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 26, 2002
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 26, 2002)
$500,000,000
[TEMPLE-INLAND INC. LOGO]
$ % SENIOR NOTES DUE
$ % SENIOR NOTES DUE
------------------
The notes due 20 will bear interest at a rate of % per year, and the
notes due 20 will bear interest at a rate of % per year. Interest on the
notes is payable on and of each year, beginning on
. The notes due 20 will mature on , and the notes due 20
will mature on . We may redeem some or all of the notes at any time.
The redemption prices are discussed under the caption "Description of the
Notes -- Optional Redemption."
The notes will be senior obligations of our company and will rank equally
with all of our other unsecured senior indebtedness.
------------------
INVESTING IN THE NOTES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-10.
------------------
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 NOTE PER NOTE TOTAL
---------- ---------- --------
Public Offering Price.................................... % % $
Underwriting Discount.................................... % % $
Proceeds to Temple-Inland Inc. (before expenses)......... % % $
Interest on the notes will accrue from , 2002 to date of
delivery.
------------------
The underwriters expect to deliver the notes to purchasers on or about
, 2002.
------------------
SALOMON SMITH BARNEY
---------------------
UBS WARBURG
---------------------
ABN AMRO ROTHSCHILD LLC
BANC OF AMERICA SECURITIES LLC
BANC ONE CAPITAL MARKETS, INC.
TD SECURITIES
Credit Lyonnais Securities (USA) Inc.
KBC Financial Products
McDonald Investments Inc.
Scotia Capital
, 2002
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-10
Cautionary Statement About Forward-Looking Statements....... S-14
Use of Proceeds............................................. S-15
Ratio of Earnings to Fixed Charges.......................... S-15
Capitalization.............................................. S-16
Our Business................................................ S-17
Our Executive Officers and Directors........................ S-18
Recent Offerings............................................ S-23
Description of the Notes.................................... S-27
Unaudited Pro Forma Combined Financial Statements........... S-31
Selected Financial Data..................................... S-40
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-42
Underwriting................................................ S-61
Legal Matters............................................... S-63
Experts..................................................... S-63
Where You Can Find More Information......................... S-63
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(SM)............................... 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
---------------
(SM) Service mark of Salomon Smith Barney Inc.
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 notes. 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.
S-1
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.
We believe the Gaylord 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.
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
our 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 our non-strategic land. We expect to
sell the remaining non-strategic land over time.
S-2
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
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.
S-3
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-4
THE OFFERING
Notes Offered................. $ million aggregate principal amount of %
senior notes due .
$ million aggregate principal amount of %
senior notes due .
Interest...................... The notes will accrue interest from the date of
their issuance at the rate set forth above with
respect to each series.
The interest on the notes will be payable on
and of each year, beginning
on .
Optional Redemption........... We may redeem some or all of the notes, at any
time, at the prices discussed below under the
caption "Description of the Notes -- Optional
Redemption."
Ranking....................... The notes:
- are our senior obligations; and
- rank equally with all of our other unsecured
senior indebtedness.
Certain covenants............. The indenture under which the notes will be
issued limits our ability and the ability of
our subsidiaries to:
- incur additional liens upon any timberlands
or principal manufacturing facility;
- leaseback any timberlands or principal
manufacturing facility;
- sell, transfer or dispose of any timberlands
or any principal manufacturing facility to
any financial services subsidiary; and
- engage in consolidations, mergers and
transfers of substantially all of our assets
and property.
All of these limitations and prohibitions are
subject to a number of important qualifications
and exceptions. See "Description of the Notes"
in this prospectus supplement and "Description
of Debt Securities" in the accompanying
prospectus.
Use of proceeds............... The net proceeds from this offering, after
deducting underwriting discounts and offering
expenses, are estimated to be approximately
$ million, which will be used to repay a
portion of our outstanding debt related to our
acquisition of Gaylord Container Corporation
and for other corporate purposes.
RECENT OFFERINGS
COMMON STOCK OFFERING
On April 25, 2002, we sold, pursuant to an underwriting agreement with the
several underwriters party thereto, 3,600,000 shares of our common stock. The
common stock offering is scheduled to close and fund on May 1, 2002. Net
proceeds from this common stock offering, after deducting underwriting discounts
and offering expenses, are expected to be approximately $178.2 million. The net
proceeds will be used to repay a portion of our outstanding debt related to our
acquisition of Gaylord Container Corporation and for other corporate purposes.
We have also granted the underwriters to this offering an option, exercisable
for 30 days from April 25, 2002, to purchase up to 540,000 additional shares of
common stock to cover over-allotments. See "Recent Offerings -- Common Stock
Offering."
S-5
UPPER DECS OFFERING
On April 25, 2002, we sold, pursuant to an underwriting agreement with the
several underwriters party thereto, 6,000,000 Upper DECS. Net proceeds from this
Upper DECS offering, after deducting underwriting discounts and offering
expenses, are expected to be approximately $290.7 million. The Upper DECS
offering is scheduled to close and fund on May 1, 2002. The net proceeds will be
used to repay a portion of our outstanding debt related to our acquisition of
Gaylord Container Corporation and for other corporate purposes. We have also
granted the underwriters to this offering an option, exercisable for 13 days
from April 25, 2002, to purchase up to 900,000 additional Upper DECS to cover
over-allotments. See "Recent Offerings -- Upper DECS Offering."
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 2002 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.
S-6
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.
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-7
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
------ ------ ------ ------ ------
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..................... (0.04) -- -- (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-8
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.
SUMMARY PRO FORMA DATA
The following table sets forth summary pro forma data giving effect to our
recent acquisition of Gaylord Container Corporation, our recent offerings of
common stock and Upper DECS and for this offering. We derived this pro forma
data from our unaudited pro forma combined financial statements. You should read
this summary pro forma data in conjunction with the sections 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
AND AS ADJUSTED FOR
THE RECENT
COMMON STOCK PRO FORMA AS FURTHER
PRO FORMA FOR THE AND UPPER DECS ADJUSTED FOR THIS
GAYLORD ACQUISITION OFFERINGS OFFERING
------------------- ------------------- ----------------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Total revenues...................................... $ 4,844 $ 4,844 $ 4,844
======= ======= =======
Operating income.................................... $ 325 $ 325 $ 325
======= ======= =======
Income from continuing operations................. $ 107 $ 111 $ 104
======= ======= =======
Diluted earnings per share:
Income from continuing operations................. $ 2.17 $ 2.10 $ 1.97
======= ======= =======
Average diluted shares outstanding.................. 49.3 52.9 52.9
At year-end:
Total assets:
Parent company.................................... $ 5,149 $ 5,143 $ 5,139
Parent company debt:
Bridge Financing Facility......................... $ 884 $ 403 --
Long-term debt.................................... 1,407 1,407 $ 1,314
Upper DECS senior notes........................... -- 300 300
Senior notes...................................... -- -- 500
Shareholders' equity................................ $ 1,896 $ 2,063 $ 2,058
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-9
RISK FACTORS
In considering whether to purchase our notes, 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.
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. These
rationalization activities 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. Our recent common stock and Upper DECS offerings will provide equity
and equity-linked financing to repay a portion of the Gaylord acquisition debt.
These offerings have not yet closed or funded and we can provide no assurance
that these offerings will be sufficient upon closing and funding 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 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.
S-10
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.
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
S-11
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 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.
