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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[|X|] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission file number 0-565
ALEXANDER & BALDWIN, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
822 Bishop Street
Post Office Box 3440, Honolulu, Hawaii 96801
(Address of principal executive offices and zip code)
808-525-6611
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Number of shares of Common Stock outstanding at February 13, 2003:
41,390,388
Aggregate market value of Common Stock held by non-affiliates at June 30, 2002:
$1,003,571,857
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes |X| No _____
Documents Incorporated By Reference
Portions of Registrant's Proxy Statement dated March 10, 2003
(Part III of Form 10-K)
TABLE OF CONTENTS
PART I
Page
Items 1 & 2. Business and Properties............................................................ 1
A. Transportation..................................................................... 1
(1) Freight Services.......................................................... 1
(2) Vessels................................................................... 2
(3) Terminals................................................................. 2
(4) Intermodal and Other Services............................................. 4
(5) Competition............................................................... 4
(6) Labor Relations........................................................... 5
(7) Rate Regulation........................................................... 5
B. Property Development and Management................................................ 5
(1) General................................................................... 5
(2) Planning and Zoning....................................................... 6
(3) Residential Projects...................................................... 7
(4) Commercial Properties..................................................... 8
C. Food Products...................................................................... 10
(1) Production................................................................ 10
(2) Marketing of Sugar and Coffee............................................. 11
(3) Competition and Sugar Legislation......................................... 11
(4) Properties and Water...................................................... 12
D. Employees and Labor Relations...................................................... 13
E. Energy .......................................................................... 14
F. Available Information.............................................................. 14
Item 3. Legal Proceedings.................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................................ 15
Executive Officers of the Registrant................................................................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............. 16
Item 6. Selected Financial Data............................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 33
Item 8. Financial Statements and Supplementary Data........................................ 34
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................................... 69
PART III
Item 10. Directors and Executive Officers of the Registrant................................. 70
A. Directors.......................................................................... 70
B. Executive Officers................................................................. 70
Item 11. Executive Compensation............................................................. 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................................ 71
Item 13. Certain Relationships and Related Transactions..................................... 71
Item 14. Controls and Procedures............................................................ 72
A. Evaluation of Disclosure Controls and Procedures................................... 72
B. Changes in Internal Controls....................................................... 72
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................... 73
A. Financial Statements............................................................... 73
B. Financial Statement Schedules...................................................... 73
C. Exhibits Required by Item 601 of Regulation S-K.................................... 73
D. Reports on Form 8-K................................................................ 79
Signatures ....................................................................................... 80
Certifications....................................................................................... 82
Independent Auditors' Consent........................................................................ 84
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2002
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Alexander & Baldwin, Inc. ("A&B") is a diversified corporation with
most of its operations centered in Hawaii. It was founded in 1870 and
incorporated in 1900. Ocean transportation operations and related shoreside
operations of A&B are conducted by a wholly-owned subsidiary, Matson Navigation
Company, Inc. ("Matson") and several Matson subsidiaries. Property development
and food products operations are conducted by A&B and certain other subsidiaries
of A&B.
The industry segments of A&B are as follows:
A. Transportation - carrying freight, primarily between various
ports on the U.S. Pacific Coast and major Hawaii ports and
Guam; chartering vessels to third parties; providing terminal,
stevedoring and container equipment maintenance services in
Hawaii; arranging intermodal transportation in North America;
and providing third-party logistics services.
B. Property Development and Management - purchasing, developing,
selling, managing and leasing commercial (including retail,
office and industrial) and residential properties, in Hawaii
and on the U.S. mainland.
C. Food Products - growing sugar cane and coffee in Hawaii;
producing bulk raw sugar, specialty food-grade sugars,
molasses and green coffee; marketing and distributing roasted
coffee and green coffee; providing sugar and molasses hauling
and storage, general freight and petroleum hauling in Hawaii;
and generating and selling electricity.
For information about the revenue, operating profits and identifiable
assets of A&B's industry segments for the three years ended December 31, 2002,
see Note 14 ("Industry Segments") to A&B's financial statements in Item 8 of
Part II below.
DESCRIPTION OF BUSINESS AND PROPERTIES
A. Transportation
(1) Freight Services
Matson's Hawaii Service offers containership freight services between
the ports of Long Beach, Oakland, Seattle, and the major ports in Hawaii,
located on the islands of Oahu, Kauai, Maui and Hawaii. Roll-on/roll-off service
is provided between California and the major ports in Hawaii. Container cargo
also is received at and delivered to Portland, Oregon, and moved overland
between Portland and Seattle.
Matson is the principal carrier of ocean cargo between the U.S. Pacific
Coast and Hawaii. In 2002, Matson carried approximately 152,500 containers
(compared with 149,600 in 2001) and 120,500 motor vehicles (compared with
122,400 in 2001) between those destinations. Principal westbound cargoes carried
by Matson to Hawaii include refrigerated commodities, dry containers of mixed
commodities, packaged foods, motor vehicles and building materials. Principal
eastbound cargoes carried by Matson from Hawaii include motor vehicles,
household goods, canned pineapple, refrigerated containers of fresh pineapple
and dry containers of mixed commodities. The preponderance of Matson's Hawaii
Service revenue is derived from the westbound carriage of containerized freight
and motor vehicles.
Matson's Guam Service provides containership freight services between
the U.S. Pacific Coast and Guam and Micronesia. Matson's Guam Service is a
component of the Pacific Alliance Service, a strategic alliance established by
Matson and American President Lines, Ltd. ("APL") to provide freight services
between the U.S. Pacific Coast and Hawaii, Guam and several Far East ports. In
2002, Matson carried approximately 16,300 containers (compared with 17,300 in
2001) and 3,760 automobiles (compared with 2,750 in 2001) in the Guam Service.
The alliance currently utilizes five vessels (three Matson vessels and two APL
vessels) in a schedule which provides service from the U.S. Pacific Coast to
Guam and Micronesia, continuing through Far East ports and returning to
California.
Matson's Mid-Pacific Service offers container and conventional freight
services between the U.S. Pacific Coast and the ports of Kwajalein, Ebeye and
Majuro in the Republic of the Marshall Islands and Johnston Island, all via
Honolulu.
See "Rate Regulation" below for a discussion of Matson's freight rates.
(2) Vessels
Matson's cargo fleet consists of eleven containerships, two combination
container/trailerships, one roll-on/roll-off barge, two container barges
equipped with cranes that serve the neighbor islands of Hawaii and one container
barge equipped with cranes in the Mid-Pacific Service. These seventeen vessels
represent an investment of approximately $698,992,000 expended over the past 32
years. The majority of vessels in the Matson cargo fleet have been acquired with
the assistance of withdrawals from a Capital Construction Fund established under
Section 607 of the Merchant Marine Act, 1936, as amended. Matson is actively
pursuing a vessel renewal program because its fleet is aging, with six vessels
that will be between 30 and 33 years old in 2003.
In 2002, Matson's vessel renewal program resulted in an agreement to
purchase two new containerships for the Hawaii Service, each at a total project
cost of approximately $110 million. The ships, which are being built by Kvaerner
Philadelphia Shipyard, Inc., are expected to be delivered, respectively, in the
third quarter of 2003 and the second quarter of 2004.
Currently, three containerships are time-chartered to APL in connection
with the Pacific Alliance Service. Two container/trailerships previously
bareboat-chartered to Sea Star Line, LLC, which operates the vessels in the
Florida-Puerto Rico trade, and in which Matson has a minority investment
interest, were sold to Sea Star Line, LLC in January 2002. One containership
currently in reserve status is scheduled to be scrapped in 2003.
Matson's fleet units are described on the list on the following page.
As a complement to its fleet, Matson owns approximately 14,200
containers, 10,500 container chassis, 700 auto-frames and miscellaneous other
equipment. Capital expenditures incurred by Matson in 2002 for vessels,
equipment and systems totaled approximately $4,750,000.
(3) Terminals
Matson Terminals, Inc. ("Matson Terminals"), a wholly-owned
subsidiary of Matson, provides container stevedoring, container equipment
maintenance and other terminal services for Matson and other ocean carriers at
MATSON NAVIGATION COMPANY, INC.
FLEET--2/1/03
Usable Cargo Capacity
--------------------------------------------
Containers Vehicles
Year Maximum Maximum ----------------------------- --------------
Official Year Recon- Speed Deadweight Reefer
Vessel Name Number Built structed Length (Knots) (Long Tons) 20' 24' 40' Slots TEUs (1) Autos Trailers
- ----------- -------- ----- -------- ---------- ------- ----------- --- --- ----- ------ -------- ----- --------
Diesel-Powered Ships
- --------------------
R.J. PFEIFFER....... 979814 1992 713'6" 23.0 27,100 48 171 988 300 2,229 -- --
MOKIHANA (2)........ 655397 1983 860'2" 23.0 30,167 182 0 1,340 408 2,824 -- --
MAHIMAHI (2)........ 653424 1982 860'2" 23.0 30,167 182 0 1,340 408 2,824 -- --
MANOA (2)........... 651627 1982 860'2" 23.0 30,187 182 0 1,340 408 2,824 -- --
Steam-Powered Ships
- -------------------
KAUAI............... 621042 1980 1994 720'5 1/2" 22.5 26,308 -- 458 538 300 1,626 44 --
MAUI................ 591709 1978 1993 720'5 1/2" 22.5 26,623 -- 458 538 300 1,626 -- --
MATSONIA............ 553090 1973 1987 760'0" 21.5 22,501 16 128 771 201 1,712 450 56
LURLINE............. 549900 1973 1982 826'6" 21.5 22,213 6 162 713 292 1,626 220 81
EWA (3)............. 530140 1972 1978 787'8" 21.0 38,747 286 276 681 228 1,979 -- --
CHIEF GADAO......... 530138 1971 1978 787'8" 21.0 37,346 230 464 597 274 1,981 -- --
LIHUE............... 530137 1971 1978 787'8" 21.0 38,656 286 276 681 188 1,979 -- --
MANULANI............ 528400 1970 720'5 1/2" 22.5 27,109 26 160 659 221 1,536 -- --
MANUKAI (4)......... 524219 1970 720'5 1/2" 22.5 27,107 -- 537 416 251 1,476 -- --
Barges
- ---------------
WAIALEALE (5)....... 978516 1991 345'0" -- 5,621 -- -- -- 35 -- 230 45
ISLANDER (6)........ 933804 1988 372'0" -- 6,837 -- 276 24 70 380 -- --
MAUNA LOA (6)....... 676973 1984 350'0" -- 4,658 -- 144 72 84 316 -- --
HALEAKALA (6)....... 676972 1984 350'0" -- 4,658 -- 144 72 84 316 -- --
Molasses
----------
Vessel Name Short Tons
- ----------- ----------
Diesel-Powered Ships
- --------------------
R.J. PFEIFFER....... --
MOKIHANA (2)........ --
MAHIMAHI (2)........ --
MANOA (2)........... --
Steam-Powered Ships
- -------------------
KAUAI............... 2,600
MAUI................ 2,600
MATSONIA............ 4,300
LURLINE............. 2,100
EWA (3)............. --
CHIEF GADAO......... --
LIHUE............... --
MANULANI............ 5,300
MANUKAI (3)......... 5,300
Tugs and Barges
- ---------------
WAIALEALE (4)....... --
ISLANDER (5)........ --
MAUNA LOA (5)....... 2,100
HALEAKALA (5)....... 2,100
- --------
(1) "Twenty-foot Equivalent Units" (including trailers). TEU is a standard
measure of cargo volume correlated to the volume of a standard 20-foot dry
cargo container.
(2) Time-chartered to APL until February 2006.
(3) Reserve Status
(4) Reserve Status. Scheduled to be scrapped in 2003.
(5) Roll-on/Roll-off Barge
(6) Container Barge
its 108-acre marine terminal in Honolulu. Matson Terminals owns and operates
seven cranes at the terminal, which handled approximately 378,600 containers in
2002 (compared with 383,500 in 2001) and can accommodate three vessels at one
time. Matson Terminals' lease with the State of Hawaii runs through September
2016. In 2001, Matson Terminals substantially completed a $32 million terminal
improvement project at the Honolulu terminal, which included the conversion from
a straddle carrier-based container handling system to a wheeled chassis- and
toppick-based system. Although the new system initially has not provided planned
improvements in productivity, the conversion is expected in the long run to
increase terminal storage density, improve productivity and reduce costs.
SSA Terminals, LLC ("SSAT"), a joint venture of Matson and Stevedoring
Services of America ("SSA"), provides terminal and stevedoring services at U.S.
Pacific Coast terminal facilities in Long Beach, Oakland and Seattle.
Capital expenditures incurred by Matson Terminals in 2002 for terminals
and equipment totaled approximately $5,350,000.
(4) Intermodal and Other Services
Matson Intermodal System, Inc. ("Matson Intermodal") is an intermodal
marketing company which arranges North American rail and motor carrier
transportation for shippers and carriers, in conjunction with ocean and other
surface transportation. Through volume purchases of rail and motor carrier
transportation services, augmented by such services as shipment tracing and
single-vendor invoicing, Matson Intermodal is able to reduce transportation
costs for customers. Matson Intermodal operates six customer service centers and
has 18 sales offices across the U.S. mainland. Capital expenditures incurred by
Matson Intermodal in 2002 totaled approximately $400,000.
Matson Logistics Solutions, Inc. ("Matson Logistics"), a wholly-owned
subsidiary of Matson, provides third-party logistics (3PL) services primarily in
Hawaii, Alaska, Puerto Rico and Guam-Micronesia. These services include
transportation management, air freight, supply chain audits and project cargo
logistics to Matson customers and others.
(5) Competition
Matson's Hawaii Service and Guam Service have one major containership
competitor that serves Long Beach, Oakland, Tacoma, Honolulu and Guam. Other
competitors in the Hawaii Service include two common carrier barge services,
unregulated proprietary and contract carriers of bulk cargoes, and air cargo
service providers. Although air freight competition is intense for
time-sensitive or perishable cargoes, historic and projected inroads of such
competition in cargo volume are limited by the amount of cargo space available
in passenger aircraft and by generally higher air freight rates.
