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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 2, 1999
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
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COMMON STOCK, $1.00 PAR VALUE PER SHARE, NEW YORK STOCK EXCHANGE
NON-CUMULATIVE PACIFIC EXCHANGE
PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
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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 10, 1999, was $1,866,578,995. 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 10, 1999, 55,663,155 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 25-69 of the Annual Report to Shareholders for the fiscal year
ended January 2, 1999 -- Parts I and I.
(b) The Company's definitive proxy statement, dated March 26, 1999, in
connection with the Annual Meeting of Shareholders to be held May 7,
1999 -- Part III.
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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 business of the Company is
divided among three groups: (1) the Paper Group, (2) the Building Products
Group, and (3) the Financial Services Group. Forest resources include
approximately 2.2 million acres of timberland in Texas, Louisiana, Georgia, and
Alabama.
The Company's Paper Group, operated by Inland Paperboard and Packaging,
Inc. ("Inland"), consists of the corrugated packaging and bleached paperboard
operations. The corrugated packaging operation is vertically integrated and
consists of four linerboard mills, two corrugating medium mills, 41 box plants,
and eight specialty converting plants. The bleached paperboard operation
consists of one large mill located in Evadale, Texas.
The Company's Building Products Group, operated by Temple-Inland Forest
Products Corporation ("Temple-Inland FPC"), manufactures a wide range of
building products including lumber, plywood, particleboard, medium density
fiberboard, gypsum wallboard, fiber-cement siding, and fiberboard.
The Company's Financial Services Group consists of savings bank activities,
mortgage banking, real estate development, and insurance brokerage. The
Company's savings bank, Guaranty Federal Bank, F.S.B. ("Guaranty"), conducts its
business through 135 banking centers in Texas and California. Mortgage banking
is conducted through Temple-Inland Mortgage Corporation ("Temple-Inland
Mortgage"), a subsidiary of Guaranty that arranges financing of single-family
mortgage loans, then sells the loans into the secondary market (primarily FNMA,
FHLMC, and GNMA). Real estate operations include development of residential
subdivisions, as well as the management and sale of income properties.
The Company is a Delaware corporation that was organized in 1983. Its
principal subsidiaries include Inland, Temple-Inland FPC, Temple-Inland
Financial Services Inc. ("Financial Services"), Guaranty, and 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.
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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
-----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN MILLIONS)
Revenues
Paper................................... $2,017.6 $2,062.9 $2,082.3 $2,198.4 $1,740.7
Building products....................... 613.0 617.3 562.6 532.9 575.5
Other activities........................ -- -- -- -- 19.2
-------- -------- -------- -------- --------
Manufacturing net sales......... 2,630.6 2,680.2 2,644.9 2,731.3 2,335.4
Financial services........................ 1,109.5 945.2 815.4 764.3 631.4
-------- -------- -------- -------- --------
Total revenues.................. $3,740.1 $3,625.4 $3,460.3 $3,495.6 $2,966.8
======== ======== ======== ======== ========
Income before taxes
Paper................................... $ 32.5 $ (39.0) $ 113.0 $ 356.6 $ 73.7
Building products....................... 112.5 131.1 102.0 67.0 138.8
Other activities........................ -- -- -- -- 1.5
-------- -------- -------- -------- --------
145.0 92.1 215.0 423.6 214.0
Financial services...................... 154.1 132.1 63.1(a) 98.1 56.3
-------- -------- -------- -------- --------
Segment operating income........ 299.1 224.2 278.1 521.7 270.3
Corporate expense....................... (27.9) (24.6) (17.2) (21.7) (13.7)
Special charge(b)....................... (47.4) -- -- -- --
Parent company interest -- net.......... (106.0) (110.3) (109.6) (72.7) (67.1)
Other income............................ 6.6 5.7 4.6 3.7 3.8
-------- -------- -------- -------- --------
Income before taxes............. $ 124.4 $ 95.0 $ 155.9 $ 431.0 $ 193.3
======== ======== ======== ======== ========
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(a) Includes SAIF assessment of $43.9 million.
(b) Includes nonrecurring charges related to (1) the impairment of the Paper
Group's investment in its South American corrugated packaging plants, (2)
severance costs from the restructuring efforts in the Paper Group, and (3)
the write-off of abandoned assets in the Paper Group and the Building
Products Group.
For more information with respect to total assets, capital expenditures,
depreciation, depletion, and amortization on a business segment basis, see pages
65 and 66 of the Company's 1998 Annual Report to Shareholders, which are
incorporated herein by reference.
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The following table shows the revenues of the Company by product:
REVENUES
FOR THE YEAR
----------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN MILLIONS)
Paper
Corrugated packaging(a).................. $1,641.5 $1,694.0 $1,760.6 $1,910.3 $1,499.2
Bleached paperboard...................... 376.1 366.0 300.5 249.0 217.4
Pulp and other........................... -- 2.9 21.2 39.1 24.1
-------- -------- -------- -------- --------
2,017.6 2,062.9 2,082.3 2,198.4 1,740.7
-------- -------- -------- -------- --------
Building Products
Pine lumber.............................. 222.7 262.1 217.4 190.1 211.9
Fiber products........................... 64.4 66.2 73.3 59.7 66.3
Particleboard............................ 141.5 125.0 112.2 99.1 103.0
Plywood.................................. 59.6 55.2 52.1 49.3 56.8
Gypsum wallboard......................... 115.5 104.6 90.2 83.1 74.3
Medium density fiberboard................ 9.3 -- -- -- --
Retail distribution(b)................... -- 4.2 17.1 51.3 58.4
Other.................................... -- -- .3 0.3 4.8
-------- -------- -------- -------- --------
613.0 617.3 562.6 532.9 575.5
-------- -------- -------- -------- --------
Other activities(c)........................ -- -- -- -- 19.2
-------- -------- -------- -------- --------
Manufacturing net sales.................. 2,630.6 2,680.2 2,644.9 2,731.3 2,335.4
Financial services......................... 1,109.5 945.2 815.4 764.3 631.4
-------- -------- -------- -------- --------
Total revenues................... $3,740.1 $3,625.4 $3,460.3 $3,495.6 $2,966.8
======== ======== ======== ======== ========
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(a) Reclassified to include revenues for 1997, 1996, 1995, and 1994 from 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, and $57.9 million in 1997, 1996, 1995, and 1994, respectively. The
Company sold substantially all the assets of this subsidiary in the fourth
quarter of 1997.
(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 the construction and
maintenance of electrical distribution facilities until their operations
were terminated in 1994.