S-12
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-13
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.
S-14
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the notes in this
offering, after deducting underwriting discounts and commissions and the
estimated expenses of this offering payable by us, will be $ million. The
net proceeds to us from the recent common stock and Upper DECS offerings are
estimated to be approximately $468.9 million, excluding any proceeds from the
exercise by the underwriters in either offering of their over-allotment options
that have not been exercised as of the date of this prospectus supplement, and
after deducting estimated underwriting discounts and commissions and offering
expenses. We are not required to close the common stock and Upper DECS offerings
in order to sell the notes in this offering. See "Recent Offerings."
We anticipate using the aggregate net proceeds from this offering, and our
recent common stock and Upper DECS offerings, to repay 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 (a weighted average of approximately 3.23%
as of April 15, 2002) 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."
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.
FOR THE YEAR
-------------------------------------------------------------------------
PRO FORMA PRO FORMA PRO FORMA
2001(a) 2001(b) 2001(c) 2001 2000 1999 1998 1997
--------- --------- --------- ----- ----- ----- ----- -----
Consolidated............ 1.21x 1.23x 1.22x 1.25x 1.39x 1.45x 1.26x 1.19x
Consolidated, excluding
interest on
deposits:............. 1.43x 1.48x 1.45x 1.56x 1.94x 2.06x 1.65x 1.42x
Parent company:......... 1.59x 1.70x 1.63x 2.05x 3.13x 3.29x 1.61x 3.88x
---------------
(a) As adjusted for this offering, the recent common stock and Upper DECS
offerings and the acquisition of Gaylord Container Corporation.
(b) As adjusted for the recent common stock and Upper DECS offerings and the
acquisition of Gaylord Container Corporation.
(c) As adjusted for the acquisition of Gaylord Container Corporation. Note that
the ratios provided in this column differ slightly from those provided in
the accompanying prospectus as a result of our identification of additional
discontinued operations.
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.
S-15
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 our acquisition of Gaylord and our recent common stock and
Upper DECS offerings. The pro forma as further adjusted basis gives effect to
our acquisition of Gaylord and our recent common stock and Upper DECS offerings
and this offering of notes. The pro forma as adjusted and as further adjusted
columns reflect the application of the net proceeds of these offerings as
described under "Use of Proceeds."
YEAR-END DECEMBER 2001
------------------------------------------------------------------
PRO FORMA AS
ADJUSTED FOR THE
PRO FORMA FOR RECENT COMMON PRO FORMA AS
ACQUISITION OF STOCK AND UPPER FURTHER ADJUSTED
HISTORICAL GAYLORD DECS OFFERINGS FOR THIS OFFERING
---------- -------------- ---------------- -----------------
(IN MILLIONS)
CONSOLIDATED:
Federal Home Loan Bank advances...................... $3,435 $3,435 $3,435 $3,435
Securities sold under repurchase agreements.......... 1,107 1,107 1,107 1,107
Stock issued by subsidiaries......................... 306 306 306 306
Long-term debt....................................... 1,553 1,621 1,621 1,528
Bridge Financing Facility............................ -- 884 403 --
Upper DECS senior notes.............................. -- -- 300 300
Senior notes......................................... -- -- -- 500
------ ------ ------ ------
Total.............................................. $6,401 $7,353 $7,172 $7,176
------ ------ ------ ------
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 65
Additional paid-in capital........................... 367 367 536 536
Upper DECS purchase contracts........................ -- -- -- --
Accumulated other comprehensive loss................. (1) (1) (1) (1)
Retained earnings.................................... 2,014 2,014 2,008 2,003
Less treasury stock.................................. (545) (545) (545) (545)
------ ------ ------ ------
Total shareholders' equity......................... 1,896 1,896 2,063 2,058
------ ------ ------ ------
Total consolidated capitalization.................. $8,297 $9,249 $9,235 $9,234
====== ====== ====== ======
PARENT COMPANY:
Long-term debt....................................... $1,339 $1,407 $1,407 $1,314
Bridge Financing Facility............................ -- 884 403 --
Upper DECS senior notes.............................. -- -- 300 300
Senior notes......................................... -- -- -- 500
------ ------ ------ ------
Total.............................................. $1,339 $2,291 $2,110 $2,114
------ ------ ------ ------
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 65
Additional paid-in capital........................... 367 367 536 536
Upper DECS purchase contracts........................ -- -- -- --
Accumulated other comprehensive loss................. (1) (1) (1) (1)
Retained earnings.................................... 2,014 2,014 2,008 2,003
Less treasury stock.................................. (545) (545) (545) (545)
------ ------ ------ ------
Total shareholders' equity......................... 1,896 1,896 2,063 2,058
------ ------ ------ ------
Total parent company capitalization................ $3,235 $4,187 $4,173 $4,172
====== ====== ====== ======
S-16
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 per year. 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-17
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 in May. 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
S-18
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
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
S-19
Information Officer of Financial Services from August 1995 to June 1999. Mr.
Smith also serves as the Chief Financial Officer of Guaranty Bank.
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:
NAME AGE YEAR FIRST 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
shareholders.
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
S-20
President of General Motors Corporation. He is also a director of iShares, MSCI
Series, Inc., FLIR Systems, Inc. and General Motors Acceptance Corporation
(GMAC).
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
S-21
Chairman and Chief Executive Officer of Fannie Mae from 1991 through 1998. He is
also a director of 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, as its Chief Executive Officer from 1986 until February 1997
and 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-22
RECENT OFFERINGS
COMMON STOCK OFFERING
We recently offered 3,600,000 shares of our common stock at a public
offering price of $52.00 per share, plus up to an additional 540,000 shares if
the over-allotment option is exercised in full. The common stock offering is
scheduled to close and fund on May 1, 2002. The underwriters in the common stock
offering have until May 25, 2002 to exercise the over-allotment option.
UPPER DECS OFFERING
We recently offered $300 million of our Upper DECS, plus up to an
additional $45 million of Upper DECS if the over-allotment option for that
offering is exercised in full. The Upper DECS offering is scheduled to close and
fund on May 1, 2002. The underwriters in the Upper DECS offering have until May
8, 2002 to exercise the over-allotment option.
UPPER DECS
Each Upper DECS has a stated amount of $50 and will initially consist of:
(1) a purchase contract under which:
- each holder agrees to purchase, and we agree to sell, for $50, shares
of our common stock on May 17, 2005 (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 each holder contract adjustment payments at the annual
rate of 1.08% of the stated amount of $50, payable on a quarterly
basis (subject to our right to deferral as described below); and
(2) a senior note due May 17, 2007, with a principal amount of $50, on
which we will pay interest quarterly at the initial annual rate of
6.42%.
The senior notes that are a component of the Upper DECS are owned by the
holders, but are pledged to us to secure each holder's obligation under the
purchase contracts. These senior notes are of a different series and have
different terms than the notes in this offering. Each holder of Upper DECS may
elect at any time to withdraw the pledged senior notes or, after a successful
remarketing, as described below, the treasury securities underlying the Upper
DECS, creating "Stripped 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, after a successful remarketing,
treasury securities 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 a successful remarketing, the applicable specified
treasury securities for the treasury securities underlying the Stripped DECS.
The purchase price of each Upper DECS will be allocated by us between the
purchase contract and the senior note based on the fair value of each
instrument.
THE PURCHASE CONTRACTS
The purchase contract underlying an Upper DECS obligates the holder 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.
