SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Quarterly Period
Ended March 29, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Transition Period
From to
Commission File Number 001-08634
Temple-Inland Inc.
(Exact name of registrant as specified in its charter)
Delaware 75-1903917
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1300 South MoPac Expressway, Austin, Texas 78746
(Address of principal executive offices, including Zip Code)
(512) 434-5800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Number of common shares outstanding
Class as of March 29, 2003
Common Stock (par
value $1.00 per share) 54,042,894
Page 1 of 47 The Exhibit Index is page 45.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SUMMARIZED STATEMENTS OF INCOME
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited
First Quarter
2003 2002
------ ------
(in millions)
NET REVENUES $ 847 $ 747
COSTS AND EXPENSES
Cost of sales 796 657
Selling and administrative 75 68
Other (income) expense 9 --
------ ------
880 725
------ ------
(33) 22
FINANCIAL SERVICES EARNINGS 39 27
------ ------
OPERATING INCOME 6 49
Interest expense (35) (25)
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES (29) 24
Income tax (expense) benefit 12 (9)
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS (17) 15
Discontinued operations -- --
------ ------
INCOME (LOSS) BEFORE ACCOUNTING CHANGE (17) 15
Effect of accounting change (1) (11)
------ ------
NET INCOME (LOSS) $ (18) $ 4
====== ======
See the notes to consolidated financial statements.
3
SUMMARIZED BALANCE SHEETS
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited
First
Quarter Year-End
2003 2002
------ ------
(in millions)
ASSETS
Current Assets
Cash $ 9 $ 17
Receivables, net of allowances of $13 in 2003
and $13 in 2002 382 352
Inventories:
Work in process and finished goods 86 69
Raw materials and supplies 232 269
------ ------
Total inventories 318 338
------ ------
Prepaid expenses and other 64 50
------ ------
Total current assets 773 757
------ ------
Investment in Financial Services 1,171 1,178
Property and Equipment:
Land and buildings 639 638
Machinery and equipment 3,430 3,412
Construction in progress 85 92
Less allowances for depreciation (2,150) (2,101)
------ ------
2,004 2,041
Timber and timberlands - less depletion 504 508
------ ------
Total property and equipment 2,508 2,549
Goodwill 243 249
Assets of Discontinued Operations 29 78
Other Assets 146 146
------ ------
TOTAL ASSETS $ 4,870 $ 4,957
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 195 $ 188
Employee compensation and benefits 50 67
Accrued interest 26 30
Accrued property taxes 16 28
Other accrued expenses 127 133
Liabilities of discontinued operations 21 28
Current portion of long-term debt 7 8
------ ------
Total current liabilities 442 482
Long-Term Debt 1,879 1,883
Deferred Income Taxes 220 245
Postretirement Benefits 148 147
Pension Liability 152 142
Other Long-Term Liabilities 105 109
------ ------
Total Liabilities 2,946 3,008
Shareholders' Equity 1,924 1,949
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 4,870 $ 4,957
====== ======
See the notes to consolidated financial statements.
4
SUMMARIZED STATEMENTS OF CASH FLOW
PARENT COMPANY (TEMPLE-INLAND INC.)
Unaudited
First Quarter
2003 2002
------ ------
(in millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income (loss) $ (18) $ 4
Adjustments:
Depreciation, depletion and amortization 58 49
Depreciation of leased property 1 1
Non-cash stock based compensation 9 2
Non-cash pension and postretirement expense 14 6
Cash contribution to pension and
postretirement plans (3) (3)
Impairment of long-lived assets 4 --
Deferred income taxes (13) 6
Unremitted earnings from Financial Services (25) (24)
Dividends from Financial Services 35 50
Working capital changes, net (47) (41)
Net assets of discontinued operations (5) (3)
Cumulative effect of accounting change 1 11
Other 9 (3)
----- -----
20 55
----- -----
CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures (29) (26)
Sales of non-strategic assets and operations 30 --
Acquisition of Gaylord, net of cash acquired -- (525)
Other acquisitions and joint ventures (3) (10)
----- -----
(2) (561)
----- -----
CASH PROVIDED BY (USED FOR) FINANCING
Bridge financing facility -- 847
Payment of assumed Gaylord bank debt -- (285)
Other additions to debt 1 39
Other payments of debt (6) (57)
Cash dividends paid to shareholders (19) (16)
Other -- 3
----- -----
(24) 531
----- -----
Effect of exchange rate changes on cash (2) --
----- -----
Net increase (decrease) in cash (8) 25
Cash at beginning of period 17 3
----- -----
Cash at end of period $ 9 $ 28
===== =====
See the notes to consolidated financial statements.
5
SUMMARIZED STATEMENTS OF INCOME
FINANCIAL SERVICES
Unaudited
First Quarter
2003 2002
------ ------
(in millions)
INTEREST INCOME
Loans and loans held for sale $ 133 $ 146
Securities available-for-sale 20 31
Securities held-to-maturity 39 10
Other earning assets 1 1
------ ------
Total interest income 193 188
INTEREST EXPENSE
Deposits 53 65
Borrowed funds 45 31
------ ------
Total interest expense 98 96
------ ------
NET INTEREST INCOME 95 92
Provision for loan losses (11) (14)
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 84 78
------ ------
NONINTEREST INCOME
Loan servicing fees 9 11
Amortization and impairment of servicing rights (18) (8)
Loan origination 43 30
Gain on sale of loans 23 13
Real estate operations 8 9
Insurance commissions and fees 10 11
Service charges on deposits 8 7
Operating lease income 2 3
Other 10 9
------ ------
Total noninterest income 95 85
------ ------
NONINTEREST EXPENSE
Compensation and benefits 83 76
Loan servicing and origination 3 1
Real estate operations, other than compensation 7 7
Insurance operations, other than compensation 3 4
Occupancy 8 9
Data processing 7 10
Other 29 29
------ ------
Total noninterest expense 140 136
------ ------
INCOME BEFORE TAXES 39 27
Income tax (expense) (14) (3)
------ ------
NET INCOME $ 25 $ 24
====== ======
See the notes to consolidated financial statements.
6
SUMMARIZED BALANCE SHEETS
FINANCIAL SERVICES
Unaudited
First
Quarter Year-End
2003 2002
------ ------
(in millions)
ASSETS
Cash and cash equivalents $ 327 $ 438
Loans held for sale 920 1,088
Loans receivable, net of allowance for losses of
$122 in 2003 and $132 in 2002 9,846 9,668
Securities available-for-sale 1,776 1,926
Securities held-to-maturity 4,192 3,915
Mortgage servicing rights 93 105
Real estate 254 249
Premises and equipment, net 157 157
Accounts, notes and accrued interest receivable 148 159
Goodwill 149 148
Other assets 207 163
------ ------
TOTAL ASSETS $ 18,069 $ 18,016
====== ======
LIABILITIES AND SHAREHOLDER'S EQUITY
Deposits $ 9,330 $ 9,203
Federal Home Loan Bank advances 3,114 3,386
Repurchase agreements 2,953 2,907
Other borrowings 190 181
Preferred stock issued by subsidiaries 305 305
Obligations to settle trade date securities 470 369
Other liabilities 536 487
------ ------
TOTAL LIABILITIES 16,898 16,838
------ ------
SHAREHOLDER'S EQUITY 1,171 1,178
------ ------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 18,069 $ 18,016
====== ======
See the notes to consolidated financial statements.