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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
YEAR END -------------------------------------
1998 1998 1997 1996 1995 1994
----------- ----- ----- ----- ----- -----
(IN THOUSANDS OF TONS)
Paper
Corrugated packaging........................... (a) 2,519 2,769 2,435 2,333 2,492
Bleached paperboard............................ (b) 623 635 524 400 430
Pulp........................................... (b) -- 2 100 99 87
(IN MILLIONS OF BOARD FEET)
Building products
Pine lumber.................................... 675 603 639 605 582 583
(IN MILLIONS OF SQUARE FEET)
Fiber products................................. 460 423 402 457 422 441
Particleboard(c)............................... 610 518 470 399 329 347
Plywood........................................ 265 289 281 259 217 260
Gypsum wallboard(d)............................ 866 858 843 838 813 796
Medium density fiberboard(d)(e)................ 260 35 -- -- -- --
- ---------------
(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 550,000 tons per year. The rated
annual capacity of the linerboard mills is approximately 2.2 million tons
per year. In the second quarter of 1998, the Company closed its corrugating
medium mill in Newark, California, the rated annual capacity of which was
70,000 tons.
(b) The annual capacity of the four paper machines in operation at the bleached
paperboard mill is approximately 670,000 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 unit sales for the particleboard plants includes the unit sales of the
Hope, Arkansas, plant, which began operations late in 1995 but did not
reach full production until the fourth quarter of 1996. The unit sales 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.
(d) The annual capacity and unit sales figures for these product lines do not
include the annual capacities and unit sales related to the Company's
interest in facilities owned through joint venture interests.
(e) The annual capacity for medium density fiberboard includes the rated annual
capacity for two medium density fiberboard plants acquired by the Company
in September 1998, both of which are in the start-up phase.
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NARRATIVE DESCRIPTION OF THE BUSINESS:
The business of the Company is divided among three groups: (1) the Paper
Group, (2) the Building Products Group, and (3) the Financial Services Group.
For 1998, the Paper Group, Building Products Group, and Financial Services Group
provided 53.9 percent, 16.4 percent, and 29.7 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 Inland
manufactures containerboard that it converts into a complete line of corrugated
packaging and point-of-purchase displays. Approximately 86 percent of the
containerboard produced by Inland in 1998 was converted into corrugated
containers at its box plants. Inland's nationwide network of box plants produces
a wide range of products from commodity brown boxes to intricate die cut
containers that can be printed with multi-color graphics. Even though the
corrugated box business is characterized by commodity pricing, each order for
each customer is a custom order. Inland's corrugated boxes are sold to a variety
of customers in the food, paper, glass containers, chemical, appliance, and
plastics industries, among others.
Inland also manufactures litho-laminate corrugated packaging, high graphics
folding cartons, and bulk containers constructed of multi-wall corrugated board
for extra strength, which are used for bulk shipments of various materials.
In the corrugated packaging operation, Inland services about 7,000
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 1998 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 produces
various grades and weights of coated and uncoated paperboard for use in
high-quality printing and publishing applications, greeting cards, office
supplies, and foodware.
Bleached paperboard products are sold to a large number of customers. Sales
to the largest customer of this operation accounted for approximately 13 percent
of bleached paperboard sales in 1998. 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 Paper Group or Temple-Inland 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 Paper Group. The 10 largest customers accounted for approximately 54
percent of bleached paperboard sales in 1998. During 1998, sales were made to
customers in 37 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.
BUILDING PRODUCTS GROUP. The Building Products Group produces a wide
variety of building products, such as lumber, plywood, particleboard, medium
density fiberboard, gypsum wallboard, fiber-cement siding, and fiberboard.
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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. Approximately
84 percent of particleboard sales are to commercial fabricators, such as
manufacturers of cabinets and furniture. The 10 largest customers accounted for
approximately 22 percent of the Building Products Group's 1998 sales. The
building products business is heavily dependent upon the level of residential
housing expenditures, including the repair and remodeling market.
In September 1998, the Building Products Group acquired two medium density
fiberboard plants from MacMillan Bloedel Limited for approximately $106 million.
The plants, each of which is capable of producing 130 million square feet
annually, are located in Clarion, Pennsylvania, and Pembroke, Ontario, Canada.
The Building Products Group is a 50 percent owner in three joint ventures.
One of these joint ventures recently began producing medium density fiberboard
at a facility in Arkansas. Another of these joint ventures began producing
fiber-cement products in the first quarter of 1999 at a plant 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 in the first quarter of 1998 of a wallboard plant to be
located in Tennessee, completion of which is anticipated during the second half
of 1999.
The Building Products Group intends during 1999 to cease operations at its
plywood plant and add a state-of-the-art sawmill at that site. This will permit
the Company to optimize the use of available sawtimber and produce a higher
value product.
FINANCIAL SERVICES GROUP. The Financial Services Group operates a savings
bank and engages in mortgage banking, real estate development, and insurance
activities.
(i) Savings Bank. Guaranty is a federally-chartered stock savings bank that
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 its acquisition of California Financial Holding Company, the parent
company of Stockton Savings Bank, F.S.B., 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 fourth quarter of 1998, the Company entered into an Agreement
and Plan of Merger (the "Merger Agreement") with HF Bancorp, Inc. ("HFB"), the
parent corporation of Hemet Federal Savings and Loan Association ("Hemet")
headquartered in Hemet, California, by which HFB will be merged into the Company
or one of its subsidiaries. The transaction, which is subject to approval by the
HFB stockholders and by regulatory authorities, is expected to close during the
second quarter of 1999. Terms of the Merger Agreement provide for HFB
stockholders to receive a combination of common stock of the Company and cash
valued at $18.50 per share, for a total consideration of approximately $118
million. Subject to certain limitations, each HFB stockholder will be given the
election to have the consideration for their shares paid in Company common
stock, cash or a combination of the two. The Company, however, will issue no
more than 1,216,470 shares of common stock in the transaction. If the HFB
stockholders electing to receive shares of the Company's common stock do not
represent a sufficient portion of the total consideration in order for the
transaction to receive favorable tax treatment for the HFB stockholders, the
entire merger consideration will
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be paid in cash. When the transaction is completed, the operations of Hemet,
which has approximately $1.0 billion in assets and operates 18 branches in
Southern California, principally in Riverside County, Palm Springs, and San
Diego County, will be merged into Guaranty. In connection with execution of the
Merger Agreement, HFB granted the Company an option, exercisable under certain
circumstances, to purchase approximately 1,273,000 shares of HFB common stock,
representing approximately 19.9 percent of the shares presently outstanding, at
a price of approximately $16.00 per share.