S-23
We will pay each holder of Upper DECS quarterly contract adjustment
payments on the purchase contracts at the annual rate of 1.08% of the $50 stated
amount through and including the stock purchase date, subject to our right to
defer these payments. Contract adjustment payments will be paid quarterly in
arrears on each February 17, May 17, August 17 and November 17, commencing
August 17, 2002. Each holder of Stripped DECS will only be entitled to receive
quarterly contract adjustment payments payable by us at the annual rate of 1.08%
of the $50 stated amount until the stock purchase date. The contract adjustment
payments are subject to deferral as described below.
OPTION TO DEFER CONTRACT ADJUSTMENT PAYMENTS
We have the right, upon prior written notice, to defer payment of all or a
part of the contract adjustment payments on the purchase contracts until no
later than the stock purchase date. If we defer any of these payments, we will
pay additional contract adjustment payments on the deferred amounts at the
annual rate of 6.42% until paid, compounded quarterly, to but excluding May 17,
2005. In the event 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 under "-- Settlement."
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.
We are not entitled to defer payments on the senior notes.
SETTLEMENT
Each purchase contract underlying an Upper DECS, unless earlier terminated
or earlier settled at the holder's option or upon specified mergers and other
transactions, obligates each holder 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-24
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 the terms of the purchase contract,
will be as follows:
- if the applicable market value, determined as described below, of our
common stock is equal to or greater than $63.44, the settlement rate will
be 0.7881 shares of our common stock per purchase contract;
- if the applicable market value of our common stock is less than $63.44
but greater than $52.00, 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 $52.00, the settlement rate will be 0.9615 shares of our common stock
per purchase contract.
The "applicable market value" of our common stock is 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.
A holder's obligations under the purchase contract may be satisfied:
- through the remarketing described below, or if the remarketing is
unsuccessful, through the retention by us of the securities pledged as
collateral in full satisfaction of such holder's obligations under the
purchase contract;
- if the holder has created a Stripped DECS or elected not to participate
in the remarketing, by delivering and pledging specified treasury
securities in substitution for such holder's 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;
- through an early settlement of the purchase contract by the early
delivery of cash to the purchase contract agent; or
- if we are involved in a merger 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.
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 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 the
holders. If the purchase contracts are terminated, the holders will have no
further rights to receive any accrued or deferred contract adjustment payments
on the purchase contracts.
THE SENIOR NOTES THAT ARE A COMPONENT OF THE UPPER DECS
The terms and conditions of the senior notes that are a component of the
Upper DECS described in this "Recent Offerings" section of this prospectus
supplement are different from the terms and conditions of the notes in this
offering. The senior notes that are a component of the Upper DECS, whether held
separately from or as part of the Upper DECS, will initially pay interest at the
annual rate of 6.42% for the quarterly payments payable on or before February
17, 2005. Interest on the senior notes will accrue from May 1, 2002 and will be
payable quarterly in arrears on each February 17, May 17, August 17, and
November 17, commencing August 17, 2002. 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 their maturity on May 17, 2007.
The reset rate will be the rate sufficient to cause the aggregate market value
at the
S-25
remarketing date of all the outstanding senior notes to be equal to 100.50% of
the remarketing value described below. If the remarketing agent cannot establish
a reset rate meeting certain requirements, the remarketing agent will not reset
the interest rate on these senior notes, and the interest rate will continue to
be the initial annual rate of 6.42%, until the remarketing agent can on a later
remarketing date prior to the stock purchase date establish a reset rate meeting
such requirements. If no remarketing occurs prior to the stock purchase date,
the initial rate will be the interest rate through maturity of these senior
notes. We are not entitled to defer payments on these senior notes.
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 that are a component of the Upper DECS, other
than those whose holders elect not to participate in the remarketing. The
proceeds of the remarketing will be used to purchase treasury securities, which
will be pledged to secure the obligations of the participating holders of Upper
DECS under the purchase contract. 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 under the
related purchase contracts.
Unless a holder of Upper DECS elects not to participate in the remarketing
as described below, the senior notes that are included in the Upper DECS will be
remarketed on one or more occasions starting on the remarketing date, which
initially will be the third business day immediately preceding February 17,
2005, the last quarterly interest payment date before the stock purchase date,
unless the remarketing agent delays the remarketing to a later date.
A holder of Upper DECS may elect not to participate in the remarketing and
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, to the purchase contract agent no later than the fourth
business day prior to the remarketing date. The interest rate on such holder's
senior notes will be reset to the reset rate, even though the holder did not
participate in the remarketing.
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 in a public offering or a
private placement, at a price equal to at least 100.50% of the remarketing
value, which will be equal to the sum of:
- 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 payments that are
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
- 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.
S-26
DESCRIPTION OF THE NOTES
GENERAL
We will issue each of the % senior notes due 20 and the % senior notes
due 20 (collectively, the "notes") under an 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 refer to the indenture and its amendments together
as the "indenture."
The following description supplements the description of general terms and
provisions of the debt securities contained in the accompanying prospectus. The
following description does not purport to be complete and is subject to, and is
qualified in its entirety by reference to the description in the accompanying
prospectus and to the indenture, a copy of which is filed or incorporated by
reference as an exhibit to the registration statement on Form S-3 of which this
prospectus supplement and the accompanying prospectus are a part.
The notes will be unsecured and will rank equally with all of our other
unsecured and unsubordinated debt and other obligations from time to time
outstanding. The % senior notes due 20 and the % senior notes due 20 will
initially be issued in an aggregate principal amount of $ and $ ,
respectively. We may, without the consent of the holders of the notes, create
and issue additional notes ranking equally with the notes and otherwise similar
in all respects except for the issue date and the issue price. Such further
notes may be consolidated and form a single series with the applicable series of
notes offered by this prospectus supplement and the accompanying prospectus.
The % senior notes due 20 will mature on , 20 and the %
senior notes due 20 will mature on , 20 .
Interest on the % senior notes due 20 will accrue at the rate of % per
year and interest on the % senior notes due 20 will accrue at the rate of %
per year and, in each case, will be payable semi-annually on and
(including the maturity date) of each year, commencing , 2002. We
will make each interest payment to the holders of record of the applicable
series of notes on the immediately preceding and .
Interest on each series of notes will be computed on the basis of a 360-day
year comprised of twelve 30-day months.
All payments on each series of notes will be made, and transfers of each
series of notes will be registrable, at the trustee's office in New York, unless
we designate another place for such purpose.
There will be no sinking fund for the notes.
The provisions of the indenture do not afford holders of the notes
protection in the event of a change in control, highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving us that
may adversely affect holders of the notes.
OPTIONAL REDEMPTION
Each series of notes will be redeemable, in whole or in part, at our
option, at any time or from time to time, on at least 30 days', but not more
than 60 days', prior notice mailed to the registered address of
S-27
each holder of that particular series of notes, on any date prior to its
maturity (a "redemption date") at a redemption price equal to:
- 100% of the outstanding principal amount of the particular series of
notes being redeemed; plus
- accrued and unpaid interest on the notes being redeemed to, but
excluding, the redemption date; plus
- a make-whole premium as described below.
In no event will the redemption price of the notes ever be less than 100% of the
principal amount of the notes being redeemed plus accrued and unpaid interest
thereon.