7
SUMMARIZED STATEMENTS OF CASH FLOWS
FINANCIAL SERVICES
Unaudited
First Quarter
2003 2002
------ ------
(in millions)
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income $ 25 $ 24
Adjustments:
Amortization, accretion and depreciation 26 16
Provision for loan losses 11 14
Originations of loans held for sale (3,194) (1,825)
Sales of loans held for sale 3,362 2,022
Collections on loans serviced for others, net (24) (99)
Originated mortgage servicing rights (6) (21)
Other 60 41
------ ------
260 172
------ ------
CASH PROVIDED BY (USED FOR) INVESTING
Purchases of securities available-for-sale (4) (13)
Principal payments and maturities of securities
available-for-sale 161 219
Purchases of securities held-to-maturity (553) (313)
Principal payments and maturities of securities
held-to-maturity 371 15
Loans originated or acquired, net of collections (239) (5)
Sale of mortgage servicing rights -- 19
Sale of loans 11 --
Acquisitions, net of cash acquired (1) (6)
Capital expenditures (5) (2)
Other (12) (2)
------ ------
(271) (88)
------ ------
CASH PROVIDED BY (USED FOR) FINANCING
Net increase (decrease) in deposits 150 (277)
Securities sold under repurchase agreements and
short-term borrowings, net 2 (182)
Additions to debt and long-term FHLB advances 10 319
Payments of debt and long-term FHLB advances (228) (39)
Dividends paid to parent company (35) (50)
Other 1 (2)
------ ------
(100) (231)
------ ------
Net increase (decrease) in cash and cash equivalents (111) (147)
Cash and cash equivalents at beginning of period 438 587
------ ------
Cash and cash equivalents at end of period $ 327 $ 440
====== ======
See the notes to consolidated financial statements.
8
CONSOLIDATED STATEMENTS OF INCOME
TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited
First Quarter
2003 2002
------ ------
(in millions,
except per share
amounts)
REVENUES
Manufacturing $ 847 $ 747
Financial Services 288 273
------ ------
1,135 1,020
------ ------
COSTS AND EXPENSES
Manufacturing 880 725
Financial Services 249 246
------ ------
1,129 971
------ ------
OPERATING INCOME 6 49
Parent company interest (35) (25)
------ ------
INCOME (LOSS) BEFORE TAXES (29) 24
Income tax (expense) benefit 12 (9)
------ ------
INCOME (LOSS) FROM CONTINUING OPERATIONS (17) 15
Discontinued operations -- --
------ ------
INCOME (LOSS) BEFORE ACCOUNTING CHANGE (17) 15
Effect of accounting change (1) (11)
------ ------
NET INCOME (LOSS) $ (18) $ 4
====== ======
EARNINGS (LOSS) PER SHARE
Basic:
Income (loss) from continuing operations $ (0.31) $ 0.30
Discontinued operations -- --
Effect of accounting change (0.01) (0.22)
------ ------
Net income (loss) $ (0.32) $ 0.08
====== ======
Diluted:
Income (loss) from continuing operations $ (0.31) $ 0.30
Discontinued operations -- --
Effect of accounting change (0.01) (0.22)
------ ------
Net income (loss) $ (0.32) $ 0.08
====== ======
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.34 $ 0.32
====== ======
See the notes to consolidated financial statements.
9
CONSOLIDATING BALANCE SHEETS
TEMPLE-INLAND INC. AND SUBSIDIARIES
First Quarter 2003
Unaudited
Parent Financial
Company Services Consolidated
(in millions)
ASSETS
Cash and cash equivalents $ 9 $ 327 $ 336
Loans held for sale -- 920 920
Loans and leases receivable, net -- 9,846 9,846
Securities available-for-sale -- 1,776 1,776
Securities held-to-maturity -- 4,192 4,192
Trade receivables, net 382 -- 382
Inventories 318 -- 318
Property and equipment, net 2,508 157 2,665
Goodwill 243 149 392
Other assets 239 702 891
Investment in Financial Services 1,171 -- --
------ ------ ------
TOTAL ASSETS $ 4,870 $ 18,069 $ 21,718
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ -- $ 9,330 $ 9,330
Federal Home Loan Bank advances -- 3,114 3,114
Securities sold under repurchase agreements -- 2,953 2,953
Obligations to settle trade date securities -- 470 470
Other liabilities 547 536 1,041
Long-term debt 1,879 190 2,069
Deferred income taxes 220 -- 212
Postretirement benefits 148 -- 148
Pension liability 152 -- 152
Preferred stock issued by subsidiaries -- 305 305
------ ------ ------
TOTAL LIABILITIES $ 2,946 $ 16,898 $ 19,794
------ ------ ------
SHAREHOLDERS' EQUITY
Preferred stock - par value $1 per share:
authorized 25,000,000 shares; none issued --
Common stock - par value $1 per share:
authorized 200,000,000 shares; issued
61,389,552 shares including shares held in the treasury 61
Additional paid-in capital 367
Accumulated other comprehensive income (loss) (135)
Retained earnings 1,964
------
2,257
Cost of shares held in the treasury: 7,346,658 shares (333)
------
TOTAL SHAREHOLDERS' EQUITY 1,924
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,718
======
See the notes to consolidated financial statements.
10
CONSOLIDATING BALANCE SHEETS
TEMPLE-INLAND INC. AND SUBSIDIARIES
Year-End 2002
Unaudited
Parent Financial
Company Services Consolidated
(in millions)
ASSETS
Cash and cash equivalents $ 17 $ 438 $ 455
Loans held for sale -- 1,088 1,088
Loans and leases receivable, net -- 9,668 9,668
Securities available-for-sale -- 1,926 1,926
Securities held-to-maturity -- 3,915 3,915
Trade receivables 352 -- 352
Inventories 338 -- 338
Property and equipment, net 2,549 157 2,706
Goodwill 249 148 397
Other assets 676 915
Investment in Financial Services 1,178 -- --
------ ------ ------
TOTAL ASSETS $ 4,957 $ 18,016 $ 21,760
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ -- $ 9,203 $ 9,203
Federal Home Loan Bank advances -- 3,386 3,386
Securities sold under repurchase agreements -- 2,907 2,907
Obligations to settle trade date securities -- 369 369
Other liabilities 591 487 1,052
Long-term debt 1,883 181 2,064
Deferred income taxes 245 -- 236
Postretirement benefits 147 -- 147
Pension liability 142 -- 142
Preferred stock issued by subsidiaries -- 305 305
------ ------ ------
TOTAL LIABILITIES $ 3,008 $ 16,838 $ 19,811
------ ------ ------
SHAREHOLDERS' EQUITY
Preferred stock - par value $1 per share:
authorized 25,000,000 shares; none issued --
Common stock - par value $1 per share:
authorized 200,000,000 shares; issued
61,389,552 shares including shares held in the treasury 61
Additional paid-in capital 368
Accumulated other comprehensive income (loss) (136)
Retained earnings 2,000
------
2,293
Cost of shares held in the treasury: 7,583,293 shares (344)
------
TOTAL SHAREHOLDERS' EQUITY 1,949
------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,760
======
See the notes to consolidated financial statements.
11
CONSOLIDATED STATEMENT OF CASH FLOWS
TEMPLE-INLAND INC. AND SUBSIDIARIES
Unaudited
First Quarter
2003 2002
------ ------
(in millions)
CASH PROVIDED (USED FOR) OPERATIONS
Net income (loss) $ (18) $ 4
Adjustments:
Depreciation, depletion and amortization 64 56
Depreciation on leased property 2 4
Provision for loan losses 11 14
Impairment of long-lived assets 4 --
Deferred taxes (13) 6
Amortization and accretion of financial instruments 18 6
Originations of loans held for sale (3,194) (1,825)
Sales of loans held for sale 3,362 2,022
Working capital changes, net (47) (41)
Collections and remittances on loans serviced for others, net (24) (99)
Originated mortgage servicing rights (6) (21)
Net assets of discontinued operations (5) (3)
Cumulative effect of accounting change 1 11
Other 90 43
----- -----
245 177
----- -----
CASH PROVIDED BY (USED FOR) INVESTING
Capital expenditures (34) (28)
Sale of non-strategic assets and operations 40 --
Purchases of securities available-for-sale (4) (13)
Principal payments and maturities of securities
available-for-sale 161 219
Purchases of securities held-to-maturity (553) (313)
Principal payments and maturities of securities
held-to-maturity 371 15
Sale of mortgage servicing rights -- 19
Loans originated or acquired, net of principal collected (239) (5)
Proceeds from sale of loans 11 --
Acquisitions, net of cash acquired (4) (541)
Other (22) (2)
----- -----
(273) (649)
----- -----
CASH PROVIDED BY (USED FOR) FINANCING
Net increase (decrease) in deposits 150 (277)
Bridge financing facility -- 847
Payment of assumed Gaylord bank debt -- (285)
Additions to debt 11 358
Payments of debt (234) (96)
Repurchase agreements and short-term borrowings, net 2 (182)
Cash dividends paid to shareholders (19) (16)
Other 1 1
----- -----
(89) 350
----- -----
Effect of exchange rate changes on cash (2) --
----- -----
Net increase (decrease) in cash and cash equivalents (119) (122)
Cash and cash equivalents at beginning of period 455 590
----- -----
Cash and cash equivalents at end of period $ 336 $ 468
===== =====
See the notes to consolidated financial statements.