The House and Senate are discussing 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
6.31 percent of adjusted total assets. Because of loan growth experienced by
Guaranty in 1998, changes in asset mix in Guaranty's balance sheet, and
prospective changes in Guaranty's risk-based capital calculation, Guaranty
expects an increase in its capital requirements. As a result, the Company
expects to increase capital in Guaranty by up to $160 million in the first
quarter of 1999 in order for Guaranty to maintain its classification of "well
capitalized" under OTS regulations. For additional information regarding
regulatory capital requirements, see Note L to Financial Services Group
Summarized Financial Statements on page 53 of the Company's 1998 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 through 78 offices located throughout the United States. 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. At the end of 1998,
Temple-Inland Mortgage was servicing $22.9 billion in mortgage loans, including
loans serviced for affiliates and approximately $1.0 billion in mortgages
subject to a call option. Temple-Inland Mortgage produced $6.0 billion in
mortgage loans during 1998 compared with $3.2 billion during 1997.
(iii) Real Estate Development and Income Properties. Subsidiaries of
Financial Services are involved in the development of 38 residential
subdivisions in Texas, Arizona, California, Colorado, Florida, Georgia,
Missouri, Tennessee, and Utah. The real estate group also owns 18 commercial
properties, including properties owned by subsidiaries through joint venture
interests.
(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 insurance 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.
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The following schedule presents the average balances, interest
income/expense, and rates earned or paid by major balance sheet category for the
years 1996 through 1998:
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST SPREAD
YEAR END 1998 YEAR END 1997 YEAR END 1996
----------------------------- ----------------------------- ----------------------------
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.................... $ 25.8 $ 1.4 5.27% $ 71.0 $ 4.1 5.71% $ 32.1 $ 2.1 6.42%
Mortgage-backed and investment
securities..................... 2,606.1 150.0 5.76% 2,802.2 161.3 5.75% 3,208.5 183.5 5.72%
Securities purchased under
agreements to resell, agency
discount notes, federal funds
sold, and commercial paper..... 61.4 3.4 5.47% 332.9 18.3 5.51% 339.4 18.4 5.41%
Loans receivable and mortgage
loans held for sale(1)......... 7,610.2 582.8 7.66% 6,618.4 524.9 7.93% 5,258.4 426.1 8.10%
Other............................ 13.0 .6 4.80% 6.9 .4 6.22% 26.0 .7 2.91%
--------- ------ --------- ------ -------- ------
Total interest-earning
assets................... 10,316.5 $738.2 7.16% 9,831.4 $709.0 7.21% 8,864.4 $630.8 7.12%
====== ====== ======
Cash............................... 100.4 100.1 90.6
Other FSLIC receivables............ -- -- .8
Other assets....................... 924.2 785.6 586.0
--------- --------- --------
Total assets............... $11,341.1 $10,717.1 $9,541.8
========= ========= ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest-bearing liabilities:
Deposits:
Interest-bearing demand........ $ 1,176.8 $ 27.2 2.31% $ 1,099.6 $ 26.4 2.40% $1,087.2 $ 26.1 2.41%
Savings deposits............... 214.8 4.8 2.25% 212.4 4.7 2.22% 184.6 4.2 2.28%
Time deposits.................. 5,866.5 325.3 5.55% 5,416.4 300.1 5.54% 5,013.6 278.0 5.54%
--------- ------ --------- ------ -------- ------
Total interest-bearing
deposits................. 7,258.1 357.3 4.92% 6,728.4 331.2 4.92% 6,285.4 308.3 4.91%
Advances from the Federal Home
Loan Bank...................... 1,892.3 106.6 5.63% 1,276.6 79.0 6.19% 629.1 34.0 5.41%
Securities sold under repurchase
agreements..................... 349.2 19.6 5.62% 1,297.2 67.9 5.24% 1,484.3 83.5 5.62%
Other borrowings................. 202.8 11.2 5.53% 147.7 10.1 6.82% 131.9 9.5 7.24%
--------- ------ --------- ------ -------- ------
Total interest-bearing
liabilities.............. 9,702.4 $494.7 5.10% 9,449.9 $488.2 5.17% 8,530.7 $435.3 5.10%
====== ====== ======
Noninterest-bearing demand......... 63.1 61.1 46.4
Other liabilities.................. 726.3 475.6 361.8
Preferred stock issued by
subsidiary....................... 196.5 90.4 --
Shareholder's equity............... 652.8 640.1 602.9
--------- --------- --------
Total liabilities and
shareholder's equity..... $11,341.1 $10,717.1 $9,541.8
========= ========= ========
Net interest income................ $243.5 $220.8 $195.5
====== ====== ======
Net yield on interest-earning
assets........................... 2.36% 2.25% 2.20%
===== ===== =====
- ---------------
(1) Nonaccruing loans are included in the average of loans receivable.
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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
1998 COMPARED WITH 1997 1997 COMPARED WITH 1996
----------------------------- -------------------------------
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.............................. $ (2.4) $ (.3) $ (2.7) $ 2.2 $(0.2) $ 2.0
Mortgage-backed and investment
securities......................... (11.3) -- (11.3) (23.3) 1.1 (22.2)
Securities purchased under agreements
to resell, agency discount notes,
federal funds sold, and commercial
paper.............................. (14.8) (.1) (14.9) (0.4) 0.3 (0.1)
Loans receivable and mortgage loans
held for sale...................... 76.4 (18.5) 57.9 108.0 (9.2) 98.8
Other................................. .3 (.1) .2 (0.8) 0.5 (0.3)
------ ------ ------ ------ ----- ------
Total interest income......... $ 48.2 $(19.0) $ 29.2 $ 85.7 $(7.5) $ 78.2
====== ====== ====== ====== ===== ======
Interest expense:
Deposits:
Interest-bearing demand............ $ 1.8 $ (1.0) $ .8 $ 0.3 $ -- $ 0.3
Savings deposits................... .1 -- .1 0.6 (0.1) 0.5
Time deposits...................... 24.9 .3 25.2 22.3 (0.2) 22.1
------ ------ ------ ------ ----- ------
Total interest on deposits.... 26.8 (.7) 26.1 23.2 (0.3) 22.9
Advances from the Federal Home Loan
Bank............................... 35.2 (7.6) 27.6 39.4 5.5 44.9
Securities sold under repurchase
agreements......................... (53.0) 4.7 (48.3) (10.0) (5.5) (15.5)
Other borrowings...................... 3.3 (2.2) 1.1 1.1 (0.5) 0.6
------ ------ ------ ------ ----- ------
Total interest expense........ $ 12.3 $ (5.8) $ 6.5 $ 53.7 $(0.8) $ 52.9
====== ====== ====== ====== ===== ======
Net interest income (expense)........... $ 35.9 $(13.2) $ 22.7 $ 32.0 $(6.7) $ 25.3
====== ====== ====== ====== ===== ======
- ---------------
(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.
