AVERAGE MAXIMUM AVERAGE AVERAGE INTEREST AMOUNT AMOUNT INTEREST BALANCE AT RATE AT OUTSTANDING OUTSTANDING RATE END OF END OF DURING THE DURING THE DURING THE PERIOD PERIOD PERIOD PERIOD PERIOD ---------- -------- ----------- ----------- ---------- 1997 Securities sold under agreements to repurchase............................ $ 270.0 5.9% $1,696.6 $1,297.2 5.2% Short-term FHLB advances................ $1,128.5 5.9% $1,128.5 $ 871.1 6.1% 1996 Securities sold under agreements to repurchase............................ $ 959.3 5.5% $1,992.4 $1,484.3 5.6% Short-term FHLB advances................ $ 977.6 5.5% $1,022.6 $ 559.9 5.0% 1995 Securities sold under agreements to repurchase............................ $1,573.7 5.8% $1,864.1 $1,490.3 6.2% Short-term FHLB advances................ $ 30.0 5.8% $ 50.0 $ 228.9 5.3%
- --------------- Note: Certain short-term FHLB advances and securities sold under agreements to repurchase generally mature within thirty days of the transaction date. Average borrowings during the year were calculated based on daily average. RAW MATERIALS The Company's main resource is timber, with approximately 2.2 million acres of timberland located in Texas, Louisiana, Alabama, and Georgia. In 1997, wood fiber required for the Company's paper and wood 13 15 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......................................... 58% Pine Pulpwood..................................... 63% Hardwood Pulpwood................................. 35%
The balance of the wood fiber required for these operations was purchased from numerous landowners and other lumber companies. In an effort to provide an alternative for a portion of its projected need for hardwood fiber, the Company operates a eucalyptus plantation in Mexico. The Company expects to begin receiving fiber from this project in approximately five years. 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 Newport, Indiana; Newark, California; and New Johnsonville, Tennessee, mills are solely corrugating medium mills. The principal raw material used by the Rome, Georgia, and Orange, Texas, mills is virgin fiber. The Ontario, California; Newark, California; Newport, Indiana; 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 1997, OCC represented approximately 44% 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 from its own quarry near Fletcher, Oklahoma, and from one outside source through a long-term purchase contract. At its gypsum wallboard plant in West Memphis, Arkansas, the Company also uses synthetic gypsum as a raw material. Synthetic gypsum is a by-product of coal-burning electrical power plants. The joint venture gypsum wallboard plant being built in Cumberland City, Tennessee, will use only synthetic gypsum in its operations. The Company has entered into a long-term supply agreement for synthetic gypsum produced at a TVA electrical plant located adjacent to the joint venture plant. Synthetic gypsum acquired pursuant to this agreement will supply all of the synthetic gypsum required by the joint venture plant and a portion of the requirements for 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 50 percent of its energy requirements at its mills in Rome, Georgia; Evadale, Texas; and Orange, Texas, during 1997. The Ontario, California, mill operates a cogeneration power plant that sells to an electric utility excess electricity generated. 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. 14 16 The natural gas needed to run the Company's natural gas fueled power boilers is acquired pursuant to multiple gas contracts that provide for the purchase of gas on an interruptible basis at favorable rates. EMPLOYEES At January 3, 1998, the Company and its subsidiaries had approximately 15,000 employees. Approximately 4,900 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(A) EMPLOYEES COVERED EXPIRATION DATES -------- ------------------ ----------------- ---------------- Bleached United Paperworkers 489 Hourly Production August 1, 2004 Paperboard Mill, International Union Employees, 193 Hourly Evadale, Texas ("UPIU"), Local 801, UPIU, Mechanical Maintenance Local 825, and Employees, and 70 International Brotherhood Electrical Maintenance of Electrical Workers Employees ("IBEW"), Local 390 Linerboard Mill, UPIU, Local 1398, and 242 Hourly Production July 31, 1999 Orange, Texas UPIU, Local 391 Employees and 102 Hourly Maintenance Employees Linerboard Mill, UPIU, Local 804, IBEW, 355 Hourly Production August 28, 2000 Rome, Georgia Local 613, United Employees, 43 Electrical Association of Journeymen Maintenance Employees, and & Apprentices of the 137 Hourly Maintenance Plumbing & Pipefitting Employees Industry of the U.S. and Canada, Local 766, and International Association of Machinists & Aerospace Workers, Local 414 Evansville, UPIU, Local 1046, UPIU, 103, 102, and 96 Hourly August 30, 2002 Indiana, Local 1737, and UPIU, Production Employees, Louisville, Local 114, respectively respectively Kentucky, and Middletown, Ohio, Box Plants ("Northern Multiple") Rome, Georgia, and UPIU Local 838 and UPIU 135 and 103 Hourly December 1, 2003 Orlando, Local 634, respectively Production Employees, Florida, Box respectively Plants ("Southern Multiple")
The Company has additional collective bargaining agreements with the employees of various of its other box plants, mills, and building products plants. These agreements each cover a relatively small number of employees and are negotiated on an individual basis at each such facility. The Company considers its relations with its employees to be good. ENVIRONMENTAL PROTECTION The operations conducted by the subsidiaries of the Company are subject to federal, state, and local provisions regulating the discharge of materials into the environment and otherwise related to the protection of the environment. Compliance with these provisions, primarily the Federal Clean Air Act, Clean Water Act, 15 17 Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"), 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 $16 million during 1997. 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 trend toward more stringent environmental regulation to continue for the foreseeable future. The trend in interpretation and application of existing regulations by regulatory authorities also appears to be toward increasing stringency particularly under RCRA with respect to certain solid wastes generated at kraft mills. Given these uncertainties, the Company currently estimates that capital expenditures for environmental purposes during the period 1998 through 2000 will average approximately $15 million each year. The estimated expenditures could be significantly higher if more stringent laws and regulations are implemented. On November 14, 1997, 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"). According to the EPA, the technology standards in the Cluster Rule will cut the industry's toxic air pollutant emissions by almost 60 percent from current levels and virtually eliminate all dioxin discharged from pulp, paper, and paperboard mills into rivers and other surface waters. The rule also provides incentives for individual mills to adopt technologies that will lead to further reductions in toxic pollutant discharges. The EPA estimates that the industry will need to invest approximately $1.8 billion in capital expenditures and approximately $277 million per year in operating expenditures to comply with the Cluster Rule. The initial compliance period is three years from the date these regulations are published in the Federal Register. The estimated expenditures of the Company that are disclosed above do not include expenditures that may be needed to comply with the Cluster Rule. Based upon its interpretation of the Cluster Rule as issued, the Company currently estimates that compliance with the rule may require modifications at several facilities. Some of these modifications can be included in modernization projects that will provide economic benefits to the Company. The extent of such benefits can increase these investments, but currently these expenditures are not expected to exceed $110 million over the next three years. RCRA establishes a regulatory program for the treatment, storage, transportation, and disposal of solid and hazardous wastes. Under RCRA, subsidiaries of the Company have prepared hazardous waste closure plans to address land disposal units containing hazardous wastes formerly managed at various facilities. These closure plans are in various states of implementation, with most sites simply awaiting state certification. The Company believes that the costs associated with these plans will not have a material impact on the earnings or competitive position of the Company. 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. 16 18 COMPETITION All of the industries in which the Company operates are highly competitive. The level of competition in a given product or market may be affected by the strength of the dollar and other market factors including geographic location, general economic conditions, and the operating efficiencies of competitors. Factors influencing the Company's competitive position vary depending on the characteristics of the products involved. The primary factors are product quality and performance, price, service, and product innovation. The corrugated packaging industry is highly competitive with almost 1,500 box plants in the United States. Box plants operated by Inland and its subsidiaries accounted for approximately 8.3 percent of total industry shipments during 1997. 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. Bleached paperboard produced by the Paper Group has a variety of ultimate uses and, therefore, serves diversified markets. The Company competes with larger paper producers with greater resources. 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 commodity building materials. Financial Services competes with commercial banks, savings and loan associations, mortgage bankers, and other lenders in its mortgage banking and consumer savings bank activities, and with real estate investment and management companies in its development activities. Mortgage banking, real estate development, and consumer savings banks are highly competitive businesses, and a number of entities with which the Company competes have greater resources. EXECUTIVE OFFICERS Set forth below are the names, ages, and titles of the persons who serve as executive officers of the Company:
NAME AGE OFFICE ---- --- ------ Clifford J. Grum...... 63 Chairman of the Board and Chief Executive Officer Kenneth M. Jastrow, II.................. 50 President, Chief Operating Officer, and Chief Financial Officer William B. Howes...... 60 Executive Vice President Harold C. Maxwell..... 57 Group Vice President Ted A. Owens.......... 59 Group Vice President Jack C. Sweeny........ 51 Group Vice President Joseph E. Turk........ 54 Group Vice President David H. Dolben....... 62 Vice President and Chief Accounting Officer M. Richard Warner..... 46 Vice President, General Counsel, and Secretary David W. Turpin....... 47 Treasurer
Clifford J. Grum became Chairman of the Board, Chief Executive Officer, and a Director of the Company in February 1991 after serving as President, Chief Executive Officer, and a Director since October 1983. He also serves as a Director of Temple-Inland FPC, a Director of Inland, Chairman of the Board of Guaranty, and a Director of Financial Services. Kenneth M. Jastrow, II was named President, Chief Operating Officer, and a Director of the Company in February 1998, and continues to serve as the Chief Financial Officer of the Company, a position he has held since November 1991. Before being named President and Chief Operating Officer, Mr. Jastrow was a Group Vice President of the Company since 1995. He also serves as Chairman of the Board and Chief Executive Officer of Financial Services, President and Chief Executive Officer of Guaranty, and Chairman of the Board and Chief Executive Officer of Temple-Inland Mortgage. William B. Howes, who was named Executive Vice President and a Director in August 1996, became a Group Vice President of the Company and the Chairman of the Board and Chief Executive Officer of Inland in July 1993 after serving as the President and Chief Operating Officer of Inland since April 1992. From August 1990 until April 1992, Mr. Howes was the Executive Vice President of Inland. Before joining Inland in 17 19 1990, Mr. Howes was an employee of Union Camp Corporation for 28 years, serving most recently as Senior Vice President. Harold C. Maxwell became Group Vice President of the Company in May 1989. In March 1998, Mr. Maxwell was named Chairman of the Board, President, and Chief Executive Officer of Temple-Inland FPC after having served as Group Vice President -- Building Products of Temple-Inland FPC since November 1982. Ted A. Owens became a Group Vice President of the Company in August 1996. He also serves as Executive Vice President of Inland. Mr. Owens has been employed by Inland since 1976. During that time he has served in various positions, including Group Vice President -- Containerboard, and Vice President Sales, Administration, and Engineering. Jack C. Sweeny became a Group Vice President of the Company in May 1996. He also serves as Group Vice President -- Forests Division of Temple-Inland FPC. From November 1982 through May 1996, Mr. Sweeny served as Vice President -- Operations of the Building Products Division of Temple-Inland FPC. Joseph E. Turk became a Group Vice President of the Company in August 1996. He also serves as Executive Vice President of Inland. Mr. Turk has been employed by Inland since 1967 and has served in various capacities including Group Vice President -- Container Division and Division Vice President Manufacturing Services. David H. Dolben became Vice President of the Company in May 1987. Mr. Dolben also serves as Vice President, Treasurer, and a Director of Temple-Inland FPC and a Director of Inland. M. Richard Warner became Vice President, General Counsel and Secretary of the Company in June 1994. From 1991 to 1994, Mr. Warner was an attorney in private practice in Lufkin, Texas. Mr. Warner served as Treasurer of the Company from January 1986 to 1990 and as Vice Chairman of Guaranty from 1990 to 1991. 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. Mr. Turpin was first employed by the Company in December 1990 as the Senior Vice President and Treasurer of Lumbermen's Investment Corporation. 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 plants, mills, and manufacturing facilities throughout the United States, three box plants in Mexico, and box plants in Argentina, Chile, and Puerto Rico. Additional descriptions as of year-end of selected properties are set forth in the following charts: CONTAINERBOARD MILLS
RATED NO. OF ANNUAL 1997 LOCATION PRODUCT MACHINES CAPACITY PRODUCTION -------- ------- -------- -------- ---------- (IN TONS) Ontario, California............................. Linerboard 1 300,000 288,000 Rome, Georgia................................... Linerboard 2 835,000 849,000 Orange, Texas................................... Linerboard 2 630,000 608,000 Maysville, Kentucky............................. Linerboard 1 390,000 397,000 Newark, California(1)........................... Medium 2 70,000 73,000 Newport, Indiana................................ Medium 1 280,000 284,000 New Johnsonville, Tennessee..................... Medium 1 265,000 262,000
- --------------- (1) In February 1998, the Company announced its intention to close this mill during the second quarter of 1998. 18 20 BLEACHED PAPERBOARD MILL
RATED NO. OF ANNUAL 1997 LOCATION PRODUCT MIX MACHINES CAPACITY PRODUCTION -------- ----------- -------- -------- ---------- (IN TONS) Evadale, Texas......................... Bleached Pulp .6% 4 3,734 Food Service 35.9% 243,652 Packaging 38.4% 260,568 Office Supplies 15.3% 103,736 Specialties 7.0% 47,363 Nodular Pulp 2.8% 18,750 ----- ------- ------- 100% 4 690,000* 677,803 ===== =======
- --------------- * The production capacity may vary to some degree depending on product mix. Due to market conditions for the grade it was designed to produce, the Company decided in 1993 to no longer operate a cylinder machine at the mill. 19 21 CORRUGATED CONTAINER PLANTS*
DATE CORRUGATOR ACQUIRED OR LOCATION SIZE CONSTRUCTED -------- ---------- ----------- Fort Smith, Arkansas........................................ 87" 1978 Fort Smith, Arkansas(1)***.................................. None 1996 Bell, California............................................ 97" 1972 El Centro, California(1).................................... 87" 1990 Newark, California (2)...................................... 87" 1974 Ontario, California......................................... 87" 1985 Santa Fe Springs, California................................ 98" 1972 Tracy, California**......................................... 87" 1986 Wheat Ridge, Colorado....................................... 87" 1977 Orlando, Florida............................................ 98" 1955 Rome, Georgia**............................................. 87" & 98" 1955 Chicago, Illinois........................................... 87" 1957 Crawfordsville, Indiana..................................... 98" 1971 Evansville, Indiana......................................... 98" 1958 Garden City, Kansas......................................... 96" 1981 Kansas City, Kansas......................................... 87" 1981 Louisville, Kentucky........................................ 87" 1958 Minden, Louisiana........................................... 98" 1986 Minneapolis, Minnesota...................................... 87" 1986 Hattiesburg, Mississippi.................................... 87" 1965 St. Louis, Missouri......................................... 87" 1963 Spotswood, New Jersey....................................... 87" 1963 Middletown, Ohio............................................ 98" 1930 Streetsboro, Ohio........................................... 98" 1997 Biglerville, Pennsylvania................................... 98" 1955 Hazleton, Pennsylvania...................................... 98" 1976 Vega Alta, Puerto Rico...................................... 87" 1977 Lexington, South Carolina................................... 98" 1980 Rock Hill, South Carolina................................... 87" 1972 Elizabethton, Tennessee..................................... 98" 1982 Elizabethton, Tennessee(1)***............................... None 1990 Dallas, Texas............................................... 98" 1962 Edinburg, Texas............................................. 87" 1989 Petersburg, Virginia........................................ 87" 1991 San Jose Iturbide, Mexico................................... 87" 1994 Monterrey, Mexico........................................... 87" 1994 Los Mochis, Sinaloa, Mexico................................. 80" 1997 Buenos Aires, Argentina..................................... 98" 1994 Santiago, Chile............................................. 87" 1995
- --------------- * The annual capacity of Inland's box plants is not given because such annual capacity is a function of the product mix, customer requirements and the type of converting equipment installed and operating at each plant, each of which varies from time to time. ** The Tracy, California and Rome, Georgia plants each contain two corrugators. *** Sheet plants. (1) Leased facilities. (2) In February 1998, the Company announced its intention to close this box plant during the second quarter of 1998. 20 22 Inland owns specialty converting plants in Santa Fe Springs, California; Harrington, Delaware; Indianapolis, Indiana; and Leominster, Massachusetts, and leases specialty converting plants in Buena Park, California; Santa Fe Springs, California; Ontario, California; and Rural Hall, North Carolina. Additionally, Inland owns a graphics resource center in Indianapolis, Indiana, that has a 100" preprint press and a tape manufacturing facility in Milwaukee, Wisconsin, and also leases 50 warehouses located throughout much of the United States. BUILDING PRODUCTS
RATED ANNUAL DESCRIPTION LOCATION CAPACITY ----------- -------- --------------- (IN MILLIONS OF BOARD FEET) Lumber........................................... Diboll, Texas 150* Lumber........................................... Pineland, Texas 95 Lumber........................................... Buna, Texas 170 Lumber........................................... Rome, Georgia 115 Lumber........................................... DeQuincy, Louisiana 145
- --------------- * Includes separate finger jointing capacity of 10 million board feet.