12
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Therefore, these statements do not include all of the information
and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the
opinion of management, all adjustments (consisting only of normal
accruals) considered necessary for a fair presentation have been
included. Interim operating results are not necessarily
indicative of the results that may be expected for the entire
year. For further information, refer to the financial statements
and footnotes included in the Annual Report on Form 10-K of
Temple-Inland Inc. (the "Company") for the fiscal year ended
December 28, 2002.
The consolidated financial statements include the accounts
of the Company and its manufacturing and financial services
subsidiaries. The consolidated net assets invested in financial
services activities are subject, in varying degrees, to
regulatory rules and restrictions including restrictions on the
payment of dividends to the Company. Accordingly, included as an
integral part of the consolidated financial statements are
separate summarized financial statements for the Company's
manufacturing and financial services subsidiaries.
The Parent Company (Temple-Inland Inc.) summarized financial
statements include the accounts of the Company and its
manufacturing subsidiaries (the parent company). The net assets
invested in Financial Services are reflected in the summarized
financial statements on the equity basis. Related earnings,
however, are presented before tax to be consistent with the
consolidated financial statements. These financial statements
should be read in conjunction with the Company's consolidated
financial statements and the Financial Services summarized
financial statements.
All material intercompany amounts and transactions have been
eliminated. Certain amounts have been reclassified to conform to
current year's classifications.
13
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE B - EARNINGS PER SHARE
Denominators used in computing per share amounts follow:
First Quarter
2003 2002
----- ------
(in millions)
Denominators for earnings (loss) per share
Weighted average shares outstanding - basic 54.0 49.4
Dilutive effect of equity purchase contracts -- --
Dilutive effect of stock options -- 0.1
----- -----
Weighted average shares outstanding - diluted 54.0 49.5
===== =====
As a result of the net loss in first quarter 2003,
incremental shares attributable to the assumed exercise of
outstanding employee stock options and equity purchase contracts
are antidilutive and, therefore, excluded from the computation of
diluted earnings per share. Had these shares been included in the
computation for first quarter 2003, the effect would not have
been material.
NOTE C - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of:
First Quarter
2003 2002
------ ------
(in millions)
Net income (loss) $ (18) $ 4
Other comprehensive income (loss), net of taxes:
Unrealized gains (losses) on:
Available-for-sale securities 4 --
Derivative instruments -- 1
Foreign currency translation adjustments (3) 1
----- -----
Other comprehensive income (loss) 1 2
----- -----
Comprehensive income (loss) $ (17) $ 6
===== =====
At first quarter-end 2003, the aggregate fair value of all
derivative instruments was a $9 million liability, consisting of
a $9 million liability for an interest rate swap derivative and a
$0.1 million liability related to linerboard and OCC derivatives.
There was no ineffective portion of derivatives charged to
earnings in first quarter 2003 and amounts reclassified from
other comprehensive income into earnings were not material.
14
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE D - SEGMENT INFORMATION
The Company has three reportable segments: Corrugated
Packaging, Building Products, and Financial Services.
- -----------------------------------------------------------------------------------
For first quarter or Corrugated Building Financial Corporate
at quarter-end 2003 Packaging Products Services and Other Total
- -------------------- ---------- -------- --------- --------- -------
(in millions)
Revenues from external
customers $ 667 180 288 -- $ 1,135
Depreciation, depletion
and amortization $ 41 16 7 2 $ 66
Operating income $ (4) (9) 39 (20)(a) $ 6
Financial Services, net
interest income $ -- -- 95 -- $ 95
Total assets $ 2,444 1,126 18,069 79 $ 21,718
Capital expenditures $ 20 8 5 1 $ 34
Goodwill $ 243 -- 149 -- $ 392
- -----------------------------------------------------------------------------------
For first quarter or
at quarter-end 2002
(in millions)
Revenues from external
customers $ 557 190 273 -- $ 1,020
Depreciation, depletion
and amortization $ 35 14 10 1 $ 60
Operating income $ 22 10 34 (17)(b) $ 49
Financial Services, net
interest income $ -- -- 92 -- $ 92
Total assets $ 2,688 1,203 15,711 75 $ 19,677
Capital expenditures $ 17 9 2 -- $ 28
Goodwill $ 314 -- 130 -- $ 444
- -----------------------------------------------------------------------------------
(a) Includes a charge of $6 million related to box plant
closures, which applies to Corrugated Packaging, and a charge of
$3 million related to consolidation and supply chain cost
reduction initiatives, which applies to Corporate and Other.
(b) Includes a charge of $7 million related to severance and
write-off of technology investments, all of which applies to
Financial Services.
NOTE E - CONTINGENCIES
There are pending against the Company and its subsidiaries
lawsuits, claims and environmental matters arising in the regular
course of business. The resolution of these matters is not
expected to have a material adverse effect on the Company's
operations or financial position.
NOTE F - ACQUISITIONS
The Company acquired effective control of Gaylord Container
Corporation on February 28, 2002. The results of Gaylord's
operations have been included in the Company's income statement
since the beginning of March 2002.
During first quarter 2003, the Company completed the
allocation of the purchase price to the acquired assets and
liabilities of Gaylord, which resulted in a $6 million reduction
of goodwill. At first quarter-end 2003, goodwill related to the
Gaylord acquisition was $195 million. The allocation is based, in
15
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
part, on estimated amounts for income taxes and other
liabilities. Differences between the estimated amount for income
taxes and the actual amount will result in an adjustment of
goodwill. Additionally, liabilities included in the allocation
that are settled for amounts less than estimated, will result in
a reduction to goodwill while liabilities settled for more than
estimated will result in a charge to income.
The following parent company unaudited pro forma information
for first quarter 2002, assumes the acquisition of Gaylord and
the related financing transactions occurred at the beginning of
2002:
Net revenues $ 887
Income from continuing operations 7
Per diluted share
Income from continuing operations $ 0.15
NOTE G - DISCONTINUED OPERATIONS
At first quarter-end 2003, discontinued operations consist
of Gaylord's chemical business and accruals related to the 1999
sale of the bleached paperboard operations. At first quarter-end
2003, the assets and liabilities of discontinued operations
includes $12 million of working capital, $16 million of property
and equipment, and $20 million of environmental and other long-
term accruals. Revenues from discontinued operations for first
quarter 2003 were $9 million.
NOTE H - OTHER OPERATING (INCOME) EXPENSE
Other operating (income) expense consists of:
First Quarter
2003 2002
------ ------
(in millions)
Expenses associated with consolidation and
supply chain initiatives $ 3 $ --
Loss on closure of box plants 6 --
----- -----
Total $ 9 $ --
===== =====
During first quarter 2003, the Company incurred $3 million
in expenses related to initiatives to consolidate administrative
functions and effect improvements in supply chain management.
These expenses consist principally of fees paid to third party
consultants.
During first quarter 2003, the Company announced its
intentions to permanently close two box plants, which resulted in
an impairment loss of $4 million related to long-lived assets and
$2 million in involuntary employee termination liabilities
16
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
affecting approximately 200 employees. It is expected that the
two box plants will close and severance will be paid during
second quarter 2003.
A summary of the activity related to all facility closure
accruals for first quarter 2003 follows:
Beginning Cash End of
of Period Additions Payments Period
--------- --------- -------- ------
Involuntary employee
terminations $ 1 $ 2 $ (1) $ 2
Contract termination
penalties 6 -- -- 6
Environmental
compliance 13 -- -- 13
Demolition 13 -- (1) 12
----- ----- ----- -----
Total $ 33 $ 2 $ (2) $ 33
===== ===== ===== =====
NOTE I - NEW ACCOUNTING PRONOUNCEMENTS
Stock-Based Compensation
Beginning January 2003, the Company voluntarily adopted the
prospective transition method of accounting for stock-based
compensation contained in Statement of Financial Accounting
Standards (SFAS) No. 148, Accounting for Stock-Based Compensation-
Transition and Disclosure, an amendment of FASB Statement No.