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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
------------------------------
1998 1997 1996
-------- -------- --------
(IN MILLIONS)
Held-to-Maturity:
Mortgage-backed securities................................ $1,413.3 $1,768.3 $2,083.7
Available-for-Sale:
Mortgage-backed securities................................ 891.7 948.1 643.9
Debt securities
Corporate bonds........................................ 2.7 3.0 3.0
Equity securities
Federal Home Loan Bank Stock........................... 176.7 85.7 52.6
Other.................................................. .2 .5 .3
-------- -------- --------
176.9 86.2 52.9
-------- -------- --------
$2,484.6 $2,805.6 $2,783.5
======== ======== ========
The table below sets forth the maturities of mortgage-backed and investment
securities as of year end 1998:
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....... $-- -- $-- -- $-- -- $ -- -- $1,413.3 5.16% $1,413.3
Available-for-Sale:
Mortgage-backed
securities....... -- -- -- -- -- -- -- -- 891.7 6.49% 891.7
Debt securities
Corporate
bonds.......... -- -- -- -- .5 6.58% 2.2 6.56% -- -- 2.7
Equity securities
Federal Home Loan
Bank stock..... -- -- -- -- -- -- -- -- 176.7 6.00% 176.7
Other............ -- -- -- -- -- -- -- -- .2 -- .2
--- --- --- ---- -------- --------
-- -- -- -- -- -- -- 176.9 176.9
--- --- --- ---- -------- --------
$-- $-- $.5 $2.2 $2,481.9 $2,484.6
=== === === ==== ======== ========
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The following table shows the loan distribution for Financial Services:
TYPES OF LOANS
AS OF DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- --------
(IN MILLIONS)
Real estate mortgage...................... $ 4,632.9 $4,525.0 $4,206.3 $3,732.6 $3,147.1
Construction and development (including
residential)............................ 4,702.6 2,975.1 2,152.4 1,500.6 1,022.6
Commercial and business................... 1,887.1 1,142.1 651.0 393.7 219.4
Consumer and other........................ 877.3 590.2 467.2 416.0 366.0
--------- -------- -------- -------- --------
12,099.9 9,232.4 7,476.9 6,042.9 4,755.1
Less:
Unfunded portion of loans............... 3,927.7 2,709.7 2,002.8 1,211.8 1,027.7
Unearned discounts...................... -- -- -- -- .6
Unamortized purchase discounts.......... (19.2) (21.3) (11.8) (1.8) (5.1)
Net deferred fees....................... 3.9 2.0 3.6 3.0 3.2
Allowance for loan losses............... 86.6 91.1 68.4 65.5 53.9
--------- -------- -------- -------- --------
3,999.0 2,781.5 2,063.0 1,278.5 1,080.3
--------- -------- -------- -------- --------
$ 8,100.9 $6,450.9 $5,413.9 $4,764.4 $3,674.8
========= ======== ======== ======== ========
Additionally, in the commercial and business category, $825 million was to
the mortgage finance industry.
The table below presents the maturity distribution of loans (excluding real
estate mortgage and consumer loans) outstanding at year end 1998, 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 TO 5 AFTER
1 YEAR YEARS 5 YEARS TOTAL
-------- -------- ------- --------
(IN MILLIONS)
Construction and development (including
residential)........................................ $2,631.2 $2,071.2 $ .2 $4,702.6
Commercial and business............................... 966.7 901.1 19.3 1,887.1
-------- -------- ----- --------
$3,597.9 $2,972.3 $19.5 $6,589.7
======== ======== ===== ========
Loans maturing after 1 year with:
Fixed interest rates................................ $ -- $ 7.5 $10.7 $ 18.2
Variable interest rates............................. -- 2,964.8 8.8 2,973.6
-------- -------- ----- --------
$ -- $2,972.3 $19.5 $2,991.8
======== ======== ===== ========
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 0.7 percent of total loans for 1998, 1.1 percent of total
loans for 1997, and less than two percent of total loans during 1996, 1995, and
1994. The aggregate amounts and the interest income foregone on such loans,
therefore, are immaterial and are not disclosed.
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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
----------------------------------------
1998 1997 1996 1995 1994
----- ----- ------ ----- ------
(DOLLARS IN MILLIONS)
Balance at beginning of year...................... $91.1 $68.4 $ 65.5 $53.9 $ 47.9
Charge-offs:
Real estate mortgages........................... (6.5) (4.8) (5.8) (3.9) (4.4)(b)
Construction and development.................... (.2) (.1) (.1) -- --
Commercial...................................... -- (.9) (2.9) (.7) (1.1)
Consumer and other.............................. (1.5) (2.0) (4.4) (5.0) (4.7)(b)
----- ----- ------ ----- ------
(8.2) (7.8) (13.2) (9.6) (10.2)
Recoveries:
Real estate mortgages........................... 2.5 .9 2.1 1.1 .6
Construction and development.................... .1 -- -- -- --
Commercial...................................... -- -- -- .5 .1
Consumer and other.............................. .4 .9 .9 .8 1.4
----- ----- ------ ----- ------
3.0 1.8 3.0 2.4 2.1
----- ----- ------ ----- ------
Net charge-offs......................... (5.2) (6.0) (10.2) (7.2) (8.1)(b)
Additions charged to operations................... .6 (1.7) 13.8 14.6 6.5
Additions related to bulk purchases of loans, net
of adjustments.................................. .1 30.4(a) (.7) 4.2 7.6
----- ----- ------ ----- ------
Balance at end of year............................ $86.6 $91.1 $ 68.4 $65.5 $ 53.9
===== ===== ====== ===== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year....... .07% .10% .20% .16% .27%
===== ===== ====== ===== ======
- ---------------
(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
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995
----------------------- ----------------------- ----------------------- -----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT OF LOANS TO AMOUNT OF LOANS TO AMOUNT OF LOANS TO AMOUNT OF LOANS TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- ----------- --------- ----------- --------- -----------
Real estate
mortgage............ 49.4 38% $54.1 49% $48.0 56% $52.5 61%
Construction and
development......... 3.6 39% 6.5 32% 1.9 29% 1.7 25%
Commercial and
business............ 13.6 16% 4.1 13% 1.6 9% .8 7%
Consumer and other... 3.4 7% 3.2 6% 3.8 6% 4.5 7%
Unallocated.......... 16.6 -- 23.2 -- 13.1 -- 6.0 --
----- --- ----- --- ----- --- ----- ---
$86.6 100% $91.1 100% $68.4 100% $65.5 100%
===== === ===== === ===== === ===== ===
AT YEAR END
-----------------------
1994
-----------------------
PERCENT OF
AMOUNT OF LOANS TO
ALLOWANCE TOTAL LOANS
--------- -----------
Real estate
mortgage............ $36.2 66%
Construction and
development......... 1.2 21%
Commercial and
business............ 8.6 5%
Consumer and other... 4.7 8%
Unallocated.......... 3.2 --
----- ---
$53.9 100%
===== ===
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
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14
may affect the borrower's ability to repay, estimated value of any underlying
collateral, and current economic conditions.