The term "make-whole premium" means an amount equal to the discounted
present value calculated for any note subject to redemption less the unpaid
principal amount of such note; provided, however, that no make-whole premium
shall be less than zero. For purposes of this definition, the "discounted
present value" of any note subject to redemption shall be equal to the
discounted present value of all principal and interest payments scheduled to
become due in respect of such note after the redemption date, calculated using a
discount rate equal to the sum of:
- the yield to maturity on the United States treasury security having a
maturity date equal to the maturity date of such note and trading in the
secondary market at the price closest to par, plus:
- basis points for the % senior notes due 20 ; and
- basis points for the % senior notes due 20 ;
provided, however, that if there is no United States treasury security having a
maturity date equal to the maturity date of such note, such discount rate shall
be calculated using a yield to maturity interpolated or extrapolated on a
straight-line basis (rounding to the nearest month, if necessary) from the
yields to maturity for the two United States treasury securities having maturity
dates most closely corresponding to the maturity date of such note and trading
in the secondary market at the price closest to par.
BOOK-ENTRY; DELIVERY AND FORM
The notes will be represented by one or more permanent global notes in
registered, global form without interest coupons. These global notes will be
deposited upon issuance with the trustee as custodian for the Depository Trust
Company (the "depository") in New York, New York, and registered in the name of
the depository or its nominee, in each case for credit to an account of a direct
or indirect participant as described below. Except as set forth below, the
global notes may be transferred, in whole and not in part, only to the
depository, a nominee of the depository or to a successor of the depository or
its nominee. Beneficial interests in the global notes may not be exchanged for
notes in certificated form except in the limited circumstances described below.
The trustee will act as registrar.
DEPOSITORY PROCEDURES
The depository has advised us that it is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "participants") and to facilitate the clearance and settlement of
transactions in those securities between participants through electronic
book-entry changes in accounts of participants. The participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to the depository's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
either directly or indirectly (collectively, "indirect participants"). Persons
who are not participants may own beneficially securities held by or on behalf of
the depository only through participants or indirect participants. The ownership
interest and transfer of ownership interest of each actual purchaser of each
security held by or on behalf of the depository are recorded on the records of
the participants and indirect participants.
S-28
The depository also has advised us that pursuant to procedures established
by it:
- upon deposit of the global notes, the depository will credit the
accounts of participants designated by the underwriters with portions
of the principal amount of global notes; and
- ownership of interests in the global notes will be shown on, and the
transfer of ownership thereof will be effected only through, records
maintained by the depository with respect to participants or by
participants and the indirect participants with respect to other
owners of beneficial interest in the global notes.
Investors in the global note may hold their interests therein directly
through the depository, if they are participants in such system, or indirectly
through organizations (including Euroclear and Clearstream) that are
participants in such system. All interests in a global note including those held
through Euroclear or Clearstream, may be subject to the procedures and
requirements of the depository.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in a global note to such persons may be limited to
that extent. Because the depository can act only on behalf of participants,
which in turn act on behalf of indirect participants and certain banks, the
ability of a person having a beneficial interest in a global note to pledge such
interest to persons or entities that do not participate in the depository
system, or otherwise take actions in respect of such interests may be affected
by the lack of physical certificate evidencing such interests.
Except as described below, owners of interests in the global notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
holders thereof under the indenture for any purpose.
Payments in respect of the principal and premium and liquidated damages, if
any, and interest in a global note registered in the name of the depository or
its nominee will be payable by the paying agent to the depository or its nominee
in its capacity as the registered holder of a global note under the indenture.
Under the terms of the indenture, we and the trustee will treat the persons in
whose names the notes, including the global notes, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever.
Consequently, neither we, the trustee nor any agent of us or the trustee
have or will have any responsibility or liability for:
- any aspect of the depository's records or any participant's or
indirect participant's records relating to or payments made on account
of beneficial ownership interests in the global notes, or for
maintaining, supervising or reviewing any of the depository's records
or any participant's or indirect participant's records relating to the
beneficial ownership interests in the global notes; or
- any other matter relating to the actions and practices of the
depository or any of its participants or indirect participants.
The depository has advised us that its current practices, upon receipt of
any payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant participants with the
payment on the payment date, in amounts proportionate to their respective
holdings in principal amount of beneficial interests in the relevant security
such as the global notes as shown on the records of the depository. Payments by
participants and the indirect participants to the beneficial owners of notes
will be governed by standing instructions and customary practices and will not
be the responsibility of the depository, the trustee or us. Neither we nor the
trustee will be liable for any delay by the depository or its participants in
identifying the beneficial owners of the notes, and we and the trustee may rely
conclusively on and will be protected in relying on instructions from the
depository or its nominee as the registered owner of the notes for all purposes.
S-29
Interests in the global notes will trade in the depository's same-day funds
settlement system and secondary market trading activity in such interests will,
therefore, settle in immediately available funds, subject in all cases to the
rules and procedures of the depository and its participants. Transfers between
participants in the depository will be effective in accordance with the
depository's procedures, and will be settled in same-day funds.
The depository has advised us that it will take any action permitted to be
taken by a holder of notes only at the direction of one or more participants to
whose account the depository interests in the global notes are credited and only
in respect of such portion of the aggregate principal amount of the notes as to
which such participant or participants has or have given direction. However, if
there is an event of default under the notes, the depository reserves the right
to exchange global notes for legended notes in certificated form, and to
distribute such notes to its participants.
The information in this section concerning the depository and its
book-entry systems has been obtained from sources that we believe to be
reliable, but we take no responsibility for the accuracy thereof. Neither we nor
the trustee will have any responsibility for the performance by the depository
or its respective participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A global note is exchangeable for definitive notes in registered
certificated form if:
- the depository:
- notifies us that it is unwilling or unable to continue as
depositary for the global note and we thereupon fail to appoint a
successor depositary; or
- has ceased to be a clearing agency registered under the
Securities Exchange Act of 1934;
- upon the continuance of an event of default; or
- we, at our option, notify the trustee in writing that we elect to
cause issuance of the notes in certificated form.
In addition, beneficial interests in a global note may be exchanged for
certificated notes upon request but only upon at least 30 days' prior written
notice given to the trustee by or on behalf of the depository in accordance with
customary procedures. In all cases, certificated notes delivered in exchange for
any global note or beneficial interest therein will be registered in names, and
issued in any approved denominations, requested by or on behalf of the
depository (in accordance with its customary procedures).
