THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THIS PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
Filed Pursuant to Rule 424(b)(5)
Registration Nos. 333-84120, 333-84120-01, 333-84120-02
SUBJECT TO COMPLETION, DATED APRIL 15, 2002
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 26, 2002)
6,000,000 UPPER DECS(SM)
[TEMPLE-INLAND LOGO]
% Upper DECS
------------------
We are selling 6,000,000 of our Upper DECS. We have granted the underwriters
an option to purchase up to 900,000 additional Upper DECS to cover
over-allotments.
Each Upper DECS has a stated amount of $50 and will initially consist of (a)
a contract to purchase, for $50, shares of our common stock on , 2005
and (b) a senior note with a principal amount of $50 that is due on ,
2007. The senior note will initially be held as a component of your Upper DECS
and be pledged to us to secure your obligation to purchase shares of our common
stock under the purchase contract.
We will make quarterly contract adjustment payments to you under the
purchase contract at the annual rate of % of the stated amount of $50 per
purchase contract. In addition, you will receive quarterly interest payments on
the senior note at the initial annual rate of %. We have the right to defer
the contract adjustment payments on the purchase contracts until ,
2005, but not the interest payments on the senior notes, as described in this
prospectus supplement. The interest rate on the senior notes will be reset, and
the senior notes remarketed, as described in this prospectus supplement. The
senior notes will be unsecured and rank equally with all of our other unsecured
senior indebtedness. The Upper DECS will be sold in minimum quantities of 20
Upper DECS.
Concurrently with this offering of Upper DECS, we are also making an
offering of 3,600,000 shares of our common stock, plus up to an additional
540,000 shares of our common stock if the underwriters for that offering
exercise their over-allotment option in full. Neither offering is conditioned on
the other.
Our common stock is listed on the New York Stock Exchange and the Pacific
Exchange under the symbol "TIN." The last reported sale price of our common
stock on the New York Stock Exchange on April 12, 2002 was $56.40 per share.
Prior to this offering, there has been no public market for the Upper DECS.
We have applied to list the Upper DECS on the New York Stock Exchange under the
symbol " ."
------------------
INVESTING IN OUR UPPER DECS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE S-19.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
------------------
PER UPPER
DECS TOTAL
--------- --------
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Temple-Inland Inc. (before expenses) $ $
The public offering price set forth above does not include accumulated
contract adjustment payments and accrued interest, if any. Contract adjustment
payments on the purchase contracts and interest on the senior notes will accrue
from the date of original issuance of the Upper DECS, expected to be
, 2002, to the date of delivery.
The underwriters expect to deliver the Upper DECS to purchasers on
, 2002.
------------------
SALOMON SMITH BARNEY
UBS WARBURG
------------------
ABN AMRO ROTHSCHILD LLC
BANC OF AMERICA SECURITIES LLC
BANC ONE CAPITAL MARKETS, INC.
TD SECURITIES INC.
, 2002
---------------
(SM) Service mark of Salomon Smith Barney Inc.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AS APPLICABLE.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
-----
Summary..................................................... S-1
Risk Factors................................................ S-19
Cautionary Statement About Forward-Looking Statements....... S-27
Accounting Treatment........................................ S-27
Use of Proceeds............................................. S-29
Capitalization.............................................. S-30
Our Business................................................ S-31
Our Executive Officers and Directors........................ S-32
Price Range of Common Stock and Dividend Policy............. S-37
Description of the Upper DECS............................... S-38
Description of the Senior Notes............................. S-55
Unaudited Pro Forma Combined Financial Statements........... S-59
Selected Financial Data..................................... S-67
Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................. S-69
Certain United States Federal Income Tax Consequences....... S-88
ERISA Considerations........................................ S-96
Underwriting................................................ S-98
Legal Matters............................................... S-100
Experts..................................................... S-100
Where You Can Find More Information......................... S-100
PROSPECTUS
About this Prospectus....................................... ii
Where You Can Find More Information......................... ii
Incorporation of Certain Documents by Reference............. iii
Cautionary Statement About Forward-Looking Statements....... iii
About Temple-Inland Inc..................................... 1
About the Temple-Inland Trusts.............................. 3
Use of Proceeds............................................. 4
Ratio of Earnings to Fixed Charges.......................... 4
Description of the Securities We May Offer.................. 6
Description of Debt Securities.............................. 6
Description of Common Stock................................. 17
Description of Preferred Stock.............................. 20
Description of Depositary Shares............................ 21
Description of Warrants..................................... 23
Description of Stock Purchase Contracts and Stock Purchase
Units..................................................... 24
Description of Upper DECS................................... 24
Description of the Trust Preferred Securities............... 26
Description of the Trust Preferred Securities Guarantee..... 28
Relationship Among the Trust Preferred Securities, the Debt
Securities and the Guarantee.............................. 31
Plan of Distribution........................................ 32
Legal Matters............................................... 33
Experts..................................................... 34
i
SUMMARY
This summary highlights certain information incorporated by reference or
appearing elsewhere in this prospectus supplement or the accompanying
prospectus. As a result, it is not complete and does not contain all of the
information that you should consider before purchasing our Upper DECS. You
should read the following summary in conjunction with the more detailed
information contained in this prospectus supplement, the accompanying prospectus
and the documents incorporated by reference. References to "Temple-Inland" refer
to Temple-Inland Inc. Unless the context requires otherwise, references to "we,"
"us" and "our" refer collectively to Temple-Inland and its subsidiaries.
TEMPLE-INLAND INC.
OVERVIEW
We are a holding company and conduct all of our operations through our
subsidiaries. Our business is divided among three groups:
- the paper group, which manufactures corrugated packaging products;
- the building products group, which manufactures a wide range of building
products and manages our forest resources of approximately 2.1 million
acres of timberland in Texas, Louisiana, Georgia and Alabama; and
- the financial services group, which engages in savings bank, mortgage
banking, real estate and insurance brokerage activities.
THE PAPER GROUP
The paper group is operated by Inland Paperboard and Packaging, Inc. On a
pro forma basis after giving effect to the acquisition of Gaylord Container
Corporation, the group's revenue in 2001 would have been $2.8 billion, or 57% of
our pro forma consolidated revenues. The paper group is a vertically integrated
corrugated packaging operation that includes:
- six linerboard mills;
- one corrugating medium mill; and
- 82 converting facilities.
Our paper group is focused on a single grade of paper, containerboard.
Containerboard is the largest segment of the paper market and is used to make
corrugated packaging. We believe this grade is well positioned for the future
due to a decline in industry containerboard capacity and the fact that no
announcements relating to the installation of any new capacity over the next few
years have been made.
The paper group converts containerboard that it manufactures into a
complete line of corrugated packaging and point-of-purchase displays. Our
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. The corrugated boxes are sold to a variety of customers in
the food, paper, glass containers, chemical, appliance and plastics industries,
among others.
During 2001, the paper group served about 7,000 customers with
approximately 9,000 shipping destinations. The largest single customer accounted
for approximately 5% and the ten largest customers accounted for approximately
25% of our 2001 corrugated packaging revenues. Costs of freight and customer
service requirements necessitate the location of box plants relatively close to
customers. Each of our plants tends to service a market within a 150-mile radius
of the plant.
Sales of corrugated shipping containers track changing population patterns
and other demographics. Historically, there has been a correlation between the
demand for containers and containerboard and real growth in the United States
gross domestic product, particularly the non-durable goods segment.
On April 5, 2002, we completed our acquisition of Gaylord Container
Corporation for approximately $868 million. Gaylord manufactures and sells
corrugated containers and multiwall and retail paper bags. The operations of
Gaylord consist of two containerboard mills, one unbleached kraft paper mill, 19
corrugating converting facilities, two multiwall bag plants and four retail bag
plants. The acquisition of Gaylord will further our strategy to enhance return
on investment by building a high-performance, fully-integrated corrugated
packaging operation.
S-1
We believe the Gaylord acquisition will:
- increase market share and further industry consolidation;
- increase revenues and improve customer mix;
- provide opportunities for significant synergies;
- provide opportunities for capacity rationalization and increased
integration; and
- provide opportunities for dispositions of non-core assets.
THE BUILDING PRODUCTS GROUP
The building products group is operated by Temple-Inland Forest Products
Corporation. Its revenue for 2001 was $726 million, or 15% of our 2001 pro forma
consolidated net revenues after giving effect to the acquisition of Gaylord
Container Corporation. The building products group manufactures a wide range of
building products, including:
- lumber;
- particleboard;
- medium density fiberboard;
- gypsum wallboard; and
- fiberboard.
We sell building products throughout the continental United States and in
Canada, with the majority of sales occurring in the southern United States. The
ten largest customers accounted for approximately 30% of the building products
group's 2001 sales. The building products business is heavily dependent upon the
level of residential housing expenditures, including the repair and remodeling
market. The building products group's converting operations are located near
many of the fastest growing U.S. metropolitan areas. This geographic
positioning, coupled with a commitment to deliver quality products and service,
provides a strategic advantage for servicing the Company's building products
customers.
The building products group also manages our 2.1 million acres of
timberland. These lands are an important strategic asset and provide
approximately 70% of the virgin fiber requirements of our containerboard mills
and 60% of the raw material requirements for the building products operations.
Based on a study completed during 2001, we identified 1,800,000 acres of
timberlands as strategic and core, 160,000 acres as high-value land with the
potential for real estate development and 110,000 acres as non-strategic. During
September 2001, we sold 78,000 acres of non-strategic land. We expect to sell
the remaining non-strategic land over time.
THE FINANCIAL SERVICES GROUP
The financial services group is operated by subsidiaries of Temple-Inland
Financial Services Inc. Its revenue for 2001 was $1.4 billion, or 28% of our
2001 pro forma consolidated net revenues after giving effect to the acquisition
of Gaylord Container Corporation. The financial services group engages in:
- savings bank;
- mortgage banking;
- real estate; and
- insurance brokerage activities.
Savings Bank. Our savings bank, Guaranty Bank, a federally-chartered stock
savings bank, conducts its business through 152 banking centers in Texas and
California. Guaranty's 108 Texas banking centers are concentrated in the
metropolitan areas of Houston, Dallas/Fort Worth, San Antonio and Austin, as
well as the central and eastern regions of the state. The 44 California banking
centers are concentrated in Southern California and the Central Valley. The
primary activities of Guaranty include providing deposit products to the general
public, investing in single-family adjustable-rate mortgages, lending for the
construction of real estate projects and the financing of business operations.
Mortgage Banking. Mortgage banking is conducted through Guaranty
Residential Lending, Inc., a subsidiary of Guaranty Bank. Guaranty Residential
Lending arranges financing of single-family mortgage loans (primarily Fannie
Mae, Freddie Mac and Ginnie Mae), securitizes the loans and sells the loans into
S-2
the secondary market. The mortgage bank typically retains the servicing rights
on approximately one-third of the loans it originates and sells the remainder to
third parties. At the end of 2001, the mortgage banking operation was servicing
$11.6 billion in mortgage loans. The mortgage banking operation produced $7.6
billion in mortgage loans during 2001.
Real Estate. The financial services group is involved in the development
of 48 residential subdivisions in Texas, California, Colorado, Florida, Georgia,
Missouri, Tennessee and Utah. Real estate activities also include ownership of
ten commercial properties, including properties owned by subsidiaries through
joint venture interests.
Insurance Brokerage. Subsidiaries of the financial services group are
engaged in the brokerage of commercial and personal lines of property, casualty,
life and group health insurance products. One of these subsidiaries is an
insurance agency that administers the marketing and distribution of several
mortgage-related personal life, accident and health insurance programs.
TRANSFORMATION
Over the past two years, we have been transforming Temple-Inland into a
market-driven, customer-focused company in order to improve financial
performance. Our goal is to deliver a superior rate of return for shareholders
over economic cycles. In order to accomplish this, we have implemented
strategies to improve profitability and returns by meeting the needs of our
customers, matching production with demand across all product lines, controlling
capital and reducing costs. In addition, our compensation programs have been
aligned so that our employees focus on returns and value creation for our
shareholders. Our unique mix of businesses, locations and market focus provide
the opportunity to meet our goals and provide the foundation for further growth.
We have made significant progress in the transformation of our company. We
believe we rank in the top quartile in the industry based on return on
investment, but our objective is to be consistently at the top.
OUR BUSINESS STRATEGIES
Our overall objective is to deliver a superior rate of return for our
shareholders over economic cycles. Our specific business strategies include the
following:
- creating value by remaining focused on customers and products, the
cornerstone principles of a market driven company;
- matching production with demand across all product lines;
- increasing the integration of the paper group's containerboard and
corrugated packaging operations, thereby reducing reliance on the more
volatile spot and export markets for containerboard;
- growing through acquisitions that meet our return requirements, rather
than building new facilities;
- maintaining high-quality, low-cost assets; and
- maintaining strict financial discipline.
OUR COMPETITIVE STRENGTHS
Our key competitive strengths include:
- our strong position in the paper and building products segments;
- our acquisition of Gaylord, which serves as an excellent strategic fit
with our existing businesses and makes us the third largest corrugated
packaging manufacturer in North America;
- our strong track record for integrating acquisitions;
- our returns from financial services exceed our cost of capital and
improve our return on investment; and
- our focused management team, whose compensation is directly tied to our
return on investment.
S-3
THE OFFERING
WHAT ARE THE UPPER DECS?
Each Upper DECS will be issued at the stated amount of $50 and will
initially consist of:
(1) a purchase contract under which:
- you will agree to purchase, and we will agree to sell, for $50,
shares of our common stock on , 2005 (the "stock purchase
date"), the number of which we will determine based on the average
trading price of our common stock for a period preceding that date,
calculated in the manner described below; and
- we will pay you contract adjustment payments at the annual rate of
% of the stated amount of $50 as specified below (subject to
our right of deferral); and
(2) a senior note due , 2007, with a principal amount of $50
on which we will pay interest quarterly at the initial annual rate
of % until a successful remarketing of the senior notes and at
the reset rate (as described below) thereafter (assuming the senior
notes are successfully remarketed).
The senior notes that are a component of the Upper DECS will be owned by
you but will initially be pledged to us to secure your obligations under the
purchase contracts.
Each holder of Upper DECS may elect at any time to withdraw the pledged
senior notes or, after the remarketing described below, treasury securities
underlying the Upper DECS, creating "Stripped DECS." A holder might consider it
beneficial to either hold the senior notes directly or to realize income from
their sale. To create Stripped DECS, a holder must substitute, as pledged
securities, specifically identified treasury securities that will pay $50 on the
stock purchase date, the amount due on such date under the purchase contract,
and the pledged senior notes or treasury securities (after a successful
remarketing, as described below) will be released from the pledge agreement and
delivered to the holder. Holders of Stripped DECS may recreate Upper DECS by
resubstituting the senior notes or, after the successful remarketing, applicable
treasury securities for the treasury securities underlying the Stripped DECS.
We will not initially list either the Stripped DECS or the senior notes on
any national securities exchange. In the event that either of these securities
is separately traded to a sufficient extent that applicable exchange listing
requirements are met, we may attempt to list these securities on the exchange on
which the Upper DECS are then listed.
If the senior notes are successfully remarketed as described in this
prospectus supplement, the applicable ownership interest in the treasury
securities will replace the senior notes as a component of each Upper DECS and
will be pledged to us to secure your obligations under the purchase contracts.
WHAT ARE THE PURCHASE CONTRACTS?
The purchase contract underlying an Upper DECS obligates you to purchase,
and us to sell, for $50, on the stock purchase date, a number of newly issued
shares of our common stock equal to the settlement rate described below. We will
base the settlement rate on the average trading price of our common stock for a
period preceding that date, calculated in the manner described below.
WHAT PAYMENTS WILL BE MADE TO HOLDERS OF THE UPPER DECS AND THE SENIOR NOTES?
If you hold Upper DECS, we will pay you quarterly contract adjustment
payments on the purchase contracts at the annual rate of % of the $50 stated
amount through and including the stock purchase date and quarterly interest
payments on the senior notes at the initial annual rate of % of the principal
amount of $50 per senior note through and including , 2005, and at the
reset rate thereafter (assuming the senior notes are successfully remarketed).
The contract adjustment payments may be subject to deferral as described
below. We are not entitled to defer interest payments on the senior notes. On
the stock purchase date, if your senior notes were successfully remarketed as
described below, you will still receive a quarterly interest payment at the same
annual rate as was paid on the senior notes prior to remarketing.
If you hold Stripped DECS, you will receive only the quarterly contract
adjustment payments payable by us at the annual rate of % of the $50 stated
amount through and including the stock purchase date.
S-4
The contract adjustment payments may be subject to deferral as described below.
In the event that we elect to defer the payment of contract adjustment payments
on the purchase contracts until the stock purchase date, each holder of Upper
DECS and Stripped DECS will receive on the stock purchase date in respect of the
deferred contract adjustment payments a number of shares of our common stock in
lieu of a cash payment, as described below.
If you hold senior notes separately from the Upper DECS, you will receive
only the cash interest payable on the senior notes. The senior notes, whether
held separately from or as part of the Upper DECS, will initially pay interest
at the annual rate of % of the principal amount of $50 per senior note for
the quarterly payments payable on and before , 2005. If the senior
notes are successfully remarketed, they will pay interest to the holders of such
senior notes after the remarketing at the reset rate from the date of the
settlement of the successful remarketing until their maturity on ,
2007. If the remarketing agent cannot establish a reset rate meeting the
requirements described in this prospectus supplement, the remarketing agent will
not reset the interest rate on the senior notes and the interest rate will
continue to be the initial annual rate of % until the remarketing agent can,
on a later remarketing date prior to the stock purchase date, establish a reset
rate meeting the requirements described in this prospectus supplement. If no
remarketing occurs prior to the stock purchase date, the initial annual rate of
% will be the interest rate through maturity of the senior notes. We are not
entitled to defer interest payments on the senior notes.
WHAT ARE THE PAYMENT DATES?
Subject to our deferral right in respect of the contract adjustment
payments described below, payments of interest on the senior notes and contract
adjustment payments on the purchase contracts will be paid quarterly in arrears
on each , , and , commencing , 2002.
WHEN CAN WE DEFER PAYMENTS?
We may, at our option and upon prior written notice to the holders of the
Upper DECS and the purchase contract agent, defer payment of all or part of the
contract adjustment payments on the purchase contracts until no later than the
stock purchase date. We will pay additional contract adjustment payments on any
deferred installments of contract adjustment payments at a rate of % per year
until paid, compounded quarterly, to but excluding , 2005, unless your
purchase contract has been terminated. All contract adjustment payments deferred
until the stock purchase date will be paid in shares of our common stock in lieu
of cash payment.
We are not entitled to defer payments of interest on the senior notes.
WHAT IS THE RESET RATE?
In order to facilitate the remarketing of the senior notes at the
remarketing price described below, the remarketing agent will reset the interest
rate on the senior notes for the quarterly payments payable on and after
, 2005 until their maturity on , 2007. The reset rate will
be the rate sufficient to cause the then current aggregate market value of all
the outstanding senior notes to be equal to 100.50% of the remarketing value
described below. The remarketing agent will assume for this purpose, even if not
true, that all of the senior notes continue to be components of the Upper DECS
and will be remarketed. Resetting the interest rate on the senior notes at this
rate should enable the remarketing agent to sell the senior notes in the
remarketing and purchase the necessary treasury securities, the proceeds of
which will be applied in settlement of the purchase contracts and to payment of
the quarterly payment on the Upper DECS due on , 2005.
The reset rate will be determined by the remarketing agent on the third
business day (as defined below) prior to , 2005, the last quarterly
interest payment date before the stock purchase date. If the remarketing agent
cannot establish a reset rate meeting these requirements on the remarketing date
and, as a result, the senior notes cannot be sold as described below, the
interest rate will not be reset and will continue to be the initial interest
rate on the senior notes. However, the remarketing agent may thereafter attempt
to establish a reset rate meeting these requirements, and the remarketing agent
will attempt to remarket the senior notes on the subsequent dates as described
below. If a reset rate cannot be established on a given date, the remarketing
will not occur on that date.
S-5
The resetting of the interest rate on the senior notes will not change the
quarterly payment due to holders of the Upper DECS on , 2005, which,
as described above, will be paid in an amount equal to interest on the senior
notes at the initial rate of % plus the contract adjustment payments that are
accrued and unpaid at that time.
A "business day" means any day other than Saturday, Sunday or any other day
on which banking institutions and trust companies in the State of New York or at
a place of payment are authorized or required by law, regulation or executive
order to be closed.
WHAT IS REMARKETING?
In order to provide holders of the Upper DECS with the necessary collateral
to be applied in the settlement of their purchase contracts, the remarketing
agent will sell the senior notes of holders of Upper DECS, other than those
electing not to participate in the remarketing. The remarketing agent will use
the proceeds to purchase treasury securities, which the participating holders of
Upper DECS will then pledge to secure their obligations under the related
purchase contracts. The cash paid on the pledged treasury securities underlying
the Upper DECS of such holders will be used to satisfy such holders' obligations
to purchase shares of our common stock on the stock purchase date. This will be
one way for holders of Upper DECS to satisfy their obligations to purchase
shares of our common stock under the related purchase contracts. Unless a holder
elects not to participate in the remarketing as described below, the remarketing
agent will remarket the senior notes that are included in the Upper DECS on one
or more occasions starting on the remarketing date, which initially will be the
third business day immediately preceding , 2005, the last quarterly
interest payment date before the stock purchase date, unless the remarketing
agent delays the remarketing to a later date as described below.
We will enter into a remarketing agreement with a nationally recognized
investment banking firm, pursuant to which it will agree to use its commercially
reasonable best efforts to sell the senior notes that are included in the Upper
DECS and that are participating in the remarketing at a price equal to at least
100.50% of the remarketing value.
The "remarketing value" will be equal to the sum of:
(1) the value at the remarketing date of such amount of treasury securities
that will pay, on or prior to the quarterly payment date falling on the
stock purchase date, an amount of cash equal to the aggregate interest
payment that is scheduled to be payable on that quarterly interest
payment date on each senior note which is included in an Upper DECS and
which is participating in the remarketing, assuming for this purpose,
even if not true, that the interest rate on the senior notes remains at
the initial rate; and
(2) the value at the remarketing date of such amount of treasury securities
that will pay, on or prior to the stock purchase date, an amount of
cash equal to $50 for each senior note which is included in an Upper
DECS and which is participating in the remarketing.
The remarketing agent will use the proceeds from the sale of the senior
notes included in the Upper DECS in a successful remarketing described in this
section to purchase, in the discretion of the remarketing agent, in open market
transactions or at treasury auction, the amount and the types of treasury
securities described in (1) and (2) above, which it will deliver through the
purchase contract agent to the collateral agent to secure the obligations under
the related purchase contracts of the holders of the Upper DECS whose senior
notes participated in the remarketing. The remarketing agent will deduct, as a
remarketing fee, an amount not exceeding 25 basis points (0.25%) of the total
proceeds from such remarketing. The remarketing agent will remit the remaining
portion of the proceeds, if any, to the holders of the Upper DECS participating
in the remarketing.
Alternatively, a holder of Upper DECS may elect not to participate in the
remarketing and retain the senior notes underlying such holder's Upper DECS by
delivering the treasury securities described in (1) and (2) above, in the amount
and types specified by the remarketing agent, applicable to the holder's senior
notes, to the purchase contract agent no later than the fourth business day
prior to the remarketing date to satisfy such holder's obligation under the
purchase contracts. The interest rate on the senior notes will be reset to the
reset rate regardless of whether holders of the senior notes elect to
participate in the remarketing.
S-6
WHAT HAPPENS IF THE REMARKETING AGENT DOES NOT SELL THE SENIOR NOTES?
If, as described above, the remarketing agent cannot establish a reset rate
on the remarketing date that will be sufficient to cause the current aggregate
market value of all the outstanding senior notes to be equal to at least 100.50%
of the remarketing value, assuming, even if not true, that all of the senior
notes are held as components of the Upper DECS and will be remarketed, and the
remarketing agent cannot sell the senior notes offered for remarketing on the
remarketing date at a price equal to at least 100.50% of the remarketing value,
determined on the basis of the senior notes being remarketed, the remarketing
agent will attempt to establish a reset rate meeting these requirements on each
of the two immediately following business days. If the remarketing agent cannot
establish a reset rate meeting these requirements on either of those days, it
will attempt to establish such a reset rate on each of the three business days
immediately preceding , 2005. If the remarketing agent cannot
establish such a reset rate during that period, it will further attempt to
establish such a reset rate on each of the three business days immediately
preceding the stock purchase date. We refer to each of these three business day
periods as "remarketing periods" in this prospectus supplement. In order for any
such remarketing to be successful, the remarketing agent must resell the senior
notes offered for remarketing at a price equal to at least 100.50% of the
remarketing value.
If the remarketing agent fails to remarket the senior notes offered for
remarketing at the price specified in the preceding paragraph by the business
day immediately preceding the stock purchase date, any holder of an Upper DECS
that has not otherwise settled its related purchase contract in cash by the
close of business on the business day immediately preceding the stock purchase
date (but without regard to the notice requirements otherwise applicable to cash
settlement) will be deemed to have directed us to retain the securities pledged
as collateral in satisfaction of its obligations under the purchase contract and
we will retain such securities in full satisfaction of those obligations.
IF A HOLDER OF SENIOR NOTES IS NOT A PARTY TO A PURCHASE CONTRACT, MAY THAT
HOLDER STILL PARTICIPATE IN A REMARKETING OF SUCH HOLDER'S SENIOR NOTES?
Holders of senior notes that are not included as part of an Upper DECS may
elect to have their senior notes included in the remarketing in the manner
described in "Description of the Upper DECS -- Optional Remarketing of Senior
Notes Which Are Not Included in Upper DECS." The remarketing agent will use its
commercially reasonable best efforts to remarket the separately held senior
notes included in the remarketing at a price equal to at least 100.50% of the
remarketing value, determined on the basis of the separately held senior notes
being remarketed. After deducting its remarketing fee in an amount not exceeding
25 basis points (0.25%) of the total proceeds from the remarketing, the
remaining portion of the proceeds, if any, will be remitted to the holders whose
separate senior notes were sold in the remarketing. If a holder of senior notes
elects to have its senior notes remarketed but the remarketing agent fails to
sell the senior notes during any remarketing period at the price specified
above, the senior notes will be promptly returned to the holder following the
conclusion of that period.
WHAT IS THE SETTLEMENT RATE?
The settlement rate is the number of newly issued shares of our common
stock that we are obligated to sell and holders are obligated to buy upon
settlement of a purchase contract on the stock purchase date.
The settlement rate for each purchase contract will be as follows, subject
to adjustment under specified circumstances as described in this prospectus
supplement:
- if the applicable market value, determined as described below, of our
common stock is equal to or greater than $ , the settlement rate
will be shares of our common stock per purchase contract;
- if the applicable market value of our common stock is less than $ but
greater than $ , the settlement rate will be equal to $50
divided by the applicable market value of our common stock per purchase
contract; and
- if the applicable market value of our common stock is less than or equal
to $ , the settlement rate will be shares of our common
stock per purchase contract.
S-7
The "applicable market value" means the average of the closing price per
share of our common stock on each of the 20 consecutive trading days ending on
the third trading day immediately preceding the stock purchase date.
At the option of each holder, a purchase contract may be settled early by
the early delivery of cash to the purchase contract agent, as described below.
However, this option will not be available unless at such time, if so required
under the U.S. federal securities laws, there is in effect a registration
statement and a current prospectus is available covering the common stock to be
delivered in respect of the purchase contracts being settled. In the case of
early settlement shares of our common stock will be issued per purchase
contract.
BESIDES PARTICIPATING IN A REMARKETING, HOW ELSE CAN A HOLDER'S OBLIGATIONS
UNDER THE PURCHASE CONTRACT BE SATISFIED?
Besides participating in the remarketing, your obligations under the
purchase contract may also be satisfied:
- if you have created Stripped DECS or elected not to participate in the
remarketing, by delivering and pledging specified treasury securities in
substitution for your senior notes, and applying the cash payments
received on the pledged treasury securities;
- through the delivery of cash on the business day immediately preceding
the stock purchase date upon advance notice as described in "Description
of the Upper DECS -- Notice to Settle with Cash";
- through an early settlement of the purchase contract by the early
delivery of cash to the purchase contract agent in the manner described
in "Description of the Upper DECS -- Early Settlement"; or
- if we are involved in a merger, acquisition or consolidation prior to the
stock purchase date in which at least 30% of the consideration for our
common stock consists of cash or cash equivalents, through an early
settlement of the purchase contract by the early delivery of cash to the
purchase contract agent as described in "Description of the Upper
DECS -- Early Settlement upon Cash Merger."
In addition, the purchase contracts, our related rights and obligations and
those of the holders of the Upper DECS and the Stripped DECS, including their
obligations to purchase shares of our common stock, will automatically terminate
upon the occurrence of particular events of our bankruptcy, insolvency or
reorganization. Upon such a termination of the purchase contracts, the pledged
senior notes and treasury securities will be released and distributed to you. If
we become the subject of a case under the federal bankruptcy code, a delay may
occur as a result of the automatic stay under the bankruptcy code and continue
until the automatic stay has been lifted. The automatic stay will not be lifted
until such time as the bankruptcy judge agrees to lift it and return your
collateral to you.
If the purchase contract is settled early through cash or as the result of
a bankruptcy event as described above, such holders will have no further rights
to receive any accrued contract or deferred contract adjustment payments.
UNDER WHAT CIRCUMSTANCES MAY WE REDEEM THE SENIOR NOTES BEFORE THEY MATURE?
If the tax laws change or are interpreted in a way that adversely affects
the tax treatment of the senior notes, then we, as the issuer of the senior
notes, may elect to redeem the senior notes for the price of a portfolio of
treasury securities described below. If the senior notes are redeemed before a
successful remarketing the money received from the redemption will be used by
the collateral agent to purchase a portfolio of zero-coupon U.S. treasury
securities that mature on or prior to each payment date of the senior notes
through the stock purchase date, in an aggregate amount equal to the principal
amount of the senior notes included in Upper DECS and the interest that would
have been due on such payment date on the senior notes included in Upper DECS.
These treasury securities will replace the senior notes as the collateral
securing your obligations to purchase shares of our common stock under the
purchase contracts. If the senior notes are redeemed, then each Upper DECS will
consist of a purchase contract for shares of our common stock and an ownership
interest in the portfolio of treasury securities.
S-8
WHAT IS THE MATURITY OF THE SENIOR NOTES?
The senior notes will mature on , 2007.
WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES RELATED TO THE UPPER
DECS AND SENIOR NOTES?
If you purchase Upper DECS in this offering, you will be treated for United
States federal income tax purposes as having acquired the senior notes and
purchase contracts constituting those Upper DECS, and by purchasing the Upper
DECS you agree to treat the senior notes in that manner for all tax purposes. In
addition, you will agree to treat the senior notes as our indebtedness for all
tax purposes. You must allocate the purchase price of the Upper DECS between
those senior notes and purchase contracts in proportion to their respective fair
market values, which will establish your initial tax basis. We expect to report
the fair market value of each senior note as $50 and the fair market value of
each purchase contract as $0.
For United States federal income tax purposes, the senior notes should be
treated as contingent payment debt instruments subject to the "noncontingent
bond method" of accruing original issue discount. As discussed more fully under
"Certain United States Federal Income Tax Consequences -- Senior
Notes -- Original Issue Discount," the effects of this method will be (1) to
require you, regardless of your usual method of tax accounting, to use the
accrual method with respect to the senior notes, (2) for all accrual periods
through , 2005, to require you to accrue interest income in excess of interest
payments actually received by you and (3) generally to result in ordinary rather
than capital treatment of any gain or loss on the disposition of the Upper DECS
to the extent attributable to the senior notes. In addition, we intend to report
the contract adjustment payments as ordinary income to you, but you should
consult your tax advisor concerning alternative characterizations.
Because there is no statutory, judicial or administrative authority
directly addressing the tax treatment of Upper DECS or instruments similar to
Upper DECS, you are urged to consult your tax advisor concerning the tax
consequences of an investment in Upper DECS. For additional information, see
"Certain United States Federal Income Tax Consequences."
WILL THE UPPER DECS BE LISTED ON A STOCK EXCHANGE?
We will apply to list the Upper DECS on the New York Stock Exchange under
the symbol " ." Neither the Stripped DECS nor the senior notes will
initially be listed; however, in the event that either of these securities are
separately traded to a sufficient extent that applicable exchange listing
requirements are met, we may attempt to cause those securities to be listed on
the exchange on which the Upper DECS are then listed.
WHAT ARE THE EXPECTED USES OF PROCEEDS FROM THE OFFERING?
We estimate that our net proceeds from the sale of Upper DECS in this
offering after deducting underwriting discounts and commissions and the
estimated expenses of this offering payable by us, will be $ million,
or $ million if the underwriters exercise their over-allotment option
to purchase additional Upper DECS in full.
We anticipate using the aggregate net proceeds from this offering, together
with an estimated $ million of net proceeds from the concurrent
offering of our common stock, or $ million if the underwriters in that
offering exercise their over-allotment option to purchase additional shares of
common stock in full, to repay a portion of our outstanding debt related to our
acquisition of Gaylord Container Corporation and for other general corporate
purposes.
S-9
THE OFFERING -- EXPLANATORY DIAGRAMS
The following diagrams demonstrate some of the key features of the purchase
contracts, Upper DECS, Stripped DECS and the senior notes, and the
transformation of Upper DECS into Stripped DECS and senior notes.
PURCHASE CONTRACTS
- Upper DECS and Stripped DECS both include a purchase contract under which
you agree to purchase, and we agree to sell, shares of our common stock
on the stock purchase date.
- The number of shares of common stock to be purchased under each purchase
contract will depend on the "applicable market value." The "applicable
market value" means the average of the closing price per share of our
common stock on each of the 20 consecutive trading days ending on the
third trading day immediately preceding the stock purchase date.
VALUE OF DELIVERED SHARES
ON STOCK PURCHASE DATE
LOGO
PERCENTAGE OF SHARES DELIVERED ON
STOCK PURCHASE DATE(3)
LOGO
---------------
(1) The "reference price" is $ .
(2) The "threshold appreciation price" is equal to $ , which is
% of the reference price.
(3) For each of the percentage categories shown, the percentage (expressed
as a decimal) of the shares of common stock to be delivered on the
stock purchase date to a holder of Upper DECS or Stripped DECS is
determined by dividing:
- the related number of shares of common stock to be delivered, as
indicated in the footnote for each such category, by
- an amount equal to $50, the stated amount of the Upper DECS, divided
by the reference price.
(4) If the applicable market value of our common stock is less than or
equal to the reference price, the number of shares of our common stock
to be delivered will be calculated by dividing the stated amount of $50
by the reference price.
(5) If the applicable market value of our common stock is between the
reference price and the threshold appreciation price, the number of
shares of common stock to be delivered will be calculated by dividing
the stated amount of $50 by the applicable market value.
(6) If the applicable market value of our common stock is greater than or
equal to the threshold appreciation price, the number of shares of
common stock to be delivered will be calculated by dividing the stated
amount of $50 by the threshold appreciation price.
S-10
UPPER DECS
- An Upper DECS will consist of two components as illustrated below:
Upper DECS Flow Chart
- After a successful remarketing, the Upper DECS will include specified
treasury securities instead of the senior notes.
- If you hold an Upper DECS, you own the senior notes and, after a
successful remarketing, the treasury securities, but you will pledge them
to us to secure your obligations under the related purchase contract.
- If you hold an Upper DECS, you may also substitute a specified amount of
treasury securities for the senior notes if you decide not to participate
in the remarketing.
STRIPPED DECS
- A Stripped DECS will consist of two components as illustrated below:
Stripped DECS Flow Chart
- If you hold a Stripped DECS, you own the treasury securities but you will
pledge them to us to secure your obligations under the related purchase
contract. The treasury securities are zero-coupon U.S. treasury
securities (CUSIP No. ) that mature on , 2005.
S-11
SENIOR NOTES
- The senior notes will have the terms illustrated below:
Temple Flow Chart
- If you hold a senior note that is a component of an Upper DECS, you have
the option to either:
- allow the senior note to be included in the remarketing process the
proceeds of which will be used to purchase treasury securities, if the
remarketing is successful, which will be applied to settle the
purchase contract; or
- elect not to participate in the remarketing process, by delivering
treasury securities in substitution for the senior note, the proceeds
of which will be applied to settle the purchase contract.
- If you hold a senior note that is separate and not a component of an
Upper DECS, you have the option to either:
- continue to hold the senior note whose rate may be reset for the
quarterly payments payable on and after , 2005; or
- deliver the senior note to the remarketing agent to be included in the
remarketing.
TRANSFORMING UPPER DECS INTO STRIPPED DECS AND SENIOR NOTES
- To create a Stripped DECS, you may combine the purchase contract with the
specified zero-coupon U.S. treasury security that matures on ,
2005.
- You will then own the zero-coupon U.S. treasury securities but you will
pledge them to us to secure your obligations under the related purchase
contract.
- The zero-coupon U.S. treasury securities together with the purchase
contract would then constitute a Stripped DECS. The senior note (or,
after a successful remarketing, treasury securities), which was
previously a component of the Upper DECS, will be tradeable as a separate
security.
S-12
Temple Flow Chart
- After a successful remarketing, the Upper DECS will include specified
U.S. treasury securities instead of the senior notes.
- You can also transform Stripped DECS and senior notes (or, after a
successful remarketing, treasury securities) into Upper DECS. Following
that transformation, the specified zero-coupon U.S. treasury securities,
which were previously a component of the Stripped DECS, will be tradeable
as a separate security.
- The transformation of Upper DECS into Stripped DECS and senior notes (or,
after a successful remarketing, treasury securities) and the
transformation of Stripped DECS and senior notes (or, after a successful
remarketing, treasury securities) into Upper DECS requires certain
minimum amounts of securities, as more fully described in this prospectus
supplement.
S-13
CONCURRENT OFFERING
We are also offering, in a concurrent offering, 3,600,000 shares of our
common stock, plus up to an additional 540,000 shares of our common stock if the
over-allotment option for that offering is exercised in full.
RECENT DEVELOPMENTS
On April 15, 2002, we reported the following first quarter 2002 results:
FIRST QUARTER
----------------
2002 2001
------ ------
(IN MILLIONS)
Income from continuing operations........................... $ 15 $ 12
Effect of accounting change................................. (11) (2)
------ ------
Net income.................................................. $ 4 $ 10
====== ======
Diluted earnings per share:
Income from continuing operations........................... $ 0.30 $ 0.24
Effect of accounting change................................. (0.22) (0.04)
------ ------
Net income.................................................. $ 0.08 $ 0.20
====== ======
Included in our income from continuing operations for the quarter were the
effect of our acquisition of Gaylord and a charge related to cost reduction
initiatives at the financial services group. We acquired effective control of
Gaylord and began consolidating the results of Gaylord on March 1, 2002. Gaylord
contributed $5 million to the paper group's segment operating income in the
quarter. This contribution, however, was offset by a similar increase in
interest expense related to financing costs of the acquisition. Therefore, these
acquired operations had a minimal effect on first quarter 2002 income from
continuing operations. Also during the quarter, we recognized a $6 million
charge related to initiatives of the financial services group to lower costs.
This charge includes one time severance costs and the write-off of technology
investments. Excluding this charge, income from continuing operations would have
been $19 million, or $0.38 per diluted share.
Beginning January 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. Under this statement,
amortization of goodwill and other indefinitely lived intangible assets would be
precluded but would be periodically measured for impairment. The cumulative
effect of adopting this statement was to reduce first quarter 2001 net income by
$11 million or $0.22 per diluted share as a result of a $18 million goodwill
impairment associated with the paper group's pre-2001 specialty packaging
acquisitions.
The paper group reported operating income of $22 million in first quarter
2002, including the $5 million contributed from Gaylord. This compares with $21
million in first quarter 2001 and $27 million in fourth quarter 2001. Excluding
the operations of Gaylord, shipments of corrugated containers were down
approximately 4% compared with first quarter 2001, but up 2% compared with
fourth quarter 2001 levels. Containerboard production was curtailed by
approximately 100,000 tons in the quarter.
Average prices for corrugated containers in first quarter 2002 were 3%
lower than first quarter 2001 and down approximately 1% compared with fourth
quarter 2001. The cost of old corrugated containers was down 5% compared with
first quarter 2001 and flat compared with fourth quarter 2001.
The building products group reported operating income of $10 million in the
quarter, compared with an operating loss of $9 million in first quarter 2001 and
an operating loss of $4 million in fourth quarter 2001. Operating income in
first quarter 2002 included $8 million from ongoing initiatives to sell smaller
tracts of high-value timberland.
S-14
Lumber prices in first quarter 2002 were flat compared with first quarter
2001, but up 9% compared with fourth quarter 2001. Average prices for
particleboard were down 12% compared with first quarter 2001 and down 6%
compared with fourth quarter 2001. Medium density fiberboard prices were up 5%
compared with first quarter 2001, but down 3% compared with fourth quarter 2001.
A price increase for gypsum was implemented in March and first quarter 2002
prices were up 24% compared with first quarter 2001 and flat compared with
fourth quarter 2001. Although demand for most products improved throughout the
quarter, the Company continued to curtail production in all products to match
customer demand.
The financial services group reported operating income of $34 million in
the quarter compared with operating income of $45 million in first quarter 2001
and $50 million in fourth quarter 2001. The decline in earnings is primarily
attributable to a slowdown in loan demand and continued competitive pressure on
deposit costs.
Due to the slowdown in loan demand and resulting decrease in loans
outstanding, this group took steps in the quarter to lower costs through a
reduction in workforce and the write-off of certain technology investments.
These actions resulted in a $6 million charge in the quarter related to
severance and other one-time costs, but should result in annual savings
exceeding $13 million.
S-15
SUMMARY FINANCIAL DATA
SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial data for each
of the fiscal years in the five-year period ended December 2001. We derived this
summary historical financial data from our audited financial statements. You
should read this summary historical financial data in conjunction with the
selected financial data contained in the section titled "Selected Financial
Data" and the section titled "Management's Discussion and Analysis of Financial
Condition and Results of Operations," each included in this prospectus
supplement, and the consolidated financial statements and related notes of
Temple-Inland contained in our Annual Report on Form 10-K for the fiscal year
ended December 29, 2001 and incorporated into this prospectus supplement by
reference. See "Where You Can Find More Information."
FOR THE YEAR
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
Paper.................................. $ 2,082 $ 2,092 $ 1,869 $ 1,707 $ 1,768
Building products...................... 726 836 837 660 662
Financial services..................... 1,364 1,369 1,116 1,036 923
------- ------- ------- ------- -------
Total revenues........................... $ 4,172 $ 4,297 $ 3,822 $ 3,403 $ 3,353
======= ======= ======= ======= =======
Segment operating income:
Paper.................................. $ 107 $ 207 $ 104 $ 39 $ (53)
Building products...................... 13 77 189 118 136
Financial services..................... 184 189 138 154 132
------- ------- ------- ------- -------
Total segment operating income(a)........ $ 304 $ 473 $ 431 $ 311 $ 215
======= ======= ======= ======= =======
Income from continuing operations........ $ 111 $ 195 $ 191 $ 88 $ 59
Discontinued operations(b)............... -- -- (92) (21) (8)
Effect of accounting change.............. (2) -- -- (3) --
------- ------- ------- ------- -------
Net income............................... $ 109 $ 195 $ 99 $ 64 $ 51
======= ======= ======= ======= =======
Diluted earnings per share:
Income from continuing operations...... $ 2.26 $ 3.83 $ 3.43 $ 1.59 $ 1.04
Discontinued operations................ -- -- (1.65) (0.38) (0.14)
Effect of accounting change............ (.04) -- -- (0.06) --
------- ------- ------- ------- -------
Net income............................. $ 2.22 $ 3.83 $ 1.78 $ 1.15 $ 0.90
======= ======= ======= ======= =======
Dividends per common share............... $ 1.28 $ 1.28 $ 1.28 $ 1.28 $ 1.28
Average diluted shares outstanding....... 49.3 50.9 55.8 55.9 56.2
Depreciation and depletion............... $ 205 $ 216 $ 217 $ 206 $ 200
Capital expenditures..................... 208 257 204 196 231
S-16
FOR THE YEAR
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
At Year-end:
Total assets:
Parent company......................... $ 4,121 $ 4,011 $ 4,005 $ 4,308 $ 4,170
Financial services..................... 15,738 15,324 13,321 12,376 10,772
Long-term debt:
Parent company......................... $ 1,339 $ 1,381 $ 1,253 $ 1,501 $ 1,356
Financial services..................... 214 210 212 210 167
Shareholders' equity..................... $ 1,896 $ 1,833 $ 1,927 $ 1,998 $ 2,045
---------------
(a) Segment operating income for 2001 includes a $27 million reduction in
depreciation expense resulting from a change in the estimated useful lives
of certain production equipment. Of this amount, $20 million applies to the
paper group and $7 million applies to the building products group.
(b) Represents the bleached paperboard operations sold in 1999 and includes a
loss on disposal of $71 million.
S-17
SUMMARY PRO FORMA DATA
The following table sets forth summary pro forma data giving effect to our
recent acquisition of Gaylord Container Corporation and the offerings of Upper
DECS and common stock. We derived this pro forma data from certain unaudited pro
forma combined financial statements. You should read this summary pro forma data
in conjunction with the section titled "Our Business -- Acquisition and
Integration of Gaylord Container Corporation" and "Unaudited Pro Forma Combined
Financial Statements," each included in this prospectus supplement, and the
consolidated financial statements and related notes of Temple-Inland contained
in our Annual Report on Form 10-K for the fiscal year ended December 29, 2001
and incorporated into this prospectus supplement by reference. See "Where You
Can Find More Information."
FOR THE YEAR 2001
------------------------------------------
PRO FORMA FOR THE
GAYLORD ACQUISITION
PRO FORMA FOR THE AND AS ADJUSTED FOR
GAYLORD ACQUISITION THE OFFERINGS
------------------- -------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Total revenues............................................ $ 4,844 $ 4,844
======= =======
Operating income.......................................... $ 325 $ 325
======= =======
Income from continuing operations......................... $ 107 $ 111
======= =======
Diluted earnings per share:
Income from continuing operations....................... $ 2.17 $ 2.10
======= =======
Average diluted shares outstanding........................ 49.3 52.9
At Year-end:
Total assets:
Parent company.......................................... $ 5,149 $ 5,143
Parent company debt:
Bridge financing facility............................... $ 884 $ 403
Long-term debt.......................................... 1,407 1,407
Upper DECS senior notes................................. -- 300
Shareholders' equity...................................... $ 1,896 $ 2,063
This pro forma data does not reflect the effects of any capacity
rationalization, cost savings or other synergies that may be affected or
realized through reductions in duplicative selling, general and administrative
expenses and improvements in the mill and packaging systems and logistics.