123. The principal effect of adopting the prospective transition
method is that the fair value of stock options granted in 2003
and thereafter are charged to expense over the option vesting
period. As a result of the adoption of this prospective
transition method, first quarter 2003 net loss was increased by
$0.1 million with no effect on earnings per share.
Prior to 2003, the Company used the intrinsic value method
in accounting for its stock-based compensation. As a result, no
stock-based compensation expense related to stock options is
reflected in prior years' net income, as all stock options
granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. Therefore, the cost
related to stock-based compensation recognized in net income
(loss) for first quarter 2003 and 2002 is less than would have
been recognized if the fair value method had been applied to all
stock options granted since 1995. The following table illustrates
the effect on net income (loss) and earnings (loss) per share as
if the fair value method had been applied to all stock options
granted since 1995.
17
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
First Quarter
2003 2002
------ ------
(in millions)
Net income (loss), as reported $ (18) $ 4
Add: Stock-based compensation
expense, net of related tax
effects, included in the
determination of reported net
income 5 1
Deduct: Total stock-based
compensation expense, net of
related tax effects, determined
under the fair value based
method for all awards (7) (3)
---- ----
Pro forma net income (loss) $ (20) $ 2
==== ====
Earnings (loss) per share:
Basic, as reported $ (0.32) $ 0.08
Basic, pro forma $ (0.37) $ 0.04
Diluted, as reported $ (0.32) $ 0.08
Diluted, pro forma $ (0.37) $ 0.04
Asset Retirement Obligations
Beginning January 2003, the Company was required to adopt
SFAS No. 143, Accounting for Asset Retirement Obligations. The
Statement requires legal obligations associated with the
retirement of long-lived assets to be recognized at their fair
value at the time that the obligations are incurred. Upon initial
recognition of a liability, that cost is capitalized as part of
the related long-lived asset and allocated to expense over the
useful life of the asset. The effect of adopting this statement
was to increase property, plant and equipment by $3 million,
recognize an asset retirement obligation liability of $4 million,
and to increase first quarter net loss by $1 million or $0.01 per
share for the cumulative effect of adoption.
Disposal Activities
Beginning January 2003, the Company was required to adopt
SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. Under this statement, liabilities for costs
associated with exit or disposal activities, including
restructurings, are recognized when the liability is incurred and
can be measured at estimated fair value. The effect on earnings
or financial position of adopting this statement was not
material.
18
TEMPLE-INLAND INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Pronouncements
Also during first quarter 2003, the Company was required to
adopt FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others and FASB Interpretation No.
46, Consolidation of Variable Interest Entities. The effect on
earnings or financial position of adopting these other
pronouncements was not material.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements
that involve risks and uncertainties. The actual results achieved
by the Company may differ significantly from the results
discussed in the forward-looking statements. Factors that might
cause such differences include general economic, market, or
business conditions; the opportunities or lack thereof that may
or may not be presented to and pursued; availability and price of
raw materials used; competitive actions by other companies;
changes in laws or regulations; the accuracy of certain judgments
and estimates concerning the integration of acquired operations;
the accuracy of certain judgments and estimates concerning the
consolidation and supply chain initiatives; and other factors,
many of which are beyond the control of the Company.
Results of Operations for the fiscal quarters ended March 2003
and 2002
Summary
Consolidated revenues were $1.1 billion in first quarter
2003 compared with $1.0 billion in first quarter 2002. Income
from continuing operations was a $17 million loss in first
quarter 2003 compared with income of $15 million in first quarter
2002. Income from continuing operations per share was a $0.31
loss in first quarter 2003 compared with income of $0.30 in first
quarter 2002.
Business Segments
The Company manages its operations through three business
segments, Corrugated Packaging, Building Products, and Financial
Services. Each of these business segments is affected by the
factors of supply and demand and changes in domestic and global
economic conditions. These conditions include changes in interest
rates, new housing starts, home repair and remodeling activities,
and the strength of the U.S. dollar, some or all of which may
have varying degrees of impact on the business segments. As used
herein the term "parent company" refers to the financial
statements of the Company and its manufacturing business
segments, Corrugated Packaging and Building Products, with
Financial Services reflected on the equity method.
20
A summary of the results of operations by business segment
follows:
First Quarter
2003 2002
------ ------
(in millions)
Revenues
Corrugated Packaging $ 667 $ 557
Building Products 180 190
Financial Services 288 273
------ ------
Total revenues $ 1,135 $ 1,020
====== ======
Segment Operating Income
Corrugated Packaging $ (4) $ 22
Building Products (9) 10
Financial Services 39 34
------ ------
Total segment operating income 26 66
------ ------
Corporate expenses (11) (10)
Other income (expense)(a) (9) (7)
Parent company interest (35) (25)
------ ------
Income (loss) before taxes (29) 24
Income tax (expense) benefit 12 (9)
------ ------
Income (loss) from continuing operations (17) 15
Discontinued operations -- --
Effect of accounting change (1) (11)
------ ------
Net income (loss) $ (18) $ 4
====== ======
(a) Other income (expense) includes (i) in 2003 a $6 million
charge for box plant closures, all of which applies to
Corrugated Packaging, and $3 million of expenses for
consolidation and supply chain initiatives, all of which
applies to Corporate and other, and (ii) in 2002 a $7 million
charge for severance and write-off of technology investments,
all of which applies to Financial Services.
First quarter 2002 amounts have been reclassified to conform
to current year classifications.
Corrugated Packaging
The Company acquired effective control of Gaylord Container
Corporation and began consolidating the results of Gaylord in
March 2002. The Company also acquired a box plant in Puerto Rico
in March 2002, the converting facilities of Mack Packaging Group
in May 2002, and Fibre Innovations LLC in November 2002. As a
result, the 2003 financial information for Corrugated Packaging
is not comparable to prior periods.
Corrugated Packaging revenues were $667 million in first
quarter 2003 compared with $557 million in first quarter 2002.
Revenues from sales of corrugated packaging represented 94
percent of segment revenues in both first quarter 2003 and first
quarter 2002. The remaining revenues are derived from sales of
linerboard. The change in revenues in 2003 was principally due to
the inclusion of the acquired operations, $122 million, partially
offset by lower box prices and lower box and linerboard shipments.
21
Average corrugated packaging prices were down two percent.
Corrugated packaging shipments, adjusted for the effect of
acquisitions in 2002, were down three percent. Average linerboard
prices were up two percent. Linerboard shipments, adjusted for
the effect of acquisitions in 2002, were down six percent.
Compared with fourth quarter 2002, Corrugated Packaging
revenues were up $12 million. Average corrugated packaging prices
were down less than one percent while shipments were up two
percent. Average linerboard prices were down one percent while
shipments were down slightly. Corrugated packaging markets
continue to be adversely affected by the weak economy. Linerboard
markets continue to be adversely affected by both the weak
economy and increased offshore capacity partially offset by a
weaker U.S. dollar.
Costs, which include production, distribution, and
administrative costs were $671 million in first quarter 2003
compared with $535 million in first quarter 2002. The change in
costs in 2003 was principally due to:
- the inclusion of the acquired operations,
- higher energy costs, up $22 million,
- higher pension costs, up $7 million, and
- higher OCC costs, up $3 million.
Average OCC cost was $82 per ton during first quarter 2003
compared with $68 per ton during first quarter 2002. OCC prices
rose throughout first quarter 2003. It is likely that OCC costs
will continue to fluctuate during 2003.
Mill production was:
- 763,000 tons in first quarter 2003,
- 614,000 tons in first quarter 2002, and
- 713,000 tons in fourth quarter 2002.
Mill production data presented above is not comparable due to the
effect of the Gaylord acquisition, beginning on March 1, 2002,
and the Antioch shutdown in September 2002.
The percentage of mill production used by Corrugated
Packaging operations was:
- 84 percent in first quarter 2003,
- 83 percent in first quarter 2002, and
- 83 percent in fourth quarter 2002.
The remainder was sold in the domestic and export markets.
22
Excluding routine maintenance, production downtime was:
- 46,000 tons in first quarter 2003 due to mix and operational
reasons,
- 103,000 tons in first quarter 2002 due to market, mix and
operational reasons, and
- 96,000 tons in fourth quarter 2002 due to market, mix and
operational reasons.