S-30
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, as indicated in each case, to give effect to the recent common stock and
Upper DECS offerings and to this 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-31
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 2001
ADJUSTMENTS
FOR THE
RECENT
COMMON
PRO STOCK AND
TEMPLE- ACQUISITION FORMA UPPER DECS
INLAND GAYLORD ADJUSTMENTS(a)(f) ACQUISITION OFFERINGS
------------- ------- ----------------- ----------- ------------
(IN MILLIONS)
ASSETS:
Cash and cash equivalents... $ 590 $ 6 $ (6) $ 590 $ --
Mortgage loans held for
sale...................... 958 -- -- 958 --
Loans and leases receivable,
net....................... 9,847 -- -- 9,847 --
Other securities
available-for-sale........ 2,599 -- -- 2,599 --
Other securities held-to-
maturity.................. 775 -- -- 775 --
Trade receivables........... 288 118 (24) 378 --
(4)(c)
Inventories................. 258 100 (23) 335 --
Property and equipment...... 2,251 530 (93) 2,688 --
Deferred income taxes....... -- 171 (171) -- --
Goodwill and other
intangibles............... 186 -- 260 446 --
Financing fees.............. -- -- 16(b) 16 (6)(a)(c)
Assets held for sale........ -- -- 100 100 --
Other assets................ 935 63 (15) 983 --
------- ------ ----- ------- -----
TOTAL ASSETS.......... $18,687 $ 988 $ 40 $19,715 $ (6)
======= ====== ===== ======= =====
LIABILITIES:
Deposits.................... $ 9,030 $ -- $ -- $ 9,030 $ --
Federal Home Loan Bank
advances.................. 3,435 -- -- 3,435 --
Securities sold under
repurchase agreements..... 1,107 -- -- 1,107 --
Other liabilities........... 914 248 (168) 990 8(b)(c)
(4)(c)
Bridge Financing Facility... -- -- 884(b) 884 (481)(a)
Long-term debt.............. 1,553 862 (794) 1,621 --
Upper DECS senior notes..... -- -- -- -- 300(a)
Senior notes................ -- -- -- -- --
Deferred income taxes....... 304 -- -- 304 --
Postretirement benefits..... 142 -- -- 142 --
Stock issued by
subsidiaries.............. 306 -- -- 306 --
------- ------ ----- ------- -----
TOTAL LIABILITIES..... $16,791 $1,110 $ (82) $17,819 $(173)
------- ------ ----- ------- -----
SHAREHOLDERS' EQUITY:
Preferred stock............. -- -- -- -- --
Common stock................ 61 -- -- 61 4(a)
Additional paid-in
capital................... 367 180 (180) 367 169(a)(b)
Upper DECS purchase
contracts................. -- -- -- -- --
Accumulated other
comprehensive income
(loss).................... (1) (2) 2 (1) --
Retained earnings........... 2,014 (292) 292 2,014 (6)(c)
------- ------ ----- ------- -----
2,441 (114) 114 2,441 167
Cost of shares held in the
treasury.................. (545) (8) 8 (545) --
------- ------ ----- ------- -----
TOTAL SHAREHOLDERS'
EQUITY............. 1,896 (122) 122 1,896 167
------- ------ ----- ------- -----
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY............. $18,687 $ 988 $ 40 $19,715 $ (6)
======= ====== ===== ======= =====
PRO FORMA
AS
ADJUSTED PRO
FOR THE FORMA
RECENT AS
COMMON FURTHER
STOCK AND ADJUSTMENTS ADJUSTED
UPPER DECS FOR THIS FOR THIS
OFFERINGS OFFERING OFFERING
------------ ------------- -------------
(IN MILLIONS)
ASSETS:
Cash and cash equivalents... $ 590 $ -- $ 590
Mortgage loans held for
sale...................... 958 -- 958
Loans and leases receivable,
net....................... 9,847 -- 9,847
Other securities
available-for-sale........ 2,599 -- 2,599
Other securities held-to-
maturity.................. 775 -- 775
Trade receivables........... 378 -- 378
Inventories................. 335 -- 335
Property and equipment...... 2,688 -- 2,688
Deferred income taxes....... -- -- --
Goodwill and other
intangibles............... 446 -- 446
Financing fees.............. 10 (4)(a)(c) 6
Assets held for sale........ 100 -- 100
Other assets................ 983 -- 983
------- ------- -------
TOTAL ASSETS.......... $19,709 $ (4) $19,705
======= ======= =======
LIABILITIES:
Deposits.................... $ 9,030 $ -- $ 9,030
Federal Home Loan Bank
advances.................. 3,435 -- 3,435
Securities sold under
repurchase agreements..... 1,107 -- 1,107
Other liabilities........... 998 (3)(c) 995
Bridge Financing Facility... 403 (403)(a) --
Long-term debt.............. 1,621 (93)(a) 1,528
Upper DECS senior notes..... 300 -- 300
Senior notes................ -- 500(a) 500
Deferred income taxes....... 304 -- 304
Postretirement benefits..... 142 -- 142
Stock issued by
subsidiaries.............. 306 -- 306
------- ------- -------
TOTAL LIABILITIES..... $17,646 $ 1 $17,647
------- ------- -------
SHAREHOLDERS' EQUITY:
Preferred stock............. -- -- --
Common stock................ 65 -- 65
Additional paid-in
capital................... 536 -- 536
Upper DECS purchase
contracts................. -- -- --
Accumulated other
comprehensive income
(loss).................... (1) -- (1)
Retained earnings........... 2,008 (5)(c) 2,003
------- ------- -------
2,608 (5) 2,603
Cost of shares held in the
treasury.................. (545) -- (545)
------- ------- -------
TOTAL SHAREHOLDERS'
EQUITY............. 2,063 (5) 2,058
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY............. $19,709 $ (4) $19,705
======= ======= =======
See the notes to the unaudited pro forma combined financial statements.
S-32
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 2001
ADJUSTMENTS
FOR THE
RECENT
COMMON
PRO STOCK AND
TEMPLE- DISCONTINUED ACQUISITION FORMA UPPER DECS
INLAND GAYLORD(e) OPERATIONS(f) ADJUSTMENTS ACQUISITION OFFERINGS
------- ---------- ------------- ----------- ----------- ------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES:
Manufacturing............ $2,808 $1,052 $(343) $(37)(c) $3,480 $ --
Financial services....... 1,364 -- -- 1,364 --
------ ------ ----- ---- ------ ----
4,172 1,052 (343) (37) 4,844 --
COSTS AND EXPENSES:
Manufacturing............ 2,717 1,022 (363) (37)(c) 3,339 --
Financial services....... 1,180 -- -- 1,180 --
------ ------ ----- ---- ------ ----
3,897 1,022 (363) (37) 4,519 --
------ ------ ----- ---- ------ ----
OPERATING INCOME......... 275 30 20 -- 325 --
Parent company
interest............... (98) (90) -- 34 (b) (154) 27(d)
Upper DECS............... -- -- -- -- -- (20)(e)
Senior notes............. -- -- -- -- -- --
------ ------ ----- ---- ------ ----
INCOME (LOSS) BEFORE
TAXES.................. 177 (60) 20 34 171 7
Income taxes............. (66) 23 (8) (13)(d) (64) (3)(f)
------ ------ ----- ---- ------ ----
INCOME (LOSS) FROM
CONTINUING
OPERATIONS............. $ 111 $ (37) $ 12 $ 21 $ 107 $ 4
====== ====== ===== ==== ====== ====
EARNINGS PER SHARE:
Basic.................. $ 2.26 $ 2.17
Diluted................ $ 2.26 $ 2.17
AVERAGE SHARES
OUTSTANDING:
Basic.................. 49.3 49.3 3.6
Diluted................ 49.3 49.3 3.6
PRO FORMA
AS
ADJUSTED
FOR THE PRO
RECENT FORMA AS
COMMON FURTHER
STOCK AND ADJUSTMENTS ADJUSTED
UPPER DECS FOR THIS FOR THIS
OFFERINGS OFFERING OFFERING
------------ ----------- -------------
(IN MILLIONS, EXCEPT PER SHARE DATA)
REVENUES:
Manufacturing............ $3,480 $ -- $3,480
Financial services....... 1,364 -- 1,364
------ ------ ------
4,844 -- 4,844
COSTS AND EXPENSES:
Manufacturing............ 3,339 -- 3,339
Financial services....... 1,180 -- 1,180
------ ------ ------
4,519 -- 4,519
------ ------ ------
OPERATING INCOME......... 325 -- 325
Parent company
interest............... (127) 26(c) (101)
Upper DECS............... (20) -- (20)
Senior notes............. -- (38)(d) (38)
------ ------ ------
INCOME (LOSS) BEFORE
TAXES.................. 178 (12) 166
Income taxes............. (67) 5(e) (62)
------ ------ ------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS............. $ 111 $ (7) $ 104
====== ====== ======
EARNINGS PER SHARE:
Basic.................. $ 2.10 $ 1.97
Diluted................ $ 2.10 $ 1.97
AVERAGE SHARES
OUTSTANDING:
Basic.................. 52.9 52.9
Diluted................ 52.9 52.9
See the notes to the unaudited pro forma combined financial statements.