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 140 Particleboard................................ Hope, Arkansas 180 Plywood...................................... Pineland, Texas 265 Gypsum Wallboard............................. West Memphis, Arkansas 400 Gypsum Wallboard............................. Fletcher, Oklahoma 466 Gypsum Wallboard*............................ McQueeney, Texas 300
- --------------- * This facility is owned by a joint venture in which a subsidiary of the Company has a 50 percent interest. TIMBER AND TIMBERLANDS* (IN ACRES) Pine Plantations......................................... 1,510,779 Natural Pine............................................. 323,738 Hardwood................................................. 215,826 Special Use/Non-Forested................................. 107,913 --------- TOTAL.................................................... 2,158,256 =========
- --------------- * Includes approximately 243,000 acres of leased land. In the opinion of management, the Company's plants, mills, and manufacturing facilities are suitable for their purpose and adequate for the Company's business. Through its subsidiaries, the Company owns certain of the office buildings in which various of its corporate offices are headquartered. This includes approximately 76,000 square feet of space in Diboll, Texas, approximately 130,000 square feet in Indianapolis, Indiana, and 270,000 square feet of office space in Austin, 21 23 Texas. Construction is currently in progress for a 175,000 square foot addition to the Company's office complex in Austin, Texas. The Company also owns 381,000 mineral acres in Texas and Louisiana. Revenue from lease and production activities on these acres totaled $10.8 million in 1997. Additionally, the Company owns 395,830 mineral acres in Alabama and Georgia, which produced no lease or production revenue in 1997. At year end 1997 property and equipment having a net book value of approximately $48.4 million were subject to liens in connection with $71.6 million of debt. ITEM 3. LEGAL PROCEEDINGS General: During the year, the Company disclosed that a former employee of the Company ("Employee") filed a wrongful termination lawsuit against the Company on August 4, 1995, which is currently pending in state district court in Angelina County, Texas. Employee alleges that his employment was terminated for refusing to participate in alleged illegal activity consisting of underpayment of the Company's federal income taxes and filing with the Securities and Exchange Commission (the "Commission") financial reports that were misleading because of the understatement of income. Although the Company does not consider this litigation to be material, the Company has publicly denied the allegations made by Employee in response to media attention given to the litigation. The Company remains confident that upon the ultimate trial of the issues raised, the allegations will be found to have no merit or grounds whatsoever. As a result of the allegations made by Employee, the Commission began a non-public investigation into the allegations. The Company has provided information to the Commission in response to a subpoena issued in this investigation and will continue to cooperate with the Commission in resolving this matter. The Company and its subsidiaries are involved in various other legal proceedings that have arisen from time to time in the ordinary course of business. In the opinion of the Company's management, such proceedings will not be material to the business or financial condition of the Company and its subsidiaries. Environmental: The facilities of the Company are periodically inspected by environmental authorities, with whom the Company must file periodic reports on the discharge of pollutants. Occasionally, one or more of these facilities 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. The Company, however, has noticed an increase in the number and dollar amount of fines and penalties imposed by environmental authorities. No assurance can be given, therefore, that any fines levied against the Company in the future for any such violations will not be material. Subsidiaries of the Company are involved in regulatory enforcement actions concerning the management of solid wastes at various facilities. These proceedings are representative of a trend the Company has observed toward more stringent application of RCRA regulations to solid wastes generated at kraft mills. In July 1993, a subsidiary's facility in Rome, Georgia, experienced a significant upset in its wastewater treatment process. This upset caused the Georgia environmental agency to order a temporary cessation of production. The Company's subsidiary has resolved its potential liability to the State of Georgia by paying a $100,000 monetary penalty and agreeing to perform certain work, but remains exposed to potential claims of the U.S. EPA and private citizens. Management believes, however, that these matters will not result in liability to an extent that would have a material adverse effect on the business or financial condition of the Company. 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 numerous proceedings relating to the cleanup of hazardous waste sites under CERCLA and similar state laws. The subsidiaries have 22 24 conducted investigations of the sites and in certain instances believe that there is no basis for liability and have so informed the governmental entities. The internal investigations of the remaining sites reveal that the portion of the remediation costs for these sites to be allocated to the Company should be relatively small and will have no material impact on the Company. There can be no assurance that subsidiaries of the Company will not be named as potentially responsible parties at additional Superfund sites in the future or that the costs associated with the remediation of those sites would not be material. All litigation has an element of uncertainty and the final outcome of any legal proceeding cannot be predicted with any degree of certainty. With these limitations in mind, the Company presently believes that any ultimate liability from the legal proceedings discussed herein would not have a material adverse effect on the business or financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matter to a vote of its stockholders 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 information concerning market prices of the Company's Common Stock required by this item is incorporated by reference from page 34 of the Company's 1997 Annual Report to Shareholders furnished to the Securities and Exchange Commission pursuant to Rule 14a-3(b). Stockholders: The Company's stock transfer records indicated that as of March 4, 1998, there were approximately 7,240 holders of record of the Common Stock. Dividend Policy: On February 6, 1998, the Board of Directors declared a quarterly dividend on the Common Stock of $.32 per share payable on March 13, 1998, to stockholders of record on February 27, 1998. During the first two quarters of 1995, the Company paid a quarterly dividend of $.27 per share. The quarterly dividend was increased to $.30 per share beginning with the dividend payable September 15, 1995, and was increased again to $.32 per share beginning with the dividend payable 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. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated by reference from page 34 of the Company's 1997 Annual Report to Shareholders furnished to the Securities and Exchange Commission pursuant to Rule 14a-3(b). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated by reference from pages 25 through 33 of the Company's 1997 Annual Report to Shareholders furnished to the Securities and Exchange Commission pursuant to Rule 14a-3(b). Management's Discussion and Analysis of Financial Condition and Results of Operations that is incorporated by reference into this item and the Market Risk Disclosures set forth in item 7A contain forward-looking statements that involve risks and uncertainties. The actual results achieved by Temple-Inland 23 25 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. ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk: The Company is subject to interest rate risk from the utilization of financial instruments such as term debt and other borrowings, as well as the lending and deposit gathering activities of the Financial Services Group. Historically, the exposure of income to interest rate risk has been maintained at a relatively moderate level due to the high correlation between changes in the rates earned on the group's adjustable rate assets (which comprise over 90% of earning assets) and changes in the aggregate cost of the group's funding sources. The Company has many options to mitigate the earnings impact of a significant change in interest rates. Potential options include selling assets, executing hedges, and modifying the maturity or repricing characteristics of assets and/or liabilities. The Company routinely utilizes a simulation model to measure the sensitivity of income to movements in interest rates. The model incorporates the maturity and repricing characteristics of interest rate sensitive assets and liabilities, as well as assumptions regarding the impact of changing interest rates on the prepayment rates of certain assets. 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:
CHANGE IN INCREASE/(DECREASE) IN INTEREST RATES INCOME BEFORE TAXES - -------------- ---------------------- (IN MILLIONS) +2% $ 4 +1% $ 9 0 $ 0 -1% $(12) -2% $(14)
Additionally, the fair value (estimated at $270 million as of the end of 1997) of the Financial Services Group's mortgage servicing rights is also affected by changes in interest rates. The Company estimates that a one percentage point decrease in interest rates from current levels would decrease the fair value of the mortgage servicing rights by approximately $40 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: The Company has no financial instruments subject to commodity price risks. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements of the Company and its subsidiaries required to be included in this Item 8 are set forth in Item 14 of this Report. 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. 24 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated herein by reference from pages 5 through 8 of 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 pages 10 through 16 of 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 pages 2 through 4 of the Company's Definitive Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from page 8 of 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:
PAGE ITEM NUMBER ---- ------ Temple-Inland Inc. and Subsidiaries Report of Independent Auditors*............................. 61 Consolidated Statements of Income -- for the years 1997, 1996, and 1995*........................................... 50 Consolidating Balance Sheets at year end 1997 and 1996*..... 52-53 Consolidated Statements of Shareholders' Equity -- for the years 1997, 1996, and 1995*............................... 54 Consolidated Statements of Cash Flows -- for the years 1997, 1996, and 1995*........................................... 51 Notes to Consolidated Financial Statements*................. 55-60
- --------------- * Incorporated herein by reference from the Company's Annual Report to Shareholders for the fiscal year ended January 3, 1998, and filed for purposes of those portions so incorporated as Exhibit 13. Page numbers refer to page numbers in the Company's 1997 Annual Report to Shareholders. 25 27 2. FINANCIAL STATEMENT SCHEDULE: The following Financial Statement Schedule of the Company required by Regulation S-X and excluded from the Annual Report to Shareholders for the year ended January 3, 1998, is filed herewith at the page indicated.