Matson vessels are operated on schedules which make available to
shippers and consignees regular day-of-the-week sailings from the U.S. Pacific
Coast and day-of-the-week arrivals in Hawaii. Under its current schedule, Matson
operates 208 Hawaii round-trip voyages per year, double the westbound voyages of
its nearest competitor, and arranges additional voyages when cargo volumes
require additional capacity. This service is attractive to customers because
more frequent arrivals permit customers to lower inventory costs. Matson also
competes by offering a more comprehensive service to customers, supported by its
scope of equipment and its efficiency and experience in the handling of
containerized cargoes and competitive pricing.
The carriage of cargo between the U.S. Pacific Coast and Hawaii on
foreign-built or foreign-documented vessels is prohibited by Section 27 of the
Merchant Marine Act, 1920, frequently referred to as the Jones Act. However,
foreign-flag vessels carrying cargo to Hawaii from foreign sources provide
indirect competition for Matson's Hawaii Service. Far East countries, Australia,
New Zealand and South Pacific islands have direct foreign-flag services to
Hawaii.
In response to coordinated efforts by various interests to convince
Congress to repeal the Jones Act, in 1995 Matson joined other businesses and
organizations to form the Maritime Cabotage Task Force, which supports the
retention of the Jones Act and other cabotage laws. Repeal of the Jones Act
would allow all foreign-flag vessel operators, which do not have to abide by
U.S. laws and regulations, to sail between U.S. ports in direct competition with
Matson and other U.S. operators which must comply with such laws and
regulations. The Task Force seeks to inform elected officials and the public
about the economic, national security, commercial, safety and environmental
benefits of the Jones Act and similar cabotage laws.
Matson Intermodal competes for freight with a number of large and small
companies engaged in intermodal transportation. Matson Logistics competes with
many larger providers of logistics services and with transportation companies
whose services include logistics.
(6) Labor Relations
The absence of strikes and the availability of labor through hiring
halls are important to the maintenance of profitable operations by Matson. Until
2002, Matson's operations had not been disrupted significantly by labor disputes
in over 30 years. See "Employees and Labor Relations" below for descriptions of
the labor disruption in 2002, labor agreements to which Matson and Matson
Terminals are parties, and certain unfunded liabilities for multi-employer
pension plans to which Matson and Matson Terminals contribute.
(7) Rate Regulation
Matson is subject to the jurisdiction of the Surface Transportation
Board with respect to its domestic rates. A rate in the noncontiguous domestic
trade is presumed reasonable and will not be subject to investigation if the
aggregate of increases and decreases is not more than 7.5 percent above, or more
than 10 percent below, the rate in effect one year before the effective date of
the proposed rate, subject to increase or decrease by the percentage change in
the U.S. Producer Price Index. Matson filed a 2.75 percent across-the-board
increase in its Hawaii Service freight rates which became effective April 14,
2002, and a three percent across-the-board increase in its Guam Service freight
rates, which became effective October 3, 2002. Also in 2002, Matson increased
its fuel surcharge in its Hawaii Service and Guam Service from 3.25 percent to
4.75 percent, effective May 5, and from 4.75 percent to 6 percent, effective
October 20 in Hawaii and November 9 in Guam. Effective January 12, 2003, Matson
implemented, in its Hawaii Service, a terminal handling charge of $200 per
container for westbound freight, $100 per container for eastbound freight and
$30 per automobile. On February 14, 2003, due to dramatic increases in fuel
prices attributed to the increasing likelihood of war in Iraq, Matson announced
an increase in its fuel surcharge from 6 percent to 7.5 percent in the Hawaii
and Guam Services effective March 3, 2003.
B. Property Development and Management
(1) General
A&B and its subsidiaries, including A & B Properties, Inc., own
approximately 90,800 acres, consisting of approximately 90,600 acres in Hawaii
and approximately 200 acres elsewhere, as follows:
Location No. of Acres
-------- ------------
Oahu .................................................. 52
Maui .................................................. 68,649
Kauai ................................................. 21,881
California ............................................ 89
Texas ................................................. 26
Washington ............................................ 13
Arizona ............................................... 35
Nevada ................................................ 39
Colorado .............................................. 5
------
TOTAL ............................................... 90,789
======
As described more fully in the table below, the bulk of this acreage currently
is used for agricultural and related activities, and includes pasture land,
watershed land and conservation reserves. The balance is used or planned for
development or other urban uses. An additional 3,270 acres on Maui and Kauai are
leased from third parties.
Current Use No. of Acres
- ----------- ------------
Hawaii
Fully-entitled urban (defined below) 1,218
Agricultural, pasture and miscellaneous 60,073
Watershed land/conservation 29,291
U.S. Mainland
Fully-entitled urban 207
------
TOTAL 90,789
======
A&B and its subsidiaries are actively involved in the entire spectrum
of land development, including planning, zoning, financing, constructing,
purchasing, managing and leasing, and selling and exchanging real property.
(2) Planning and Zoning
The entitlement process for development of property in Hawaii is both
time-consuming and costly, involving numerous State and County regulatory
approvals. For example, conversion of an agriculturally-zoned parcel to
residential zoning usually requires the following approvals:
- amendment of the County general plan to reflect the desired
residential use;
- approval by the State Land Use Commission to reclassify the
parcel from the "Agricultural" district to the "Urban" district;
- County approval to rezone the property to the precise residential
use desired; and,
- if the parcel is located in the Special Management Area ("SMA"), the
granting of an SMA permit by the County.
The entitlement process is complicated by the conditions, restrictions
and exactions that are placed on these approvals, including, among others, the
construction of infrastructure improvements, payment of impact fees,
restrictions on the permitted uses of the land, provision of affordable housing
and/or mandatory fee sale of portions of the project.
A&B actively works with regulatory agencies, commissions and
legislative bodies at various levels of government to obtain zoning
reclassification of land to its highest and best use. A&B designates a parcel as
"fully-entitled" or "fully-zoned" when all necessary government land use
approvals have been obtained.
As described in more detail below, in 2002, work to obtain entitlements
for urban use focused on (i) obtaining Community Plan designations for various
A&B lands on Maui, and (ii) obtaining County entitlements for a proposed
single-family subdivision and proposed hotel on Maui. The Community Plans serve
to guide planning and development activity on Maui. A&B has obtained and
continues to seek various urban designations for its undeveloped lands within
the four Community Plans where most of its Maui lands are located.
(3) Residential Projects
A&B is pursuing a number of residential projects in Hawaii, including:
(a) Kukui`Ula. Kukui`Ula is a 1,045-acre master planned resort
residential community located in Poipu, Kauai. Approximately 837 acres are fully
entitled for up to 900 hotel and vacation ownership (timeshare) units, 3,000
residential units, a golf course and commercial uses. The balance of the project
is partially entitled and was planned for up to 750 residential units.
In April 2002, a joint venture agreement was signed with an affiliate
of DMB Associates, Inc., an Arizona-based developer of master planned
communities, for the joint development of Kukui`Ula. The venture's initial
conceptual land use plan anticipates a reduction in overall project density from
the over 4,000 units originally entitled, to approximately 1,500 high-end
residential and hotel units. Applications to amend Kukui`Ula's land use
boundaries are expected to be filed by mid-2003. Title to approximately 850
acres is also expected to be transferred to the joint venture by mid-2003, with
the balance of the land to be transferred to the joint venture upon securing
further entitlements for the property.
All of the remaining lots at Koloa Estates, Kukui`Ula's first
residential project, were sold in 2002. The average sales price for this
project, which began in 1999, was approximately $150,000 per lot.
(b) The Summit at Kaanapali. In January 2000, A&B acquired 17 acres in
the Kaanapali Golf Estates project. This land is being developed into 53
single-family homes or house lots. Site work construction was completed in May
2001. Construction of the 17 homes in the project's first phase commenced June
2001 and was completed in May 2002. In June 2002, the sale of 19 vacant lots in
the project's next phase commenced. As of December 31, 2002, 15 homes and 14
lots were closed, at an average price of $1.1 million for the homes and $320,000
for the lots.
(c) HoloHolo Ku. In October 2001, A&B entered into a joint venture with
Kamuela Associates LLC for the development of 44 detached single-family homes
under a condominium regime, on an 8.5-acre parcel in Kamuela on the island of
Hawaii. An additional 7.2-acre estate lot is available for sale. Construction
commenced November 2001. Five homes were sold in 2002 and 29 homes were in
escrow as of December 31, 2002. All 44 homes are either completed or in various
stages of completion.
(d) Kai Lani. In September 2001, A&B entered into a joint venture with
Armstrong Kai Lani Corporation for the development of 116 townhouse units on an
11-acre parcel in the Ko Olina Resort on Oahu. Construction commenced February
2002, and the first units are scheduled to close in February 2003. As of
December 31, 2002, 81 units were in escrow, including 76 under binding
contracts. Prices for the units sold to date range from $365,000 to $659,000,
with an average price of $440,000.
(e) Waikiki Condominium. On November 1, 2001, A&B acquired a 1.63-acre,
vacant, fee simple development site in Waikiki, Oahu, for approximately $3.6
million. The property, located at the entrance to Waikiki, is zoned for
high-rise residential use and limited commercial uses. Based on focus group
input from Waikiki brokers, design and permitting activities began in 2002 and
are expected to be completed in early 2003 with construction scheduled to
commence in the third quarter of 2003. Approximately 100 apartments, averaging
slightly under 1,100 square feet in size, are planned for the project.
(f) Haliimaile Subdivision. A&B continues to seek entitlements for a
subdivision consisting of between 150 and 200 lots on 67 acres in Haliimaile
(Upcountry, Maui). The project is before the County Council for final zoning
approval. In June 2002, the Council deferred future hearings on the project
until a suitable water source is found, due to water shortage conditions in the
Upcountry region. In 2002, a water study was commissioned to evaluate potential
Upcountry well sites to meet the potable water requirements, and the
subdivision's layout and lot sizes are being refined to meet anticipated market
demand. It is expected that water source and traffic issues will be resolved in
2003.
(4) Commercial Properties
An important source of property revenue is the lease rental income A&B
receives from over five million leasable square feet of commercial building
space, ground leases on 272 acres for commercial use, and leases on 11,540 acres
for agricultural/pasture use.
(a) Hawaii Commercial Properties
In Hawaii, most of the approximately 1.7 million square feet of the
improved, income-producing commercial properties owned by A&B are located on
Oahu and in the Kahului/Wailuku region of Maui, with smaller holdings in the
area of Port Allen, on the island of Kauai, including the recently completed
Port Allen Marina Center. A&B's Hawaii commercial properties portfolio consists
primarily of seven retail centers, eight office buildings and three industrial
properties. The average occupancy for the Hawaii portfolio was 89 percent in
2002 (compared with 90 percent in 2001). The decline was due primarily to lower
occupancies in the office properties.
The Mililani Shopping Center, comprising 180,300 square feet on Oahu,
was acquired by A&B in June 2002 and is presently 100 percent occupied. Proceeds
from several tax-deferred exchanges under Section 1031 of the Internal Revenue
Code, as amended ("Code"), were used to pay for a portion of the purchase price.
The primary Hawaii commercial properties are as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- ---------
Maui Mall Kahului, Maui Retail 192,600
Mililani Shopping Center Mililani, Oahu Retail 180,300
Pacific Guardian Complex Honolulu, Oahu Office 138,400
Kaneohe Bay Shopping Center Kaneohe, Oahu Retail 124,500
P&L Warehouse Kahului, Maui Industrial 104,100
Kahului Shopping Center Kahului, Maui Retail 99,600
Ocean View Center Honolulu, Oahu Office 99,200
Hawaii Business Park Pearl City, Oahu Industrial 85,200
Haseko Center Honolulu, Oahu Office 84,200
One Main Plaza Wailuku, Maui Office 82,800
Wakea Business Center Kahului, Maui Industrial/Retail 61,500
Kahului Office Building Kahului, Maui Office 56,800
Fairway Shops at Kaanapali Kaanapali, Maui Retail 35,100
Kahului Office Center Kahului, Maui Office 31,300
Stangenwald Building Honolulu, Oahu Office 27,100
Port Allen Marina Center Port Allen, Kauai Retail 23,600
Judd Building Honolulu, Oahu Office 20,200
A number of other commercial projects are being developed on Maui and
Oahu, including:
(i) Triangle Square. Previous construction at Triangle Square in
Kahului, Maui includes two retail buildings with a combined leasable area of
42,600 square feet, a BMW car dealership and three other improved commercial
properties under long-term ground leases. Agreements have been negotiated with a
second car dealership and Krispy Kreme to develop portions of the available 4.5
acres at this development.
(ii) Maui Business Park. Located in Kahului, Maui, the initial phase of
Maui Business Park consists of Phase IA (37.4 saleable acres), completed in
1995, and Phase IB (32.0 saleable acres), completed in 2000.
Phase IA includes the 349,300 square-foot Maui Marketplace retail
center, which is owned by a third party and occupies 20.3 acres of the
subdivision. The remaining area of Phase IA consists of 30 lots with an average
size of 22,900 square feet, of which seven lots were sold in 2002. As of
December 31, 2002, seven lots (4.0 saleable acres) remained available for sale
or lease.
In Phase IB, Home Depot completed construction of a 135,000 square-foot
store in May 2001. In February 2001, Wal-Mart purchased a 14.0-acre parcel in
the subdivision and completed construction of a 142,000 square-foot store in
October 2001. The remaining area consists of ten lots with an average size of
18,800 square feet. As of December 31, 2002, eight lots (3.8 saleable acres)
remained available for sale or lease.