S-33
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
ACQUISITION ADJUSTMENTS
On March 4, 2002, we completed tender offers in which we acquired 86.3% of
Gaylord's outstanding common stock for $56 million cash and 99.3% of Gaylord's
9 3/8% Senior Notes due 2007, 98.5% of Gaylord's 9 3/4% Senior Notes due 2007
and 83.6% of Gaylord's 9 7/8% Senior Subordinated Notes due 2008 for $462
million cash. On April 5, 2002, we effected our merger with Gaylord whereby we
acquired for $1.17 per share in cash the remaining 13.7% of Gaylord's common
stock that we 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 our 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.
S-34
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(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. We paid $16
million in fees to the lending institutions for this facility, which were
funded from the Bridge 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 0.125% 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) We intend to divest several non-strategic Gaylord assets including the
retail bag business, which we anticipate 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. We
are identifying other assets that may be divested, and we currently
anticipate 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.
S-35
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK AND UPPER DECS OFFERINGS ADJUSTMENTS
(a) To reflect the recent common stock and Upper DECS offerings and the
application of the net proceeds.
The estimated proceeds from the recent common stock and Upper DECS
offerings consist of (in millions):
The common stock 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
The 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
====
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 0.125% 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
$63.44.
S-36
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
SENIOR NOTES OFFERING ADJUSTMENTS
(a) To reflect this notes offering and the application of the net proceeds.
The estimated proceeds from this offering consist of (in millions):
Sale of senior notes........................................ $500
Underwriting discount and estimated expense................. (4)
----
Estimated net proceeds...................................... $496
====
The underwriting discounts and estimated expense will be capitalized and
amortized over the term of the senior notes.
(b) To write-off the remainder of the Bridge Financing Facility fees and
recognize the tax effect thereof.
(c) To reflect the reduction in interest expense due to the repayment of the
Bridge Financing Facility using an all-in rate of approximately 5.6% and to
the repayment of other debt using an all-in rate of 3.0%.
(d) To reflect the increase in interest expense due to the issue of the senior
notes. It is assumed that the senior notes will bear interest at 7.5%. A
0.125% change in these rates would affect annual interest expense by less
than $1 million.
(e) Tax effect of the pro forma adjustments.
S-37
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED BALANCE SHEET
AS OF DECEMBER 2001
PRO FORMA
AS
ADJUSTMENTS ADJUSTED
FOR THE FOR THE
RECENT RECENT
COMMON COMMON
PRO STOCK AND STOCK AND
TEMPLE- ACQUISITION FORMA UPPER DECS UPPER DECS
INLAND GAYLORD ADJUSTMENTS(a)(f) ACQUISITION OFFERINGS OFFERINGS
------- ------- ----------------- ----------- ------------ ------------
(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:
Current 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
Senior notes.................................... -- -- -- -- -- --
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
====== ===== ====== ====== ===== ======
PRO
FORMA
AS
FURTHER
ADJUSTMENTS ADJUSTED
FOR THIS FOR THIS
OFFERING OFFERING
------------- -------------
(IN MILLIONS)
ASSETS:
Current assets:
Cash........................................... $ -- $ 3
Receivables, net............................... -- 378
Inventories.................................... -- 335
Prepaid expenses............................... -- 95
------ ------
Total current assets......................... -- 811
Investment in financial services................ -- 1,142
Property and equipment.......................... -- 2,522
Deferred income taxes........................... -- --
Goodwill and other intangibles.................. -- 322
Financing fees.................................. (4)(a)(c) 6
Assets held for sale............................ -- 100
Other assets.................................... -- 236
------ ------
TOTAL ASSETS................................... $ (4) $5,139
====== ======
LIABILITIES:
Current liabilities:
Accounts payable............................... $ -- $ 176
Accrued expenses............................... (3)(c) 227
Current portion of long-term debt.............. -- 1
Bridge Financing Facility...................... (403)(a) --
------ ------
Total current liabilities.................... (406) 404
Long-term debt.................................. (93)(a) 1,314
Upper DECS senior notes......................... -- 300
Senior notes.................................... 500(a) 500
Deferred income taxes........................... -- 310
Postretirement benefits......................... -- 142
Other liabilities............................... -- 111
------ ------
TOTAL LIABILITIES.............................. 1 3,081
------ ------
SHAREHOLDERS' EQUITY:
Preferred stock................................. -- --
Common stock.................................... -- 65
Additional paid-in capital...................... -- 536
Upper DECS purchase contracts................... -- --
Accumulated other comprehensive income (loss)... -- (1)
Retained earnings............................... (5)(c) 2,003
------ ------
(5) 2,603
Cost of treasury stock.......................... -- (545)
------ ------
TOTAL SHAREHOLDERS' EQUITY..................... (5) 2,058
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..... $ (4) $5,139
====== ======
See the notes to the unaudited pro forma combined financial statements.