PAGE ITEM NUMBER ---- ------ Temple-Inland Inc. and Subsidiaries Schedule II -- Valuation and Qualifying Accounts.......... 32
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are inapplicable and, therefore, have been omitted. 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(18) 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(12), and as amended by Third Supplemental Indenture dated as of May 9, 1991(13) 4.03 -- Form of Specimen Medium-Term Note of the Company(5) 4.04 -- Form of Fixed-rate Medium Term Note, Series B, of the Company(12) 4.05 -- Form of Floating-rate Medium Term Note, Series B, of the Company(12) 4.06 -- Form of 9% Note due May 1, 2001, of the Company(15) 4.07 -- Form of Fixed-rate Medium Term Note, Series D, of the Company(14) 4.08 -- Form of Floating-rate Medium Term Note, Series D, of the Company(14) 4.09 -- Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, dated February 16, 1989(6) 4.10 -- Rights Agreement, dated February 3, 1989, between the Company and NCNB Texas National Bank, Dallas, Texas, as Rights Agent(7) 4.11 -- Form of 7.25% Note due September 15, 2004, of the Company(16) 4.12 -- Form of 8.25% Debenture due September 15, 2022, of the Company(16) 10.01* -- 1988 Stock Option Plan for Key Employees and Directors of Temple-Inland Inc. and its Subsidiaries(8) 10.02* -- Form of Incentive Option Agreement under the 1988 Stock Option Plan(8) 10.03* -- Form of Nonqualified Option Agreement under the 1988 Stock Option Plan(8) 10.04* -- Temple-Inland Inc. Incentive Stock Plan(1), as amended May 6, 1988(9), as amended February 7, 1992(18) 10.05* -- Form of Incentive Shares Agreement(10) 10.06* -- 1988 Performance Unit Plan for Key Employees of Temple-Inland Inc. and its Subsidiaries(9), as amended February 4, 1994(20) 10.07* -- Form of Performance Unit Rights Agreement under the Performance Unit Plan(6)
26 28
EXHIBIT NUMBER EXHIBIT ------- ------- 10.08 -- Assistance Agreement dated September 30, 1988, among the Federal Savings and Loan Insurance Corporation; Guaranty Federal Savings Bank, Dallas, Texas; Guaranty Holdings Inc. I; Guaranty Holdings Inc. II; Temple-Inland Inc.; Mason Best Company; and Trammell Crow Ventures 3, Ltd.(11) 10.09* -- Temple-Inland Inc. 1993 Stock Option Plan(17) 10.10* -- Temple-Inland Inc. 1993 Restricted Stock Plan(17) 10.11* -- Temple-Inland Inc. 1993 Performance Unit Plan(17), as amended February 4, 1994(20) 10.12 -- Stock Purchase Agreement and Agreement and Plan of Reorganization by and among Guaranty, Guaranty Holdings Inc. I ("GHI"), Lone Star Technologies, Inc. ("LST"), and LSST Financial Services Corporation ("LSST Financial"), dated as of February 16, 1993(19) 10.13 -- First Amendment to Stock Purchase agreement and Agreement and Plan of Reorganization by and among Guaranty, GHI, LST and LSST Financial, dated as of April 2, 1993(19) 10.14 -- Second Amendment to Stock Purchase Agreement and Agreement and Plan of Reorganization by and among Guaranty, GHI, LST and LSST Financial, dated as of August 31, 1993(19) 10.15 -- Third Amendment to Stock Purchase Agreement and Agreement and Plan of Reorganization by and among Guaranty, GHI, LST and LSST Financial, dated as of September 30, 1993(19) 10.16 -- Holdback Escrow Agreement by and among LST, Guaranty, and Bank One, Texas, N.A. dated as of November 12, 1993(19) 10.17 -- Termination Agreement by and among Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund, Guaranty Federal Bank, F.S.B., Guaranty Holdings Inc. I, and Temple-Inland Inc., dated as of October 31, 1995(21) 10.18 -- GFB Tax Agreement by and among Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund, Guaranty Federal Bank, F.S.B., Guaranty Holdings Inc. I, and Temple-Inland Inc., dated as of October 31, 1995(21) 10.19 -- Termination Agreement by and among Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund, Guaranty Federal Bank, F.S.B., the surviving institution resulting from the merger of American Federal Bank, F.S.B. with and into Guaranty, which subsequently became the successor-in-interest to LSST Financial Services Corporation, Guaranty Holdings Inc. I, and Temple-Inland Inc., dated as of October 31, 1995(21) 10.20 -- AFB Tax Agreement by and among Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund, Guaranty Federal Bank, F.S.B., the surviving institution resulting from the merger of American Federal Bank, F.S.B. with and into Guaranty, which subsequently became the successor-in-interest to LSST Financial Services Corporation, Guaranty Holdings Inc. I, and Temple-Inland Inc., dated as of October 31, 1995(21) 10.21 -- Agreement and Plan of Merger by and among Temple-Inland Inc., California Financial Holding Company, Guaranty Federal Bank, F.S.B., and Stockton Savings Bank, F.S.B., dated as of December 8, 1996(22) 10.22* -- Temple-Inland Inc. 1997 Stock Option Plan(23) 10.23* -- Temple-Inland Inc. 1997 Restricted Stock Plan(23)
27 29
EXHIBIT NUMBER EXHIBIT ------- ------- 11 -- Statement re: Computation of Per Share Earnings for the three years ended January 3, 1998(24) 13 -- Annual Report to Shareholders for the year ended January 3, 1998. Such Report is not deemed to be filed with the Commission as part of this Annual Report on Form 10-K, except for the portions thereof expressly incorporated by reference.(24) 21 -- Subsidiaries of the Company(24) 23 -- Consent of Ernst & Young LLP(24) 27.1 -- Financial Data Schedules(24) 27.2 -- Restated 1995 and 1996 Annual Financial Data Schedules(24) 27.3 -- Restated 1997 Interim Financial Data Schedules(24) 27.4 -- Restated 1996 Interim Financial Data Schedules(24)
- --------------- * 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-1 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 Form 8-K filed with the Commission on February 16, 1989. (8) Incorporated by reference to Registration Statement No. 33-23132 on Form S-8 filed by the Company with the Commission. (9) Incorporated by reference to the Company's Definitive Proxy Statement filed with the Commission on March 18, 1988. (10) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1983. (11) Incorporated by reference to the Company's Form 8-K filed with the Commission on October 14, 1988. (12) Incorporated by reference to the Company's Form 8-K filed with the Commission on December 27, 1990. (13) Incorporated by reference to Registration Statement No. 33-40003 on Form S-3 filed by the Company with the Commission. (14) Incorporated by reference to Registration Statement No. 33-43978 on Form S-3 filed by the Company with the Commission. (15) Incorporated by reference to the Company's Form 8-K filed with the Commission on May 2, 1991. 28 30 (16) Incorporated by reference to Registration Statement No. 33-50880 on Form S-3 filed by the Company with the Commission. (17) 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. (18) Incorporated by reference to the Company's Form 10-K for the year ended January 2, 1993. (19) Incorporated by reference to the Company's Form 8-K filed with the Commission on November 24, 1993. (20) Incorporated by reference to the Company's Form 10-K for the year ended January 1, 1994. (21) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995. (22) Incorporated by reference to Registration Statement on Form S-4 (No. 333-21937) filed by the Company with the Commission. (23) 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. (24) Filed herewith. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter of 1997. 29 31 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 report to be signed on its behalf by the undersigned thereunto authorized, on March 30, 1998. TEMPLE-INLAND INC. (Registrant) By: /s/ CLIFFORD J. GRUM ---------------------------------- Clifford J. Grum, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, 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/ CLIFFORD J. GRUM Director, Chairman of the March 30, 1998 - ----------------------------------------------------- Board, Chief Executive Clifford J. Grum Officer /s/ KENNETH M. JASTROW, II Director, President, Chief March 30, 1998 - ----------------------------------------------------- Operating Officer, and Kenneth M. Jastrow, II Chief Financial Officer /s/ DAVID H. DOLBEN Vice President and Chief March 30, 1998 - ----------------------------------------------------- Accounting Officer David H. Dolben /s/ PAUL M. ANDERSON Director March 30, 1998 - ----------------------------------------------------- Paul M. Anderson /s/ ROBERT CIZIK Director March 30, 1998 - ----------------------------------------------------- Robert Cizik /s/ ANTHONY M. FRANK Director March 30, 1998 - ----------------------------------------------------- Anthony M. Frank /s/ WILLIAM B. HOWES Director March 30, 1998 - ----------------------------------------------------- William B. Howes /s/ BOBBY R. INMAN Director March 30, 1998 - ----------------------------------------------------- Bobby R. Inman /s/ HERBERT A. SKLENAR Director March 30, 1998 - ----------------------------------------------------- Herbert A. Sklenar /s/ WALTER P. STERN Director March 30, 1998 - ----------------------------------------------------- Walter P. Stern /s/ ARTHUR TEMPLE III Director March 30, 1998 - ----------------------------------------------------- Arthur Temple III /s/ CHARLOTTE TEMPLE Director March 30, 1998 - ----------------------------------------------------- Charlotte Temple /s/ LARRY E. TEMPLE Director March 30, 1998 - ----------------------------------------------------- Larry E. Temple
30 32 REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE We have audited the consolidated financial statements of Temple-Inland Inc. as of January 3, 1998 and December 28, 1996, and for each of the three years in the period ended January 3, 1998, and have issued our report thereon dated January 30, 1998 which is incorporated by reference in this Annual Report (Form 10-K) from the 1997 Annual Report to Shareholders of Temple-Inland Inc. Our audits also included the financial statement schedule listed in Item 14(a) of this Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Houston, Texas January 30, 1998 31 33 SCHEDULE II TEMPLE-INLAND INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (IN MILLIONS)
CHARGED BALANCE AT CHARGED TO TO OTHER BALANCE BEGINNING OF COSTS AND ACCOUNTS -- DEDUCTIONS -- AT END PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD ------------ ---------- ----------- ------------- --------- For the year 1997: Deducted from accounts receivable: Allowance for doubtful accounts.................... $ 9.4 $ 6.8 $-- $6.8 (A) $ 9.4 Reserve for discounts and allowances.................. 1.4 -- 7.8 (B) 7.7 (C) 1.5 Allowance for loan losses..... 68.4 (1.7) 30.4 (D) 6.0 (A) 91.1 Allowance for unrealized losses on available-for-sale securities.................. 12.2 (2.5) (4.6) (E) -- 5.1 Allowance for unrealized losses on mortgage loans held for sale............... -- 0.4 -- -- 0.4 ----- ----- ----- ----- ------ Totals................... $91.4 $ 3.0 $33.6 $20.5 $107.5 ===== ===== ===== ===== ====== For the year 1996: Deducted from accounts receivable: Allowance for doubtful accounts.................... $ 8.3 $ 3.1 $-- $2.0 (A) $ 9.4 Reserve for discounts and allowances.................. 1.5 -- 7.0 (B) 7.1 (C) 1.4 Allowance for loan losses..... 65.5 13.8 -- 10.9 (A) 68.4 Allowance for unrealized losses on available-for-sale securities.................. (1.7) -- 13.9 (E) -- 12.2 Allowance for unrealized losses on mortgage loans held for sale............... 0.3 -- -- 0.3 (A) -- ----- ----- ----- ----- ------ Totals................... $73.9 $16.9 $20.9 $20.3 $ 91.4 ===== ===== ===== ===== ====== For the year 1995: Deducted from accounts receivable: Allowance for doubtful accounts.................... $ 8.4 $ 1.9 $-- $2.0 (A) $ 8.3 Reserve for discounts and allowances.................. 0.7 -- 7.9 (B) 7.1 (C) 1.5 Allowance for loan losses..... 53.9 14.6 4.2 (D) 7.2 (A) 65.5 Allowance for unrealized losses on available-for-sale securities.................. 0.7 (0.7) (1.7)(E) -- (1.7) Allowance for unrealized losses on mortgage loans held for sale............... 0.8 -- -- 0.5 (A) 0.3 ----- ----- ----- ----- ------ Totals................... $64.5 $15.8 $10.4 $16.8 $ 73.9 ===== ===== ===== ===== ======
- --------------- (A) Uncollectible accounts written off, net of recoveries. (B) Reduction of revenues for customer discounts. (C) Customer discounts taken. (D) Additions related to bulk purchases of loans. (E) Unrealized gains/losses. 32 34 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT ------- ------- 11 -- Statement re: Computation of Per Share Earnings for the three years ended January 3, 1998 13 -- Annual Report to Shareholders for the year ended January 3, 1998. Such Report is not deemed to be filed with the Commission as part of this Annual Report on Form 10-K, except for the portions thereof expressly incorporated by reference. 21 -- Subsidiaries of the Company 23 -- Consent of Ernst & Young LLP 27.1 -- Financial Data Schedules 27.2 -- Restated 1995 and 1996 Annual Financial Data Schedules (24) 27.3 -- Restated 1997 Interim Financial Data Schedules 27.4 -- Restated 1996 Interim Financial Data Schedules
EX-11 2 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT (11) TEMPLE-INLAND INC. AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (IN MILLIONS EXCEPT FOR PER SHARE DATA)
YEAR ENDED ------------------------- 1997 1996 1995 ----- ------ ------ Basic Weighted average shares outstanding......................... 56.0 55.5 56.0 ===== ====== ====== Net income.................................................. $50.8 $132.8 $281.0 ===== ====== ====== Earnings per share.......................................... $0.91 $ 2.39 $ 5.02 ===== ====== ====== Diluted Weighted average shares outstanding......................... 56.0 55.5 56.0 Dilutive effect of stock options............................ 0.2 0.1 0.1 ----- ------ ------ Total weighted average shares outstanding................... 56.2 55.6 56.1 ===== ====== ====== Net income.................................................. $50.8 $132.8 $281.0 ===== ====== ====== Earnings per share.......................................... $0.90 $ 2.39 $ 5.01 ===== ====== ======
EX-13 3 ANNUAL REPORT TO SECURITY HOLDERS 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations and Financial Condition Results of operations, including information regarding the principal business segments, are shown below. BUSINESS SEGMENTS
For the year 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 - -------------------------------------------------------------------------------------------------------------------------- (in millions) REVENUES Paper $ 2,063 $2,082 $2,198 $1,740 $1,572 $ 1,610 $1,519 $1,517 $1,506 $1,429 Building products 617 563 533 575 497 409 311 305 320 312 Other activities -- -- -- 20 58 77 68 70 68 33 - -------------------------------------------------------------------------------------------------------------------------- Manufacturing net sales 2,680 2,645 2,731 2,335 2,127 2,096 1,898 1,892 1,894 1,774 Financial services 945 815 764 632 635 638 609 509(b) 49 40 - -------------------------------------------------------------------------------------------------------------------------- Total revenues $ 3,625 $3,460 $3,495 $2,967 $2,762 $ 2,734 $2,507 $2,401 $1,943 $1,814 ========================================================================================================================== INCOME BEFORE TAXES Paper $ (39) $ 113 $ 357 $ 74 $ 6 $ 135 $ 156 $ 250 $ 323 $ 304 Building products 131 102 67 139 102 40 5 9 24 25 Other activities -- -- -- 1 (2) (2) 1 (2) (1) 1 - -------------------------------------------------------------------------------------------------------------------------- Operating profit 92 215 424 214 106 173 162 257 346 330 Financial services 132 63(a) 98 56 68 64 54 52(b) (2) -- - -------------------------------------------------------------------------------------------------------------------------- 224 278 522 270 174 237 216 309 344 330 Corporate expense (25) (17) (22) (14) (11) (15) (16) (21) (13) (20) Parent Company interest - net (110) (110) (73) (67) (69) (48) (38) (26) (26) (23) Other income 6 5 4 4 2 3 5 7 7 17 - -------------------------------------------------------------------------------------------------------------------------- Income before taxes $ 95 $ 156 $ 431 $ 193 $ 96 $ 177 $ 167 $ 269 $ 312 $ 304 ==========================================================================================================================
(a) Includes a one-time assessment of $44 million to recapitalize the Savings Association Insurance Fund (SAIF). (b) Includes operating results from the consolidation of Guaranty Federal Bank, F.S.B., beginning January 1, 1990. 25 2 PAPER The Paper Group is composed of two units: corrugated packaging and bleached paperboard. The following table provides information on the operating earnings of this group.
For the year(*) 1997 1996 1995 - ------------------------------------------------------------------------------ (in millions) Corrugated packaging $ (11.0) $ 165.6 $ 386.3 Bleached paperboard 15.3 (8.2) 24.7 Group administration (43.3) (44.4) (54.4) - ------------------------------------------------------------------------------ Operating Earnings $ (39.0) $ 113.0 $ 356.6 ==============================================================================
(*) Food Service operating earnings reclassified to corrugated packaging from bleached paperboard. CORRUGATED PACKAGING The corrugated packaging operation manufactures linerboard and corrugating medium at seven paper mills and converts it into corrugated packaging at 39 box plants located throughout the United States, Puerto Rico, Mexico and South America. In addition, it operates nine specialty converting plants. Operation of the Erie, Pennsylvania, box plant was discontinued in the second half of 1997. During 1997, two state-of-the-art corrugated packaging plants began operations--one in Sinaloa, Mexico; the other in Streetsboro, Ohio. Before administrative costs, the corrugated packaging operation lost $11.0 million in 1997, compared with $165.6 million earned in 1996. Revenues for this operation decreased 4 percent in 1997, compared with 1996, as average product prices continued to decline from 1996 levels. Revenues for 1996 were down 8 percent, compared with 1995. Increased sales volumes in both 1997 and 1996 were able to offset some of the effect of significantly lower product prices. The weak demand for corrugated packaging that developed in late 1995 and additional industry capacity completed in 1996 resulted in unstable market conditions throughout 1996. As a result, box prices declined by 19 percent on average in 1996. Although demand improved in the second half of 1996, markets were unable to stabilize and inventories were higher than normal in early 1997. Pricing continued to decline in 1997 with an additional 8 percent reduction by August before beginning a slow rebound. By year end, box prices had almost recovered from the deterioration that occurred earlier in the year. Tons of boxes sold were up 4.1 percent in 1997, slightly ahead of the 3.5 percent increase in 1996. While the 1997 earnings decline was moderated by the increased sales volume, the cost of old corrugated containers (OCC), the principal raw material used in approximately 44 percent of the group's containerboard production, more than offset this gain. The cost of OCC was up $16 per ton in 1997, compared with 1996. This increase followed a $71 per ton decrease in 1996 versus 1995. As indicated in the table below, mill production totaled 2,761,000 tons in 1997, a 184,000-ton increase in production over 1996. Production of containerboard exceeded internal box plant usage by 336,000 tons in 1997, 275,000 tons in 1996, and 317,000 tons in 1995. Excess production was sold in the domestic and export markets. The company curtailed production by approximately 35,000 tons in 1997 and 120,000 tons in 1996 to control inventory levels.