Loans receivable are assigned a risk rating to distinguish levels of credit
risk and identify higher or unacceptable credit risks and deteriorating loan
quality. These risk ratings are categorized as pass or criticized grade with the
resultant allowance for loan losses based on this distinction. Certain loan
portfolios are considered to be performance based and are graded by analyzing
performance through assessment of delinquency status. The allowance for loan
losses is comprised of an allowance based on criticized graded loans, a general
allowance based on pass graded loans, and an unallocated allowance based on
analysis of other environmental factors. The allowance for loan losses is
increased by charges to income and by the portion of the purchase price related
to credit risk on bulk purchases of loans and decreased by charge-offs, net of
recoveries.
Allowances established on the outstanding principal balance of criticized
graded loans range from 5 percent to 35 percent on Substandard classified loans,
36 percent to 70 percent on Doubtful classified loans, and 100 percent on Loss
classified loans, respectively. The Financial Services Group uses general
allowances for pools of loans with relatively similar risks based on
management's assessment of homogenous attributes, such as product types,
markets, aging, and collateral. The Financial Services Group uses information on
historic trends in delinquencies, charge-offs, and recoveries to identify
unfavorable trends. The analysis considers adverse trends in the migration of
classifications to be an early warning of potential problems that would indicate
a need to increase loss provisions over historic levels. The Financial Services
Group also establishes a level of unallocated allowance to support the portfolio
as a whole based on adverse conditions considered probable of resulting in
losses in the loan portfolios, including certain segments or as a whole. In this
category, management considers the level, severity, and trend of classified
assets; level and trend of delinquent and non-accrual loans; recent loss
experience trends; concentrations of credit; size of individual credit exposure;
current economic conditions; and trends in portfolio volume, maturity, and
composition.
Allowances for loan losses are allocated to loan categories based on loan
pools having relatively similar risks. The unallocated allowance for loan losses
addresses the portfolio as a whole and is based on identifiable and probable
adverse events, the occurrence of which would result in losses to the Company.
The amount of unallocated allowance is determined by management on a monthly
basis and is less than 20 percent of the total allowance for loan losses at
December 31, 1998.
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 9 hereof.
The amount of time deposits of $100,000 or more and related maturities at
year end 1998, are disclosed in Note E to Financial Services Group Summarized
Financial Statements on page 50 of the Company's 1998 Annual Report to
Shareholders.
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
---------------------------
1998 1997 1996
----- ------ ------
Return on average assets................................ 1.12% 1.04% .41%*
Return on average equity................................ 19.48% 17.41% 6.43%*
Dividend payout ratio................................... 47.17% 246.72% 128.96%*
Equity to assets ratio.................................. 5.76% 5.97% 6.32%
- ---------------
* 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.
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15
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)
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
END OF INTEREST RATE AT DURING THE DURING THE DURING THE
PERIOD END OF PERIOD PERIOD PERIOD PERIOD
---------- ---------------- ----------- ----------- -------------
1998
Securities sold under agreements
to repurchase................. -- -- $1,254.9 $ 349.2 5.6%
Short-term FHLB advances......... $2,252.0 4.9% $2,290.0 $1,382.0 5.4%
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%
- ---------------
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 1998, wood
fiber required for the Company's paper and wood products operations was produced
from these lands and as a by-product of its solid wood operations to the extent
shown on the following chart:
WOOD FIBER REQUIREMENTS
PERCENTAGE
SUPPLIED
RAW MATERIALS INTERNALLY
- ------------- ----------
Sawtimber................................................. 61%
Pine Pulpwood............................................. 68%
Hardwood Pulpwood......................................... 18%
The balance of the wood fiber required for these operations was purchased
from numerous landowners and other lumber companies. The Company also operates a
eucalyptus plantation in Mexico from which it expects to begin harvesting fiber
in approximately four 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, 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; 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 1998, OCC represented approximately 46
percent of the total fiber needs of the Company's containerboard operations. The
price of OCC may exhibit volatility due to normal supply and demand fluctuations
for the raw material
15
16
and for the finished product. OCC is purchased by the Company and its
competitors on the open market from numerous suppliers. Price fluctuations
reflect the competitiveness of these markets. The Company's historical grade
patterns produce more linerboard and less corrugating medium than is converted
at the Company's box plants. The deficit of corrugating medium is obtained
through open market purchases and/or trades and the excess linerboard is sold in
the open market.
Temple-Inland FPC obtains the gypsum for its wallboard operations in
Fletcher, Oklahoma, from its own quarry located nearby, and from one outside
source through a long-term purchase contract. At its gypsum wallboard plant in
West Memphis, Arkansas, the Company 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 also 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 the synthetic gypsum
required by the joint venture plant and the West Memphis plant.
In the opinion of management, the sources outlined above will be sufficient
to supply the Company's raw material needs for the foreseeable future.
ENERGY
Electricity and steam requirements at the Company's manufacturing
facilities are either supplied by a local utility or generated internally
through the use of a variety of fuels, including natural gas, fuel oil, coal,
wood bark, and in some instances, waste products resulting from the
manufacturing process. By utilizing these waste products and other wood
by-products as a biomass fuel to generate electricity and steam, the Company was
able to generate approximately 60 percent of its energy requirements at its
mills in Rome, Georgia, Evadale, Texas, and Orange, Texas, during 1998. In most
cases where natural gas or fuel oil is used as a fuel, the Company's facilities
possess a dual capacity enabling the use of either fuel as a source of energy.
The natural gas needed to run the Company's natural gas fueled power
boilers, package boilers, and turbine is acquired pursuant to a multiple vendor
solicitation process that provides for the purchase of gas on an interruptible
basis at favorable rates.