In May 2002, the Maui County Council approved the inclusion of
approximately 175 acres in the Wailuku-Kahului Community Plan for the future
expansion of Maui Business Park. Future entitlement efforts include seeking
State "Urban" designation and County "Light Industrial" zoning for the property.
(iii) Kahului Airport Hotel. In March 2002, the County Council approved
A&B's zoning and Community Plan amendment applications for the proposed 134-room
Courtyard by Marriott hotel, to be developed on 3.4 acres near the Kahului
Airport. The project's SMA permit was subsequently obtained in April 2002.
Design of the hotel commenced May 2002 and construction plans were submitted to
the County for review in December 2002. Preliminary design and preparation of an
SMA permit are underway for the project's affordable housing requirement,
consisting of 34 townhouse units on A&B-owned land in Kahului.
(iv) Mill Town Center. Located in Waipahu, Oahu (approximately 12 miles
from Honolulu), the Mill Town Center is a light-industrial subdivision
consisting of 27.5 saleable acres being developed in two phases. Phase IA (10.2
saleable acres), completed in 1999, consists of 23 fee simple industrial lots.
In 2002, three lots were sold to commercial and industrial businesses and, as of
December 31, 2002, five lots (2.2 saleable acres) remained available for sale or
lease.
Phase IB (17.3 acres) was subdivided into 32 lots and IB's sitework was
completed in November 2002. As of December 31, 2002, 31 lots (14.3 saleable
acres) remained available for sale or lease in Phase IB.
(b) U.S. Mainland Commercial Properties
On the U.S. mainland, A&B owns a portfolio of commercial properties,
acquired primarily by way of tax-deferred exchanges under Code Section 1031,
comprising approximately 3.3 million square feet of leasable area. The portfolio
consists of seven retail centers, four office buildings and six industrial
properties, as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- ---------
Ontario Distribution Center........... Ontario, CA Industrial 895,500
Sparks Business Center................ Sparks, NV Industrial 396,100
Ontario-Pacific Business Centre....... Ontario, CA Industrial 246,100
Valley Freeway Corporate Park......... Kent, WA Industrial 229,100
Airport Square........................ Reno, NV Retail 170,800
San Pedro Plaza....................... San Antonio, TX Office 163,700
2868 Prospect Park.................... Sacramento, CA Office 161,700
Arbor Park............................ San Antonio, TX Retail 139,500
Mesa South Center..................... Phoenix, AZ Retail 133,600
San Jose Avenue Warehouse............. City of Industry, CA Industrial 126,000
Southbank II.......................... Phoenix, AZ Office 120,800
Village at Indian Wells............... Indian Wells, CA Retail 104,600
2450 Venture Oaks..................... Sacramento, CA Office 99,000
Northwest Business Center............. San Antonio, TX Office/Industrial 87,000
Carefree Marketplace.................. Carefree, AZ Retail 85,000
Marina Shores......................... Long Beach, CA Retail 67,700
Wilshire Center....................... Greeley, CO Retail 46,500
In February 2002, A&B sold the Great Southwest Industrial property,
located in Dallas, Texas. This seven-building portfolio contained 842,900 square
feet of leasable area. Other 2002 sales include the 43,300 square-foot Market
Square Shopping Center, located in Greeley, Colorado (May), the 133,600
square-foot Moulton Plaza Shopping Center, located in Laguna Hills, California
(December), and the 147,300 square-foot Day Creek industrial facility, located
in Ontario, California (December).
In 2002, A&B acquired the 67,700 square-foot Marina Shores Shopping
Center in Long Beach, California (May) and the 396,100 square-foot Sparks
Business Center in Sparks, Nevada, in the Reno metropolitan area (December).
Both of these properties were acquired in Code Section 1031 exchanges.
A&B's Mainland commercial properties achieved an average occupancy rate
of 92 percent in 2002 (compared with 93 percent in 2001). The decrease was due
primarily to two tenant bankruptcies which resulted in an increase in available
space in the Ontario Distribution Center and the Mesa South Shopping Center.
C. Food Products
(1) Production
A&B has been engaged in activities relating to the production of cane
sugar and molasses in Hawaii since 1870, and production of coffee in Hawaii
since 1987. A&B's current food products operations consist of a sugar plantation
on the island of Maui, operated by its Hawaiian Commercial & Sugar Company
("HC&S") division, and a coffee farm on the island of Kauai, operated by its
Kauai Coffee Company, Inc. ("Kauai Coffee") subsidiary.
HC&S is Hawaii's largest producer of raw sugar, having produced
approximately 215,900 tons of raw sugar in 2002, or about 79 percent of the raw
sugar produced in Hawaii (compared with 191,500 tons or about 70 percent in
2001). The increase in production was due primarily to an extended harvesting
season, combined with improved factory efficiency. Total Hawaii sugar
production, in turn, amounted to approximately four percent of total United
States sugar production. HC&S harvested 16,557 acres of sugar cane in 2002
(compared with 15,101 in 2001). The increase in acres harvested was due
primarily to a later-than-expected factory startup in 2001. Yields averaged 13.0
tons of sugar per acre in 2002 (compared with 12.7 in 2001). The average cost
per ton of sugar produced at HC&S was $332 in 2002 (compared with $371 in 2001).
The decrease in cost per ton was attributable to higher sugar production,
partially offset by higher operating costs. As a by-product of sugar production,
HC&S also produced approximately 74,300 tons of molasses in 2002 (compared with
71,200 in 2001).
In 2002, approximately 11,000 tons of the raw sugar produced by HC&S
were produced as specialty food-grade raw sugars and sold under HC&S's Maui
Brand(R) trademark. A $2.4 million expansion of the production facilities for
these sugars was completed in February 2001 and an additional $3.6 million
expansion is underway.
During 2002, Kauai Coffee had approximately 3,400 acres of coffee trees
under cultivation. The harvest of the 2002 coffee crop yielded approximately 2.8
million pounds of green coffee (compared with 3.8 million in 2001). The
decreased production was due primarily to the inherent nature of coffee trees,
which typically produce higher yields bi-annually, magnified by a high natural
drop of the coffee to the ground.
HC&S and McBryde Sugar Company, Limited ("McBryde"), a subsidiary of
A&B and the parent company of Kauai Coffee, produce electricity for internal use
and for sale to the local electric utility companies. HC&S's power is produced
by burning bagasse, by hydroelectric power generation and, when necessary, by
burning fossil fuels, whereas McBryde produces power solely by hydroelectric
generation. The price for the power sold by HC&S and McBryde is equal to the
utility companies' "avoided cost" of not producing such power themselves. In
addition, HC&S receives a capacity payment to provide a guaranteed power
generation capacity to the local utility. See "Energy" below for power
production and sales data.
Kahului Trucking & Storage, Inc., a subsidiary of A&B, provides sugar
and molasses hauling and storage, petroleum hauling, mobile equipment
maintenance and repair services and self-service storage facilities on Maui.
Kauai Commercial Company, Incorporated, another subsidiary of A&B, provides
similar services on Kauai, as well as general trucking services.
(2) Marketing of Sugar and Coffee
Substantially all of the raw sugar produced in Hawaii is purchased,
refined and marketed by C&H Sugar Company, Inc. ("C&H"), of which A&B owns a 36
percent common stock interest. The results of A&B's equity investment in C&H are
reported in A&B's financial statements as an investment in an affiliate. C&H
processes the raw cane sugar at its refinery at Crockett, California, and
markets the refined products primarily in the western and central United States.
HC&S markets its specialty food-grade raw sugars to food and beverage producers
and to retail stores under its Maui Brand(R) label, and to distributors that
repackage the sugars under their own labels. HC&S's largest food-grade raw sugar
customers are Cumberland Packing Corp. and Sugar Foods Corporation, which
repackage HC&S's turbinado sugar for their "Sugar in the Raw" products.
Hawaiian Sugar & Transportation Cooperative ("HS&TC"), a cooperative
consisting of the two remaining sugar cane growers in Hawaii (including HC&S),
has a ten-year supply contract with C&H, ending in June 2003. Pursuant to the
supply contract, the growers sell their raw sugar to C&H at a price equal to the
New York No. 14 Contract settlement price, less a discount and less costs of
sugar vessel discharge and stevedoring. This price, after deducting the
marketing, operating, distribution, transportation and interest costs of HS&TC,
reflects the gross revenue to the Hawaii sugar growers, including HC&S. HS&TC
has agreed in principle to a revised supply agreement with C&H through the 2008
crop. Notwithstanding the supply contract, HC&S arranged directly with C&H for
the forward pricing of a portion of its 2002 harvest, as described in Item 7A
("Quantitative and Qualitative Disclosures About Market Risk") of Part II below.
In addition, as of December 31, 2002, approximately 33 percent of the expected
2003 harvest has been forward priced.
At Kauai Coffee, coffee marketing efforts are directed toward
developing a market for premium-priced, estate-grown Kauai green coffee. Most of
the coffee crop is being marketed on the U.S. mainland and in Asia as green
(unroasted) coffee. In addition to the sale of green coffee, Kauai Coffee
produces and sells roasted, packaged coffee in Hawaii under the Kauai Coffee(R)
trademark.
(3) Competition and Sugar Legislation
Hawaii sugar growers produce more sugar per acre than most other major
producing areas of the world, but that advantage is offset by Hawaii's high
labor costs and the distance to the U.S. mainland market. Hawaiian refined sugar
is marketed primarily west of Chicago. This is also the largest beet sugar
growing and processing area and, as a result, the only market area in the United
States that produces more sugar than it consumes. Sugar from sugar beets is the
greatest source of competition in the refined sugar market for the Hawaiian
sugar industry.
The overall U.S. caloric sweetener market continues to grow. The use of
non-caloric (artificial) sweeteners accounts for a relatively small percentage
of the domestic sweetener market. The anticipated increased use of high fructose
corn syrup and artificial sweeteners is not expected to affect sugar markets
significantly in the near future.
The U.S. Congress historically has sought, through legislation, to
assure a reliable domestic supply of sugar at stable and reasonable prices. The
current protective legislation is the Farm Security and Rural Investment Act of
2002 ("2002 Farm Bill"). The two main elements of U.S. sugar policy are the
tariff-rate quota ("TRQ") import system and the price support loan program. The
TRQ system limits imports by allowing only a quota amount to enter the U.S.
after payment of a relatively low tariff. A higher, over-quota tariff is imposed
for imported quantities above the quota amount.
The 2002 Farm Bill reauthorized the sugar price support loan program,
which supports the U.S. price of sugar by providing for commodity-secured loans
to producers. Unlike most other commodity programs, sugar loans are made to
processors and not directly to producers. HC&S is both a producer and a
processor. To qualify for loans, processors must agree to provide a part of the
loan payment to producers. Loans may be repaid either in cash or by forfeiture
without penalty. The 2002 Farm Bill eliminated the former loan forfeiture
penalty and marketing assessments, which increased the effective support level.
Under the 2002 Farm Bill, the government is required to administer the
loan program at no net cost by avoiding sugar loan forfeitures. This is
accomplished by reestablishing marketing allotments, which provides each
processor or producer a specific limit on sales for the year, above which
penalties would apply. It is also accomplished by adjusting fees and quotas for
imported sugar to maintain the domestic price at a level that discourages
producers from defaulting on loans. A loan rate (support price) of 18 cents per
pound for raw cane sugar is in effect for the 2003 through 2007 crops. The
pending revised supply agreement between HS&TC and C&H is expected to limit
HC&S's ability to place sugar under loan pursuant to the loan program, while
providing a "floor" price.
In 2002, U.S. domestic raw sugar prices averaged 20.85 cents per pound,
above the 20-year lows experienced in 2000, but still below historical averages.
The pricing situation continues to be challenging, even to efficient producers
like HC&S. A chronological chart of the average U.S. domestic raw sugar prices,
based on the average daily New York Contract No. 14 settlement price for
domestic raw sugar, is shown below:
[CHART]
JAN-99 22.41
FEB 22.34
MAR 22.55
APR 22.58
MAY 22.65
JUN 22.63
JUL 22.61
AUG 21.31
SEP 20.10
OCT 20.51
NOV 17.45
DEC 17.67
JAN-00 17.70
FEB 17.05
MAR 18.46
APR 19.41
MAY 19.12
JUN 19.26
JUL 17.64
AUG 18.13
SEP 18.97
OCT 21.20
NOV 21.39
DEC 20.53
JAN-01 20.81
FEB 21.18
MAR 21.40
APR 21.51
MAY 21.19
JUN 21.04
JUL 20.64
AUG 21.01
SEP 20.87
OCT 20.85
NOV 21.19
DEC 21.35
JAN-02 21.03
FEB 20.63
MAR 19.92
APR 19.64
MAY 19.52
JUN 19.82
JUL 20.86
AUG 20.92
SEP 21.65
OCT 22.05
NOV 22.22
DEC 21.94
Liberalized international trade agreements, such as the General
Agreement on Tariffs and Trade, or GATT, include provisions relating to
agriculture that can affect the U.S. sugar or sweetener industries materially.
Kauai Coffee competes with coffee growers located worldwide, including
in Hawaii. Due to an oversupply of coffee in the marketplace, coffee commodity
prices continue to be adversely affected and are near record lows.
(4) Properties and Water
The HC&S sugar plantation, the largest in Hawaii, consists of
approximately 43,300 acres of land, including 2,000 acres leased from the State
of Hawaii and 1,300 acres under lease from private parties. Over 37,000 acres
are under cultivation, and the balance either is used for contributory purposes,
such as roads and plant sites, or is not suitable for cultivation.
McBryde owns approximately 9,500 acres of land on Kauai, of which
approximately 2,400 acres are used for watershed and other conservation uses,
approximately 3,400 acres are used by Kauai Coffee and the remaining acreage is
leased to various agricultural enterprises for cultivation of a variety of crops
and for pasturage.
It is crucial for HC&S and Kauai Coffee to have access to reliable
sources of water supply and efficient irrigation systems. A&B's plantations
conserve water by using a "drip" irrigation system that distributes water to the
roots through small holes in plastic tubes. All but a small test area of the
cultivated cane land farmed by HC&S is drip irrigated. All of Kauai Coffee's
fields also are drip irrigated.