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- MILL PRODUCTION (in tons) 2,761,000 2,577,000 2,514,000 ================================================================================
Box production at the Mexican, Puerto Rican and South American converting facilities increased by 50,000 tons to 174,000 tons in 1997. While volumes increased in Chile and Argentina, competitive pricing pressures contributed to continued operating losses at these plants. Additionally, the Sinaloa, Mexico, box plant was unprofitable. The operations of the other two Mexican plants, in Guanajuato and Monterrey, were stabilized in 1997 and reported improved earnings. The net operating losses in Argentina, Chile and Sinaloa, Mexico, served to increase the effective tax rate for the corporation, since the company did not accrue a tax benefit for these losses. The following table shows the quarterly sales of the corrugated packaging operation in tons and dollars. The totals presented include not only boxes sold, but also open market sales of linerboard and related products. CORRUGATED PACKAGING
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- UNIT SALES (in thousands of tons) 1st Quarter 647 575 602 2nd Quarter 719 608 614 3rd Quarter 706 636 564 4th Quarter 697 616 553 - -------------------------------------------------------------------------------- 2,769 2,435 2,333 ================================================================================ NET SALES(*) (in millions) 1st Quarter $ 411.9 $ 469.7 $ 452.8 2nd Quarter 432.6 453.4 499.5 3rd Quarter 421.3 423.3 487.9 4th Quarter 428.2 414.2 470.1 - -------------------------------------------------------------------------------- $1,694.0 $1,760.6 $1,910.3 ================================================================================
(*) Reclassified to include Food Service sales for 1996 and 1995. 26 3 In October 1997, the company sold substantially all of the operating assets of its subsidiary, Temple-Inland Food Service Corporation (Food Service), for approximately book value. Food Service had revenues of $66.3 million, $84.1 million and $80.9 million during 1997, 1996 and 1995, respectively. BLEACHED PAPERBOARD The bleached paperboard operation manufactures bleached paperboard at one mill in Evadale, Texas. Its products are sold to commercial printers and paperboard converters, including those serving packaging, food service and office product markets. The mill completed a major modernization and expansion program during 1995. The cornerstone of this project was a new 550-ton-per-day paperboard machine capable of producing low-density, lightweight bleached paperboard and bleached bristols. Other key elements of the expansion project included major technological upgrades on three existing paperboard machines, a pine fiberline, a coating plant, a power boiler, an extruder plant, a lime kiln and a concentrator. One of the mill's recovery boilers was also rebuilt. Before administrative costs, the bleached paperboard operation reported income of $15.3 million in 1997, compared with a loss of $8.2 million in 1996. Average prices for bleached paperboard were basically flat in 1997, compared with 1996, after having declined by 12 percent in 1996. Paperboard sales volume increased by 21 percent in 1997 versus 1996 as demand improved. Paperboard sales volume increased 31 percent in 1996. Production in both 1997 and 1996 was limited to control inventory levels. Most of the earnings improvement in 1997 was achieved through a reduction in manufacturing costs of $16 per ton as the efficiencies from the increased level of production and the effect of a cost-reduction program were realized. Manufacturing costs for 1996 were relatively unchanged from 1995 levels. The following table lists the quarterly sales of the bleached paperboard operation in tons and dollars. Changes in product mix from period to period may make historical comparisons difficult. BLEACHED PAPERBOARD
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- UNIT SALES (in thousands of tons) PAPERBOARD 1st Quarter 155 108 120 2nd Quarter 178 125 97 3rd Quarter 169 149 83 4th Quarter 133 142 100 - -------------------------------------------------------------------------------- 635 524 400 ================================================================================ - -------------------------------------------------------------------------------- PULP 2 100 99 ================================================================================ NET SALES (in millions) PAPERBOARD 1st Quarter $ 87.6 $ 66.1 $ 70.7 2nd Quarter 95.0 73.6 56.8 3rd Quarter 96.9 83.3 54.4 4th Quarter 86.5 77.5 67.1 - -------------------------------------------------------------------------------- $ 366.0 $ 300.5 $ 249.0 ================================================================================ - -------------------------------------------------------------------------------- PULP AND OTHER $ 2.9 $ 21.2 $ 39.1 ================================================================================
The Paper Group's administrative costs were down slightly in 1997, compared with 1996. These costs decreased $10 million in 1996 from 1995, primarily because the company paid significantly lower bonuses to its managers in 1996 as a result of the lower level of profitability. 27 4 BUILDING PRODUCTS The Building Products Group manufactures a diversified line of construction and commercial grade building materials at 13 facilities (including one joint-venture facility) located in Texas, Louisiana, Oklahoma, Arkansas, Alabama and Georgia. In 1997, almost 82 percent of its revenues were generated from wood-based materials made from Southern Pine logs or log residues. These products, sold to both residential and commercial market segments, include lumber, plywood, fiber products and particleboard. The non-wood-based business unit manufactures a variety of gypsum wallboard products that are sold to the same market segments as wood-based materials. The group earned $131.1 million in 1997, the second-highest earnings level in its history, following earnings of $139 million in 1994. Net manufacturing revenues in 1997 increased $54 million, or 10 percent, over 1996. This 10 percent increase followed a 6 percent increase in 1996. As a result of improved residential and commercial construction levels, prices advanced in 1997 across all product lines, except for particleboard and plywood. During 1997, the group completed its exit from the retail building products distribution business. Retail operations accounted for less than 1 percent of group net revenues in 1997, compared with about 3 percent in 1996 and 10 percent in 1995. The group began its exit from this business during the fourth quarter of 1995 by selling its two major Houston-area retail locations. Late in 1996, two of the three remaining locations were sold and the last location was sold in December 1997. The following table provides information on unit sales volumes and net sales for each business unit. BUILDING PRODUCTS
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- UNIT SALES(*) Pine lumber 639 605 582 Fiber products 402 457 422 Particleboard 470 399 329 Plywood 281 259 217 Gypsum wallboard 843 838 813 ================================================================================ NET SALES (in millions) Pine lumber $ 262.1 $ 217.4 $ 190.1 Fiber products 66.2 73.3 59.7 Particleboard 125.0 112.2 99.1 Plywood 55.2 52.1 49.3 Gypsum wallboard 104.6 90.2 83.1 Retail distribution 4.2 17.1 51.3 Other -- 0.3 0.3 - -------------------------------------------------------------------------------- $ 617.3 $ 562.6 $ 532.9 ================================================================================
(*)Unit sales amounts shown are in millions of square feet, except pine lumber, which is in millions of board feet. Pine lumber shipments of 639 million board feet increased 6 percent over 1996. Lumber prices improved during the first three quarters of the year, ranging from 11 percent in the third quarter to 26 percent in the first quarter, above the same periods in 1996. By the fourth quarter, the price level was virtually identical to the level sustained in the fourth quarter of 1996. However, the average selling price experienced for the year was 12 percent higher than the average selling price for 1996. Fiber products revenues decreased 10 percent from 1996 due to a 12 percent decrease in shipments. Shipments were lower due to a shift in product mix in order to manufacture more siding products rather than traditional sheathing. TrimCraft(TM) , the company's alternative lumber trim product, continued to gain market acceptance, and shipments of this product advanced 4 percent over 1996 levels. Shipment of TrimCraft increased 30 percent in 1996, compared with 1995. During 1997, construction continued on a new medium density fiberboard (MDF) plant in El Dorado, Arkansas. The $97 million facility, a joint-venture operation, is designed to produce 150 million square feet of MDF annually and is projected to begin operations in the second quarter of 1998. MDF products are high-grade composite panels that serve as suitable alternatives to high-quality millwork lumber and as flooring substrates. Also during 1997, the group, through a joint venture, began construction on a new cement fiberboard plant in Waxahachie, Texas. This $60 million facility is designed to produce 126 million square feet of cement fiberboard annually. This plant is expected to start operations during the third quarter of 1998. Cement fiberboard is a weather-stable product with increasing acceptance for applications such as exterior sidings, tile backing and roofing. Using by-products of lumber processing, the group manufactures particleboard at four plants in Texas, Alabama, Arkansas and Georgia. The Arkansas plant, completed late in the fourth quarter of 1995 at a cost of $65 million, increased overall particleboard capacity by about 50 percent. Particleboard shipments increased 18 percent over 1996, despite lost production at the Texas and Georgia plants, each of which incurred a ten-week outage for a major modernization. Due to the increase in shipments, the particleboard group's revenues rose $13 million, or 11 percent, from 1996, despite an average price decline of 6 percent from 1996 levels. In 1996, shipments were 21 percent above, and prices were 6 percent below, 1995 levels. 28 5 Record earnings were achieved by the group's gypsum wallboard operation in 1997 as prices continued the recovery begun in 1994, and the mix of products manufactured continued to improve. Gypsum wallboard shipments of 843 million square feet were slightly above 1996 levels, but revenues increased by $14 million due to a 15 percent increase in average sales price. Gypsum wallboard demand improved in both 1996 and 1997 as a result of the increased level of construction, including both residential and commercial. In addition to a strong market, specialty products, including the group's Stretch 54(R) product, pre-sized to reduce material waste and application labor in houses with nine-foot-high ceilings, continued to gain market share. Specialty panels in 1997 accounted for 40 percent of total shipments, compared with 38 percent in 1996. In 1997, plans were announced to construct another gypsum wallboard plant near Cumberland City, Tennessee. The plant will be operated by the Standard Gypsum LLC joint venture, of which a subsidiary of the company is a 50 percent partner. This state-of-the-art plant is expected to produce in excess of 700 million square feet of gypsum wallboard annually, and will utilize 100 percent flue gas desulphurization (synthetic) gypsum. This plant will be adjacent to the Cumberland Fossil Plant, the Tennessee Valley Authority's (TVA) largest coal-fired steam electric plant, which will supply 100 percent of the synthetic gypsum for use in the production of the wallboard at this facility. The synthetic gypsum is produced as a by-product of the TVA plant's air-cleaning system. Construction of this $60 million facility will begin in 1998, and production is expected to begin by 2000. TIMBER AND TIMBERLANDS The company controls approximately 2.2 million acres of timberland in Texas, Louisiana, Georgia and Alabama. In 1997, this renewable resource provided approximately 58 percent of the company's sawtimber requirements and roughly 57 percent of the fiber necessary to operate the company's paper, particleboard and fiberboard converting operations. FINANCIAL SERVICES The company's Financial Services Group includes savings bank, mortgage banking, real estate development and insurance operations. The following selected financial information provides a detailed description of these operations. FINANCIAL SERVICES GROUP SELECTED FINANCIAL INFORMATION
For the year or at year end 1997 1996 1995 - -------------------------------------------------------------------------------- (in millions) INCOME Savings bank $ 106.6 $ 37.5 (a) $ 78.1 Mortgage banking 24.0 23.0 20.3 Real estate (3.4) (1.7) (3.8) Insurance 4.8 4.3 3.5 - -------------------------------------------------------------------------------- Income before taxes 132.0 63.1 98.1 Taxes on income 20.6 24.3 27.3 - -------------------------------------------------------------------------------- Net income $ 111.4 $ 38.8 $ 70.8 ================================================================================ ASSETS Savings bank $10,370.6 $ 8,945.9 $ 8,881.7 Mortgage banking 385.6 241.4 157.0 Real estate 280.4 287.4 238.4 Insurance 32.4 26.3 19.1 Other activities -- 0.1 1.6 Eliminations (284.3) (166.0) (86.7) - -------------------------------------------------------------------------------- Total assets $10,784.7 $ 9,335.1 $ 9,211.1 ================================================================================ LIABILITIES Savings bank $ 9,798.1 $ 8,509.9 $ 8,405.2 Mortgage banking 303.4 177.1 113.5 Real estate 222.0 204.7 156.2 Insurance 19.7 17.7 13.2 Other activities -- (0.1) 4.6 Preferred stock issued by subsidiary 150.0 -- -- Eliminations (284.3) (166.0) (86.7) - -------------------------------------------------------------------------------- Total liabilities $10,208.9 $ 8,743.3 $ 8,606.0 ================================================================================ EQUITY Savings bank $ 422.5 $ 436.0 $ 476.5 Mortgage banking 82.2 64.3 43.5 Real estate 58.4 82.7 82.2 Insurance 12.7 8.6 5.9 Other activities -- 0.2 (3.0) - -------------------------------------------------------------------------------- Total equity $ 575.8 $ 591.8 $ 605.1 ================================================================================