S-18
RISK FACTORS
In considering whether to purchase the Upper DECS, you should carefully
consider all the information we have included or incorporated by reference in
this prospectus supplement and the accompanying prospectus. In particular, you
should carefully consider the risk factors described below. Because an Upper
DECS consists of a purchase contract to acquire shares of our common stock and a
senior note issued by us, you are making an investment decision with regard to
our common stock and senior notes, as well as the Upper DECS. You should
carefully review the information in this prospectus supplement and the
accompanying prospectus about all of these securities.
RISKS RELATED TO OUR BUSINESS
WE MAY ENCOUNTER DIFFICULTIES ARISING FROM INTEGRATING OUR ACQUISITION OF
GAYLORD CONTAINER CORPORATION, RESTRUCTURING OUR OPERATIONS OR SELLING NON-CORE
ASSETS.
Our acquisition of Gaylord involves the integration of two companies that
have previously operated independently. We expect to realize significant
synergies and cost reduction opportunities within two years of the acquisition,
but there is no guarantee of when or whether we will be able to realize the
benefits expected from this integration of operations. Our management's
attention to integration issues may have a negative effect on our current
operations. In addition, we may or may not be able to retain Gaylord customers.
Our acquisition of Gaylord gives us the opportunity to review our entire
mill system and consider various rationalization opportunities. Many of these
rationalization activities, such as closing the Antioch mill, will lower our
total production capacity, which could have a negative impact on our
profitability. We intend to sell certain non-core Gaylord businesses and assets,
beginning with the retail bag business, and use the net proceeds to reduce our
debt. We are identifying other assets to be divested and we currently anticipate
that such sales will occur during 2002 and 2003. Because the assets we intend to
sell are in cyclical industries, an industry downturn could reduce the
realizable value of those assets. If we are unable to sell the assets or unable
to sell them at the prices we anticipate, we would likely be required to carry
more debt than otherwise and would continue to own and operate or shut down
non-core businesses and assets.
WE WILL BE ADVERSELY AFFECTED IF OUR DEBT IS DOWNGRADED.
Our acquisition of Gaylord required us to incur approximately $880 million
in additional debt pursuant to a 364-day credit facility with Citibank, N.A., as
administrative agent, and Salomon Smith Barney Inc., as sole arranger, book
manager and syndication agent. Incurring this debt has caused our debt-to-equity
ratio to exceed its historical range, caused Standard and Poor's to place our
credit ratings on CreditWatch with negative implications and caused Moody's to
lower certain of our ratings and to make the outlook for all of our ratings
negative. This offering and the concurrent offering will provide equity and
equity-linked financing to repay a portion of the Gaylord acquisition debt. We
can provide no assurance, however, that this proposed offering and the
concurrent offering will be sufficient to maintain our present credit ratings or
to improve the outlook for such credit ratings or that other factors will not
have a negative effect on our credit ratings. If our rating is lowered to below
investment grade, certain of our credit facilities may become unavailable to us,
and our future ability to obtain funding and the cost of our funding could be
adversely affected.
THE INDUSTRIES IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
All of the industries in which we operate are highly competitive. No single
company is dominant in any of our industries.
Our paper product competitors include large, vertically integrated
paperboard and packaging products companies and numerous smaller companies.
Because these products are globally traded commodities, the
S-19
industries in which we compete are particularly sensitive to price fluctuations
as well as other factors including innovation, design, quality and service, with
varying emphasis on these factors depending on the product line. To the extent
that one or more of our competitors become more successful with respect to any
key competitive factor, our business could be materially adversely affected.
Although corrugated packaging is dominant in the national distribution process,
our products also compete with various other packaging materials, including
products made of paper, plastics, wood and various types of metal.
In the building materials markets, our building products group competes
with many companies that are substantially larger and have greater resources in
the manufacturing of building materials.
The financial services industry is also a highly competitive business, and
a number of entities with which we compete have greater resources than we do.
Our financial services group competes with commercial banks, savings and loan
associations, mortgage banks and other lenders in its mortgage banking and
savings bank activities, and with real estate investment and management
companies in its real estate activities.
OUR RESULTS ARE AFFECTED BY THE COST OF CERTAIN RAW MATERIALS AND ENERGY.
Virgin wood fiber and recycled wood fiber, including old corrugated
containers, are the principal raw materials used in the manufacture of our paper
products. The portion of our virgin fiber requirements that do not come from our
timberland or that are not produced as a by-product from our building products
operations (approximately one-third of our needs in 2001) are purchased in
highly competitive, price sensitive markets. The price for these materials has
historically fluctuated on a cyclical basis and has often depended on a variety
of factors over which we have no control, including environmental and
conservation regulations, natural disasters, the price and level of imported
timber and the continuation of any applicable tariffs and weather. In addition,
the increase in demand of products manufactured, in whole or in part, from
recycled fiber, including old corrugated containers, has caused an occasional
tightness in the supply of recycled fiber. It may also cause a significant
increase in the cost of such fiber used in the manufacture of recycled
containerboard and related products. Such costs are likely to continue to
fluctuate. While we have not experienced any significant difficulty in obtaining
wood fiber and recycled fiber in economic proximity to our mills, this may not
continue to be the case for any or all of our mills.
The cost of producing our products is also sensitive to the price of
energy. While we have attempted to contain energy costs through internal
generation and in some instances the use of by-products from our manufacturing
processes as fuel, no assurance can be given that such efforts will be
successful in the future or that energy prices will not rise to levels that
would have a material adverse effect on our financial condition or results of
operations.
THE PAPER AND BUILDING PRODUCTS INDUSTRIES ARE CYCLICAL IN NATURE AND EXPERIENCE
PERIODS OF OVERCAPACITY.
The operating results of our paper and building products groups reflect
each such industry's general cyclical pattern. While the cycles of each industry
do not necessarily coincide, demand and prices in each tend to decline in an
economic downturn. Further, each industry has experienced substantial
overcapacity in recent years. Both industries are capital intensive, which leads
to high fixed costs and generally results in continued production as long as
prices are sufficient to cover marginal costs. These conditions have contributed
to substantial price competition and volatility in the industries, even when
demand was strong. Any increased production by our competitors could further
depress prices for our products. From time to time, we have closed certain of
our facilities or have taken downtime based on prevailing market demand for our
products and may continue to do so, reducing our total production levels.
Certain of our competitors have also temporarily closed or reduced production at
their facilities, but can reopen and/or increase production capacity at any
time, which could exacerbate the overcapacity in the industries and depress
prices.
S-20
THE RESULTS OF OUR BUILDING PRODUCTS GROUP COULD BE NEGATIVELY AFFECTED BY THE
SOFTWOOD LUMBER AGREEMENT.
The Softwood Lumber Agreement between the United States and Canada, which
restricted the amount of lumber that Canada could export to the United States
without paying a duty, expired on April 1, 2001. On April 2, 2001, the U.S.
Coalition for Fair Lumber Imports filed anti-dumping and countervailing duty
petitions against Canada. On March 22, 2002, the U.S. Department of Commerce
levied duties of 29% on Canadian lumber shipments. The International Trade
Commission is scheduled to confirm this decision on May 6, 2002. If the
International Trade Commission does not confirm this decision or if the
Department of Commerce decision is otherwise overturned, lumber prices could be
negatively affected.
OUR MANUFACTURING ACTIVITIES ARE SUBJECT TO ENVIRONMENTAL REGULATIONS AND
LIABILITIES THAT COULD HAVE A NEGATIVE EFFECT ON OUR OPERATING RESULTS.
Our operations 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 has
required us to invest substantial funds to modify facilities to ensure
compliance with applicable environmental regulations. In our most recent Annual
Report on Form 10-K filed with the SEC, we provided certain estimates of
expenditures we expect to make for environmental compliance in the next few
years. See "Where You Can Find Additional Information." However, we could incur
additional significant expenditures due to changes in law or the discovery of
new information, and such expenditures could have a material adverse effect on
our financial condition and results of operations.
Our recently acquired subsidiary, Gaylord Container Corporation, entered
into a settlement agreement in August 2001, relating to a mass toxic tort and
insurance coverage action arising from an accident involving the explosion of a
rail car in Bogalusa, Louisiana in 1995. This agreement is subject to judicial
review and approval. Failure to obtain such approval could reopen this
litigation, a negative outcome in the final adjudication of which could have a
material adverse effect on our financial condition and results of operation.
OUR FINANCIAL SERVICES GROUP OPERATES IN A HIGHLY REGULATED ENVIRONMENT AND MAY
BE ADVERSELY AFFECTED BY CHANGES IN FEDERAL AND LOCAL LAWS AND REGULATIONS.
Our financial services group is subject to regulation, supervision and
examination by federal and state banking authorities. The regulations enforced
by these authorities are intended to protect customers and federal deposit
insurance funds, not creditors, shareholders or other security holders.
Regulations affecting banks and financial services companies are continuously
changing, and any change in applicable regulations or federal or state
legislation could have a negative effect on our financial services group.
Further, regulators have significant discretion and power to prevent or remedy
unsafe or unsound practices or violations of laws by federal savings banks and
their holding companies (including the power to appoint a conservator or
receiver for the bank) or to require changes in various aspects of their
operation at any time, including restrictions on the payment of dividends to the
parent company. Any exercise of such regulatory discretion could have a negative
effect on our financial condition or results of our operations. Moreover, many
of our non-bank competitors are not subject to the same degree of regulation as
we are, and thus, they may have advantages over us in providing certain
services.
IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO COVER ACTUAL LOAN LOSSES,
THE INCOME FROM OUR FINANCIAL SERVICES GROUP COULD DECREASE.
Our loan customers may fail to repay their loans according to the terms of
these loans, and the collateral securing the payment of these loans may be
insufficient to assure repayment. Such loan losses could have a material adverse
effect on our operating results. We make various assumptions and judgments about
the collectibility of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of our loans. In
S-21
determining the size of the allowance for loan losses, we rely on our experience
and our evaluation of economic conditions. If our assumptions prove to be
incorrect, our current allowance for loan losses may not be sufficient to cover
losses inherent in our loan portfolio and adjustments may be necessary that
would have a material adverse impact on the income of our financial services
group.
In addition, federal and state regulators periodically review our allowance
for loan losses and may require us to increase our provision for loan losses or
recognize additional loan charge-offs. Any increase in our allowance for loan
losses or loan charge-offs as required by these regulatory agencies could have a
material adverse effect on the income of our financial services group.
FLUCTUATIONS IN INTEREST RATES COULD REDUCE OUR PROFITABILITY.
A major element of the income of our financial services group is its net
interest income, which consists largely of the difference between interest
earned on loans and investments and the interest paid on deposits and
borrowings. We expect to experience periodic "gaps" in the interest rate
sensitivities of our assets and liabilities, meaning that either our
interest-bearing liabilities will be more sensitive to changes in market
interest rates than our interest-earning assets, or vice versa. In either event,
if market interest rates should move contrary to our position, our net interest
margin and, consequently, our net income may be negatively affected.
We cannot predict fluctuations of market interest rates, which are affected
by, among other factors, changes in the following:
- inflation rates;
- levels of business activity;
- unemployment levels;
- monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve;
- money supply; and
- domestic and foreign financial markets.
DECREASED GROWTH RATES IN TRADITIONAL DEPOSITS MAY RESULT IN THE NEED TO FUND
LOAN GROWTH WITH HIGHER-COST SOURCES.
As with the rest of the financial services industry, we have seen decreased
growth rates in traditional deposits as consumers elect other savings and
investment opportunities. Continued slow growth in traditional deposits would
likely result in the need to fund loan growth in part with higher-cost funding
sources, which may contribute to decreases in our net interest margin. This in
turn may negatively affect the income of our financial services group.
WE RELY ON OUR SUBSIDIARIES FOR OUR CASH FLOW.
We are a holding company and, accordingly, substantially all of our
operations are conducted through our subsidiaries. Our principal asset is our
stock ownership in our subsidiaries. As a result, our cash flow and our ability
to service our debt depends upon the earnings of our subsidiaries and their
payment of dividends, extension of loans or advances by our subsidiaries to us.
Our subsidiaries are separate and distinct legal entities. Our subsidiaries
have no obligation to provide us with funds for our payment obligations, whether
by dividends, distributions, loans or other payments. Payments to us by our
subsidiaries will also be contingent upon our subsidiaries' earnings and
business considerations.
S-22
RISKS RELATED TO THIS OFFERING
YOU WILL BEAR THE ENTIRE RISK OF A DECLINE IN THE PRICE OF OUR COMMON STOCK.
The market value of the shares of our common stock you will receive on the
stock purchase date may be materially different from the effective price per
share paid by you on the stock purchase date. If the average trading price of
our common stock on the stock purchase date is less than $ per share, you
will, on the stock purchase date, be required to purchase shares of common stock
at a loss. Accordingly, a holder of Upper DECS assumes the entire risk that the
market value of our common stock may decline. Any such decline could be
substantial.
YOU WILL RECEIVE ONLY A PORTION OF ANY APPRECIATION IN OUR COMMON STOCK PRICE.
The aggregate market value of the shares of our common stock you will
receive upon settlement of a purchase contract generally will exceed the stated
amount of $50 only if the average closing price per share of our common stock
over the applicable 20-trading day period preceding settlement equals or exceeds
$ , which we refer to as the "threshold appreciation price." The
threshold appreciation price represents an appreciation of % over
$ , the price of our common stock on , 2002. Therefore,
during the period prior to the stock purchase date, an investment in the Upper
DECS affords less opportunity for equity appreciation than a direct investment
in our common stock. If the average closing price exceeds $ , which we
refer to as the "reference price," but falls below the threshold appreciation
price, you will realize no equity appreciation on the common stock for the
period during which you hold the purchase contract. Furthermore, if the
applicable average closing price exceeds the threshold appreciation price, the
value of the shares of common stock you will receive under the purchase contract
will be approximately % of the value of the shares of common stock you
could have purchased with $50 at the time of this offering.
THE TRADING PRICE FOR OUR COMMON STOCK AND THE GENERAL LEVEL OF INTEREST RATES
AND OUR CREDIT QUALITY WILL DIRECTLY AFFECT THE TRADING PRICE FOR THE UPPER
DECS.
It is impossible to predict whether the price of our common stock or
interest rates will rise or fall. Our credit quality, operating results and
prospects and economic, financial and other factors will affect trading prices
of our common stock. In addition, market conditions can affect the capital
markets generally, in turn affecting the price of our common stock. These
conditions may include the level of, and fluctuations in, the trading prices of
stocks generally and sales of substantial amounts of our common stock in the
market after the offering of the Upper DECS or the perception that those sales
could occur. Fluctuations in interest rates may affect the relative value of our
common stock underlying the purchase contracts and of the other components of
the Upper DECS, which could, in turn, affect the trading prices of the Upper
DECS and our common stock.
YOU MAY SUFFER DILUTION OF OUR COMMON STOCK ISSUABLE UPON SETTLEMENT OF YOUR
PURCHASE CONTRACT.
The number of shares of our common stock issuable upon settlement of your
purchase contract is subject to adjustment only for stock splits and
combinations, stock dividends and specified other transactions described in this
prospectus supplement. The number of shares of our common stock issuable upon
settlement of each purchase contract is not subject to adjustment for other
events, such as employee stock option grants, offerings of common stock for
cash, or in connection with acquisitions or other transactions which may
adversely affect the price of our common stock. The terms of the Upper DECS do
not restrict our ability to offer common stock in the future or to engage in
other transactions that could dilute our common stock. Moreover, we have no
obligation to consider the interests of the holders of the Upper DECS in
engaging in any such offering or transaction.
S-23
YOU WILL HAVE NO RIGHTS AS COMMON SHAREHOLDERS.
Until you acquire shares of our common stock upon settlement of your
purchase contract, you will have no rights with respect to our common stock,
including voting rights, rights to respond to tender offers and rights to
receive any dividends or other distributions on our common stock. Upon
settlement of your purchase contract, you will be entitled to exercise the
rights of a holder of common stock only as to actions for which the record date
occurs after the stock purchase date.
YOUR PLEDGED SECURITIES WILL BE ENCUMBERED.
Although holders of Upper DECS will be beneficial owners of the underlying
pledged senior notes or treasury securities, the holders will pledge those
securities with the collateral agent to secure their obligations under the
related purchase contracts. Therefore, for so long as the purchase contracts
remain in effect, holders will not be allowed to withdraw their pledged senior
notes or treasury securities from this pledge arrangement, except upon
substitution of other securities as described in this prospectus supplement.
Additionally, notwithstanding the automatic termination of the purchase
contracts in the event we become the subject of a case under the U.S. Bankruptcy
Code, the delivery of the pledged securities to you may be delayed by the
imposition of the automatic stay of Section 362 of the Bankruptcy Code.
THE PURCHASE CONTRACT AGREEMENT WILL NOT BE QUALIFIED UNDER THE TRUST INDENTURE
ACT OF 1939; THE OBLIGATIONS OF THE PURCHASE CONTRACT AGENT WILL BE LIMITED.
The purchase contract agreement relating to the Upper DECS will not be
qualified under the Trust Indenture Act of 1939. The purchase contract agent
under the purchase contract agreement, who will act as the agent and the
attorney-in-fact for the holders of the Upper DECS, will not be qualified as a
trustee under the Trust Indenture Act of 1939. Accordingly, holders of the Upper
DECS will not have the benefits of the protections of the Trust Indenture Act of
1939 other than to the extent applicable to a senior note included in an Upper
DECS. Under the terms of the purchase contract agreement, the purchase contract
agent will have only limited obligations to the holders of the Upper DECS.
THE SECONDARY MARKET FOR THE UPPER DECS MAY BE ILLIQUID.
We are unable to predict how the Upper DECS will trade in the secondary
market or whether that market will be liquid or illiquid. There is currently no
secondary market for the Upper DECS. We will apply to list the Upper DECS on the
NYSE. We will not initially list either the Stripped DECS or the senior notes;
however, in the event that either of these securities is separately traded to a
sufficient extent that applicable exchange listing requirements are met, we may
attempt to list those securities on the exchange on which the Upper DECS are
then listed. We have been advised by the underwriters that they presently intend
to make a market for the Upper DECS; however, they are not obligated to do so
and any market making may be discontinued at any time. There can be no assurance
as to the liquidity of any market that may develop for the Upper DECS, the
Stripped DECS or the senior notes, your ability to sell such securities or
whether a trading market, if it develops, will continue. In addition, in the
event that sufficient numbers of Upper DECS are converted to Stripped DECS, the
liquidity of Upper DECS could be adversely affected. We cannot provide assurance
that a listing application for Upper DECS, Stripped DECS or senior notes will be
accepted or, if accepted, that the Upper DECS, Stripped DECS or senior notes
will not be delisted from the NYSE or that trading in the Upper DECS, Stripped
DECS or senior notes will not be suspended as a result of elections to create
Stripped DECS or recreate Upper DECS through the substitution of collateral that
causes the number of these securities to fall below the applicable requirements
for listing securities on the NYSE.
WE MAY REDEEM THE SENIOR NOTES UPON THE OCCURRENCE OF A TAX EVENT.
We have the option to redeem the senior notes, on not less than 30 days nor
more than 60 days prior written notice, in whole but not in part, at any time if
a tax event occurs and continues under the circumstances described in this
prospectus supplement. If we exercise this option, we will redeem the
S-24
senior notes at the redemption price. If we redeem the senior notes, we will pay
the redemption price (described later in this prospectus supplement) in cash to
the holders of the senior notes. In the case of senior notes held as part of an
Upper DECS at the time the tax event redemption occurs prior to the successful
remarketing of the notes, the redemption price payable to you as a holder of the
Upper DECS will be distributed to the collateral agent, who in turn will apply
an amount equal to the redemption price to purchase a portfolio of zero-coupon
U.S. treasury securities on your behalf, and will remit the remainder of the
redemption price, if any, to you, and the treasury securities will be
substituted for the senior notes as collateral to secure your obligations under
the purchase contracts related to the Upper DECS. If your senior notes are not
components of Upper DECS, you, rather than the collateral agent, will receive
redemption payments. There can be no assurance as to the effect on the market
prices for the Upper DECS if we substitute the treasury securities as collateral
in place of any senior notes so redeemed. A tax event redemption will be a
taxable event to the holders of the senior notes.
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE UPPER DECS ARE UNCLEAR.
No statutory, judicial or administrative authority directly addresses the
treatment of the Upper DECS or instruments similar to the Upper DECS for United
States federal income tax purposes. As a result, the United States federal
income tax consequences of the purchase, ownership and disposition of the Upper
DECS are not entirely clear. In addition, any gain on the disposition of a
senior note prior to the purchase contract settlement date will generally be
treated as ordinary interest income; thus, the ability to offset such interest
income with a loss, if any, on a purchase contract may be limited.
BECAUSE THE SENIOR NOTES WILL BE ISSUED WITH ORIGINAL ISSUE DISCOUNT, YOU WILL
HAVE TO INCLUDE INTEREST IN YOUR TAXABLE INCOME BEFORE YOU RECEIVE CASH.
Because the senior notes should be treated as contingent payment debt
instruments, original issue discount will accrue from the issue date of the
senior notes and will be included in your gross income for United States federal
income tax purposes before you receive a cash payment to which the income is
attributable and in an amount greater than the interest payable on the senior
notes prior to , 2005.
THE TRADING PRICE OF THE SENIOR NOTES MAY NOT FULLY REFLECT THE VALUE OF THEIR
ACCRUED BUT UNPAID INTEREST.
The senior notes may trade at a price that does not fully reflect the value
of their accrued but unpaid interest. If you dispose of your senior notes
between record dates for interest payments, you will be required to include in
gross income the daily portions of original issue discount through the date of
disposition in income as ordinary income and to add this amount to your adjusted
tax basis in the notes disposed of. To the extent the selling price is less than
your adjusted tax basis, you will recognize a loss.
THE SENIOR NOTES ARE OUR OBLIGATIONS AND ARE NOT OBLIGATIONS OF OUR SUBSIDIARIES
AND WILL BE EFFECTIVELY SUBORDINATED TO THE CLAIMS OF OUR SUBSIDIARIES'
CREDITORS.
The Upper DECS are exclusively our obligations and are not obligations of
our subsidiaries. We are a holding company and, accordingly, substantially all
of our operations are conducted through our subsidiaries. As a result, our cash
flow and our ability to service our debt, including the Upper DECS, depends upon
the earnings of our subsidiaries. In addition, we depend on the distribution of
earnings, loans or other payments by our subsidiaries to us.
Our subsidiaries are separate and distinct legal entities. Our subsidiaries
have no obligation to pay any amounts due on the Upper DECS or to provide us
with funds for our payment obligations, whether by dividends, distributions,
loans or other payments. In addition, any payment of dividends, distributions,
loans or advances by our subsidiaries to us could be subject to statutory or
contractual restrictions. Payments to us by our subsidiaries will also be
contingent upon our subsidiaries' earnings and business considerations.
S-25
Our right to receive any assets of any of our subsidiaries upon their
liquidation or reorganization, and therefore the right of the holders of the
Upper DECS to participate in those assets, will be effectively subordinated to
the claims of that subsidiary's creditors, including senior debenture and note
holders and bank trade creditors. In addition, even if we were a creditor of any
of our subsidiaries, our rights as a creditor would be subordinate to any
security interest in the assets of our subsidiaries and any indebtedness of our
subsidiaries senior to that held by us.
DELIVERY OF THE SECURITIES UNDER THE PLEDGE AGREEMENT IS SUBJECT TO POTENTIAL
DELAY IF WE BECOME SUBJECT TO A BANKRUPTCY PROCEEDING.
Notwithstanding the automatic termination of the purchase contracts, if we
become the subject of a case under the U.S. bankruptcy code, imposition of an
automatic stay under Section 362 of the U.S. bankruptcy code may delay the
delivery to you of your securities being held as collateral under the pledge
arrangement, and such delay may continue until the automatic stay has been
lifted. The automatic stay will not be lifted until such time as the bankruptcy
judge agrees to lift it and return your collateral to you.
S-26
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This prospectus supplement contains and incorporates by reference
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve risks
and uncertainties and are identified by their use of terms and phrases such as
"believe," "anticipate," "could," "estimate," "intend," "may," "plan," "expect"
and similar expressions, including references to assumptions. Such
forward-looking statements may be included in, but are not limited to, various
filings made by us with the SEC and press releases or oral statements made by
our management. These statements relate to analyses and other information that
are based on forecasts of future results and estimates of amounts not yet
determinable. These statements also relate to our future prospects, developments
and business strategies. You should not place undue reliance on these forward-
looking statements, which reflect our management's analysis, judgment, belief or
expectation only as of the date of this prospectus supplement.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for these forward-looking statements. In order to comply with the terms
of the safe harbor, we note that a variety of factors could cause our actual
results to differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to:
- general economic, market or business conditions;
- the opportunities (or lack thereof) that may be presented to and pursued
by Temple-Inland and its subsidiaries;
- the availability and price of raw materials used by Temple-Inland and its
subsidiaries;
- competitive actions by other companies;
- changes in laws or regulations;
- the accuracy of certain judgments and estimates concerning the
integration of Gaylord Container Corporation into the operations of
Temple-Inland; and
- other factors, many of which are beyond the control of Temple-Inland and
its subsidiaries.
ACCOUNTING TREATMENT
BALANCE SHEET
We will recognize the fair value of the senior notes as a liability. We
expect the fair value of each senior note to be $50. The purchase contracts are
forward transactions in our common stock. We will recognize the fair value of
the purchase contracts as an increase in equity with a corresponding decrease in
additional paid in capital. We expect the fair value of each purchase contract
to be $0. We will not recognize any subsequent changes in the fair value of the
purchase contract or the senior notes. When we settle the purchase contracts we
will issue our common stock and the amount we receive will be added to equity
and allocated between common stock and additional paid in capital. We will
recognize the present value of the annual contract adjustment payment as a
liability with an offsetting reduction in equity.
INCOME STATEMENT
The quarterly interest payments on the senior notes will be recognized as
interest expense. The annual contract payments will be allocated between the
liability recognized at date of issuance and interest expense based on a
constant rate over the term of the purchase contract.
Fees and expense incurred in connection with this offering will be
allocated between the senior notes and the purchase contracts. The amount
allocated to the senior notes will be deferred and recognized as interest
expense over the term of the senior notes. The amount allocated to the purchase
contracts will be charged to equity.
S-27
EARNINGS PER SHARE
Before the settlement of the purchase contracts, we will consider the
shares to be issued under the purchase contracts in our calculation of diluted
earnings per share using the treasury stock method. Under this method, we will
increase diluted shares by the number of shares we would be required to issue to
settle the purchase contracts and we will decrease diluted shares outstanding by
the number of shares that we could purchase using the proceeds from the
settlement of the purchase contracts. We anticipate that there will be no
dilution of our earnings per share except during the periods when the average
price of our common stock is above $ .
OTHER MATTERS
Both the Financial Accounting Standards Board and its Emerging Issues Task
Force continue to study the accounting for financial instruments and derivatives
instruments including instruments such as the purchase contracts. It is possible
that our accounting for the purchase contracts and the senior notes could be
affected by any new accounting rules that might be issued by these groups.
S-28
USE OF PROCEEDS
We estimate that our net proceeds from the sale of Upper DECS in this
offering after deducting underwriting discounts and commissions and the
estimated expenses of this offering payable by us, will be $ million,
or $ million if the underwriters exercise their over-allotment option
in full to purchase additional Upper DECS. The net proceeds to us from the
concurrent common stock offering are estimated to be approximately $ million,
or $ million if the underwriters in that offering exercise their over-allotment
option in full to purchase additional shares of common stock, after deducting
estimated underwriting discounts and commissions and offering expenses. We are
not required to sell the common stock in order to sell the Upper DECS in this
offering.
We anticipate using the aggregate net proceeds from this offering and the
common stock offering to repay a portion of our 364-day credit facility, dated
March 1, 2002, with Citibank, N.A., as administrative agent, and Salomon Smith
Barney Inc., as sole arranger, book manager and syndication agent, and for other
general corporate purposes.
We owe approximately $880 million under our 364-day credit facility, which
was incurred pursuant to our acquisition of Gaylord Container Corporation. This
debt bears interest at variable rates (currently a weighted average of
approximately 3.23%) based on a spread over a base rate or the London interbank
offer rate. The spread varies depending on the credit rating of our long-term
senior unsecured debt. The credit agreement for this facility was filed as an
exhibit to our Current Report on Form 8-K filed on March 4, 2002, which is
incorporated into this prospectus supplement by reference. See "Where You Can
Find More Information."
S-29
CAPITALIZATION
The following table sets forth our capitalization on a consolidated basis
and on a parent company basis as of year-end December 2001. This table should be
read in conjunction with our historical financial statements, which are
incorporated by reference in the accompanying prospectus and with the pro forma
combined financial statements included under "Unaudited Pro Forma Combined
Financial Statements."
The operations of our financial services group are subject, in varying
degrees, to regulatory rules and restrictions on the payment of dividends.
Consequently, our ability to receive dividends from our financial services group
may be affected from time to time as a result of these rules and restrictions.
Our consolidated and parent company capitalization is shown on a historical
basis, on a pro forma basis and on a pro forma as adjusted basis. The pro forma
basis gives effect to our acquisition of Gaylord. The pro forma as adjusted
basis gives effect to this offering and our concurrent common stock offering and
the application of the net proceeds of these offerings as described under "Use
of Proceeds."
YEAR-END DECEMBER 2001
--------------------------------------------------
PRO FORMA PRO FORMA
FOR ACQUISITION AS ADJUSTED
HISTORICAL OF GAYLORD FOR THE OFFERINGS
---------- --------------- -----------------
(IN MILLIONS)
CONSOLIDATED:
Federal Home Loan Bank advances...................... $3,435 $3,435 $3,435
Securities sold under repurchase agreements.......... 1,107 1,107 1,107
Stock issued by subsidiaries......................... 306 306 306
Long-term debt....................................... 1,553 1,621 1,621
Bridge financing facility............................ -- 884 403
Upper DECS senior notes.............................. -- -- 300
------ ------ ------
Total........................................... $6,401 $7,353 $7,172
------ ------ ------
Shareholders' equity:
Preferred stock, par value $1 per share, 25 million
shares authorized, none issued..................... $ -- $ -- $ --
Common stock, par value $1 per share, 200 million
shares authorized, 61.4 million shares issued
(actual) and 65.0 million shares issued (as
adjusted).......................................... 61 61 65
Additional paid-in capital........................... 367 367 536
Upper DECS purchase contracts........................ -- -- --
Accumulated other comprehensive loss................. (1) (1) (1)
Retained earnings.................................... 2,014 2,014 2,008
Less treasury stock.................................. (545) (545) (545)
------ ------ ------
Total shareholders' equity...................... 1,896 1,896 2,063
------ ------ ------
Total consolidated capitalization............... $8,297 $9,249 $9,235
------ ------ ------
PARENT COMPANY:
Long-term debt....................................... $1,339 $1,407 $1,407
Bridge financing facility............................ -- 884 403
Upper DECS senior notes.............................. -- -- 300
------ ------ ------
Total........................................... $1,339 $2,291 $2,110
------ ------ ------
Shareholders' equity:
Preferred stock, par value $1 per share, 25 million
shares authorized, none issued..................... $ -- $ -- $ --
Common stock, par value $1 per share, 200 million
shares authorized, 61.4 million shares issued
(actual) and 65.0 million shares issued (as
adjusted).......................................... 61 61 65
Additional paid-in capital........................... 367 367 536
Upper DECS purchase contracts........................ -- -- --
Accumulated other comprehensive loss................. (1) (1) (1)
Retained earnings.................................... 2,014 2,014 2,008
Less treasury stock.................................. (545) (545) (545)
------ ------ ------
Total shareholders' equity...................... 1,896 1,896 2,063
------ ------ ------
Total parent company capitalization............. $3,235 $4,187 $4,173
====== ====== ======
S-30
OUR BUSINESS
OVERVIEW
You should read the section titled "Summary--Temple-Inland Inc." in this
prospectus supplement and our Annual Report on Form 10-K for the year ended
December 29, 2001, incorporated into this prospectus supplement by reference,
for a general description of our business and operations. See "Where You Can
Find More Information."
ACQUISITION AND INTEGRATION OF GAYLORD CONTAINER CORPORATION
On April 5, 2002, we completed our acquisition of Gaylord Container
Corporation for approximately $868 million. The acquisition of Gaylord will
further our strategy to enhance return on investment by building a
high-performance, fully-integrated corrugated packaging operation. We believe
the acquisition will:
- increase market share and further industry consolidation;
- increase revenues and improve customer mix;
- extend market reach and improve operating efficiency;
- provide opportunities for significant synergies;
- provide opportunities for capacity rationalization and increased
integration; and
- provide opportunities for dispositions of non-core assets.
MARKET SHARE AND INDUSTRY CONSOLIDATION
The combination of Temple-Inland and Gaylord's corrugated packaging
businesses will create the third-largest U.S. manufacturer in the corrugated
packaging industry, with an approximate 12% market share. This acquisition will
also further consolidate the industry, increasing the market share of the top
five producers of corrugated packaging, which including this combination, has
increased from approximately 45% in 1993 to approximately 72% in 2002.
REVENUES AND CUSTOMER MIX
The acquisition of Gaylord would have increased paper group 2001 revenues
on a pro forma basis from $2.1 billion to approximately $2.8 billion. In
addition, the acquisition will improve our customer base, increasing the portion
of more value-added, higher-margin local business as a percentage of total
revenues.
MARKET REACH AND OPERATING EFFICIENCY
Gaylord's facilities include two containerboard mills and 19 corrugating
converting facilities. With the acquisition of Gaylord, we will have seven
containerboard mills and 82 converting facilities. The addition of Gaylord's
converting facilities strengthens our presence in existing markets, extends our
reach into new geographic markets and increases scale to better serve customers.
SIGNIFICANT SYNERGIES
We believe the combination with Gaylord will result in significant synergy
and cost reduction opportunities, currently estimated to be approximately $60
million. These synergies will be realized from the elimination of duplicative
selling, general and administrative expenses of approximately $40 million per
year and improvements in the mill system, packaging and logistics, resulting in
expense reduction of approximately $20 million per year. We expect to realize
approximately $30 million of synergies in the first year after the acquisition
and approximately $60 million by the end of the second year.
S-31
CAPACITY RATIONALIZATION AND INCREASED INTEGRATION
The combination of Gaylord and Temple-Inland provided us the opportunity to
review our entire mill system and consider various rationalization
opportunities. As a result of this review, we have decided to shut down the
Antioch mill (425,000 tons of containerboard capacity) and the Bogalusa #2, #5
and #6 machines (170,000 tons of containerboard capacity), resulting in closures
of approximately 595,000 tons of containerboard capacity, or approximately 15%
of our containerboard capacity. These closures, coupled with our acquisition of
Elgin Corrugated Box Company, ComPro Packaging and the converting operations of
Chesapeake Corporation in 2001, have increased our integration level from
approximately 86% at the beginning of 2001 to approximately 103% currently.
Integration refers to the tons of boxes that can be produced by our converting
facilities divided by the tons of containerboard that can be produced by our
mills. Thus, following the integration of Gaylord, we will have the capacity to
produce more tons of boxes than tons of containerboard.
ASSET DISPOSITIONS
We intend to divest several non-strategic Gaylord assets including four
retail bag plants, a 50% ownership in a specialty bag business, two multiwall
bag plants, a 450 TPD kraft paper mill, and a DMS and DMSO chemical
manufacturing plant. Proceeds from these divestitures are expected to be at
least $100 million, with 50% of the proceeds expected to be received in the
first year after the acquisition and the balance expected to be received by the
end of the second year. A definitive agreement for Duro Bag Manufacturing
Company to purchase the four retail bag plants was entered into on March 11,
2002, and the transaction is expected to close by the end of April. The proceeds
from this sale will be approximately $32 million.
OUR EXECUTIVE OFFICERS AND DIRECTORS
OUR EXECUTIVE OFFICERS
Set forth below are the names, ages, and titles of the persons who serve as
our executive officers:
NAME AGE OFFICE
---- --- ------
Kenneth M. Jastrow, II.............. 54 Chairman of the Board and Chief
Executive Officer
William B. Howes.................... 64 Executive Vice President
Harold C. Maxwell................... 61 Executive Vice President
Bart J. Doney....................... 52 Group Vice President
Kenneth R. Dubuque.................. 53 Group Vice President
James C. Foxworthy.................. 50 Group Vice President
Dale E. Stahl....................... 54 Group Vice President
Jack C. Sweeny...................... 55 Group Vice President
M. Richard Warner................... 50 Chief Administrative Officer, Vice
President and General Counsel
Randall D. Levy..................... 50 Chief Financial Officer
Louis R. Brill...................... 60 Vice President and Chief Accounting
Officer
Scott Smith......................... 47 Chief Information Officer
Doyle R. Simons..................... 38 Vice President -- Administration
David W. Turpin..................... 51 Treasurer
Leslie K. O'Neal.................... 46 Assistant General Counsel and
Secretary
Kenneth M. Jastrow, II became Chairman of the Board and Chief Executive
Officer of Temple-Inland on January 1, 2000. Mr. Jastrow previously served
Temple-Inland in various capacities since 1991, including President, Chief
Operating Officer, Chief Financial Officer and Group Vice President. He also
S-32
serves as Chairman of the Board of Financial Services, Chairman of the Board of
Guaranty Bank and a Director of each of Temple-Inland FPC and Inland Paperboard
and Packaging.
William B. Howes, who was named Executive Vice President and a Director in
August 1996, became a Group Vice President of Temple-Inland and the Chairman of
the Board of Inland Paperboard and Packaging in July 1993 after serving as the
President and Chief Operating Officer of Inland Paperboard and Packaging since
April 1992. From August 1990 until April 1992, Mr. Howes was the Executive Vice
President of Inland Paperboard and Packaging. Mr. Howes has announced his
intention to retire on May 3, 2002.
Harold C. Maxwell became Executive Vice President of Temple-Inland in
February 2000 after serving as Group Vice President since May 1989. In March
1998, Mr. Maxwell was named Chairman of the Board and Chief Executive Officer of
Temple-Inland FPC after having served as Group Vice President -- Building
Products of Temple-Inland FPC since November 1982.
Bart J. Doney became Group Vice President of Temple-Inland in February
2000. Mr. Doney has served Inland Paperboard and Packaging as Executive Vice
President, Packaging since June 1998, Senior Vice President from 1996 until
1998, and Vice President, Sales and Administration, Containerboard Division from
1990 to 1996.
Kenneth R. Dubuque became Group Vice President of Temple-Inland in February
2000. In October 1998, Mr. Dubuque was named President and Chief Executive
Officer of Guaranty Bank. From 1996 until 1998, Mr. Dubuque served as Executive
Vice President and Manager -- International Trust and Investment of Mellon Bank
Corporation. From 1991 until 1996, he served as Chairman, President and Chief
Executive Officer of the Maryland, Virginia and Washington, D.C., operating
subsidiary of Mellon Bank Corporation.
James C. Foxworthy became Group Vice President of Temple-Inland in February
2000. Mr. Foxworthy also serves as Executive Vice President, Paperboard of
Inland Paperboard and Packaging, a position he has held since June 1998. From
1995 until 1998, he served as Senior Vice President of Inland Paperboard and
Packaging.
Dale E. Stahl became Group Vice President of Temple-Inland in July 2000 and
serves as the President and Chief Executive Officer of Inland Paperboard and
Packaging. Mr. Stahl served as President and Chief Operating Officer of Gaylord
Container Corporation for twelve years prior to joining Temple-Inland in 2000.
Jack C. Sweeny became a Group Vice President of Temple-Inland in May 1996.
He also serves as President and Chief Operating Officer and a Director of
Temple-Inland FPC. From November 1982 through May 1996, Mr. Sweeny served as a
Vice President of Temple-Inland FPC and as Executive Vice President from May
1996 to February 2002.
M. Richard Warner became Vice President and General Counsel of
Temple-Inland in June 1994 and was named Chief Administrative Officer in May
1999.
Randall D. Levy became Chief Financial Officer of Temple-Inland in May
1999. Mr. Levy joined Guaranty Bank in 1989 serving in various capacities,
including Treasurer and most recently as Chief Operating Officer since 1994.
Louis R. Brill became Vice President and Controller of Temple-Inland in
December 1999 and was named Chief Accounting Officer in May 2000. Before joining
Temple-Inland in 1999, Mr. Brill was a partner of Ernst & Young LLP for 25
years.
Scott Smith became Chief Information Officer of Temple-Inland in February
2000. Prior to that, Mr. Smith was Treasurer of Guaranty Bank from November 1993
to December 1999 and Chief Information Officer of Financial Services from August
1995 to June 1999. Mr. Smith also serves as the Chief Financial Officer of
Guaranty Bank.
S-33
Doyle R. Simons became Vice President -- Administration in November 2000.
Mr. Simons has served as the Director of Investor Relations for Temple-Inland
since 1994.
David W. Turpin became Treasurer of Temple-Inland 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 Temple-Inland.
Leslie K. O'Neal became Secretary of Temple-Inland in February 2000 after
serving as Assistant Secretary since 1995. Ms. O'Neal also serves as Assistant
General Counsel of Temple-Inland, a position she has held since 1985. Ms. O'Neal
also serves as Secretary of various subsidiaries of Temple-Inland.
OUR DIRECTORS
Set forth below are the names, ages and year first elected of the persons
who serve as our directors:
YEAR FIRST
NAME AGE ELECTED
---- --- ----------
Afsaneh Mashayekhi Beschloss................................ 46 2002
Anthony M. Frank............................................ 70 1992
W. Allen Reed............................................... 54 2000
Charlotte Temple............................................ 62 1994
Robert Cizik................................................ 70 1983
James T. Hackett............................................ 48 2000
Arthur Temple III........................................... 60 1983
Larry E. Temple............................................. 66 1991
Bobby R. Inman.............................................. 70 1987
Kenneth M. Jastrow, II...................................... 54 1998
James A. Johnson............................................ 58 2000
Herbert A. Sklenar.......................................... 70 1993
William B. Howes............................................ 64 1996
Afsaneh Mashayekhi Beschloss is the Managing Director and Partner of The
Carlyle Group, a private investment firm. Ms. Beschloss also serves as CEO and
President of Carlyle Asset Management Group. Prior to joining The Carlyle Group
in May 2001, Ms. Beschloss served as Vice President, Treasurer and Chief
Investment Officer of the World Bank since 1998. Prior to that position, she
served as Senior Manager for Derivatives and Structured Products and Director
and Chief Investment Officer of the World Bank's Investment Management
Department.
Anthony M. Frank is Chairman Emeritus of Belvedere Capital Partners, LLC, a
private equity investment firm. Mr. Frank served as Postmaster General of the
United States from 1988 until 1992. Prior to his appointment as Postmaster
General, Mr. Frank served as Chairman of the Board and Chief Executive Officer
of the San Francisco-based First Nationwide Bank. He has also served as Chairman
of the Federal Home Loan Bank of San Francisco and Chairman of the California
Housing Finance Agency, and was the first Chairman of the Federal Home Loan
Mortgage Corporation Advisory Board. Mr. Frank is also a director of The Charles
Schwab Corporation, General American Investors Company, Inc., Bedford
Properties, Inc., Crescent Real Estate Equities and Cotelligent, Inc. Mr.
Frank's retirement from the Board will take effect at the 2004 annual meeting of
stockholders.
W. Allen Reed is President and Chief Executive Officer of General Motors
Investment Management Corporation, an investment and asset management company.
Mr. Reed was elected to his current position in 1994 and also serves as Chairman
and CEO of the GM Trust Company and as a Corporate Vice President of General
Motors Corporation. He is also a director of iShares, MSCI Series, Inc., FLIR
Systems, Inc. and General Motors Acceptance Corporation (GMAC).
S-34
Charlotte Temple is the Owner and President of Temple Vineyards, grower of
prime Napa Valley grapes. Ms. Temple is also a private investor with prior
experience in the commercial real estate investment area. Ms. Temple is also a
director of Exeter Investment Company.
Robert Cizik is the former Chairman and Chief Executive Officer of Cooper
Industries, Inc., Houston, Texas, a diversified international manufacturing
company (1975-1996). He currently serves as Non-Executive Chairman of Koppers
Industries, Inc., Pittsburgh, Pennsylvania. He previously served as a director
of Harris Corporation from 1988 until November 1999, and Air Products and
Chemicals, Inc. from 1992 until January 2002.
James T. Hackett is the Chairman, President and Chief Executive Officer of
Ocean Energy, Inc., an independent oil and gas exploration and production
company. Mr. Hackett was Chairman and Chief Executive Officer of Seagull Energy
Corporation from 1998 until it merged with Ocean Energy, Inc. in March 1999,
when he assumed the title of Chief Executive Officer and President. He assumed
the Chairman title on January 1, 2000. Mr. Hackett served as President-Energy
Services Group of Duke Energy Corporation, Houston, Texas from 1997 until 1998
and as Executive Vice President of PanEnergy Corporation (which merged into Duke
Energy) from 1996 until 1997. Mr. Hackett served as Senior Vice President and
President of the Trident Division of NGC Corporation from 1995 until 1996. Mr.
Hackett is also a director of Fluor Corporation, New Jersey Resources
Corporation and Kaiser Aluminum & Chemical Corporation.
Arthur Temple III is the Chairman of the Board and Chief Executive Officer
of Exeter Investment Company. Mr. Temple III has served as Chairman of the Board
of Exeter Investment Company from 1975 to early 1982 and since March 1986. From
1973 until 1980, Mr. Temple III served as a member of the Texas legislature and
from January 1981 until March 1986 he served as a member and Chairman of the
Railroad Commission of Texas, which regulates mineral resources and for-hire
highway transportation in Texas. Mr. Temple III is also Chairman of the Board of
First Bank & Trust, East Texas.
Larry E. Temple is an attorney and during the last five years has been in
private practice. He has served as Chairman of the Texas Select Committee on
Higher Education, as Chairman of the Texas Higher Education Coordinating Board,
and as a member of the Texas Guaranteed Student Loan Corporation. Mr. Temple has
also served on several boards of the University of Texas and is a member of the
Board and President of the Lyndon B. Johnson Foundation. Mr. Temple formerly
served as Special Counsel to President Lyndon B. Johnson and as an Executive
Assistant to Texas Governor John Connally.
Bobby R. Inman is the Managing Director of Inman Ventures, an investment
firm. Admiral Inman served as Chairman of the Board of Westmark Systems, Inc., a
Texas-based electronics industry holding company, from September 1986, and as
its Chief Executive Officer from December 31, 1986 until December 31, 1989. From
January 1983 until December 1986, Admiral Inman was President and Chief
Executive Officer of the Microelectronics and Computer Technology Corp. in
Austin, Texas. Admiral Inman retired from active duty with the United States
Navy with permanent four star rank on July 1, 1982. Admiral Inman served as
Chairman of the Federal Reserve Bank of Dallas from January 1987 to December
1990. He is a director of Fluor Corporation, Massey Energy Company, SBC
Communications Inc., and Science Applications International Corp.