S-38
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 2001
ADJUSTMENTS
FOR THE
RECENT
COMMON
PRO STOCK AND
TEMPLE- DISCONTINUED ACQUISITION FORMA UPPER DECS
INLAND GAYLORD(e) OPERATIONS(f) ADJUSTMENTS ACQUISITION OFFERINGS
------- ---------- ------------- ----------- ----------- ------------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
NET REVENUES........... $2,808 $1,052 $(343) $(37)(c) $3,480 $ --
COSTS AND EXPENSES:
Cost of sales........ 2,457 916 (330) (37)(c) 3,006 --
Selling and
administrative..... 261 100 (21) -- 340 --
Other (income)
expense............ (1) 6 (12) -- (7) --
------ ------ ----- ---- ------ ----
2,717 1,022 (363) (37) 3,339 --
------ ------ ----- ---- ------ ----
91 30 20 -- 141 --
FINANCIAL SERVICES
EARNINGS............. 184 -- -- -- 184 --
------ ------ ----- ---- ------ ----
OPERATING INCOME....... 275 30 20 -- 325 --
Interest............. (98) (90) -- 34 (b) (154) 27 (d)
Upper DECS........... -- -- -- -- -- (20)(e)
Senior notes......... -- -- -- -- -- --
------ ------ ----- ---- ------ ----
INCOME (LOSS) BEFORE
TAXES................ 177 (60) 20 34 171 7
Income taxes......... (66) 23 (8) (13)(d) (64) (3)(f)
------ ------ ----- ---- ------ ----
INCOME (LOSS) FROM
CONTINUING
OPERATIONS........... $ 111 $ (37) $ 12 $ 21 $ 107 $ 4
====== ====== ===== ==== ====== ====
EARNINGS PER SHARE:
Basic................ $ 2.26 $ 2.17
Diluted.............. $ 2.26 $ 2.17
AVERAGE SHARES
OUTSTANDING:
Basic................ 49.3 49.3 3.6
Diluted.............. 49.3 49.3 3.6
PRO FORMA
AS
ADJUSTED PRO
FOR THE FORMA
RECENT AS
COMMON FURTHER
STOCK AND ADJUSTMENTS ADJUSTED
UPPER DECS FOR THIS FOR THIS
OFFERINGS OFFERING OFFERING
------------ ------------- -------------
(IN MILLIONS, EXCEPT EARNINGS PER SHARE)
NET REVENUES........... $3,480 $ -- $3,480
COSTS AND EXPENSES:
Cost of sales........ 3,006 -- 3,006
Selling and
administrative..... 340 -- 340
Other (income)
expense............ (7) -- (7)
------ ------ ------
3,339 -- 3,339
------ ------ ------
141 -- 141
FINANCIAL SERVICES
EARNINGS............. 184 -- 184
------ ------ ------
OPERATING INCOME....... 325 -- 325
Interest............. (127) 26 (c) (101)
Upper DECS........... (20) -- (20)
Senior notes......... -- (38)(d) (38)
------ ------ ------
INCOME (LOSS) BEFORE
TAXES................ 178 (12) 166
Income taxes......... (67) 5 (e) (62)
------ ------ ------
INCOME (LOSS) FROM
CONTINUING
OPERATIONS........... $ 111 $ (7) $ 104
====== ====== ======
EARNINGS PER SHARE:
Basic................ $ 2.10 $ 1.97
Diluted.............. $ 2.10 $ 1.97
AVERAGE SHARES
OUTSTANDING:
Basic................ 52.9 52.9
Diluted.............. 52.9 52.9
See the notes to the unaudited pro forma combined financial statements.
S-39
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................ (0.04) -- -- (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-40
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-41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section contains forward-looking statements that involve
risks and uncertainties. The actual results achieved by us 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 us and our subsidiaries; the availability and price of raw
materials used by us and our subsidiaries; competitive actions by other
companies; changes in laws or regulations; and other factors, many of which are
beyond our control and that of our 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 Condition 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. We 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
We manage our 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, we follow generally accepted
accounting policies, which in many cases require us 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. We base our 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-42
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's 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 represented 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 old corrugated
container (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
S-43
the last three years, respectively. OCC prices began to decline near the end of
the second quarter 2000 and continued to decline through the second quarter
2001. OCC prices have remained relatively constant since then. OCC costs
averaged $69 per ton in 2001, $107 per ton in 2000 and $89 per ton in 1999.
Year-end OCC prices were $53 per ton in 2001, $67 per ton in 2000 and $99 per
ton in 1999. The reduction in depreciation expense was due to the lengthening of
estimated useful lives of certain production equipment beginning January 2001.
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 action. 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 were
included in other expenses. Other initiatives included the December 1999 sale of
the bleached paperboard operations, 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's 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 overcapacity
and weak demand.
S-44
It is likely that these conditions will continue for much of 2002. The MDF
markets could also be affected by new industry capacity coming on line in 2002.
Costs, which include production, distribution and administrative costs,
were $713 million in 2001, $759 million in 2000 and $648 million in 1999. The
change in costs in 2001 was due to lower production volumes, lower depreciation
expense and the disposition of the fiber cement venture during the third quarter
2000 offset by higher energy costs, principally natural gas. Fiber costs were
relatively unchanged. Depreciation expense was reduced by $7 million due to the
lengthening of estimated useful lives of certain production 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-45
Operations
The financial services group's 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 were primarily due to
growth and changes in the mix of average earning assets and interest-bearing
liabilities. The changes in the net yield were 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 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
S-46
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, 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. 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. You should read Note G to the financial services group Summarized
Financial Statements in conjunction with the 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."
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 the provision for
loan losses in 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-47
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.
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. You should read Note D to the financial services group Summarized
Financial Statements in conjunction with the 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."
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
S-48
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.
Construction and development and commercial and business loans by maturity
date at year-end 2001 follow:
CONSTRUCTION AND
DEVELOPMENT COMMERCIAL AND BUSINESS
-------------------------- --------------------------
VARIABLE RATE FIXED RATE VARIABLE RATE FIXED RATE TOTAL
------------- ---------- ------------- ---------- ------
(IN MILLIONS)
Due within one year........... $2,598 $ 90 $ 613 $ 42 $3,343
After one but within five
years....................... 1,525 21 839 368 2,753
After five years.............. -- -- 99 155 254
------ ---- ------ ---- ------
$4,123 $111 $1,551 $565 $6,350
====== ==== ====== ==== ======
Asset Quality
Several important measures are used to evaluate and monitor asset quality.
They include the level of loan delinquencies, nonperforming loans and assets and
net loan charge-offs compared to average loans.
AT YEAR-END
--------------------------
2001 2000 1999
------ ------- -------
(IN MILLIONS)
Accruing loans past due 30-89 days....................... $ 107 $ 170 $ 95
Accruing loans past due 90 days or more.................. -- 6 6
------ ------- -------
Accruing loans past due 30 days or more................ $ 107 $ 176 $ 101
====== ======= =======
Nonaccrual loans......................................... $ 166 $ 65 $ 85
Restructured loans....................................... -- -- --
------ ------- -------
Nonperforming loans.................................... 166 65 85
Foreclosed property...................................... 2 3 8
------ ------- -------
Nonperforming assets................................... $ 168 $ 68 $ 93
====== ======= =======
Allowance for loan losses................................ $ 139 $ 118 $ 113
Net charge-offs.......................................... $ 27 $ 36 $ 24
Nonperforming loan ratio................................. 1.67% 0.62% 0.90%
Nonperforming asset ratio................................ 1.68% 0.65% 0.99%
Allowance for loan losses/total loans.................... 1.39% 1.12% 1.20%
Allowance for loan losses/nonperforming loans............ 83.73% 179.73% 133.52%
Net loans charged off/average loans...................... 0.25% 0.35% 0.26%
Accruing delinquent loans past due 30 days or more were 1.10% 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
S-49
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, whereas the allowance
as a percent of nonperforming loans increased in 2000. Loans accounted for on a
nonaccrual basis, accruing loans that are contractually past due 90 days or
more, and restructured or other potential problem loans were less than 2% 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)
S-50
FOR THE YEAR
--------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(IN MILLIONS)
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.