(a) Includes a one-time SAIF assessment of $43.9 million. 29 6 SAVINGS BANK The company's savings bank, Guaranty Federal Bank, F.S.B. (Guaranty), conducts its business through 135 banking centers in Texas and California. The Texas operations 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. All of Guaranty's deposit locations in California are in the Central Valley area. The primary business of Guaranty is to attract savings deposits from the general public, to invest in loans secured by real estate mortgages, to be a major construction lender to the commercial and residential real estate industry, and to provide a variety of loan products to consumers and businesses. GUARANTY FEDERAL BANK, F.S.B. SELECTED FINANCIAL INFORMATION
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- (dollars in millions) INCOME AND EXPENSE Net interest income $ 222.3 $ 193.0 $ 179.5 Noninterest income 17.8 22.2 37.7 Noninterest expense 128.5 163.9 (a) 124.6 Minority interest in income of subsidiary 6.5 -- -- Income before taxes 106.6 37.5 78.1 AVERAGE BALANCE SHEET Total earning assets 9,919.1 8,889.0 8,819.5 Loans receivable and mortgage loans held for sale 6,530.9 5,215.1 4,453.6 Mortgage-backed and investment securities 2,721.6 3,204.3 3,647.1 Covered assets -- -- 298.6 Deposits 7,090.5 6,423.9 6,721.3 Securities sold under repurchase agreements and FHLB advances 2,573.9 2,113.5 1,873.0 KEY RATIOS Yield on earning assets 7.06% 6.96% 6.87% Cost of funds 4.95% 4.91% 4.96% - -------------------------------------------------------------------------------- Net interest spread 2.11% 2.05% 1.91% ================================================================================
(a) Includes a one-time SAIF assessment of $43.9 million. At year end 1997, loans receivable comprised 71 percent of earning assets, compared with 67 percent in the prior year. For increased flexibility during 1997, Guaranty securitized a portion of its mortgage loans held in its portfolio. At year end 1997, the ratio of loans receivable to earning assets, with the inclusion of the balance of $768 million in loans securitized, was 79 percent. Net interest income for 1997 increased $29.3 million from 1996. This was a result of an increase in average earning assets of $1 billion from 1996, principally due to the acquisition of Stockton Savings Bank, F.S.B. (SSB) discussed below, combined with the improved asset mix of loans. Net interest income for 1996 increased $13.5 million from 1995. Although the average balance of total earning assets remained virtually constant with 1995, the improved mix of loans receivable to securities improved the net interest spread by 14 basis points. When new loans are originated, an estimated allowance for losses is provided. Thereafter, this provision is adjusted for actual net charge-off experience and other factors. The provision for loan loss decreased $15.5 million during 1997, compared with 1996, primarily related to the securitization of about $1 billion of mortgage loans, payoff of other notes, as well as favorable net charge-off experience. Noninterest income is composed primarily of fees collected, including service charges on deposits. Losses on the sale of certain mortgage securities resulted in a net noninterest income reduction of $4.4 million. In 1995, Guaranty recognized a $9 million gain, representing its portion of gains on certain asset dispositions (see Note C on page 44 for additional information). Excluding the gain recognized in 1995, noninterest income decreased by $6.5 million in 1996. Excluding $43.9 million related to the 1996 one-time Savings Association Insurance Fund (SAIF) assessment discussed below, noninterest expense for 1997 increased $8.5 million from 1996. The assessment reduced insurance premiums on deposits by $9.8 million in 1997. Primarily as the result of new operations in California, other noninterest expense was up $18.3 million in 1997, compared with a decrease of $4.6 million in 1996. BIF/SAIF LEGISLATION On September 30, 1996, President Clinton signed the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (the Act). Among its many provisions, the Act provided for (i) the recapitalization of the SAIF to an amount sufficient to increase the SAIF's net worth to 1.25 percent of SAIF-insured deposits, (ii) the reduction of SAIF insurance assessments to parity with those of the Bank Insurance Fund (BIF), and (iii) the eventual merger of the SAIF and BIF. Specifically, the statute required a one-time special assessment of SAIF members, calculated at 65.7 basis points of insured deposits, or $43.9 million for Guaranty. 30 7 Effective January 1, 1997, Guaranty is not required to pay any deposit insurance assessments, but is required to pay approximately 6.5 basis points on its insured deposits annually to repay certain Financial Corporation (FICO) bond obligations. Prior to the special assessment, Guaranty was paying 23 basis points of insured deposits for insurance premiums, as compared with the approximate 6.5 basis points of insured deposits currently being paid to repay FICO bond obligations. ACQUISITIONS On June 27, 1997, the company acquired all of the outstanding stock of California Financial Holding Company, the parent company of Stockton Savings Bank, F.S.B. (SSB), and merged the operations of SSB into Guaranty. The consideration for the transaction was $143.4 million, consisting of approximately 1,614,000 shares of Temple-Inland Inc. common stock and cash of $47.3 million. SSB operated 25 banking centers in the Central Valley area of California and had assets at acquisition totaling approximately $1.4 billion, consisting primarily of loans and securities. LIQUIDITY, INTEREST RATE RISK MANAGEMENT AND CAPITAL Guaranty is required by the Office of Thrift Supervision (OTS) to maintain average daily balances of statutorily defined liquid assets. During 1997, the liquid assets requirement was decreased from 5 percent to 4 percent of net withdrawable deposits and short-term borrowings. The operations of Guaranty are subject to a risk of interest rate fluctuation to the extent that interest-earning assets and interest-bearing liabilities mature or reprice at different times or in differing amounts. Because approximately 94 percent of Guaranty's assets at year end 1997 have adjustable rates, this risk is significantly mitigated. A substantial portion of Guaranty's investments in adjustable-rate mortgage-backed securities have annual or lifetime caps that subject Guaranty to interest rate risk should rates rise above certain levels. To optimize net interest income while maintaining acceptable levels of interest rate and liquidity risk, Guaranty, from time to time, will enter into various interest rate contracts for purposes other than trading. See Note L on page 48 for additional information. On May 28, 1997, a newly formed subsidiary of Guaranty that qualifies as a real estate investment trust (REIT) issued $150 million of noncumulative floating rate preferred stock in a private placement. The preferred stock qualifies for inclusion in regulatory capital, subject to certain limitations. OTS regulations require savings institutions to maintain certain minimum levels of capital. Guaranty's regulatory capital exceeded all applicable capital requirements at year end 1997. Note M on page 49 contains additional information concerning Guaranty's capital requirements. MORTGAGE BANKING Mortgage banking is conducted through Temple-Inland Mortgage Corporation (TIMC). TIMC arranges financing of single-family mortgage loans, then sells the loans into the secondary market (primarily FNMA, FHLMC and GNMA securities). TIMC generally retains the servicing of these loans. A summary of selected financial information is provided below. MORTGAGE BANKING OPERATIONS SUMMARY
For the year 1997 1996 1995 - ------------------------------------------------------------------------------ (dollars in millions) Revenues $ 136 $ 95 $ 71 Income before taxes 24 23 20 ============================================================================== PORTFOLIO ROLL-FORWARD (Including loans serviced for affiliates) Beginning servicing $ 17,851 $ 13,460 $ 10,068 Purchased servicing 9,497 4,888 3,782 New loans added, net of servicing released 2,600 2,265 948 Run-off (3,866) (2,762) (1,338) - ------------------------------------------------------------------------------ Ending servicing $ 26,082 $ 17,851 $ 13,460 - ------------------------------------------------------------------------------ Portfolio growth rate 46.1% 32.6% 33.7% Run-off factor 16.8% 15.9% 10.9% Ending number of loans serviced 351,600 225,700 184,800 ==============================================================================
The servicing portfolio grew from both internal production and acquisition to a record $26.1 billion during 1997. Servicing totaling $9.5 billion was acquired during 1997, of which $6.4 billion is associated with the acquisition of Knutson Mortgage Corporation (KMC). Servicing totaling $4.9 billion was acquired during 1996, a portion of which was acquired subject to a call option. At the end of 1997, $1.6 billion of the servicing portfolio was subject to the call option. The call option price, if exercised, would exceed the carrying value. The mortgage origination network increased during 1997 from 41 branch offices to 80. The volume of originations increased to $3.2 billion. REAL ESTATE GROUP Real estate operations conducted by Lumbermen's Investment Corporation include development of residential subdivisions, as well as management and sale of income properties. Land development projects include 34 residential subdivisions in Texas, Arizona, California, Colorado, Florida, Georgia, Missouri, Tennessee and Utah. At the end of 1997, land development inventory included 2,190 residential lots (1,437 under contract) and 5,664 acres of land. Lot sales for 1997 were 1,422, compared with 1,082 in 1996, and 467 in 1995. 31 8 The company owns 12 commercial properties consisting of two hotels, two office buildings, one retail center, two business parks and five parcels of commercial land. The company is also a financial partner in joint ventures that are constructing six apartment projects. Selected financial information related to these activities is shown below. REAL ESTATE GROUP OPERATIONS SUMMARY
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- (in millions) REVENUES Residential $ 43.4 $ 35.9 $ 12.7 Commercial 21.4 18.2 19.4 Interest and other 3.7 7.0 4.9 - ------------------------------------------------------------------------------- Total $ 68.5 $ 61.1 $ 37.0 =============================================================================== INCOME (LOSS) BEFORE TAXES Residential $ 2.2 $ 3.0 $ (1.9) Commercial 4.5 2.2 2.0 Interest and other (10.1) (6.9) (3.9) - ------------------------------------------------------------------------------- Total $ (3.4) $ (1.7) $ (3.8) - -------------------------------------------------------------------------------
INSURANCE Timberline Insurance Managers, Inc. (Timberline), one of the largest insurance agencies in Texas, operates as a general agency selling a full range of insurance products, including automobile, homeowners, business insurance, annuities, and life and health products. The agency also acts as the risk management department of the company. Timberline currently has offices in Austin, Houston, El Paso and San Antonio, Texas. A summary of revenues and income before taxes is shown below. INSURANCE OPERATIONS SUMMARY
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- (in millions) REVENUES $ 30.4 $ 24.9 $ 16.5 INCOME BEFORE TAXES 4.8 4.3 3.5 ================================================================================
ENVIRONMENTAL MATTERS The company is committed to protecting the health and welfare of its employees, the public and the environment, and strives to maintain compliance with all state and federal environmental regulations in a cost-effective manner. In the construction of new facilities and the modernization of existing facilities, the company installed state-of-the-art technology for controlling air and water emissions. These forward-looking programs should minimize the impact that changing regulations have on capital expenditures for environmental compliance. Future expenditures for environmental-control facilities will depend on changing laws and regulations and techno-logical advances. Given these uncertainties, the company estimates that capital expenditures for environmental purposes during the period 1998 through 2000 will average $15 million each year, exclusive of the expenditures for the Cluster Rule compliance discussed below. On November 14, 1997, the U.S. Environmental Protection Agency (EPA) issued extensive regulations governing air and water emissions from the pulp and paper industry (the Cluster Rule). According to the EPA, the technology standards in the Cluster Rule will cut the industry's toxic air pollutant emissions by almost 60 percent from current levels and virtually eliminate all dioxin discharged from pulp, paper and paperboard mills into rivers and other surface waters. The rule also provides incentives for individual mills to adopt technologies that will lead to further reductions in toxic pollutant discharges. The EPA estimates that the industry will need to invest approximately $1.8 billion in capital expenditures and approximately $277 million per year in operating expenditures to comply with the Cluster Rule. The initial compliance period is three years from the date the regulations are published in the Federal Register. The estimated expenditures disclosed above do not include expenditures that may be needed to comply with the Cluster Rule. Based upon its interpretation of the Cluster Rule as issued, the company currently estimates that compliance with the rule may require modifications at several facilities. Some of these modifications can be included in modernization projects that will provide economic benefits to the company. Excluding these investments, environmental expenditures are not expected to exceed $110 million over the next three years. CAPITAL RESOURCES AND LIQUIDITY The company's financial condition continues to be strong. Internally generated funds, existing credit facilities and the capacity to issue long-term debt are sufficient to fund projected capital expenditures, to service existing debt, to pay dividends and to meet normal working capital requirements. A summary of capital expenditures is shown below.
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- (in millions) CAPITAL EXPENDITURES Paper $ 155.8 $ 147.7 $ 299.1 Building products 53.4 52.0 67.6 Timber and timberlands 20.5 74.7 19.1 Other activities 3.0 0.9 0.3 - -------------------------------------------------------------------------------- Total manufacturing group $ 232.7 $ 275.3 $ 386.1 ================================================================================
32 9 Capital expenditures of approximately $250 million are projected for 1998. Commitments on construction projects totaled $31.6 million at the end of 1997. Net interest expense incurred by the Parent Company is shown below.