Kenneth M. Jastrow, II is Chairman of the Board and Chief Executive Officer
of Temple-Inland. Mr. Jastrow was elected to his current office effective
January 1, 2000. He served as Group Vice President of Temple-Inland from 1995
until 1998, as President and Chief Operating Officer in 1998 and 1999, and as
Chief Financial Officer from November 1991 until 1999. Mr. Jastrow is also a
director of MGIC Investment Corporation and K.B. Home.
James A. Johnson is Vice Chairman of Perseus LLC, a merchant bank and
private equity fund management firm. Mr. Johnson served as Chairman and Chief
Executive Officer of Johnson Capital Partners until 2001, as Chairman of the
Executive Committee of the Board of Fannie Mae in 1999 and as Chairman and Chief
Executive Officer of Fannie Mae from 1991 through 1998. He is also a director of
S-35
Cummins Engine Company, Inc., Target Corporation, The Goldman Sachs Group, Inc.,
K.B. Home, UnitedHealth Group, and Gannett Co., Inc.
Herbert A. Sklenar is Chairman of the Board Emeritus of Vulcan Materials
Company, a producer of construction materials and chemicals. Mr. Sklenar served
as President of Vulcan Materials Company from 1983 until his election as
Chairman in 1992, he served as its Chief Executive Officer from 1986 until
February 1997 and he served as Chairman from 1992 until his retirement in 1997.
William B. Howes, who was named Executive Vice President and a Director in
August 1996, became a Group Vice President of Temple-Inland and the Chairman of
the Board of Inland Paperboard and Packaging in July 1993 after serving as the
President and Chief Operating Officer of Inland Paperboard and Packaging since
April 1992. From August 1990 until April 1992, Mr. Howes was the Executive Vice
President of Inland Paperboard and Packaging. Mr. Howes has announced his
intention to retire on May 3, 2002.
S-36
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed on the New York Stock Exchange and the Pacific
Exchange under the symbol "TIN."
The following table sets forth, for the periods indicated, the range of
high and low closing sale prices of the common stock. Prices are as reported on
the New York Stock Exchange based on published financial sources.
COMMON STOCK
---------------------------
HIGH LOW DIVIDENDS
----- ----- ---------
FISCAL YEAR 2000:
First Quarter............................................... 67.69 43.75 0.32
Second Quarter.............................................. 57.50 40.94 0.32
Third Quarter............................................... 47.63 37.06 0.32
Fourth Quarter.............................................. 55.50 34.63 0.32
FISCAL YEAR 2001:
First Quarter............................................... 57.38 40.35 0.32
Second Quarter.............................................. 56.80 41.95 0.32
Third Quarter............................................... 62.15 43.90 0.32
Fourth Quarter.............................................. 59.55 45.68 0.32
FISCAL YEAR 2002:
First Quarter............................................... 59.99 50.35 0.32
Second Quarter (through April 12, 2002)..................... 58.30 54.15 (1)
---------------
(1) Second quarter dividend scheduled to be considered at the May 3, 2002 Board
of Directors meeting.
SHAREHOLDERS
As of April 11, 2002, approximately 5,557 holders of record held our common
stock.
DIVIDEND POLICY
As indicated above, the Company paid quarterly dividends during each of the
two most recent fiscal years in the amounts shown. On February 1, 2002, the
Board of Directors declared a quarterly dividend on the Common Stock of $0.32
per share payable on March 15, 2002, to shareholders of record on March 1, 2002.
The quarterly dividend has been $0.32 per share since the dividend paid on
September 13, 1996. The Board of Directors 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 the Board of Directors.
S-37
DESCRIPTION OF THE UPPER DECS
We summarize below the principal terms of the Upper DECS and the purchase
contracts and senior notes which comprise the Upper DECS. The following
description is not complete, and we refer you to the agreements which will
govern your rights as a holder of Upper DECS. See "Where You Can Find More
Information."
OVERVIEW
Each Upper DECS will be issued at the stated amount of $50. Each Upper DECS
will initially consist of:
(1) a purchase contract under which:
- you will agree to purchase, and we will agree to sell, for $50, shares
of our common stock on the stock purchase date, the number of which
will be determined by the settlement rate described below, based on
the average trading price of our common stock for a period preceding
that date; and
- we will pay you contract adjustment payments at the annual rate of
% payable on a quarterly basis as specified below (subject to our
right to deferral as described below); and
(2) a senior note due , 2007 with a principal amount of $50,
on which we will pay interest quarterly at the initial annual rate of
% until a successful remarketing of the senior notes and at the
reset rate thereafter (assuming the senior notes are successfully
remarketed).
The senior notes will initially be pledged to us to secure your obligations
under the purchase contracts. Each holder of Upper DECS may elect to withdraw
the pledged senior notes or treasury securities (after a successful remarketing)
underlying the Upper DECS by substituting, as pledged securities, specifically
identified treasury securities that will pay $50 on the stock purchase date, the
amount due on such date under each purchase contract. If a holder of Upper DECS
elects to substitute treasury securities as pledged securities, the pledged
senior notes or treasury securities will be released from the pledge agreement
and delivered to the holder. The Upper DECS would then become "Stripped DECS."
Holders of Stripped DECS may recreate Upper DECS by resubstituting the senior
notes (or, after a successful remarketing, the applicable specified treasury
securities) for the treasury securities underlying the Stripped DECS.
As a beneficial owner of an Upper DECS, you will be deemed to have:
- irrevocably agreed to be bound by the terms of the purchase contract
agreement, pledge agreement and purchase contract for so long as you
remain a beneficial owner of such Upper DECS; and
- appointed the purchase contract agent under the purchase contract
agreement as your agent and attorney-in-fact to enter into and perform
the purchase contract on your behalf.
In addition, as a beneficial owner of an Upper DECS, you will be deemed by
your acceptance of the Upper DECS to have agreed, for all tax purposes, to treat
yourself as the owner of the related senior notes or the treasury securities, as
the case may be, to treat the senior notes as our indebtedness.
At the closing of the offering of the Upper DECS, the underwriters will
purchase the Upper DECS. The purchase price of each Upper DECS will be allocated
by us between the related purchase contract and the related senior note. The
senior notes will then be pledged to the collateral agent to secure the holders'
obligations owed to us under the purchase contracts.
We will enter into:
- a purchase contract agreement with , as purchase contract
agent, governing the appointment of the purchase contract agent as the
agent and attorney-in-fact for the holders of the Upper DECS, the
purchase contracts, the transfer, exchange or replacement of certificates
representing the Upper DECS and certain other matters relating to the
Upper DECS; and
S-38
- a pledge agreement with , as collateral agent, custodial
agent and securities intermediary creating a pledge and security interest
for our benefit to secure the obligations of holders of Upper DECS under
the purchase contracts.
CREATING STRIPPED DECS AND RECREATING UPPER DECS
Holders of Upper DECS will have the ability to "strip" those Upper DECS and
take delivery of the pledged senior notes (or after a successful remarketing,
the pledged treasury securities), creating "Stripped DECS," and holders of
Stripped DECS will have the ability to recreate Upper DECS from their Stripped
DECS by depositing senior notes (or after a successful remarketing, the
applicable treasury securities) as described in more detail below. Holders who
elect to create Stripped DECS or recreate Upper DECS will be responsible for any
related fees or expenses.
CREATING STRIPPED DECS
Each holder of Upper DECS may create Stripped DECS and withdraw the pledged
senior notes or treasury securities (after a successful remarketing) underlying
such holder's Upper DECS by substituting, as pledged securities, the treasury
securities described below that will pay $50 on the stock purchase date, the
amount due on that date under the purchase contract. Holders of Upper DECS may
create Stripped DECS at any time on or before the second business day prior to
the stock purchase date, except that they may not create Stripped DECS during
the period from four business days prior to any remarketing period until the
expiration of three business days after the end of that period.
In order to create Stripped DECS, a holder of Upper DECS must substitute,
as pledged securities, zero-coupon U.S. treasury securities (CUSIP No. )
which mature on the stock purchase date. Upon creation of the Stripped DECS, the
treasury securities will be pledged with the collateral agent to secure the
holder's obligation to purchase shares of our common stock under the purchase
contract, and the pledged senior notes or treasury securities (after a
successful remarketing) underlying the holder's Upper DECS will be released.
Because treasury securities are issued in integral multiples of $1,000, holders
of Upper DECS may make the substitution only in integral multiples of 20 Upper
DECS. However, after a successful remarketing of the senior notes or the
occurrence of a tax event redemption, the holders may make the substitution only
in integral multiples of Upper DECS such that both the treasury securities to be
deposited and the treasury securities to be released are in integral multiples
of $1,000.
To create Stripped DECS, you must:
- deposit with the collateral agent the treasury securities described
above, which will be substituted for the pledged senior notes or treasury
securities (after a successful remarketing) underlying your Upper DECS
and pledged with the collateral agent to secure your obligation to
purchase shares of our common stock under the purchase contract;
- transfer the Upper DECS to the purchase contract agent; and
- deliver a notice to the purchase contract agent stating that you have
deposited the specified treasury securities with the collateral agent and
are requesting that the purchase contract agent instruct the collateral
agent to release to you the pledged senior notes or treasury securities,
as applicable, underlying your Upper DECS.
Upon that deposit and the receipt of an instruction from the purchase
contract agent, the collateral agent will effect the release to the purchase
contract agent of the underlying pledged senior notes or treasury securities, as
applicable, from the pledge under the pledge agreement free and clear of our
security interest. The purchase contract agent will then:
- cancel your Upper DECS;
- transfer to you the underlying pledged senior notes or treasury
securities as applicable; and
- deliver to you the Stripped DECS.
S-39
Any senior notes or treasury securities, as applicable, released to you
will be tradeable separately from the resulting Stripped DECS. Interest on the
senior notes will continue to be payable in accordance with their terms.
RECREATING UPPER DECS
Each holder of Stripped DECS may recreate Upper DECS by substituting, as
pledged securities, senior notes or treasury securities, as applicable, then
constituting a part of the Upper DECS for the treasury securities underlying the
Stripped DECS. Holders may recreate Upper DECS at any time on or before the
second business day prior to the stock purchase date except that they may not
recreate Upper DECS during the period from four business days prior to any
remarketing period until the expiration of three business days after that
period.
Upon recreation of the Upper DECS, the senior notes or treasury securities,
as applicable, will be pledged with the collateral agent to secure the holder's
obligation to purchase shares of our common stock under the purchase contract,
and the treasury securities underlying the stripped upper DECS will be released.
Because treasury securities are issued in integral multiples of $1,000, holders
of Stripped DECS may make the substitution only in integral multiples of 20
Stripped DECS. However, after a successful remarketing of the senior notes or
the occurrence of a tax event redemption, the holder may make the substitution
only in integral multiples of Stripped DECS such that both the treasury
securities to be deposited and the treasury securities to be released are in
integral multiples of $1,000.
To recreate Upper DECS from Stripped DECS, you must:
- deposit with the collateral agent:
- if the substitution occurs prior to the successful remarketing of the
senior notes, senior notes having an aggregate principal amount equal
to the aggregate stated amount of your Stripped DECS; or
- if the substitution occurs after the successful remarketing of the
senior notes or the occurrence of a tax event redemption, the
applicable treasury securities then constituting a part of the Upper
DECS;
- transfer the Stripped DECS to the purchase contract agent; and
- deliver a notice to the purchase contract agent stating that you have
deposited the senior notes or treasury securities, as applicable, with
the collateral agent and are requesting that the purchase contract agent
instruct the collateral agent to release to you the pledged treasury
securities underlying those Stripped DECS.
The senior notes or treasury securities, as applicable, will be substituted
for the treasury securities underlying your Stripped DECS and will be pledged
with the collateral agent to secure your obligation to purchase shares of our
common stock under your purchase contract.
Upon that deposit and the receipt of an instruction from the purchase
contract agent, the collateral agent will effect the release to the purchase
contract agent of the underlying pledged treasury securities from the pledge
under the pledge agreement free and clear of our security interest. The purchase
contract agent will:
- cancel the Stripped DECS;
- transfer to you the underlying treasury securities; and
- deliver to you the Upper DECS.
CURRENT PAYMENTS
If you hold Upper DECS, we will pay you payments consisting of quarterly
contract adjustment payments on the purchase contracts at the annual rate of
% of the $50 stated amount through and
S-40
including the stock purchase date and quarterly interest payments on the senior
notes at the annual rate of % of the principal amount of $50 per senior
note. If the senior notes are successfully remarketed, they will pay interest to
the holders of such senior notes after the remarketing at the reset rate from
the date of the settlement of the successful remarketing until their maturity on
, 2007. On the stock purchase date, if your senior notes were
successfully remarketed, you will receive a quarterly payment at the same annual
rate as was initially paid on the senior notes prior to the remarketing.
If you hold Stripped DECS, you will only be entitled to receive quarterly
contract adjustment payments payable by us at the annual rate of % of the
$50 stated amount through and including the stock purchase date.
The contract adjustment payments are subject to deferral by us until the
stock purchase date as described below. If we defer any of these payments, we
will pay or accrue additional payments on the deferred amounts at the annual
rate of % until paid.
If you hold senior notes separately from the Upper DECS, you will only
receive the cash interest payable on the senior notes. The senior notes, whether
held separately or as part of the Upper DECS, will initially pay interest at the
annual rate of % of the principal amount of $50 per senior note for the
quarterly payments payable on and before , 2005. After that date, if
the senior notes are successfully remarketed, interest payments on the senior
notes will be made at the reset rate from the date of settlement of the
successful remarketing until their maturity on , 2007. However, if a
reset rate meeting the requirements described in this prospectus supplement
cannot be established, the interest rate will not be reset and will continue to
be the initial annual rate of %, until a reset rate meeting the
requirements described in this prospectus supplement can be established on a
later remarketing date prior to the stock purchase date. If no remarketing
occurs prior to that date, the initial annual rate of % will be the
interest rate through maturity of the senior notes.
Contract adjustment payments and interest payments on the senior notes
payable for any period will be computed (1) for any full quarterly period on the
basis of a 360-day year of twelve 30-day months and (2) for any period shorter
than a full quarterly period, on the basis of a 30-day month and, for periods of
less than a month, on the basis of the actual number of days elapsed per 30-day
month. Contract adjustment payments and interest on the senior notes will accrue
from , 2002 and will be payable quarterly in arrears on
, , and of each year,
commencing , 2002. If the purchase contracts are settled early, at
your option, or terminated, you will have no right to receive any accrued and
deferred contract adjustment payments.
Our obligations with respect to the senior notes will be unsecured and will
rank equally with all our other unsecured and unsubordinated indebtedness. See
"Description of the Senior Notes" below.
Contract adjustment payments and interest payments on the senior notes will
be payable to the holders of Upper DECS as they are registered on the books and
records of the purchase contract agent on the relevant record dates. So long as
the Upper DECS remain in book-entry only form, the record date will be the
business day prior to the relevant payment dates. Contract adjustment payments
will be paid through the purchase contract agent, which will hold amounts
received in respect of the contract adjustment payments for the benefit of the
holders of the purchase contracts that are a part of such Upper DECS. Subject to
any applicable laws and regulations, each payment will be made as described
under "Description of the Senior Notes -- Book-Entry and Settlement" below. If
the Upper DECS do not remain in book-entry only form, the relevant record dates
will be the 15th day prior to the relevant payment dates. If any date on which
these payments and distributions are to be made is not a business day, then
amounts payable on that date will be made on the next day that is a business day
without any interest or other payment in respect of the delay, except that, if
the business day is in the next calendar year, payment will be made on the
immediately preceding business day, in each case with the same force and effect
as if made on the scheduled payment date.
S-41
OPTION TO DEFER CONTRACT ADJUSTMENT PAYMENTS
We may, at our option and upon prior written notice to the holders of the
Upper DECS and the purchase contract agent, defer the payment of contract
adjustment payments on the purchase contracts forming a part of the Upper DECS
and Stripped DECS until no later than the stock purchase date. However, we will
pay additional contract adjustment payments on any deferred installments of
contract adjustment payments at the rate of % per year (compounded quarterly)
until paid. If the purchase contracts are terminated (upon the occurrence of
certain events of bankruptcy, insolvency or reorganization with respect to us),
the right to receive contract adjustment payments and deferred contract
adjustment payments will also terminate.
In the event that we elect to defer the payment of contract adjustment
payments on the purchase contracts until the stock purchase date, each holder of
Upper DECS and Stripped DECS will receive on the stock purchase date in respect
of the deferred contract adjustment payments, in lieu of a cash payment, a
number of shares of our common stock equal to (a) the aggregate amount of
deferred contract adjustment payments payable to the holder divided by (b) the
applicable market value (as defined below).
We will not issue any fractional shares of our common stock with respect to
the payment of deferred contract adjustment payments on the stock purchase date.
In lieu of fractional shares otherwise issuable with respect to such payment of
deferred contract adjustment payments, the holder will be entitled to receive an
amount in cash equal to the fraction of a share times the applicable market
value.
In the event we exercise our option to defer the payment of contract
adjustment payments, then until the deferred contract adjustment payments have
been paid, we will not, and we will not permit any subsidiary of ours to,
declare or pay dividends on, make distributions with respect to, or redeem,
purchase or acquire, or make a liquidation payment with respect to, any class of
our common stock other than:
- purchases, redemptions or acquisitions of shares of our common stock in
connection with any employment contract, benefit plan or other similar
arrangement with or for the benefit of employees, officers or directors
or a stock purchase or dividend reinvestment plan, or the satisfaction by
us of our obligations pursuant to any contract or security outstanding on
the date of such event;
- as a result of a reclassification of our capital stock or the exchange or
conversion of one class or series of our capital stock for another class
or series of the capital stock;
- the purchase of fractional interests in shares of our common stock
pursuant to the conversion or exchange provisions of the security being
converted or exchanged;
- dividends or distributions in our common stock (or rights to acquire our
common stock), or repurchases, redemptions or acquisitions of our common
stock in connection with the issuance or exchange of common stock (or
securities convertible into or exchangeable for shares of our common
stock); or
- redemptions, exchanges or repurchases of any rights outstanding under a
shareholder rights plan or the declaration or payment thereunder of a
dividend or distribution of or with respect to rights in the future.
DESCRIPTION OF THE PURCHASE CONTRACTS
Each purchase contract underlying an Upper DECS, unless earlier terminated
or earlier settled at your option or upon specified mergers and other
transactions described below, will obligate you to purchase, and us to sell, for
$50, on the stock purchase date a number of newly issued shares of our common
stock equal to the settlement rate.
S-42
The settlement rate, which is the number of newly issued shares of our
common stock issuable upon settlement of a purchase contract on the stock
purchase date, subject to adjustment under certain circumstances as described
under "-- Anti-dilution Adjustments" below, will be as follows:
- If the applicable market value of our common stock is equal to or greater
than the threshold appreciation price of $ , which is
approximately % above the reference price of $ , the
settlement rate, which is equal to the stated amount of $50 divided by
$ , will be shares of our common stock per purchase
contract. Accordingly, if the market price for our common stock increases
to an amount that is greater than $ on the settlement date, the
aggregate market value of the shares of common stock issued upon
settlement of each purchase contract, assuming that this market value is
the same as the applicable market value of our common stock, will be
greater than $50, and if the market price equals $ , the
aggregate market value of those shares, assuming that this market value
is the same as the applicable market value of our common stock, will
equal $50.
- If the applicable market value of our common stock is less than
$ but greater than $ , the settlement rate will be
equal to the stated amount of $50 divided by the applicable market value
of our common stock. Accordingly, if the market price for our common
stock increases but that market price is less than $ on the
settlement date, the aggregate market value of the shares of common stock
issued upon settlement of each purchase contract, assuming that this
market value is the same as the applicable market value of our common
stock, will equal $50.
- If the applicable market value of our common stock is less than or equal
to $ , the settlement rate, which is equal to the stated amount
of $50 divided by $ , will be shares of our common
stock per purchase contract. Accordingly, if the market price for our
common stock decreases to an amount that is less than $ on the
settlement date, the aggregate market value of the shares of our common
stock issued upon settlement of each purchase contract, assuming that the
market value is the same as the applicable market value of our common
stock, will be less than $50, and if the market price equals $ ,
the aggregate market value of those shares, assuming that this market
value is the same as the applicable market value of our common stock,
will equal $50.
The "applicable market value" of our common stock is the average of the
closing prices per share of our common stock on each of the 20 consecutive
trading days ending on the third trading day immediately preceding the stock
purchase date.
For purposes of determining the applicable market value for our common
stock, the closing price of our common stock on any date of determination means
the closing sale price or, if no closing price is reported, the last reported
sale price of our common stock on the NYSE on that date. If our common stock is
not listed for trading on the NYSE on any date, the closing price of our common
stock on any date of determination means the closing sales price as reported in
the composite transactions for the principal U.S. securities exchange on which
our common stock is so listed, or, if our common stock is not so listed on a
U.S. national or regional securities exchange, as reported by the Nasdaq stock
market, or, if our common stock is not so reported, the last quoted bid price
for our common stock in the over-the-counter market as reported by the National
Quotation Bureau or similar organization or, if that bid price is not available,
the market value of our common stock on that date as determined by a nationally
recognized independent investment banking firm retained by us for this purpose.
A trading day is a day on which our common stock (1) is not suspended from
trading on any national or regional securities exchange or association or
over-the-counter market at the close of business and (2) has traded at least
once on the national or regional securities exchange or association or over-the-
counter market that is the primary market for the trading of our common stock.
S-43
SETTLEMENT
Settlement of the purchase contracts will occur on the stock purchase date,
unless:
- you have settled the purchase contract prior to the stock purchase date
through the early delivery of cash to the purchase contract agent, in the
manner described in "-- Early Settlement;
- we are involved in a merger prior to the stock purchase date in which at
least 30% of the consideration for our common stock consists of cash or
cash equivalents, and you have settled the related purchase contract
through an early settlement as described in "-- Early Settlement upon
Cash Merger"; or
- an event described under "-- Termination of Purchase Contracts" below has
occurred.
The settlement of the purchase contracts on the stock purchase date will
occur as follows:
- for Stripped DECS or Upper DECS that include pledged treasury securities,
the cash payments on the treasury securities will automatically be
applied to satisfy in full your obligation to purchase shares of our
common stock under the purchase contracts; and
- for Upper DECS in which the related senior notes remain a part of the
Upper DECS if the senior notes have not been successfully remarketed, we
will exercise our rights as a secured party to retain or dispose of the
senior notes in accordance with applicable law in satisfaction of your
obligation to purchase shares of our common stock under the purchase
contracts.
Shares of our common stock will then be issued and delivered to you or your
designee, upon payment of the applicable consideration, presentation and
surrender of the certificate evidencing the Upper DECS or Stripped DECS, if the
Upper DECS or Stripped DECS are held in certificated form, and payment by you of
any transfer or similar taxes payable in connection with the issuance of our
common stock to any person other than you.
Prior to the date on which shares of our common stock are issued in
settlement of purchase contracts, shares of our common stock underlying the
related purchase contracts will not be deemed to be outstanding for any purpose
and you will have no rights with respect to the common stock, including voting
rights, rights to respond to tender offers and rights to receive any dividends
or other distributions on the common stock, by virtue of holding the purchase
contracts.
No fractional shares of common stock will be issued by us pursuant to the
purchase contracts. In place of fractional shares otherwise issuable, you will
be entitled to receive an amount of cash equal to the fractional share,
calculated on an aggregate basis in respect of the purchase contracts you are
settling, times the applicable market value.
REMARKETING
The senior notes held by each holder of an Upper DECS will be subject to a
remarketing on the remarketing date, which will be the third business day
immediately preceding , 2005, the last quarterly payment date before
the stock purchase date, unless the holder elects not to participate in the
remarketing. The proceeds of such remarketing will be used to purchase treasury
securities, which will be pledged to secure the obligations of such
participating holder of Upper DECS under the related purchase contract. The
redemption proceeds received on the pledged treasury securities underlying the
Upper DECS of such holder will be used to satisfy such participating holder's
obligation to purchase shares of our common stock on the stock purchase date.
A holder of Upper DECS may elect not to participate in the remarketing and
instead to retain the senior notes included in such holder's Upper DECS by
delivering specified treasury securities in a kind and amount designated by the
remarketing agent, as described below. The senior notes that are included in the
Upper DECS (other than senior notes with respect to which an election has been
made, as described in the preceding sentence) will be remarketed on the
remarketing date, unless the remarketing agent delays the remarketing to a later
date as described below.
S-44
We will enter into a remarketing agreement with a nationally recognized
investment banking firm, pursuant to which that firm will agree, as remarketing
agent, to use its commercially reasonable best efforts to sell the senior notes
that are included in the Upper DECS and that are participating in the
remarketing, at a price equal to at least 100.50% of the remarketing value.
The "remarketing value" will be equal to the sum of:
(1) the value at the remarketing date of such amount of treasury securities
that will pay, on or prior to the stock purchase date, an amount of
cash equal to the aggregate interest payment that is scheduled to be
payable on that quarterly payment date, on each senior note which is
included in an Upper DECS and which is participating in the
remarketing, assuming for this purpose, even if not true, that the
interest rate on the senior notes remains at the initial rate; and
(2) the value at the remarketing date of such amount of treasury securities
that will pay, on or prior to the stock purchase date, an amount of
cash equal to $50 for each senior note which is included in an Upper
DECS and which is participating in the remarketing.
For purposes of (1) and (2) above, the value on the remarketing date of the
treasury securities will assume that (a) the treasury securities are highly
liquid treasury securities maturing on or within 35 days prior to the stock
purchase date (as determined in good faith by the remarketing agent in a manner
intended to minimize the cash value of the treasury securities) and (b) those
treasury securities are valued based on the ask-side price of the treasury
securities at a time between 9:00 a.m. and 11:00 a.m., New York City time,
selected by the remarketing agent, on the remarketing date (as determined on a
third-day settlement basis by a reasonable and customary means selected in good
faith by the remarketing agent) plus accrued interest to that date.
The remarketing agent will use the proceeds from the sale of these senior
notes in a successful remarketing described in this section to purchase, in the
discretion of the remarketing agent in open market transactions or at treasury
auction, the amount and the types of treasury securities described in (1) and
(2) above, which it will deliver through the purchase contract agent to the
collateral agent to secure the obligations under the related purchase contracts
of holders of the Upper DECS whose senior notes participated in the remarketing.
The remarketing agent will deduct as a remarketing fee an amount not exceeding
25 basis points (0.25%) of the total proceeds from such remarketing. The
remarketing agent will remit the remaining portion of the proceeds, if any, to
the holders of the Upper DECS participating in the remarketing.
Alternatively, a holder of Upper DECS may elect not to participate in the
remarketing and retain the senior notes underlying such holder's Upper DECS by
delivering the treasury securities described in (1) and (2) above, in the amount
and types specified by the remarketing agent, applicable to the holder's senior
notes, to the purchase contract agent no later than the fourth business day
prior to the remarketing date to satisfy such holder's obligation under the
related purchase contract. In such case, the interest rate on such holder's
senior notes will be reset to the reset rate, regardless of whether or not the
holder participated in the remarketing.
The purchase contract agent will give holders of Upper DECS notice of
remarketing, including the specific treasury securities (including the CUSIP
numbers and/or the principal terms thereof) that must be delivered by holders
that elect not to participate in the remarketing, on the seventh business day
prior to the remarketing date. A holder electing not to participate in the
remarketing must notify the purchase contract agent of such election and deliver
such specified treasury securities to the purchase contract agent not later than
10:00 a.m. on the fourth business day prior to the remarketing date. A holder
that notifies the purchase contract agent of such election but does not so
deliver the treasury securities and a holder that does not notify the purchase
contract agent will be deemed to have elected to participate in the remarketing.
On the stock purchase date, the purchase contract agent will apply the cash
payments received on the pledged treasury securities to pay the purchase price
under the purchase contracts.
If the remarketing agent cannot establish a reset rate on the remarketing
date that will be sufficient to cause the aggregate market value at the
remarketing date of all the outstanding senior notes to be equal to
S-45
at least 100.50% of the remarketing value, assuming, even if not true, that all
of the senior notes are held as components of the Upper DECS and will be
remarketed, and the remarketing agent cannot remarket the senior notes offered
for remarketing on the remarketing date at a price equal to at least 100.50% of
the remarketing value, determined on the basis of the senior notes being
remarketed, the remarketing agent will attempt to establish a reset rate meeting
these requirements on each of the two immediately following business days. If
the remarketing agent cannot establish a reset rate meeting these requirements
on either of those days, it will attempt to establish such a reset rate on each
of the three business days immediately preceding , 2005. If the
remarketing agent cannot establish such a reset rate during that period, it will
further attempt to establish such a reset rate on each of the three business
days immediately preceding the stock purchase date. We refer to each of these
three business day periods as "remarketing periods" in this prospectus
supplement. In order for any such remarketing to be successful, the remarketing
agent must resell the senior notes offered for remarketing at a price equal to
at least 100.50% of the remarketing value (determined on the basis of the senior
notes being remarketed) on the subsequent remarketing date.
If the remarketing agent fails to remarket the senior notes offered for
remarketing at the price specified in the preceding paragraph by the business
day immediately preceding the stock purchase date, any holder of an Upper DECS
that has not otherwise settled its related purchase contract in cash by the
close of business on the business day immediately preceding the stock purchase
date (but without regard to the notice requirements described below under
"-- Notice to Settle with Cash") will be deemed to have directed us to retain
the securities pledged as collateral in satisfaction of its obligations under
the related purchase contracts, and our retention of such securities will
satisfy such holder's obligation to purchase our common stock under the
applicable portion of the related purchase contracts.
We will cause a notice of any failed remarketing period to be published on
the fourth business day immediately following such period, by publication in a
daily newspaper in the English language of general circulation in New York City,
which is expected to be The Wall Street Journal. We will also release this
information by means of Bloomberg and Reuters newswire. In addition, we will
request, not later than seven nor more than 15 calendar days prior to any
remarketing period, that The Depository Trust Company ("DTC") notify its
participants holding senior notes, Upper DECS and Stripped DECS of the
remarketing.
OPTIONAL REMARKETING OF SENIOR NOTES WHICH ARE NOT INCLUDED IN UPPER DECS
Under the remarketing agreement, on or prior to the fourth business day
immediately preceding the beginning of a remarketing period, holders of senior
notes that are not included in Upper DECS may elect to have their senior notes
included in the remarketing by delivering their senior notes along with a notice
of such election to the collateral agent prior to the beginning of a remarketing
period, but no earlier than the payment date immediately preceding ,
2005. The collateral agent will hold these senior notes in an account separate
from the collateral account in which the securities pledged to secure the
holders' obligations under the purchase contracts will be held. Holders of
senior notes electing to have their senior notes remarketed will also have the
right to withdraw that election on or prior to the fifth business day
immediately preceding the first day of the relevant remarketing period.
On the third business day immediately prior to the relevant remarketing
period, the collateral agent will deliver these separate senior notes to the
remarketing agent for remarketing. The remarketing agent will use its
commercially reasonable best efforts to remarket the separately held senior
notes included in the remarketing at a price equal to at least 100.50% of the
remarketing value, determined on the basis of the separately held senior notes
being remarketed. After deducting as the remarketing fee an amount not exceeding
25 basis points (0.25%) of the total proceeds from such remarketing, the
remarketing agent will remit to the collateral agent the remaining portion of
the proceeds for payment to such participating holders.
If, as described above, the remarketing agent cannot remarket the senior
notes during any remarketing period at the price specified above, the
remarketing agent will promptly return the senior notes to the
S-46
collateral agent to release to the holders. Holders of senior notes that are not
components of Upper DECS may elect to have their senior notes remarketed during
any subsequent remarketing period pursuant to the procedures described above.
EARLY SETTLEMENT
At any time not later than 10:00 a.m. on the seventh business day prior to
the stock purchase date, a holder may settle the purchase contracts by
delivering to the purchase contract agent immediately available funds in an
amount equal to $50 multiplied by the number of purchase contracts being
settled, provided that at that time, if so required under the United States
federal securities laws, there is in effect a registration statement and a
current prospectus is available covering the shares of common stock to be
delivered in respect of the purchase contracts being settled. Holders may settle
early only in units of 20 and integral multiples of 20.
No later than the third business day after an early settlement, we will
issue, and the holder will be entitled to receive, shares of our common
stock for each purchase contract being settled, regardless of the market price
of our common stock on the date of early settlement, subject to adjustment under
the circumstances described under "-- Anti-dilution Adjustments" below. At that
time, the holder's right to receive future contract adjustment payments will
terminate. The holder will also receive the senior notes or other securities
underlying those units.
We have agreed that, if required under the United States federal securities
laws, we will use commercially reasonable efforts to (1) have in effect, subject
to some exceptions, a registration statement covering the shares of common stock
to be delivered in respect of the purchase contracts being settled and (2)
provide a prospectus in connection therewith, in each case in a form that may be
used in connection with the early settlement process.
NOTICE TO SETTLE WITH CASH
Unless the treasury securities have replaced the senior notes as a
component of Upper DECS as a result of a successful remarketing of the senior
notes or a tax event redemption, a holder of Upper DECS may settle the purchase
contract with separate cash prior to 11:00 a.m., New York City time, on the
business day immediately preceding the stock purchase date. A holder of an Upper
DECS wishing to settle the purchase contract with separate cash must notify the
purchase contract agent by presenting and surrendering the Upper DECS
certificate evidencing the Upper DECS at the offices of the purchase contract
agent with the form of "Notice to Settle by Separate Cash" on the reverse side
of the certificate completed and executed as indicated on or prior to 5:00 p.m.,
New York City time, on the seventh business day immediately preceding the stock
purchase date. If a holder of Upper DECS who has given notice of its intention
to settle the purchase contract with separate cash fails to deliver the cash to
the collateral agent on the business day immediately preceding the stock
purchase date, such holder will be deemed to have directed us to retain the
senior note in full satisfaction of the holder's obligation to purchase shares
of our common stock under the purchase contracts.
EARLY SETTLEMENT UPON CASH MERGER
Prior to the stock purchase date, if we are involved in a merger in which
at least 30% of the consideration for our common stock consists of cash or cash
equivalents ("cash merger"), then on or after the date of the cash merger each
holder of Upper DECS or Stripped DECS will have the right to accelerate and
settle the purchase contract at the settlement rate in effect immediately before
the cash merger, provided that at that time, if so required under the United
States federal securities laws, there is in effect a registration statement and
a current prospectus is available covering the shares of common stock to be
delivered in respect of the purchase contracts being settled. We refer to this
right as the "merger early settlement right." We will provide each of the
holders with a notice of the completion of a cash merger within five business
days thereof. The notice will specify a date, which shall not be less than 20
nor more than 30 days after the date of the notice, on which the optional early
settlement will occur and a
S-47
date by which each holder's merger early settlement right must be exercised. The
notice will set forth, among other things, the applicable settlement rate and
the amount of the cash, securities and other consideration receivable by the
holder upon settlement. To exercise the merger early settlement right, you must
deliver to the purchase contract agent, on or at least one business day before
the merger early settlement date, the certificate evidencing your Upper DECS or
Stripped DECS, if the Upper DECS or Stripped DECS are held in certificate form,
and payment of the applicable purchase price in the form of a certified or
cashier's check. If you exercise the merger early settlement right, we will
deliver to you on the merger early settlement date the kind and amount of
securities, cash or other property that you would have been entitled to receive
if you had settled the purchase contract immediately before the cash merger at
the settlement rate in effect at such time. You will also receive the senior
notes or treasury securities underlying those Upper DECS or Stripped DECS. If
you do not elect to exercise your merger early settlement right, your Upper DECS
or Stripped DECS will remain outstanding and subject to normal settlement on the
stock purchase date.
We have agreed that, if required under the United States federal securities
laws, we will use commercially reasonable efforts to (1) have in effect, subject
to some exceptions, a registration statement covering the shares of common stock
to be delivered in respect of the purchase contracts being settled and (2)
provide a prospectus in connection therewith, in each case in a form that may be
used in connection with the early settlement upon a cash merger.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the settlement rate and the number of shares of
our common stock to be delivered upon an early settlement may be adjusted if
certain events occur, including:
(1) the payment of dividends or other distributions, in each case of our
common stock on our common stock;
(2) the issuance to all holders of our common stock of rights or warrants,
other than any dividend reinvestment or share purchase or similar
plans, entitling them to subscribe for or purchase our common stock at
less than the current market price thereof (as defined below);
(3) subdivisions, splits and combinations of our common stock;
(4) distributions to all holders of our common stock of evidences of our
indebtedness, shares of capital stock, securities, cash or other assets
(excluding any dividend or distribution covered by clause (1) or (2)
above and any dividend or distribution paid exclusively in cash);
(5) distributions consisting exclusively of cash to all holders of our
common stock in an aggregate amount that, when combined with (a) other
all-cash distributions made within the preceding 12 months and (b) the
cash and the fair market value, as of the date of expiration of the
tender or exchange offer referred to below, of the consideration paid
in respect of any tender or exchange offer by us or a subsidiary of
ours for our common stock concluded within the preceding 12 months,
exceeds 15% of our aggregate market capitalization (such aggregate
market capitalization being the product of the current market price of
our common stock multiplied by the number of shares of common stock
then outstanding) on the date fixed for the determination of
stockholders entitled to receive such distribution; and
(6) the successful completion of a tender or exchange offer made by us or
any subsidiary of ours for our common stock that involves an aggregate
consideration that, when combined with (a) any cash and the fair market
value of other consideration payable in respect of any other tender or
exchange offer by us or a subsidiary of ours for our common stock
concluded within the preceding 12 months and (b) the aggregate amount
of any all-cash distributions to all holders of our common stock made
within the preceding 12 months exceeds 15% of our aggregate market
capitalization on the date of expiration of such tender or exchange
offer.
S-48
The "current market price" per share of our common stock on any day means
the average of the daily closing prices for the five consecutive trading days
preceding the earlier of the day preceding the day in question and the day
before the "ex date" with respect to the issuance or distribution requiring such
computation. For purposes of this paragraph, the term "ex date," when used with
respect to any issuance or distribution means the first date on which our common
stock trades without the right to receive the issuance or distribution.
In the case of reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions that cause our common stock to be
converted into the right to receive other securities, cash or property, each
purchase contract then outstanding would, without the consent of the holders of
Upper DECS, become a contract to purchase such other securities, cash or
property instead of shares of our common stock. In such event, on the stock
purchase date the settlement rate then in effect will be applied to the value on
the stock purchase date of the securities, cash or property a holder would have
received if it had held the shares covered by the purchase contract when the
applicable transaction occurred. Holders have the right to settle their
obligations under the purchase contracts early in the event of certain cash
mergers as described under "-- Early Settlement upon Cash Merger."
In the case of the payment of a dividend or other distribution on our
common stock of shares of capital stock of any class or series, or similar
equity interests, of or relating to a subsidiary or other business unit, which
we refer to as a "spin-off," the settlement rate in effect immediately before
the close of business on the record date fixed for determination of shareholders
entitled to receive that distribution will be increased by multiplying:
- the settlement rate by
- a fraction, the numerator of which is the current market price of our
common stock plus the fair market value, determined as described below,
of the portion of those shares of capital stock or similar equity
interests so distributed applicable to one share of common stock and the
denominator of which is the current market price of our common stock.
The adjustment to the settlement rate under the preceding paragraph will
occur at the earlier of:
- the tenth trading day from, and including, the effective date of the
spin-off and
- the date of the securities being offered in the initial public offering
of the spin-off, if that initial public offering is effected
simultaneously with the spin-off.
For purposes of this section, "initial public offering" means the first
time securities of the same class or type as the securities being distributed in
the spin-off are bona fide offered to the public for cash.
In the event of a spin-off that is not effected simultaneously with an
initial public offering of the securities being distributed in the spin-off, the
fair market value of the securities to be distributed to holders of our common
stock means the average of the sale prices of those securities over the first 10
trading days after the effective date of the spin-off. Also, for purposes of
such a spin-off, the current market price of our common stock means the average
of the sales prices of our common stock over the first 10 trading days after the
effective date of the spin-off.
If, however, an initial public offering of the securities being distributed
in the spin-off is to be effected simultaneously with the spin-off, the fair
market value of the securities being distributed in the spin-off means the
initial public offering price, while the current market price of our common
stock means the sale price of our common stock on the trading day on which the
initial public offering price of the securities being distributed in the
spin-off is determined.
In addition, we may increase the settlement rate if our board of directors
deems it advisable to avoid or diminish any income tax to holders of our common
stock resulting from any dividend or distribution of shares (or rights to
acquire shares) or from any event treated as a dividend or distribution for
income tax purposes or for any other reasons.
S-49
Adjustments to the settlement rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the settlement rate will be required
unless the adjustment would require an increase or decrease of at least one
percent in the settlement rate. If any adjustment is not required to be made
because it would not change the settlement rate by at least one percent, then
the adjustment will be carried forward and taken into account in any subsequent
adjustment.
We will be required, as soon as practicable following the occurrence of an
event that requires or permits an adjustment in the settlement rate, to provide
written notice to the holders of Upper DECS of the occurrence of that event. We
will also be required to deliver a statement setting forth in reasonable detail
the method by which the adjustment to the settlement rate was determined and
setting forth the revised settlement rate.
Each adjustment to the settlement rate will result in a corresponding
adjustment to the number of shares of our common stock issuable upon early
settlement of a purchase contract.
PLEDGED SECURITIES AND PLEDGE AGREEMENT
The senior notes or treasury securities (after a successful remarketing)
underlying the Upper DECS will be pledged to the collateral agent for our
benefit. Under the pledge agreement, the pledged securities will secure the
obligations of holders of Upper DECS and Stripped DECS to purchase shares of our
common stock under the purchase contracts. A holder of an Upper DECS or a
Stripped DECS cannot separate or separately transfer the purchase contract from
the pledged securities underlying the Upper DECS or Stripped DECS. Your rights
to the pledged securities will be subject to our security interest created by
the pledge agreement. You will not be permitted to withdraw the pledged
securities related to the Upper DECS or Stripped DECS from the pledge
arrangement except:
- to substitute specified treasury securities for the related pledged
senior notes or other pledged treasury securities upon creation of a
Stripped DECS;
- to substitute senior notes or specified treasury securities for the
related pledged treasury securities upon the recreation of an Upper DECS;
- upon delivering specified treasury securities when electing not to
participate in a remarketing; or
- upon the termination or early settlement of the purchase contracts.
Subject to our security interest and the terms of the purchase contract
agreement and the pledge agreement:
- each holder of Upper DECS that include senior notes will retain ownership
of the senior notes and will be entitled through the purchase contract
agent and the collateral agent to all of the rights of a holder of the
senior notes, including interest payments, redemption and repayment
rights; and
- each holder of Stripped DECS or Upper DECS that include treasury
securities as a result of a successful remarketing will retain ownership
of the treasury securities.
We will have no interest in the pledged securities other than our security
interest.
QUARTERLY PAYMENTS ON PLEDGED SECURITIES
Except as described in "-- Description of the Purchase Contracts," the
collateral agent, upon receipt of quarterly interest payments on the pledged
securities underlying the Upper DECS, will distribute those payments to the
purchase contract agent, which will, in turn, distribute that amount to persons
who were the holders of Upper DECS on the record date for the payment. As long
as the Upper DECS remain in book-entry only form, the record date for any
payment will be one business day before the payment date.
S-50
TERMINATION OF PURCHASE CONTRACTS
The purchase contracts, our related rights and obligations and those of the
holders of the Upper DECS or Stripped DECS, including their rights to receive
contract adjustment payments or deferred contract adjustment payments and
obligations to purchase shares of our common stock, will automatically terminate
upon the occurrence of particular events of our bankruptcy, insolvency or
reorganisation.
Upon such a termination of the purchase contracts, the collateral agent
will release the securities held by it to the purchase contract agent for
distribution to the holders. If a holder would otherwise have been entitled to
receive less than $1,000 principal amount at maturity of any treasury security
upon termination of the purchase contract, the purchase contract agent will
dispose of the security for cash and pay the cash to the holder. Upon
termination, however, the release and distribution may be subject to a delay. If
we become the subject of a case under the U.S. Bankruptcy Code, a delay in the
release of the pledged senior notes or treasury securities may occur as a result
of the automatic stay under the Bankruptcy Code and continue until the automatic
stay has been lifted. The automatic stay will not be lifted until such time as
the bankruptcy judge agrees to lift it and return your collateral to you.
THE PURCHASE CONTRACT AGREEMENT
Distributions on the Upper DECS will be payable, purchase contracts will be
settled and transfers of the Upper DECS will be registrable at the office of the
purchase contract agent in the Borough of Manhattan, the City of New York. In
addition, if the Upper DECS do not remain in book-entry form, payment of
distributions on the Upper DECS may be made, at our option, by check mailed to
the address of the persons shown on the Upper DECS register.
If any quarterly payment date or the stock purchase date is not a business
day, then any payment required to be made on that date must be made on the next
business day (and so long as the payment is made on the next business day,
without any interest or other payment on account of any such delay), except that
if the next business day is in the next calendar year, the payment or settlement
will be made on the prior business day with the same force and effect as if made
on the payment date. A "business day" means any day other than Saturday, Sunday
or any other day on which banking institutions and trust companies in the State
of New York or at a place of payment are authorized or required by law,
regulation or executive order to be closed.
If your Upper DECS or Stripped DECS are held in certificated form and you
fail to surrender the certificate evidencing your Upper DECS or Stripped DECS to
the purchase contract agent on the stock purchase date, the shares of our common
stock issuable in settlement of the related purchase contracts will be
registered in the name of the purchase contract agent. These shares, together
with any distributions on them, will be held by the purchase contract agent as
agent for your benefit, until the certificate is presented and surrendered or
you provide satisfactory evidence that the certificate has been destroyed, lost
or stolen, together with any indemnity that may be required by the purchase
contract agent and us.
If your Upper DECS or Stripped DECS are held in certificated form and (1)
the purchase contracts have terminated prior to the stock purchase date, (2) the
related pledged securities have been transferred to the purchase contract agent
for distribution to the holders and (3) you fail to surrender the certificate
evidencing your Upper DECS or Stripped DECS to the purchase contract agent, the
pledged securities that would otherwise be delivered to you and any related
payments will be held by the purchase contract agent as agent for your benefit,
until you present and surrender the certificate or provide the evidence and
indemnity described above.
The purchase contract agent will not be required to invest or to pay
interest on any amounts held by it pending distribution.
No service charge will be made for any registration of transfer or exchange
of the Upper DECS, except for any applicable tax or other governmental charge.