16
17
EMPLOYEES
At January 2, 1999, the Company and its subsidiaries had approximately
15,700 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(S) EMPLOYEES COVERED EXPIRATION DATES
- -------- ------------------------- ------------------------- ----------------
Bleached Paperboard United Paperworkers 485 Hourly Production August 1, 2004
Mill, Evadale, Texas International Union Employees, 188 Hourly
("UPIU"), Local 801, Mechanical Maintenance
UPIU, Local 825, and Employees, and 67
International Brotherhood Electrical Maintenance
of Electrical Workers Employees
("IBEW"), Local 390
Linerboard Mill, UPIU, Local 1398, and 231 Hourly Production July 31, 1999
Orange, Texas UPIU, Local 391 Employees and 107 Hourly
Maintenance Employees
Linerboard Mill, UPIU, Local 804, IBEW, 313 Hourly Production August 28, 2000
Rome, Georgia Local 613, United Employees, 38 Electrical
Association of Journeymen Maintenance Employees,
& Apprentices of the and 164 Hourly
Plumbing & Pipefitting Maintenance Employees
Industry of the U.S. and
Canada, Local 766, and
International Association
of Machinists & Aerospace
Workers, Local 414
Evansville, Indiana, UPIU, Local 1046, UPIU, 106, 103, and 96 Hourly August 30, 2002
Louisville, Kentucky, Local 1737,and UPIU, Production Employees,
and Middletown, Ohio, Local 114, respectively respectively
Box Plants ("Northern
Multiple")
Rome, Georgia, and UPIU Local 838 and UPIU 153 and 107 Hourly December 1, 2003
Orlando, Florida, Box Local 834, respectively Production Employees,
Plants ("Southern respectively
Multiple")
The Company has additional collective bargaining agreements with the
employees of various of its other box plants, mills, and building products
plants. These agreements each cover a relatively small number of employees and
are negotiated on an individual basis at each such facility.
The Company considers its relations with its employees to be good.
ENVIRONMENTAL PROTECTION
The operations conducted by the subsidiaries of the Company are subject to
federal, state, and local provisions regulating the discharge of materials into
the environment and otherwise related to the protection of the environment.
Compliance with these provisions, primarily the Federal Clean Air Act, Clean
Water Act, Comprehensive Environmental Response, Compensation and Liability Act
of 1980, 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
17
18
compliance with applicable environmental regulations. Capital expenditures
directly related to environmental compliance totaled approximately $13 million
during 1998. 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
1999 through 2001 will average approximately $17 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. All persons subject to
the Cluster Rule, including the Company, must be in compliance with the initial
requirements by April 15, 2001. 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. The extent of such
benefits can increase these investments, but currently these expenditures are
not expected to exceed a total of $110 million by the initial compliance date
noted above.
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 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.
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
18
19
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 7.9 percent of total industry shipments
during 1998. 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 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..................... 64 Chairman of the Board and Chief Executive
Officer
Kenneth M. Jastrow, II............... 51 President, Chief Operating Officer, and Chief
Financial Officer
William B. Howes..................... 61 Executive Vice President
Harold C. Maxwell.................... 58 Group Vice President
Jack C. Sweeny....................... 52 Group Vice President
Joseph E. Turk....................... 55 Group Vice President
David H. Dolben...................... 63 Vice President and Chief Accounting Officer
M. Richard Warner.................... 47 Vice President, General Counsel, and Secretary
David W. Turpin...................... 48 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 each of Temple-Inland FPC, Inland, Guaranty, and Financial Services.
Mr. Grum has announced his intention to retire from the Company and as a
Director at the end of 1999.
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, Chairman of the
Board of Guaranty, and a Director of each of Temple-Inland FPC and Inland.
William B. Howes, who was named Executive Vice President and a Director in
August 1996, became a Group Vice President of the Company and the Chairman of
the Board and Chief Executive Officer of Inland in July 1993 after serving as
the President and Chief Operating Officer of Inland since April 1992. From
August 1990 until April 1992, Mr. Howes was the Executive Vice President of
Inland. Before joining Inland in
19
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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.
Jack C. Sweeny became a Group Vice President of the Company in May 1996. He
also serves as Group Vice President -- Forest and a Director of Temple-Inland
FPC. From November 1982 through May 1996, Mr. Sweeny served as Vice
President -- Operations of the Building Products Division of Temple-Inland FPC.
Joseph E. Turk became a Group Vice President of the Company in August 1996.
He also serves as Executive Vice President and a Director 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 1998
LOCATION PRODUCT MACHINES CAPACITY PRODUCTION
- -------- ---------- -------- -------- ----------
(IN TONS)
Ontario, California................................ Linerboard 1 325,000 282,000
Rome, Georgia...................................... Linerboard 2 795,000 735,000
Orange, Texas...................................... Linerboard 2 640,000 551,000
Maysville, Kentucky................................ Linerboard 1 405,000 381,000
Newport, Indiana................................... Medium 1 285,000 270,000
New Johnsonville, Tennessee........................ Medium 1 265,000 254,000
20
21
BLEACHED PAPERBOARD MILL
RATED
NO. OF ANNUAL 1998
LOCATION PRODUCT MIX MACHINES CAPACITY PRODUCTION
- -------- ----------- -------- -------- ----------
(IN TONS)
Evadale, Texas.......................... Bleached Pulp 0.20% 4 670,000 1,322
Food Service 38.42 249,500
Packaging 32.73 212,574
Office Supplies 17.81 115,667
Specialties 9.22 59,847
Nodular Pulp 1.62 10,507
----- ------- -------
100% 4 670,000* 649,417
===== ======= =======
- ---------------
* 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.
CORRUGATED CONTAINER PLANTS*
DATE
CORRUGATOR ACQUIRED OR
LOCATION SIZE CONSTRUCTED
- -------- ---------- -----------
Fort Smith, Arkansas........................................ 87" 1978
Fort Smith, Arkansas(1)***.................................. None 1996
Bell, California............................................ 97" 1974
El Centro, California(1).................................... 87" 1990
Ontario, California......................................... 87" 1985
Santa Fe Springs, California................................ 97" 1973
Tracy, California**......................................... 87" 1979
Wheat Ridge, Colorado....................................... 87" 1970
Orlando, Florida............................................ 98" 1955
Rome, Georgia**............................................. 87" & 98" 1955
Chicago, Illinois........................................... 87" 1958
Crawfordsville, Indiana..................................... 98" 1972
Evansville, Indiana......................................... 98" 1938
Garden City, Kansas......................................... 98" 1981
Kansas City, Kansas......................................... 87" 1981
Louisville, Kentucky........................................ 92" 1958
Minden, Louisiana........................................... 98" 1978
Minneapolis, Minnesota...................................... 87" 1959
Hattiesburg, Mississippi.................................... 87" 1965
St. Louis, Missouri......................................... 87" 1963
Spotswood, New Jersey....................................... 87" 1964
Middletown, Ohio............................................ 98" 1929
Streetsboro, Ohio........................................... 98" 1997
Biglerville, Pennsylvania................................... 98" 1932
Hazleton, Pennsylvania...................................... 98" 1976
Vega Alta, Puerto Rico...................................... 87" 1977
Lexington, South Carolina................................... 98" 1973
Rock Hill, South Carolina................................... 87" 1972
Elizabethton, Tennessee..................................... 98" 1982
21
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DATE
CORRUGATOR ACQUIRED OR
LOCATION SIZE CONSTRUCTED
- -------- ---------- -----------
Elizabethton, Tennessee(1)***............................... None 1990
Nashville, Tennessee(1)***.................................. None 1998
Dallas, Texas............................................... 98" 1962
Edinburg, Texas............................................. 87" 1988
Petersburg, Virginia........................................ 87" 1991
Petersburg, Virginia(1)***.................................. None 1998
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.