Production downtime may occur in future quarters.
Market conditions continue to be weak for lightweight gypsum
facing paper. As a result, the Company's Premier Boxboard joint
venture continues to produce corrugating medium. The Company
purchased 26,000 tons of corrugating medium from the joint
venture in first quarter 2003. It is uncertain when market
conditions for lightweight gypsum facing paper will improve.
In conjunction with the acquisition of Gaylord, the Company
announced its intention to sell several non-strategic assets and
operations obtained in the acquisition including the retail bag
business, the multi-wall bag business and kraft paper mill, and
the chemical business. The only non-strategic asset that remains
is the chemical business. The operating results and cash flows of
this operation are classified as discontinued operations and are
excluded from business segment operating income. The Company
expects that it may not sell the chemical business until the
toxic tort litigation in which the chemical business is involved
is satisfactorily resolved.
The Company is continuing its efforts to enhance return on
investment within Corrugated Packaging. These efforts include
reviewing operations that are unable to meet return objectives
and determining appropriate courses of actions including the
possible consolidation and rationalization of converting
facilities. In March 2003, the Company announced its intention
to close permanently its converting facilities in Hattiesburg,
Mississippi and Elizabethton, Tennessee, which resulted in an
impairment loss of $4 million related to long-lived assets and
$2 million in involuntary employee termination liabilities. It
is expected that the two box plants will close and severance will
be paid during second quarter 2003. These losses and costs are
included in other operating expenses and excluded from segment
operating income.
Corrugated Packaging had a $4 million operating loss in
first quarter 2003 compared with income of $22 million in first
quarter 2002.
23
Building Products
Building Products' revenues were $180 million in first
quarter 2003 compared with $190 million in first quarter 2002.
The change in revenues in 2003 was principally due to lower
average prices and shipments in most product lines as follows:
First Quarter 2003 versus First Quarter 2002
Increase (Decrease) in
--------------------------------------------
Average Prices Shipments
-------------- ---------
Lumber (8%) 14%
Particleboard (8%) (3%)
Gypsum (3%) (7%)
MDF -- (4%)
Other revenues include sales of high-value timberlands. These
sales contributed $1 million in operating income in first quarter
2003 compared with $8 million in first quarter 2002.
Compared with fourth quarter 2002, revenues were up $3
million. While average prices for lumber were up four percent,
average prices for particleboard were down one percent, gypsum
down five percent, and MDF down three percent. Shipments of
lumber were up six percent, particleboard up two percent, and MDF
up seven percent. Shipments of gypsum were down five percent.
Costs, which include production, distribution, and
administrative costs were $189 million in first quarter 2003
compared with $180 million in first quarter 2002. The change in
costs in 2003 was principally due to:
- higher lumber production volumes, up $3 million,
- higher energy costs, up $3 million, and
- higher pension costs, up $2 million.
Production averaged from a low of 66 percent to a high of 76
percent of capacity in the various product lines. Production was
curtailed to varying degrees in all product lines in first quarter
2003 to match customer demand. The Company's joint venture
operations also experienced production curtailments in first
quarter 2003. Production may be curtailed in future quarters to
match customer demand.
The Company's Del-Tin Fiber LLC MDF joint venture in El
Dorado, Arkansas continues to experience production and cost
issues, though some improvement was made in first quarter 2003.
In January 2003, Deltic Timber Corporation, the partner in this
venture, announced its intention to exit this business upon the
earliest, reasonable opportunity provided by the market. It is
uncertain what effects Deltic Timber's decision will have on the
joint venture or its operations. The venture had a net loss of $3
million in first quarter 2003 compared with a net loss of $5
million in first quarter 2002. The Company's share of the
venture's loss was $1 million in first quarter 2003 compared with
24
$2 million in first quarter 2002. In first quarter 2003, the
Company and Deltic Timber Corporation each contributed $3 million
in cash to the venture.
The Company is continuing its efforts to enhance return on
investment within Building Products. These include reviewing
operations that are unable to meet return objectives and
determining appropriate courses of action including the possible
rationalization of production facilities. In addition, the
Company is continuing to address market issues at its
particleboard and MDF facilities, including the Del-Tin Fiber MDF
joint venture. In April 2003, the Company announced the
indefinite shutdown of its Mt. Jewett, Pennsylvania particleboard
plant. In connection with this shutdown the Company expects to
incur $1 million in involuntary employee termination liabilities.
It is expected that these liabilities will be paid during second
quarter 2003.
Building Products had a $9 million operating loss in first
quarter 2003 compared with income of $10 million in first quarter
2002.
Financial Services
Operations
Financial Services' revenues, consisting of interest and non-
interest income, were $288 million in first quarter 2003 compared
with $273 million in first quarter 2002.
Selected financial information for Financial Services
follows:
Fourth
First Quarter Quarter
------------- -------
2003 2002 2002
---- ---- ----
(in millions)
Net interest income $ 95 $ 92 $ 96
Provision for loan losses (11) (14) (3)
Noninterest income 95 85 116
Noninterest expense (140) (129) (153)
----- ----- -----
Segment operating income 39 34 56
Severance and asset write-offs -- (7) --
----- ----- -----
Operating income $ 39 $ 27 $ 56
===== ===== =====
Net interest income was $95 million in first quarter 2003
compared with $92 million in first quarter 2002. The change in
net interest income in 2003 was principally due to an increase in
average earning assets, principally securities, up 16 percent,
partially offset by a decline in the net interest spread
resulting from the lower interest rate environment combined with
the maintenance of an asset sensitive position. If interest rates
25
continue to decline in 2003 it is likely that net interest income
will be adversely affected. However, if interest rates begin to
rise in 2003, then it is likely that net interest income would be
positively affected.
The provision for loan losses was $11 million in first
quarter 2003 compared with $14 million in first quarter 2002. The
provision for first quarter 2003 related principally to
commercial and business loans primarily in the asset-based
lending and leasing portfolios. The provision for first quarter
2002 related principally to commercial and business loans
primarily in the asset-based lending portfolio.
Noninterest income includes revenues from mortgage banking
and real estate and insurance activities. Noninterest income was
$95 million in first quarter 2003 compared with $85 million in
first quarter 2002. The change in noninterest income in 2003 was
principally due to an increase in mortgage originations. See
Mortgage Banking Activities for further information regarding
mortgage-banking operations.
Noninterest expense was $140 million in first quarter 2003
compared with $129 million in first quarter 2002. The change in
noninterest expense in 2003 was principally due to costs
associated with the mortgage banking operations, primarily
salary, commissions, benefits, and loan servicing and origination
expenses.
Earning Assets
Earning assets include cash equivalents, mortgage loans held
for sale, securities, and loans. At first quarter-end 2003, cash
equivalents, mortgage loans held for sale, securities, and
residential housing loans constituted 77 percent of total earning
assets compared with 69 percent at first quarter-end 2002.
Securities, which include mortgage-backed and other
securities, were $6.0 billion at first quarter-end 2003 compared
with $3.8 billion at first quarter-end 2002. The increase in 2003
was due to an effort to increase residential earning assets.
Loans were $10.0 billion at first quarter-end 2003 compared
with $9.9 billion at first quarter-end 2002 and $9.8 billion at
year-end 2002. The following table summarizes the composition of
the loan portfolio:
26
First Quarter-End Year-End
----------------- --------
2003 2002 2002
------ ------ ------
(in millions)
Single-family mortgage $ 2,743 $ 1,961 $ 2,470
Single-family mortgage warehouse 463 392 522
Single-family construction 1,028 1,024 1,004
Multifamily and senior housing 1,892 1,917 1,858
------ ------ ------
Total residential housing 6,126 5,294 5,854
Commercial real estate 1,765 2,483 1,891
Commercial and business 1,886 1,897 1,856
Consumer and other 191 245 199
------ ------ ------
9,968 9,919 9,800
Less allowance for loan losses (122) (136) (132)
------ ------ ------
$ 9,846 $ 9,783 $ 9,668
====== ====== ======
Single-family mortgages are made to owners to finance the
purchase of a home. Single-family mortgage warehouse provides
funding to mortgage lenders to support the flow of loans from
origination to sale. Single-family construction finances the
development and construction of single-family homes,
condominiums, and town homes, including the acquisition and
development of home lots. Multifamily and senior housing loans
are for the development, construction, and lease up of apartment
projects and housing for independent, assisted, and memory-
impaired residents.