S-51
MODIFICATION
The purchase contract agreement, the pledge agreement and the purchase
contracts may be amended with the consent of the holders of a majority of the
Upper DECS at the time outstanding. However, no modification may, without the
consent of the holder of each outstanding Upper DECS affected by the
modification:
- change any payment date;
- change the amount or type of pledged securities required to be pledged to
secure obligations under the Upper DECS, impair the right of the holder
of any pledged securities to receive distributions on the pledged
securities underlying the Upper DECS or otherwise adversely affect the
holder's rights in or to the pledged securities;
- change the place or currency of payment for any amounts payable in
respect of the Upper DECS, increase any amounts payable by holders in
respect of the Upper DECS or decrease any other amounts receivable by
holders in respect of the Upper DECS;
- reduce any contract adjustment payment or change the place or currency of
that payment;
- impair the right to institute suit for the enforcement of any purchase
contract;
- reduce the number of shares of common stock purchasable under any
purchase contract, increase the price to purchase shares of common stock
on settlement of any purchase contract, change the stock purchase date or
otherwise adversely affect the holder's rights under any purchase
contract; or
- reduce the above stated percentage of outstanding Upper DECS the consent
of whose holders is required for the modifications or amendment of the
provisions of the purchase contract agreement, the pledge agreement or
the purchase contracts.
CONSOLIDATION, MERGER, SALE OR CONVEYANCE
We will agree in the purchase contract agreement that we will not (1) merge
with or into or consolidate with any other entity or (2) sell, assign, transfer,
lease or convey all or substantially all of our properties and assets to any
person, firm or corporation other than, with respect to clause (2), our direct
or indirect wholly-owned subsidiaries, unless:
- we are the continuing corporation or the successor corporation is a
corporation organized under the laws of the United States of America or
any state or the District of Columbia;
- the successor entity expressly assumes our obligations under the purchase
contract agreement, the pledge agreement, the purchase contracts and the
remarketing agreement; and
- we or such corporation is not, immediately after such merger,
consolidation, sale, assignment, transfer, lease or conveyance, in
default in the performance of any of our or its obligations under the
purchase contract agreement, the pledge agreement, the purchase contracts
or the remarketing agreement.
TITLE
We, the purchase contract agent and the collateral agent may treat the
registered holder of any Upper DECS as the absolute owner of those Upper DECS
for the purpose of making payment and settling the related purchase contracts
and for all other purposes.
GOVERNING LAW
The purchase contract agreement, the pledge agreement, the remarketing
agreement and the purchase contracts will be governed by, and construed in
accordance with, the laws of the State of New York.
S-52
BOOK-ENTRY SYSTEM
DTC will act as securities depositary for the Upper DECS and Stripped DECS.
The Upper DECS and Stripped DECS will be issued only as fully-registered
securities registered in the name of Cede & Co., DTC's nominee. One or more
fully-registered global security certificates, representing the total aggregate
number of Upper DECS or Stripped DECS, will be issued and deposited with DTC and
will bear a legend regarding the restrictions on exchanges and registration of
transfer referred to below.
The laws of some jurisdictions require that some purchasers of securities
take physical delivery of securities in definitive form. Those laws may impair
the ability to transfer beneficial interests in the Upper DECS or Stripped DECS
so long as the Upper DECS or Stripped DECS are represented by global security
certificates.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934.
DTC holds securities that its participants deposit with DTC. DTC also
facilitates the settlement among participants of securities transactions,
including transfers and pledges, in deposited securities through electronic
computerized book-entry changes in participants' accounts, thus eliminating the
need for physical movement of securities certificates. Direct participants
include securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. DTC is owned by a number of its
direct participants and by the NYSE, the American Stock Exchange, Inc. and the
National Association of Securities Dealers, Inc., collectively referred to as
participants. Access to the DTC system is also available to others, including
securities brokers and dealers, banks and trust companies that clear
transactions through or maintain a direct or indirect custodial relationship
with a direct participant either directly or indirectly, collectively referred
to as indirect participants. The rules applicable to DTC and its participants
are on file with the SEC.
No Upper DECS or Stripped DECS represented by global security certificates
may be exchanged in whole or in part for certificated Upper DECS or Stripped
DECS registered, and no transfer of global security certificates will be made in
whole or in part for certificated Upper DECS or Stripped DECS registered, and no
transfer of global security certificates in whole or part may be registered, in
the name of any person other than DTC or any nominee of DTC, unless, however,
DTC has notified us that it is unwilling or unable to continue as depositary for
the global security certificates and no successor depository has been appointed
within 90 days after this notice, has ceased to be qualified to act as required
by the purchase contract agreement and no successor depository has been
appointed within 90 days after we learn that DTC is no longer qualified or we
determine that we will no longer have debt securities represented by global
securities or permit any of the global securities certificates to be
exchangeable or there is a continuing default by us in respect of our
obligations under one or more purchase contracts, the senior debt indenture, the
purchase contract agreement, the senior notes, the Upper DECS, the Stripped
DECS, the pledge agreement or any other principal agreements or instruments
executed in connection with this offering. All Upper DECS represented by one or
more global security certificates or any portion of them will be registered in
those names as DTC may direct.
As long as DTC or its nominee is the registered owner of the global
security certificates, DTC or that nominee will be considered the sole owner and
holder of the global security certificates and all Upper DECS represented by
those certificates for all purposes under the Upper DECS and Stripped DECS and
the purchase contract agreement. Except in the limited circumstances referred to
above, owners of beneficial interests in global security certificates will not
be entitled to have the global security certificates or the Upper DECS and
Stripped DECS represented by those certificates registered in their names, will
not receive or be entitled to receive physical delivery of Upper DECS and
Stripped DECS certificates in exchange and will not be considered to be owners
or holders of the global security certificates or any Upper DECS and Stripped
DECS represented by those certificates for any purpose under the Upper
S-53
DECS and Stripped DECS or the purchase contract agreement. All payments on the
Upper DECS and Stripped DECS represented by the global security certificates and
all related transfers and deliveries of senior notes, treasury securities and
common stock will be made to DTC or its nominee as their holder.
Ownership of beneficial interests in the global security certificates will
be limited to participants or persons that may hold beneficial interests through
institutions that have accounts with DTC or its nominee. Ownership of beneficial
interests in global security certificates will be shown only on, and the
transfer of those ownership interests will be effected only through, records
maintained by DTC or its nominee with respect to participants' interests or by
the participant with respect to interests of persons held by the participants on
their behalf.
Procedures for settlement of purchase contracts on the stock purchase date
or upon early settlement will be governed by arrangements among DTC,
participants and persons that may hold beneficial interests through participants
designed to permit the settlement without the physical movement of certificates.
Payments, transfers, deliveries, exchange and other matters relating to
beneficial interests in global security certificates may be subject to various
policies and procedures adopted by DTC from time to time.
Neither we nor any of our agents, nor the purchase contract agent or any of
its agents, will have any responsibility or liability for any aspect of DTC's or
any participant's records relating to, or for payments made on account of,
beneficial interests in global security certificates, or for maintaining,
supervising or reviewing any of DTC's records or any participant's records
relating to those beneficial ownership interests.
The information in this section concerning DTC and its book-entry system
has been obtained from sources that we believe to be reliable, but we do not
take responsibility for its accuracy.
REPLACEMENT OF CERTIFICATES
If physical certificates are issued, we will replace any mutilated
certificate at your expense upon surrender of that certificate to the purchase
contract agent. We will replace certificates that become destroyed, lost or
stolen at your expense upon delivery to us and the purchase contract agent of
satisfactory evidence that the certificate has been destroyed, lost or stolen,
together with any indemnity that may be required by the purchase contract agent
and us.
We, however, are not required to issue any certificates representing Upper
DECS or Stripped DECS on or after the stock purchase date or after the purchase
contracts have terminated. In place of the delivery of a replacement certificate
following the stock purchase date, the purchase contract agent, upon delivery of
the evidence and indemnity described above, will deliver the shares of our
common stock issuable pursuant to the purchase contracts included in the Upper
DECS or Stripped DECS evidenced by the certificate, or, if the purchase
contracts have terminated prior to the stock purchase date, transfer the pledged
securities related to the Upper DECS or Stripped DECS evidenced by the
certificate.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
will initially act as purchase contract agent. The purchase contract
agent will act as the agent and attorney-in-fact for the holders of Upper DECS
and Stripped DECS from time to time. The purchase contract agreement will not
obligate the purchase contract agent to exercise any discretionary authority in
connection with a default under the terms of the purchase contract agreement,
the pledge agreement and the purchase contracts, or the pledged securities.
The purchase contract agreement will contain provisions limiting the
liability of the purchase contract agent. The purchase contract agreement will
contain provisions under which the purchase contract agent may resign or be
replaced. Resignation or replacement of the purchase contract agent would be
effective upon the appointment of a successor.
The purchase contract agent is one of a number of banks with which we and
our subsidiaries maintain ordinary banking and trust relationships.
S-54
INFORMATION CONCERNING THE COLLATERAL AGENT
will initially act as collateral agent. The collateral agent
will act solely as our agent and will not assume any obligation or relationship
of agency or trust for or with any of the holders of the Upper DECS and Stripped
DECS except for the obligations owed by a pledgee of property to the owner
thereof under the pledge agreement and applicable law.
The pledge agreement will contain provisions limiting the liability of the
collateral agent. The pledge agreement will contain provisions under which the
collateral agent may resign or be replaced. Resignation or replacement of the
collateral agent would be effective upon the appointment of a successor.
The collateral agent is one of a number of banks with which we and our
subsidiaries maintain ordinary banking and trust relationships.
MISCELLANEOUS
The purchase contract agreement will provide that we will pay all fees and
expenses related to:
- the offering of the Upper DECS;
- the retention of the collateral agent and the purchase contract agent;
- the enforcement by the purchase contract agent of the rights of the
holders of the Upper DECS and Stripped DECS; and
- with certain exceptions, stock transfer and similar taxes attributable to
the initial issuance and delivery of our common stock upon settlement of
the purchase contracts.
Should you elect to create Stripped DECS or recreate Upper DECS, you will
be responsible for any fees or expenses payable in connection with the
substitution of the applicable pledged securities, as well as any commissions,
fees or other expenses incurred in acquiring the pledged securities to be
substituted and we will not be responsible for any of those fees or expenses.
DESCRIPTION OF THE SENIOR NOTES
The senior notes will be issued under the senior debt indenture between
Temple-Inland and JPMorgan Chase Bank (formerly known as The Chase Manhattan
Bank and Chemical Bank), as trustee, dated as of September 1, 1986, as amended
by the first supplemental indenture, dated as of April 15, 1988, the second
supplemental indenture, dated as of December 27, 1990, and the third
supplemental indenture, dated as of May 9, 1991. A copy of the senior debt
indenture is on file with the SEC and may be obtained by accessing the Internet
address provided or contacting us as described under "Where You Can Find More
Information." The following description is qualified in its entirety by
reference to the provisions of the senior debt indenture. You should read the
senior debt indenture carefully to fully understand the terms of the senior
notes.
Unless otherwise indicated, capitalized terms used in the following summary
that are defined in the senior debt indenture have the meanings used in the
senior debt indenture.
GENERAL
The senior notes will mature on , 2007. The senior notes
will initially pay interest at the annual rate of % on each ,
, and , commencing on , 2002, for
quarterly payments due on or before , 2005. After that date, if
the senior notes are successfully remarketed, they will pay interest at the
reset rate from the date of the settlement of the successful remarketing until
they mature on , 2007. If the remarketing agent cannot establish
a reset rate meeting the requirements described under "Description of the Upper
DECS -- Remarketing," the remarketing agent will not reset the interest rate on
the senior notes and the interest rate will continue to be the initial annual
rate of % until the remarketing agent can establish such a
S-55
reset rate on a later remarketing date prior to the stock purchase date. If no
remarketing occurs prior to that date the initial annual rate of % will be
the interest rate through maturity of the notes. The senior notes are not
redeemable prior to their stated maturity except as described below.
The amount of interest payable for any period will be computed (1) for any
full quarterly period on the basis of a 360-day year of twelve 30-day months and
(2) for any period shorter than a full quarterly period, on the basis of a
30-day month and, for periods of less than a month, on the basis of the actual
number of days elapsed per 30-day month. If any date on which interest is
payable on the senior notes is not a business day, the payment of the interest
payable on that date will be made on the next day that is a business day,
without any interest or other payment in respect of the delay, except that if
the next business day is in the next calendar year, then the payment will be
made on the immediately preceding business day, in each case with the same force
and effect as if made on the scheduled payment date.
The senior notes will be issued in denominations of $50 and integral
multiples of $50.
The senior notes will not have the benefit of a sinking fund.
Payment of the principal of and interest on the senior notes will rank
equally with all of our other unsecured and unsubordinated debt. As of the
completion of this offering, there will exist approximately $2,024 million of
other indebtedness that will rank equally with the senior notes.
The senior debt indenture will not limit the amount of additional
indebtedness that we or any of our subsidiaries may incur. Since our operations
are conducted through subsidiaries, the cash flow and the consequent ability to
service debt including our senior notes, are partially dependent upon the
earnings of our subsidiaries and the distribution of those earnings to, or upon
other payments of funds by those subsidiaries to, us. The subsidiaries are
separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due on the senior notes or to make funds available
for such payments, whether by dividends, loans or other payments. In addition,
the payment of dividends and the making of loans and advances to us by our
subsidiaries are subject to statutory or contractual restrictions, are
contingent upon the earnings of those subsidiaries, and are subject to various
business considerations.
Any right we have to receive assets of any of our subsidiaries upon their
liquidation or reorganization and the resulting right of the holders of the
senior notes to participate in those assets, will be effectively subordinated to
the claims of that subsidiary's creditors, including trade creditors, except to
the extent that we are recognized as a creditor of such subsidiary, in which
case our claims would be subordinated to any security interests in the assets of
such subsidiary and any indebtedness of such subsidiary senior to that held by
us.
REMARKETING
The senior notes will be remarketed as described under "Description of the
Upper DECS -- Remarketing."
OPTIONAL REMARKETING OF SENIOR NOTES WHICH ARE NOT INCLUDED IN UPPER DECS
On or prior to the fourth business day immediately preceding the first day
of a remarketing period, holders of senior notes that are not components of
Upper DECS may elect to have their senior notes remarketed in the same manner as
senior notes that are components of Upper DECS by delivering their senior notes
along with a notice of this election to the collateral agent. The collateral
agent will hold the senior notes in an account separate from the collateral
account in which the pledged securities will be held. Holders of senior notes
electing to have their notes remarketed will also have the right to withdraw the
election on or prior to the fourth business day immediately preceding the first
day of the relevant remarketing period.
S-56
TAX EVENT REDEMPTION
If a tax event occurs and is continuing, we may, at our option, redeem the
senior notes in whole, but not in part, at any time at a price, which we refer
to as the redemption price, equal to, for each senior note, the redemption
amount referred to below to the date of redemption. Installments of interest on
senior notes which are due and payable on or prior to a redemption date will be
payable to holders of the senior notes registered as such at the close of
business on the relevant record dates. If, following the settlement of the
purchase contracts and following the occurrence of a tax event, we exercise our
option to redeem the senior notes, the proceeds of the redemption will be
payable in cash to the holders of the senior notes. If the tax event redemption
occurs prior to a successful remarketing of the senior notes, the redemption
price for the senior notes forming part of Upper DECS at the time of the tax
event redemption will be distributed to the collateral agent, who in turn will
purchase the applicable treasury portfolio described below on behalf of the
holders of Upper DECS and remit the remainder of the redemption price, if any,
to the purchase contract agent for payment to the holders. The treasury
portfolio will be substituted for corresponding senior notes and will be pledged
to the collateral agent to secure the obligations of the holders of the Upper
DECS to purchase shares of our common stock under the purchase contracts.
"Tax event" means the receipt by us of an opinion of nationally recognised
tax counsel experienced in such matters (which may be Skadden, Arps, Slate,
Meagher & Flom LLP) to the effect that there is more than an insubstantial risk
that interest payable by us on the senior notes on the next interest payment
date would not be deductible, in whole or in part, by us for United States
federal income tax purposes as a result of any amendment to, change in, or
announced proposed change in, the laws, or any regulations thereunder, of the
United States or any political subdivision or taxing authority thereof or
therein affecting taxation, any amendment to or change in an official
interpretation or application of any such law or regulations by any legislative
body, court, governmental agency or regulatory authority or any official
interpretation or pronouncement that provides for a position with respect to any
such laws or regulations that differs from the generally accepted position on
the date of this prospectus supplement, which amendment change, or proposed
change is effective or which interpretation or pronouncement is announced on or
after the date of this prospectus supplement.
"Redemption amount" means in the case of a tax event redemption occurring
prior to a successful remarketing of the senior notes, for each senior note the
product of the principal amount of the note and a fraction whose numerator is
the treasury portfolio purchase price and whose denominator is the aggregate
principal amount of senior notes outstanding on the tax event redemption date,
and in the case of a tax event redemption date occurring after a successful
remarketing of the senior notes, the stated principal amount of the senior
notes.
"Treasury portfolio" shall mean a portfolio of zero-coupon U.S. treasury
securities consisting of principal or interest strips of U.S. treasury
securities that mature on or prior to the stock purchase date in an aggregate
amount equal to the aggregate principal amount of the senior notes outstanding
on the tax event redemption date, and with respect to each scheduled interest
payment date on the senior notes that occurs after the tax event redemption date
and no later than the stock purchase date, interest or principal strips of U.S.
treasury securities that mature on or prior to that interest payment date in an
aggregate amount equal to the aggregate interest payment that would be due on
the aggregate principal amount of the senior notes outstanding on the tax event
redemption date. These treasury securities are non-callable by us.
"Treasury portfolio purchase price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City to the quotation
agent on the third business day immediately preceding the tax event redemption
date for the purchase of the treasury portfolio for settlement on the tax event
redemption date.
"Quotation agent" means or its successor or any other
primary U.S. government securities dealer in New York City selected by us.
S-57
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each registered holder of senior notes to
be redeemed at its registered address. Unless we default in payment of the
redemption price, on and after the redemption date interest shall cease to
accrue on the senior notes. In the event any senior notes are called for
redemption, neither we nor the trustee will be required to register the transfer
of or exchange the notes to be redeemed.
BOOK-ENTRY AND SETTLEMENT
Senior notes that are released from the pledge following substitution or
early settlement will be issued in the form of one or more global certificates,
which we refer to as global securities, registered in the name of DTC or its
nominee. Except as provided below and except upon recreation of Upper DECS,
owners of beneficial interests in such a global security will not be entitled to
receive physical delivery of notes in certificated form and will not be
considered the holders (as defined in the senior debt indenture) thereof for any
purpose under the senior debt indenture, and no global security representing
notes shall be exchangeable, except for another global security of like
denomination and tenor to be registered in the name of DTC or its nominee or a
successor depositary or its nominee. Accordingly, each beneficial owner must
rely on the procedures of DTC or if such person is not a participant, on the
procedures of the participant through which such person owns its interest to
exercise any rights of a holder under the indenture.
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of the securities in certificated form. These
laws may impair the ability to transfer beneficial interests in such a global
security.
In the event that
- DTC notifies us that it is unwilling or unable to continue as a
depositary for the global security certificates and no successor
depositary has been appointed within 90 days after this notice, or
- DTC at any time ceases to be a clearing agency registered under the
Securities Exchange Act at which time DTC is required to be so registered
to act as depositary and no successor depositary has been appointed
within 90 days after we learn that DTC has ceased to be so registered, or
- we determine in our sole discretion that we will no longer have debt
securities represented by global securities or permit any of the global
security certificates to be exchangeable or an event of default under the
indenture has occurred and is continuing,
certificates for the notes will be printed and delivered in exchange for
beneficial interests in the global security certificates. Any global note that
is exchangeable pursuant to the preceding sentence shall be exchangeable for
note certificates registered in the names directed by DTC. We expect that these
instructions will be based upon directions received by DTC from its participants
with respect to ownership of beneficial interests in the global security
certificates.
GOVERNING LAW
The senior debt indenture is, and the senior notes will be, governed by,
and construed in accordance with, the internal laws of the State of New York.
S-58
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The pro forma financial statements give effect to our acquisition of
Gaylord using the purchase method of accounting and on a pro forma as adjusted
basis to give effect to this offering and the concurrent common stock offering.
The pro forma as adjusted basis reflects the application of the net proceeds of
these offerings as described under "Use of Proceeds." The pro forma balance
sheet was prepared as if the acquisition and offerings had occurred as of
December 2001. The pro forma income statement was prepared as if the acquisition
and offerings had occurred as of the beginning of the year 2001. The pro forma
financial statements are presented for informational purposes. They are not
necessarily indicative of actual or future financial position or results of
operations that would have or will occur.
The pro forma balance sheet was prepared based upon the historical balance
sheets of Temple-Inland and Gaylord as of December 2001. The pro forma income
statement was prepared based upon the historical income statements of
Temple-Inland for the year ended December 2001 and of Gaylord for the 12 months
ended December 2001. The Gaylord income statement was derived from Gaylord's
historical income statements for its year ended September 2001 and its three
months ended December 2001 and 2000. The accounting policies of Temple-Inland
and Gaylord are comparable.
The pro forma adjustments are estimates based on currently available
information and assumptions that Temple-Inland believes are reasonable. The pro
forma adjustments are directly attributable to the acquisition and are expected
to have a continuing impact on the financial position and results of operations
of Temple-Inland. The pro forma acquisition adjustments reflect a preliminary
allocation of the purchase price. The actual allocation will be based upon
independent appraisals and other valuations and will reflect finalized
management intentions. The actual allocation will probably differ from that
assumed.
The supplemental pro forma financial statements are identical to the pro
forma financial statements except that Temple-Inland's financial statements have
been reclassified to reflect the assets and operations of its financial services
group using the equity method of accounting.
These pro forma and supplemental pro forma financial statements should be
read in conjunction with the historical consolidated financial statements of
Temple-Inland and Gaylord, which are incorporated by reference in this
prospectus supplement. See "Where You Can Find More Information."
S-59
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 2001
ACQUISITION PRO FORMA OFFERINGS PRO FORMA
TEMPLE-INLAND GAYLORD ADJUSTMENTS(A)(F) ACQUISITION ADJUSTMENTS AS ADJUSTED
------------- ------- ----------------- ----------- ----------- -----------
(IN MILLIONS)
ASSETS:
Cash and cash equivalents............... $ 590 $ 6 $ (6) $ 590 $ -- $ 590
Mortgage loans held for sale............ 958 -- -- 958 -- 958
Loans and leases receivable, net........ 9,847 -- -- 9,847 -- 9,847
Other securities available-for-sale..... 2,599 -- -- 2,599 -- 2,599
Other securities held-to-maturity....... 775 -- -- 775 -- 775
Trade receivables....................... 288 118 (24) 378 -- 378
(4)(c)
Inventories............................. 258 100 (23) 335 -- 335
Property and equipment.................. 2,251 530 (93) 2,688 -- 2,688
Deferred income taxes................... -- 171 (171) -- -- --
Goodwill and other intangibles.......... 186 -- 260 446 -- 446
Financing fees.......................... -- -- 16(b) 16 (6)(a)(c) 10
Assets held for sale.................... -- -- 100 100 -- 100
Other assets............................ 935 63 (15) 983 -- 983
------- ------ ----- ------- ----- -------
TOTAL ASSETS........................ $18,687 $ 988 $ 40 $19,715 $ (6) $19,709
======= ====== ===== ======= ===== =======
LIABILITIES:
Deposits................................ $ 9,030 $ -- $ -- $ 9,030 $ -- $ 9,030
Federal Home Loan Bank advances......... 3,435 -- -- 3,435 -- 3,435
Securities sold under repurchase
agreements............................ 1,107 -- -- 1,107 -- 1,107
Other liabilities....................... 914 248 (168) 990 8 (b)(c 998
(4)(c)
Bridge financing facility............... -- -- 884(b) 884 (481)(a) 403
Long-term debt.......................... 1,553 862 (794) 1,621 -- 1,621
Upper DECS senior notes................. -- -- 300(a) 300
Deferred income taxes................... 304 -- -- 304 -- 304
Postretirement benefits................. 142 -- -- 142 -- 142
Stock issued by subsidiaries............ 306 -- -- 306 -- 306
------- ------ ----- ------- ----- -------
TOTAL LIABILITIES................... $16,791 $1,110 $ (82) $17,819 $(173) $17,646
------- ------ ----- ------- ----- -------
SHAREHOLDERS' EQUITY:
Preferred stock......................... -- -- -- --
Common stock............................ 61 -- -- 61 4(a) 65
Additional paid-in capital.............. 367 180 (180) 367 169 (a)(b 536
Upper DECS purchase contracts
Accumulated other comprehensive income
(loss)................................ (1) (2) 2 (1) -- (1)
Retained earnings....................... 2,014 (292) 292 2,014 (6)(c) 2,008
------- ------ ----- ------- ----- -------
2,441 (114) 114 2,441 167 2,608
Cost of shares held in the treasury..... (545) (8) 8 (545) -- (545)
------- ------ ----- ------- ----- -------
TOTAL SHAREHOLDERS' EQUITY.......... 1,896 (122) 122 1,896 167 2,063
------- ------ ----- ------- ----- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................ $18,687 $ 988 $ 40 $19,715 $ (6) $19,709
======= ====== ===== ======= ===== =======
See the notes to the unaudited pro forma combined financial statements.
S-60
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 2001
TEMPLE- DISCONTINUED ACQUISITION PRO FORMA OFFERINGS PRO FORMA
INLAND GAYLORD(E) OPERATIONS(F) ADJUSTMENTS ACQUISITION ADJUSTMENTS AS ADJUSTED
------- ---------- ------------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE DATA)
REVENUES
Manufacturing.................... $2,808 $1,052 $(343) $(37)(c) $3,480 $ -- $3,480
Financial services............... 1,364 -- -- 1,364 -- 1,364
------ ------ ----- ---- ------ ---- ------
4,172 1,052 (343) (37) 4,844 -- 4,844
COSTS AND EXPENSES
Manufacturing.................... 2,717 1,022 (363) (37)(c) 3,339 -- 3,339
Financial services............... 1,180 -- -- 1,180 -- 1,180
------ ------ ----- ---- ------ ---- ------
3,897 1,022 (363) (37) 4,519 -- 4,519
------ ------ ----- ---- ------ ---- ------
OPERATING INCOME................. 275 30 20 -- 325 -- 325
Parent company interest.......... (98) (90) -- 34(b) (154) 27(d) (127)
Upper DECS....................... -- -- -- -- -- (20)(e) (20)
------ ------ ----- ---- ------ ---- ------
INCOME (LOSS) BEFORE TAXES....... 177 (60) 20 34 171 7 178
Income taxes..................... (66) 23 (8) (13)(d) (64) (3)(f) (67)
------ ------ ----- ---- ------ ---- ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS..................... $ 111 $ (37) $ 12 $ 21 $ 107 $ 4 $ 111
====== ====== ===== ==== ====== ==== ======
EARNINGS PER SHARE
Basic.......................... $ 2.26 $ 2.17 $ 2.10
Diluted........................ $ 2.26 $ 2.17 $ 2.10
AVERAGE SHARES OUTSTANDING
Basic.......................... 49.3 49.3 3.6 52.9
Diluted........................ 49.3 49.3 3.6 52.9
See the notes to the unaudited pro forma combined financial statements.
S-61
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
ACQUISITION ADJUSTMENTS
On March 4, 2002, Temple-Inland completed tender offers in which it
acquired 86.3% of Gaylord's outstanding common stock for $56 million cash and
99.3% of Gaylord's 9 3/8% Senior Notes, 98.5% of Gaylord's 9 3/4% Senior Notes
and 83.6% of Gaylord's 9 7/8% Senior Subordinated Notes for $462 million cash.
On April 5, 2002, Temple-Inland effected its merger with Gaylord whereby
Temple-Inland acquired for $1.17 per share in cash the remaining 13.7% of
Gaylord's common stock that it did not already own.
The estimated cash purchase price to acquire Gaylord consists of (in
millions):
Tender Offer:
Common stock ($1.17 X 48.3 million shares)................ $ 56
Senior Notes and Subordinated Notes....................... 462
Accrued interest.......................................... 10
----
528
Merger:
Common stock ($1.17 X 7.6 million shares)................. 9
----
Cash paid to Gaylord security holders....................... 537
Estimated costs and expenses directly attributable to the
acquisition:
Termination and change in control agreements.............. $41
Advisory and professional fees............................ 20 61
--- ----
Estimated cash purchase price............................... $598
====
(a) The purchase price will be allocated to the assets acquired and the
liabilities assumed based on their fair values. The preliminary allocation
of the purchase prices follows (in millions):
ASSETS ACQUIRED:
Current assets.............................................. $ 193
Property and equipment...................................... 437
Assets held for sale........................................ 100
Other assets................................................ 26
Goodwill and other intangible assets........................ 260
------
Total.................................................. 1,016
LIABILITIES ASSUMED:
Current liabilities......................................... $ 67
Bank debt................................................... 270
Senior and Subordinated Notes and other secured debt........ 68
Other long-term liabilities................................. 13 (418)
---- ------
Net assets acquired......................................... $ 598
======
The acquisition is accounted for in accordance with the new accounting
rules for goodwill and other intangible assets. Under these new rules,
goodwill is no longer amortized but is periodically measured for
impairment. Therefore, these pro forma financial statements do not include
any amortization of the goodwill created by the Gaylord acquisition.
Goodwill arising from the acquisition will be allocated to Temple-Inland's
paper group. It is anticipated that all of the goodwill will be deductible
for income tax purposes. Changes, if any, to the fair value of property and
equipment will impact the amount of depreciation that would be reported.
(b) Proceeds from a $900 million Credit Agreement (the Bridge Financing
Facility) are being used to fund the estimated cash purchase price of $598
million and to pay off the assumed bank debt of $270 million. Temple-
Inland paid $16 million in fees to the lending institutions for this
facility, which were funded from the Bridge
S-62
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Financing Facility. The Bridge Financing Facility is due 364 days from the
date funded and bears interest at a variable rate. The all in financing
rate on the Bridge Financing Facility is assumed to approximate 5.6% and
will result in an annual interest expense of $50 million.
As a result of the lower interest rate on the Bridge Financing
Facility compared with the interest rate on Gaylord's debt, interest
expense in the pro forma income statement is $34 million lower than
Gaylord's reported interest expense for the 12 months ended December 2001.
A 1/8% change in the interest rate on the Bridge Financing Facility would
affect annual interest expense by $1 million.
(c) Elimination of significant intercompany balances and transactions.
(d) Tax effect of pro forma adjustments.
(e) Gaylord's historical financial information for the 12 months ended December
2001 was derived as follows:
(LOSS)
NET OPERATING BEFORE
REVENUES INCOME TAXES
-------- --------- ------
For the fiscal year ended September 2001.................. $1,104 $ 48 $(44)
Less three months ended December 2000..................... (295) (25) (2)
Add three months ended December 2001...................... 243 7 (14)
------ ---- ----
Total..................................................... $1,052 $ 30 $(60)
====== ==== ====
(f) Temple-Inland intends to divest several non-strategic Gaylord assets
including the retail bag business, which Temple-Inland anticipates selling
during April 2002, the multi-wall bag business, the kraft paper mill and
the chemical business. As a result, the operations of these businesses,
including an $11 million asset impairment related to the retail bag
business, are eliminated in the pro forma income statement, as they will be
treated for accounting purposes as a discontinued operation. The assets of
these businesses have been adjusted to their estimated realizable values
and are included in the pro forma balance sheet under the caption "Assets
held for sale." The difference between their book value and estimated
realizable value of approximately $42 million has been reflected as an
increase in goodwill. Other assets that may be divested are being
identified by Temple-Inland, and it is currently anticipated that such
sales will occur during 2002 and 2003.
These pro forma financial statements do not reflect the effects of any
capacity rationalization, cost savings or other synergies that may be
affected or realized through reductions in duplicative selling, general and
administrative expenses and improvements in the mill and packaging systems
and logistics.
OFFERINGS ADJUSTMENTS
(a) To reflect the offerings and the application of the net proceeds.
The estimated proceeds from this offering and the concurrent Upper
DECS offering consists of (in millions):
This offering:
Sale of common stock (estimated 3.6 million shares at an
assumed market price of $56.00 per share).............. $200
Underwriting discount and estimated expense............... (9)
----
Estimated net proceeds.................................... $191
Upper DECS offering:
Sale of Upper DECS........................................ $300
Underwriting discount and estimated expenses.............. (10)
----
Estimated net proceeds.................................... 290
----
Aggregate net proceeds from these offerings used to repay a
portion of the Bridge Financing Facility.................. $481
====
S-63
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
At the date of issuance, the Upper DECS senior notes have a fair value
equal to their face value and the Upper DECS purchase contracts have
nominal value.
Of the underwriting discounts and estimated expense, $2 million will
be capitalized and amortized over the term of the Upper DECS senior notes
and the remaining $17 million will be charged against additional paid-in
capital.
(b) To record the present value of the Upper DECS purchase contract adjustment
payments as a liability with a corresponding reduction in additional
paid-in capital.
(c) To write-off the portion of the Bridge Financing Facility fees applicable
to the amount of the Bridge Financing Facility that was repaid and
recognize the tax effect thereof.
(d) To reflect the reduction in interest expense due to the repayment of $481
million of the Bridge Financing Facility using an all in rate of
approximately 5.6%.
(e) To reflect the increase in interest expense due to the issue of the Upper
DECS senior notes and the interest portion of the Upper DECS purchase
contract adjustment payment. It is assumed that the senior notes will bear
interest at 6.375% and that the purchase contract adjustment payments will
be 1.375%. A 1/8% change in these rates would affect annual interest
expense by less than $1 million.
(f) Tax effect of the pro forma adjustments.
(g) The dilutive effect of the shares to be issued under the Upper DECS
purchase contracts is computed using the treasury stock method. Under this
method, diluted shares are increased by the number of shares required to be
issued to settle the purchase contracts and decreased by the number of
shares that could be purchased using the proceeds from the settlement of
the purchase contracts. Therefore there is no dilution of our earnings per
share except during the periods when the average price of the common stock
is above $ .
S-64
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 2001
TEMPLE- ACQUISITION PRO FORMA OFFERINGS PRO FORMA
INLAND GAYLORD ADJUSTMENTS(A)(F) ACQUISITION ADJUSTMENTS AS ADJUSTED
------- ------- ----------------- ----------- ----------- -----------
(IN MILLIONS)
ASSETS:
Current assets
Cash...................................... $ 3 $ 6 $ (6) $ 3 $ -- $ 3
Receivables, net.......................... 288 118 (24) 378 -- 378
(4)(c)
Inventories............................... 258 100 (23) 335 -- 335
Prepaid expenses.......................... 73 23 (1) 95 -- 95
------ ------ ----- ------ ----- ------
Total current assets.................... 622 247 (58) 811 -- 811
Investment in Financial Services.......... 1,142 -- -- 1,142 -- 1,142
Property and equipment...................... 2,085 530 (93) 2,522 -- 2,522
Deferred income taxes....................... -- 171 (171) --
Goodwill and other intangibles.............. 62 -- 260 322 -- 322
Financing fees.............................. -- -- 16(b) 16 (6)(a)(c) 10
Assets held for sale........................ -- -- 100 100 -- 100
Other assets................................ 210 40 (14) 236 -- 236
------ ------ ----- ------ ----- ------
TOTAL ASSETS.............................. $4,121 $ 988 $ 40 $5,149 $ (6) $5,143
====== ====== ===== ====== ===== ======
LIABILITIES:
Accounts payable.......................... $ 149 $ 41 $ (10) $ 176 $ -- $ 176
(4)(c)
Accrued expenses.......................... 197 52 (16) 233 (3)(c) 230
Current portion of long-term debt........... 1 105 (105) 1 -- 1
Bridge financing facility................. -- 884(b) 884 (481)(a) 403
------ ------ ----- ------ ----- ------
Total current liabilities............... 347 198 749 1,294 (484) 810
Long-term debt.............................. 1,339 862 (794) 1,407 -- 1,407
Upper DECS senior notes..................... -- -- -- -- 300 (a) 300
Deferred income taxes....................... 310 -- -- 310 -- 310
Postretirement benefits..................... 142 -- -- 142 -- 142
Other liabilities........................... 87 50 (37) 100 11 (b) 111
------ ------ ----- ------ ----- ------
TOTAL LIABILITIES......................... 2,225 1,110 (82) 3,253 (173) 3,080
------ ------ ----- ------ ----- ------
SHAREHOLDERS' EQUITY
Preferred stock............................. -- -- -- -- -- --
Common stock................................ 61 -- -- 61 4 (a) 65
Additional paid-in capital.................. 367 180 (180) 367 169 (a)(b) 536
Upper DECS purchase contracts............... -- -- -- -- -- --
Accumulated other comprehensive income
(loss).................................... (1) (2) 2 (1) -- (1)
Retained earnings........................... 2,014 (292) 292 2,014 (6)(c) 2,008
------ ------ ----- ------ ----- ------
2,441 (114) 114 2,441 167 2,608
Cost of treasury stock...................... (545) (8) 8 (545) -- (545)
------ ------ ----- ------ ----- ------
TOTAL SHAREHOLDERS' EQUITY................ 1,896 (122) 122 1,896 167 2,063
------ ------ ----- ------ ----- ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................. $4,121 $ 988 $ 40 $5,149 $ (6) $5,143
====== ====== ===== ====== ===== ======
See the notes to the unaudited pro forma combined financial statements.
S-65
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 2001
TEMPLE- DISCONTINUED ACQUISITION PRO FORMA OFFERINGS PRO FORMA
INLAND GAYLORD(E) OPERATIONS(F) ADJUSTMENTS ACQUISITION ADJUSTMENTS AS ADJUSTED
------- ---------- ------------- ----------- ----------- ----------- -----------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
NET REVENUES....................... $2,808 $1,052 $(343) $(37)(c) $3,480 $ -- $3,480
COSTS AND EXPENSES:
Cost of sales.................... 2,457 916 (330) (37)(c) 3,006 -- 3,006
Selling and administrative....... 261 100 (21) -- 340 -- 340
Other (income) expense........... (1) 6 (12) -- (7) -- (7)
------ ------ ----- ---- ------ ---- ------
2,717 1,022 (363) (37) 3,339 -- 3,339
------ ------ ----- ---- ------ ---- ------
91 30 20 -- 141 -- 141
FINANCIAL SERVICES EARNINGS........ 184 -- -- -- 184 -- 184
------ ------ ----- ---- ------ ---- ------
OPERATING INCOME................... 275 30 20 -- 325 -- 325
Interest......................... (98) (90) -- 34 (b) (154) 27 (d) (127)
Upper DECS....................... -- -- -- -- -- (20)(e) (20)
------ ------ ----- ---- ------ ---- ------
INCOME (LOSS) BEFORE TAXES......... 177 (60) 20 34 171 7 178
Income taxes..................... (66) 23 (8) (13)(d) (64) (3)(f) (67)
------ ------ ----- ---- ------ ---- ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS....................... $ 111 $ (37) $ 12 $ 21 $ 107 $ 4 $ 111
====== ====== ===== ==== ====== ==== ======
EARNINGS PER SHARE:
Basic............................ $ 2.26 $ 2.17 $ 2.10
Diluted.......................... $ 2.26 $ 2.17 $ 2.10
AVERAGE SHARES OUTSTANDING:
Basic............................ 49.3 49.3 3.6 52.9
Diluted.......................... 49.3 49.3 3.6 52.9
See the notes to the unaudited pro forma combined financial statements.
S-66
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for each of the
fiscal years in the five-year period ended December 2001. We derived this
selected financial data from our audited financial statements. You should read
this selected financial data in conjunction with the section titled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included in this prospectus supplement, and the consolidated
financial statements and related notes of Temple-Inland contained in our Annual
Report on Form 10-K for the fiscal year ended December 29, 2001 and incorporated
into this prospectus supplement by reference. See "Where You Can Find More
Information."
FOR THE YEAR
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues:
Paper.................................. $ 2,082 $ 2,092 $ 1,869 $ 1,707 $ 1,768
Building products...................... 726 836 837 660 662
Financial services..................... 1,364 1,369 1,116 1,036 923
------- ------- ------- ------- -------
Total revenues........................... $ 4,172 $ 4,297 $ 3,822 $ 3,403 $ 3,353
======= ======= ======= ======= =======
Segment operating income:
Paper.................................. $ 107 $ 207 $ 104 $ 39 $ (53)
Building products...................... 13 77 189 118 136
Financial services..................... 184 189 138 154 132
------- ------- ------- ------- -------
Segment operating income(a).............. 304 473 431 311 215
Corporate expenses....................... (30) (33) (30) (28) (25)
Other income (expense)(b)................ 1 (15) -- (47) --
Parent company interest.................. (98) (105) (95) (78) (82)
------- ------- ------- ------- -------
Income before taxes...................... 177 320 306 158 108
Income taxes............................. (66) (125) (115) (70) (49)
------- ------- ------- ------- -------
Income from continuing operations........ 111 195 191 88 59
Discontinued operations(c)............... -- -- (92) (21) (8)
Effect of accounting change.............. (2) -- -- (3) --
------- ------- ------- ------- -------
Net income............................... $ 109 $ 195 $ 99 $ 64 $ 51
======= ======= ======= ======= =======
Diluted earnings per share:
Income from continuing operations...... $ 2.26 $ 3.83 $ 3.43 $ 1.59 $ 1.04
Discontinued operations................ -- -- (1.65) (0.38) (0.14)
Effect of accounting change............ (.04) -- -- (0.06) --
------- ------- ------- ------- -------
Net Income............................. $ 2.22 $ 3.83 $ 1.78 $ 1.15 $ 0.90
======= ======= ======= ======= =======
Dividends per common share............... $ 1.28 $ 1.28 $ 1.28 $ 1.28 $ 1.28
Average diluted shares outstanding....... 49.3 50.9 55.8 55.9 56.2
Common shares outstanding at year-end.... 49.3 49.2 54.2 55.6 56.3
Depreciation and depletion:
Manufacturing(a)....................... $ 182 $ 198 $ 200 $ 192 $ 187
Financial services..................... 23 18 17 14 13
Capital expenditures:
Manufacturing.......................... $ 182 $ 223 $ 178 $ 157 $ 213
Financial services..................... 26 34 26 39 18
S-67
FOR THE YEAR
---------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE DATA)
At Year-end:
Total assets:
Parent company......................... $ 4,121 $ 4,011 $ 4,005 $ 4,308 $ 4,170
Financial Services..................... 15,738 15,324 13,321 12,376 10,772
Long-term debt:
Parent company......................... $ 1,339 $ 1,381 $ 1,253 $ 1,501 $ 1,356
Financial Services..................... 214 210 212 210 167
Stock issued by subsidiaries............. $ 306 $ 306 $ 226 $ 225 $ 150
Shareholders' equity..................... $ 1,896 $ 1,833 $ 1,927 $ 1,998 $ 2,045
Ratio of total debt to total
capitalization -- parent company....... 41% 43% 39% 43% 40%
---------------
(a) Segment operating income for 2001 includes a $27 million reduction in
depreciation expense resulting from a change in the estimated useful lives
of certain production equipment. Of this amount $20 million, applies to the
paper group and $7 million applies to the building products group.
(b) Other income (expense) includes (i) in 2001, a $20 million gain from the
sale of non-strategic timberlands and $15 million in losses from the
disposition of under performing assets; (ii) in 2000, a $15 million loss
from the decision to exit the fiber cement business; and (iii) in 1998, a
$24 million loss from the disposition of the Argentine operations and $23
million in losses and charges related to other under performing assets.
(c) Represents the bleached paperboard operations sold in 1999 and includes a
loss on disposal of $71 million.
S-68
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. The actual results achieved by Temple-Inland may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include general economic, market, or
business conditions; the opportunities (or lack thereof) that may be presented
to and pursued by Temple-Inland and its subsidiaries; the availability and price
of raw materials used by Temple-Inland and its subsidiaries; competitive actions
by other companies; changes in laws or regulations; and other factors, many of
which are beyond the control of Temple-Inland and its subsidiaries.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 2001, 2000 AND 1999
SUMMARY
All of the results and other information contained in this "Management's
Discussion and Analysis of Financial Conditions and Results of Operations"
excludes any results or other data related to our acquisition of Gaylord
Container Corporation, which was completed on April 5, 2002. Temple-Inland had
consolidated revenues of $4.2 billion in 2001, $4.3 billion in 2000 and $3.8
billion in 1999. Income from continuing operations was $111 million in 2001,
$195 million in 2000, and $191 million in 1999. Income from continuing
operations per diluted share was $2.26 in 2001, $3.83 in 2000, and $3.43 in
1999.
BUSINESS SEGMENTS
Temple-Inland manages its operations through three business segments:
Paper, Building Products and Financial Services. Each of these business segments
is affected by the factors of supply and demand and changes in domestic and
global economic conditions. These conditions include changes in interest rates,
new housing starts, home repair and remodeling activities, and the strength of
the U.S. dollar, some or all of which may have varying degrees of impact on the
business segments. As used herein the term "parent company" refers to
Temple-Inland and its manufacturing business segments, Paper and Building
Products with the financial services group reported on the equity method.
CRITICAL ACCOUNTING POLICIES
In preparing the financial statements, Temple-Inland follows generally
accepted accounting policies, which in many cases require Temple-Inland to make
assumptions, estimates and judgments that affect the amounts reported. Many of
these policies are relatively straightforward. There are, however, a few
policies that are critical because they are important in determining the
financial condition and results and they are difficult to apply. Within the
parent company, they include asset impairments and pension accounting and within
the financial services group, they include the allowance for loan losses and
mortgage servicing rights. The difficulty in applying these policies arises from
the assumptions, estimates and judgments that have to be made currently about
matters that are inherently uncertain, such as future economic conditions,
operating results and valuations as well as management intentions. As the
difficulty increases, the level of precision decreases, meaning that actual
results can and probably will be different from those currently estimated.
Temple-Inland bases its assumptions, estimates and judgments on a combination of
historical experiences and other reasonable factors.
Measuring assets for impairments requires estimating intentions as to
holding periods, future operating cash flows and residual values of the assets
under review. Changes in management intentions, market conditions or operating
performance could indicate that impairment charges might be necessary. The
expected long-term rate of return on pension plan assets is an important
assumption in determining pension expense. In selecting that rate, consideration
is given to both historical returns and future returns over the next quarter
century. Differences between actual and expected returns will adjust future
pension expense. Allowances for loan losses are based on loan classifications,
historical experiences and evaluations of future cash flows and collateral
values and are subject to regulatory scrutiny. Changes in general
S-69
economic conditions or loan specific circumstances will inevitably change those
evaluations. Measuring for impairment and amortizing mortgage servicing rights
is largely dependent upon the speed at which loans are repaid and market rates
of return. Changes in interest rates will affect both of these variables and
could indicate that impairments or adjustments of the rate of amortization might
be necessary.
THE PAPER GROUP
The paper group manufactures linerboard and corrugating medium that it
converts into a complete line of corrugated and specialty packaging. The paper
group operations consist of 4 linerboard mills, 1 corrugating medium mill, 53
converting plants, 8 specialty-converting plants and an interest in a gypsum
facing paper joint venture. The paper group's facilities are located throughout
the United States and in Mexico and Puerto Rico.