A&B owns 16,000 acres of watershed lands on Maui that supply a portion
of the irrigation water used by HC&S. A&B also held four water licenses to
38,000 acres owned by the State of Hawaii, which over the years supplied
approximately one-third of the irrigation water used by HC&S. The last of these
water license agreements expired in 1986, and all four agreements have since
been extended as revocable permits that are renewable annually. In 2001, a
request was made to the State Board of Land and Natural Resources to replace
these revocable permits with a long-term water lease. Pending a contested case
hearing before the Board on the request for the long-term lease, the Board
renewed the existing permits.
D. Employees and Labor Relations
As of December 31, 2002, A&B and its subsidiaries had approximately
2,025 regular full-time employees. About 940 regular full-time employees were
engaged in the growing of sugar cane and coffee and the production of raw sugar
and green coffee; 898 were engaged in transportation; 44 were engaged in
property development and management and the balance was in administration and
miscellaneous operations. Approximately 55 percent were covered by collective
bargaining agreements with unions.
As of December 31, 2002, Matson and its subsidiaries also had
approximately 318 seagoing employees. Approximately 22 percent of Matson's
regular full-time employees and all of the seagoing employees were covered by
collective bargaining agreements.
Historically, collective bargaining with longshore and seagoing unions
has been complex and difficult. However, Matson and Matson Terminals consider
their relations with those unions, other unions and their non-union employees
generally to be satisfactory.
Matson's seagoing employees are represented by six unions, three
representing unlicensed crew members and three representing licensed crew
members. Matson negotiates directly with these unions. In 2002, collective
bargaining agreements with the three unions representing unlicensed crew members
were renewed without service interruption, each for three-year terms ending June
30, 2005. The collective bargaining agreement with radio officers on Matson
vessels will expire December 31, 2003.
As described in "Transportation - Rate Regulation" above, SSAT, the
previously-described joint venture of Matson and SSA, provides stevedoring and
terminal services for Matson vessels calling at U.S. Pacific Coast ports.
Matson, SSA and SSAT are members of the Pacific Maritime Association ("PMA")
which, on behalf of its members, negotiates collective bargaining agreements
with the International Longshore and Warehouse Union ("ILWU") on the U.S.
Pacific Coast. Matson Terminals provides stevedoring and terminal services to
Matson vessels calling at Honolulu. Matson Terminals is a member of the Hawaii
Stevedore Industry Committee ("SIC") which, on behalf of its members, negotiates
with the ILWU in Hawaii.
In response to widespread work slowdowns at U.S. Pacific Coast
terminals in connection with contract negotiations with the ILWU that had begun
in May 2002, the PMA initiated a lockout at the end of September 2002 that
continued for ten days until the U.S. District Court in San Francisco issued a
temporary restraining order under the Taft-Hartley Act. On the U.S. Pacific
Coast, agreement on the terms of a six-year contract was reached in December
2002. Following that agreement, the SIC and the ILWU in Hawaii also reached
agreement on the terms of a six-year contract.
During 2001, Matson renewed its collective bargaining agreement with
ILWU clerical workers at Los Angeles for a three-year term and expects in 2003
to renew its agreement with ILWU clerical workers at Oakland without service
interruption.
During 2002, Matson contributed to multi-employer pension plans for
vessel crews. If Matson were to withdraw from or significantly reduce its
obligation to contribute to one of the plans, Matson would review and evaluate
data, actuarial assumptions, calculations and other factors used in determining
its withdrawal liability, if any. In the event that any third parties materially
disagree with Matson's determination, Matson would pursue the various means
available to it under federal law for the adjustment or removal of its
withdrawal liability. Matson Terminals participates in a multi-employer pension
plan for its Hawaii longshore employees. For a discussion of withdrawal
liabilities under the Hawaii longshore and seagoing plans, see Note 10
("Employee Benefit Plans") to A&B's financial statements in Item 8 of Part II
below.
Bargaining unit employees of HC&S are covered by two collective
bargaining agreements with the ILWU. The agreements with the HC&S production
unit employees and clerical bargaining unit employees were extended in 2001 and
expired January 31, 2003. One of the collective bargaining agreements covering
the two ILWU bargaining units at Kahului Trucking & Storage, Inc. expired June
30, 2002, and is expected to be renewed without service interruption. The two
collective bargaining agreements with Kauai Commercial Company, Incorporated
employees represented by the ILWU were renegotiated in 2001 and will expire
April 30, 2004. The collective bargaining agreement with the ILWU for the
production unit employees of Kauai Coffee was renegotiated in 2001 and will
expire January 31, 2004.
E. Energy
Matson and Matson Terminals purchase residual fuel oil, lubricants,
gasoline and diesel fuel for their operations. Residual fuel oil is by far
Matson's largest energy-related expense. In 2002, Matson vessels purchased
approximately 1.7 million barrels of residual fuel oil (compared with 1.8
million in 2001).
Residual fuel oil prices paid by Matson started in 2002 at $15.30 per
barrel and ended the year at $22.87. The low for the year was $15.30 per barrel
in January and the high was $29.50 in October. Sufficient fuel for Matson's
requirements is expected to be available in 2003.
As has been the practice with sugar plantations throughout Hawaii, HC&S
uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate
steam for the production of most of the electrical power for sugar milling and
irrigation pumping operations. In addition to bagasse, HC&S uses diesel fuel
oil, boiler fuel oil and coal to produce power during the factory shutdown
period when bagasse is not being produced. In 2002, HC&S produced and sold,
respectively, approximately 220,300 MWH and 87,400 MWH of electric power
(compared with 203,650 MWH produced and 61,100 MWH sold in 2001). The increase
in power produced and sold was due to HC&S's extended harvest season and
abundant spring rainfall that reduced irrigation pumping requirements. HC&S's
oil use decreased to approximately 21,000 barrels in 2002, from 69,000 barrels
used in 2001. Coal use for power generation also decreased, to approximately
46,700 short tons in 2002, from 62,400 short tons in 2001. The decrease in oil
and coal use was attributed to the extended harvest season and the larger cane
crop, which improved the availability of bagasse supplies for the boilers.
In 2002, McBryde produced approximately 33,300 MWH of hydroelectric
power (compared with 30,600 MWH in 2001). Power sales in 2002 amounted to
approximately 24,400 MWH (compared with 21,200 MWH in 2001). The increase in
power production and sales was due primarily to abundant spring rainfall in 2002
that alleviated the drought conditions experienced in 2001.
F. Available Information
A&B files reports with the Securities and Exchange Commission (the
"SEC"). The reports and other information filed include: Forms 10-K, 10-Q, 8-K
and other reports and information filed under the Securities Exchange Act of
1934 (the "Exchange Act").
The public may read and copy any materials A&B files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding A&B and other issuers that file electronically with the SEC. The
address of that site is http://www.sec.gov.
A&B makes available, free of charge on or through its Internet website,
A&B's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the SEC.
The address of A&B's Internet website is http://www.alexanderbaldwin.com.
ITEM 3. LEGAL PROCEEDINGS
See "Business and Properties - Transportation - Rate Regulation" above
for a discussion of rate and other regulatory matters in which Matson is
routinely involved.
On September 14, 1998, Matson was served with a complaint filed by the
Government of Guam with the Surface Transportation Board ("STB"), alleging that
Sea-Land Services, Inc. ("Sea-Land"), APL and Matson have charged unreasonable
rates in the Guam trade since January 1991. Matson did not begin its Guam
Service until February 1996. In 2002, APL was dismissed as a defendant based on
the statute of limitations. On April 23, 2002, the parties filed initial briefs
addressing the appropriate rate reasonableness methodology to be applied. The
parties filed reply briefs on June 17, 2002.
In August 2001, HC&S self-reported to the State of Hawaii Department of
Health ("DOH") possible violations of state and federal air pollution control
regulations relating to a boiler at HC&S's Maui sugar mill. The boiler was
constructed in 1974 and HC&S thereafter operated the boiler in compliance with
the permits issued by DOH. Because the boiler is fueled with less than 50
percent fossil fuels and is therefore a "biomass boiler" under state air
pollution control rules, DOH initially concluded, and the DOH permits reflected,
that the boiler was not subject to the more stringent regulations applicable to
"fossil fuel-fired" boilers. In 2001, HC&S identified federal regulatory
guidance that provides that a boiler that burns any amount of fossil fuel may be
a "fossil fuel-fired boiler." HC&S then voluntarily reported the possible
compliance failures to DOH. On January 8, 2003, DOH orally informed HC&S that
DOH will issue to HC&S a Notice of Violation resulting in monetary sanctions for
failing to comply with Hawaii and federal air pollution control regulations with
respect to the boiler. In the opinion of management, after consultation with
counsel, this matter will not have a material adverse effect on A&B's results of
operations or financial position.
A&B and its subsidiaries are parties to, or may be contingently liable
in connection with, other legal actions arising in the normal conduct of their
businesses, the outcomes of which, in the opinion of management after
consultation with counsel, would not have a material adverse effect on A&B's
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
For the information about executive officers of A&B required to be
included in this Part I, see section B ("Executive Officers of the Registrant")
in Item 10 of Part III below, which is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A&B common stock is listed on The Nasdaq Stock Market and trades under
the symbol "ALEX." As of February 13, 2003, there were 4,082 shareholders of
record of A&B common stock. In addition, Cede & Co., which appears as a single
record holder, represents the holdings of thousands of beneficial owners of A&B
common stock.
A summary of daily stock transactions is listed in the Nasdaq National
Market Issues section of major newspapers. Trading volume averaged 150,600
shares a day in 2002, compared with 135,600 in 2001 and 98,900 in 2000.
The quarterly high and low sales prices and closing prices, as reported
by The Nasdaq Stock Market, and cash dividends paid per share of common stock,
for 2002 and 2001, were as follows:
Market Price
Dividends ------------------------------------
Paid High Low Close
---- ---- --- -----
2002
- ----
First Quarter $0.225 $28.010 $23.980 $27.610
Second Quarter 0.225 29.250 24.735 25.800
Third Quarter 0.225 26.190 21.500 22.250
Fourth Quarter 0.225 26.500 20.500 25.790
2001
- ----
First Quarter $0.225 $29.609 $21.063 $21.375
Second Quarter 0.225 25.840 20.610 25.750
Third Quarter 0.225 26.430 21.120 23.410
Fourth Quarter 0.225 27.920 21.600 26.700
Although A&B expects to continue paying quarterly cash dividends on its
common stock, the declaration and payment of dividends in the future are subject
to the discretion of the Board of Directors and will depend upon A&B's financial
condition, results of operations, cash requirements and other factors deemed
relevant by the Board of Directors. A&B strives to pay the highest possible
dividends commensurate with operating and capital needs. A&B has paid cash
dividends each quarter since 1903. The most recent increase in the quarterly
dividend rate was effective the first quarter of 1998, from 22.0 cents per share
to 22.5 cents. In 2002, dividend payments to shareholders totaled $36,889,000,
which was 63 percent of reported net income for the year. The following dividend
schedule for 2003 has been set, subject to final approval by the Board of
Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
- ------------------ ---------------- ----------- ------------
First January 23 February 13 March 6
Second April 24 May 8 June 5
Third June 26 August 7 September 4
Fourth October 23 November 6 December 4
A&B common stock is included in the Dow Jones Transportation Index, the
Dow Jones Composite Index, the Dow Jones Marine Transportation Index, and the
Russell 2000 Index.
The number of shares of A&B common stock repurchased by A&B during each
of the three years ended December 31, 2002, was as follows:
Shares Average Price
Year Purchased (per share)
---- --------- ------------
2002 -- --
2001 105,000 $21.61
2000 2,378,195 $20.29
A&B's Board of Directors has authorized A&B to repurchase up to 2
million shares of its common stock.
The Company has a Shareholder Rights Plan, designed to protect the
interests of shareholders in the event an attempt is made to acquire the
Company. The rights initially will trade with the Company's outstanding common
stock and will not be exercisable absent certain acquisitions or attempted
acquisitions of specified percentages of such stock. If exercisable, the rights
generally entitle shareholders (other than the acquiring party) to purchase
additional shares of the Company's stock or shares of an acquiring company's
stock at prices below market value.
Securities authorized for issuance under equity compensation plans as
of December 31, 2002, included:
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
Plan Category issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
(a) (b) (c)
Equity compensation plans 3,171,000 $24.84 1,991,000
approved by security holders
- ------------------------------ ----------------------------- ---------------------------- ----------------------------
Equity compensation plans
not approved by security
holders -- -- 332,780*
- ------------------------------ ----------------------------- ---------------------------- ----------------------------
Total 3,171,000 $24.84 2,323,780
- ------------------------------ ----------------------------- ---------------------------- ----------------------------
* A&B has two compensation plans under which its stock is authorized for
issuance that were adopted without the approval of its security
holders. (1) Under A&B's Non-Employee Director Stock Retainer Plan,
each outside Director is issued a stock retainer of 300 A&B shares
after each year of service on A&B's Board of Directors. Those 300
shares vest immediately and are free and clear of any restrictions.
These shares are issued in January of the year following the year of
the Director's service to A&B. (2) Under A&B's Restricted Stock Bonus
Plan, the Compensation and Stock Option Committee identifies the
executive officers and other key employees who participate in one- and
three-year performance improvement incentive plans and formulates
performance goals to be achieved for the plan cycles. At the end of
each plan cycle, results are compared with goals, and awards are made
accordingly. Participants may elect to receive awards entirely in cash
or up to 50 percent in shares of A&B stock and the remainder in cash.
If a participant elects to receive a portion of the award in stock, an
additional 50 percent stock bonus may be awarded. Shares issued under
the Restricted Stock Bonus Plan may not be traded for three years
following the award date.