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- (in millions) PARENT COMPANY INTEREST - NET Interest expense $ 112.3 $ 112.9 $ 111.3 Capitalized interest (2.0) (3.3) (38.6) - ------------------------------------------------------------------------------- Interest expense - net $ 110.3 $ 109.6 $ 72.7 ===============================================================================
Interest expense increased in 1996, compared with 1995, due to the levels of debt outstanding. The higher amount of capitalized interest in 1995 was due to higher levels of construction in progress associated primarily with the modernization and expansion project at Evadale, Texas. Since this project was completed in 1995, capitalized interest in 1997 and 1996 decreased to $2.0 million and $3.3 million, respectively. Parent Company interest paid during 1997, 1996 and 1995 was $104.5 million, $105.9 million and $95.4 million, respectively. In August 1995, the Board of Directors approved a stock repurchase program allowing the company to repurchase up to 2.5 million shares. At year end 1997, approximately 75 percent of this program had been completed. INCOME TAXES The effective tax rate for the year was 46 percent, compared with a normalized rate of 35 percent in the previous year. The increase in the annual tax rate was primarily attributable to a decrease in the book benefit of Federal Deposit Insurance Corporation assistance, increased taxes incurred on non-deductible goodwill associated with the disposition of Temple-Inland Food Service and losses in foreign operations for which no financial benefit was recognized. IMPACT OF YEAR 2000 ISSUES In 1996, the company began to address the forthcoming millennium date and what is frequently referred to in data processing as the "year 2000 problem." Discussions were initiated with major suppliers, customers and financial institutions to ensure that those parties have appropriate plans to remediate year 2000 issues, where their systems interface with the company's systems or otherwise impact its operations. Comprehensive year 2000 initiatives are being directed and managed by both internal and external resources. These initiatives are designed to effect an orderly transition into the new millennium without adversely affecting the company's core operations and to ensure that transactions with customers, suppliers and financial institutions are fully supported. The company is well under way with its project plans and expects to complete business systems corrections by December 31, 1998. Test environments are fully operational and will be available for testing to begin in 1998 and continue into 1999 in order to implement ongoing business and manufacturing changes with no negative impact on previous year 2000 corrections. The company has evaluated the year 2000 readiness of the control systems used in manufacturing. No significant problems were discovered, but work plans have been detailed with tasks and resources identified for becoming year 2000 ready in these operations. The total cost of year 2000 readiness is expected to be $12.8 million, of which $2.2 million has been expended. This cost is not material to the company's results of operations or financial position. PENDING ACCOUNTING POLICY CHANGES In June 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes new standards for reporting information about operating segments in both annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The company will adopt the new requirements retroactively in 1998. Management has not completed its review of Statement 131, but does not anticipate that the adoption of this statement will have a significant effect on the company's reported segments. In June 1997, the FASB issued Statement 130, Reporting Comprehensive Income, which establishes new rules for the reporting and display of comprehensive income and its components, effective first quarter 1998. Under the new statement, the company would be required to include unrealized gains or losses on the company's available-for-sale securities and foreign currency translation adjustments that are currently reported in shareholders' equity, in other comprehensive income and to disclose the total comprehensive income. If the company adopted Statement 130 for the year 1997, the total of other comprehensive income would be $55 million. 33 10 SELECTED FINANCIAL DATA
For the year 1997(*) 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------ (dollars in millions, except per share data) Total revenues $ 3,625 $ 3,460 $ 3,495 $ 2,967 $ 2,762 Manufacturing net sales 2,680 2,645 2,731 2,335 2,127 Net income 51 133 281 131 117(b) Capital expenditures: Manufacturing 233 275 386 463 340 Financial services 18 15 34 20 14 Depreciation and depletion: Manufacturing 255 244 208 200 191 Financial services 13 10 8 8 6 Earnings per share: Basic 0.91 2.39 5.02 2.35 2.12(b) Diluted 0.90 2.39 5.01 2.35 2.11(b) Dividends per common share 1.28 1.24 1.14 1.02 1.00 Weighted average shares outstanding: Basic 56.0 55.5 56.0 55.8 55.3 Diluted 56.2 55.6 56.1 55.9 55.5 Common shares outstanding at year end 56.3 55.4 55.7 56.0 55.5 - ------------------------------------------------------------------------------------------------------------ AT YEAR END Total assets $14,364 $12,947 $12,764 $12,251 $11,959 Long-term debt: Parent Company 1,438 1,522 1,489 1,316 1,045 Financial services 167 133 113 82 76 Preferred stock issued by subsidiary 150 -- -- -- -- Ratio of total debt to total capitalization - Parent Company 41% 43% 43% 43% 38% Shareholders' equity 2,045 2,015 1,975 1,783 1,700 ============================================================================================================ For the year 1992 1991 1990 1989 1988 - ------------------------------------------------------------------------------------------------------------ (dollars in millions, except per share data) Total revenues $ 2,734 $ 2,507 $ 2,401(a) $ 1,943 $ 1,814 Manufacturing net sales 2,096 1,898 1,892 1,894 1,774 Net income 147 138 232(a) 207 199 Capital expenditures: Manufacturing 359 378 324 260 219 Financial services 11 9 4 9 4 Depreciation and depletion: Manufacturing 167 158 140 126 112 Financial services 5 4 5 2 2 Earnings per share: Basic 2.66 2.53 4.24(a) 3.78 3.61 Diluted 2.65 2.51 4.20(a) 3.75 3.58 Dividends per common share 0.96 0.88 0.80 0.58 0.42 Weighted average shares outstanding: Basic 55.1 54.8 54.9 54.9 55.2 Diluted 55.5 55.2 55.4 55.3 55.7 Common shares outstanding at year end 55.2 54.9 54.6 54.9 55.2 - ------------------------------------------------------------------------------------------------------------ AT YEAR END Total assets $10,766 $10,068 $ 7,834(c) $ 2,380 $ 2,247 Long-term debt: Parent Company 964 864 501 399 417 Financial services 99 76 94 30 25 Preferred stock issued by subsidiary -- -- -- -- -- Ratio of total debt to total capitalization - Parent Company 38% 36% 26% 24% 29% Shareholders' equity 1,633 1,532 1,439 1,259 1,096 ============================================================================================================
(*) Includes effects of acquiring Stockton Savings Bank and Knutson Mortgage Company. (a) Includes operating results from consolidation of Guaranty Federal Bank, F.S.B., beginning January 1, 1990. (b) Includes a credit of $50 million or $0.90 per share from cumulative effect of accounting changes. (c) Includes savings bank assets from consolidation of Guaranty Federal Bank, F.S.B., beginning January 1, 1990. COMMON STOCK PRICES AND DIVIDEND INFORMATION
- -------------------------------------------------------------------------------------------------------------------- 1997 1996 - -------------------------------------------------------------------------------------------------------------------- PRICE RANGE Price Range HIGH LOW DIVIDENDS High Low Dividends - -------------------------------------------------------------------------------------------------------------------- 1st Quarter $ 57 $ 52 $ 0.32 $ 48-1/4 $ 39-3/4 $ 0.30 2nd Quarter 62-1/8 49-5/8 0.32 51-7/8 45-1/2 0.30 3rd Quarter 69-7/16 56-1/8 0.32 53-1/8 47 0.32 4th Quarter 65-7/8 49-11/16 0.32 55-3/8 48-3/8 0.32 For the year $ 69-7/16 $ 49-5/8 $ 1.28 $ 55-3/8 $ 39-3/4 $ 1.24 - --------------------------------------------------------------------------------------------------------------------
34 11 NOTE F - Deposits Deposits consisted of the following:
At year end 1997 1996 - ------------------------------------------------------------------------------------ Stated Stated Rate Amount Rate Amount - ------------------------------------------------------------------------------------ (dollars in millions) Noninterest-bearing demand -- $ 160.0 -- % $ 123.7 Interest-bearing demand 2.55% 1,107.7 2.70% 970.6 Savings deposits 2.27% 205.9 2.29% 174.8 Time deposits 5.63% 5,900.3 5.53% 4,992.8 7,373.9 6,261.9 - ------------------------------------------------------------------------------------ Deposit premium 0.9 1.2 - ------------------------------------------------------------------------------------ $ 7,374.8 $ 6,263.1 ====================================================================================
Scheduled maturities of time deposits at year end 1997 are as follows:
$100,000 Less than Time deposits or more $100,000 Total - -------------------------------------------------------------------------------- (in millions) 3 months or less $ 160.8 $ 870.7 $1,031.5 Over 3 through 6 months 158.4 1,069.6 1,228.0 Over 6 through 12 months 198.1 1,220.0 1,418.1 Over 12 months 295.7 1,927.0 2,222.7 - -------------------------------------------------------------------------------- $ 813.0 $5,087.3 $5,900.3 ================================================================================
A summary of interest paid by the group is shown below:
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- (in millions) Interest on deposits $ 333.4 $ 310.8 $ 317.7 Interest on borrowed funds 160.5 128.7 115.9 - -------------------------------------------------------------------------------- $ 493.9 $ 439.5 $ 433.6 ================================================================================
At year end 1997, time deposits maturity dates were as follows (in millions): 1998--$3,677.6; 1999--$1,227.9; 2000--$400.2; 2001--$336.6; 2002--$253.5; 2003 and thereafter--$4.5. 47 12 Guaranty is also a party to an interest rate cap agreement to reduce the impact of interest rate increases on certain adjust-able 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. The agreement matures in 2004. The amounts potentially subject to credit risks are the streams of payments receivable by Guaranty under the terms of the contracts and not the notional amounts used to express the volumes of these transactions. Guaranty minimizes its exposure to such credit risk by entering into contracts with major U.S. securities firms. NOTE M - REGULATORY CAPITAL MATTERS Guaranty is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly discretionary, actions by regulators that, if undertaken, could have a direct material effect on Guaranty's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Guaranty must meet specific capital guidelines that involve quantitative measures of Guaranty's assets, liabilities and certain off-balance-sheet items, as calculated under regulatory accounting practices. Guaranty's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The payment of dividends from Guaranty is subject to proper regulatory notification. Quantitative measures established by regulation to ensure capital adequacy require Guaranty to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted tangible assets. Management believes, as of year end 1997, Guaranty met all its capital adequacy requirements. As of year end 1997, the most recent notification from regulators categorized Guaranty as well capitalized under the regulatory framework for prompt corrective action. To be so categorized as well capitalized, Guaranty must maintain minimum total risk-based, Tier I (Core) risk-based, and Tier I (Core) leverage capital ratios, as set forth in the table. There are no conditions or events since that notification that management believes have changed Guaranty's category. Guaranty's actual capital amounts and ratios are also presented in the table below. No amounts were deducted from capital for interest rate risk at December 31, 1997, or 1996.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions - -------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - -------------------------------------------------------------------------------------------------------------------------- (dollars in millions) At year end 1997: Total Risk-Based Ratio (Risk-based capital/total risk-weight assets) $ 651.0 10.14% >$513.7 >8.0% >$641.9 >10.0% - - - - Tier I (Core) Risk-Based Ratio (Core capital/total risk-weight assets) $ 570.7 8.89% >$256.8 >4.0% >$385.2 >6.0% - - - - Tier I (Core) Leverage Ratio (Core capital/adjusted tangible assets) $ 570.7 5.48% >$416.4 >4.0% >$520.5 >5.0% - - - - Tangible Ratio (Tangible capital/tangible assets) $ 570.7 5.48% >$156.2 >1.5% N/A N/A - - At year end 1996: Total Risk-Based Ratio (Risk-based capital/total risk-weight assets) $ 533.8 10.39% >$411.1 >8.0% >$513.8 >10.0% - - - - Tier I (Core) Risk-Based Ratio (Core capital/total risk-weight assets) $ 498.2 9.70% >$205.5 >4.0% >$308.3 >6.0% - - - - Tier I (Core) Leverage Ratio (Core capital/adjusted tangible assets) $ 498.2 5.52% >$361.1 >4.0% >$451.4 >5.0% - - - - Tangible Ratio (Tangible capital/tangible assets) $ 498.2 5.52% >$135.4 >1.5% N/A N/A - - ==========================================================================================================================
49 13 CONSOLIDATED STATEMENTS OF INCOME Temple-Inland Inc. and Subsidiaries
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- (in millions, except per share data) REVENUES Manufacturing $ 2,680 $ 2,645 $ 2,731 Financial services 945 815 764 - ------------------------------------------------------------------------------- 3,625 3,460 3,495 - ------------------------------------------------------------------------------- COSTS AND EXPENSES Manufacturing 2,613 2,447 2,329 Financial services 813 752 666 - ------------------------------------------------------------------------------- 3,426 3,199 2,995 - ------------------------------------------------------------------------------- OPERATING INCOME 199 261 500 Parent Company interest, net (110) (110) (73) Other 6 5 4 - ------------------------------------------------------------------------------- INCOME BEFORE TAXES 95 156 431 Taxes on income 44 23 150 - ------------------------------------------------------------------------------- NET INCOME $ 51 $ 133 $ 281 - ------------------------------------------------------------------------------- EARNINGS PER SHARE: Basic $ 0.91 $ 2.39 $ 5.02 Diluted $ 0.90 $ 2.39 $ 5.01 ===============================================================================
See the notes to the consolidated financial statements. 50 14 CONSOLIDATED STATEMENTS OF CASH FLOWS Temple-Inland Inc. and Subsidiaries
For the year 1997 1996 1995 - ------------------------------------------------------------------------------------------ (in millions) CASH PROVIDED BY (USED FOR) OPERATIONS Net income $ 51 $ 133 $ 281 Adjustments to reconcile net income to net cash: Depreciation and depletion 268 254 216 Deferred taxes 21 (11) 53 Amortization and accretion 29 23 18 Receivable from FDIC -- 7 (18) Mortgage loans held for sale (99) (88) 24 Receivables 7 (11) (42) Inventories (30) 23 (71) Accounts payable and accrued expenses (7) (27) (46) Collections and remittances on loans serviced for others, net 193 (7) 96 Other (81) (70) (36) - ------------------------------------------------------------------------------------------ 352 226 475 - ------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED FOR) INVESTMENTS Capital expenditures (251) (290) (420) Proceeds from sale of property and equipment 53 7 16 Purchases of securities available-for-sale (121) (4) (54) Maturities of securities available-for-sale 210 98 12 Maturities of securities held-to-maturity 308 322 391 Loans originated or acquired, net of principal collected on loans (1,084) (672) (1,009) Proceeds from sale of securities available-for-sale 844 206 192 Reduction in covered assets -- -- 343 Acquisitions and joint ventures (22) (38) (2) Acquisition of California Financial Holding Company, net of cash acquired (22) -- -- Other 27 (1) (23) - ------------------------------------------------------------------------------------------ (58) (372) (554) - ------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED FOR) FINANCING Additions to debt 447 281 356 Payments of debt (329) (349) (165) Securities sold under repurchase agreements and short-term borrowings, net (609) 285 239 Purchase of stock for treasury (59) (16) (24) Cash dividends paid to shareholders (71) (69) (64) Net increase (decrease) in deposits 128 (112) (217) Proceeds from sale of subsidiary preferred stock 150 -- -- Other 9 (4) (3) - ------------------------------------------------------------------------------------------ (334) 16 122 - ------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (40) (130) 43 Cash and cash equivalents at beginning of year 228 358 315 - ------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 188 $ 228 $ 358 ==========================================================================================
See the notes to the consolidated financial statements. 51 15 CONSOLIDATING BALANCE SHEETS Temple-Inland Inc. and Subsidiaries