Commercial real estate loans provide funding for the
development, construction, and lease up principally of office,
retail, and industrial projects. Commercial and business loans
finance business operations and principally include asset-based,
syndicated and middle market loans, and direct financing leases
on equipment. Consumer and other loans principally include loans
secured by junior liens on single-family homes, not related to
their purchase.
Although total loans have remained relatively flat over the
past year, the composition of the portfolio has changed due to an
effort to increase residential housing earning assets. As a
result, residential housing loans represent 61 percent of the
loan portfolio at first quarter-end 2003 compared with 53 percent
at first quarter-end 2002 and 60 percent at year-end 2002.
Asset Quality
Several key measures are used to evaluate and monitor asset
quality. These measures include the level of loan delinquencies,
nonperforming loans and assets and net charge-offs compared with
average loans.
27
First Quarter-End Year-End
----------------- --------
2003 2002 2002
------ ------ ------
(in millions)
Accruing loans past due 30 - 89 days $ 95 $ 95 $ 108
Accruing loans past due 90 days or more 15 1 7
------ ----- -----
Accruing loans past due 30 days or more $ 110 $ 96 $ 115
====== ===== =====
Nonaccrual loans $ 128 $ 169 $ 126
Restructured loans -- -- --
------ ----- -----
Nonperforming loans 128 169 126
Foreclosed property 4 3 6
Restructured operating leases 42 -- --
------ ----- -----
Nonperforming assets $ 174 $ 172 $ 132
====== ===== =====
Allowance for loan losses $ 122 $ 136 $ 132
Nonperforming loan ratio 1.28% 1.71% 1.28%
Nonperforming asset ratio 1.74% 1.74% 1.34%
Allowance for loan losses/total loans 1.22% 1.37% 1.34%
Allowance for loan losses/nonperforming
loans 95.52% 80.31% 104.80%
The change at first quarter-end 2003 as compared with first
quarter-end 2002 in the level of nonaccrual loans was principally
due to payoffs and upgrades of loans in the senior housing
portfolio. The change in 2003 in the level of restructured
operating leases was due to the restructuring of two leveraged,
direct financing leases on cargo aircraft totaling $32 million.
Due to a reduction in the lease payments in the restructuring,
the leases were reclassified as operating leases. As a result,
$20 million in leverage was removed, and the assets were written
down to estimated fair market value. The restructured operating
leases will be classified as nonperforming until such time as the
lessee has evidenced the ability to perform under the terms of
the restructured leases.
Both the asset-based lending and leasing portfolios, which
represent 37 percent of commercial and business loans, will
likely continue to be adversely affected by the weak economy.
Allowance for Loan Losses
The allowance for loan losses is comprised of specific
allowances, general allowances, and an unallocated allowance.
Management evaluates the allowance for loan losses to ensure the
level is adequate to absorb losses inherent in the loan
portfolio. The allowance is increased by charges to income and
decreased by charge-offs, net of recoveries.
28
Changes in the allowance for loan losses were:
Fourth
First Quarter Quarter
------------- -------
2003 2002 2002
---- ---- ----
(in millions)
Balance at beginning of period $ 132 $ 139 $ 141
Charge-offs:
Residential -- -- --
Commercial real estate -- -- --
Commercial and business (21) (18) (12)
Consumer and other -- -- --
----- ----- -----
Total charge-offs (21) (18) (12)
Recoveries:
Residential -- -- --
Commercial real estate -- -- --
Commercial and business -- 1 --
Consumer and other -- -- --
----- ----- -----
Total recoveries -- 1 --
----- ----- -----
Net charge-offs (21) (17) (12)
Provision for loan losses 11 14 3
----- ----- -----
Balance at end of period $ 122 $ 136 $ 132
===== ===== =====
Net charge-offs (annualized) as
a percentage of average loans
outstanding 0.86% 0.72% 0.49%
First quarter 2003 charge-offs related principally to two
loans in the asset-based lending portfolio and two leveraged
direct financing leases, reclassifed as operating leases as of
quarter end, on cargo aircraft in the leasing portfolio. The
leveraged lease charge-offs totaled $10 million and represented
the write down of the underlying assets to their estimated fair
market value. First quarter 2002 charge-offs related principally
to asset-based loans in the commercial and business portfolio
were partially offset by recoveries of $1 million.
Mortgage Banking Activities
Mortgage loan originations were $3.2 billion in first
quarter 2003 compared with $2.0 billion in first quarter 2002.
Included in total production were loans originated for the
savings bank of $555 million in first quarter 2003 compared with
$184 million in first quarter 2002. The significant increase in
loans originated for the savings bank in first quarter 2003 was
the result of continued efforts to increase the level of single-
family mortgage assets at the savings bank. The high level of
mortgage loan originations during first quarter 2003 was due to
continued refinance activity resulting from the low interest rate
environment. Higher interest rates in first quarter 2002 resulted
in a significant reduction in mortgage refinancing activity,
contributing to the lower level of originations.
29
Mortgage servicing portfolio runoff was 42 percent in first
quarter 2003 compared with 26 percent in first quarter 2002. The
change in the runoff rate was due to the low interest rate
environment in 2003. As a result of the high runoff rates, the
mortgage operation recorded significant amortization of mortgage
servicing rights and impairment charges in first quarter 2003.
Amortization of mortgage servicing rights was $16 million in
first quarter 2003 compared with $10 million in first quarter
2002. The provision for impairment of mortgage servicing rights
totaled $2 million in first quarter 2003 compared with a reversal
of impairment reserves of $2 million in first quarter 2002. The
valuation allowance at first quarter-end 2003 was $17 million,
compared with $4 million at first quarter-end 2002.
In first quarter 2003, the mortgage banking operations sold
$2.8 billion in loans to secondary markets by delivering loans to
third parties or by delivering loans into mortgage-backed
securities that were purchased by third parties. Of the loans
sold in first quarter 2003, the only retained interest was
mortgage servicing rights of $6 million relating to $600 million
of loans.
The mortgage servicing portfolio was $10.2 billion at first
quarter-end 2003 compared with $11.1 billion at first quarter-end
2002. The change was principally due to significant repayments on
loans serviced for third parties and the sale of originated loans
on a service released basis. Included in the mortgage servicing
portfolio were loans serviced for the savings bank totaling $2.0
billion at first quarter-end 2003 compared with $0.7 billion at
first quarter-end 2002.
In 2002 and 2003, the mortgage banking operations were
significantly affected by the refinancing activity associated
with the declining interest rate environment. If interest rates
continue to decline in 2003, the level of mortgage originations
and the level of mortgage servicing rights impairment will likely
remain high. However, if interest rates remain constant or begin
to rise in 2003, then the level of mortgage originations and the
level of mortgage servicing rights impairment will likely
decline.
Corporate, Interest and Other Income (Expense)
Corporate expenses were $11 million in first quarter 2003
compared with $10 million in first quarter 2002. The change in
2003 was principally due to an increase in pension costs.
Parent company interest expense was $35 million in first
quarter 2003 compared with $25 million in first quarter 2002. The
change is principally due to the full effect of interest expense
on debt related to the acquisition of Gaylord. In addition,
during second quarter 2002, the parent company effected a number
of transactions that lengthened debt maturities and reduced
reliance on short-term borrowings. The average interest on
30
borrowings was 7.0 percent in first quarter 2003 compared with
5.3 percent in first quarter 2002.
Other operating expenses for first quarter 2003 include $3
million in expenses related to initiatives to consolidate
administrative functions and effect improvements in supply chain
management. These expenses consist principally of fees paid to
third party consultants. The Company expects to incur in 2003
approximately $35 million in relocation, severance, and other
expenses related to these initiatives, the majority of which will
be incurred and paid during second and third quarter 2003. The
Company expects the benefits from these initiatives to begin to
be realized in 2004.
Pension Expense
The Company expects to incur $43 million in non-cash
pension expense in 2003, or about $11 million per quarter. Non-
cash pension expense in 2002 was $9 million or about $2 million
per quarter. The change in 2003 was due to a decrease in the
assumed discount rate from 7.50 percent to 6.75 percent, a
decrease in the expected rate of return on plan assets from 9.0
percent to 8.5 percent, and an increase in the recognition of the
accumulated decline in the fair value of plan assets.