Of the 332,780 shares that were available for future issuance, 12,725
shares were available for future issuance under the Non-Employee
Director Stock Retainer Plan and 320,055 shares were available for
issuance under the Restricted Stock Bonus Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data," and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(dollars and shares in thousands, except per-share amounts):
2002 2001 2000 1999 1998
------------ ------------ ------------ ----------- ------------
ANNUAL OPERATIONS
Total revenue1 $ 1,088,885 $ 1,189,152 $ 1,056,179 $ 992,891 $ 1,334,989
Cost of goods sold and operating
expenses1 939,084 915,142 844,505 812,627 1,173,030
Depreciation and amortization 69,889 73,593 70,224 71,943 86,574
Interest expense 11,680 18,658 24,252 17,774 24,799
Income taxes 21,734 65,377 42,350 31,114 22,610
------------ ------------ ------------ ----------- ------------
Income from continuing operations
before accounting changes 46,498 116,382 74,848 59,433 27,976
Discontinued operations - real estate 11,658 3,431 3,476 3,146 2,967
Discontinued operations - agribusiness -- (9,185) -- -- --
Cumulative effect of change in
accounting methods -- -- 12,250 -- (5,801)
------------ ------------ ------------ ----------- ------------
Net income $ 58,156 $ 110,628 $ 90,574 $ 62,579 $ 25,142
============ ============ ============ =========== ============
Comprehensive income $ 31,341 $ 48,691 $ 103,050 $ 48,711 $ 33,327
Earnings per share:
From continuing operations before
accounting change:
Basic $ 1.13 $ 2.87 $ 1.83 $ 1.38 $ 0.63
Diluted $ 1.13 $ 2.86 $ 1.83 $ 1.37 $ 0.62
Net Income:
Basic $ 1.42 $ 2.73 $ 2.21 $ 1.45 $ 0.56
Diluted $ 1.41 $ 2.72 $ 2.21 $ 1.45 $ 0.56
Return on beginning equity 8.2% 15.9% 13.5% 9.0% 3.5%
Cash dividends per share $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90
Average number of shares outstanding 41,008 40,535 40,898 43,206 44,760
Effective income tax rate 33.0% 36.0% 36.5% 34.5% 45.4%
MARKET PRICE RANGE PER SHARE
High $ 29.250 $ 29.609 $ 28.250 $ 27.125 $ 31.125
Low 20.500 20.610 17.938 18.625 18.813
Close 25.790 26.700 26.250 22.813 23.250
AT YEAR END
Shareholders of record 4,107 4,252 4,438 4,761 5,125
Shares outstanding 41,268 40,529 40,353 42,526 44,028
Shareholders' equity $ 723,648 $ 710,667 $ 693,651 $ 670,963 $ 694,642
Per-share 17.54 17.54 17.19 15.78 15.78
Total assets 1,597,569 1,544,419 1,666,012 1,561,460 1,605,640
Working capital 82,584 24,445 55,861 59,805 67,113
Current ratio 1.5 to 1 1.1 to 1 1.4 to 1 1.4 to 1 1.4 to 1
Real estate developments - noncurrent $ 42,050 $ 47,840 $ 62,628 $ 60,810 $ 57,690
Investments - noncurrent 32,923 33,021 183,141 158,726 159,068
Capital Construction Fund 208,400 158,737 150,405 145,391 143,303
Long-term debt - noncurrent 247,789 207,378 330,766 277,570 255,766
Debt to debt plus capital 26.2% 24.2% 34.2% 30.9% 33.1%
1 Prior year amounts restated for amounts treated as discontinued operations.
`
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and
results of operations of Alexander & Baldwin, Inc. and its subsidiaries
(collectively, the "Company") should be read in conjunction with the
consolidated financial statements and related notes thereto.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially from those projected in the
statements, including, but not limited to: (1) the timing and outcome of current
Hawaii labor negotiations; (2) labor relations in Hawaii, the U.S. Pacific
Coast, Guam and other locations where the Company has operations; (3) impact on
the Company of acts of terrorism; (4) economic conditions in Hawaii and
elsewhere; (5) market demand; (6) competitive factors and pricing pressures in
the Company's primary markets; (7) legislative and regulatory environments at
the federal, state and local levels, such as government rate regulations,
land-use regulations, government administration of the U.S. sugar program, and
modifications to or retention of cabotage laws; (8) acts of nature, including
but not limited to, drought, greater than normal rainfall and hurricanes; (9)
fuel prices; (10) raw sugar prices; (11) risks associated with current or future
litigation and resolution of tax issues with the IRS and state tax authorities;
(12) the performance of unconsolidated affiliates and ventures; and (13) other
risk factors described elsewhere in these communications and from time to time
in the Company's filings with the SEC.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Earnings and Revenue: Net income in 2002 was $58,156,000,
or $1.42 per basic share, versus $110,628,000, or $2.73 per basic share, in
2001, and $90,574,000, or $2.21 per basic share, in 2000. Revenue in 2002 was
$1,088,885,000, compared with revenue of $1,189,152,000 in 2001 and
$1,056,179,000 in 2000.
Accounting Changes and Significant Unusual Transactions
2002: There were no significant accounting changes or significant
unusual transactions in 2002.
2001: Results for 2001 include the sales of the Company's marketable
equity securities. The sales of these securities resulted in cash receipts of
approximately $134,722,000, pre-tax gains of approximately $125,478,000 and
after-tax gains of about $77,788,000 ($1.92 per basic share). The Company also
donated appreciated stock with an approximate fair value of $7,500,000 to its
charitable foundation. These sales are described more fully in Note 5 to the
consolidated financial statements included in Item 8.
The Company reduced the carrying value of its equity investments in C&H
Sugar Company, Inc. ("C&H") by $28,600,000. This resulted in an after-tax charge
of $17,732,000 ($0.44 per basic share). In addition, the Company wrote off
$4,823,000 of power generation equipment, resulting in a $3,087,000 after-tax
charge to earnings ($0.08 per basic share). These impairments are discussed more
fully in Note 4 to the consolidated financial statements included in Item 8.
The Company ceased the operations of and abandoned its panelboard
manufacturing subsidiary on Maui. This discontinued operation resulted in a
$9,185,000 after-tax charge to earnings ($0.23 per basic share). This is
described in Note 3 to the consolidated financial statements included in Item 8.
2000: The Company made two changes in accounting methods (see Note 2 to
the consolidated financial statements). The first change was for vessel
drydocking costs at its subsidiary, Matson Navigation Company, Inc. ("Matson").
Previously, the estimated costs for future drydocking of vessels were accrued in
advance of the drydocking. Subsequent payments were charged against the accrued
liability. Under the new method, drydocking expenditures that benefit future
periods are capitalized and depreciated. This change increased 2000 net income
by $12,250,000 (net of income tax expense of $7,668,000), or $0.29 per basic
share. The second change was for the presentation of certain costs recorded in
the ocean transportation and property leasing segments, which previously were
recorded as an offset to revenue. This change did not affect net income.
RESULTS OF INDUSTRY SEGMENT OPERATIONS
Detailed information related to the operations and financial
performance of the Company's Industry Segments is included in Note 14 of Item 8
"Financial Statements and Supplementary Data." The following information should
be read in relation to information contained in that Note.
2002 Compared with 2001
Transportation - Ocean Transportation revenue of $686,927,000 for 2002
was one percent higher than the $682,272,000 reported in 2001. The higher
revenue was due mainly to rate actions and a recovery, in 2002, of cargo volumes
that had declined immediately following the terrorist events of September 11,
2001, partially offset by revenue losses from U.S. Pacific Coast labor
disruptions experienced in the fourth quarter of 2002.
Operating profit of $42,430,000 declined 30 percent from the
$60,704,000 reported for 2001. The decline in operating profit resulted
primarily from (1) lost revenue and increased costs caused by fourth quarter
2002 disruptions in U.S. Pacific Coast ports, (2) higher pension and health plan
expense, (3) lower productivity at Matson's Sand Island terminal, (4) the 2001
gain from the sale of two tugboats, (5) barge drydockings in Hawaii early in
2002 that increased third-party service costs, and (6) the 2002 write-off of
assets made obsolete by the replacement of two cranes at the Company's Sand
Island terminal. These unfavorable factors were offset partially by operating
one fewer vessel in the Hawaii Service during most of 2002 and increased
contract cargo carriage. Matson's share of the Sea Star Line, LLC and SSA
Terminals, LLC joint venture losses, included in operating profit, was less than
its share of losses recorded in 2001.
For 2002 compared with 2001, Hawaii Service container volume was two
percent higher, Hawaii Service automobile volume was two percent lower and Guam
Service container volume was six percent lower. The increased Hawaii Service
container volume was due, in part, to the lower than normal 2001 fourth quarter
cargo that was affected adversely by terrorist events of September 11, 2001.
2002 2001
---- ----
Hawaii Service container volume 152,500 149,600
Hawaii Service automobile volume 120,500 122,400
Guam Service container volume 16,300 17,300
In January 2002, Matson reduced the number of vessels in the Hawaii
Service from eight to seven. An eighth vessel was returned to the regular Hawaii
Service in December 2002 to help alleviate the cargo backlogs that resulted from
the previously discussed port disruptions. In January 2002, Matson sold two
vessels to Sea Star Line, LLC for $17,000,000, which approximated the vessels'
carrying value.
Due to higher fuel costs, Matson increased its fuel surcharge from 3.25
percent to 4.75 percent in May 2002 and to six percent in October 2002 in Hawaii
and in November 2002 in Guam. Effective March 3 2002, the surcharge was
increased to 7.5 percent. In January 2003, Matson implemented a terminal
handling charge in its Hawaii Service of $200 per container for westbound
freight, $100 per container for eastbound freight, and $30 per automobile. The
charge is intended to recover a portion of the increased costs associated with
the movement of cargo through terminal facilities on the Pacific Coast and in
Hawaii.
In May 2002, the International Longshore and Warehouse Union ("ILWU")
and the Pacific Maritime Association ("PMA"), of which Matson is a member, began
negotiations on the contract that governs longshore labor for the U.S. Pacific
Coast marine terminals. The contract was extended from July 1 through September
2, after which the ILWU declined further extensions. On September 29, the PMA
ordered terminal operators and shippers to close 29 Pacific Coast ports; Matson
operates ships through four of these ports. On October 8, following efforts by
federal mediators to resolve the deadlock, President George W. Bush, invoking
provisions of the Taft-Hartley Act, requested that the San Francisco Federal
Court issue an order requiring that the ports be re-opened and longshore workers
be ordered back to work for an 80-day cooling off period. The Federal Court
approved the order, and the ports were re-opened on October 8. In December, the
ILWU and the PMA reached agreement on the terms of a new contract. The agreement
was ratified by the ILWU members in January 2003. The estimated impact of the
port disruptions on 2002 operating profit was approximately $13.6 million. The
separate Hawaii labor agreement with the ILWU Local 142 was scheduled to expire
on July 1, 2002, but was extended. A new six-year contract was ratified in
January 2003. The impact of the new ILWU agreements will result in increased
terminal handling costs for Matson, especially in the later years of the
contract.
On December 8, 2002, Typhoon Pongsona hit the Island of Guam, causing
extensive property and economic damage to the Island, but only minor damage to
Matson's office and equipment. Port operations subsequently have been restored,
supporting the Island community as it rebuilds.
Transportation - Intermodal Services provides intermodal marketing and
trucking brokerage services throughout North America. Revenue was $195,114,000
for 2002, compared with $121,960,000 in 2001. Operating profit was $3,068,000
for 2002, compared with $1,560,000 earned in 2001. The 2002 revenue growth was
primarily the result of new business. The revenue for intermodal services
includes the total amount billed to customers for transportation services. The
primary costs of the business include purchased transportation for that cargo.
As a result, the operating profit margins for this business are consistently
lower than other A&B businesses. The primary operating profit and investment
risk in the intermodal business is the quality of receivables, which are
monitored closely by management.
Property Development and Management - Leasing revenue, before
subtracting amounts treated as discontinued operations, was $73,087,000 for
2002, or three percent higher than the $70,685,000 reported in 2001. Operating
profit, also before subtracting discontinued operations, was $32,905,000 for
2002, or four percent lower than the $34,139,000 earned in 2001. The decrease in
operating profit was due primarily to lower occupancies, increased operating
costs, and additional maintenance expense to repair a siding problem on a
commercial building. In 2002, occupancy levels for Mainland properties averaged
92 percent, versus 93 percent in 2001. Mainland occupancy declined, due
principally to vacancies resulting from two tenant bankruptcies. In 2002,
occupancy levels for Hawaii properties averaged 89 percent, versus 90 percent in
2001. Hawaii occupancy declined, due primarily to an office vacancy that
occurred in late 2001 and which was not re-tenanted until July 2002.
As with any large real estate portfolio of commercial properties,
occupancy levels will vary between reporting periods based on known lease
expirations, unanticipated lease terminations, and properties sold and purchased
in the interim periods. The Company's portfolio includes leases covering a wide
range of space sizes and income, with no necessary correlation between lease
size and lease income. For example, a large lease covering 480,000 square feet
of industrial warehouse space in Ontario, California expired in December 2002.
Although this lease constitutes approximately ten percent of the total space in
the Company's portfolio, it represents only 2.5 percent of the portfolio's
annual leasing revenue. As in the case of all space that is vacant or
anticipated to be vacant, this industrial space is being actively marketed and a
new tenant has leased approximately 21 percent of the space and has an option to
lease 26 percent of the remaining space.
Property Development and Management - Sales, before subtracting amounts
treated as discontinued operations, had revenue of $92,965,000 and operating
profit of $19,418,000 in 2002. This was primarily the result of sales of a
shopping center and an industrial complex in California, a seven-building
distribution complex in Texas, a shopping center in Colorado, several small
Hawaii commercial properties, 27 residential properties, an 85-acre parcel in
Upcountry Maui and nine business parcels on Oahu and Maui. Revenue of
$89,156,000 and operating profit of $17,926,000 in 2001 resulted from the sales
of a 14-acre parcel at Maui Business Park to Wal-Mart, three commercial
properties in Bainbridge, Washington, a four-acre parcel on Maui, 82 residential
properties and a 68-acre parcel for highway widening on Maui.