During 2001, the paper group completed the acquisition of the corrugated
packaging operations of Chesapeake Corporation, Elgin Corrugated Box Company and
ComPro Packaging LLC. These operations consist of 13 corrugated converting
plants in eight states. These acquired operations did not contribute
significantly to the paper group's 2001 operating income. During January 2002,
the parent company initiated a tender offer to acquire Gaylord Container
Corporation. The transaction was contingent on several matters including the
tender of at least two-thirds of the outstanding shares and at least 90% in
aggregate principal amount of the senior notes and 82.6% of the senior
subordinated notes. The tender expired on February 28, 2002, and was funded from
our 364-day credit facility.
The paper group's revenues come principally from the sales of corrugated
packaging products and to a lesser degree from the sales of linerboard in the
domestic and export markets. The paper group's revenues were $2.1 billion in
2001, $2.1 billion in 2000 and $1.9 billion in 1999. While revenues were flat in
2001 and up 12% in 2000, the mix of revenues is changing. Corrugated packaging
revenues represent 93% of total revenues in 2001 and 91% in 2000 and 1999. In
2001, the corrugated packaging revenues derived from the acquired corrugated
packaging operations, approximately $100 million, were offset by declines in
domestic shipments due to the weakening economy. Average box prices were up 2%,
and box shipments were unchanged. Excluding the acquired corrugated packaging
operations, average box prices would have been up 1%, and shipments would have
been down 3%. Revenues and volumes were also affected by the poor performance of
the specialty packaging operations. Until the economy improves, box shipments
will likely remain weak, and box prices will likely trend downward. The changes
in revenues in 2000 and 1999 were due to increases in average box prices, up 17%
in 2000 and 3% in 1999 with essentially no change in volumes.
The decrease in linerboard revenues in 2001 was due to lower prices, down
7%, and lower shipments, down 14%. The weakening economy softened the market for
domestic linerboard while increased offshore capacity and a strong U.S. dollar
continued to affect export markets. Until the economy improves, the downward
trend in the domestic linerboard market will probably continue. It is likely
that the downward trend in export demand will continue during 2002 due to
significant new offshore capacity. The changes in revenues in 2000 and 1999 were
due to increases in average prices, up 20% in 2000 and 6% in 1999, with volumes
down 10% in 2000 and up 61% in 1999.
Costs, which include production, distribution and administrative costs,
were $2.0 billion in 2001, $1.9 billion in 2000 and $1.8 billion in 1999. The
change in costs in 2001 was due to the acquired corrugated packaging operations
and higher costs for energy, principally natural gas, up $30 million, labor and
benefit costs, up $19 million, and new technology systems, up $14 million. Costs
were also affected by the poor performance of the specialty packaging
operations. Partially offsetting these increases were lower OCC costs, down $35
million, and lower depreciation expense, down $20 million. The changes in costs
in 2000 were due to higher energy costs, up $10 million, and higher OCC costs
coupled with increased outside purchases of corrugating medium. Energy costs
began to rise during the second quarter 2000 and continued to rise through the
second quarter 2001. Energy costs peaked during the second quarter 2001 and
began to decline the remainder of 2001 reaching more normalized levels by
year-end 2001. OCC represented 38%, 41% and 46% of the fiber requirements during
the last three years. OCC prices began to
S-70
decline near the end of the second quarter 2000 and continued to decline through
the second quarter 2001. OCC prices have remained relatively constant since
then. OCC costs averaged $69 per ton in 2001, $107 per ton in 2000 and $89 per
ton in 1999. Year-end OCC prices were $53 per ton in 2001, $67 per ton in 2000
and $99 per ton in 1999. The reduction in depreciation expense was due to the
lengthening of estimated useful lives of certain production equipment beginning
January 2001.
Mill production was 2.1 million tons in 2001, 2.3 million tons in 2000 and
2.7 million tons in 1999. Of the mill linerboard production, 83% in 2001 and 80%
in 2000 and 1999 was used by the corrugated packaging operations; the remainder
was sold in the domestic and export markets. Production was affected by
curtailments due to market, maintenance and operational factors in 2001 and 2000
and by the conversion of the Newport medium mill (285,000-ton annual capacity)
in 2000. Production curtailments totaled 327,000 tons in 2001 and 315,000 tons
in 2000. Production curtailments were minimal in 1999. The No. 2 paper machine
(220,000-ton annual capacity) at the Orange, Texas linerboard mill was shut down
for an indefinite period in December 2001 due to weak market conditions. Absent
an improvement in market conditions, it is likely that the paper group will
continue to curtail production in 2002.
The joint venture conversion of the Newport mill to enable it to produce
lightweight gypsum facing paper was completed during third quarter 2000.
Start-up and production issues coupled with weak market conditions have hampered
this venture. Consequently, the mill continues to produce some corrugating
medium, a large portion of which was purchased by the paper group, 159,400 tons
in 2001 and 72,000 tons in 2000. The joint venture expects to have the
production issues resolved during the first quarter 2002; however, it is
uncertain when market conditions for gypsum-facing paper will improve.
The paper group is continuing its efforts to enhance return on investment,
including reviewing operations that are unable to meet return objectives and
determining appropriate courses of actions. During 2001, the paper group sold
its corrugated packaging operation in Chile at a loss of $5 million. The paper
group also restructured and downsized its specialty packaging operations at a
loss of $4 million and recognized an impairment charge of $4 million related to
its interest in a glass bottling venture operation in Puerto Rico. These losses
are included in other expenses. Other initiatives included the December 1999
sale of the bleached paperboard operation, which resulted in a loss on disposal
of $71 million.
The paper group's operating income was $107 million in 2001, $207 million
in 2000 and $104 million in 1999.
THE BUILDING PRODUCTS GROUP
The building products group manufactures a variety of building products
including lumber, particleboard, medium density fiberboard (MDF) and gypsum
wallboard. The building products group operations consist of 19 facilities
including a particleboard plant and an MDF plant operated under long-term
operating lease agreements and interests in a gypsum joint venture and an MDF
joint venture. The building products group operates in the United States and
Canada and manages the company's 2.1 million acres of owned and leased
timberlands located in Texas, Louisiana, Georgia and Alabama.
The building products group's revenues were $726 million in 2001, $836
million in 2000 and $837 million in 1999. Average prices for lumber,
particleboard, and gypsum fell during 2001. During 2001, prices for lumber were
down 5%, particleboard down 14% and gypsum down 39% while prices for MDF were up
4% due to improved product mix. For 2001, shipments of lumber were up 15%,
particleboard down 14%, gypsum down 13% and MDF up 5%. Lumber shipments were up
primarily due to the new Pineland sawmill, which began operations in second
quarter 2001. Particleboard shipments were down due to the explosion at the
Mount Jewett facility, which closed the facility for about five months during
2001 and weaker market conditions. Other revenue includes sales of small tracts
of high-value use timberlands ($18 million in 2001, $11 million in 2000 and $14
million in 1999) and deliveries under a long-term fiber supply agreement entered
into in connection with the 1999 sale of the bleached paperboard operations. The
lumber, particleboard and gypsum markets continue to be affected by over
capacity and weak demand. It is likely that these conditions will continue for
much of 2002. The MDF markets could also be affected by new industry capacity
coming on line in 2002.
S-71
Costs, which include production, distribution and administrative costs,
were $713 million in 2001, $759 million in 2000 and $648 million in 1999. The
change in costs in 2001 was due to lower production volumes, lower depreciation
expense and the disposition of the fiber cement venture during the third quarter
2000 offset by higher energy costs, principally natural gas. Fiber costs were
relatively unchanged. Depreciation expense was reduced by $7 million due to the
lengthening of estimated useful lives of certain production equipment beginning
January 2001. Energy costs were up $8 million. Energy costs peaked during the
second quarter 2001 and began to decline during the remainder of 2001 reaching
more normalized levels by year-end 2001. The change in costs in 2000 was due to
additional manufacturing facilities, an increase in energy costs, up $7 million,
and $13 million of operating losses from the fiber cement venture.
Production was curtailed due to market conditions to varying degrees in
most product lines beginning the third quarter 2000 and continuing through
year-end 2001. For 2001, production averaged from a low of 66% to a high of 77%
of capacity in the various product lines. Production curtailments were minimal
in 1999. The building products group's joint venture operations also experienced
production curtailments during 2001 due to market conditions. During the first
quarter 2001, the MDF joint venture in El Dorado, Arkansas was shut down due to
market conditions, higher energy prices and reconstruction of the heat energy
system of the plant. Production at this facility resumed in the second quarter
2001. Absent an improvement in market conditions, it is likely that the building
products group and its joint venture operations will continue to curtail
production to varying degrees in the various product lines in 2002.
The building products group is continuing its efforts to enhance return on
investment, including reviewing operations that are unable to meet return
objectives and determining appropriate courses of action. During 2001, the
building products group performed a review of its 600,000 acres of timberlands
in Georgia and Alabama and identified approximately 110,000 acres of
non-strategic fee and leased timberlands. During September 2001, approximately
78,000 acres of these non-strategic timberlands were sold for $54 million
resulting in a gain of $20 million, which is included in other income. The
remaining non-strategic timberlands will be sold over time. This review also
identified approximately 160,000 acres of timberlands in Georgia that will be
converted over time to higher value use. In addition, the building products
group is addressing production cost issues at its MDF facilities.
The building products group's operating income was $13 million in 2001, $77
million in 2000 and $189 million in 1999.
THE FINANCIAL SERVICES GROUP
The financial services group operates a savings bank and engages in
mortgage banking, real estate and insurance brokerage activities. The savings
bank, Guaranty Bank (Guaranty), primarily conducts business through banking
centers in Texas and California. The mortgage banking operation originates
single family mortgages and services them for Guaranty and unrelated third
parties. Real estate operations include the development of residential
subdivisions and multi-family housing and the management and sale of income
producing properties, which are principally located in Texas, Colorado, Florida,
Tennessee and California. The insurance brokerage operation sells a range of
insurance products.
During 2001, the financial services group acquired an asset-based loan
portfolio and two mortgage production operations. During 2000, the financial
services group acquired American Finance Group, Inc. (AFG), a commercial finance
company engaged in leasing and secured lending. During 1999, the financial
services group acquired Hemet Federal Savings and Loan Association (Hemet) and
the assets of Fidelity Funding Inc. (Fidelity), an asset-based lender.
S-72
OPERATIONS
The financial services group revenues, consisting of interest and
noninterest income, were $1.4 billion in 2001, $1.4 billion in 2000 and $1.1
billion in 1999. Selected financial information for the financial services group
follows:
FOR THE YEAR
-----------------------
2001 2000 1999
----- ----- -----
(IN MILLIONS)
Net interest income........................................ $ 426 $ 389 $ 299
Provision for loan losses.................................. (46) (39) (38)
Noninterest income......................................... 363 280 280
Noninterest expense........................................ (540) (423) (388)
Minority interest.......................................... (19) (18) (15)
----- ----- -----
Operating income........................................... $ 184 $ 189 $ 138
===== ===== =====
Net interest income was $426 million in 2001, $389 million in 2000 and $299
million in 1999. The increases in net interest income are primarily due to
growth and changes in the mix of average earning assets and interest-bearing
liabilities. The changes in the net yield are primarily due to changes in the
mix of the assets and liabilities and the timing of their repricing to market
rates. The following table presents average balances, interest income and
expense, and rates by major balance sheet categories:
FOR THE YEAR
---------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- --------------------------- ---------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ------ ------- -------- ------ ------- -------- ------
(IN MILLIONS)
ASSETS:
Cash equivalents and Securities.... $ 3,164 $ 195 6.16% $ 3,137 $ 205 6.53% $ 2,450 $131 5.35%
Loans and mortgage loans held for
sale(1).......................... 11,166 806 7.22% 10,377 884 8.52% 9,482 705 7.43%
------- ------ ------- ------ ------- ----
Total interest-earning
assets....................... $14,330 $1,001 6.99% $13,514 $1,089 8.06% $11,932 $836 7.01%
Other assets....................... 1,048 1,077 1,066
------- ------- -------
Total Assets................... $15,378 $14,591 $12,998
======= ======= =======
LIABILITIES AND EQUITY:
Deposits:
Interest-bearing demand.......... $ 2,838 $ 77 2.72% $ 2,294 $ 93 4.04% $ 1,851 $ 56 3.04%
Savings deposits................. 172 3 1.89% 189 4 1.94% 215 5 2.17%
Time deposits.................... 5,990 319 5.32% 6,993 396 5.67% 6,052 318 5.25%
------- ------ ------- ------ ------- ----
Total interest-bearing
deposits..................... 9,000 399 4.44% 9,476 493 5.20% 8,118 379 4.66%
Advances from FHLBs................ 3,412 139 4.08% 2,511 159 6.35% 2,683 139 5.19%
Securities sold under repurchase
agreements....................... 594 23 3.84% 484 32 6.51% 112 5 4.98%
Other borrowings................... 235 14 5.91% 217 16 7.34% 217 14 6.35%
------- ------ ------- ------ ------- ----
Total interest-bearing
liabilities.................. $13,241 $ 575 4.34% $12,688 $ 700 5.52% $11,130 $537 4.83%
Other liabilities.................. 687 597 731
Stock issued by subsidiaries....... 308 230 227
Shareholder's equity............... 1,142 1,076 910
------- ------- -------
Total liabilities and equity....... $15,378 $14,591 $12,998
======= ======= =======
Net interest income................ $ 426 $ 389 $299
====== ====== ====
Net yield on interest-earning
assets........................... 2.97% 2.88% 2.51%
---------------
(1) Nonaccruing loans are included in loans and mortgage loans held for sale.
A portion of the increase in average interest-earning assets in 2001 was
the result of the first quarter 2001 acquisition of an asset-based lending
portfolio and the first quarter 2000 acquisition of AFG. The
S-73
remainder of the increase in 2001 was due to internally generated growth,
primarily in construction and development loans, mortgage warehouse loans,
commercial and business loans and mortgage loans held for sale. A portion of the
increase in average interest-earning assets in 2000 was the result of the first
quarter 2000 acquisition of AFG and the mid-1999 acquisitions of Hemet and
Fidelity. The remainder of the increase in 2000 was due to internally generated
growth, primarily in construction and development loans and commercial and
business loans and purchases of mortgage-backed securities. As a percentage of
average earning assets, loans, which include loans and mortgage loans held for
sale, were 78% in 2001, 77% in 2000 and 79% in 1999.
The decline in average interest-bearing deposits in 2001 was the result of
very competitive markets. Despite paying rates for new deposits at a
historically high spread, non-renewed maturing deposits exceeded new deposits
during 2001. A portion of the increase in average interest-bearing deposits in
2000 was the result of the mid-1999 acquisition of Hemet. The remainder of the
increase was the result of internally generated growth through new product
offerings and marketing campaigns. See Note G to the financial services group
Summarized Financial Statements for further information regarding deposits. The
increase in average borrowings in 2001 resulted from the competitive deposit
market and the growth in average earning assets. The increase in average
borrowings in 2000 resulted from the growth in average earning assets outpacing
the growth in average interest-bearing deposits.
The following table presents the changes in net interest income
attributable to changes in volume and rates of interest-earning assets and
interest-bearing liabilities.
2001 COMPARED WITH 2000 2000 COMPARED WITH 1999
INCREASE (DECREASE) DUE TO(1) INCREASE (DECREASE) DUE TO(1)
----------------------------- -------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------ ------ -------- ------ -------
(IN MILLIONS)
Interest income:
Cash equivalent and securities....... $ 2 $ (12) $ (10) $ 41 $ 33 $ 74
Loans and mortgage loans held for
sale.............................. 64 (142) (78) 70 109 179
---- ----- ----- ---- ---- ----
Total interest income............. $ 66 $(154) $ (88) $111 $142 $253
Interest expense:
Deposits:
Demand and savings deposits....... $ 18 $ (35) $ (17) $ 15 $ 21 $ 36
Time deposits..................... (54) (23) (77) 52 26 78
---- ----- ----- ---- ---- ----
Total interest on deposits........ (36) (58) (94) 67 47 114
Advances from FHLBs.................... 47 (67) (20) (9) 29 20
Securities sold under repurchase
agreements........................... 6 (15) (9) 24 3 27
Other borrowings....................... -- (2) (2) -- 2 2
---- ----- ----- ---- ---- ----
Total interest expense............ $ 17 $(142) $(125) $ 82 $ 81 $163
---- ----- ----- ---- ---- ----
Net interest income.................... $ 49 $ (12) $ 37 $ 29 $ 61 $ 90
==== ===== ===== ==== ==== ====
---------------
(1) The change in interest income and expense due to both volume and rate has
been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
The provision for loan losses was $46 million in 2001, $39 million in 2000
and $38 million in 1999. The increase in 2001 was primarily the result of a
decline in asset quality related to loans in the construction and development
(senior housing) and commercial and business (asset-based) portfolios. Loan
growth and a change in the mix of the loan portfolio affected both 2000 and
1999.
Noninterest income includes service charges, fees and the revenues from
mortgage banking, real estate and insurance activities. Noninterest income was
$363 million in 2001 and $280 million in 2000 and in 1999. The growth in
noninterest income in 2001 was due to increased mortgage banking and insurance
S-74
revenues and fee-based products. Mortgage banking revenues were up almost 200%
due to acquisitions and the high level of refinance activity resulting from low
interest rates. This was partially offset by a reduction in servicing revenues
due to the sale of $8.6 billion in loans during the second quarter 2001 and an
increase in amortization expense and impairment reserves due to the high level
of prepayments. In 2000, the growth in fee-based products was offset by declines
in mortgage banking revenues due to the impact of the higher interest rate
environment on mortgage financing and refinancing activities.
Noninterest expense includes compensation and benefits, real estate
operations, occupancy and data processing expenses. Noninterest expense was $540
million in 2001, $423 million in 2000 and $388 million in 1999. The growth in
noninterest expense in 2001 was primarily due to the acquired mortgage banking
production operations and asset-based portfolios and expenses associated with
new product offerings. The growth in noninterest expense in 2000 was primarily
due to the acquired savings bank operation.
EARNING ASSETS
Securities, which include mortgage-backed and other securities, were $3.4
billion at year-end 2001, $3.3 billion at year-end 2000 and $2.5 billion at
year-end 1999. Purchases and securitizations totaling $948 million offset
payments received on securities in 2001. The increase in 2000 was the result of
purchases of $1.0 billion partially offset by maturities and prepayments. See
Note D to the financial services group Summarized Financial Statements for
further information regarding securities. Mortgage loans held for sale were $958
million at year-end 2001, $232 million at year-end 2000 and $252 million at
year-end 1999. The increase at year-end 2001 resulted from the growth in the
mortgage production operations due to acquisitions and high refinancing
activities due to the lower interest rate environment.
Loans were $10.0 billion at year-end 2001, $10.5 billion at year-end 2000
and $9.4 billion at year-end 1999. The following table summarizes the
composition of the loan portfolio.
AT YEAR-END
-----------------------------------------------
2001 2000 1999 1998 1997
------ ------- ------ ------ ------
(IN MILLIONS)
Real estate mortgage......................... $2,872 $ 3,600 $3,763 $4,133 $4,036
Construction and development(1).............. 4,234 4,007 3,253 2,210 1,379
Commercial and business...................... 2,116 1,681 1,265 1,031 582
Consumer and other, net...................... 764 1,224 1,128 844 585
------ ------- ------ ------ ------
9,986 10,512 9,409 8,218 6,582
Less allowance for loan losses............... (139) (118) (113) (87) (91)
------ ------- ------ ------ ------
$9,847 $10,394 $9,296 $8,131 $6,491
====== ======= ====== ====== ======
---------------
(1) Includes residential construction
The financial services group continued to alter the mix of the loan
portfolio through increased lending in the construction and development,
mortgage warehouse, and commercial and business areas and the introduction of
new products. These changes to the loan portfolio provide further product and
geographic diversification.
Lending activities are subject to underwriting standards and liquidity
considerations. Specific underwriting criteria for each type of loan are
outlined in a credit policy approved by the Board of Directors of the savings
bank. In general, commercial loans are evaluated based on cash flow, collateral,
market conditions, prevailing economic trends, character and leverage capacity
of the borrower and capital and investment in a particular property, if
applicable. Most small business and consumer loans are underwritten using
credit-scoring models that consider factors including payment capacity, credit
history and collateral. In addition, market conditions, economic trends and the
character of the borrower are considered. The credit policy, including the
underwriting criteria for loan categories, is reviewed on a regular basis and
adjusted when warranted.
S-75
Construction and development and commercial and business loans by maturity
date at year-end 2001 follow:
CONSTRUCTION AND COMMERCIAL AND
DEVELOPMENT BUSINESS
--------------------- ---------------------
VARIABLE VARIABLE
RATE FIXED RATE RATE FIXED RATE TOTAL
-------- ---------- -------- ---------- ------
(IN MILLIONS)
Due within one year....................... $2,598 $ 90 $ 613 $ 42 $3,343
After one but within five years........... 1,525 21 839 368 2,753
After five years.......................... -- -- 99 155 254
------ ---- ------ ---- ------
$4,123 $111 $1,551 $565 $6,350
====== ==== ====== ==== ======
ASSET QUALITY
Several important measures are used to evaluate and monitor asset quality.
They include the level of loan delinquencies, nonperforming loans and assets and
net loan charge-offs compared to average loans.
AT YEAR-END
----------------------------
2001 2000 1999
------ ------- -------
(IN MILLIONS)
Accruing loans past due 30-89 days.......................... $ 107 $ 170 $ 95
Accruing loans past due 90 days or more..................... -- 6 6
------ ------- -------
Accruing loans past due 30 days or more................... $ 107 $ 176 $ 101
====== ======= =======
Nonaccrual loans............................................ $ 166 $ 65 $ 85
Restructured loans.......................................... -- -- --
------ ------- -------
Nonperforming loans....................................... 166 65 85
Foreclosed property......................................... 2 3 8
------ ------- -------
Nonperforming assets...................................... $ 168 $ 68 $ 93
====== ======= =======
Allowance for loan losses................................... $ 139 $ 118 $ 113
Net charge-offs............................................. $ 27 $ 36 $ 24
Nonperforming loan ratio.................................... 1.67% 0.62% 0.90%
Nonperforming asset ratio................................... 1.68% 0.65% 0.99%
Allowance for loan losses/total loans....................... 1.39% 1.12% 1.20%
Allowance for loan losses/nonperforming loans............... 83.73% 179.73% 133.52%
Net loans charged off/average loans......................... 0.25% 0.35% 0.26%
Accruing delinquent loans past due 30 days or more were 1.10% of total
loans at year-end 2001, 1.67% at year-end 2000 and 1.07% at year-end 1999. There
were no accruing delinquent loans past due 90 days or more at year-end 2001.
Accruing delinquent loans past due 90 days or more were 0.06% at year-end 2000
and 0.07% at year-end 1999.
Nonperforming loans consist of nonaccrual loans (loans on which interest
income is not currently recognized) and restructured loans (loans with below
market interest rates or other concessions due to the deteriorated financial
condition of the borrower). Interest payments received on nonperforming loans
are applied to reduce principal if there is doubt as to the collectibility of
contractually due principal and interest. Nonperforming loans increased in 2001
due to loans in the construction and development (senior housing) and commercial
and business (asset-based) portfolios. One of the asset-based loans was affected
by the events of September 11, 2001, and is currently being restructured. This
increase in nonperforming loans resulted in a decline in the allowance as a
percent of nonperforming loans; 83.73% at year-end 2001 compared with 179.73% at
year-end 2000. The allowance as a percent of total loans increased to 1.39% at
year-end 2001 compared with 1.12% at year-end 2000. Nonperforming loans declined
in both dollars and as a percent of total loans in 2000; the allowance as a
percent of nonperforming loans increased in 2000.
S-76
Loans accounted for on a nonaccrual basis, accruing loans that are contractually
past due 90 days or more, and restructured or other potential problem loans were
less than 2% of total loans as of the most recent five year-ends. The aggregate
amounts and the interest income foregone on such loans are immaterial.
The investment in impaired loans was $66 million at year-end 2001 and $6
million at year-end 2000, with a related allowance for loan losses of $28
million and $3 million, respectively. The average investment in impaired loans
during 2001 and 2000 was $37 million and $45 million, respectively. The related
amount of interest income recognized on impaired loans for 2001 and 2000 was
immaterial.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is comprised of specific allowances, general
allowances and an unallocated allowance. Management continuously evaluates the
allowance for loan losses to ensure the level is adequate to absorb losses
inherent in the loan portfolio. The allowance is increased by charges to income
and by the portion of the purchase price related to credit risk on loans
acquired through bulk purchases and acquisitions, and decreased by charge-offs,
net of recoveries.
Specific allowances are based on a thorough review of the financial
condition of the borrower, general economic conditions affecting the borrower,
collateral values and other factors. General allowances are based on historical
loss trends and management's judgment concerning those trends and other relevant
factors, including delinquency rates, current economic conditions, loan size,
industry competition and consolidation, and the effect of government regulation.
The unallocated allowance provides for inherent loss exposures not yet
identified. The evaluation of the appropriate level of unallocated allowance
considers current risk factors that may not be apparent in historical factors
used to determine the specific and general allowances. These factors include
inherent delays in obtaining information and the volatility of economic
conditions.
Changes in the allowance for loan losses were:
FOR THE YEAR
------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN MILLIONS)
Balance at beginning of year................... $118 $113 $ 87 $91 $68
Charge-offs:
Real estate mortgage......................... -- (22) (16) (6) (5)
Commercial and business...................... (28) (11) (7) -- (1)
Consumer and other........................... (3) (4) (2) (2) (2)
---- ---- ---- --- ---
(31) (37) (25) (8) (8)
Recoveries:
Real estate mortgage......................... 3 -- -- 3 1
Consumer and other........................... 1 1 1 -- 1
---- ---- ---- --- ---
4 1 1 3 2
---- ---- ---- --- ---
Net charge-offs........................... (27) (36) (24) (5) (6)
Additions charged to operations................ 46 39 38 1 (2)
Acquisitions and bulk purchases of loans, net
of adjustments............................... 2 2 12 -- 31
---- ---- ---- --- ---
Balance at end of year......................... $139 $118 $113 $87 $91
==== ==== ==== === ===
Ratio of net charge-offs during the year to
average loans outstanding during the year.... .25% .35% .26% .07% .10%
An analysis of the allocation of the allowance for loan losses follows.
Allocation of a portion of the allowance does not preclude its availability to
absorb losses in other categories of loans.
S-77
AT YEAR-END
---------------------------------------------------------------------------------------------
2001 2000 1999 1998
--------------------- --------------------- --------------------- ---------------------
CATEGORY CATEGORY CATEGORY CATEGORY
AS A % OF AS A % OF AS A % OF AS A % OF
TOTAL TOTAL TOTAL TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
Real estate
mortgage........... $ 14 29% $ 26 34% $ 60 40% $36 50%
Construction and
development........ 62 42% 30 38% 24 35% 17 27%
Commercial and
business........... 36 21% 31 16% 12 13% 14 13%
Consumer and other... 3 8% 5 12% 5 12% 3 10%
Unallocated.......... 24 -- 26 -- 12 -- 17 --
---- --- ---- --- ---- --- --- ---
Total....... $139 100% $118 100% $113 100% $87 100%
==== === ==== === ==== === === ===
AT YEAR-END
---------------------
1997
---------------------
CATEGORY
AS A % OF
TOTAL
ALLOWANCE LOANS
--------- ---------
Real estate
mortgage........... $46 61%
Construction and
development........ 15 21%
Commercial and
business........... 4 9%
Consumer and other... 3 9%
Unallocated.......... 23 --
--- ---
Total....... $91 100%
=== ===
The allowance allocated to real estate mortgage was down in 2001 due to a
reduction in loans outstanding and improved credit quality and down in 2000 due
to charge-offs of loans previously provided for. The amount allocated to
construction and development was up in 2001 and 2000 due to loans in the senior
housing industry. The amount allocated to commercial and business loans was up
in 2001 due to the growth in asset-based lending partially offset by charge-offs
of syndicated loans previously provided for. The decrease in the unallocated
allowance in 2001 was the result of a more mature construction and development
portfolio reducing construction period and lease-up risk. The unallocated amount
was up in 2000 as a reflection of slowing economic activity and an increase in
the size of the loan portfolio. The allowance for loan losses is considered
adequate based on information currently available. However, adjustments to the
allowance may be necessary due to changes in economic conditions, assumptions as
to future delinquencies or loss rates and intent as to asset disposition
options. In addition, regulatory authorities periodically review the allowance
for loan losses as a part of their examination process. Based on their review,
the regulatory authorities may require adjustments to the allowance for loan
losses based on their judgment about the information available to them at the
time of their review.
MORTGAGE BANKING ACTIVITIES
Mortgage loan originations were $7.6 billion in 2001, $2.1 billion in 2000
and $3.7 billion in 1999. The record production in 2001 was due to the
acquisition of production operations in the upper mid-west and mid-Atlantic
regions and the high level of refinance activity resulting from the low interest
rate environment. Higher interest rates during 2000 resulted in a significant
reduction in mortgage refinancing activity, contributing to a reduction in
mortgage loan originations. Mortgage servicing portfolio runoff was 26.1% in
2001, 13.9% in 2000 and 21.0% in 1999. The changes in the runoff rates are due
to the lower interest rate environments in 2001 and 1999, leading to high levels
of refinancing, and a relatively higher interest rate environment in 2000
resulting in low levels of refinancing. The mortgage-servicing portfolio was
$11.4 billion at year-end 2001 and $19.5 billion at year-end 2000. The decrease
was due to the sale of $8.6 billion in servicing during the second quarter 2001
and the accelerated runoff rate. The accelerated runoff rate was due to
prepayments in the lower rate environment, partially offset by the retention of
servicing on a portion of the mortgage loans originated.
OTHER MATTERS
The financial services group is continuing its efforts to enhance return on
investment, including reviewing operations that are unable to meet return
objectives and determining appropriate courses of action. During January and
February 2002, a plan was enacted to exit certain businesses and product
delivery methods that were not expected to meet return objectives in the near
term. This action resulted in a reduction in force and the write-off of certain
technology investments; however, the ongoing cost savings from these actions is
anticipated to exceed significantly the related severance and write-off
expenses.
S-78
During 2001, the financial services group completed acquisitions that
significantly increased its mortgage production capacity. In addition, the
mortgage loan-servicing portfolio was reduced by approximately 40% during the
year through a bulk sale of servicing and an increase in the sale of servicing
with loan production. The acquisitions and change in the size of the servicing
portfolio were designed to reposition the mortgage banking operations to be more
of a production operation and to minimize impairment risk associated with
mortgage servicing rights.
CORPORATE, INTEREST AND OTHER INCOME/EXPENSE
Corporate expenses were $30 million in 2001, $33 million in 2000 and $30
million in 1999. The decrease in 2001 was primarily due to reduced pension
costs.
Parent company interest expense was $98 million in 2001, $105 million in
2000 and $95 million in 1999. The average interest rate on borrowings was 6.3%
in 2001 and 7.2% in 2000. In addition, during 2001, debt was reduced $43
million. Parent company interest expense for 1999 was reduced $28 million to
reflect an allocation of parent company debt to the discontinued bleached
paperboard operation, which was sold at year-end 1999.
Other income/expense primarily consists of gains and losses on the sale or
disposition of under-performing and non-strategic assets. For 2001, it includes
a $20 million gain on the sale of non-strategic timberlands and $13 million of
losses related to under-performing assets. It also includes a $4 million fair
value adjustment of an interest rate swap agreement before its designation as a
cash flow hedge. For 2000, other income/expense consists of a $15 million charge
related to the decision to exit the fiber cement business.
PENSION CREDITS
Non-cash pension credits were $18 million in 2001, $9 million in 2000, $1
million in 1999. The increase in the pension credit in 2001 and 2000 reflects
the cumulative better than expected performance of the pension plan assets
through year-end 2000 and 1999. Based upon the actuarial valuation as of year-
end 2001, the pension credit will revert to a pension expense of approximately
$5 million for 2002. This is due mainly to less than expected performance of the
pension plan assets through year-end 2001.
INCOME TAXES
The effective tax rate was 37% in 2001, 39% in 2000 and 38% in 1999. The
difference between the effective tax rate and the statutory rate is due to state
income taxes, nondeductible goodwill amortization and losses in certain foreign
operations for which no financial benefit was recognized. The 2001 rate reflects
a one time, 3%, financial benefit realized from the sale of the corrugated
packaging operation in Chile.
AVERAGE SHARES OUTSTANDING
Average diluted shares outstanding were 49.3 million in 2001, 50.9 million
in 2000 and 55.8 million in 1999. The decreases of 3% in 2001 and 9% in 2000
were due mainly to the effects of share repurchases under the stock repurchase
programs authorized during the fourth quarter 1999 and the third quarter 2000.
CAPITAL RESOURCES AND LIQUIDITY FOR THE YEAR 2001
The consolidated net assets invested in the financial services group are
subject, in varying degrees, to regulatory rules and regulations including
restrictions on the payment of dividends to the parent company. Accordingly, the
parent company and the financial services group capital resources and liquidity
are discussed separately.
S-79
PARENT COMPANY
Operating Activities
Cash from operations was $346 million, down 10%. The decrease was due to
lower earnings offset in part by better use of working capital and an increase
in dividends received from the financial services group. Dividends received from
the financial services group totaled $124 million in 2001 and $110 million in
2000.
Depreciation and amortization was $186 million, down $16 million. The
decrease was due to the revisions in the estimated useful lives of certain
production equipment, which reduced depreciation by $27 million, partially
offset by an increase in amortization of new technology systems and new capital
additions.
Investing Activities
Capital expenditures were $184 million, down 17%. Capital expenditures are
expected to approximate $140 million for 2002.
Cash proceeds from the sale of 78,000 acres of non-strategic timberland
were $54 million. Cash used to acquire three corrugated packaging operations
totaled $144 million and $15 million was invested in existing building products
joint ventures.
There were no capital contributions to the financial services group during
2001.
Financing Activities
Long-term debt was reduced by $43 million, including a $25 million non-cash
reduction arising from the sale of the corrugated packaging operation in Chile.
During 2001, $200 million of 9.0% term notes were repaid using $100 million
of short-term borrowings and $100 million from an existing three-year revolving
credit agreement. In the fourth quarter 2001, a wholly-owned and consolidated
subsidiary established a new $200 million trade receivable backed revolving
credit due in November 2002. Under this agreement, the subsidiary purchases, on
an ongoing basis, substantially all of the parent company's trade receivables.
As the parent company requires funds, the subsidiary draws under its revolving
credit agreement, pledges the trade receivables as collateral and remits the
proceeds to the parent company. In case of liquidation of the subsidiary, its
creditors would be entitled to satisfy their claims from the subsidiary's assets
before distributions back to the parent company. At year-end 2001, the
subsidiary owned $248 million of trade receivables against which it had borrowed
$70 million of the $168 million currently available to borrow under the
agreement.
Cash dividends paid to shareholders were $63 million or $1.28 per share.
There were no treasury stock purchases during 2001 under the August 2000
Board of Directors authorization to repurchase 2.5 million shares. To date a
total of 750,000 shares had been repurchased under this authorization at a cost
of $31 million.
S-80
Liquidity and Off Balance Sheet Financing Arrangements
The following table summarizes the parent company's contractual cash
obligations at year-end 2001:
PAYMENT DUE OR EXPIRATION BY YEAR
-------------------------------------------
TOTAL 2002 2003-4 2005-6 2007+
------ ---- ------ ------ -----
(IN MILLIONS)
Long-term debt............................. $1,339 $107 $323 $294 $615
Capital leases............................. 188 -- -- -- 188
Operating leases........................... 317 42 49 35 191
Purchase obligations....................... 77 3 6 68 --
------ ---- ---- ---- ----
Total................................. $1,921 $152 $378 $397 $994
====== ==== ==== ==== ====
The parent company's sources of short-term funding are its operating cash
flows, which include dividends received from the financial services group, and
its existing credit arrangements. The parent company operates in cyclical
industries, and its operating cash flows vary accordingly. The dividends
received from the financial services group are subject to regulatory approval
and restrictions. At year-end 2001, the parent company had $505 million in
unused borrowing capacity under its existing credit agreements. Most of the
credit agreements contain terms and conditions customary for such agreements
including minimum levels of interest coverage and limitations on leverage. At
year-end 2001, the parent company complied with all the terms and conditions of
its credit agreements. Of the current credit agreements, $75 million in lines of
credit and the $200 million receivable securitization program could not be
accessed if the long-term debt of the parent company was rated below "investment
grade" by rating agencies. Several supply and lease agreements include similar
rating requirements, which if activated would result in a variety of remedies
including restructuring of the agreements. The long-term debt of the parent
company is currently rated BBB and Baa3 by the rating agencies. Because of the
tender offer for Gaylord Container Corporation and its related financing
commitment of $900 million, the current debt rating was reviewed by the rating
agencies.
The following table summarizes the parent company's commercial commitments
at year-end 2001:
EXPIRING BY YEAR
------------------------------------------
TOTAL 2002 2003-4 2005-6 2007+
----- ---- ------ ------ -----
(IN MILLIONS)
Joint venture guarantees..................... $105 $28 $-- $10 $67
Performance bonds and recourse obligations... 105 35 58 -- 12
---- --- --- --- ---
Total................................... $210 $63 $58 $10 $79
==== === === === ===
Approximately $17 million in joint venture guarantees, letters of credit
and recourse obligations include rating requirements, which if activated would
result in acceleration. Of the recourse obligations, $6 million relate to
receivables arising from the 1998 sale of the operations in Argentina, which
were subsequently sold with recourse. It is possible that the currency crisis in
Argentina will have some affect on the borrower's ability to repay these notes,
which could lead to these notes being repurchased by the parent company.
The parent company is a participant in three joint ventures engaged in
manufacturing and selling of paper and building materials. The joint venture
partner in each of these ventures is a publicly held company. At year-end 2001,
these ventures had $215 million in long-term debt of which the parent company
had guaranteed obligations and letters of credit aggregating $105 million. The
parent company has no unconsolidated special purpose entities.
The parent company had an interest rate and several commodity derivative
instruments outstanding at year-end 2001. The interest rate instrument expires
in 2008 and the majority of the commodity instruments expire in the third
quarter 2002. These instruments are non-exchange traded and are valued using
either third-party resources or models. At year-end 2001, the fair value of
these instruments was a
S-81
negative $5 million. Adjustments in their fair value are recorded in other
comprehensive income, a component of shareholders' equity.
The preferred stock issued by subsidiaries of Guaranty Bank is
automatically exchanged into preferred stock of Guaranty Bank upon the
occurrence of certain regulatory events or administrative actions. If such
exchange occurs, each preferred share is automatically surrendered to the parent
company in exchange for senior notes of the parent company. At year-end 2001,
the outstanding preferred stock issued by these subsidiaries totaled $305
million.
THE FINANCIAL SERVICES GROUP
Operating Activities
Cash used by operations in 2001 was $397 million compared with cash
provided by operations of $217 million in 2000. Higher earnings and an increase
in the change in cash for mortgage loans serviced for others were more than
offset by a $673 million increase in mortgage loans held for sale. Mortgage
loans held for sale were $958 million at year-end 2001.
Investing Activities
Loans and securities decreased $750 million due primarily to a decrease in
mortgage assets resulting from the high level of prepayments in the lower
interest rate environment.
Cash proceeds from the sale of mortgage servicing rights totaled $143
million. During 2001, servicing rights on $8.6 billion in mortgage loans were
sold to mitigate exposure to changes in the valuation of mortgage servicing
rights in the lower interest rate environment.
Cash paid for acquisitions of mortgage production operations and an
asset-based lending portfolio was $364 million. Capital expenditures were $26
million.
Financing Activities
Borrowings increased $1.1 billion during 2001. Borrowings consist primarily
of long- and short-term advances from Federal Home Loan Banks and securities
sold under repurchase agreements and resulted from funding needs as deposits
declined $766 million and earning assets grew slightly. The decline in deposits
was due to competitive market conditions.
Dividends paid to the parent company totaled $124 million.
Cash Equivalents
Cash equivalents were $587 million, an increase of $267 million. This
increase was primarily the result of proceeds received on the sale of mortgage
loans on the last day of 2001, which were used in January 2002 to reduce
borrowings.
S-82
Liquidity, Off Balance Sheet Financing Arrangements and Capital Adequacy
The following table summarizes the financial services group's contractual
cash obligations at year-end 2001:
PAYMENTS DUE OR EXPIRATION BY YEAR
-----------------------------------------------
TOTAL 2002 2003-4 2005-6 2007+
------- ------- ------ ------ -----
(IN MILLIONS)
Deposits.............................. $ 9,030 $ 6,726 $1,945 $357 $ 2
FHLB advances......................... 3,435 2,816 249 232 138
Repurchase agreements................. 1,107 1,107 -- -- --
Other borrowings...................... 214 174 6 4 30
Preferred stock issued by
subsidiaries........................ 305 -- -- -- 305
Operating leases...................... 60 17 25 12 6
------- ------- ------ ---- ----
Total............................ $14,151 $10,840 $2,225 $605 $481
======= ======= ====== ==== ====
The financial services group's short-term funding needs are met through
operating cash flows, attracting new retail and wholesale deposits, increased
borrowings and converting assets to cash through sales or reverse repurchase
agreements. Assets that can be converted to cash include short-term investments,
mortgage loans held for sale and securities available-for-sale. At year-end
2001, the financial services group had available liquidity of $2.0 billion. The
maturities of deposits in the above table are based on contractual maturities
and repricing periods. Most of the deposits that are shown to mature in 2002 are
comprised of transaction deposit accounts and short-term (less than one year)
certificates of deposit, most of which have historically renewed at maturity.
In the normal course of business, the financial services group enters into
commitments to extend credit including loans, leases, and letters of credit.
These commitments generally require collateral upon funding and as such carry
substantially the same risk as loans. In addition, the commitments normally
include provisions that under certain circumstances allow the financial services
group to exit the commitment. At year-end 2001, loan, lease and letter of credit
commitments totaled $5.0 billion with expiration dates primarily within the next
three years. In addition, at year-end 2001, commitments to originate
single-family residential mortgage loans totaled $985 million and commitments to
sell single-family residential mortgage loans totaled $1.1 billion.
At year-end 2001, the savings bank met or exceeded all applicable
regulatory capital requirements. The parent company expects to maintain the
savings bank's capital at a level that exceeds the minimum required for
designation as "well capitalized" under the capital adequacy regulations of the
Office of Thrift Supervision. From time to time, the parent company may make
capital contributions to the savings bank or receive dividends from the savings
bank. During 2001, the parent company received $124 million in dividends from
the savings bank.
At year-end 2001, preferred stock of subsidiaries was outstanding with a
liquidation preference of $305 million. These preferred stocks are automatically
exchanged into $305 million in savings bank preferred stock if federal banking
regulators determine that the savings bank is or will become undercapitalized in
the near term or upon the occurrence of certain administrative actions. If such
an exchange occurs, the parent company must issue senior notes in exchange for
the savings bank preferred stock in an amount equal to the liquidation
preference of the preferred stock exchanged.
S-83
Selected financial and regulatory capital data for the savings bank
follows:
AT YEAR-END
------------------
2001 2000
------- -------
(IN MILLIONS)
Balance sheet data:
Total assets.............................................. $15,251 $14,885
Total deposits............................................ 9,639 10,088
Shareholder's equity...................................... 954 931
SAVINGS FOR
BANK REGULATORY CATEGORIZATION AS
ACTUAL MINIMUM "WELL-CAPITALIZED"
------- ---------- --------------------
Regulatory capital ratios:
Tangible capital.............................. 7.8% 2.0% N/A
Leverage capital.............................. 7.8% 4.0% 5.0%
Risk-based capital............................ 10.7% 8.0% 10.0%
Of the subsidiary preferred stock, $298 million qualifies as core
(leverage) capital and the remainder qualifies as Tier 2 (supplemental
risk-based) capital.
ENVIRONMENTAL MATTERS
Temple-Inland is committed to protecting the health and welfare of its
employees, the public and the environment, and strives to maintain compliance
with all state and federal environmental regulations. When constructing new
facilities or modernizing existing facilities, Temple-Inland uses state of the
art technology for controlling air and water emissions. These forward-looking
programs should minimize the effect that changing regulations have on capital
expenditures for environmental compliance.
Temple-Inland has been designated as a potentially responsible party at
nine Superfund sites, excluding sites as to which Temple-Inland's records
disclose no involvement or as to which Temple-Inland's potential liability has
been finally determined. At year-end 2001, Temple-Inland estimated the
undiscounted total costs it could incur for the remediation and toxic tort
actions at Superfund sites to be about $2 million, which has been accrued.
Temple-Inland also utilizes landfill operations to dispose of non-hazardous
waste at three paperboard and two building product mill operations. At year-end
2001, Temple-Inland estimated that the undiscounted total costs it could incur
to ensure proper closure of these landfills over the next twenty-five years to
be about $14 million, which is being accrued over the estimated lives of the
landfills.
On April 15, 1998, the U.S. Environmental Protection Agency (EPA) issued
the Cluster Rule regulations governing air and water emissions for the pulp and
paper industry. Temple-Inland has spent approximately $15 million toward Cluster
Rule compliance through the end of 2001. Future expenditures for environmental
control facilities will depend on additional Maximum Available Control
Technology (MACT) II regulations for hazardous air pollutants relating to pulp
mill combustion sources (estimated at $2 million) and the upcoming plywood and
composite wood products MACT proposal (estimated at $12 million), as well as
changing laws and regulations and technological advances. Given these
uncertainties, Temple-Inland estimates that capital expenditures for
environmental purposes excluding the MACT rules during the period 2002 through
2004 will average approximately $12 million each year.
ENERGY AND THE EFFECTS OF INFLATION
Inflation has had minimal effects on operating results the last three years
except for the increase in energy costs during 2001 and 2000. Energy costs were
up $38 million in 2001 and $17 million in 2000. Energy costs began to rise
during the second quarter 2000 and continued to rise through the second quarter
2001. Energy costs peaked during the second quarter 2001 and began to decline
during the remainder of 2001 reaching more normalized levels by year-end 2001.
In some instances, Temple-Inland
S-84
elected to take downtime at certain of its manufacturing facilities rather than
pay significantly higher energy prices.
The paper group is a party to a long-term power purchase contract agreement
with Southern California Edison (Edison). Under this agreement, the paper group
sold to Edison a portion of its electrical generating capacity from a
co-generation facility operated in connection with its Ontario mill. Edison was
to pay the paper group for its committed generating capacity and for electricity
generated and sold by Edison. During the fourth quarter 2000 and the first
quarter 2001, the Ontario mill generated and delivered electricity to Edison but
was not paid. During the second quarter 2001, the paper group notified Edison
that the long-term power purchase agreement was cancelled because of Edison's
material breach of the agreement. Edison contested the right of the paper group
to terminate the agreement. It has also asserted that it is entitled to recover
a portion of the payments it made during the term of the agreement from the
paper group. The parties are currently in litigation to determine, among other
matters, whether the agreement has been terminated and whether the paper group
may sell its excess generating capacity to third parties. The paper group
continues to provide power to Edison and has received some payments from Edison.