Income Taxes
The effective tax rate for first quarter 2003 is 42 percent
and is based on current expectations of income and expenses for
the year 2003. The effective tax rate includes federal and state
income taxes and the effects of non-deductible items.
In first quarter 2003, the Company amended its tax sharing
agreement with its subsidiaries. As a result, Financial Services'
effective tax rate now approximates the federal statutory rate as
if Financial Services were filing a separate tax return. This
amendment has no effect on the Company's consolidated income tax
provision or effective tax rate.
Average Shares Outstanding
Average shares outstanding were 54.0 million in first
quarter 2003 compared with 49.5 million in first quarter 2002.
The change in 2003 was principally due to the May 2002 sale of
4.1 million shares of common stock. The dilutive effect of stock
options and equity purchase contracts was not significant in any
of the periods presented.
Capital Resources and Liquidity
The consolidated net assets invested in Financial Services
are subject, in varying degrees, to regulatory rules and
regulations including restrictions on the payment of dividends to
31
the parent company. Accordingly, parent company and Financial
Services capital resources and liquidity are discussed
separately.
Parent Company
Operating Activities
Cash provided by operations was $20 million. The loss for
first quarter 2003 included $86 million of depreciation and other
non-cash charges. Dividends received from Financial Services were
$35 million. Working capital needs increased $47 million,
principally due to a $30 million increase in receivables and the
payment of year-end 2002 accrued expense. The increase in
receivables was due primarily to seasonally higher March
revenues.
Investing Activities
Investing activities used $2 million. Proceeds from the sale
of non-strategic assets acquired in connection with the
acquisition of Gaylord were $30 million.
Capital expenditures were $29 million. Capital expenditures
are expected to approximate $170 million in 2003 or about 70
percent of the $240 million of expected depreciation in 2003.
Financing Activities
Financing activities used $24 million. Cash dividends paid
to shareholders were $19 million or $0.34 per share. Debt and
other borrowings were reduced $5 million.
Liquidity and Off Balance Sheet Financing Arrangements
The parent company's sources of short-term funding are its
operating cash flows, which include dividends received from
Financial Services, and its existing credit arrangements. The
parent company operates in cyclical industries, and its operating
cash flows vary accordingly. The dividends received from
the savings bank are subject to regulatory approval and
restrictions.
At first quarter-end 2003, the parent company had $666
million in unused borrowing capacity under its existing credit
agreements and $148 million under the accounts receivable
securitization program. At first quarter-end 2003, the parent
company complied with all of the terms and conditions of its
credit agreements and accounts receivable securitization program.
In 2003, $80 million in credit agreements expire all of which are
unused at first quarter-end 2003. The long-term debt of the
parent company is currently rated BBB and Baa3 by the rating
agencies, with one rating agency maintaining a negative outlook.
32
In first quarter 2003, one of the joint ventures in which
the Company participates successfully renewed its letters of
credit that were scheduled to expire in second quarter 2003. The
Company continues to guarantee one-half, or $28 million of the
renewed letters of credit.
Financial Services
The principal sources of cash for Financial Services are
operating cash flows, principal payments on securities, deposits,
and borrowings. Financial Services uses these funds to invest in
earning assets, generally loans and securities.
Operating Activities
Cash provided by operations was $260 million. Loans held for
sale increased $168 million while escrow cash related to mortgage
loans serviced decreased $24 million.
Investing Activities
Cash used in investing activities was $271 million.
Securities purchases, net of maturities, were $25 million and
loan originations, net of collections, were $239 million.
Financing Activities
Cash used for financing activities was $100 million.
Borrowings decreased $216 million while deposits increased $150
million. In addition, a $35 million dividend was paid to the
parent company.
Cash Equivalents
Cash equivalents were $327 million at first quarter-end 2003
compared with $438 million at year-end 2002.
Other
Financial Services' short-term funding needs are met through
operating cash flows, attracting new retail deposits, increased
borrowings, and converting assets to cash through sales or
reverse repurchase agreements. Assets that can be converted to
cash include short-term investments, mortgage loans held for
sale, and securities. At first quarter-end 2003, Financial
Services had available liquidity of $2.2 billion. In addition, at
first quarter-end 2003 commitments to originate single-family
residential mortgage loans totaled $2.2 billion and commitments
to sell single-family residential mortgage loans totaled $1.8
billion.
33
At first quarter-end 2003, the savings bank exceeded all
applicable regulatory capital requirements. The parent company
expects to maintain the savings bank capital at a level that
exceeds the minimum required for designation as "well
capitalized." As a result, the Company may make capital
contributions to the savings bank. During first quarter 2003,
the Company made no capital contributions to the savings bank.
Selected financial and regulatory capital data for the
savings bank follows:
First
Quarter Year-End
2003 2002
----- ------
(dollars in millions)
Balance sheet data
Total assets $ 17,459 $ 17,479
Total deposits 9,568 9,467
Shareholder's equity 936 944
Savings Regulatory For Categorization
Bank Minimum as "Well
Capitalized"
------ ---------- ------------------
Regulatory capital ratios:
Tangible capital 6.4% 2.0% N/A
Leverage capital 6.4% 4.0% 5.0%
Tier 1 risk-based capital 9.5% 4.0% 6.0%
Total risk-based capital 10.7% 8.0% 10.0%
Energy and the Effects of Inflation
Energy costs, principally natural gas, were $75 million in
first quarter 2003 compared with $50 million in first quarter
2002. Energy costs began to rise during fourth quarter 2002 and
continued to rise during first quarter 2003, moderating somewhat
in April 2003. It is likely that energy costs will continue to
fluctuate during 2003.
Litigation and Related Matters
On May 14, 1999, Inland Paperboard and Packaging ("Inland")
and Gaylord were named as defendants in a Consolidated Class
Action Complaint that alleged a civil violation of Section 1 of
the Sherman Act. The suit, captioned Winoff Industries, Inc. v.
Stone Container Corporation, MDL No. 1261 (E.D. Pa.), names
Inland, Gaylord, and eight other linerboard manufacturers as
defendants. The complaint alleges that the defendants, during the
period from October 1, 1993, through November 30, 1995, conspired
to limit the supply of linerboard, and that the purpose and
effect of the alleged conspiracy was artificially to increase
prices of corrugated containers. The plaintiffs moved to certify
a class of all persons in the United States who purchased
corrugated containers directly from any defendant during the
above period, and seek treble damages and attorneys' fees on
34
behalf of the purported class. The trial court granted
plaintiffs' motion on September 4, 2001, but modified the
proposed class to exclude those purchasers whose prices were "not
tied to the price of linerboard." The United States Court of
Appeals for the Third Circuit accepted review of the decision to
certify the class and upheld the trial court's ruling.
Defendants appealed this decision to the United States Supreme
Court, which denied their petition for a writ of certiorari. The
case is currently set for trial in April 2004.
Inland and Gaylord executed a settlement agreement on April
11, 2003, with the representatives of the class. On April 14,
2003, the trial court entered an order preliminarily approving
the terms of the settlement. Inland and Gaylord paid a total of
$8 million into escrow on April 17, 2003, to fulfill the terms of
the settlement, which amount was within the amount previously
accrued by the Company in connection with this matter. Notice
of the settlement has been mailed to all members of the classes
and will be published in the Wall Street Journal and trade
publications. Objections to the settlement, if any, must be filed
with the court no later than June 9, 2003. A final hearing on the
fairness of the settlement to the classes will be held on August
11, 2003. The settlement will not become final until appeals, if
any, to a final order approving the settlement terms have been
exhausted.
Accounting Policies
New Accounting Standards Adopted
Stock-Based Compensation
Beginning January 2003, the Company voluntarily adopted the
prospective transition method of accounting for stock-based
compensation contained in SFAS No. 148, Accounting for Stock-
Based Compensation-Transition and Disclosure, an amendment of
FASB Statement No. 123. The principal effect of adopting the
prospective transition method is that the fair value of stock
options granted in 2003 and thereafter are charged to expense
over the option vesting period. As a result of the adoption of
this prospective transition method, first quarter 2003 net loss
was increased by $0.1 million with no effect on earnings per
share.