Discontinued Operations: Properties - During 2002, the sales of the
previously noted California, Texas, and Colorado commercial properties, four
commercial properties on Maui, and the planned sale, within the next 12 months,
of a Nevada commercial property, met the criteria for classification as
discontinued operations. The revenue, operating profit, and after-tax effects of
these transactions for 2002 and 2001 were as follows (in thousands, except per
share amounts):
2002 2001
---------- ---------
Sales Revenue $ 65,434 --
Leasing Revenue $ 6,501 $ 9,913
Sales Operating Profit $ 14,559 --
Leasing Operating Profit $ 4,006 $ 5,446
After-tax Earnings $ 11,658 $ 3,431
Basic Earnings Per Share $ 0.29 $ 0.09
Consistent with the Company's intention to reinvest the sales proceeds
into new investment property, the proceeds from the sales of property treated as
discontinued operations were deposited in escrow accounts for tax-deferred
reinvestment in accordance with Section 1031 of the Internal Revenue Code.
As permitted by Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
comparable property sales that were initiated prior to the Company's adoption of
this accounting standard on January 1, 2001, were not reported as discontinued
operations. During 2001, the Company sold three properties in Washington State
for an aggregate price of $15.6 million and a $2.1 million after-tax gain. Since
these transactions were initiated prior to the adoption of SFAS No. 144,
accounting treatment as discontinued operations was not required.
Food Products revenue of $112,727,000 for 2002 was six percent higher
than the $105,976,000 reported in 2001. Operating profit for 2002 was
$13,841,000, compared with $5,660,000 reported in 2001. This operating profit
improvement was due primarily to higher production and modestly higher sugar
prices and the sale, for $1.2 million, of obsolete equipment in 2002. Operating
profit in 2001 included a charge of $4.8 million for the write-off of power
generation equipment that no longer was needed in the business and a one-time
$5,000,000 (pre-tax) distribution from Hawaiian Sugar & Transportation
Cooperative ("HS&TC"), the cooperative that transports and markets Hawaii sugar.
Even with the wet harvesting conditions early in 2002, total year sugar
production was 215,900 tons, or 13 percent higher than the 191,500 tons produced
during 2001. Sugar production and costs in 2001 were affected adversely by
drought conditions. Although the 2002 harvest season was extended several weeks,
the Company expects to begin the 2003 harvest as scheduled in February. For
2003, production is expected to be comparable with 2002; however, weather
conditions, which can change quickly and unexpectedly, could affect production
and yields significantly.
Approximately 95 percent of the Company's sugar production was sold to
HS&TC during 2002 under a standard marketing contract. HS&TC sells, under a
supply agreement that expires in June 2003, its raw sugar to C&H at a price
equal to the New York No. 14 Contract settlement price, less a discount and less
costs for sugar vessel discharge and stevedoring. This price, after deducting
the marketing, operating, distribution, transportation and interest costs of
HS&TC, reflects the gross revenue to the Company. HS&TC has agreed in principle
to a revised agreement with C&H through the 2008 crop. HS&TC's operations
include chartering its integrated tug and barge unit under short-term
transportation arrangements. In recent years, these have included charters to
North Korea and Indonesia. To the extent that HS&TC is not able to continue
these charters in 2003, due to political unrest or trade restrictions, the net
sales price to the Company may be lower.
For 2002, the actual raw sugar prices averaged $21.57/cwt, compared
with $21.12/cwt for 2001. The New York No. 14 Contract settlement price, which
is the benchmark for most of the Company's raw sugar sales, averaged $20.85/cwt
for 2002, and $21.09/cwt for 2001. As of December 31, 2002, the Company had
forward priced approximately 33 percent of its expected 2003 sugar production at
approximately $22.00/cwt.
The collective bargaining agreement between the Company's Maui sugar
plantation and the ILWU Local 142 expired at the end of January 2003. A
tentative agreement has subsequently been reached, but has not yet been
ratified.
Coffee production of 2.8 million pounds for 2002 was approximately one
million pounds lower than the 3.8 million pounds produced in 2001. During 2002,
the Company recorded an expense of $250,000 to reduce the carrying cost of
inventory to the amount it expects to realize when it is sold. Coffee prices
continue to be affected adversely by world oversupply and near record lows.
Operating profit for the food products segment also includes the
Company's share of equity in earnings or losses in C&H, a sugar refinery to
which HS&TC sells substantially all of its raw sugar and that is partially owned
by the Company. During 2002, the Company recorded no equity in earnings or
losses of C&H since C&H had estimated break-even operations. During 2001, the
Company recorded $1.6 million for its share of C&H losses. The closure of a
competing refinery in Sugarland Texas could have a stabilizing influence on
C&H's business (see Notes 5 and 13 of Item 8).
In 2001, the Company ceased the operations of, and abandoned, its
panelboard manufacturing business operated by Hawaiian DuraGreen, Inc., a wholly
owned subsidiary of A&B (reported in 2001 discontinued operations). This is
discussed further in Note 3 of Item 8 of the Company's Form 10-K for the year
ended December 31, 2001.
Other operating profit for 2001 included the revenue and gain from the
sale of the Company's marketable equity securities. The sales are described in
Note 5 of Item 8.
2001 Compared with 2000
Transportation - Ocean Transportation revenue of $682,272,000 was
$32,391,000, or five percent, lower than the $714,663,000 reported for 2000.
Operating profit of $60,704,000 was $33,321,000, or 35 percent, lower than the
$94,025,000 reported during the prior year. The revenue and operating profit
declines were directly attributable to cargo volumes and terminal productivity
issues.
For 2001 compared with 2000, Hawaii Service container volume was one
percent lower, Hawaii Service automobile volume was seven percent lower and Guam
Service container volume was five percent lower.
2001 2000
---- ----
Hawaii Service container volume 149,600 151,500
Hawaii Service automobile volume 122,400 132,200
Guam Service container volume 17,300 18,200
The lower cargo and automobile volumes were primarily the result of the
weakened Hawaii economy following the September 11, 2001 terrorist attacks on
the United States of America. These attacks had a significant adverse effect on
air travel. This reduced Hawaii tourism and, in turn, significantly reduced the
fourth quarter carriage of commercial cargo and automobiles to Hawaii.
In addition, transition problems related to a terminal improvement
project at Matson's Honolulu terminal reduced productivity during the fourth
quarter. Lower results from Matson's investments in a shipping operation in
Puerto Rico and from a stevedoring joint venture also adversely affected the
total-year results.
A 3.5 percent increase in Hawaii Service rates announced in 2000 took
effect in February 2001. Total fuel costs decreased by $7,609,000 in 2001 versus
2000, resulting in a decrease in the fuel surcharge from 4.25 percent to 3.25
percent.
Transportation - Intermodal Services revenue was $121,960,000 in 2001
compared with $132,403,000 in 2000. Operating profit was $1,560,000 for 2001
compared with a loss of $293,000 for 2000. The decline in revenue in 2001 was
due principally to the commerce related effects of the September 11 terrorist
attacks.
Property Development and Management - Leasing revenue, before
subtracting amounts treated as discontinued operations, of $70,685,000 was 14
percent higher than 2000 revenue of $62,105,000. Operating profit, also before
subtracting discontinued operations, of $34,139,000 was 13 percent higher than
2000 operating profit of $30,120,000. These increases were due primarily to
additions to the leased property portfolio, higher occupancy levels in the
Hawaii portfolio, and increased royalty revenue. Occupancy levels for the
Mainland portfolio averaged 93 percent in 2001, versus 96 percent in 2000. The
Company owned four million square feet of leasable improved property on the
Mainland at year-end 2001, the same as at year-end 2000. Occupancy levels for
the Hawaii properties averaged 90 percent in 2001, versus 86 percent in 2000.
The Company owned 1.5 million square feet of leasable improved property in
Hawaii at year-end 2001, compared with 1.2 million square feet at year-end 2000.
Property Development and Management - Sales revenue, before subtracting
amounts treated as discontinued operations, was $89,156,000 for 2001 compared
with $46,322,000 of revenue a year earlier. Operating profit, also before
subtracting discontinued operations, was $17,926,000 for 2001 compared with
operating profit of $24,228,000 for 2000. Sales in 2001 included a 14-acre
parcel at Maui Business Park to Wal-Mart, three commercial properties in
Bainbridge, Washington, a four-acre parcel on Maui, 82 residential properties
and a 68-acre parcel for highway widening on Maui. Sales in 2000 included a
ground lease under a Costco store, a 13-acre parcel at Maui Business Park, 16
business parcels, and 28 residential properties.
Discontinued Operations: Properties - As previously discussed, certain
property sold during 2002 or intended to be sold within one year were
reclassified to discontinued operations. The revenue, operating profit, and
after-tax effects of these transactions for 2001 and 2000 were as follows (in
thousands, except per share amounts):
2001 2000
---- ----
Leasing Revenue $ 9,913 $ 10,010
Leasing Operating Profit $ 5,446 $ 5,517
After-tax Earnings $ 3,431 $ 3,476
Basic Earnings Per Share $ 0.09 $ 0.09
Food Products revenue of $105,976,000 in 2001 compared with revenue of
$107,510,000 in 2000. Operating profit of $5,660,000 in 2001 was 25 percent
lower than the $7,522,000 earned in 2000. The benefits of higher domestic raw
sugar and molasses prices throughout 2001, a one-time $5,000,000 distribution
from HS&TC, and improved sales of natural sugars under the Maui Brand(R) label
were more than offset by a write-off of power generation equipment that no
longer was needed in the business, lower raw sugar production and power sales,
and lower results from the Company's minority investment in C&H. The previously
discussed impairment loss related to the Company's investment in C&H was not
included in segment operating profit.
HC&S produced 191,500 tons of raw sugar during 2001, compared with
210,300 tons a year earlier. This lower production was the result of harvesting
nearly 13 percent fewer acres in 2001, compared with 2000, combined with
extended drought conditions. Drought conditions on Maui lessened in late 2001
compared with 2000 and early 2001. Average raw sugar sales prices for 2001 were
$21.12/cwt, compared with $19.10/cwt for 2000.
As previously noted, in 2001, the Company ceased the operations of and
abandoned its panelboard manufacturing business operated by Hawaiian DuraGreen,
Inc.
Other operating profit of $127,635,000 for 2001 was due primarily to
the sales of marketable equity securities during 2001. This is described more
fully in Note 5 of the consolidated financial statements included in Item 8.
ECONOMIC OUTLOOK
In early 2003, Hawaii's economy continued to grow modestly. That growth
was drawing on a continuing recovery in the visitor industry as well as strength
in construction and home sales.
Projections for Hawaii's growth have to be viewed, however, in the
context of a still-uncertain U.S. economy and weakness in Japan's economy. In
addition, the situations with Iraq and North Korea present real risks to
Hawaii's economy. These conflicts could have direct and immediate effects on
Hawaii's tourism, but the ramifications are difficult to forecast. For example,
although tourism declined sharply during the 1991 conflict with Iraq, it
recovered relatively quickly.
Nonetheless, the late-January release of the State of Hawaii's index of
leading economic indicators was higher for the ninth consecutive month. Six of
its ten measures were positive. This index is designed to signal changes in
Hawaii's economic environment five to ten months in advance.
The prominent visitor industry is enjoying an early surge in 2003,
following positive performance in the important winter months. The 30th annual
Honolulu Marathon, for example, held in December 2002, had 17,300 participants
from Japan, up from 9,200 the prior year, an 88 percent rise. On a sustained
basis, however, travelers from the "U.S. West" have been the key to the visitor
industry's improvement.
The sales of existing homes and condominium properties on Oahu and all
of Hawaii's neighbor islands continue to be strong, with the number of
transactions, median prices and the total dollar sales volume all rising. This
demand, in turn, is being reflected in continuing strength in construction and
private construction authorizations. Total third quarter private authorizations
were up 18 percent from a year ago, with the residential portion up 35 percent.
Barring disruptions from any of the external factors mentioned above,
moderately positive trends, especially in the visitor industry and in real
estate, may provide more favorable circumstances for A&B's businesses than has
been the case since early 2001.
FINANCIAL CONDITION AND LIQUIDITY
Debt and Liquid Resources: Liquid resources of the Company, comprising
cash and cash equivalents, receivables, sugar and coffee inventories and unused
lines of credit, less accrued deposits to the Capital Construction Fund ("CCF"),
totaled $504,494,000 at December 31, 2002, a decrease of $23,362,000 from
December 31, 2001. This net decrease was due primarily to $34,000,000 in lower
available balances on variable rate facilities (including both short- and
long-term facilities) following the payment of federal income taxes related to
the December 2001 bank stock sales and deposits into the CCF during 2002, and
lower cash balances, partially offset by higher receivables of $25,000,000.
Long-term debt increased $40,411,000 since the end of 2001, reflecting
a combination of operating, working capital, and capital expenditure needs. A&B
renewed, and extended for one year, its uncommitted $70 million credit line.
Matson renewed, and extended for two years, its $50,000,000 and $40,000,000
revolving credit facilities. These latter two facilities also have one-year term
options.
Working Capital: Working capital was $82,584,000 at December 31, 2002,
an increase of $58,139,000 from the balance at the end of 2001. The higher
working capital was due primarily to the payment of federal income taxes in
early 2002 (which were unusually high at December 31, 2001, due to the gain
realized from the December 2001 sale of the Company's BancWest Corporation
holdings), higher real estate inventory held for sale (due principally to
classification of a commercial property as held for sale), higher trade
receivables (due principally to increased intermodal and ocean freight revenue
and to a real-estate note receivable reclassified from non-current to current),
and a reduction in the current portion of long-term debt, partially offset by
lower cash balances and the sale, in January 2002, of two vessels that had been
included in current assets.