Additionally, Inland owns a graphics resource center in Indianapolis,
Indiana, that has a 100" preprint press and also leases 50 warehouses located
throughout much of the United States. Inland owns specialty converting plants in
Santa Fe Springs, California; Harrington, Delaware; Indianapolis, Indiana; and
Leominster, Massachusetts, and leases specialty converting plants in Buena Park,
California, Santa Fe Springs, California; Ontario, California; and Rural Hall,
North Carolina. Operations at a tape manufacturing facility in Milwaukee,
Wisconsin, were discontinued by the Company during 1998.
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.
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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
Medium Density Fiberboard.................... Clarion, Pennsylvania 130
Medium Density Fiberboard.................... Pembroke, Ontario, Canada 130
Medium Density Fiberboard*................... El Dorado, Arkansas 150
Fiber-cement*................................ Waxahachie, Texas 126
- ---------------
* 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............................................ 1,431,824
Natural Pine................................................ 131,030
Hardwood.................................................... 133,489
Special Use/Non-Forested.................................... 465,147
---------
Total............................................. 2,161,490
=========
- ---------------
* Includes approximately 268,729 acres of leased land.
In the opinion of management, the Company's plants, mills, and
manufacturing facilities are suitable for their purpose and adequate for the
Company's business.
Through its subsidiaries, the Company owns certain of the office buildings
in which various of its corporate offices are headquartered. This includes
approximately 150,000 square feet of space in Diboll, Texas, approximately
130,000 square feet in Indianapolis, Indiana, and 445,000 square feet of office
space 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 $3.6 million in
1998. Additionally, the Company owns 395,830 mineral acres in Alabama and
Georgia, which produced no lease or production revenue in 1998.
At year end 1998 property and equipment having a net book value of
approximately $60 million were subject to liens in connection with $87 million
of debt.
ITEM 3. LEGAL PROCEEDINGS
GENERAL:
The Company and its subsidiaries are involved in various legal proceedings
that have arisen from time to time in the ordinary course of business. In the
opinion of the Company's management, such proceedings will not be material to
the business or financial condition of the Company and its subsidiaries.
23
24
ENVIRONMENTAL:
The facilities of the Company are periodically inspected by environmental
authorities and must file periodic reports on the discharge of pollutants with
these authorities. Occasionally, one or more of these facilities 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 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 shareholders during
the fourth quarter of its last fiscal year.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION:
The information concerning market prices of the Company's Common Stock
required by this item is incorporated by reference from page 36 of the Company's
1998 Annual Report to Shareholders furnished to the Securities and Exchange
Commission pursuant to Rule 14a-3(b).
24
25
SHAREHOLDERS:
The Company's stock transfer records indicated that as of March 10, 1999,
there were approximately 6,726 holders of record of the Common Stock.
DIVIDEND POLICY:
On February 5, 1999, the Board of Directors declared a quarterly dividend
on the Common Stock of $.32 per share payable on March 15, 1999, to shareholders
of record on March 1, 1999. 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 36 of the Company's 1998 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 36 of the Company's 1998 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 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 be presented to and pursued by the
Company and its subsidiaries; the availability and price of raw materials used
by the Company and its subsidiaries; competitive actions by other companies;
changes in laws or regulations; and other factors, many of which are beyond the
control of the Company 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 adjustable rate debt and other borrowings, as well
as the lending and deposit gathering activities of the Financial Services Group.
The following table illustrates the estimated impact on pre-tax income of
immediate, parallel, and sustained shifts in interest rates for the subsequent
12 month period at year end 1998, with comparative information at year end 1997:
INCREASE/(DECREASE)
IN INCOME BEFORE TAXES
CHANGE IN ----------------------
INTEREST RATES 1998 1997
- -------------- ------ ------
(IN MILLIONS)
+2%............................................. $(26) $ 4
+1%............................................. $ (1) $ 9
0.............................................. $ -- $ --
- -1%............................................. $ 10 $(12)
- -2%............................................. $ 29 $(14)
The change in exposure to interest rate risk from year end 1997 is due
primarily to the Financial Services Group entering into interest rate floor and
collar agreements to hedge the prepayment risk inherent in a portion of its
adjustable rate mortgage assets and an increase in the Company's adjustable rate
debt. At year
25
26
end 1997, the sensitivity of the Financial Services Group's earnings to changes
in interest rates was inverse to the impact of interest changes on the Company's
adjustable rate debt. By substantially decreasing the earnings volatility of the
Financial Services Group to interest rate changes through the use of floor and
collar agreements, the Company's sensitivity to interest rate risk at the end of
1998 is primarily driven by changes in rates on the Company's adjustable rate
debt.
Additionally, the fair value (estimated at $244 million at year end 1998)
of the Financial Services Group's mortgage servicing rights is also affected by
changes in interest rates. The fair value of the servicing rights has declined
by $26 million (10 percent) since year end 1997, due to the recent decline in
interest rates, actual and estimated future prepayments, and the smaller size of
the servicing portfolio. 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 an additional $41 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.
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 9 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 11 through 17 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 5 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.
26
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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............................ 69
Consolidated Statements of Income -- for the years 1998,
1997, and 1996......................................... 54
Consolidating Balance Sheets at year end 1998 and 1997.... 56-57
Consolidated Statements of Shareholders' Equity -- for the
years 1998, 1997, and 1996............................. 58
Consolidated Statements of Cash Flows -- for the years
1998, 1997, and 1996................................... 55
Notes to Consolidated Financial Statements................ 59-68
Parent Company (Temple-Inland Inc.)