Prior to 2003, the Company used the intrinsic value method
in accounting for its stock-based compensation. As a result, no
stock-based compensation expense related to stock options is
reflected in prior years' net income, as all stock options
granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. Therefore, the cost
related to stock-based compensation recognized in net income
(loss) for first quarter 2003 and 2002 is less than would have
been recognized if the fair value method had been applied to all
35
stock options granted since 1995. See Note I for further
information regarding stock-based compensation.
Asset Retirement Obligations
Beginning January 2003, the Company was required to adopt
Statement of Financial Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations. The Statement
requires legal obligations associated with the retirement of long-
lived assets to be recognized at their fair value at the time
that the obligations are incurred. Upon initial recognition of a
liability, that cost is capitalized as part of the related long-
lived asset and allocated to expense over the useful life of the
asset. The effect of adopting this statement was to increase
property, plant and equipment by $3 million, recognize an asset
retirement obligation liability of $4 million, and to increase
first quarter net loss by $1 million or $0.01 per share for the
cumulative effect of adoption.
Disposal Activities
Beginning January 2003, the Company was required to adopt
SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. Under this statement, liabilities for costs
associated with exit or disposal activities, including
restructurings, are recognized when the liability is incurred and
can be measured at estimated fair value. The effect on earnings
or financial position of adopting this statement was not
material.
Other Pronouncements
Also during first quarter 2003, the Company was required to
adopt FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others and FASB Interpretation No.
46, Consolidation of Variable Interest Entities. The effect on
earnings or financial position of adopting these other
pronouncements was not material.
Critical Accounting Estimates
In first quarter 2003, there were no significant changes in
critical accounting estimates from that disclosed in the
Company's Form 10-K for the year 2002.
36
Statistical and other data(a)
First Quarter
2003 2002
------ ------
Revenues (dollars in millions)
Corrugated Packaging
Corrugated packaging $ 625 $ 522
Linerboard 42 35
----- -----
Total Corrugated Packaging $ 667 $ 557
===== =====
Building Products
Pine lumber $ 56 $ 52
Particleboard 39 43
Medium density fiberboard 26 26
Gypsum wallboard 18 19
Fiberboard 14 16
Other 27 34
----- -----
Total Building Products $ 180 $ 190
===== =====
Unit sales
Corrugated Packaging
Corrugated packaging, thousand tons 780 635
Linerboard, thousands of tons 124 109
----- -----
Total, thousands of tons 904 744
===== =====
Building Products
Pine lumber, mbf 198 173
Particleboard, msf 155 160
Medium density fiberboard, msf 64 67
Gypsum wallboard, msf 161 173
Fiberboard, msf 87 97
(a) Revenues and unit sales do not include joint venture
operations
Note: Data for Corrugated Packaging for 2003 is not comparable
due to the effect of acquisitions completed in 2002.
37
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Risk
The Company is subject to interest rate risk from the
utilization of financial instruments such as adjustable-rate
debt and other borrowings, as well as the lending and deposit-
gathering activities of Financial Services. In first quarter
2003, there were no significant changes in interest rate risk
from that disclosed in the Company's Form 10-K for the year
2002.
Additionally, the fair value of mortgage servicing rights
(estimated at $102 million at first quarter-end 2003) is also
affected by changes in interest rates. The Company estimates
that a one percent decline in interest rates from current levels
would decrease the fair value of the mortgage servicing rights
by approximately $26 million.
Foreign Currency Risk
In first quarter 2003, there were no significant changes in
foreign currency risk from that disclosed in the Company's Form
10-K for the year 2002.
Commodity Price Risk
In first quarter 2003, there were no significant changes in
commodity price risk from that disclosed in the Company's Form
10-K for the year 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a)Evaluation of disclosure controls and procedures
The Company's chief executive officer and its chief financial
officer, based on their evaluation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule 13a-
14(c)) as of a date within 90 days prior to the filing of this
Quarterly Report on Form 10-Q, have concluded that the Company's
disclosure controls and procedures are adequate and effective for
the information required to be disclosed by us in the reports we
file or submit under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), is recorded, processed, summarized,
and reported within the time periods specified in the Securities
and Exchange Commission's ("SEC") rules and forms.
(b) Changes in internal controls.
There were no significant changes in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation. There
38
were no significant deficiencies or material weaknesses revealed
through this evaluation and, accordingly, no corrective actions
were necessary.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The information set forth in Note E to Notes to
Consolidated Financial Statements in Part I of this report
is incorporated by reference thereto.
On May 14, 1999, Inland Paperboard and Packaging, Inc.
("Inland") and Gaylord were named as defendants in a Consolidated
Class Action Complaint that alleged a civil violation of Section
1 of the Sherman Act. The suit, captioned Winoff Industries, Inc.
v. Stone Container Corporation, MDL No. 1261 (E.D. Pa.), names
Inland, Gaylord, and eight other linerboard manufacturers as
defendants. The complaint alleges that the defendants, during the
period from October 1, 1993, through November 30, 1995, conspired
to limit the supply of linerboard, and that the purpose and
effect of the alleged conspiracy was artificially to increase
prices of corrugated containers. The plaintiffs moved to certify
a class of all persons in the United States who purchased
corrugated containers directly from any defendant during the
above period, and seek treble damages and attorneys' fees on
behalf of the purported class. The trial court granted
plaintiffs' motion on September 4, 2001, but modified the
proposed class to exclude those purchasers whose prices were "not
tied to the price of linerboard." The United States Court of
Appeals for the Third Circuit accepted review of the decision to
certify the class and upheld the trial court's ruling.
Defendants appealed this decision to the United States Supreme
Court, which denied their petition for a writ of certiorari. The
case is currently set for trial in April 2004.
Inland and Gaylord executed a settlement agreement on April
11, 2003, with the representatives of the class. On April 14,
2003, the trial court entered an order preliminarily approving
the terms of the settlement. Inland and Gaylord paid a total of
$8 million into escrow on April 17, 2003, to fulfill the terms of
the settlement, which amount was within the amount previously
accrued by the Company in connection with this matter. Notice
of the settlement has been mailed to all members of the classes
and will be published in the Wall Street Journal and trade
publications. Objections to the settlement, if any, must be filed
with the court no later than June 9, 2003. A final hearing on the
fairness of the settlement to the classes will be held on August
11, 2003. The settlement will not become final until appeals, if
any, to a final order approving the settlement terms have been
exhausted.
39
On April 3, 2003, the Georgia Department of Natural
Resources, Environmental Protection Division sent Inland a Notice
of Violation alleging that Inland's linerboard mill in Rome,
Georgia, had experienced 502 excess sulfur dioxide emissions in
the fourth quarter of 2002 due to the burning of coal with a
level of sulfur that was too high. The Company timely filed its
response to the State on May 1, 2003. The Company believes the
likelihood of a material loss from this to be remote and does not
believe that the outcome of this Notice of Violation should have
a material adverse effect on its financial position, results of
operations, or cash flow.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
99.1 - Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 - Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
During the quarter ended March 29, 2003, the
Company filed the following Current Reports on
Form 8-K:
1. Current Report on Form 8-K dated February 7, 2003, reporting
under Item 9 the issuance of the Company's earnings release for
the period ended December 29, 2002.
2. Current Report on Form 8-K dated March 26, 2003, reporting
under Item 9 a press release issued by the Company commending on
earnings for the period ending March 29, 2003.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TEMPLE-INLAND INC.
(Registrant)
Dated: May 12, 2003 By: /s/ Louis R. Brill
-----------------------
Louis R. Brill
Chief Accounting Officer
41
CERTIFICATIONS
I, Kenneth M. Jastrow, II, Chief Executive Officer of Temple-
Inland Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Temple-
Inland Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
42
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ Kenneth M. Jastrow, II
----------------------------
Kenneth M. Jastrow, II
Chief Executive Officer
43
CERTIFICATIONS
I, Randall D. Levy, Chief Financial Officer of Temple-Inland
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Temple-
Inland Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
44
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ Randall D. Levy
-------------------------
Randall D. Levy
Chief Financial Officer
45
INDEX TO EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- ---------
99.1 Certification of Chief Executive 46
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-
Oxley Act of 2002
99.2 Certification of Chief Financial 47
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-
Oxley Act of 2002