Temple-Inland does not believe that the resolution of these matters will have a
material adverse effect on its consolidated operations or financial position.
The parent company's fixed assets, including timber and timberlands, are
reflected at their historical costs. At current replacement costs, depreciation
expense and the cost of timber harvested or timberlands sold would be
significantly higher than amounts reported.
NEW ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ESTIMATE
Beginning January 2001, Temple-Inland adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. This statement requires that derivative instruments be
included on the balance sheet at fair value with the changes in their fair value
reflected in net income or other comprehensive income, depending upon the
classification of the derivative instrument. Temple-Inland uses to a limited
degree, derivative instruments to hedge risks, including those associated with
changes in product pricing, manufacturing cost and interest rates. Temple-
Inland does not use derivatives for trading purposes. The cumulative effect of
adoption was to reduce 2001 net income by $2 million. Additionally, as permitted
by this Statement, the financial services group changed the designation of its
portfolio of held-to-maturity securities, which are carried at unamortized cost,
to available-for-sale, which are carried at fair value. As a result, the
carrying value of these securities was adjusted to their fair value with a
corresponding after tax reduction in other comprehensive income, a component of
shareholders' equity, of $16 million.
Beginning January 2001, the parent company began computing depreciation of
certain production equipment using revised useful lives. These revisions ranged
from a reduction of several years to a lengthening of up to five years and were
based on an assessment performed by the manufacturing groups, which indicated
that revisions of the estimated useful lives of certain production equipment
were warranted. The maximum estimated useful lives for production equipment is
25 years. As a result of these revisions, 2001 depreciation expense was reduced
by $27 million.
Temple-Inland adopted Statement of Financial Accounting Standards No. 141,
Business Combinations, on June 30, 2001. This Statement requires business
combinations to be accounted for using the purchase method.
Beginning January 2002, Temple-Inland adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under this
Statement, amortization of goodwill is precluded and goodwill is periodically
measured for impairment. The effect of not amortizing goodwill during 2001 would
have been to increase operating income by $11 million and net income by $9
million or $0.18 per diluted share. While Temple-Inland has not yet determined
the amount of goodwill impairment to be recognized during the first quarter 2002
upon adoption of this new statement, it is likely that up to $20 million of
goodwill associated with pre-2001 specialty packaging acquisitions may be
impaired. Under
S-85
the new rules, impairment is measured based upon the present value of future
operating cash flows while under the old rules impairment was measured based
upon undiscounted future operating cash flows.
Temple-Inland will be required to adopt Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations, beginning 2003.
Temple-Inland has not yet determined the effect on earnings or financial
position of adopting this statement. In addition, Temple-Inland will be required
to adopt Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets beginning 2002. While Temple-Inland
has not yet determined the effect on earnings or financial position of adopting
this statement, it is likely that the effect of adoption will not be material.
S-86
STATISTICAL AND OTHER DATA(A)
FOR THE YEAR
------------------------
2001 2000 1999
------ ------ ------
(IN MILLIONS)
Revenues:
Paper Group:
Corrugated packaging...................................... $1,935 $1,902 $1,692
Linerboard................................................ 147 190 177
------ ------ ------
Total paper....................................... $2,082 $2,092 $1,869
====== ====== ======
Building Products Group:
Pine lumber............................................... $ 228 $ 218 $ 239
Particleboard............................................. 175 230 189
Medium density fiberboard................................. 98 90 66
Gypsum wallboard.......................................... 56 98 162
Fiberboard................................................ 63 67 75
Other..................................................... 106 133 106
------ ------ ------
Total building products........................... $ 726 $ 836 $ 837
====== ====== ======
Financial Services Group:
Savings bank.............................................. $1,042 $1,121 $ 841
Mortgage banking.......................................... 153 92 131
Real estate............................................... 117 117 111
Insurance brokerage....................................... 52 39 33
------ ------ ------
Total financial services.......................... $1,364 $1,369 $1,116
====== ====== ======
Unit sales:
Paper Group:
Corrugated packaging, thousands of tons................... 2,214 2,217 2,284
Linerboard, thousands of tons............................. 404 468 518
------ ------ ------
Total, thousands of tons.......................... 2,618 2,685 2,802
====== ====== ======
Building Products Group:
Pine lumber, mbf.......................................... 728 666 618
Particleboard, msf........................................ 582 676 574
Medium density fiberboard, msf............................ 256 244 187
Gypsum wallboard, msf..................................... 586 678 890
Fiberboard, msf........................................... 385 368 439
Financial Services Group:
Segment operating income:
Savings bank.............................................. $ 166 $ 168 $ 109
Mortgage banking.......................................... 4 11 19
Real estate............................................... 4 3 4
Insurance brokerage....................................... 10 7 6
------ ------ ------
Total financial services operating income......... $ 184 $ 189 $ 138
====== ====== ======
Operating Ratios:
Return on average assets.................................. 1.08% 1.01% 0.93%
Return on average equity.................................. 14.55% 13.64% 13.29%
Dividend pay-out ratio.................................... 74.62% 74.92% 57.85%
Equity to asset ratio at year-end......................... 7.43% 7.38% 7.00%
Equity at year-end:
Savings bank.............................................. $ 954 $ 931 $ 857
Mortgage banking.......................................... 91 78 90
Real estate............................................... 66 56 54
Insurance brokerage....................................... 31 28 22
------ ------ ------
Total financial services equity................... $1,142 $1,093 $1,023
====== ====== ======
---------------
(a) Revenues and unit sales do not include joint venture operations.
S-87
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of certain of the material U.S. federal
income tax consequences of the purchase, ownership and disposition of the Upper
DECS, the senior notes, treasury securities and purchase contracts that are or
may be the components of a unit, and shares of our common stock acquired under a
purchase contract to holders of Upper DECS who purchase Upper DECS in the
initial offering at the original issue price. This discussion assumes that the
Upper DECS, senior notes, treasury securities, purchase contracts and shares of
our common stock are held as capital assets. This discussion is based upon the
Internal Revenue Code of 1986 as amended (the "Code"), Treasury regulations
(including proposed Treasury regulations) issued thereunder, Internal Revenue
Service ("IRS") rulings and pronouncements and judicial decisions now in effect,
all of which are subject to change or differing interpretations, possibly with
retroactive effect.
This discussion does not address all aspects of U.S. federal income
taxation that may be relevant to holders in light of their particular
circumstances, such as holders who are subject to special tax treatment (for
example, (1) banks, regulated investment companies, insurance companies, dealers
in securities or currencies or tax-exempt organizations, (2) persons holding
Upper DECS, senior notes or shares of common stock as part of a straddle, hedge,
conversion transaction or other integrated investment, or (3) U.S. holders (as
defined below) whose functional currency is not the U.S. dollar), nor does it
address alternative minimum taxes or state, local or foreign taxes.
No statutory, administrative or judicial authority directly addresses the
treatment of Upper DECS or instruments similar to Upper DECS for U.S. federal
income tax purposes. As a result, no assurance can be given that the IRS or a
court will agree with the tax consequences described herein.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT
TO THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF UPPER DECS, SENIOR NOTES AND SHARES OF COMMON STOCK ACQUIRED
UNDER A PURCHASE CONTRACT IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES, AS
WELL AS THE EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
CONSEQUENCES TO U.S. HOLDERS
The following is a discussion of U.S. federal income tax considerations
relevant to a "U.S. holder" of Upper DECS. For purposes of this discussion, the
term U.S. holder means (1) a person who is a citizen or resident of the United
States, (2) a corporation or partnership created or organized in or under the
laws of the United States or any political subdivision thereof, (3) an estate
the income of which is subject to U.S. federal income taxation regardless of its
source or (4) a trust if a court within the United States is able to exercise
primary supervision over the administration of such trust and one or more U.S.
persons have the authority to control all substantial decisions of the trust. If
a partnership holds Upper DECS, notes or common stock, the partnership itself
will not be subject to U.S. Federal income tax on a net income basis, but the
tax treatment of a partner will generally depend upon the status of the partner
and the activities of the partnership.
UPPER DECS
Allocation of Purchase Price. A U.S. holder's acquisition of an Upper DECS
will be treated for U.S. federal income tax purposes as an acquisition of a
senior note and the purchase contract constituting the Upper DECS. The purchase
price of each Upper DECS will be allocated between the senior note and the
purchase contract constituting the unit, in proportion to their respective fair
market values at the time of purchase. Such allocation will establish the U.S.
holder's initial tax basis in the senior note and the purchase contract. We
expect to report the fair market value of each senior note as $50 and the fair
market value of each purchase contract as $0. This position will be binding on
each U.S. holder (but not on the IRS) unless such U.S. holder explicitly
discloses a contrary position on a statement attached to such U.S. holder's
timely filed U.S. federal income tax returns for the taxable year in which an
Upper DECS is acquired. Thus, absent such disclosure, a U.S. holder should
allocate the purchase price for an Upper DECS in accordance with the values
reported by us. The remainder of this discussion assumes that
S-88
this allocation of the purchase price of an Upper DECS will be respected for
U.S. federal income tax purposes.
Ownership of Senior Notes or Treasury Securities. A U.S. holder will be
treated as owning the senior notes or treasury securities constituting a part of
the Upper DECS owned. We (under the terms of the Upper DECS) and each U.S.
holder (by acquiring Upper DECS) agree to treat the senior notes or treasury
securities constituting a part of the Upper DECS as owned by such U.S. holder
for all tax purposes, and the remainder of this summary assumes such treatment.
The U.S. federal income tax consequences of owning the senior notes or treasury
securities are discussed below (see "-- Senior Notes," "-- Stripped DECS" and
"-- Treasury Securities Purchased on Remarketing").
Sales, Exchanges or Other Taxable Dispositions of Upper DECS. If a U.S.
holder sells, exchanges or otherwise disposes of Upper DECS in a taxable
disposition (collectively, a "disposition"), such U.S. holder will be treated as
having disposed of each of the purchase contract and the senior note (or
treasury securities) that constitute such unit. The proceeds realized on such
disposition will be allocated between the purchase contract and the senior note
(or treasury securities) respectively, in proportion to their respective fair
market values. As a result, as to each of the purchase contract and the senior
note (or treasury securities), a U.S. holder generally will recognize gain or
loss equal to the difference between the portion of the proceeds received by
such U.S. holder that is allocable to the purchase contract and the senior note
(or treasury securities) and such U.S. holder's adjusted tax basis therein,
except to the extent that such holder is treated as receiving an amount with
respect to accrued acquisition discount on the treasury securities (generally
the difference between the stated principal amount of such securities and the
U.S. holder's adjusted tax basis therein) which amount would be treated as
ordinary income, or to the extent such holder is treated as receiving an amount
with respect to accrued contract adjustment payments or deferred contract
adjustment payments, which may be treated as ordinary income, in each case, to
the extent not previously taken into income, see "-- Purchase
Contracts -- Contract Adjustment Payments and Deferred Contract Adjustment
Payments" below. In the case of the purchase contract and the treasury
securities, such gain or loss generally will be capital gain or loss. Such gain
or loss generally will be long-term capital gain or loss if the U.S. holder held
the Upper DECS (or, in the case of the treasury securities, the treasury
security) for more than one year immediately prior to such disposition.
Long-term capital gains of individuals are eligible for reduced rates of
taxation. The deductibility of capital losses is subject to limitations. The
rules governing the determination of the character of gain or loss on the
disposition of a senior note are summarized under "-- Senior Notes -- Sales,
Exchanges, Remarketing or Other Taxable Dispositions of Senior Notes." Because
gain or loss on disposition of a senior note may be treated as ordinary income
or loss, disposition of an Upper DECS consisting of a purchase contract and a
senior note may give rise to capital gain or loss on the purchase contract and
ordinary income or loss on the senior note, which must be reported separately
for U.S. federal income tax purposes.
If the disposition of an Upper DECS occurs when the purchase contract has a
negative value, a U.S. holder should be considered to have received additional
consideration for the senior note (or treasury securities) in an amount equal to
such negative value and to have paid such amount to be released from such U.S.
holder's obligations under the related purchase contract. Because, as discussed
below, any gain on the disposition of a senior note prior to the purchase
contract settlement date generally will be treated as ordinary interest income,
the ability to offset such interest income with a loss on the purchase contract
may be limited. U.S. holders should consult their tax advisors regarding a
disposition of an Upper DECS at a time when the purchase contract has a negative
value.
In determining gain or loss on a disposition of Upper DECS, payments to a
U.S. holder of contract adjustment payments or deferred contract adjustment
payments which the U.S. holder has determined not to include in income should
either reduce such U.S. holder's adjusted tax basis in the purchase contract or
result in an increase in the U.S. holder's amount realized on the disposition of
the purchase contract. Any contract adjustment payments or deferred contract
adjustment payments that a U.S. holder has determined to accrue in income prior
to receipt should increase such U.S. holder's adjusted tax basis in the purchase
contract, see "-- Purchase Contracts -- Contract Adjustment Payments and
Deferred Contract Adjustment Payments" below.
S-89
SENIOR NOTES
Classification of the Senior Notes. In connection with the issuance of the
senior notes, Skadden, Arps, Slate, Meagher & Flom LLP will deliver an opinion
that, under current law, and based on certain representations, facts and
assumptions set forth in the opinion, the senior notes will be classified as
indebtedness for U.S. federal income tax purposes. We (under the terms of the
senior notes) and each U.S. holder (by acquiring senior notes) agree to treat
the senior notes as our indebtedness for all tax purposes.
Original Issue Discount. Because of the manner in which the interest rates
on the senior notes are reset, the senior notes should be classified as
contingent payment debt instruments subject to the "noncontingent bond method"
for accruing original issue discount, as set forth in the applicable Treasury
regulations. We intend to treat the senior notes as such, and the remainder of
this discussion assumes that the senior notes will be so treated for U.S.
federal income tax purposes. As discussed more fully below, the effects of
applying such method will be (1) to require each U.S. holder, regardless of such
holder's usual method of tax accounting, to use an accrual method with respect
to the interest income on senior notes, (2) to require each U.S. holder to
accrue interest income in excess of interest payments actually received for all
accrual periods through , 2005, and (3) generally to result in ordinary,
rather than capital, treatment of any gain or loss on the disposition of senior
notes. (See "-- Sales, Exchanges, Remarketing or Other Taxable Dispositions of
Senior Notes" below.)
A U.S. holder will be required to accrue original issue discount on a
constant yield to maturity basis based on the "comparable yield" of the senior
notes. The comparable yield of the senior notes generally will be the rate at
which we would issue a fixed rate noncontingent debt instrument with terms and
conditions similar to the senior notes. We have determined that the comparable
yield is % and the projected payments are $ on , 2002,
$ for each subsequent quarter ending on or prior to, 2005 and
$ for each quarter ending after , 2005. We have also
determined that the projected payment for the senior notes, per $50 of principal
amount, at the maturity date is $ (which includes the stated principal
amount of the senior notes as well as the final projected interest payment).
If, after the date on which the interest rate on the senior notes is reset,
the remaining amounts of principal and interest payable differ from the payments
set forth on the applicable projected payment schedule, negative or positive
adjustments reflecting such difference should generally be taken into account by
such U.S. holder as adjustments to interest income in a reasonable manner over
the period to which they relate. We expect to account for any such difference
with respect to a period as an adjustment for that period. A U.S. holder is
generally bound by the comparable yield and projected payment schedule provided
by us under the terms of the Upper DECS.
The comparable yield and projected payment schedules are supplied by us
solely for computing income under the noncontingent bond method for U.S. federal
income tax purposes and do not constitute projections or representations as to
the amounts that such U.S. holder will actually receive as a result of owning
senior notes or Upper DECS.
Tax Basis in Senior Notes. A U.S. holder's tax basis in a senior note will
be increased by the amount of original issue discount included in income with
respect to the senior note and decreased by the amount of projected payments
with respect to the senior note through the computation date.
Sales, Exchanges, Remarketing or Other Taxable Dispositions of Senior
Notes. A U.S. holder will recognize gain or loss on a disposition of senior
notes (including a redemption for cash or upon the remarketing thereof) in an
amount equal to the difference between the amount realized by such U.S. holder
on the disposition of the senior notes and such U.S. holder's adjusted tax basis
in such senior notes. Selling expenses incurred by such U.S. holder, including
the remarketing fee, will reduce the amount of gain or increase the amount of
loss recognized by such U.S. holder upon a disposition of senior notes. Gain
recognized on the disposition of a senior note prior to the purchase contract
settlement date will be treated as ordinary interest income. Loss recognized on
the disposition of a senior note prior to the
S-90
purchase contract settlement date will be treated as ordinary loss to the extent
of such U.S. holder's prior inclusions of original issue discount on the senior
note reduced by coupon payments received. Any loss in excess of such amount will
be treated as a capital loss. In general, gain recognized on the disposition of
a senior note on or after the purchase contract settlement date will be ordinary
interest income to the extent attributable to the excess, if any, of the total
remaining principal and interest payments due on the senior note over the total
remaining payments set forth on the projected payment schedule for the senior
note. Any gain recognized in excess of such amount and any loss recognized on
such a disposition will generally be treated as a capital gain or loss.
Long-term capital gains of individuals are eligible for reduced rates of
taxation. The deductibility of capital losses is subject to limitations.
PURCHASE CONTRACTS
Contract Adjustment Payments and Deferred Contract Adjustment
Payments. There is no direct authority addressing the treatment, under current
law, of the contract adjustment payments or deferred contract adjustment
payments, and such treatment is, therefore, unclear. Contract adjustment
payments and deferred contract adjustment payments may constitute taxable
ordinary income to a U.S. holder when received or accrued, in accordance with
such U.S. holder's regular method of tax accounting. To the extent we are
required to file information returns with respect to contract adjustment
payments and deferred contract adjustment payments, we intend to report such
payments as taxable ordinary income to U.S. holders. U.S. holders should consult
their tax advisors concerning the treatment of contract adjustment payments and
deferred contract adjustment payments, including the possibility that any
contract adjustment payment or deferred contract adjustment payment may be
treated as a loan, purchase price adjustment, rebate or payment analogous to an
option premium, rather than being includible in income on a current basis. The
treatment of contract adjustment payments and deferred contract adjustment
payments could affect a U.S. holder's adjusted tax basis in a purchase contract
or common stock received under a purchase contract or the amount realized by a
U.S. holder upon the sale or disposition of an Upper DECS or the termination of
a purchase contract.
Acquisition of our Common Stock Under a Purchase Contract. A U.S. holder
generally will not recognize gain or loss on the purchase of our common stock
under a purchase contract, except with respect to any cash paid to a U.S. holder
in lieu of a fractional share of our common stock, which should be treated as
paid in exchange for such fractional share. A U.S. holder's aggregate initial
tax basis in the common stock received under a purchase contract should
generally equal the purchase price paid for such common stock, plus the properly
allocable portion of such U.S. holder's adjusted tax basis (if any) in the
purchase contract (see "-- Upper DECS -- Allocation of Purchase Price"), less
the portion of such purchase price and adjusted tax basis allocable to the
fractional share. Payments of contract adjustment payments or deferred contract
adjustment payments that have been received in cash by a U.S. holder but which
payments the U.S. holder has determined not to include in income should reduce
such U.S. holder's adjusted tax basis in the purchase contract or the common
stock to be received thereunder, see "-- Purchase Contracts -- Contract
Adjustment Payments and Deferred Contract Adjustment Payments" below. The
holding period for our common stock received under a purchase contract will
commence on the day following the acquisition of such common stock.
Early Settlement of Purchase Contract. The purchase of our common stock on
early settlement of the purchase contract will be taxed as described above. A
U.S. holder of Upper DECS will not recognize gain or loss on the return of the
U.S. holder's proportionate share of senior notes or treasury securities upon
early settlement of the purchase contract and will have the same adjusted tax
basis and holding period in the senior notes or treasury securities as before
the early settlement. Any contract adjustment payments or deferred contract
adjustment payments that a U.S. holder has determined to include in income but
were forfeited and not paid upon early settlement of the purchase contract
should increase such U.S. holder's adjusted tax basis in the common stock
received under the purchase contract.
Termination of Purchase Contract. If a purchase contract terminates, a
U.S. holder of Upper DECS will recognize gain or loss equal to the difference
between the amount realized (if any) upon such termination and such U.S.
holder's adjusted tax basis (if any) in the purchase contract at the time of
such
S-91
termination. Any contract adjustment payments or deferred contract adjustment
payments that a U.S. holder has determined to accrue in income prior to receipt
should increase such U.S. holder's adjusted tax basis in the purchase contract
in accordance with the discussion in the previous paragraph. Gain or loss
recognized will generally be capital gain or loss and will generally be
long-term capital gain or loss if the U.S. holder held such purchase contract
for more than one year at the time of such termination. Long-term capital gains
of individuals are eligible for reduced rates of taxation. The deductibility of
capital losses is subject to limitations. A U.S. holder will not recognize gain
or loss on the return of such U.S. holder's proportionate share of senior notes
or treasury securities upon termination of the purchase contract and such U.S.
holder will have the same adjusted tax basis and holding period in such senior
notes or treasury securities as before such termination.
Adjustment to Settlement Rate. A U.S. holder of Upper DECS might be
treated as receiving a constructive dividend distribution from us if (1) the
settlement rate is adjusted and as a result of such adjustment such U.S.
holder's proportionate interest in our assets or earnings and profits is
increased and (2) the adjustment is not made pursuant to a bona fide, reasonable
anti-dilution formula. An adjustment in the settlement rate would not be
considered made pursuant to such a formula if the adjustment were made to
compensate a U.S. holder for certain taxable distributions with respect to the
common stock. Thus, under certain circumstances, an increase in the settlement
rate might give rise to a taxable dividend to a U.S. holder of Upper DECS even
though such U.S. holder would not receive any cash related thereto.
COMMON STOCK ACQUIRED UNDER THE PURCHASE CONTRACT
Any distribution on our common stock paid by us out of our current or
accumulated earnings and profits (as determined for U.S. federal income tax
purposes) will constitute a dividend and will be includible in income by a U.S.
holder when received. Any such dividend will be eligible for the dividends
received deduction if the U.S. holder is an otherwise qualifying corporate
holder that meets the holding period and other requirements for the dividends
received deduction.
Upon a disposition of our common stock, a U.S. holder will recognize
capital gain or loss in an amount equal to the difference between the amount
realized and such U.S. holder's adjusted tax basis in our common stock (see
"-- Purchase Contracts -- Acquisition of our Common Stock Under a Purchase
Contract"). Long-term capital gains of individuals are eligible for reduced
rates of taxation. The deductibility of capital losses is subject to
limitations.
STRIPPED DECS
Substitution of Treasury Securities to Create or Recreate Stripped DECS. A
U.S. holder of Upper DECS who delivers treasury securities to the collateral
agent in substitution for senior notes or other pledged securities generally
will not recognize gain or loss upon the delivery of such treasury securities or
the release of the senior notes or other pledged securities to such U.S. holder.
Such U.S. holder will continue to take into account items of income or deduction
otherwise includible or deductible, respectively, by such U.S. holder with
respect to such treasury securities and senior notes or other pledged
securities, and the purchase contract will not be affected by such delivery and
release. In general, a U.S. holder will be required for U.S. federal income tax
purposes to recognize original issue discount on the treasury securities (on a
constant yield basis, regardless of the U.S. holder's method of accounting), or
acquisition discount on the treasury securities (when it is paid or accrues
generally in accordance with such U.S. holder's normal method of accounting).
U.S. holders should consult their tax advisors concerning the tax consequences
of purchasing, owning and disposing of the treasury securities so delivered to
the collateral agent.
Substitution of Senior Notes to Recreate Upper DECS. A U.S. holder of
Stripped DECS who delivers senior notes to the collateral agent in substitution
for pledged treasury securities generally will not recognize gain or loss upon
the delivery of such senior notes or the release of the pledged treasury
securities to such U.S. holder. Such U.S. holder will continue to take into
account items of income or
S-92
deduction otherwise includible or deductible, respectively, by such holder with
respect to such pledged treasury securities and such senior notes. Such U.S.
holder's tax basis in the senior notes, the pledged treasury securities and the
purchase contract will not be affected by such delivery and release. U.S.
holders should consult their own advisors concerning the tax consequences of
purchasing, owning and disposing of the treasury securities so released to them.
TREASURY SECURITIES PURCHASED ON REMARKETING
Ownership of Treasury Securities. We and, by acquiring Upper DECS, each
U.S. holder agrees to treat such U.S. holder as the owner, for U.S. federal
income tax purposes, of the applicable ownership interest of the treasury
securities constituting a part of the Upper DECS beneficially owned by such U.S.
holder in the event of a remarketing of the senior notes prior to the purchase
contract settlement date. Each U.S. holder will include in income any amount
earned on such U.S. holder's proportionate share of the treasury securities for
all tax purposes. The remainder of this discussion assumes that U.S. holders of
Upper DECS will be treated as the owners of the applicable ownership interest of
the treasury securities that constitutes a part of such Upper DECS for U.S.
federal income tax purposes.
Acquisition Discount. Following a remarketing of the senior notes prior to
the purchase contract settlement date, a U.S. holder of Upper DECS will be
required to treat such U.S. holder's proportionate share of each treasury
security that is acquired with the proceeds of the remarketing as a short-term
bond that was originally issued on the date the collateral agent acquired the
relevant treasury securities with acquisition discount equal to the U.S.
holder's proportionate share of the excess of the amounts payable on such
treasury security over the amount paid for the treasury security by the
collateral agent. In general, only accrual basis taxpayers will be required to
include acquisition discount in income as it accrues. Unless such accrual basis
U.S. holder elects to accrue the acquisition discount on a treasury security on
a constant yield to maturity basis, such acquisition discount will be accrued on
a straight-line basis. A U.S. holder that creates Stripped DECS after a
successful remarketing will recognize ordinary income on a disposition of the
treasury securities it holds to the extent of any gain realized that does not
exceed an amount equal to such U.S. holder's proportionate share of the
acquisition discount on the treasury securities not previously included in
income.
Tax Basis in the Treasury Securities. A U.S. holder's initial tax basis in
such U.S. holder's applicable ownership interest of the treasury securities will
equal such U.S. holder's proportionate share of the amount paid by the
collateral agent for the treasury securities. A U.S. holder's adjusted tax basis
in the treasury securities will be increased by the amount of acquisition
discount included in income with respect thereto and decreased by the amount of
cash received with respect to the treasury securities.
CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion is addressed to non-U.S. holders. A "non-U.S.
Holder," is a holder of an Upper DECS that is not a U.S. holder as defined under
"-- Consequences to U.S. Holders." Special rules may apply if such non-U.S.
holder is a "controlled foreign corporation," "passive foreign investment
company" or "foreign personal holding company" or is subject to special
treatment under the Code. In addition, this summary does not address non-U.S.
holders that at any time beneficially and/or constructively own more than 5% of
the Upper DECS or the common stock. A non-U.S. holder that falls within any of
the foregoing categories should consult its tax advisor to determine the U.S.
federal, state, local and foreign tax consequences that may be relevant to it.
UNITED STATES FEDERAL WITHHOLDING TAX
A non-U.S. holder will be treated as owning the senior notes or treasury
securities constituting a part of the Upper DECS owned. We (under the terms of
the Upper DECS) and each non-U.S. holder (by acquiring Upper DECS) agree to
treat the senior notes or treasury securities constituting a part of the Upper
DECS as owned by such non-U.S. holder for all tax purposes, and the remainder of
this summary assumes such treatment.
S-93
U.S. federal withholding tax will not apply to any payment of principal or
interest (including original issue discount and acquisition discount) on the
senior notes or treasury securities provided that:
-- the non-U.S. holder does not actually (or constructively) own 10%
or more of the total combined voting power of all classes of our voting
stock within the meaning of the Code and the Treasury Regulations;
-- the non-U.S. holder is not a controlled foreign corporation that is
related to us through stock ownership; and
-- (a) the non-U.S. holder provides its name, address and certain
other information on an appropriate IRS form (or substitute form), and
certifies, under penalties of perjury, that it is not a United States
person or (b) the non-U.S. holder holds its senior notes or treasury
securities through certain foreign intermediaries or certain foreign
partnerships and certain certification requirements are satisfied.
We will generally withhold tax at a rate of 30% on the dividends, if any,
paid on the shares of common stock acquired under the purchase contract and on
any contract adjustment payments or deferred contract adjustment payments made
with respect to a purchase contract. If a tax treaty applies, a non-U.S. holder
may be eligible for a reduced rate of withholding. Similarly, contract
adjustment payments, deferred contract adjustment payments and dividends, any of
which are effectively connected with the conduct of a trade or business by a
non-U.S. holder within the U.S. (or, if certain tax treaties apply, attributable
to a U.S. permanent establishment maintained by the non-U.S. holder) are not
subject to the withholding tax, but instead are subject to U.S. federal income
tax, as described below. In order to claim any such exemption or reduction in
the 30% withholding tax, a non-U.S. holder should provide an appropriate
properly executed IRS form (or suitable substitute form) claiming (a) a
reduction of or an exemption from withholding under an applicable tax treaty or
(b) that such payments are not subject to withholding tax because they are
effectively connected with the non-U.S. holder's conduct of a trade or business
in the United States. In general, U.S. federal withholding tax will not apply to
any gain or income realized by a non-U.S. holder on the disposition of the Upper
DECS, senior notes, purchase contracts, treasury securities or common stock
acquired under the purchase contracts.
UNITED STATES FEDERAL INCOME TAX
If a non-U.S. holder is engaged in a trade or business in the U.S. (or, if
certain tax treaties apply, if the non-U.S. holder maintains a permanent
establishment within the U.S.) and interest (including original issue discount
and acquisition discount) on the senior notes, the treasury securities,
dividends on the common stock and, to the extent they constitute taxable income,
contract adjustment payments and deferred contract adjustment payments made with
respect to the purchase contracts are effectively connected with the conduct of
that trade or business (or, if certain tax treaties apply, that permanent
establishment), such non-U.S. holder will be subject to U.S. federal income tax
(but not withholding tax), on the interest, original issue discount, acquisition
discount, dividends, contract adjustment payments and deferred contract
adjustment payments on a net income basis in the same manner as if such non-U.S.
holder were a U.S. holder. In addition, a non-U.S. holder that is a foreign
corporation may be subject to a 30% (or, if certain tax treaties apply, such
lower rate as provided) branch profits tax.
Any gain or income realized on the disposition of a Upper DECS, a purchase
contract, a note, a treasury security, or common stock acquired under the
purchase contract generally will not be subject to U.S. federal income tax
unless:
-- that gain or income is effectively connected with the non-U.S.
holder's conduct of a trade or business in the U.S.; or
-- the non-U.S. holder is an individual who is present in the United
States for 183 days or more in the taxable year of the disposition and
certain other conditions are met.
S-94
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Non-U.S. Holders. In general, backup withholding and information reporting
will not apply to payments made by us or our paying agents, in their capacities
as such, to a non-U.S. holder if the holder has provided the required
certification that it is a non-U.S. holder, provided that neither we nor our
paying agent has actual knowledge that the holder is a U.S. holder.
S-95
ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with the
acquisition, holding and disposition of Upper DECS (and the securities
underlying such Upper DECS) by employee benefit plans that are subject to Title
I of the U.S. Employee Retirement Income Security Act of 1974, as amended
("ERISA"), plans, individual retirement accounts and other arrangements that are
subject to Section 4975 of the Code or provisions under any federal, state,
local, non-U.S. or other laws or regulations that are similar to such provisions
of the Code or ERISA (collectively, "similar laws"), and entities whose
underlying assets are considered to include "plan assets" of such plans,
accounts and arrangements (each, a "plan").
GENERAL FIDUCIARY MATTER
ERISA and the Code impose certain duties on persons who are fiduciaries of
a plan subject to Title I of ERISA or Section 4975 of the Code and prohibit
certain transactions involving the assets of a plan and its fiduciaries or other
interested parties. Under ERISA and the Code, any person who exercises any
discretionary authority or control over the administration of such a plan or the
management or disposition of the assets of such plan, or who renders investment
advice for a fee or other compensation to such a plan, is generally considered
to be a fiduciary of the plan.
In considering an investment by a plan in the Upper DECS, a fiduciary
should determine whether the investment is in accordance with the documents and
instruments governing the plan and the applicable provisions of ERISA, the Code
or any similar law relating to a fiduciary's duties to the plan including,
without limitation, the prudence, diversification, delegation of control and
prohibited transaction provisions of ERISA, the Code and any other applicable
similar laws.
Any insurance company proposing to invest assets of its general account in
the Upper DECS should consider the extent that such investment would be subject
to the requirements of ERISA in light of the U.S. Supreme Court's decision in
John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank and
under any subsequent legislation or other guidance that has or may become
available relating to that decision, including the enactment of Section 401(c)
of ERISA by the Small Business Job Protection Act of 1996 and the regulations
promulgated thereunder.
PROHIBITED TRANSACTION ISSUES
Section 406 of ERISA and Section 4975 of the Code prohibit plans subject to
Title I of ERISA or Section 4975 of the Code from engaging in specified
transactions involving plan assets with persons or entities who are "parties in
interest," within the meaning of ERISA, or "disqualified persons," within the
meaning of Section 4975 of the Code, unless an exemption is available. A party
in interest or disqualified person who engages in a non-exempt prohibited
transaction may be subject to excise taxes and other penalties and liabilities
under ERISA and the Code. In addition, the fiduciary of the plan that engages in
such a non-exempt prohibited transaction may be subject to penalties and
liabilities under ERISA and the Code.
If the Upper DECS are purchased by a plan, the Upper DECS (and the
securities underlying such Upper DECS) will be deemed to constitute "plan
assets," and the acquisition, holding and disposition of the Upper DECS (or the
securities underlying such Upper DECS) may constitute or result in a direct or
indirect prohibited transaction under Section 406 of ERISA and/or Section 4975
of the Code if (i) we or our affiliates are a party in interest or disqualified
person with respect to such plan or (ii) the plan sells or disposes of such
Upper DECS (or the securities underlying such Upper DECS) to a counterparty that
is a party in interest or disqualified person with respect to such plan, in each
case, unless an exemption is available. In addition, the disposition of the
Upper DECS (or the securities underlying such Upper DECS) to a plan may
constitute or result in a direct or indirect prohibited transaction under
Section 406 of ERISA and/or Section 4975 of the Code if the counterparty to the
disposition is a party in interest or disqualified person with respect to such
plan, unless an exemption is available. In this regard, the U.S. Department of
Labor (the "DOL") has issued prohibited transaction class exemptions, or
"PTCEs," that
S-96
may apply to these transactions. These class exemptions include, without
limitation, PTCE 84-14 respecting transactions determined by independent
qualified professional asset managers, PTCE 90-1 respecting insurance company
pooled separate accounts, PTCE 91-38 respecting bank collective investment trust
partnerships, PTCE 95-60 respecting life insurance company general accounts,
PTCE 96-23 respecting transactions determined by in-house asset managers, and
PTCE 75-1 respecting principal transactions by a broker-dealer, although there
can be no assurance that all of the conditions of any such exemptions will be
satisfied.
Accordingly, by its purchase of the Upper DECS (and the securities
underlying such Upper DECS), each holder, and the fiduciary of any plan that is
a holder, will be deemed to have represented and warranted on each day from and
including the date of its purchase of the Upper DECS (and the securities
underlying such Upper DECS) through and including the date of the satisfaction
of its obligation under the purchase contract and the disposition of any such
Upper DECS (and any security underlying such Upper DECS) either (i) that it is
not a plan or (ii) that the acquisition, holding and the disposition of any
Upper DECS (and any security underlying such Upper DECS) by such holder does not
and will not constitute a prohibited transaction under ERISA or Section 4975 of
the Code or other similar laws unless an exemption is available with respect to
such transactions and the conditions of such exemption have been satisfied.
In addition, no plan will be permitted to participate in the remarketing
program unless and until such plan provides the remarketing agent with
assurances, reasonably satisfactory to the remarketing agent, that such
participation in the remarketing program will not constitute a prohibited
transaction under ERISA or Section 4975 of the Code or other similar laws for
which an exemption is not available.
Any plan or other entity whose assets include plan assets subject to ERISA,
Section 4975 of the Code or similar laws should consult their advisors and/or
counsel.
S-97
UNDERWRITING
Salomon Smith Barney Inc. is acting as representative of the underwriters
named below. Subject to the terms and conditions stated in the underwriting
agreement dated the date of this prospectus supplement, each underwriter named
below has agreed to purchase, and we have agreed to sell to that underwriter,
the number of Upper DECS set forth opposite the underwriter's name.
NUMBER OF
UPPER
UNDERWRITER DECS
----------- --------------
Salomon Smith Barney Inc. ..................................
UBS Warburg LLC.............................................
ABN AMRO Rothschild LLC.....................................
Banc of America Securities LLC..............................
Banc One Capital Markets, Inc...............................
TD Securities (USA) Inc. ...................................
KBC Financial Products USA Inc. ............................
McDonald Investments Inc., a Key Corp. Company..............
Scotia Capital (USA) Inc. ..................................
---------
Total.................................................. 6,000,000
=========
The underwriting agreement provides that the obligations of the
underwriters to purchase the Upper DECS included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the Upper DECS, other than those covered by the
over-allotment option described below, if they purchase any of the Upper DECS.
The underwriters propose to offer some of the Upper DECS directly to the
public at the public offering price set forth on the cover page of this
prospectus supplement and some of the Upper DECS to dealers at the public
offering price less a concession not to exceed $ per Upper DECS. The
underwriters may allow, and the dealers may reallow, a concession not to exceed
$ per Upper DECS on sales to other dealers. If all of the Upper DECS are not
sold at the initial offering price, the representative may change the public
offering price and the other selling terms.
We have granted to the underwriters an option, exercisable for 13 days from
the date of the closing of this offering, to purchase up to 900,000 additional
Upper DECS at the public offering price less the underwriting discount. The
underwriters may exercise the option solely for the purpose of covering over
allotments, if any, in connection with this offering. To the extent the option
is exercised, each underwriter must purchase a number of additional Upper DECS
approximately proportionate to that underwriter's initial purchase commitment.
We, our officers and directors have agreed that, for a period of 90 days
from the date of this prospectus supplement, we and they will not, without the
prior written consent of Salomon Smith Barney, dispose of or hedge any Upper
DECS, any shares of our common stock or any securities convertible into or
exchangeable for our common stock. However, we may issue shares of our common
stock in the concurrent offering, and we may grant options to purchase shares
and issue shares upon the exercise of outstanding options under our existing
stock option plans, and we may issue shares as consideration in future
acquisitions. Salomon Smith Barney in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.
Prior to this offering, there has been no public market for the Upper DECS.
We have been advised by the underwriters that the underwriters intend to make a
market in the Upper DECS but are not obligated to do so and may discontinue
market making at any time without notice. No assurance can be given as to the
liquidity of the trading market for the Upper DECS.
S-98
We will apply to list our Upper DECS on the New York Stock Exchange under
the symbol " ". The underwriters will undertake to sell a minimum of
1,000,000 Upper DECS, with an aggregate market value of at least $4,000,000 to
not less than 400 holders of 100 or more Upper DECS to meet the New York Stock
Exchange distribution requirements for trading.
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional Upper DECS.
PAID BY
TEMPLE-INLAND INC.
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per Upper DECS.............................................. $ $
Total....................................................... $ $
This prospectus supplement, as amended or supplemented, may be used by the
remarketing agent for remarketing the senior notes or upon early settlement of
the purchase contracts.
In connection with this offering, Salomon Smith Barney on behalf of the
underwriters may purchase and sell the Upper DECS in the open market. These
transactions may include short sales, syndicate covering transactions
stabilizing transactions. Short sales involve syndicate sales in excess of the
number of Upper DECS to be purchased by the underwriters in this offering, which
creates a syndicate short position. "Covered" short sales are sales made in an
amount up to the number of Upper DECS represented by the underwriters'
over-allotment option. In determining the source of Upper DECS to close out the
covered syndicate short position, the underwriters will consider, among other
things, the price of Upper DECS available for purchase in the open market as
compared to the price at which they may purchase Upper DECS through the
over-allotment option. Transactions to close out the covered syndicate short
involve either purchases of Upper DECS in the open market after the distribution
has been completed or the exercise of the over-allotment option. The
underwriters may also make "naked" short sales of Upper DECS in excess of the
over-allotment option. The underwriters must close out any naked short position
by purchasing Upper DECS in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the Upper DECS in the open market after
pricing that will adversely affect investors who purchase in the offering.
Stabilizing transactions consist of bids for or purchases of Upper DECS in the
open market while this offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney repurchases Upper DECS originally sold by that syndicate
member in order to cover syndicate short positions or make stabilizing
purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the Upper DECS. They may also cause the price of
the Upper DECS to be higher than the price that would otherwise exist in the
open market in the absence of these transactions. The underwriters may conduct
these transactions on the New York Stock Exchange or in the over-the-counter
market, or otherwise. If the underwriters commence any of these transactions,
they may discontinue them at any time.
We estimate that our portion of the total expenses of this offering will be
$ .
Because affiliates of the underwriters may receive more than 10% of the net
proceeds of the offering, the underwriters may be deemed to have a "conflict of
interest" under Rule 2710(c)(8) of the Conduct Rules of the National Association
of Securities Dealers. Accordingly, this offering is being made in compliance
with the applicable provisions of Rule 2720 of the Conduct Rules.
S-99
The underwriters have performed investment banking an advisory services for
us from time to time for which they have received customary fees and expenses.
The underwriters may, from time to time, engage in transactions with and perform
services for us in the ordinary course of their business.
We have agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make because of any of those
liabilities.
LEGAL MATTERS
Certain legal matters with respect to the offering of the Upper DECS will
be passed on for us by M. Richard Warner, our General Counsel, and/or Skadden,
Arps, Slate, Meagher & Flom LLP, Washington, D.C. M. Richard Warner beneficially
owns approximately 55,646 shares of our common stock, including options
exercisable within 60 days to purchase 27,234 shares of common stock. Certain
legal matters with respect to the offering of the Upper DECS will be passed upon
for the underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in our Annual Report (Form 10-K) for the year
ended December 29, 2001, as set forth in their report, which is incorporated by
reference in this prospectus supplement. Our financial statements are
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing. Deloitte & Touche LLP,
independent auditors, have audited the consolidated financial statements of
Gaylord Container Corporation for the year ended September 30, 2001 incorporated
by reference in our Current Report on Form 8-K dated February 28, 2002, as set
forth in their report, which is incorporated by reference in this prospectus
supplement. The financial statements of Gaylord Container Corporation are
incorporated by reference in reliance on Deloitte & Touche LLP's report, given
on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, as well as proxy statements
and other information with the SEC. You may read and copy any document we file
with the SEC, including the registration statement, at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
further information about the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public over
the Internet at the SEC's web site at http://www.sec.gov, which contains
reports, proxy statements and other information regarding registrants like us
that file electronically with the SEC.
In addition, Temple-Inland's common stock is listed on the New York Stock
Exchange and the Pacific Exchange and such reports and other information
concerning Temple-Inland may also be inspected at their offices at 20 Broad
Street, New York, New York 10005 and 301 Pine Street, San Francisco, California
94104, respectively. Our common stock's ticker symbol is "TIN."
This prospectus supplement is part of a registration statement on Form S-3
filed by us with the SEC under the Securities Act. As permitted by SEC rules,
this prospectus supplement does not contain all of the information included in
the registration statement and the accompanying exhibits filed with the SEC. You
may refer to the registration statement and its exhibits for more information.
The SEC allows us to "incorporate by reference" into this prospectus
supplement the information we file with the SEC. This means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus supplement. If we subsequently file updating or superseding
information in a document that is incorporated
S-100
by reference into this prospectus supplement, the subsequent information will
also become part of this prospectus supplement and will supersede the earlier
information.
We are incorporating by reference the following documents that we have
filed with the SEC:
- our Annual Report on Form 10-K for the year ended December 29, 2001;
- our Current Report on Form 8-K for the event dated March 4, 2002; and
- the description of our common stock, which is registered under Section 12
of the Exchange Act, contained in the Registration Statement on Form 8-A
filed with the SEC on December 7, 1983, which incorporates by reference
the description of our common stock contained in the Registration
Statement on Form S-1 (No. 33-7091) under the heading "Description of
Common Stock," including any amendment or report filed for the purpose of
updating such description.
The preceding list supersedes and replaces the documents listed in the
accompanying prospectus in the heading "Where You Can Find More Information."
We are also incorporating by reference into this prospectus supplement all
of our future filings with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act until this offering has been completed.
You may obtain a copy of any of our filings which are incorporated by
reference, at no cost, by contacting us at:
Temple-Inland Inc.
1300 MoPac Expressway South
Austin, Texas 78746
Attention: Investor Relations
Telephone: (512) 434-5800
You should rely only on the information provided in this prospectus
supplement or incorporated by reference. We have not authorized anyone to
provide you with different information. You should not assume that the
information in this prospectus supplement is accurate as of any date other than
the date on the first page of this prospectus supplement. We are not making this
offer of securities in any state or country in which the offer or sale is not
permitted.
S-101
PROSPECTUS
$1,500,000,000
(TEMPLE-INLAND INC. LOGO)
DEBT SECURITIES
COMMON STOCK
PREFERRED STOCK
DEPOSITARY SHARES
WARRANTS
STOCK PURCHASE CONTRACTS
STOCK PURCHASE UNITS
UPPER DECS
AND
GUARANTEES
------------------
TEMPLE-INLAND TRUST I
TEMPLE-INLAND TRUST II
TRUST PREFERRED SECURITIES
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
TEMPLE-INLAND INC.
------------------
This prospectus describes securities that we may issue and sell at various
times:
- Our prospectus supplements will be filed at later dates and will contain
specific terms of each issuance of securities.
- We can issue securities with a total offering price of up to
$1,500,000,000 under this prospectus.
- We may sell the securities to or through underwriters, and also to other
purchasers or through agents. The names of the underwriters will be
stated in the prospectus supplements. We may also sell securities
directly to investors.
Our common stock is listed on the New York Stock Exchange and the Pacific
Exchange under the symbol "TIN." Any common stock sold by a prospectus
supplement will be listed on the New York Stock Exchange and Pacific Exchange
upon official notice of issuance.
You should read this prospectus and any prospectus supplements carefully
before you decide to invest. We will not sell any of the securities being
offered without delivery of the applicable prospectus supplement describing the
method and terms of the offering of the securities being offered.
------------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of any of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
------------------
The date of this prospectus is March 26, 2002.