AT YEAR-END
-----------------------------------------------------------------------------------------
2001 2000 1999 1998
-------------------- -------------------- -------------------- --------------------
CATEGORY CATEGORY CATEGORY CATEGORY
AS A % AS A % AS A % AS A %
OF TOTAL OF TOTAL OF TOTAL OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- -------- --------- -------- --------- -------- --------- --------
(IN MILLIONS)
Real estate
mortgage........... $ 14 29% $ 26 34% $ 60 40% $36 50%
Construction and
development........ 62 42% 30 38% 24 35% 17 27%
Commercial and
business........... 36 21% 31 16% 12 13% 14 13%
Consumer and other... 3 8% 5 12% 5 12% 3 10%
Unallocated.......... 24 -- 26 -- 12 -- 17 --
---- --- ---- --- ---- --- --- ---
Total............ $139 100% $118 100% $113 100% $87 100%
==== === ==== === ==== === === ===
AT YEAR-END
--------------------
1997
--------------------
CATEGORY
AS A %
OF TOTAL
ALLOWANCE LOANS
--------- --------
(IN MILLIONS)
Real estate
mortgage........... $46 61%
Construction and
development........ 15 21%
Commercial and
business........... 4 9%
Consumer and other... 3 9%
Unallocated.......... 23 --
--- ---
Total............ $91 100%
=== ===
The allowance allocated to real estate mortgage was down in 2001 due to a
reduction in loans outstanding and improved credit quality and down in 2000 due
to charge-offs of loans previously provided for. The amount allocated to
construction and development was up in 2001 and 2000 due to loans in the senior
housing industry. The amount allocated to commercial and business loans was up
in 2001 due to the growth in asset-based lending partially offset by charge-offs
of syndicated loans previously provided for. The decrease in the unallocated
allowance in 2001 was the result of a more mature construction and development
portfolio reducing construction period and lease-up risk. The unallocated amount
was up in 2000 as a reflection of slowing economic activity and an increase in
the size of the loan portfolio. The allowance for loan losses is considered
adequate based on information currently available. However, adjustments to the
allowance may be necessary due to changes in economic conditions, assumptions as
to future delinquencies or loss rates and intent as to asset disposition
options. In addition, regulatory authorities periodically review the allowance
for loan losses as a part of their examination process. Based on their review,
the regulatory authorities may require adjustments to the allowance for loan
losses based on their judgment about the information available to them at the
time of their review.
Mortgage Banking Activities
Mortgage loan originations were $7.6 billion in 2001, $2.1 billion in 2000
and $3.7 billion in 1999. The record production in 2001 was due to the
acquisition of production operations in the upper mid-west and mid-Atlantic
regions and the high level of refinance activity resulting from the lower
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
were due to the lower interest rate environments in 2001 and 1999, leading to
high levels of refinancing, and a relatively higher
S-51
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 interest rate
environment, partially offset by the retention of servicing on a portion of the
mortgage loans originated.
Other Matters
The financial services group is continuing its efforts to enhance return on
investment, including reviewing operations that are unable to meet return
objectives and determining appropriate courses of action. During January and
February 2002, a plan was enacted to exit certain businesses and product
delivery methods that were not expected to meet return objectives in the near
term. This action resulted in a reduction in force and the write-off of certain
technology investments; however, the ongoing cost savings from these actions is
anticipated to exceed significantly the related severance and write-off
expenses. During 2001, the financial services group completed acquisitions that
significantly increased its mortgage production capacity. In addition, the
mortgage 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 operations, which were sold at year-end 1999.
Other income/expense primarily consisted of gains and losses on the sale or
disposition of under-performing and non-strategic assets. For 2001, it included
a $20 million gain on the sale of non-strategic timberlands and $13 million of
losses related to under-performing assets. It also included 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 consisted 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 and
$1 million in 1999. The increases in the pension credit in 2001 and 2000 reflect
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.
S-52
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's capital resources and
liquidity are discussed separately.
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-53
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 effect 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-54
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-55
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-56
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
We are committed to protecting the health and welfare of our employees, the
public and the environment, and strive to maintain compliance with all state and
federal environmental regulations. When constructing new facilities or
modernizing existing facilities, we use 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.
We have been designated as a potentially responsible party at nine
Superfund sites, excluding sites as to which our records disclose no involvement
or as to which our potential liability has been finally determined. At year-end
2001, we estimated the undiscounted total costs we could incur for the
remediation and toxic tort actions at Superfund sites to be about $2 million,
which has been accrued. We also utilize landfill operations to dispose of
non-hazardous waste at three paperboard and two building product mill
operations. At year-end 2001, we estimated that the undiscounted total costs we
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. We have 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, we estimate 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
S-57
remainder of 2001 reaching more normalized levels by year-end 2001. In some
instances, we elected to take downtime at certain of our 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.
We do 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, we 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. We use to a limited degree, derivative instruments
to hedge risks, including those associated with changes in product pricing,
manufacturing cost and interest rates. We do 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.
We 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, we 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 we have not yet determined the amount of goodwill
impairment to be recognized during the first quarter 2002 upon adoption of this
new statement, it is likely that up to $20 million of goodwill associated with
pre-2001 specialty packaging acquisitions may be impaired. Under the new rules,
impairment is
S-58
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.
We will be required to adopt Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations, beginning 2003. We have
not yet determined the effect on earnings or financial position of adopting this
statement. In addition, we 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 we have 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-59
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-60
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
principal amount of notes set forth opposite the underwriter's name.
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- ----------------
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. ...................................
Credit Lyonnais Securities (USA) Inc. ......................
KBC Financial Products USA Inc..............................
McDonald Investments Inc., a Key Corp. Company..............
Scotia Capital (USA) Inc. ..................................
------------
Total............................................. $500,000,000
============
The underwriting agreement provides that the obligations of the
underwriters to purchase the notes 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 notes if they purchase any of the notes.
The underwriters propose to offer some of the notes directly to the public
at the public offering price set forth on the cover page of this prospectus
supplement and some of the notes to dealers at the public offering price less a
concession not to exceed % of the principal amount of the notes. The
underwriters may allow, and the dealers may reallow, a concession not to exceed
% of the principal amount of the notes on sales to other dealers. After the
initial offering of the notes to the public, the representative[s] may change
the public offering price and concessions.
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters in connection with this offering (expressed as
a percentage of the principal amount of the notes).
PAID BY
TEMPLE-INLAND INC.
------------------
Per note.................................................... %
In connection with the offering, Salomon Smith Barney, on behalf of the
underwriters, may purchase and sell notes in the open market. These transactions
may include over-allotment, syndicate covering transactions and stabilizing
transactions. Over-allotment involves syndicate sales in excess of the principal
amount of notes to be purchased by the underwriters in the offering, which
creates a syndicate short position. Syndicate covering transactions involve
purchases of the notes in the open market after the distribution has been
completed in order to cover syndicate short positions. Stabilizing transactions
consist of certain bids or purchases of notes made for the purpose of preventing
or retarding a decline in the market price of the notes while the 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, in covering syndicate short positions or making
stabilizing purchases, repurchases notes originally sold by that syndicate
member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the notes. They may also cause the price of the
notes to be higher than the price that otherwise would
S-61
exist in the open market in the absence of these transactions. The underwriters
may conduct these transactions 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 total expenses for 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. See "Use of
Proceeds."
The underwriters have performed investment banking, commercial banking and
advisory services for us from time to time for which they have received
customary fees and expenses. The underwriters of this offering also acted as
underwriters of our recent offerings of common stock and Upper DECS, for which
they received customary underwriting discounts. See "Recent Offerings." 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 certain 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.
S-62
LEGAL MATTERS
Certain legal matters with respect to this offering of notes 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 this offering of notes 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 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
- our Current Report on Form 8-K for the event dated April 25, 2002.
S-63
The preceding list supersedes and replaces the documents listed in the
accompanying prospectus under the heading "Incorporation of Certain Documents by
Reference."
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-64
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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
$500,000,000
[TEMPLE-INLAND INC. LOGO]
$ % SENIOR NOTES DUE
$ % SENIOR NOTES DUE
------------
PROSPECTUS SUPPLEMENT
, 2002
------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------