At December 31, 2002, the Company had receivables totaling
$155,544,000, compared with $130,491,000 a year earlier. These amounts were net
of allowances for doubtful accounts of $10,988,000 and $7,252,000, respectively.
The increase in receivables was mainly the result of higher cargo and intermodal
business during the fourth quarter of 2002 and the reclassification of
approximately $5 million of real estate receivable balances to current. The
Company's management believes that the quality of these receivables is good and
that its reserves are adequate.
Capital Construction Fund: During 2002, the Company deposited
$58,163,000 into the CCF and withdrew, for qualified purposes, approximately
$4,500,000. The additional deposits reflect contributions from the sale of two
vessels in early 2002 and amounts that may be used for the purchase of new
vessels in 2003 and 2004.
Property and Capital Additions: Property, at cost, before accumulated
depreciation and amortization (see Note 6), declined by $52,615,000 since
December 31, 2001. This reflects primarily the sales of $71,415,000 of
commercial real estate, the write-off of fully depreciated capitalized software
and hardware of approximately $33,600,000, the disposal of substantially
depreciated straddle carriers, cranes, and other equipment totaling
approximately $32,000,000, the reclassification to current assets of $15,600,000
for a commercial property expected to be sold within the next year, and the
sales of approximately $5 million of other fixed assets. These reductions in
property were partially offset by current year capital expenditures of
approximately $44,613,000 and the purchases of new commercial real estate
property of approximately $60,375,000, using the proceeds from real property
sold on a tax-deferred basis. This latter item is described more fully under the
caption "Tax-Deferred Real Estate Exchanges."
Capital additions comprise capital expenditures for property and
capital expenditures for real property, including the re-deployment of non-cash
tax-deferred funds to purchase property that are noted under "Non-cash
Activities" on the Statements of Cash Flows, but exclude capital expenditures
for real-estate developments held for sale, since this latter item is treated as
inventory on the Balance Sheets. Capital additions during 2002 were
$104,988,000, compared with $141,440,000 in 2001. Ocean transportation capital
additions in 2002 of $10,451,000 were primarily for terminal improvements and
vessel modifications. Property development and management capital additions in
2002 of $83,656,000 included $60,375,000 for the re-deployment of tax-deferred
sales proceeds into similar income producing assets and $23,281,000 for the
development of real estate, for improvements to leased properties, and for the
purchase of developed commercial property. Food products capital additions in
2002 of $9,943,000 were primarily for routine factory modifications and
replacements.
Cash Flows: Cash Flows from Operating Activities were $55,654,000 for
2002, compared with Cash Flows from Operating Activities of $150,968,000
for 2001. This decline of $95,314,000 was due principally to the timing of
payments for income taxes that, in large part, resulted from the December 2001
sale of the Company's stock in BancWest Corporation, changes in accounts and
notes receivable, and the timing of sales and expenditures for real estate
development projects that are classified as a current asset as Real Estate Held
for Sale.
INVESTMENTS, COMMITMENTS AND CONTINGENCIES
Contractual Obligations and Commitments: At December 31, 2002 and 2001,
the Company had the following contractual obligations (in thousands):
2002 2001 Note
-------- -------- ----
Long-term debt $247,789 $207,378 8
Operating lease obligations $155,514 $146,521 9
Sand Island revenue bonds $ 10,974 $ 10,431 9
The payment schedules associated with the December 31, 2002 obligations
are included in the referenced Notes 8 and 9 of the consolidated financial
statements in Item 8
Investments: The Company has the following principal joint ventures,
each of which is accounted for following the equity method of accounting:
Kukui'Ula Development Company: During 2002, the Company accelerated
development plans for its Kukui'Ula project on the island of Kauai by entering
into a joint venture with an affiliate of DMB Associates, Inc. It is anticipated
that the Company will contribute to the venture, land, and existing
improvements, totaling approximately $28 million. DMB will fund all future
development costs, subject to an option available to the Company, which
diminishes over time, to participate in a portion of that funding. The Kukui'Ula
project comprises 1,045 acres on the southern coast of Kauai, adjacent to the
Poipu resort. The project consists of 837 fully entitled acres planned for a
resort, an 18-hole golf course, residential and commercial use, and parks and
open space. The remaining 208 acres are partially entitled.
Kai Lani and HoloHolo Ku: The Company has a minority interest in Kai
Lani, a limited liability company that is building 116 townhouse condominium
units at Ko' Olina, a resort community on the island of Oahu. It also has a
minority interest in HoloHolo Ku, a limited liability company that is building
44 single-family condominium homes in Waimea on the island of Hawaii. The
Company has notes receivable totaling $6.6 million from these two investments.
SSA Terminals: Matson's ownership interest in SSA Terminals, LLC
("SSAT"), a West Coast stevedoring and terminal service provider, was reduced to
35 percent from 49.5 percent, because of an agreement to eliminate the majority
owner's preferred cash return.
Sea Star Line, LLC: The operating agreement for Sea Star Line, LLC
("Sea Star"), an ocean transportation venture carrying cargo between Florida and
Puerto Rico, in which Matson is a minority owner, was revised when Matson chose
not to participate with other owners in capital calls associated with
acquisition of the assets of a bankrupt Puerto Rico competitor. As a result,
Matson's ownership interest in Sea Star was reduced from 45 percent to
approximately 20 percent.
C&H Sugar Company: The Company owns approximately 36 percent of C&H
Sugar Company's ("C&H") common voting stock, 40 percent of its junior preferred
stock, and 100 percent of its senior preferred stock. Approximately 95 percent
of the Company's Maui sugar production is sold to C&H through an intermediary
raw sugar marketing and transportation cooperative, Hawaiian Sugar &
Transportation Cooperative.
Commitments: Other commitments and financing arrangements, other than
operating lease commitments, in effect at the end of 2002 and 2001 included the
following (in thousands):
Arrangement 2002 2001
----------- -------- --------
Appropriations for capital expenditures (a) $103,600 $ 77,633
Vessel purchases (b) $220,000 $ --
Guarantee of Sea Star debt (c) $ 29,700 $ 31,500
Guarantee of HS&TC debt (d) $ 15,000 $ 15,000
Standby letters of credit (e) $ 21,393 $ 26,019
Bonds (f) $ 13,987 $ 17,507
Benefit plan withdrawal obligations (g) $ 10,682 $ 2,465
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception of items (a) and
(b), it is not expected that the Company or its subsidiaries will be called upon
to advance funds under these commitments.
(a) At December 31, 2002, the Company and its subsidiaries had an
unspent balance of total appropriations for capital expenditures
of approximately $103,600,000. These expenditures are primarily
for vessel maintenance, real estate developments held for
investment purposes, containers and operating equipment and
vessel modifications. There are, however, no contractual
obligations to spend the entire amount. For 2003, internal cash
flows and existing credit lines are expected to be sufficient to
finance working capital needs, dividends, capital expenditures,
and debt service.
(b) During 2002, Matson entered into an agreement with Kvaerner
Philadelphia Shipyards, Inc., to purchase two container ships.
The total project cost for each ship is approximately $110
million. The cost is expected to be funded with a combination of
cash from the Capital Construction Fund, the issuance of new
debt, and operations. The first ship is expected to be delivered
in the third quarter of 2003 and the second ship is expected to
be delivered in the second quarter of 2004. No significant
payments are required until the acceptance and delivery of the
ships. No obligation for these ships is recorded on the
financial statements because conditions necessary to record
either a liability or an asset have not yet been met.
(c) Matson has guaranteed $29,700,000 of the debt of Sea Star and
would be required to perform under the guarantee should Sea Star
be unable to meet its obligations. It is expected that the
guarantee will be reduced, over time, following the change that
reduced Matson's ownership interest in that venture which is
described under the caption "Investments," and by scheduled
repayments of the debt by Sea Star. Certain assets of Sea Star
serve as collateral for these borrowings and would reduce
Matson's guarantee obligations. The Company has not recorded any
liability for its obligations under the guarantee because it
believes that the likelihood of making any payments is not
probable.
(d) The Company guarantees up to $15,000,000 of HS&TC's $30,000,000
revolving credit line. That credit line is used primarily to
fund purchases of raw sugar from the Hawaii growers and is fully
secured by the inventory, receivables and transportation assets
of the cooperative. The amount that may be drawn by HS&TC under
the facility is limited to 95 percent of its inventory value
plus up to $15,000,000 of HS&TC's receivables. The Company's
guarantee is limited to the lesser of $15,000,000 or the actual
amounts drawn. Although the amount drawn by HS&TC on its credit
line varies, as of December 31, 2002, the amount drawn was
$19,000,000. The Company has not recorded any liability for its
obligation under the guarantee because it believes that the
likelihood of making any payment is not probable.
(e) The Company has arranged for standby letters of credit totaling
$21,393,000. This includes letters of credit, totaling
approximately $15,100,000, which enable the Company to qualify
as a self-insurer for state and federal workers' compensation
liabilities. The amount also includes a letter of credit of
$4,340,000 for workers' compensation claims incurred by C&H
employees, under a now-closed self-insurance plan, prior to
December 24, 1998 (see Note 5). The Company only would be called
upon to honor this letter of credit in the event of C&H's
insolvency. The obligation to provide this letter of credit
expires on December 24, 2003. The remaining letters of credit
are for insurance-related matters, construction performance
guarantees, and other routine operating matters.
(f) Of the $13,987,000 in bonds, $5,871,000 consists of subdivision
bonds related to real estate construction projects in Hawaii.
These bonds are required either by the state or by county
governments to ensure that certain infrastructure work required
as part of real-estate development is completed as required. The
Company has the financial ability and intention to complete
these improvements. Also included in the total are $5,270,000 of
customs bonds and $2,607,000 of non-real estate performance
bonds.
(g) Under special rules approved by the PBGC and adopted by the
Pacific Coast longshore plan in 1984, the Company could cease
Pacific Coast cargo-handling operations permanently and stop
contributing to the plan without any withdrawal liability,
provided that the plan meets certain funding obligations as
defined in the plan. The estimated withdrawal liabilities under
the Hawaii longshore plan and the seagoing plans aggregated
approximately $10,682,000 as of December 31, 2002, based on
estimates by plan actuaries. Management has no present intention
of withdrawing from and does not anticipate termination of any
of the aforementioned plans.
Environmental Matters: As with most industrial and land development
companies of its size, the Company's shipping, real estate, and agricultural
businesses have certain risks that could result in expenditures for
environmental remediation. The Company believes that it is in compliance, in all
material respects, with applicable environmental laws and regulations, and works
proactively to identify potential environmental concerns. In addition, the
Company has emergency response and crisis management programs. The Company has
received a claim for reimbursement of environmental remediation costs associated
with a sugar refinery site, sold in 1994, that previously was owned by
California and Hawaiian Sugar Company. Additionally, the Company has
self-reported to the State of Hawaii Department of Health, possible violations
of state and federal air pollution control regulations at its Maui sugar mill.
Although operating in accordance with the requirements of permits issued to the
Company, the permits' operating conditions may not have reflected the federal
standards fully. The Company believes that the resolution of the two matters
noted above will not have a material effect on the Company's financial
statements.
Contingencies: The Company and certain subsidiaries are parties to
various legal actions and are contingently liable in connection with claims and
contracts arising in the normal course of business, the outcome of which, in the
opinion of management after consultation with legal counsel, will not have a
material adverse effect on the Company's financial position or results of
operations.
OTHER MATTERS
Significant Accounting Policies: The Company's significant accounting
policies and the impacts of newly issued accounting standards are described in
Notes 1 and 2 to the consolidated financial statements included in Item 8.
Significant Estimates: The preparation of the condensed consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported. The more significant of these include (1) assumptions underlying the
calculation of pension, post-retirement, and non-qualified benefit obligations
and costs, (2) assumptions underlying the carrying value of investments, (3) the
estimation of allowances for doubtful accounts, (4) the estimation of
liabilities for self-insurance programs, (5) the calculation and classification
of tax obligations and provisions prior to completion of tax returns and
completion of taxing authority audits, (6) the application of cost accounting
methods for sugar, molasses and coffee inventory and cost of sales, (7)
depreciable lives and salvage values for fixed assets, (8) liabilities for
environmental assessments and remedial efforts, (9) estimates of joint venture
earnings or losses prior to the issuance of final annual joint venture financial
statements, (10) accruals for obligations incurred but not yet billed to the
Company, and (11) recoverability of claims from losses under insurance coverage.
The Company believes that the methods it uses to determine these estimated
amounts comply with generally accepted accounting principles consistently
applied.
Composition of Property Sales: The mix of property sales in any year or
quarter can be diverse. Sales can include developed residential real estate,
commercial properties, developable subdivision lots, undeveloped land, and
property sold under threat of condemnation. The sale of undeveloped land and
vacant parcels in Hawaii generally provides a greater contribution to earnings
than does the sale of developed and commercial property, due to the low
historical cost basis of the Company's Hawaii land. Consequently, property sales
revenue trends, cash flows from the sales of real estate and the amount of real
estate held for sale on the balance sheets do not necessarily indicate future
profitability trends for this segment. The reporting of property sales is also
affected by the classification of certain property sales as discontinued
operations.
Charter Agreement: Matson and American President Lines, Ltd. ("APL")
are parties to an eight-year Successor Alliance Slot Hire and Time Charter
Agreement dated January 28, 1998 ("Agreement"). This Agreement provides the
structure of an alliance through which Matson provides a weekly service to Guam.
Pursuant to this Agreement, Matson time charters three C-9 class vessels to APL,
and APL reserves a designated number of container slots on each vessel for
Matson's exclusive use. This Agreement generates annual revenue of approximately
$34.8 million for Matson.