Parent Financial At year end 1997 Company Services Consolidated - ------------------------------------------------------------------------------------------------ (in millions) ASSETS Cash and cash equivalents $ 13 $ 175 $ 188 Mortgage loans held for sale -- 439 439 Loans receivable -- 6,451 6,451 Mortgage-backed and investment securities -- 2,806 2,806 Trade and other receivables 281 -- 277 Inventories 339 -- 339 Property and equipment 2,813 103 2,916 Other assets 178 811 948 Investment in Financial Services 576 -- -- - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 4,200 $ 10,785 $ 14,364 ================================================================================================ LIABILITIES Deposits $ -- $ 7,375 $ 7,375 Securities sold under repurchase agreements and Federal Home Loan Bank advances -- 1,955 1,955 Other liabilities 325 562 871 Long-term debt 1,438 167 1,605 Deferred income taxes 252 -- 223 Postretirement benefits 140 -- 140 Preferred stock issued by subsidiary -- 150 150 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES $ 2,155 $ 10,209 $ 12,319 ================================================================================================ 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 356 Translation and other adjustments (20) Retained earnings 1,817 - ------------------------------------------------------------------------------------------------ 2,214 Cost of shares held in the treasury: 5,069,011 shares (169) - ------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 2,045 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,364 ================================================================================================
See the notes to the consolidated financial statements. 52 16 CONSOLIDATING BALANCE SHEETS Temple-Inland Inc. and Subsidiaries
Parent Financial At year end 1996 Company Services Consolidated - ------------------------------------------------------------------------------------------------ (in millions) ASSETS Cash and cash equivalents $ 14 $ 214 $ 228 Mortgage loans held for sale -- 244 244 Loans receivable -- 5,414 5,414 Mortgage-backed and investment securities -- 2,783 2,783 Trade and other receivables 295 -- 292 Inventories 327 -- 327 Property and equipment 2,850 81 2,931 Other assets 174 599 728 Investment in Financial Services 592 -- -- - ------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 4,252 $ 9,335 $ 12,947 ================================================================================================ LIABILITIES Deposits $ -- $ 6,263 $ 6,263 Securities sold under repurchase agreements and Federal Home Loan Bank advances -- 1,992 1,992 Other liabilities 345 355 685 Long-term debt 1,522 133 1,655 Deferred income taxes 234 -- 201 Postretirement benefits 136 -- 136 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES $ 2,237 $ 8,743 $ 10,932 ================================================================================================ 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 305 Translation and other adjustments (24) Retained earnings 1,837 - ------------------------------------------------------------------------------------------------ 2,179 Cost of shares held in the treasury: 5,940,802 shares (164) - ------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 2,015 - ------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 12,947 ================================================================================================
See the notes to the consolidated financial statements. 53 17 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Temple-Inland Inc. and Subsidiaries
Additional Common Paid-in Other Equity Retained Treasury Stock Capital Adjustments Earnings Stock Total - ---------------------------------------------------------------------------------------------------------------- (in millions) BALANCE AT DECEMBER 31, 1994 $ 61 $ 305 $ (10) $ 1,556 $ (129) $ 1,783 Net income -- -- -- 281 -- 281 Translation and other adjustments -- -- (4) -- -- (4) Dividends paid on common stock -- $1.14 per share -- -- -- (64) -- (64) Stock issued for stock plans -- 154,109 shares -- 1 -- -- 2 3 Stock reacquired for treasury -- 514,544 shares -- -- -- -- (24) (24) - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 30, 1995 $ 61 $ 306 $ (14) $ 1,773 $ (151) $ 1,975 ================================================================================================================ Net income -- -- -- 133 -- 133 Translation and other adjustments -- -- (10) -- -- (10) Dividends paid on common stock -- $1.24 per share -- -- -- (69) -- (69) Stock issued for stock plans -- 149,232 shares -- (1) -- -- 3 2 Stock reacquired for treasury -- 358,623 shares -- -- -- -- (16) (16) - ---------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 28, 1996 $ 61 $ 305 $ (24) $ 1,837 $ (164) $ 2,015 ================================================================================================================ Net income -- -- -- 51 -- 51 Translation and other adjustments -- -- 4 -- -- 4 Dividends paid on common stock -- $1.28 per share -- -- -- (71) -- (71) Stock issued for acquisition of California Financial Holding Company -- 1,613,546 shares -- 48 -- -- 48 96 Stock issued for stock plans -- 253,075 shares -- 3 -- -- 6 9 Stock reacquired for treasury -- 994,830 shares -- -- -- -- (59) (59) ================================================================================================================ BALANCE AT JANUARY 3, 1998 $ 61 $ 356 $ (20) $ 1,817 $ (169) $ 2,045 ================================================================================================================
See the notes to the consolidated financial statements. 54 18 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 all subsidiaries in which the company has more than a 50 percent equity ownership. 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. However, because certain assets and liabilities are in separate corporate entities, the consolidated assets are not available to satisfy all consolidated liabilities. All material intercompany amounts and transactions have been eliminated. Certain amounts have been reclassified to conform with current year's classification. 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. Included as an integral part of the consolidated financial statements are separate summarized financial statements and notes for the company's primary business groups, as well as the significant accounting policies unique to each group. EARNINGS PER SHARE In 1997, the company adopted FASB Statement No. 128, Earnings Per Share, which requires the presentation of basic and diluted earnings per share. Under the new statement, the dilutive effect of stock options will be excluded from basic earnings per share, but included in the computation of diluted earnings per share. Earnings per share amounts for all periods presented have been restated. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, amounts due from banks, commercial paper, agency discount notes, federal funds sold 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 are translated at the historical rate of exchange, while other assets and liabilities are translated at year end exchange rates. Translation adjustments for these operations are included in earnings and are not material. Income and expense items are translated into U.S. dollars at average rates of exchange prevailing during the year. Gains and losses resulting from foreign currency transactions are included in earnings and are not material. INCOME TAXES Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes computed using current tax rates. STOCK-BASED COMPENSATION The company uses the intrinsic value method in accounting for its stock-based employee compensation plans. LONG-LIVED ASSETS Impairment losses are recognized 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 measured at the lower of carrying value or estimated fair value less costs to sell. 55 19 NOTE 2 - TAXES ON INCOME Taxes on income from continuing operations consisted of the following:
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- (in millions) CURRENT TAX PROVISION: Federal $ 21.9 $ 27.2 $ 87.2 State and other 2.2 6.5 11.9 24.1 33.7 99.1 DEFERRED TAX PROVISION: Federal 15.2 (16.5) 48.2 State and other 4.9 5.9 2.7 - -------------------------------------------------------------------------------- 20.1 (10.6) 50.9 ================================================================================ PROVISION FOR INCOME TAXES $ 44.2 $ 23.1 $ 150.0 ================================================================================
Earnings or losses from continuing operations consisted of the following:
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- (in millions) EARNINGS (LOSSES): U.S. $ 104.1 $ 163.6 $ 435.0 Non-U.S (9.1) (7.6) (4.0) - ------------------------------------------------------------------------------- $ 95.0 $ 156.0 $ 431.0 ===============================================================================
The differences between the consolidated effective income tax rate and the federal statutory income tax rate include the following:
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- (in millions) Taxes on income at statutory rate $ 33.3 $ 54.6 $ 150.9 FDIC tax-sharing settlement -- (31.5) -- Book benefit of FDIC assistance and other permanent items (0.8) (11.6) (12.1) State and other taxes 5.1 8.1 8.9 Foreign losses not benefited 3.2 2.6 1.4 Goodwill 3.4 0.9 0.9 - ------------------------------------------------------------------------------- $ 44.2 $ 23.1 $ 150.0 ===============================================================================
Significant components of the company's consolidated deferred tax assets and liabilities are as follows:
At year end 1997 1996 - ------------------------------------------------------------------------------- (in millions) DEFERRED TAX LIABILITIES: Depreciation $ 396.4 $ 346.3 Timber and timberlands 41.9 36.8 Pensions 20.6 18.5 Other 63.3 42.2 - ------------------------------------------------------------------------------- Total deferred tax liabilities 522.2 443.8 - ------------------------------------------------------------------------------- DEFERRED TAX ASSETS: Alternative minimum tax credits 264.3 215.6 Net operating loss carryforwards 78.0 96.7 OPEB obligations 54.6 47.8 Other 54.9 30.0 - ------------------------------------------------------------------------------- Total deferred tax assets 451.8 390.1 - ------------------------------------------------------------------------------- VALUATION ALLOWANCE (152.9) (147.4) - ------------------------------------------------------------------------------- Net deferred tax liability $ 223.3 $ 201.1 - -------------------------------------------------------------------------------
The valuation allowance represents accruals for deductions that are uncertain and, accordingly, have not been recognized for financial reporting purposes. The change in the valuation allowance is primarily the result of increased foreign net operating losses, the future realization of which is not assured. Deferred taxes increased $2.5 million as a result of the current year increase in equity under SFAS No. 115 and decreased by $0.4 million due to acquisitions. Income tax payments, net of refunds received, were $21 million, $38 million and $74 million during 1997, 1996 and 1995, respectively. The company has domestic net operating loss carryforwards of $187 million that expire in 2009 and foreign net operating loss carryforwards of $36 million that expire from the year 2000 through the year 2007. Alternative minimum tax credits may be carried forward indefinitely. In connection with the acquisition of Guaranty in 1988, the company entered into an assistance agreement (Assistance Agreement) with the Federal Savings and Loan Insurance Corporation. Pursuant to the Assistance Agreement, the company received various tax benefits to be shared with the FDIC when the cash benefits were realized by the company. During the term of the Assistance Agreement, the company recorded these tax-sharing liabilities on an undiscounted basis. The company and the FDIC terminated the Assistance Agreement. As a part of this termination, the company and the FDIC agreed to a one-time payment that was based on the present value of the future liabilities. In 1996, the company recognized a credit to its tax provision of $31.5 million as a result of the completion of this transaction. As a result of the sale of Temple-Inland Food Service Corporation, the company realized a $2.3 million one-time increase in 1997 tax expense from nondeductible goodwill. The Internal Revenue Service is examining the company's consolidated tax returns for the years 1984 through 1992. The resolution of these examinations is not expected to have a significant impact on the company's financial condition or results of operations. 56 20 NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of financial instruments were as follows:
At year end 1997 1996 - --------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - --------------------------------------------------------------------------------- (in millions) FINANCIAL ASSETS Loans receivable $6,450.9 $6,454.9 $5,413.9 $5,417.0 Mortgage-backed and investment securities 2,805.7 2,754.0 2,783.5 2,707.2 ================================================================================= FINANCIAL LIABILITIES Deposits 7,374.8 7,380.2 6,263.1 6,262.7 FHLB advances 1,685.0 1,687.9 1,032.9 1,036.5 Long-term debt 1,605.6 1,673.3 1,654.9 1,717.1 ================================================================================= OFF-BALANCE-SHEET INSTRUMENTS Commitments to extend credit -- (0.7) -- (1.8) =================================================================================
Differences between fair value and carrying amounts are due primarily to instruments that provide fixed interest rates or contain fixed interest rate elements. Inherently, such instruments are subject to fluctuations in fair value due to subsequent movements in interest rates. The fair value of cash and cash equivalents, trade and other receivables, securities sold under agreements to repurchase and mortgage loans held for sale consistently approximate the carrying amount due to their short-term nature and are excluded from the above table. The fair value of mortgage-backed and investment securities and off-balance-sheet instruments are based on quoted market prices. Other financial instruments are valued using discounted cash flows. The discount rates used represent current rates for similar instruments. NOTE 4 - SHAREHOLDER RIGHTS PLAN During 1989, the Board of Directors adopted a Shareholder Rights Plan in which one preferred stock purchase right (Right) was declared as a dividend for each common share outstanding. Each one-half Right entitles shareholders to purchase, under certain conditions, 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 common shares or commences a tender or exchange offer, upon consummation of which such person or group would beneficially own 25 percent or more of the common shares. The company will generally be entitled to redeem the Rights at $0.01 per Right at any time until the 10th business day following public announcement that a 20 percent position has been acquired. Rights will expire on February 20, 1999. NOTE 5 - EMPLOYEE BENEFIT PLANS PENSIONS 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 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. Net pension costs include the following:
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- (in millions) CHARGES (CREDITS) Service cost - benefits earned during the period $ 13.5 $ 12.8 $ 11.6 Interest cost on projected benefit obligation 35.4 32.2 30.6 Actual return on plan assets (125.7) (71.2) (72.0) Net amortization and deferral 74.8 25.3 31.0 - ------------------------------------------------------------------------------- Net pension cost (credit) $ (2.0) $ (0.9) $ 1.2 ===============================================================================
Significant assumptions used to develop net pension cost for the defined benefit pension plans follow:
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- Discount rate for determining projected benefit obligation 7.50% 8.00% 7.75% Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% Average increase in compensation levels 3.50% 4.00% 4.75% ===============================================================================
57 21 The funded status of employee pension plans follows:
At year end 1997 1996 - ------------------------------------------------------------------------------- (in millions) Actuarial present value of projected benefit obligations: Vested $ 440.4 $ 379.4 Nonvested 32.2 28.5 - ------------------------------------------------------------------------------- Accumulated projected benefit obligation $ 472.6 $ 407.9 =============================================================================== Plan assets at fair value, primarily stocks and bonds $ 628.3 $ 528.2 Projected benefit obligation for service rendered to date (507.3) (455.0) - ------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 121.0 73.2 Unrecognized prior service cost 1.4 1.3 Unrecognized net gain from past experience different from that assumed (61.1) (9.6) Unrecognized net asset at beginning of period, less amortization to date (12.6) (17.0) - ------------------------------------------------------------------------------- Net pension asset included in the consolidated balance sheet $ 48.7 $ 47.9 ===============================================================================
POSTRETIREMENT BENEFITS The company provides medical and insurance benefits to certain eligible salaried and hourly employees who reach retirement age while employed by the company. Net postretirement benefit costs include the following:
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- (in millions) Service cost for benefits $ 2.7 $ 2.7 $ 2.6 Interest cost 8.3 8.5 8.7 Net amortization and deferral (1.3) (0.4) (0.4) - ------------------------------------------------------------------------------- Net postretirement cost $ 9.7 $ 10.8 $ 10.9 ===============================================================================
Significant assumptions used to develop net postretirement cost for the postretirement benefit plan follow:
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- Discount rate for determining postretirement benefit obligation 7.50% 8.00% 7.75% Health care cost trend rate 9.50% 10.00% 11.00% ===============================================================================
Summary information for the plan follows:
At year end 1997 1996 - -------------------------------------------------------------------------------- (in millions) ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION Retirees $ 61.8 $ 53.4 Active participants, eligible to retire 19.3 19.1 All other participants 33.8 32.4 - -------------------------------------------------------------------------------- Accrued postretirement benefit obligation 114.9 104.9 Unrecognized net gains 15.1 22.4 Unrecognized prior service cost 9.9 9.1 - -------------------------------------------------------------------------------- Postretirement benefit obligation included in the consolidated balance sheet $ 139.9 $ 136.4 ================================================================================
The health care trend rate of 9.5 percent in 1997 is expected to decline to 6.0 percent by 2010 and remain constant there-after. If such rate increased by 1 percent, the accumulated postretirement obligation would increase by 7.9 percent, and the 1997 net postretirement cost would increase by 9.4 percent. 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, the plans permitted the grant of stock appreciation rights with all or part of any options so granted. Options granted after 1995 have primarily a 10-year term and become exercisable in steps from one to five years. A summary of stock option activity follows:
For the year 1997 1996 1995 - ------------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price - ------------------------------------------------------------------------------------------ (shares in thousands) Outstanding beginning of year 1,626 $ 45 1,404 $ 45 1,275 $ 43 Granted 201 56 456 43 326 46 Exercised (303) 41 (144) 32 (146) 30 Forfeited (94) 50 (90) 48 (51) 48 - ------------------------------------------------------------------------------------------ Outstanding end of year 1,430 $ 47 1,626 $ 45 1,404 $ 45 - ------------------------------------------------------------------------------------------ Weighted average fair value of options granted during the year $18.24 $13.07 $13.55 ==========================================================================================
58 22 Options exercisable at year end were (in thousands): 1997--658; 1996--769; and 1995--718. The weighted average price for options exercisable at year end 1997 was $46 per share and $44 per share for year end 1996. Exercise prices for options outstanding at January 3, 1998, range from $12 to $66. The weighted average remaining contractual life of these options is eight years. An additional 3,283,654 and 1,065,422 shares of common stock were available for grants at year end 1997 and 1996, respectively. A restricted stock plan also provides for a maximum of 300,000 shares of restricted common stock to be reserved for awards. At year end 1997, awards of 140,532 shares of common stock were outstanding at an average price of $47.70 per share. The fair value of the options granted in 1997, 1996 and 1995 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
For the year 1997 1996 1995 - ----------------------------------------------------------------------------------- Expected dividend yield 2.1% 2.6% 2.3% Expected stock price volatility 27.3% 26.5% 27.0% Risk-free interest rate 5.6% 6.5% 6.7% Expected life of options 8.0 years 7.0 years 5.25 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 $49.1 million and $0.87 per diluted share in 1997, $131.5 million and $2.37 per diluted share in 1996, and $280.4 million and $5.00 per diluted share in 1995. 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. NOTE 7 - EARNINGS PER SHARE Numerators and denominators used in computing earnings per share are as follows:
For the year 1997 1996 1995 - -------------------------------------------------------------------------------- (in millions) Numerator for basic and diluted earnings per share-- net income $ 50.8 $ 132.8 $ 281.0 Denominator for basic earnings per share-- weighted average shares outstanding 56.0 55.5 56.0 Dilutive effect of stock options 0.2 0.1 0.1 - -------------------------------------------------------------------------------- Denominator for diluted earnings per share 56.2 55.6 56.1 ================================================================================
NOTE 8 - COMMITMENTS AND CONTINGENCIES As a result of allegations made by a former employee in a wrongful termination lawsuit, the Securities and Exchange Commission began a non-public investigation into the allegations. The company has denied these allegations, stating that they are without merit or grounds whatsoever, and that the resolution of such will not have an adverse effect on the company's consolidated financial statements. There are pending against the company and its subsidiaries other lawsuits, claims and environmental matters arising in the regular course of business. In the opinion of management, recoveries, if any, by plaintiffs or claimants that may result from the foregoing litigation and claims will not be material in relation to the consolidated financial statements of the company and its subsidiaries. See page 33 for a discussion of commitments on construction projects. NOTE 9 - BUSINESS SEGMENT INFORMATION Refer to "Business Segments" on page 25 for information relating to Revenues and Income Before Taxes, and page 32 for information relating to Capital Expenditures for the business segments for the years 1997, 1996 and 1995. Identifiable assets by business segment are those assets specifically used in each segment's operations. The results of the timber and timberlands operations are allocated to the manufacturing groups based upon fiber usage. Corporate assets are principally cash and office buildings. Additional business segment information is presented below:
For the year 1997 1996 1995 - ------------------------------------------------------------------------------- (in millions) IDENTIFIABLE ASSETS Paper $ 2,630.4 $ 2,715.7 $ 2,762.4 Building products 369.7 346.4 297.8 Timber and timberlands 564.5 538.1 490.6 Corporate and other activities 46.9 49.0 44.7 - ------------------------------------------------------------------------------- 3,611.5 3,649.2 3,595.5 Financial services 10,784.7 9,335.1 9,211.1 Reclassifications and eliminations (32.2) (37.2) (42.2) - ------------------------------------------------------------------------------- Total $14,364.0 $12,947.1 $12,764.4 =============================================================================== DEPRECIATION AND DEPLETION Paper $ 203.0 $ 197.6 $ 171.0 Building products 32.2 29.4 24.0 Timber and timberlands 19.4 16.9 12.2 Corporate and other activities 0.6 0.5 0.4 - ------------------------------------------------------------------------------- 255.2 244.4 207.6 Financial services 13.2 9.6 8.1 - ------------------------------------------------------------------------------- Total $ 268.4 $ 254.0 $ 215.7 ===============================================================================
59 23 NOTE 10 - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Selected quarterly financial results for the years 1997 and 1996 are summarized below:
First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------------------- (in millions, except per share amounts) 1997 Total revenues $ 850.9 $ 907.9 $ 938.4 $ 928.2 Manufacturing net sales 649.0 687.1 678.2 665.9 Manufacturing gross profit 81.9 84.9 75.8 89.8 Financial services operating income before taxes 29.5 32.4 37.4 32.8 Net income 13.2 15.6 12.6 9.4 Earnings per share(*): Basic $ 0.24 $ 0.28 $ 0.22 $ 0.17 Diluted $ 0.24 $ 0.28 $ 0.22 $ 0.17 ============================================================================================ 1996 Total revenues $ 868.7 $ 883.4 $ 862.5 $ 845.7 Manufacturing net sales 670.4 677.9 658.1 638.5 Manufacturing gross profit 137.3 124.6 97.5 87.5 Financial services operating income before taxes 24.7 29.7 (17.6) 26.3 Net income 46.4 35.4 32.7 18.3 Earnings per share*: Basic $ 0.84 $ 0.63 $ 0.59 $ 0.33 Diluted $ 0.84 $ 0.63 $ 0.59 $ 0.33 ============================================================================================
(*) Earnings per share amounts have been restated to comply with FASB Statement No. 128, Earnings Per Share. 60 24 REPORT OF MANAGEMENT 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. /s/ CLIFFORD J. GRUM Clifford J. Grum Chairman of the Board and Chief Executive Officer /s/ DAVID H. DOLBEN David H. Dolben Vice President and Chief Accounting Officer 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 January 3, 1998, and December 28, 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended January 3, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material mis-statement. 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 January 3, 1998, and December 28, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 3, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Houston, Texas January 30, 1998 61 EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 SUBSIDIARIES OF TEMPLE-INLAND INC. (Including Joint Ventures & Partnerships) (State of Incorporation) (Percentage of Ownership by Immediate Parent) (Federal Tax I.D. Number) INLAND CONTAINER CORPORATION I (DELAWARE) (100%) (75-2042862) Inland Paperboard and Packaging, Inc.(Delaware)(100%)(13-2946332) El Morro Corrugated Box Corporation (Delaware)(100%)(35-1323144) El Morro Corrugated Box Corporation (Puerto Rico)(100%)(66-0274059) Georgia Kraft Company (Delaware)(100%)(75-2212491) Sabine River & Northern Railroad Company (Texas)(100%)(34-0969790) Inland Argentina, Inc. (Delaware) (100%)(75-2559834) Inland Argentina S.A. (Argentina) (99.9%) Inland Chile I, Inc. (Delaware) (100%)(75-2559831) Manufacturas y Embalajes Inland Chile Limitada (90%; 10% Inland Chile II)(Chile) Inland Chile II, Inc. (Delaware) (100%)(75-2559773) Inland Container FSC, Inc. (U.S. Virgin Islands)(100%)(66-0412023) Inland International Holding Company (Delaware)(100%)(75-2559772) Inland Corrugados de Mexico, S.A. de C.V. (Mexico)(100%) Inland Corrugados de Guanajato, S.A. de C.V. (Mexico)(100%) Inland Corrugados de Monterrey, S.A. de C.V. (Mexico)(100%) Inland Corrugados de Sinaloa, S.A. de C.V. (Mexico)(100%) TinCorr S.A. (Uruguay) (100%) Inland Paper Company, Inc. (Indiana)(100%)(35-1343720) Wesland Container LLC (Arkansas) (50%) TEMPLE-INLAND FINANCIAL HOLDINGS INC. (NEVADA)(100%)(PENDING) TEMPLE-INLAND FOREST PRODUCTS CORPORATION (DELAWARE) (100%) (75-1462427) The Angelina Free Press, Inc. (Texas)(100%)(75-1080101) Del-Tin Fiber, L.L.C. (Arkansas) (50%) (71-0772548) Eastex Incorporated (Texas)(100%)(74-1180064) Evadale Realty Company (Delaware)(100%)(74-6047398) Bestile Manufacturing Company (California) (100%)(95-1608040) Home Owners Trust Company (Texas)(100%)(74-1482976) Sabine Investment Company of Texas, Inc. (Texas)(100%)(75-1308206) Scotch Investment Company (Texas)(100%)(74-1463738) Scotch Properties Management Inc. (Delaware)(100%)(75-2242094) Southern Pine Lumber Company (Texas)(100%)(75-1183646) Southern Pine Plywood Co. (Texas)(100%)(75-1159301) Standard Gypsum L.L.C. (Texas)(50%) Templar Essex Inc. (Delaware)(100%)(75-2459426) Temple Associates, Inc. (Texas)(100%)(75-0777257) Temple-Eastex Incorporated (Delaware) (100%)(75-2248412) Temple Industries, Inc. (Texas)(100%)(75-0571180) Temple-Inland Food Service Corporation (Delaware)(100%)(75-2285370) Temple Inland Forest Products of Canada Inc. (New Brunswick, Canada)(100%) Temple-Inland Forest Products International Inc. (Delaware)(100%)(75-1462427) Planfosur S. de R.L. de C.V. (Mexico) (51%; 49% owned by TIFPC) Temple-Inland Paperboard Specialty Company (Delaware) (100%)(75-2504953) Temple-Inland Recaustisizing Company (Delaware)(100%)(75-2468479) Temple-Inland Recovery Company (Delaware)(100%)(75-2468476) Temple-Inland Stores Company (Delaware)(100%)(75-2468477) Temple-Inland Trading Company (Delaware)(100%)(75-2604111) Temple Lumber Company (Texas)(100%)(75-6018597)
2 Temple/Re-Con Inc. (Delaware)(50%)(Pending) Texas Southeastern Railroad Company (Texas)(100%)(75-6002614) Topaz Oil Company (Texas)(100%)(75-1053707) TEMPLE-INLAND FINANCIAL SERVICES INC. (DELAWARE) (100%) (74-2421034) Guaranty Holdings Inc. I (Delaware) (100%)(75-2244180) Guaranty Federal Bank, F.S.B. (Federal) (79.1%; 20.9% owned by Temple-Inland Financial Holdings) Guaranty Group Inc. (Texas)(100%)(75-2515512) Participation Purchase Corporation (Nevada)(100%)(74-2676327) RWHC Inc.(Nevada)(100%)(74-2829164) Guaranty Preferred Capital Corporation (Nevada)(100%)(74-2829164) MBHC Inc. (Nevada)(100%)(86-0881894) Knutson Mortgage Corporation (100%)(Delaware) Knutson Title Company (100%)(Minnesota) Temple-Inland Mortgage Corporation (Nevada)(100%)(74-1878850) Western Cities Mortgage Corporation (California)(100%)(95-3836552) Stockton Financial Corporation (100%)(California) Stockton Service Corporation (100%)(California) 501 Weber Bldg., Inc. (100%)(California) Temple-Inland Properties Inc. (Delaware)(100%)(74-2431999) Stanford Realty Advisors, Inc. (Delaware)(100%)(75-2426395) LIC Investments Inc. (Delaware)(100%)(74-2366105) Lumbermen's Investment Corporation (Delaware)(100%)(74-1213624) Brehm-Aviara Group LLC (California)( %) CNB/LIC Ventures Inc. (98.4%) LIC Financial Corporation (Delaware)(100%)(74-2553548) LIC Ventures, Inc. (100%)(Delaware)(74-2772874) Landon Alma Partners Limited (49%) Landon Prairie Creek Partners Limited (49%) Landon Legacy Partners Limited (49%) Red Hawk Business Park Limited Partnership (49%) Tampa Palms Apartments, Ltd. (Florida) (69%) Turnbury Park Apartments, Ltd. (69%) Onion Creek Wastewater Corporation (Texas)(100%)(74-2733721) Olympia Joint Venture (San Antonio)(50%) Sunbelt Insurance Company (Texas)(100%)(74-1950814) TEEC Inc. (Texas)(100%)(75-1962795) Timberline Insurance Managers, Inc. (Texas)(100%)(74-1550763) Capline Marketing Group (Texas)(50%) Premium Acceptance Corporation (Texas)(100%)(74-2438963) Rubiola, Blair & Associates, Inc. (Texas)(100%) The Insurance Marketplace, Inc. (Texas)(100%)(74-2333654) West Houston Residential Development Partners (60%) Temple-Inland Capital Inc. (Delaware)(100%)(75-2555146) Temple-Inland Life Inc. (Nevada)(100%)(74-2387096) Temple-Inland Insurance Corporation (Delaware)(100%)(75-2045626) Temple-Inland Realty Inc. (Delaware) (100%)(75-2370575) Temco Associates (50%)
EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of Temple-Inland Inc. of our report dated January 30, 1998, included in the 1997 Annual Report to Shareholders of Temple-Inland Inc. We consent to the incorporation by reference in each of the following Registration Statements filed by Temple-Inland Inc. and in each related Prospectus of our report dated January 30, 1998, with respect to the consolidated financial statements of Temple-Inland Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended January 3, 1998, and our report dated January 30, 1998, with respect to the financial statement schedule included in this Annual Report (Form 10-K) for the year ended January 3, 1998.
REGISTRATION STATEMENT NO. PURPOSE - ------------- ------- No. 2-88202 Post-Effective Amendment Number 3 on Form S-8 No. 33-23132 Registration Statement on Form S-8 No. 33-25650 Post-Effective Amendment Number 1 on Form S-8 No. 33-27286 Post-Effective Amendment Number 1 on Form S-8 No. 33-32124 Post-Effective Amendment Number 2 on Form S-8 No. 33-43802 Registration Statement on Form S-8 No. 33-48034 Registration Statement on Form S-8 No. 33-54388 Registration Statement on Form S-8 No. 33-63104 Registration Statement on Form S-8 No. 333-27469 Registration Statement on Form S-8
/s/ ERNST & YOUNG LLP Houston, Texas March 26, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR TEMPLE-INLAND INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR JAN-03-1998 JAN-03-1998 188 0 277 0 339 0 2,916 0 14,364 0 1,605 0 0 61 1,984 14,364 2,680 3,625 2,613 3,426 0 0 110 95 44 51 0 0 0 51 .91 .90
EX-27.2 7 RESTATED FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED INCOME STATEMENTS FOR TEMPLE-INLAND INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR YEAR DEC-28-1996 DEC-31-1995 DEC-28-1996 DEC-31-1995 228 358 0 0 292 283 0 0 327 338 0 0 2,931 2,864 0 0 12,947 12,764 0 0 1,655 1,602 0 0 0 0 61 61 1,954 1,914 12,947 12,764 2,645 2,731 3,460 3,495 2,447 2,329 3,199 2,995 0 0 0 0 110 73 156 431 23 150 133 281 0 0 0 0 0 0 133 281 2.39 5.02 2.39 5.01
EX-27.3 8 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from consolidated balance sheets and consoliodated income statements for Temple-Inland Inc. and subsidiaries and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS 6-MOS 9-MOS JAN-03-1998 JAN-03-1998 JAN-03-1998 MAR-29-1997 JUN-28-1997 SEP-27-1997 136 188 220 0 0 0 302 319 319 0 0 0 347 332 322 0 0 0 2,944 2,957 2,944 0 0 0 13,151 14,932 14,976 0 0 0 1,758 1,724 1,653 0 0 0 0 0 0 61 61 61 1,939 2,023 2,007 13,151 14,932 14,976 649 1,336 2,014 851 1,759 2,697 630 1,297 1,965 802 1,658 2,549 0 0 0 0 0 0 28 56 83 22 48 69 9 19 28 13 29 41 0 0 0 0 0 0 0 0 0 13 29 41 0.24 0.52 0.74 0.24 0.52 0.74
EX-27.4 9 RESTATED FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from consolidated balance sheets and consolidated income statements for Temple-Inland Inc. and subsidiaries and is qualified in its entirety by reference to such financial statements. 1,000,000 3-MOS 6-MOS 9-MOS DEC-28-1996 DEC-28-1996 DEC-28-1996 MAR-30-1996 JUN-29-1996 SEP-28-1996 310 377 436 0 0 0 302 313 312 0 0 0 357 328 323 0 0 0 2,883 2,928 2,917 0 0 0 13,013 13,121 13,195 0 0 0 1,684 1,726 1,665 0 0 0 0 0 0 61 61 61 1,932 2,100 1,952 13,013 13,121 13,195 662 1,328 1,975 860 1,732 2,583 588 1,204 1,806 762 1,553 2,377 0 0 0 0 0 0 27 54 82 71 126 128 25 44 13 46 82 115 0 0 0 0 0 0 0 0 0 46 82 115 0.84 1.47 2.06 0.84 1.47 2.06
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