Summarized Statements of Income -- for the years 1998,
1997, and 1996......................................... 37
Summarized Balance Sheets at year end 1998 and 1997....... 38
Summarized Statements of Cash Flows -- for the years 1998,
1997, and 1996......................................... 39
Notes to the Parent Company (Temple-Inland Inc.)
Summarized Financial Statements........................ 40-41
Financial Services Group
Summarized Statements of Income -- for the years 1998,
1997, and 1996......................................... 42
Summarized Balance Sheets at year end 1998 and 1997....... 43
Summarized Statements of Cash Flows -- for the years 1998,
1997, and 1996......................................... 44
Notes to Financial Services Group Summarized Financial
Statements............................................. 45-53
- ---------------
All financial statements listed in this item are incorporated herein by
reference from the Company's 1998 Annual Report to Shareholders for the fiscal
year ended January 2, 1999, and filed for purposes of those portions so
incorporated as Exhibit 13. Page numbers refer to page numbers in the Company's
1998 Annual Report to Shareholders.
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 2, 1999, is filed herewith at the page indicated.
PAGE
ITEM NUMBER
- ---- ------
Temple-Inland Inc. and Subsidiaries
Schedule II -- Valuation and Qualifying Accounts.......... 34
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.
27
28
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 20, 1999, between the
Company and First Chicago Trust Company of New York, as
Rights Agent(7)
4.11 -- Form of 7.25% Note due September 15, 2004, of the
Company(16)
4.12 -- Form of 8.25% Debenture due September 15, 2022, of the
Company(16)
4.13 -- Form of Fixed-rate Medium Term Note, Series F, of the
Company(24)
4.14 -- Form of Floating-rate Medium Term Note, Series F, of the
Company(24)
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)
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)
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29
EXHIBIT
NUMBER EXHIBIT
------- -------
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)
10.24 -- Agreement and Plan of Merger by and among Temple-Inland
Inc., HF Bancorp, Inc., Guaranty Federal Bank, F.S.B.,
and Hemet Federal Savings and Loan Association, dated as
of November 14, 1998(25)
11 -- Statement re: Computation of Per Share Earnings for the
three years ended January 2, 1999(26)
13 -- Annual Report to Shareholders for the year ended January
2, 1999. 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.(26)
21 -- Subsidiaries of the Company(26)
29
30
EXHIBIT
NUMBER EXHIBIT
------- -------
23 -- Consent of Ernst & Young LLP(26)
27.1 -- Financial Data Schedule(26)
27.2 -- Restated 1998 Interim Financial Data Schedules(26)
- ---------------
* 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 Registration Statement on Form
8A filed with the Commission on February 19, 1999.
(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.
(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.
30
31
(24) Incorporated by reference to the Company's Form 8-K filed with the
Commission on June 2, 1998.
(25) Incorporated by reference to Registration Statement on Form S-4 (No.
333-71699) filed by the Company with the Commission.
(26) Filed herewith.
(b) Reports on Form 10-k
No reports on Form 8-K were filed during the fourth quarter of 1998.
31
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned thereunto
authorized, on March 26, 1999.
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, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ CLIFFORD J. GRUM Director, Chairman of the March 26, 1999
- ----------------------------------------------------- Board, and Chief Executive
Clifford J. Grum Officer
/s/ KENNETH M. JASTROW, II Director, President, Chief March 26, 1999
- ----------------------------------------------------- Operating Officer, and Chief
Kenneth M. Jastrow, II Financial Officer
/s/ DAVID H. DOLBEN Vice President and Chief March 26, 1999
- ----------------------------------------------------- Accounting Officer
David H. Dolben
/s/ ROBERT CIZIK Director March 26, 1999
- -----------------------------------------------------
Robert Cizik
Director March 1999
- -----------------------------------------------------
Anthony M. Frank
/s/ WILLIAM B. HOWES Director March 26, 1999
- -----------------------------------------------------
William B. Howes
/s/ BOBBY R. INMAN Director March 26, 1999
- -----------------------------------------------------
Bobby R. Inman
/s/ HERBERT A. SKLENAR Director March 26, 1999
- -----------------------------------------------------
Herbert A. Sklenar
/s/ WALTER P. STERN Director March 26, 1999
- -----------------------------------------------------
Walter P. Stern
/s/ ARTHUR TEMPLE III Director March 26, 1999
- -----------------------------------------------------
Arthur Temple III
/s/ CHARLOTTE TEMPLE Director March 26, 1999
- -----------------------------------------------------
Charlotte Temple
/s/ LARRY E. TEMPLE Director March 26, 1999
- -----------------------------------------------------
Larry E. Temple
32
33
REPORT OF INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Temple-Inland Inc.
as of January 2, 1999, and January 3, 1998, and for each of the three years in
the period ended January 2, 1999, and have issued our report thereon dated
January 29, 1999, which is incorporated by reference in this Annual Report (Form
10-K) from the 1998 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 29, 1999
33
34
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 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts.................... $ 9.4 $ 5.7 $ 2.2(A) $ 12.9
Reserve for discounts and
allowances.................. 1.5 8.4(B) 9.3(C) 0.6
Allowance for loan losses..... 91.1 0.6 0.1(D) 5.2(A) 86.6
Allowance for unrealized
losses on available-for-sale
securities.................. 5.1 0.9 (8.7)(E) (2.7)
Allowance for unrealized
losses on mortgage loans
held for sale............... 0.4 0.0 0.3(A) 0.1
Allowance for mortgage
servicing rights............ 0.0 16.8 16.8
------ ----- ----- ----- ------
Totals................... $107.5 $24.0 ($0.2) $17.0 $114.3
====== ===== ===== ===== ======
For the year 1997:
Deducted from asset accounts:
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............... 0.0 0.4 0.4
------ ----- ----- ----- ------
Totals................... $ 91.4 $ 3.0 $33.6 $20.5 $107.5
====== ===== ===== ===== ======
For the year 1996:
Deducted from asset accounts:
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) 0.0
------ ----- ----- ----- ------
Totals................... $ 73.9 $16.9 $20.9 $20.3 $ 91.4
====== ===== ===== ===== ======
- ---------------
(A) Uncollectible accounts written off, net of recoveries.
(B) Reduction of revenues for customer discounts.
(C) Customer discounts taken.
(D) Additions related to acquisitions and bulk purchases of loans, net of
adjustments.
(E) Unrealized gains/losses.
34
35
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
11 -- Statement re: Computation of Per Share Earnings for the
three years ended January 2, 1999
13 -- Annual Report to Shareholders for the year ended January
2, 1999. 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 Schedule
27.2 -- Restated 1998 Interim Financial Data Schedules