TABLE OF CONTENTS
About This Prospectus....................................... ii
Where You Can Find More Information......................... ii
Incorporation of Certain Documents by Reference............. iii
Cautionary Statement About Forward-Looking Statements....... iii
About Temple-Inland Inc. ................................... 1
About the Temple-Inland Trusts.............................. 3
Use of Proceeds............................................. 4
Ratio of Earnings to Fixed Charges.......................... 4
Description of the Securities We May Offer.................. 6
Description of Debt Securities.............................. 6
Description of Common Stock................................. 17
Description of Preferred Stock.............................. 20
Description of Depositary Shares............................ 21
Description of Warrants..................................... 23
Description of Stock Purchase Contracts and Stock Purchase
Units..................................................... 24
Description of Upper DECS................................... 24
Description of the Trust Preferred Securities............... 26
Description of the Trust Preferred Securities Guarantee..... 28
Relationship Among the Trust Preferred Securities, the Debt
Securities and the Guarantee.............................. 31
Plan of Distribution........................................ 32
Legal Matters............................................... 33
Experts..................................................... 34
ABOUT THIS PROSPECTUS
This prospectus is part of a "shelf" registration statement that we filed
with the Securities and Exchange Commission. By using a shelf registration
statement, we may sell, from time to time, in one or more offerings, any
combination of the securities described in this prospectus. The total amount of
the securities we will sell through these offerings will not exceed
$1,500,000,000.
This prospectus and any accompanying prospectus supplement do not contain
all of the information included in the registration statement as permitted by
the rules and regulations of the SEC. For further information, we refer you to
the registration statement on Form S-3, including its exhibits. Temple-Inland is
subject to the informational requirements of the Securities Exchange Act of
1934, and, therefore, files reports and other information with the SEC.
Temple-Inland's file number with the SEC is 001-08634. Statements contained in
this prospectus and any accompanying prospectus supplement about the provisions
or contents of any agreement or other document are only summaries. If SEC rules
require that any agreement or document be filed as an exhibit to the
registration statement, you should refer to that agreement or document for its
complete contents. You should not assume that the information in this prospectus
or any prospectus supplement is accurate as of any date other than the date on
the front of each document.
This prospectus provides you with only a general description of the
securities we may offer. Each time we sell securities, we will provide a
prospectus supplement that contains specific information about the terms of
those securities. The prospectus supplement may also add, update or change
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with the additional information described
under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
Temple-Inland files annual, quarterly and current reports, proxy statements
and other information with the SEC. The registration statement and our other
filings are available over the Internet at the Commission's worldwide web site
at http://www.sec.gov. You may also read and copy any document that
Temple-Inland files, including the registration statement, at the SEC public
reference facilities at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549.
You may call the SEC at 1-800-SEC-0330 for further information about the
operation of the public reference room.
In addition, Temple-Inland's common stock is listed on the New York Stock
Exchange and the Pacific Exchange and such reports and other information
concerning Temple-Inland may also be inspected at their offices at 20 Broad
Street, New York, New York 10005 and 301 Pine Street, San Francisco, California
94104, respectively. Our common stock's ticker symbol is "TIN."
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
PROVIDED IN THIS PROSPECTUS AND ITS SUPPLEMENTS(S). WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. YOU SHOULD NOT ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE AS OF
ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION.
---------------------
ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them. This means that we can disclose important information to you by
referring you to the documents containing that information. The information
incorporated by reference is considered part of this prospectus. Any information
we file with the SEC later will automatically update and, to the extent
inconsistent, supercede the information in this prospectus. Temple-Inland is
incorporating by reference its annual report on Form 10-K for the fiscal year
ended December 29, 2001 and its current report on Form 8-K filed with the
Commission on March 8, 2002.
We also incorporate by reference any future filings we make with the SEC,
including any filings we make before the registration statement becomes
effective, pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Securities and
Exchange Act of 1934 until we have sold all the offered securities to which this
prospectus relates or the offering is otherwise terminated.
Temple-Inland will provide without charge to each person to whom a copy of
this prospectus has been delivered, upon the written or oral request of any such
person, a copy of any or all of the documents incorporated by reference herein,
other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates. You should direct written or oral requests for such copies to:
Temple-Inland Inc., 1300 MoPac Expressway South, Austin, Texas 78746, Attention:
Corporate Secretary, Telephone (512) 434-5800.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
This prospectus contains and incorporates by reference "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve risks and uncertainties and
are identified by their use of terms and phrases such as "believe,"
"anticipate," "could," "estimate," "intend," "may," "plan," "expect," and
similar expressions, including references to assumptions. Such forward-looking
statements may be included in, but are not limited to, various filings made by
us with the SEC and press releases or oral statements made by our management.
These statements relate to analyses and other information that are based on
forecasts of future results and estimates of amounts not yet determinable. These
statements also relate to our future prospects, developments, and business
strategies. You should not place undue reliance on these forward-looking
statements, which reflect our management's analysis, judgment, belief, or
expectation only as of the date of this prospectus.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for these forward-looking statements. In order to comply with the terms
of the safe harbor, we note that a variety of factors could cause our actual
results to differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such differences include,
but are not limited to:
- general economic, market, or business conditions;
- the opportunities (or lack thereof) that may be presented to and pursued
by Temple-Inland and its subsidiaries;
- the availability and price of raw materials used by Temple-Inland and its
subsidiaries;
- competitive actions by other companies;
- changes in laws or regulations;
- the accuracy of certain judgments and estimates concerning the
integration of Gaylord Container Corporation into the operations of
Temple-Inland; and
- other factors, many of which are beyond the control of Temple-Inland and
its subsidiaries.
iii
ABOUT TEMPLE-INLAND INC.
TEMPLE-INLAND INC.
We are a holding company and conduct all of our operations through our
subsidiaries. Our business is divided among three groups:
- the paper group, which manufactures corrugated packaging products,
- the building products group, which manufactures a wide range of building
products and manages our forest resources of approximately 2.1 million
acres of timberland in Texas, Louisiana, Georgia, and Alabama, and
- the financial services group, which consists of savings bank, mortgage
banking, real estate, and insurance brokerage activities.
The paper group, which is operated by Inland Paperboard and Packaging,
Inc., is a vertically integrated corrugated packaging operation that consists
of:
- four linerboard mills,
- one corrugating medium mill, and
- 61 converting facilities.
We recently completed tender offers for Gaylord Container Corporation and
our acquisition is scheduled to be completed in a close-out merger immediately
following a special meeting of Gaylord stockholders on April 5, 2002. Gaylord is
primarily engaged in the manufacture and sale of corrugated containers and
multiwall and retail paper bags. The operations of Gaylord, which will be
integrated into the paper group, consist of two containerboard mills, one
unbleached kraft paper mill, 18 converting facilities, two multiwall bag plants,
and five retail bag plants.
The building products group is operated by Temple-Inland Forest Products
Corporation and manufactures a wide range of building products including:
- lumber,
- particleboard,
- medium density fiberboard,
- gypsum wallboard, and
- fiberboard.
The financial services group is operated by subsidiaries of Temple-Inland
Financial Services Inc. and consists of:
- savings bank,
- mortgage banking,
- real estate, and
- insurance brokerage activities.
Our savings bank, Guaranty Bank, conducts its business through 152 banking
centers in Texas and California. Mortgage banking is conducted through Guaranty
Residential Lending, Inc., a subsidiary of Guaranty Bank that arranges financing
of single-family mortgage loans (primarily Fannie Mae, Freddie Mac, and Ginnie
Mae), securitizes the loans, and sells the loans into the secondary market. Real
estate operations include development of residential subdivisions, as well as
the management and sale of income producing properties. Insurance brokerage
activities include selling a full range of insurance products.
1
We are a Delaware corporation that was organized in 1983. Our principal
operating subsidiaries include:
- Inland Paperboard and Packaging, Inc.,
- Gaylord Container Corporation,
- Temple-Inland Forest Products Corporation,
- Temple-Inland Financial Services Inc.,
- Guaranty Bank, and
- Guaranty Residential Lending, Inc.
Our principal executive offices are located at 1300 MoPac Expressway South,
Austin, Texas 78746. Our telephone number is (512) 434-5800. You may obtain
additional information about us from our home page on the Internet at
http://www.templeinland.com.
ACQUISITION AND INTEGRATION OF GAYLORD CONTAINER CORPORATION
On February 28, 2002, we completed our tender offers for Gaylord Container
Corporation. Our acquisition is scheduled to be completed in a close-out merger
immediately following a special meeting of Gaylord stockholders on April 5,
2002. The total consideration paid or to be paid in the acquisition is
approximately $868 million. This amount includes approximately $65 million to
purchase in the tender offer or pay out pursuant to a close-out merger all of
the outstanding shares of common stock of Gaylord, approximately $472 million to
purchase approximately 93% of Gaylord's senior and subordinated notes
outstanding at a discount and to pay accrued interest on such notes, $270
million to satisfy all of Gaylord's bank debt and other senior secured
obligations and $61 million in related transaction fees, expenses and
change-in-control payments. We borrowed these funds pursuant to 364-day credit
facility with Citibank, N.A., as administrative agent, and Salomon Smith Barney
Inc., as sole arranger, book manager and syndication agent.
The acquisition of Gaylord will further our strategy to build a
high-performance, fully-integrated corrugated packaging business. We believe the
acquisition will:
- increase market share and further market consolidation,
- increase revenues and modify customer mix,
- extend market reach and improve operating efficiency,
- provide opportunities for significant synergies, and
- provide opportunities for capacity rationalization and asset
dispositions.
MARKET SHARE AND INDUSTRY CONSOLIDATION
The combination of Temple-Inland and Gaylord's corrugated packaging
businesses will create the third-largest U.S. manufacturer in the corrugated
packaging industry, with an approximate 12% market share. This acquisition will
also further consolidate the industry, increasing the market share of the top
five producers of corrugated packaging, which, including this combination, has
increased from approximately 45% in 1993 to approximately 72% in 2002.
REVENUES AND CUSTOMER MIX
The combination of Gaylord and Temple-Inland will increase the revenues of
our paper operation from $2.1 billion to approximately $3.0 billion. In
addition, the acquisition of Gaylord will modify our customer base, increasing
the portion of more value-added, higher-margin local business as a percentage of
total revenues.
2
MARKET REACH AND OPERATING EFFICIENCY
Gaylord's facilities include two containerboard mills and 18 converting
plants. With the acquisition of Gaylord, we will have seven containerboard mills
and 79 converting facilities. Gaylord's two containerboard mills are
high-quality, low-cost mills that will improve the operating efficiency of our
mill system through lower freight costs and trim advantages. The addition of
Gaylord's converting facilities strengthens our presence in existing markets,
extends its reach into new geographic markets and increases its scale to better
serve national account customers.
SIGNIFICANT SYNERGIES
We believe the combination with Gaylord will lead to significant synergy
and cost reduction opportunities within two years of the acquisition. These
synergies will be realized primarily through reduction of selling, general and
administrative expenses and improvement in mill system, packaging and logistics.
CAPACITY RATIONALIZATION AND ASSET DISPOSITION
The combination of Gaylord and Temple-Inland will allow us the opportunity
to review our entire mill system and consider various rationalization
opportunities. Depending on the outcome of the review and the resulting action,
our level of integration could increase. We also intend to divest several
non-strategic Gaylord assets, beginning with the retail bag business. We are
identifying other assets to be divested, and we currently anticipate that such
sales will occur during 2002 and 2003.
ABOUT THE TEMPLE-INLAND TRUSTS
Temple-Inland Trust I and Temple-Inland Trust II are Delaware business
trusts. Each trust is created under the Delaware Business Trust Act, and each
will be governed by a declaration of trust (as it may be amended and restated
from time to time) among the trustees of each trust and Temple-Inland. Each
declaration will be qualified under the Trust Indenture Act of 1939.
Each trust exists primarily for the purposes of:
- issuing and selling its trust preferred securities and trust common
securities;
- investing the proceeds from the sale of its trust securities to acquire
debt securities of Temple-Inland; and
- engaging in only such other activities as are necessary or incidental to
issuing its securities and purchasing and holding Temple-Inland's debt
securities.
Temple-Inland will own all of the common securities of each trust. Each
trust will use all of the proceeds from the sale of its trust preferred
securities and trust common securities to purchase a series of Temple-Inland's
debt securities with the same financial terms as the trust preferred and trust
common securities. The debt securities may be subordinated debt securities or
senior debt securities. We will issue only one series of debt securities to each
trust. The applicable prospectus supplement will describe the specific terms of
the debt securities offered through that prospectus supplement.
When a trust issues its trust preferred securities, holders of the trust
preferred securities will own all of the issued and outstanding trust preferred
securities of the trust. Temple-Inland will acquire all of the issued and
outstanding trust common securities of each trust, representing an undivided
beneficial interest in the assets of each trust of at least 3%.
Each of the trusts' business and affairs are conducted by its trustees who
are appointed by Temple-Inland as the trust common securities holder. The number
of trustees of each trust will initially be three. The prospectus supplement
relating to any trust preferred securities will identify the trustees, which
will include a property trustee for purposes of the Trust Indenture Act of 1939,
a Delaware trustee that has its principal place of business in the State of
Delaware, and one individual trustee who is an officer or
3
employee of Temple-Inland. The prospectus supplement relating to any trust
preferred securities will also identify a guarantee trustee that will hold the
trust preferred securities guarantee for the benefit of the holders of the trust
preferred securities.
Unless otherwise provided in the applicable prospectus supplement, because
Temple-Inland will own all of the trust common securities of each trust,
Temple-Inland will have the exclusive right to appoint, remove or replace
trustees and to increase or decrease the number of trustees. In most cases,
there will be at least three trustees. The term of a trust will be described in
the applicable prospectus supplement, but may dissolve earlier as provided in
the applicable declaration of trust.
The rights of the holders of the trust preferred securities of a trust,
including economic rights, rights to information and voting rights, and the
duties and obligations of the trustees of a trust, will be contained in and
governed by the declaration of that trust (as it may be amended and restated
from time to time), the Delaware Business Trust Act and the Trust Indenture Act
of 1939.
The address of the principal office of each trust is 1300 MoPac Expressway
South, Austin, Texas 78746, and the telephone number of each trust at that
address is (512) 434-5800.
We will provide in any applicable prospectus supplement additional
information about the issuing trust.
USE OF PROCEEDS
Unless otherwise indicated in the applicable prospectus supplement, we will
use the net proceeds from the sale of the securities for general corporate
purposes, including repayment of outstanding debt related to our acquisition of
Gaylord Container Corporation. When a particular series of securities is
offered, the applicable prospectus supplement will set forth our intended use
for the net proceeds received from the sale of such securities. Pending
application for specific purposes, the net proceeds may be invested in
short-term marketable securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges of
Temple-Inland computed on both a consolidated basis and a parent company basis.
The operations of our financial services group are subject, in varying degrees,
to regulatory rules and restrictions, including restrictions on the payment of
dividends. Consequently, our ability to receive dividends from our financial
services group may be affected from time to time as a result of these rules and
restrictions.
FISCAL YEAR
-------------------------------------
RATIO OF EARNINGS TO FIXED CHARGES 2001 2000 1999 1998 1997
---------------------------------- ----- ----- ----- ----- -----
CONSOLIDATED:
Actual....................................... 1.25x 1.39x 1.45x 1.26x 1.19x
Supplemental Pro Forma -- Acquisition(1)..... 1.23x n/a n/a n/a n/a
CONSOLIDATED, EXCLUDING INTEREST ON DEPOSITS:
Actual....................................... 1.56x 1.94x 2.06x 1.65x 1.42x
Supplemental Pro Forma -- Acquisition(1)..... 1.48x n/a n/a n/a n/a
PARENT COMPANY:
Actual....................................... 2.05x 3.13x 3.29x 1.61x 3.88x
Supplemental Pro Forma -- Acquisition(1)..... 1.69x n/a n/a n/a n/a
---------------
(1) Includes the effect of the acquisition of Gaylord Container Corporation.
Please read "About Temple-Inland Inc. -- Acquisition and Integration of
Gaylord Container Corporation." For a pro forma statement of income, read
our current report on Form 8-K filed with the SEC on March 8, 2002 and
incorporated herein by reference, and "Incorporation of Certain Documents by
Reference."
4
For purposes of computing the consolidated ratios, earnings consist of
earnings before income taxes and fixed charges and fixed charges consist of all
interest and the estimated 15% interest component of rent expense. The
consolidated ratios are also presented excluding interest on deposits from fixed
charges.
For purposes of computing the parent company ratios, earnings consist of
earnings before income taxes, excluding the unremitted earnings of our financial
services group, but including dividends received from our financial services
group and fixed charges. Fixed charges consist of parent company interest and
the 15% estimated interest component of parent company rent expense.
We have not issued to date any preferred stock, therefore the ratios of
earnings to fixed charges and preferred stock dividends are identical to the
ratios shown above.
5
DESCRIPTION OF THE SECURITIES WE MAY OFFER
We may issue from time to time, in one or more offerings, the following
securities:
- debt securities, which may be senior or subordinated;
- shares of common stock;
- shares of preferred stock;
- depositary securities;
- warrants exercisable for debt securities, common stock or preferred
stock;
- stock purchase contracts;
- stock purchase units;
- Upper DECS;
- guarantees; or
- trust preferred securities, fully and unconditionally guaranteed as
described herein by Temple-Inland.
The aggregate initial offering price of these offered securities that we
may issue will not exceed $1,500,000,000. If we issue debt securities at a
discount from their principal amount, then, for purposes of calculating the
aggregate initial offering price of the offered securities issued under this
prospectus, we will include only the initial offering price of the debt
securities and not the principal amount of the debt securities.
This prospectus contains a summary of the material general terms of the
various securities that we may offer. The prospectus supplement relating to any
particular securities offered will describe the specific terms of the
securities, which may be in addition to or different from the general terms
summarized in this prospectus. Because the summary in this prospectus and in any
prospectus supplements does not contain all of the information that you may find
useful, you should read the documents relating to the securities that are
described in this prospectus or in any applicable prospectus supplement. Please
read "Where You Can Find More Information" to find out how you can obtain a copy
of those documents.
The applicable prospectus supplement will also contain the terms of a given
offering, the initial offering price and our net proceeds. Where applicable, a
prospectus supplement will also describe any material U.S. federal income tax
considerations relating to the securities offered and indicate whether the
securities offered are or will be listed on any securities exchange.
DESCRIPTION OF DEBT SECURITIES
We may offer debt securities that constitute either senior or subordinated
debt of Temple-Inland. We will issue senior debt securities under the senior
debt indenture between Temple-Inland and JPMorgan Chase Bank (formerly known as
The Chase Manhattan Bank and Chemical Bank), as trustee, dated as of September
1, 1986, as amended by the first supplemental indenture, dated as of April 15,
1988, the second supplemental indenture, dated as of December 27, 1990, and the
third supplemental indenture, dated as of May 9, 1991. We will issue debt
securities that will be subordinated debt under the subordinated debt indenture
between Temple-Inland and JPMorgan Chase Bank, as trustee. This prospectus
refers to each of the senior debt indenture and the subordinated debt indenture
individually as the "indenture" and collectively as the "indentures." This
prospectus refers to JPMorgan Chase Bank as the "trustee." We have filed the
indentures as exhibits to the registration statement.
THE FOLLOWING SUMMARIES OF CERTAIN PROVISIONS OF THE INDENTURES AND THE
DEBT SECURITIES ARE NOT COMPLETE AND THESE SUMMARIES ARE SUBJECT TO THE DETAILED
PROVISIONS OF THE APPLICABLE INDENTURE. FOR A FULL DESCRIPTION OF THESE
PROVISIONS, INCLUDING THE DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS,
AND
6
FOR OTHER INFORMATION REGARDING THE DEBT SECURITIES, SEE THE
INDENTURES. Wherever this prospectus refers to particular sections or defined
terms of the applicable indenture, these sections or defined terms are
incorporated by reference in this prospectus as part of the statement made, and
the statement is qualified in its entirety by such reference. The indentures are
substantially identical, except for the provisions relating to subordination and
Temple-Inland's limitation on liens. Please read "-- Subordinated Debt" and
"-- Certain Covenants of Temple-Inland."
GENERAL TERMS OF THE DEBT SECURITIES
Neither of the indentures limit the amount of debt securities, debentures,
notes, or other evidences of indebtedness that we may issue. The debt securities
will be our unsecured senior or subordinated obligations. We are a holding
company that conducts all of our operations through our subsidiaries. Therefore,
our rights and the rights of our creditors, including holders of the debt
securities, to participate in the assets of any subsidiary upon the subsidiary's
liquidation or recapitalization will be subject to the prior claims of the
subsidiary's creditors, except to the extent that Temple-Inland may itself be a
creditor with recognized claims against the subsidiary. Our ability to pay
principal and interest on the debt securities is, to a large extent, dependent
upon dividends or other payments to us from our subsidiaries.
The indentures provide that we may issue debt securities from time to time
in one or more series and that we may denominate the debt securities and make
them payable in foreign currencies. Special U.S. federal income tax
considerations applicable to any debt securities denominated and payable in a
foreign currency may be described in the applicable prospectus supplement.
TERMS YOU WILL FIND IN THE PROSPECTUS SUPPLEMENT
The applicable prospectus supplement will provide information relating to
the debt securities and the following terms of the debt securities, to the
extent such terms are applicable to the debt securities described in a
particular prospectus supplement:
- classification as senior or subordinated debt securities;
- ranking of the specific series of debt securities relative to other
outstanding indebtedness, including the debt of our subsidiaries;
- if the debt securities are subordinated, the aggregate amount of
outstanding indebtedness, as of a recent date, that is senior to the
subordinated securities, and any limitation on the issuance of additional
senior indebtedness;
- the specific designation, aggregate principal amount, purchase price, and
denomination of such debt securities;
- currency or units based on or relating to currencies in which such debt
securities are denominated or in which principal, interest and premium,
if any, will or may be payable;
- maturity date;
- interest rate or rates, if any, or the method by which the rate will be
determined;
- the dates on which any interest will be payable;
- the place or places where the principal of and interest, if any, on the
debt securities will be payable;
- any redemption or sinking fund provisions;
- whether the debt securities will be issuable in registered or bearer form
or both and, if debt securities in bearer form are issuable, restrictions
applicable to the exchange of one form for another and to the offer,
sale, and delivery of debt securities in bearer form;
- whether we will issue the debt securities by themselves or as part of a
unit together with other securities;
7
- any applicable U.S. federal income tax consequences, including whether
and under what circumstances we will pay additional amounts on debt
securities held by a person who is not a U.S. person, as defined in the
prospectus supplement, in respect of any tax, assessment, or governmental
charge withheld or deducted, and if so, whether we will have the option
to redeem such debt securities rather than pay such additional amounts;
- any provisions for the remarketing of the debt securities by us or on our
behalf;
- if other than denominations of $1,000 and integral multiples thereof, the
denominations;
- any other specific terms of the debt securities, including any additional
events of default or covenants with respect to such debt securities; and
- any other terms consistent with the applicable indenture.
INTEREST RATE
Debt securities that bear interest will do so at a fixed rate or a floating
rate. We will sell, at a discount below the stated principal amount, any debt
securities that bear no interest or that bear interest at a rate that at the
time of issuance is below the prevailing market rate.
The relevant prospectus supplement will describe the special U.S. federal
income tax considerations applicable to:
- any discounted debt securities; or
- certain debt securities issued at par that are treated as having been
issued at a discount for U.S. federal income tax purposes.
SENIOR DEBT
We will issue under the senior debt indenture the debt securities that will
constitute part of our senior debt. These senior debt securities will rank
equally and ratably with all of our other unsecured and unsubordinated debt.
SUBORDINATED DEBT
We will issue under the subordinated debt indenture the debt securities
that will constitute part of our subordinated debt. These subordinated debt
securities will be subordinate and junior in right of payment, to the extent and
in the manner set forth in the subordinated debt indenture, to all of our
"senior indebtedness." The subordinated debt indenture defines "senior
indebtedness" as obligations (i.e., payments of principal, interest and a
premium, if any) of, or guaranteed or assumed by, Temple-Inland for borrowed
money or evidenced by bonds, debentures, notes, or other similar instruments,
and amendments, renewals, extensions, modifications, and refundings of any such
indebtedness or obligation, whether outstanding on the date of this prospectus
or thereafter created, incurred, assumed or guaranteed, unless expressly
provided that such indebtedness is not senior or prior in right of payment to
subordinated debt. "Senior indebtedness" does not include nonrecourse
obligations, the subordinated debt securities, or any other obligations
specifically designated as being subordinate in right of payment to senior
indebtedness.
In general, the holders of all senior indebtedness are entitled to receive
payment of the full amount unpaid on senior indebtedness before the holders of
any of the subordinated debt securities are entitled to receive a payment on
account of the principal or interest on the indebtedness evidenced by the
subordinated debt securities upon the occurrence of certain events. These events
include:
- any insolvency or bankruptcy proceedings, or any receivership, assignment
for the benefit of creditors, liquidation, reorganization, or other
similar proceedings involving us or a substantial part of our property;
8
- a default having occurred for the payment of principal, premium, if any,
or interest on or other monetary amounts due and payable on any senior
indebtedness or any other default having occurred concerning any senior
indebtedness that permits the holder or holders of any senior
indebtedness to accelerate the maturity of any senior indebtedness with
notice or lapse of time, or both. This type of an event of default must
have continued beyond the period of grace, if any, provided for this type
of an event of default under the senior indebtedness, and this type of an
event of default must not have been cured or waived or have ceased to
exist; or
- the principal of, and accrued interest on, any series of the subordinated
debt securities having been declared due and payable upon an event of
default contained in the subordinated debt indenture. This declaration
must not have been rescinded and annulled as provided in the subordinated
debt indenture.
CONVERSION OR EXCHANGE OF DEBT SECURITIES
The applicable prospectus supplement will describe the terms, if any, on
which a series of debt securities may be converted or exchanged into our common
stock or preferred stock or depository shares. These terms will include whether
the conversion or exchange is mandatory, is at our option or is at the option of
the holder. We will also describe in the applicable prospectus supplement how we
will calculate the number of securities that holders of debt securities would
receive if they were to convert or exchange their debt securities, the
conversion price, any other terms related to conversion and any anti-dilution
protections.
LIMITATIONS ON ISSUANCE OF BEARER DEBT SECURITIES
Debt securities in bearer form are subject to special U.S. tax requirements
and may not be offered, sold, or delivered within the United States or its
possessions or to a U.S. person, except in certain transactions permitted by
U.S. tax regulations. Investors should consult the prospectus supplement in the
event that bearer debt securities are issued for special procedures and
restrictions that will apply to such an offering.
REGISTERED GLOBAL SECURITIES
We may issue registered debt securities of a series in the form of one or
more fully registered global securities. We will deposit the registered global
security with a depositary or with a nominee for a depositary identified in the
prospectus supplement relating to such series. We will then issue one or more
registered global securities in a denomination or aggregate denominations equal
to the portion of the aggregate principal amount of outstanding registered debt
securities of the series to be represented by the registered global security or
securities. Unless and until it is exchanged in whole or in part for debt
securities in definitive registered form, a registered global security may not
be transferred, except as a whole in three cases:
- by the depositary for the registered global security to a nominee of the
depositary;
- by a nominee of the depositary to the depositary or another nominee of
the depositary; or
- by the depositary or any nominee to a successor of the depositary or a
nominee of the successor.
The prospectus supplement relating to a series of debt securities will
describe the specific terms of the depositary arrangement concerning any portion
of the debt securities to be represented by a registered global security. We
anticipate that the following provisions will apply to all depositary
arrangements.
Upon the issuance of a registered global security, the depositary for the
registered global security will credit, on its book-entry registration and
transfer system, the principal amounts of the debt securities represented by the
registered global security to the accounts of persons that have accounts with
the depositary. These persons are referred to as "participants." Any
underwriters or agents participating in the distribution of debt securities
represented by the registered global security will designate the accounts to be
9
credited. Only participants or persons that hold interests through participants
will be able to beneficially own interests in a registered global security. The
depositary for a global security will maintain records of beneficial ownership
interests in a registered global security for participants. Participants or
persons that hold through participants will maintain records of beneficial
ownership interests in a global security for persons other than participants.
These records will be the only means to transfer beneficial ownership in a
registered global security.
So long as the depositary for a registered global security, or its nominee,
is the registered owner of a registered global security, the depositary or its
nominee will be considered the sole owner or holder of the debt securities
represented by the registered global security for all purposes under the
applicable indenture. Except as set forth below, owners of beneficial interests
in a registered global security:
- may not have the debt securities represented by a registered global
security registered in their names;
- will not receive or be entitled to receive physical delivery of debt
securities represented by a registered global security in definitive
form; and
- will not be considered the owners or holders of debt securities
represented by a registered global security under the applicable
indenture.
PAYMENT OF INTEREST ON AND PRINCIPAL OF REGISTERED GLOBAL SECURITIES
We will make principal, premium, if any, and interest payments on debt
securities represented by a registered global security registered in the name of
a depositary or its nominee to the depositary or its nominee as the registered
owner of the registered global security. None of Temple-Inland, the trustee, or
any paying agent for debt securities represented by a registered global security
will have any responsibility or liability for:
- any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in such registered global security; or
- maintaining, supervising, or reviewing any records relating to beneficial
ownership interests.
We expect that the depositary, upon receipt of any payment of principal,
premium or interest, will immediately credit participants' accounts with
payments in amounts proportionate to their beneficial interests in the principal
amount of a registered global security as shown on the depositary's records. We
also expect that payments by participants to owners of beneficial interests in a
registered global security held through participants will be governed by
standing instructions and customary practices. This is currently the case with
the securities held for the accounts of customers registered in "street name."
We also expect that this payout will be the responsibility of participants.
EXCHANGE OF REGISTERED GLOBAL SECURITIES
We will issue debt securities in definitive form in exchange for the
registered global security if:
- the depositary for any debt securities represented by a registered global
security is at any time unwilling or unable to continue as depositary;
and
- we do not appoint a successor depositary within 90 days.
In addition, we may, at any time, determine not to have any of the debt
securities of a series represented by one or more registered global securities.
In this event, we will issue debt securities of a series in definitive form in
exchange for all of the registered global security or securities representing
these debt securities.
10
CERTAIN COVENANTS OF TEMPLE-INLAND
The indentures contain certain covenants, including those summarized below,
that will be applicable (unless waived or amended) so long as any of the debt
securities are outstanding.
Definitions. Certain defined terms used in the indentures are summarized
as follows:
"Attributable Debt" means, at the time of determination, the present
value (discounted at the interest rate, compounded semi-annually, equal to
the weighted average Yield to Maturity (as defined in the indenture) of the
debt securities then outstanding under the applicable indenture, such
average being weighted by the principal amount of the debt securities of
each series or, in the case of Original Issue Discount Securities, such
amount to be determined as provided in the definition of "Outstanding") of
the obligation of a lessee for net rental payments during the remaining
term of any lease (including any period for which such lease has been
extended) entered into in connection with a Sale and Leaseback Transaction
(as defined below).
"Debt" means indebtedness for money borrowed.
"Financial Services Subsidiary" means any Subsidiary principally
engaged in banking (including mortgage banking), real estate development,
insurance or a similar financial services business, including, without
limitation, subsidiaries which conduct the activities engaged in at the
date of the indenture by the Lumbermen's Investment Corporation and its
subsidiaries and Temple-Inland Financial Services Inc.
"Funded Debt" means Debt that by its terms matures at, or is
extendible or renewable at the option of the obligor to, a date more than
twelve months after the date of the creation of such Debt.
"Mortgage" means any mortgage, pledge, lien, encumbrance, charge or
security interest of any kind.
"Principal Manufacturing Facility" means any linerboard, corrugating
medium, paperboard, paper or pulp mill any paper converting plant of
Temple-Inland or any Subsidiary that is located within the United States of
America, other than any such mill or plant or portion thereof (1) that is
financed by obligations issued by a State, a territory or a possession of
the United States of America, or any political subdivisions of any of the
foregoing, or the District of Columbia, the interest on which is excludable
from gross income of the holders thereof pursuant to the provisions of
Section 103(a)(1) of the Internal Revenue Code (or any successor to such
provision) as in effect at the time of issuance of such obligations, or (2)
that, in the opinion of the board of directors of Temple-Inland, is not of
material importance to the total business conducted by Temple-Inland and
its Subsidiaries as an entirety.
"Subsidiary" of Temple-Inland means any corporation at least a
majority of whose outstanding voting stock shall at the time be owned,
directly or indirectly, by Temple-Inland or by one or more of its
Subsidiaries, or both.
"Timberlands" means at any time property in the United States of
America that contains standing timber which is, or upon completion of a
growth cycle than in process is expected to become, of a commercial
quantity and of merchantable quality.
Limitations on Liens. We will not, nor will we permit any of our
subsidiaries to, issue, assume, or guarantee any Debt that is secured by a
Mortgage upon any Timberlands or Principal Manufacturing Facility, now owned or
later acquired, without providing that the debt securities (together with, at
our option, any of our other indebtedness ranking equally with the debt
securities) shall be secured equally and ratably with (or prior to) such Debt.
These restrictions shall not apply to:
- Mortgages on any property acquired, constructed, or improved by us or any
of our subsidiaries that are created or assumed within 180 days after
such acquisition (or in the case of property constructed or improved,
after the completion and commencement of commercial operation of the
property, whichever is later) to secure or provide for the payment of the
purchase price or cost of
11
the construction or improvements, or existing Mortgages on property
acquired, provided that such Mortgages shall not apply to any property
previously owned by us or any of our subsidiaries other than unimproved
real property,
- Mortgages on any property acquired from a corporation that is merged with
or into us or one of our subsidiaries or Mortgages outstanding at the
time any corporation becomes one of our subsidiaries,
- Mortgages in favor of us or any of our subsidiaries,
- Mortgages granted or incurred by any Financial Services Subsidiary, or
- any extension, renewal or replacement in whole or in part, of any
Mortgage referred to in the clauses above; provided that the amount of
Debt secured by the Mortgage is not increased.
The following types of transactions, among others, shall not be deemed to
create Debt secured by a Mortgage:
- the Mortgage, sale, or other transfer of timber in connection with an
arrangement under which we or one of our subsidiaries are obligated to
cut such timber in order to provide the mortgagee or transferee with a
specified amount of money, however determined, and
- Mortgages in favor of governmental bodies of the United States or any
state thereof to secure advance, progress, or other payments pursuant to
any contract or statute or to secure indebtedness incurred to finance the
purchase price or cost of constructing or improving the property subject
to such Mortgages.
We or any of our subsidiaries may, however, without securing the debt
securities, issue, assume, or guarantee secured Debt (which would otherwise be
subject to the foregoing restrictions) in an aggregate amount that, together
with all other such Debt and the Attributable Debt in respect of Sale and
Leaseback Transactions (other than Sale or Leaseback Transactions the proceeds
of which have been applied to the retirement of debt securities or Funded Debt),
does not at the time exceed 10% of the net tangible assets of Temple-Inland and
its consolidated subsidiaries as of the latest fiscal year.
"Net tangible assets" is defined as the aggregate amount of assets (less
applicable reserves and other properly deductible items) after deducting (1) all
current liabilities and (2) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense (to the extent included in said aggregate
amount of assets) and other like intangibles, all as set forth on the most
recent consolidated balance sheet of Temple-Inland and its consolidated
subsidiaries and computed in accordance with generally accepted accounting
principles.
Limitation on Sale and Leaseback Transactions. We will not, nor will we
permit any subsidiary to, enter into any arrangement with any person providing
for the leasing to us or a subsidiary of any Timberlands or any Principal
Manufacturing Facility (except for temporary leases for a term of not more than
three years), which property has been owned and, in the case of any such
Principal Manufacturing Facility, has been placed in commercial operation for
more than 180 days by us or such subsidiary and has been or is to be sold or
transferred by us or such subsidiary to such person (referred to as a "Sale and
Leaseback Transaction"), unless either:
- we or the subsidiary would be entitled to incur Debt secured by a
Mortgage on the property to be leased in an amount equal to the
Attributable Debt with respect to such Sale and Leaseback Transaction
without equally and ratably securing the debt securities; or
- we will apply an amount equal to the fair value (as determined by our
board of directors) of the property so leased to the retirement, within
180 days of the effective date of any such Sale and Leaseback
Transaction, of debt securities or of Funded Debt of ours that ranks on a
parity with the debt securities.
12
Limitation on Debt of Subsidiaries. We will not permit any subsidiary to
issue, assume, or guarantee any Debt except for:
- Debt secured by a Mortgage permitted as described under "Limitation on
Liens" above;
- Debt of a corporation existing at the time the corporation is merged into
or consolidated with, or disposes of all or substantially all of its
properties (or those of a one of its divisions) to, a subsidiary;
- Debt of a corporation existing at the time the corporation first becomes
a subsidiary;
- Debt to, or held by, us or one of our subsidiaries;
- Debt existing on the date of the indenture;
- Debt created in connection with, or with a view to, compliance by the
subsidiary with the requirements of any program adopted by any federal,
state, or local governmental authority and applicable to the subsidiary
and providing financial or tax benefits to the subsidiary that are not
available directly to us;
- Debt incurred to pay all or any part of the purchase price or cost of
construction of property (or additions, substantial repairs, alterations,
or substantial improvements to the property) or equipment, provided such
Debt is incurred within one year of the acquisition or completion of
construction (or alteration or repair) and full operation of such
property, provided, further, in respect of such additions, substantial
repairs, alterations, or substantial improvements, that the amount of
such Debt may not exceed the expense incurred to construct such
additions, repairs, alterations, or improvements;
- Debt to a public entity on which the interest payments are exempt from
federal income tax under Section 103 of the Internal Revenue Code (or any
successor to such provision);
- Debt of a Financial Services Subsidiary; and
- any extension, renewal, or replacement of any Debt referred to above,
provided that the amount of Debt issued is not increased.
Notwithstanding these restrictions, any subsidiary may issue, assume, or
guarantee Debt that would otherwise be subject to these restrictions in an
aggregate principal amount that, together with all other Debt of our
subsidiaries that would otherwise be subject to the foregoing restrictions, does
not at any one time exceed 10% of the net tangible assets of Temple-Inland and
its consolidated subsidiaries as of the latest fiscal year.
Limitation on Transfers of Timberlands or Principal Manufacturing
Facilities to Financial Services Subsidiaries. We will not, nor will we permit
any subsidiary (other than a Financial Services Subsidiary) to, sell, transfer,
or otherwise dispose of any Timberlands or any Principal Manufacturing Facility
to any Financial Services Subsidiary other than for cash or other consideration
that, in the opinion of our board of directors, constitutes fair value for such
Timberlands or such Principal Manufacturing Facility.
CONSOLIDATION, MERGER, SALE, OR CONVEYANCE
The indentures provide that we may not consolidate with or merge into any
other corporation or convey or transfer our properties and assets substantially
as an entirety to any person, unless:
- the successor corporation is a corporation organized and existing under
the laws of the United States or any state or the District of Columbia,
that expressly assumes by a supplemental indenture the due and punctual
payment of the principal of, and any interest on, all the debt securities
and the performance of every covenant in the indentures to be performed
or observed by us;
13
- immediately after giving effect to the transaction, no event of default
(as defined below), and no event that, after notice or lapse of time or
both, would become an event of default, shall have occurred and be
continuing; and
- we shall have delivered to the trustee an officers' certificate and an
opinion of counsel, each stating that the consolidation, merger,
conveyance, or transfer and the supplemental indenture comply with these
provisions.
In case of any such consolidation, merger, conveyance, or transfer, the
successor corporation will succeed to, and be substituted for, Temple-Inland
under the indenture, with the same effect as if it had been named in the
indenture as Temple-Inland.
EVENTS OF DEFAULT
Each indenture defines an "event of default" with respect to the debt
securities of any series to mean any of the following:
(1) failure to pay any interest on any of the debt securities when due
for a continuous period of 30 days;
(2) failure to pay the principal of, or any premium on, any of the
debt securities at maturity;
(3) acceleration of the maturity of, or failure to pay at maturity,
any Funded Debt of Temple-Inland in excess of $10,000,000;
(4) failure to make payment under any sinking or purchase fund or
analogous obligation due under the terms of the debt securities;
(5) failure to perform any of our covenants, or a breach of any of our
warranties, contained in the indenture for the benefit of any of the debt
securities, for a continuous period of 90 days after written notice has
been given as specified in the indenture;
(6) certain events of bankruptcy, insolvency, or reorganization
affecting us; and
(7) any other event of default provided in any supplemental indenture
under which the debt securities are issued or in the form of security for
the debt securities.
A default under other indebtedness of ours will not necessarily be a
default under either indenture, and a default under one series of debt
securities under the indenture will not necessarily be a default under any other
series of debt securities.
The indentures provide that if an event of default described in clauses
(1), (2), (4), (5), or (7) above shall have occurred and be continuing with
respect to any series of the debt securities (and if the event of default
relates to clauses (5) or (7) and is with respect to less than all of the series
of debt securities outstanding under such indenture), then either the trustee or
the holders of not less than 25% in aggregate principal amount of the
outstanding debt securities of that series may declare the principal amount, and
any interest accrued on, all outstanding debt securities of that series to be
due and payable immediately. If an event of default described in clauses (5) or
(7) (and if the event of default relates to clauses (5) or (7) and is with
respect to all series of debt securities issued under such indenture), or (3) or
(6) above shall have occurred and be continuing, either the Trustee or the
holders of not less than 25% in aggregate principal amount of all series of debt
securities outstanding (treated as one class) may declare the principal amount,
and any interest accrued on, all series of the debt securities then outstanding
to be due and payable immediately. After any acceleration, but before a judgment
or decree based on that acceleration, the holders of a majority in aggregate
principal amount of the debt securities of that series then outstanding may,
under certain circumstances, rescind and annul that acceleration if all events
of default, other than the non-payment of accelerated principal or interest, or
other specified amount, have been cured or waived as provided in the indenture.
14
The trustee must give to the holders of the debt securities of any series
notice of all uncured defaults known to it with respect to the debt securities
within 90 days after such a default occurs. In the case of a default in the
payment of principal of, or any premium on, or any interest on, any of the debt
securities of that series, the trustee will be protected in withholding this
notice if it in good faith determines that the withholding of this notice is in
the interests of the holders of the debt securities of the applicable series.
Furthermore, for an event of default described in clause (5) above, no notice
will be given to the holder of the debt securities of that series until at least
90 days after the event.
No holder of a debt security of any series will have any right to institute
any proceeding with respect to the indenture, or for the appointment of a
receiver or a trustee, or for any other remedy provided by the indenture,
unless:
- the holder has previously given to the trustee written notice of a
continuing event of default with respect to the debt securities of that
series;
- the holders of at least 25% in aggregate principal amount of the
outstanding debt securities of that series have made written request, and
those holders have offered reasonable indemnity, to the trustee to
institute the proceeding in respect of the event of default; and
- the trustee has failed to institute the proceeding, and has not received
from the holders of a majority in aggregate principal amount of the
outstanding debt securities of that series a direction inconsistent with
that request, within 60 days after that notice, request and offer.
The holders of a majority in aggregate principal amount of the debt
securities then outstanding under the applicable indenture will have the right,
subject to certain limitations, to direct the time, method, and place of
conducting any proceeding for any remedy available to the trustee or exercising
any trust or power conferred on the trustee with respect to the debt securities.
If an event of default occurs and is continuing, the trustee, in exercising its
rights and powers, will be required to use the degree of care of a prudent
person in the conduct of such person's own affairs. The trustee will not be
required to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties under the indenture unless it
has reasonable grounds for believing that repayment of those funds, or adequate
indemnity against that risk or liability, is reasonably assured to it.
We must furnish to the trustee, within 120 days after the end of each
fiscal year, a brief certificate of our compliance with all of the conditions
and covenants under the applicable indenture.
MODIFICATION OF THE INDENTURE
With some exceptions, the indentures or the rights of the holders of the
debt securities may be modified by us and the applicable trustee with the
consent of the holders of a majority in aggregate principal amount of each
series then outstanding affected by the modification. We may not make any of the
following modifications:
- change the maturity of principal of, or any installment of interest on,
any security, or reduce the principal amount of or interest on any debt
security, or change the method of computing the amount of principal of or
interest on the debt security on any date or change any place of payment
where, or the coin or currency in which, any debt security or interest on
the debt security is payable, or impair the right to institute suit for
the enforcement of any payment on or after its maturity;
- reduce the percentage in principal amount of the outstanding debt
securities of any series, the consent of whose holders is required for
any supplemental indenture, or the consent of whose holders is required
for any waiver of compliance with specific provisions of the applicable
indenture or specific defaults under the applicable indenture and their
consequences; or
- modify any of the provisions of specific sections of the applicable
indenture, including the provisions summarized in this paragraph, except
to increase any relevant percentage of holders or to provide
15
that certain other provisions of the applicable indenture cannot be
modified or waived without the consent of the holder of each outstanding
debt security affected.
DEFEASANCE
We will be deemed to have paid and discharged the entire indebtedness on
all the outstanding debt securities by:
- depositing with the applicable trustee:
- an amount of funds sufficient to pay and discharge the entire
indebtedness on all debt securities for principal and interest; or
- such amount of direct obligations of, or obligations the principal of
and interest on which are fully guaranteed by, the government of the
United States as will, together with the income to accrue on them
without consideration of any reinvestment, be sufficient to pay and
discharge the entire indebtedness on all debt securities for principal
and interest; and
- satisfying certain other conditions precedent specified in the indenture.
In the event of any such defeasance, holders of debt securities would be
able to look only to that trust fund for payment of principal of, and any
interest on, their debt securities. To exercise the defeasance option, we, in
addition to satisfying certain other conditions precedent specified in the
indentures, are required to deliver to the trustee an opinion of counsel to the
effect that the deposit of funds or obligations described above and related
defeasance would not cause the holders of debt securities to recognize income,
gain or loss for federal income tax purposes. This opinion of counsel must be
accompanied by a ruling to that effect received from or published by the United
States Internal Revenue Service.
GOVERNING LAW
Each of the indentures provides that it and any debt securities issued
thereunder are governed by, and construed in accordance with, the laws of the
State of New York, except to the extent that the Trust Indenture Act otherwise
applies.
CONCERNING THE TRUSTEE
We may maintain customary banking relationships with JPMorgan Chase Bank,
the trustee under the indentures, in the ordinary course of business.
If an event of default, or an event that would be an event of default if
the requirements for giving us default notice or our default having to exist for
a specific period of time were disregarded, occurs the trustee may be considered
to have a conflicting interest for purposes of the Trust Indenture Act with
respect to debt securities offered under the senior debt indenture and any
offered under the subordinated debt indenture. In such case, the trustee may be
required to resign as trustee under either the senior debt indenture or the
subordinated debt indenture and we would be required to appoint a successor
trustee.
At any time, the trustee under either indenture may resign or be removed by
the holders of at least a majority in principal amount of any series of the
outstanding debt securities of that indenture. If the trustee resigns, is
removed or becomes incapable of acting as trustee, or if a vacancy occurs in the
office of the trustee for any reason, a successor trustee will be appointed in
accordance with the provisions of the indenture.
16
DESCRIPTION OF COMMON STOCK
Our amended and restated certificate of incorporation provides that we have
authority to issue up to 200,000,000 shares of common stock. As of March 21,
2002, there were 49,260,533 shares of common stock issued and outstanding, and
options to purchase 4,494,273 shares of common stock under various stock and
compensation incentive plans. The outstanding shares of our common stock are
fully paid and nonassessable. The holders of our common stock are not entitled
to preemptive or redemption rights, and shares of our common stock are not
convertible into shares of any other class of capital stock. EquiServe Trust
Company, N.A. is the transfer agent and registrar for our common stock.
DIVIDENDS
Except for any preferential rights of holders of any preferred stock that
may then be issued and outstanding and any other class or series of stock having
a preference over the common stock, holders of our common stock are entitled to
receive dividends when declared by our board of directors, from legally
available funds.
VOTING RIGHTS
Each holder of shares of our common stock is entitled to attend all special
and annual meetings of our stockholders. The holders of our common stock have
one vote for each share held on all matters voted upon by our stockholders,
including the election of directors.
RIGHTS UPON LIQUIDATION
In the event of a voluntary or involuntary liquidation, dissolution, or
winding up of Temple-Inland, after the full preferential amounts are paid or set
apart for payment to the holders of the preferred stock and any other class or
series of stock having a preference over the common stock, the holders of our
common stock will be entitled to receive all the remaining assets available for
distribution ratably in proportion to the number of shares held by each.
PROVISIONS WITH POSSIBLE ANTI-TAKEOVER EFFECTS
Various provisions of the Delaware General Corporation Law and our
certificate of incorporation and by-laws, as well as the shareholder rights plan
adopted by us and described below, may make more difficult the acquisition of
control of Temple-Inland by means of a tender offer, open market purchases, a
proxy fight or other means that are not approved by our board of directors.
CHARTER AND BY-LAW PROVISIONS
We currently have the following provisions in our certificate of
incorporation or by-laws that could be considered to be "anti-takeover"
provisions:
- an article in our by-laws providing for a classified board of directors
divided into three classes, one of which is elected for a three-year term
at each annual meeting of stockholders,
- an article in our certificate of incorporation providing that directors
cannot be removed except for cause and by the affirmative vote of a
majority of the then-outstanding shares of all classes and series of
stock entitled to vote in the election of directors (as used herein
"voting stock"),
- an article in our certificate of incorporation requiring the affirmative
vote of at least 80% of the then-outstanding shares of voting stock for
certain merger and asset sale transactions with any holder of 20% or more
of the voting power of Temple-Inland (as used in this subsection, an
"interested stockholder") or any affiliate or associate of any interested
stockholder,
- an article in our certificate of incorporation requiring the affirmative
vote of at least 80% of the then-outstanding shares of voting stock for
the issuance to any interested stockholder or any affiliate
17
or associate of any interested stockholder any securities (other than
upon conversion) that have an aggregate fair market value of $100,000,000
or more,
- an article in our certificate of incorporation requiring the affirmative
vote of at least 80% of the then-outstanding shares of voting stock for
the adoption of any plan or proposal of liquidation or dissolution by or
on behalf of any interested stockholder of any affiliate or associate of
any interested stockholder,
- an article in our certificate of incorporation requiring the affirmative
vote of at least 80% of the then-outstanding shares of voting stock for
any act by us that has the effect of increasing the proportionate share
of the outstanding shares of any class or series of stock that is owned
by an interested stockholder or any affiliate or associate of any
interested stockholder, and
- a by-law requiring stockholders to provide prior notice of nominations
for election to the board of directors or for proposing matters which can
be acted upon at stockholders meetings.
BUSINESS COMBINATIONS UNDER DELAWARE LAW
We are a Delaware corporation and are subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an interested
stockholder (defined generally as a person owning 15% or more of our outstanding
voting stock) from engaging in a business combination with us for three years
following the date that person became an interested stockholder unless:
- before that person became an interested stockholder, our board of
directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination;
- upon completion of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of our outstanding voting stock at the
time the transaction commenced (excluding stock held by persons who are
both directors and officers or by certain employee stock plans); or
- on or following the date on which that person became an interested
stockholder, the business combination is approved by our board of
directors and authorized at a meeting of stockholders by the affirmative
vote of the holders of at least 66 2/3% of our outstanding voting stock
(excluding shares held by the interested stockholder).
A business combination includes mergers, assets sales and other
transactions resulting in a financial benefit to the interested stockholder.
SHAREHOLDER RIGHTS PLAN
On February 20, 1999, we entered into a rights agreement with First Chicago
Trust Company of New York, as rights agent, which currently provides for a
dividend distribution of one-half of a right for each outstanding share of our
common stock. The rights trade automatically with shares of common stock and
become exchangeable only under the circumstances described below. The rights are
designed to protect our and our stockholders' interests against coercive
takeover tactics. The purpose of the rights is to encourage potential acquirers
to negotiate with our board of directors prior to attempting a takeover and to
provide the board with leverage in negotiating on behalf of all stockholders the
terms of any proposed takeover. The rights may have anti-takeover effects. The
rights should not, however, interfere with any merger or other business
combination approved by our board of directors.
Until a right is exercised, the right does not entitle the holder to
additional rights as a stockholder, including, without limitation, the right to
vote or to receive dividends. Upon becoming exercisable, each right entitles its
holders to purchase one one-hundredth of a share of Series A Junior
Participating Preferred Stock at an exercise or purchase price of $200 per
right, subject to adjustment. Each one one-
18
hundredth of a share of Series A Junior Participating Preferred Stock entitles
the holder to receive quarterly dividends payable in cash of an amount per share
equal to the greater of:
- $1.00, or 100 times the aggregate per share amount of all cash dividends;
plus
- 100 times the aggregate per share amount of all non-cash dividends or
other distributions, other than a dividend payable in shares of common
stock, declared on our common stock during the period immediately
preceding the quarterly dividend period.
The dividends on the Junior Participating Preferred Stock are cumulative.
Holders of Junior Participating Preferred Stock have voting rights entitling
them to 100 votes per share on all matters submitted to a vote of our
stockholders.
In general, the rights will not be exercisable until the distribution date,
which is the earlier of (1) 10 business days following a public announcement
that a person or group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of our
outstanding shares of common stock, or (2) 10 business days following the
commencement of a tender offer or exchange offer that would result in a person
or group beneficially owning 25% or more of our outstanding shares of common
stock. Below we refer to the person or group acquiring at least 20% of our
common stock as an acquiring person.
Upon the occurrence of certain events set forth in the rights agreement,
including: (1) that a person or group becomes the beneficial owner of 25% or
more of our outstanding common stock, (2) we become the surviving corporation in
a merger with an acquiring person and the common stock is not changed or
exchanged, (3) an acquiring person engages in one or more self-dealing
transactions as set forth in the rights agreement, or (4) during such time as
there is an acquiring person, an event occurs that results in the ownership
interest of such acquiring person being increased by more than 1%, then each
holder of a right will have the right to exercise and receive common stock
having a value equal to two times the exercise price of the right. The exercise
price is the purchase price times the number of shares of common stock
associated with each right. Any rights that are at any time beneficially owned
by an acquiring person will be null and void and any holder of such right will
be unable to exercise or transfer the right.
In the event that someone becomes an acquiring person and either (1) we are
acquired in a merger or other business combination transaction in which we are
not the surviving corporation or the common stock is changed or exchanged, or
(2) more than 50% of our assets or earning power is sold or transferred, each
right becomes exercisable and each right will entitle its holder to receive
common stock of the acquiring company having a value equal to two times the
exercise price of the right.
The rights will expire at the close of business on February 20, 2009,
unless we redeem them before that time. At any time after the date of the rights
agreement until 10 days following the stock acquisition date, as defined in the
rights agreement, we may redeem the rights in whole, but not in part, at a price
of $0.01 per right. Prior to the distribution date, we may amend the rights
agreement in any respect without the approval of the rights holders. However,
after the distribution date, the provisions of the rights agreement may not be
amended in any way that would adversely affect the holders of rights (other than
any acquiring person or group) or cause the rights to again become redeemable.
The Junior Participating Preferred Stock ranks junior to all other series of our
preferred stock as to the payment of dividends and the distribution of assets
unless the terms of any such other series specify otherwise.
You should refer to the applicable provisions of the rights agreement,
which is incorporated by reference to Exhibit 1 to our Form 8-A filed on
February 19, 1999. Please read "Where You Can Find More Information" to find out
how you can obtain a copy of the rights agreement.
19
DESCRIPTION OF PREFERRED STOCK
The following description discusses the general terms of the preferred
stock that we may issue. The prospectus supplement relating to a particular
series of preferred stock will describe certain other terms of such series of
preferred stock. If so indicated in the prospectus supplement relating to a
particular series of preferred stock, the terms of any such series of preferred
stock may differ from the terms set forth below. The description of preferred
stock set forth below and the description of the terms of a particular series of
preferred stock set forth in the applicable prospectus supplement are not
complete and are qualified in their entirety by reference to our certificate of
incorporation and to the certificate of designation relating to that series of
preferred stock.
AUTHORITY OF THE BOARD TO ISSUE PREFERRED STOCK
Under our amended and restated certificate of incorporation we are
authorized to issue up to 25,000,000 shares of preferred stock, par value $1.00
per share, in one or more series. Our board of directors may authorize the
issuance of preferred stock in one or more series and may fix the relative
rights and preferences of the shares, including voting powers, dividend rights,
liquidation preferences, redemption rights and conversion privileges. On the
date of this prospectus, no shares of preferred stock were outstanding, but
1,000,000 shares of preferred stock, designated as Series A Junior Participating
Preferred Stock, were authorized and reserved for issuance under the shareholder
rights plan discussed above under "Description of Common Stock -- Shareholder
Rights Plan."
You should refer to the prospectus supplement relating to the series of
preferred stock being offered for the specific terms of that series, including:
- the title of the series and the number of shares in the series;
- the price at which the preferred stock will be offered;
- the dividend rate or rates or method of calculating the rates, the dates
on which the dividends will be payable, whether or not dividends will be
cumulative or noncumulative and, if cumulative, the dates from which
dividends on the preferred stock being offered will cumulate;
- the voting rights, if any, of the holders of shares of the preferred
stock being offered;
- the provisions for a sinking fund, if any, and the provisions for
redemption, if applicable, of the preferred stock being offered;
- the liquidation preference per share;
- the terms and conditions, if applicable, upon which the preferred stock
being offered will be convertible into our common stock, including the
conversion price, or the manner of calculating the conversion price, and
the conversion period;
- the terms and conditions, if applicable, upon which the preferred stock
being offered will be exchangeable for debt securities, including the
exchange price, or the manner of calculating the exchange price, and the
exchange period;
- any listing of the preferred stock being offered on any securities
exchange;
- whether interests in the shares of the series will be represented by
depositary shares;
- a discussion of any material U.S. federal income tax considerations
applicable to the preferred stock being offered;
- the relative ranking and preferences of the preferred stock being offered
as to dividend rights and rights upon liquidation, dissolution or the
winding up of our affairs;
20
- any limitations on the issuance of any class or series of preferred stock
ranking senior or equal to the series of preferred stock being offered as
to dividend rights and rights upon liquidation, dissolution or the
winding up of our affairs; and
- any additional rights, preferences, qualifications, limitations and
restrictions of the series.
The preferred stock of each series will rank senior to the common stock and
the Series A Junior Participating Preferred Stock in priority of payment of
dividends, and in the distribution of assets in the event of any liquidation,
dissolution or the winding up of our affairs, to the extent of the preferential
amounts to which the preferred stock of the respective series will be entitled.
Upon issuance, the shares of preferred stock will be fully paid and
nonassessable, which means that its holders will have paid their purchase price
in full and we may not require them to pay additional funds. Holders of
preferred stock will not have any preemptive rights.
The transfer agent and registrar for the preferred stock will be identified
in the applicable prospectus supplement.
DESCRIPTION OF DEPOSITARY SHARES
We may elect to offer fractional interests in shares of preferred stock,
rather than offer whole shares of preferred stock. If we choose to do this, we
will provide for the issuance by a depositary to the public of receipts for
depositary shares. Each depositary share will represent fractional interests of
a particular series of preferred stock.
The shares of any series of preferred stock underlying the depositary
shares will be deposited under a separate deposit agreement between us and a
bank or trust company, which we will select. The bank or trust company must have
its principal office in the United States and a combined capital and surplus of
at least $500,000,000. The prospectus supplement relating to a series of
depositary shares will state the name and address of the depositary. Unless
otherwise provided by the deposit agreement, each owner of depositary shares
will be entitled, in proportion to the applicable fractional interests in shares
of preferred stock underlying the depositary shares, to all the rights and
preferences of the preferred stock underlying the depositary shares including
dividend, voting, redemption, conversion and liquidation rights.
The depositary shares will be evidenced by depositary receipts issued under
the deposit agreement. Depositary receipts will be distributed to those persons
purchasing the fractional interests in shares of the related series of preferred
stock in accordance with the terms of the offering described in the applicable
prospectus supplement.
DIVIDENDS AND OTHER DISTRIBUTIONS
The depositary will distribute all cash dividends or other cash
distributions received in respect of preferred stock to the record holders of
depositary shares relating to the preferred stock in proportion to the numbers
of depositary shares owned by the holders on the relevant record date. The
depositary will distribute only an amount, however, that can be distributed
without attributing to any holder of depositary shares a fraction of one cent,
and any balance not so distributed will be added to and treated as part of the
next sum received by the depositary for distribution to record holders of
depositary shares.
If there is a non-cash distribution, the depositary will distribute
property received by it to the record holders of depositary shares entitled to
it, unless the depositary determines that it is not feasible to make the
distribution. If this happens, the depositary may, with our approval, sell the
property and distribute the net sale proceeds to the holders. The deposit
agreement will also contain provisions relating to the manner in which any
subscription or similar rights that we offer to holders of the preferred stock
will be made available to the holders of depositary shares.
21
REDEMPTION OF DEPOSITARY SHARES
If a series of the preferred stock underlying the depositary shares is
redeemed in whole or in part, the depositary shares will be redeemed from the
redemption proceeds received by the depositary. The depositary will mail notice
of redemption not less than 30, and not more than 60, days before the date fixed
for redemption to the record holders of the depositary shares to be redeemed at
their addresses appearing on the depositary's books. The redemption price for
each depositary share will be equal to the applicable fraction of the redemption
price for each share payable with respect to the series of the preferred stock.
Whenever we redeem shares of preferred stock held by the depositary, the
depositary will redeem on the same redemption date the number of depositary
shares relating to the shares of preferred stock so redeemed. If less than all
of the depositary shares are to be redeemed, the depositary shares to be
redeemed will be selected by lot or proportionally as may be determined by the
depositary.
After the date fixed for redemption, the depositary shares called for
redemption will no longer be considered outstanding and all rights of the
holders of the depositary shares will cease, except the right to receive the
money, securities or other property payable upon the redemption and any money,
securities or other property to which the holders of the redeemed depositary
shares were entitled upon surrender to the depositary of the depositary receipts
evidencing the depositary shares.
VOTING THE PREFERRED STOCK
Upon receipt of notice of any meeting at which the holders of the preferred
stock are entitled to vote, the depositary will mail the information contained
in the notice of meeting to the record holders of the depositary shares relating
to the preferred stock. Each record holder of depositary shares on the record
date, which will be the same date as the record date for the preferred stock,
will be entitled to instruct the depositary how to exercise the voting rights
pertaining to the number of shares of preferred stock underlying the holder's
depositary shares. The depositary will endeavor, to the extent practicable, to
vote the number of shares of preferred stock underlying the depositary shares in
accordance with these instructions, and we will agree to take all action that
the depositary may consider necessary in order to enable the depositary to vote
the shares.
AMENDMENT AND TERMINATION OF DEPOSITARY AGREEMENT
We may enter into an agreement with the depositary at any time to amend the
form of depositary receipt evidencing the depositary shares and any provision of
the deposit agreement. However, the holders of a majority of the depositary
shares must approve any amendment which materially and adversely alters the
rights of the existing holders of depositary shares. We or the depositary may
terminate the deposit agreement only if (1) all outstanding depositary shares
issued under the agreement have been redeemed or (2) a final distribution in
connection with any liquidation, dissolution or winding up has been made to the
holders of the depositary shares.
CHARGES OF DEPOSITARY
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the depositary arrangements. We will also pay
charges of the depositary in connection with the initial deposit of the
preferred stock and any redemption of the preferred stock. Holders of depositary
shares will pay transfer and other taxes and governmental charges and such other
charges as are expressly provided in the deposit agreement to be for their
accounts.
RESIGNATION AND REMOVAL OF DEPOSITARY
The depositary may resign at any time by delivering to us notice of its
election to resign, and we may at any time remove the depositary. Any
resignation or removal will take effect when a successor depositary has been
appointed and has accepted the appointment. Appointment must occur within 60
days after delivery of the notice of resignation or removal. The successor
depositary must be a bank or trust company
22
having its principal office in the United States and having a combined capital
and surplus of at least $500,000,000.
MISCELLANEOUS
The depositary will forward to the holders of depositary shares all reports
and communications that we deliver to the depositary and that we are required to
furnish to the holders of the preferred stock. Neither the depositary nor
Temple-Inland will be liable if it is prevented or delayed by law or any
circumstance beyond its control in performing its obligations under the deposit
agreement. The obligations of Temple-Inland and the depositary under the deposit
agreement will be limited to performance in good faith of their duties under the
agreement and they will not be obligated to prosecute or defend any legal
proceeding in respect of any depositary shares or preferred stock unless the
holders provide them with satisfactory indemnity. They may rely upon written
advice of counsel or accountants, or information provided by persons presenting
preferred stock for deposit, holders of depositary shares or other persons
believed to be competent and on documents they believe to be genuine.
DESCRIPTION OF WARRANTS
We may issue warrants to purchase debt or equity securities. We may issue
warrants independently or together with any offered securities. The warrants may
be attached to or separate from those offered securities. We will issue the
warrants under warrant agreements to be entered into between us and a bank or
trust company, as warrant agent, all as described in the applicable prospectus
supplement. The warrant agent will act solely as our agent in connection with
the warrants and will not assume any obligation or relationship of agency or
trust for or with any holders or beneficial owners of warrants.
The prospectus supplement relating to any warrants that we may offer will
contain the specific terms of the warrants. These terms may include the
following:
- the title of the warrants;
- the designation, amount and terms of the securities for which the
warrants are exercisable;
- the designation and terms of the other securities, if any, with which the
warrants are to be issued and the number of warrants issued with each
other security;
- the price or prices at which the warrants will be issued;
- the aggregate number of warrants;
- any provisions for adjustment of the number or amount of securities
receivable upon exercise of the warrants or the exercise price of the
warrants;
- the price or prices at which the securities purchasable upon exercise of
the warrants may be purchased;
- if applicable, the date on and after which the warrants and the
securities purchasable upon exercise of the warrants will be separately
transferable;
- if applicable, a discussion of the material U.S. federal income tax
considerations applicable to the exercise of the warrants;
- any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants;
- the date on which the right to exercise the warrants will commence, and
the date on which the right will expire;
- the maximum or minimum number of warrants that may be exercised at any
time; and
- information with respect to book-entry procedures, if any.
23
EXERCISE OF WARRANTS
Each warrant will entitle the holder of warrants to purchase for cash the
amount of debt or equity securities, at the exercise price stated or
determinable in the prospectus supplement for the warrants. Warrants may be
exercised at any time up to the close of business on the expiration date shown
in the applicable prospectus supplement, unless otherwise specified in such
prospectus supplement. After the close of business on the expiration date,
unexercised warrants will become void. Warrants may be exercised as described in
the applicable prospectus supplement. When the warrant holder makes the payment
and properly completes and signs the warrant certificate at the corporate trust
office of the warrant agent or any other office indicated in the prospectus
supplement, we will, as soon as possible, forward the debt or equity securities
that the warrant holder has purchased. If the warrant holder exercises the
warrant for less than all of the warrants represented by the warrant
certificate, we will issue a new warrant certificate for the remaining warrants.
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
We may issue stock purchase contracts, including contracts obligating
holders to purchase from us, and for us to sell to the holders, a specified
number of shares of common stock at a future date or dates. The price per share
of common stock and the number of shares of common stock may be fixed at the
time the stock purchase contracts are issued or may be determined by reference
to a specific formula stated in the stock purchase contracts.
The stock purchase contracts may be issued separately or as part of units
that we call "stock purchase units." Stock purchase units consist of a stock
purchase contract and either our debt securities or debt obligations of third
parties, including U.S. treasury securities, securing the holders' obligations
to purchase the common stock under the stock purchase contracts.
The stock purchase contracts may require us to make periodic payments to
the holders of the stock purchase units or vice versa, and these payments may be
unsecured or refunded on some basis. The stock purchase contracts may require
holders to secure their obligations in a specified manner.
The applicable prospectus supplement will describe the terms of the stock
purchase contracts or stock purchase units. The description in the prospectus
supplement will only be a summary, and you should read the stock purchase
contracts, and, if applicable, collateral or depositary arrangements, relating
to the stock purchase contracts or stock purchase units. Material U.S. federal
income tax considerations applicable to the stock purchase units and the stock
purchase contracts will also be discussed in the applicable prospectus
supplement.
DESCRIPTION OF UPPER DECS
We may issue Upper DECS obligating holders to purchase from us, and for us
to sell to the holders, a specified number of shares of common stock at a
specified price on a future date. Each Upper DECS is a stock purchase unit that
will consist of a stock purchase contract and a senior note or other security
or, after a successful remarketing, the specified pledged treasury securities or
other security resulting from the remarketing. Each stock purchase contract
underlying an Upper DECS, unless earlier terminated or earlier settled,
obligates the holder to purchase, and us to sell, at a specified price a number
of shares of our common stock determined by the settlement rate on the stock
purchase date. A senior note or other security is pledged to secure the holders'
obligations under the stock purchase contract to purchase our common stock.
As described in the prospectus supplement relating to any Upper DECS, we
will enter into a stock purchase contract agreement with a bank or trust company
relating to any Upper DECS to act as agent for the holders of the Upper DECS. We
will also enter into a pledge agreement with a bank or trust company as
collateral agent for our benefit to secure the obligations of the holders of the
Upper DECS. At the closing of the offering of any Upper DECS, the underwriters
will purchase the Upper DECS. The
24
purchase price of each Upper DECS will be allocated by us between the related
stock purchase contract and the related senior note or other security. The
senior notes or other securities will then be pledged to the collateral agent to
secure the obligations owed to us under the stock purchase contracts.
The prospectus supplement relating to any Upper DECS that we may offer will
contain the specific terms of the Upper DECS. These terms may include:
- the title of the Upper DECS;
- the price at which the Upper DECS will be issued, which will determine
the price per share of common stock at which the securities must be
purchased and sold on the stock purchase date;
- the settlement rate, or the mechanism or formula for setting the
settlement rate, that will determine the aggregate number of newly issued
shares of our common stock issuable upon settlement of the stock purchase
contract on the stock purchase date;
- the type, and if applicable, the principal amount, maturity and any
initial or other interest rates of the senior notes or other underlying
securities constituting part of the Upper DECS;
- any anti-dilution adjustment provisions that will affect the number of
shares of common stock receivable upon settlement of the stock purchase
contracts on the stock purchase date;
- any applicable U.S. federal income tax considerations applicable to the
holding of or the exercise of any rights under the Upper DECS;
- a discussion of the conditions necessary to effect a change in control or
corporate reorganization and the effect these events would have on the
terms of the Upper DECS;
- the ability and procedures to create "Stripped DECS" from Upper DECS by
withdrawing the pledged senior note or other security underlying the
Upper DECS by substituting, as pledged securities, certain other
specifically identified securities;
- any payments that the holders of Upper DECS will receive;
- the date and terms of settlement of the stock purchase contracts that
form part of the Upper DECS, including the ability to settle the stock
purchase contract earlier or upon the occurrence of specified conditions;
- any terms related to the remarketing of the senior notes or other
underlying securities that constitute part of the Upper DECS; and
- any other terms of the Upper DECS, including terms, procedures and
limitations relating to the modification of the Upper DECS.
CREATING STRIPPED DECS AND RECREATING UPPER DECS
As described in the prospectus supplement relating to any Upper DECS,
holders of Upper DECS may be permitted to withdraw the pledged senior note or
other securities underlying the Upper DECS by substituting, as pledged
securities, specifically identified securities that will pay the amount due on
the stock purchase date specified in the stock purchase contract. If a holder of
Upper DECS elects to substitute identified securities as pledged securities, the
pledged senior notes or other underlying securities will be released from the
pledge agreement and delivered to the holder. The Upper DECS then become
Stripped DECS. As described in the prospectus supplement relating to any Upper
DECS, holders of Stripped DECS may be permitted to recreate Upper DECS by
resubstituting the senior notes or other underlying securities or, after
successful remarketing, the applicable specified securities underlying the
Stripped DECS relating to any Upper DECS.
25
PAYMENTS
As described in the prospectus supplement relating to any Upper DECS,
holders of Upper DECS may receive interest payments on the senior notes or other
underlying securities at a specified annual rate of the principal amount of the
senior note or other underlying securities until a successful remarketing of the
senior notes or other underlying securities. A holder of Stripped DECS will not
be entitled to any such payments. A holder of senior notes or other underlying
securities that holds them separate and apart from the Upper DECS will receive
the interest payments payable on the senior notes or other underlying
securities.
REMARKETING
As described in the prospectus supplement relating to any Upper DECS, the
senior notes or other underlying securities held by each holder of an Upper DECS
may be subject to a remarketing. Holders of Upper DECS may be permitted to
opt-out of any remarketing process. In any remarketing process, the proceeds
will be used to purchase treasury or other identified securities that will be
pledged to secure the obligations of the participating holder of Upper DECS
under the related stock purchase contract. The redemption proceeds received on
the pledged treasury or other identified securities underlying the Upper DECS of
the holder will be used to satisfy the participating holder's obligation to
purchase our common stock on the stock purchase date. We may enter into a
remarketing agreement with a nationally recognized investment banking firm as
remarketing agent, under which that firm will agree to use its commercially best
efforts to sell the senior notes or other underlying securities that are
included in the Upper DECS.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
From time to time, the trusts may offer trust preferred securities
representing undivided beneficial interests in the assets of the issuing trust.
The trusts will use the proceeds from the sale of their trust preferred
securities to purchase debt securities of Temple-Inland. Each trust preferred
security will entitle the holder to receive cash distributions as described in
this prospectus and the applicable prospectus supplement.
The terms of the trust preferred securities will include those stated in
the applicable declaration of trust (as it may be amended and restated from time
to time) and those made a part of that declaration by the Trust Indenture Act of
1939.
The prospectus supplement relating to trust preferred securities being
offered will include specific terms relating to the offering. These terms will
include some or all of the following:
- the particular trust issuing such trust preferred security;
- the specific designation, number and purchase price of the trust
preferred securities issued by the trust;
- the annual distribution rate and any conditions upon which distributions
are payable, the distribution payment dates, the record dates for
distribution payments and the additional amounts, if any, that may be
payable with respect to the trust preferred securities;
- whether distributions will be cumulative or compounding and, if so, the
dates from which distributions will be cumulative or compounded;
- the amounts that will be paid out of the assets of the trust, after the
satisfaction of liabilities to creditors of the trust, to the holders of
trust preferred securities upon dissolution;
- the trust's obligation or right to repurchase or redeem its trust
preferred securities;
- the liquidation amount per trust preferred security to be paid to the
holders and any preference or subordination rights upon any voluntary or
involuntary dissolution, winding-up, default or liquidation of the trust;
26
- any voting rights of the trust preferred securities in addition to those
required by law;
- terms for any conversion or exchange of the debt securities or the trust
preferred securities into other securities;
- any rights to defer distributions on the trust preferred securities by
extending the interest payment period on the debt securities;
- any securities exchange, if applicable, upon which such trust preferred
security shall be listed;
- whether such trust preferred securities are issuable in book-entry form
only and, if so, the identity of the depositary and disclosure relating
to the depositary arrangements;
- certain material U.S. federal income tax considerations applicable to any
offering of trust preferred securities; and
- any other relevant terms, rights, preferences, privileges, limitations or
restrictions of the trust preferred securities.
GENERAL
The regular trustees, on behalf of the trust and pursuant to the
declaration of trust, will issue one class of trust preferred securities and one
class of trust common securities. The trust securities will represent undivided
beneficial ownership interests in the assets of the trust.
Except as described in the applicable prospectus supplement, the trust
preferred securities will rank equally, and payments will be made thereon
proportionately, with the trust common securities. The proceeds from the sale of
the trust preferred securities and trust common securities will be used by the
trust to purchase a series of our debt securities with the same financial terms
as the trust preferred and trust common securities. The property trustee of the
trust will hold legal title to the debt securities in trust for the benefit of
the holders of the trust securities. In addition, we will execute a guarantee
agreement for the benefit of the holders of the trust preferred securities. The
guarantee will not guarantee the payment of distributions (as defined below) or
any amounts payable on redemption or liquidation of the trust preferred
securities when the trust does not have the funds available to make such
payments.
DISTRIBUTIONS AND DEFERRAL OF DISTRIBUTIONS
The only source of cash available to either trust to make payments to the
holders of its trust preferred securities will be payments received on the debt
securities it purchased from us with the proceeds from the sale of its trust
securities. If we fail to make a required payment in respect of such debt
securities, the applicable trust will not have sufficient funds to make the
related payments, including distributions, in respect of its trust preferred
securities. Each of the trusts is a separate legal entity, and the assets of one
are not available to satisfy the obligations of the other.
If you purchase trust preferred securities of a trust, you are entitled to
receive cash distributions at the rate specified in the applicable prospectus
supplement. Unless we inform you otherwise in the applicable prospectus
supplement, distributions will accumulate from the date the trust issues the
trust preferred securities and will be paid in arrears on the dates we specify
in the prospectus supplement. We may, however, defer distributions as described
below.
So long as no event of default on the series of debt securities has
occurred and is continuing, we will have the right to defer interest payments on
the debt securities held by a trust. If we elect to exercise such right, the
trusts will defer distributions on the related trust preferred securities.
During any time of deferral, distributions to which the holders of the trust
preferred securities are entitled will continue to accumulate. We will describe
in the applicable prospectus supplement any rights to defer distributions on the
trust preferred securities by extending the interest payment period on the debt
securities. We will also describe in the applicable prospectus supplement any
limitations that may be imposed on us during any
27
deferral period. We have no current intention to exercise our right to defer
payments of interest on a series of our debt securities and, accordingly,
distributions on the related trust preferred securities.
DISSOLUTION
In general, unless we inform you otherwise in the applicable prospectus
supplement, the holder of the trust common securities has the right to dissolve
the trust at any time. If the trust is dissolved, after satisfaction of the
trust's creditors, the trust may distribute debt securities on a proportionate
basis to the holders of trust preferred and trust common securities.
VOTING RIGHTS
Generally, except as described in any prospectus supplement, the holders of
the trust preferred securities will not have any voting rights.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES GUARANTEE
Temple-Inland will fully and unconditionally guarantee payments on the
trust preferred securities as described in this section and in any applicable
prospectus supplement. Such a guarantee will typically cover the following
payments:
- periodic cash distributions on the trust preferred securities out of
funds held by the property trustee;
- payments on dissolution of each trust; and
- payments on redemption of trust preferred securities of each trust.
The guarantee trustee will hold the guarantee for the benefit of the
holders of trust preferred securities.
We have summarized selected provisions of the guarantee below. This summary
is not complete. For a complete description, we encourage you to read the
specific terms of the guarantee contained in the applicable prospectus
supplement.
GENERAL
We will irrevocably and unconditionally agree to pay to the holders of
trust preferred securities in full the following amounts to the extent not paid
by the trust:
- any accumulated and unpaid distributions and any additional amounts with
respect to the trust preferred securities and any redemption price for
trust preferred securities called for redemption by the trust, if and to
the extent that we have made corresponding payments on the debt
securities to the property trustee of the trust;
- payments upon the dissolution of the trust equal to the lesser of:
- the liquidation amount plus all accumulated and unpaid distributions and
additional amounts on the trust preferred securities to the extent the
trust has funds legally available for those payments; and
- the amount of assets of the trust remaining legally available for
distribution to the holders of trust preferred securities in liquidation
of the trust.
We will not be required to make these liquidation payments if:
- the trust distributes the debt securities to the holders of trust
preferred securities in exchange for their trust preferred securities; or
- the trust redeems the trust preferred securities in full upon the
maturity or redemption of the debt securities.
28
We may satisfy our obligation to make a guarantee payment either by making
payment directly to the holders of trust preferred securities or to the
guarantee trustee for remittance to the holders or by causing the applicable
trust to make the payment to them.
Each guarantee is a guarantee from the time of issuance of the applicable
series of trust preferred securities. THE GUARANTEE, HOWEVER, ONLY COVERS
DISTRIBUTIONS AND OTHER PAYMENTS ON TRUST PREFERRED SECURITIES IF AND TO THE
EXTENT THAT WE HAVE MADE CORRESPONDING PAYMENTS ON THE DEBT SECURITIES TO THE
APPLICABLE PROPERTY TRUSTEE. IF WE DO NOT MAKE THOSE CORRESPONDING PAYMENTS ON
THE DEBT SECURITIES, THE TRUST WILL NOT HAVE FUNDS AVAILABLE FOR PAYMENTS, AND
WE WILL HAVE NO OBLIGATION TO MAKE A GUARANTEE PAYMENT.
Our obligations under the declaration of trust for each trust, the
guarantee, the debt securities and the associated indenture taken together will
provide a full and unconditional guarantee of payments due on the trust
preferred securities. We will describe the specific terms of the guarantee in a
prospectus supplement.
COVENANTS
In each guarantee, we will agree that, as long as any trust preferred
securities issued by the applicable trust are outstanding, we will not make the
payments and distributions described below if:
- we are in default on our guarantee payments or other payment obligations
under the related guarantee;
- any trust enforcement event under the applicable declaration of trust has
occurred and is continuing; or
- we have elected to defer payments of interest on the related debt
securities by extending the interest payment period and that deferral
period is continuing.
In these circumstances, we will agree that we will not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our
capital stock;
- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities that rank equally with or junior
in interest to the debt securities or make any guarantee payments with
respect to any guarantee by us of the debt of any of our subsidiaries if
such guarantee ranks equally with or junior in interest to the debt
securities.
However, even during such circumstances, we may:
- purchase or acquire our capital stock in connection with the satisfaction
by us of our obligations under any employee benefit plans or pursuant to
any contract or security outstanding on the first day of any extension
period requiring us to purchase our capital stock;
- reclassify our capital stock or exchange or convert one class or series
of our capital stock for another class or series of our capital stock;
- purchase fractional interests in shares of our capital stock pursuant to
the conversion or exchange provisions of such capital stock or the
security being converted or exchanged;
- declare dividends or distributions in our capital stock;
- redeem or repurchase any rights pursuant to a rights agreement; and
- make payments under the guarantee related to the trust preferred
securities.
In addition, as long as trust preferred securities issued by any trust are
outstanding, we will agree that we will:
- remain the sole direct or indirect owner of all the outstanding common
securities of that trust, except as permitted by the applicable
declaration of trust;
29
- permit the trust common securities of that trust to be transferred only
as permitted by the declaration of trust; and
- use reasonable efforts to cause that trust to continue to be treated as a
grantor trust for U.S. federal income tax purposes, except in connection
with a distribution of debt securities to the holders of trust preferred
securities as provided in the declaration of trust, in which case the
trust would be dissolved.
AMENDMENT AND ASSIGNMENT
We and the guarantee trustee may amend each guarantee without the consent
of any holder of trust preferred securities if the amendment does not adversely
affect the rights of the holders in any material respect. In all other cases, we
and the guarantee trustee may amend each guarantee only with the prior approval
of the holders of at least a majority of outstanding trust preferred securities
issued by the applicable trust.
We may assign our obligations under the guarantees only in connection with
a consolidation, merger or asset sale involving us and permitted under the
indenture governing the debt securities.
TERMINATION
A guarantee will terminate upon:
- full payment of the redemption price of all trust preferred securities of
the applicable trust;
- distribution of the related debt securities, or any securities into which
those debt securities are convertible, to the holders of the trust
preferred securities and trust common securities of that trust in
exchange for all the securities issued by that trust; or
- full payment of the amounts payable upon liquidation of that trust.
Each guarantee will, however, continue to be effective or will be
reinstated if any holder of trust preferred securities must repay any amounts
paid on those trust preferred securities or under the guarantee.
STATUS
Our obligations under each guarantee will be unsecured and effectively
junior to all debt and preferred stock of our subsidiaries. BY ACCEPTANCE OF THE
TRUST PREFERRED SECURITIES, A HOLDER AGREES TO ANY SUBORDINATION PROVISIONS AND
OTHER TERMS OF THE RELATED GUARANTEE. We will specify in the applicable
prospectus supplement the ranking of each guarantee with respect to our capital
stock and other liabilities, including other guarantees.
Each guarantee will be deposited with the guarantee trustee to be held for
your benefit. The guarantee trustee will have the right to enforce the guarantee
on your behalf. In most cases, the holders of a majority of outstanding trust
preferred securities issued by the applicable trust will have the right to
direct the time, method and place of:
- conducting any proceeding for any remedy available to the applicable
guarantee trustee; or
- exercising any trust or other power conferred upon that guarantee trustee
under the applicable guarantee.
Each guarantee will constitute a guarantee of payment and not merely of
collection. This means that the guarantee trustee may institute a legal
proceeding directly against us to enforce the payment rights under the guarantee
without first instituting a legal proceeding against any other person or entity.
If the guarantee trustee fails to enforce the guarantee or we fail to make
a guarantee payment, you may institute a legal proceeding directly against us to
enforce your rights under that guarantee without first
30
instituting a legal proceeding against the applicable trust, the guarantee
trustee or any other person or entity.
PERIODIC REPORTS
We will be required to provide annually to the guarantee trustee a
statement as to the performance of our obligations and our compliance with all
conditions under the guarantees.
DUTIES OF THE GUARANTEE TRUSTEE
The guarantee trustee normally will perform only those duties specifically
set forth in the applicable guarantee. The guarantees do not contain any implied
covenants. If a default occurs on a guarantee, the guarantee trustee will be
required to use the same degree of care and skill in the exercise of its powers
under the guarantee as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs. The guarantee trustee will
exercise any of its rights or powers under the guarantee at the request or
direction of holders of the applicable series of trust preferred securities only
if it is offered security and indemnity satisfactory to it.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES,
THE DEBT SECURITIES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
To the extent set forth in the guarantee and to the extent funds are
available, we will irrevocably guarantee the payment of distributions and other
amounts due on the trust securities. If and to the extent we do not make
payments on the debt securities, the trust will not have sufficient funds to pay
distributions or other amounts due on the trust securities. The guarantee does
not cover any payment of distributions or other amounts due on the trust
securities unless the trust has sufficient funds for the payment of such
distributions or other amounts. In such event, a holder of trust securities may
institute a legal proceeding directly against us to enforce payment of such
distributions or other amounts to such holder after the respective due dates.
Taken together, our obligations under the declaration of trust for each trust,
the debt securities, the indenture and the guarantee provide a full and
unconditional guarantee of payments of distributions and other amounts due on
the trust securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that provides a
full and unconditional guarantee of the trust's obligations under the trust
securities.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other amounts are made when due on the
debt securities, such payments will be sufficient to cover distributions and
payments due on the trust securities because of the following factors:
- the aggregate principal amount of the debt securities will be equal to
the sum of the aggregate stated liquidation amount of the trust
securities;
- the interest rate and the interest and other payment dates on the debt
securities will match the distribution rate and distribution and other
payment dates for the trust securities;
- we, as issuer of the debt securities, will pay, and the trust will not be
obligated to pay, directly or indirectly, any costs, expenses, debts and
obligations of the trust (other than with respect to the trust
securities); and
- the declaration of trust further provides that the trust will not engage
in any activity that is not consistent with the limited purposes of the
trust.
31
Notwithstanding anything to the contrary in the indenture, we have the
right to set-off any payment we are otherwise required to make thereunder
against and to the extent we have already made, or are concurrently on the date
of such payment making, a related payment under the guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF TRUST PREFERRED SECURITIES
The declaration of trust provides that if we fail to make interest or other
payments on the debt securities when due (taking account of any extension
period), the holders of the trust preferred securities may direct the property
trustee to enforce its rights under the applicable indenture. If the property
trustee fails to enforce its rights under the indenture in respect of an event
of default under the indenture, any holder of record of trust preferred
securities may, to the fullest extent permitted by applicable law, institute a
legal proceeding against us to enforce the property trustee's rights under the
indenture without first instituting any legal proceeding against the property
trustee or any other person or entity. Notwithstanding the foregoing, if a trust
enforcement event has occurred and is continuing and such event is attributable
to our failure to pay interest, premium or principal on the debt securities on
the date such interest, premium or principal is otherwise payable, then a holder
of trust preferred securities may institute a direct action against us for
payment of such holder's pro rata share. If a holder brings such a direct
action, we will be entitled to that holder's rights under the applicable
declaration of trust to the extent of any payment made by us to that holder.
If we fail to make payments under the guarantee, a holder of trust
preferred securities may institute a proceeding directly against us for
enforcement of the guarantee for such payments.
LIMITED PURPOSE OF TRUST
The trust preferred securities evidence undivided beneficial ownership
interests in the assets of the trust, and the trust exists for the sole purpose
of issuing and selling the trust securities and using the proceeds to purchase
our debt securities. A principal difference between the rights of a holder of
trust preferred securities and a holder of debt securities is that a holder of
debt securities is entitled to receive from us the principal amount of and
interest accrued on the debt securities held, while a holder of trust preferred
securities is entitled to receive distributions and other payments from the
trust (or from us under the guarantee) only if and to the extent the trust has
funds available for the payment of such distributions and other payments.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution of the trust involving the
redemption or repayment of the debt securities, the holders of the trust
securities will be entitled to receive, out of assets held by the trust, subject
to the rights of creditors of the trust, if any, the liquidation distribution in
cash. Because we are the guarantor under the guarantee and, as issuer of the
debt securities, we have agreed to pay for all costs, expenses and liabilities
of the trust (other than the trust's obligations to the holders of the trust
securities), the positions of a holder of trust securities and a holder of debt
securities relative to other creditors and to our stockholders in the event of
liquidation or bankruptcy of Temple-Inland would substantially be the same.
PLAN OF DISTRIBUTION
We may sell the securities through agents, underwriters or dealers, or
directly to one or more purchasers.
We may designate agents who agree to use their reasonable efforts to
solicit purchases for the period of their appointment or to sell securities on a
continuing basis.
If we use underwriters for a sale of securities, the underwriters will
acquire the securities for their own account. The underwriters may resell the
securities in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
The
32
obligations of the underwriters to purchase the securities will be subject to
the conditions stated in the applicable underwriting agreement. The underwriters
will be obligated to purchase all the securities of the series offered if any of
the securities of that series are purchased. Any initial public offering price
and any discounts or concessions allowed or re-allowed or paid to dealers may be
changed from time to time.
We may also sell securities directly to one or more purchasers without
using underwriters or agents.
One or more firms, referred to as "remarketing firms," may also offer or
sell certain of the securities offered by this prospectus, if the prospectus
supplement so indicates, in connection with a remarketing arrangement
contemplated by the terms of the securities. Remarketing firms may act as
principals for their own accounts or as agents. The applicable prospectus
supplement will identify any remarketing firm and the terms of its agreement, if
any, with us and will describe the remarketing firm's compensation. Remarketing
firms may be deemed to be underwriters in connection with the remarketing of the
securities.
Underwriters, dealers and agents that participate in the distribution of
the securities may be underwriters as defined in the Securities Act, and any
discounts or commissions they receive from us and any profit on their resale of
the securities may be treated as underwriting discounts and commissions under
the Securities Act. The applicable prospectus supplement will identify any
underwriters, dealers or agents and will describe their compensation. We may
have agreements with the underwriters, dealers and agents to indemnify them
against certain civil liabilities, including liabilities under the Securities
Act.
Underwriters, dealers and agents may engage in transactions with or perform
services for us or our subsidiaries in the ordinary course of their business.
Unless otherwise specified in the applicable prospectus supplement, each
class or series of securities will be a new issue with no established trading
market, other than the common stock, which is listed on the New York Stock
Exchange and the Pacific Exchange. We may elect to list any other class or
series of securities on any exchange, but we are not obligated to do so. It is
possible that one or more underwriters may make a market in a class or series of
securities, but the underwriters will not be obligated to do so and may
discontinue any market making at any time without notice. We cannot give any
assurance as to the liquidity of the trading market for any of the securities.
Any underwriter may engage in over-allotment, stabilizing transactions,
short-covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act. Over-allotment involves sales in excess of
the offering size, which create a short position. Stabilizing transactions
permit bids to purchase the underlying security so long as the stabilizing bids
do not exceed a specified maximum. Short-covering transactions involve purchases
of the securities in the open market after the distribution is completed to
cover short positions. Penalty bids permit the underwriters to reclaim a selling
concession from a dealer when the securities originally sold by the dealer are
purchased in a covering transaction to cover short positions. Those activities
may cause the price of the securities to be higher than it would otherwise be.
If commenced, the underwriters may discontinue any of the activities at any
time.
We expect that the net proceeds from the sale of some of the securities
under this registration statement will be used to reduce borrowings under our
bank credit facility and that affiliates of some of the lenders under that
facility will participate in offerings of the securities as underwriters. Rule
2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, Inc. will apply to any offering whose net proceeds will be used to
reduce borrowings under the credit facility owed to affiliates of underwriters
participating in the offering.
LEGAL MATTERS
M. Richard Warner, our General Counsel, and/or Skadden, Arps, Slate,
Meagher & Flom LLP, Washington, D.C., will pass upon certain legal matters for
Temple-Inland in connection with the securities offered by this prospectus. As
of March 25, 2002, M. Richard Warner beneficially owned approximately 55,646
shares of our common stock, including options exercisable within 60 days to
purchase 27,234 shares of common stock. Underwriters, dealers or agents, if any,
who we will identify in a prospectus supplement, may have their counsel pass
upon certain legal matters in connection with the securities offered by this
prospectus.
33
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in our Annual Report (Form 10-K) for the year
ended December 29, 2001, as set forth in their report, which is incorporated by
reference in this registration statement. Our financial statements are
incorporated by reference in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
34
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
6,000,000 UPPER DECS(SM)
[TEMPLE-INLAND LOGO]
% UPPER DECS
------------
PROSPECTUS SUPPLEMENT
, 2002
------------
SALOMON SMITH BARNEY
UBS WARBURG
ABN AMRO ROTHSCHILD LLC
BANC OF AMERICA SECURITIES LLC
BANC ONE CAPITAL MARKETS, INC.
TD SECURITIES INC.
(sm)Servicemark of Salomon Smith Barney Inc.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------