Tax-Deferred Real Estate Exchanges: During 2002, the Company recorded,
on a tax-deferred basis, real-estate sales of $66,857,000 and equipment sales of
$1,188,000. The real-estate sales comprised four commercial properties in
California, Texas, and Colorado, and several Maui and Kauai parcels. The
proceeds from these sales were immediately available for reinvestment in
replacement property on a tax-deferred basis. The funds from these sales were
held in escrow pending future use to purchase new real estate assets. These
amounts are not included in "Cash Flows from Operating Activities" and "Capital
Expenditures," but are reported under the caption "Other Non-cash Information"
in the Condensed Statements of Cash Flows. During 2002, $60,375,000 of these
escrowed funds were combined with $12,778,000 of general corporate funds to
purchase replacement property comprising commercial properties in Hawaii,
Nevada, and California and entitled land in central Oahu. At December 31, 2002,
$7,669,000 of tax-deferred proceeds had not been reinvested, compared with
$2,200,000 at the end of 2001.
Pensions: As described in Note 10 in Item 8 of the Company's 2002 Form
10-K, the Company has defined benefit pension plans which cover substantially
all non-bargaining unit and certain bargaining unit employees. The Company also
has unfunded non-qualified plans that provide benefits in excess of the amounts
permitted to be paid under the provisions of the tax law to participants in
qualified plans.
Pension income (expense) related to these plans was as follows for the
three years ended December 31, 2002 (in thousands):
2002 2001 2000
---- ---- ----
Qualified plan income $ 1,417 $ 12,689 $ 9,489
Non-qualified plan expense $ (2,744) $ (3,114) $ (2,961)
The Company expects that the qualified plan expense for 2003 will be
approximately $15 million and that the non-qualified expense will be
approximately $3 million for 2003.
The valuation assumptions used for the Company's pension plans for each
of the three years were as follows:
Pension Benefits
---------------------------
2002 2001 2000
---- ---- ----
Discount rate 6.50% 7.25% 7.75%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.25% 4.25% 4.25%
The expected return on plan assets is based on the Company's historical
returns combined with long-term expectations, based on the mix of plan assets,
asset class returns, and long-term inflation assumptions, after consultation
with the firm used by the Company for actuarial calculations. One, three, and
five-year pension returns were -16 percent, -9 percent, and 0 percent,
respectively. Since 1989, the average return has been nine percent. These
returns have approximated or exceeded benchmark returns used by the Company to
evaluate performance of its fund managers. The mix of assets in the pension plan
at the end of 2002 was 58 percent with domestic equity and high yield managers,
11 percent with international equity managers, 28 percent with fixed income and
real-estate managers and three percent held in cash and other investments. The
Company regularly reviews its asset allocation and rebalances the portfolio when
it is appropriate to do so.
The Company bases its determination of pension expense or income on
Statement of Financial Accounting Standards No. 87, which reduces year-to-year
volatility. Investment gains and losses are the difference between actual
returns on plan assets and expected returns. The cumulative investment gains or
losses are recognized over periods ranging from five to eighteen years. The
Company uses shorter amortization periods for certain plans because the benefits
offered under these plans are re-negotiated and updated more frequently than
those under the other benefit plans.
The discount rate used for benefit plan calculations is based on a
review of analysis, compiled by the Company's actuary, of long-term bonds that
receive one of the two highest ratings given by a recognized rating agency, with
durations that approximate the benefit cash flows for the Company's employees
and retirees.
Lowering the expected long-term rate of return on the Company's
qualified plan assets from 9 percent to 8.5 percent would have reduced pension
income for 2002 by approximately $1.5 million. Lowering the discount rate
assumption by one-half percent would have reduced pension income by
approximately $1.8 million.
The value of qualified plan assets at December 31, 2002 was $253.8
million, a decrease of 19 percent from assets totaling $314.6 million a year
earlier, due to market changes and benefit payments. This reduction, combined
with a lower discount rate, resulted in the plans being under funded by 12
percent at the end of 2002 compared with being over funded by 22 percent at the
end of 2001. The Company does not expect that its qualified plans will require
cash funding during 2003. However, cash contributions in the range of $3 to $6
million may be required annually for several years beginning in 2004, depending
on the actual experience relative to assumptions used by the Company in making
this estimate.
The Company recorded an additional minimum pension liability of $44.9
million for the qualified plans and $4.4 million for its non-qualified benefit
plans at December 31, 2002, as required by SFAS No. 87. The 2002 charge was
related to four of its qualified pension plans and its four unfunded
non-qualified supplemental pension plans, representing an excess of unfunded
accumulated benefit obligations over previously recorded pension cost
liabilities. The increase in unfunded accumulated benefit obligations was
attributed primarily to lower pension assets combined with a reduction in the
discount rate assumption. The components of the charge at December 31, 2002 were
as follows:
Other Non-current Assets (unrecognized prior service cost) $ 8,232,000
Deferred Tax Asset $ 16,010,000
Accumulated Other Comprehensive Loss $ 25,041,000
Other Non-current Liabilities (additional minimum liability) $(49,283,000)
Dependence on Information Technology Systems: The Company is highly
dependent on information technology systems to support its ability to conduct
business. These dependencies primarily include accounting, billing,
disbursement, cargo booking, vessel scheduling and stowage, banking, payroll and
employee communication systems. All of these systems are vulnerable to
reliability issues, integration and compatibility concerns, and
security-threatening intrusions. The Company has had no significant instances of
interruption to these systems.
Management believes that its information technology and systems are
adequate to meet the requirements of its business and operations. It continues
to make investments of capital for infrastructure, system development and
maintenance, system security and staffing and staff development. However, there
can be no assurances that future incidents, whether accidental or malicious,
could not affect adversely the function of the Company's information systems and
operations.
Management Changes: The following management changes occurred during
2002 and January 2003:
- W. Allen Doane was appointed Chairman of the Board of Directors of
Matson effective July 1, 2002. Mr. Doane is also President and Chief
Executive Officer of A&B and is a member of A&B's Board of Directors.
- C. Bradley Mulholland, previously President and Chief Executive
Officer of Matson, was appointed Vice Chairman of the Board of
Directors of Matson effective July 1, 2002. Mr. Mulholland is
also a member of A&B's Board of Directors.
- James S. Andrasick was promoted to Executive Vice President
of A&B effective April 25, 2002, and was appointed to additional
duties as President and Chief Executive Officer of Matson, effective
July 1, 2002. Mr. Andrasick is also Chief Financial Officer and
Treasurer of A&B.
- Paul E. Stevens, previously Senior Vice President (ocean
services) of Matson, was promoted to Executive Vice President of
Matson effective July 1, 2002.
- Ronald J. Forest, previously President of Matson Intermodal System,
Inc., assumed new responsibilities as Vice President - Operations
of Matson effective July 1, 2002.
- Robert C. Papworth was appointed President of Matson Intermodal
System, Inc. effective November 11, 2002.
- Lynn M. Swisher was appointed Vice President and Controller of
A&B's Hawaiian Commercial & Sugar Company (a division of A&B)
effective January 1, 2003. Ms. Swisher was previously A&B's Director
of Internal Audit.
- John E. Dennen was appointed Controller of Matson effective
January 23, 2003, replacing Matthew J. Cox, who continued his
responsibilities as Senior Vice President and Chief Financial
Officer of Matson.
- Grant Y. M. Chun was appointed as Vice President of A&B Properties,
Inc. effective January 1, 2003.
- Raymond L. Smith, previously Chief Operating Officer of Matson, left
Matson effective July 1, 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A&B, in the normal course of doing business, is exposed to the risks
associated with fluctuations in the market value of certain financial
instruments. A&B maintains a portfolio of investments, pension fund investments
and, through its Capital Construction Fund, an investment in mortgage-backed
securities. Details regarding these financial instruments are described in Notes
4, 5, 7 and 10 to the consolidated financial statements in Item 8, "Financial
Statements and Supplementary Data."
A&B is exposed to changes in U.S. interest rates, primarily as a result
of its borrowing and investing activities used to maintain liquidity and to fund
business operations. In order to manage its exposure to changes in interest
rates, A&B utilizes a balanced mix of debt maturities, along with both
fixed-rate and variable-rate debt. The nature and amount of A&B's long-term and
short-term debt can be expected to fluctuate as a result of future business
requirements, market conditions, and other factors. With the exception of the
financing arrangement described under the caption "Interest Rate Hedging" in
Note 8 of Item 8, the Company does not use interest rate derivative instruments,
such as interest rate swaps, currency swaps, futures, or options, to manage its
exposure to interest rate risk or for speculative purposes, but may choose to
use such instruments to manage interest rate risk in the future. A&B believes
that, as of December 31, 2002, its exposure to market risk fluctuations for its
financial instruments is not material.
The following table summarizes A&B's debt obligations at December 31,
2002, presenting principal cash flows and related interest rates by the expected
fiscal year of repayment. Variable interest rates represent the weighted-average
rates of the portfolio at December 31, 2002. A&B estimates that the carrying
value of its debt is not materially different from its fair value.
Expected Fiscal Year of Repayment as of December 31, 2002
-----------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total
--------- ---------- --------- ---------- --------- ---------- -----
(dollars in thousands)
Fixed rate $9,643 $12,500 $17,500 $17,500 $17,500 $ 27,857 $102,500
Average interest rate 7.33% 7.38% 7.42% 7.44% 7.46% 7.51% --
Variable rate -- -- -- -- -- $154,932 $154,932
Average interest rate -- -- -- -- -- 2.11% --
A&B's sugar plantation, HC&S, has a contract to sell its raw sugar
production, until June 2003, to Hawaiian Sugar & Transportation Cooperative
("HS&TC"), an unconsolidated sugar and marketing cooperative, in which A&B has
an ownership interest. Under that contract, the price paid will fluctuate with
the New York No. 14 Contract settlement price for domestic raw sugar, less a
fixed discount. HS&TC has agreed in principle to a revised contract with C&H
through the 2008 crop. A&B also has an agreement with C&H Sugar Company, Inc,
the primary purchaser of sugar from HS&TC, which allows the A&B to forward
price, with C&H, a portion of its raw sugar deliveries to HS&TC.
A&B has no direct material exposure to foreign currency risks, although
it is indirectly affected by changes in currency rates to the extent that this
affects tourism in Hawaii.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Management's Responsibility for Financial Reporting 35
Independent Auditors' Report 36
Consolidated Statements of Income 37
Consolidated Statements of Cash Flows 38
Consolidated Balance Sheets 39
Consolidated Statements of Shareholders' Equity 40
Notes to Consolidated Financial Statements 41
1. Summary of Significant Accounting Policies 41
2. Changes in Accounting Methods 46
3. Discontinued Operations 47
4. Impairment of Long-Lived Assets and Investments 47
5. Investments 48
6. Property 50
7. Capital Construction Fund 50
8. Notes Payable and Long-term Debt 51
9. Leases 52
10. Employee Benefit Plans 54
11. Income Taxes 57
12. Stock Options 58
13. Related Party Transactions, Commitments, Guarantees,
and Contingencies 60
14. Industry Segments 62
15. Quarterly Information (Unaudited) 64
16. Parent Company Condensed Financial Information 66
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Alexander & Baldwin, Inc. has the responsibility for
preparing the accompanying consolidated financial statements and related notes
accurately and objectively. The statements have been prepared in accordance with
accounting principles generally accepted in the United States of America,
consistently applied, and necessarily include amounts based on judgments and
estimates made by management. Management also prepared the other information in
this annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
The Company maintains internal control systems, and related policies
and procedures, designed to provide reasonable assurance that assets are
safeguarded, that transactions are properly executed and recorded in accordance
with management's authorization, and that underlying accounting records may be
relied upon for the accurate preparation of the consolidated financial
statements and other financial information. The design, monitoring, and revision
of internal control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures. The Company maintains an internal auditing function that evaluates and
formally reports on the adequacy and effectiveness of internal controls,
policies, and procedures.
The Company's consolidated financial statements have been audited by
Deloitte & Touche LLP, its independent auditors, who have expressed their
opinion with respect to the fairness, in all material aspects, of the
presentation of financial position, results of operations and cash flows under
accounting principles generally accepted in the United States of America.
Management has made available to Deloitte & Touche LLP all of the Company's
financial records and related data. Furthermore, management believes that all
representations made to Deloitte & Touche LLP during its audit were valid and
appropriate.
The Board of Directors, through its Audit Committee (composed of
non-employee directors), oversees management's responsibilities in the
preparation of the consolidated financial statements. The Audit Committee
appoints the independent auditors, subject to shareholder ratification. The
Audit Committee meets regularly with the external and internal auditors to
evaluate the effectiveness of their work in discharging their respective
responsibilities and to assure their independent and free access to the
Committee.
/s/ W. Allen Doane
W. Allen Doane
President and Chief Executive Officer
/s/ James S. Andrasick
James S. Andrasick
Executive Vice President, Chief Financial Officer, & Treasurer
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF ALEXANDER & BALDWIN, INC.:
We have audited the accompanying consolidated balance sheets of
Alexander & Baldwin, Inc. and subsidiaries as of December 31, 2002 and 2001, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Alexander & Baldwin, Inc.
and subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
Company adopted a new accounting standard for reporting discontinued operations
in 2001 and changed its method of accounting for vessel drydocking costs in
2000.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
January 22, 2003
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per-share amounts)
Year Ended December 31, 2002 2001 2000
-------------- ------------- ------------
Revenue:
Ocean transportation $ 679,964 $ 672,605 $ 703,506
Intermodal services 195,114 121,960 132,403
Property leasing 66,369 60,334 51,700
Property sales 26,983 88,911 46,158
Food products 112,727 107,576 103,398
Gain on sale of investments -- 125,478 --
Interest and dividends 7,728 12,288 19,014
------------- ------------- ------------
Total revenue 1,088,885 1,189,152 1,056,179
------------- ------------- ------------
Costs and Expenses:
Cost of transportation services 574,801 552,099 559,917
Cost of intermodal services 174,964 112,088 123,680
Cost of property sales and leasing services 53,501 96,533 42,873
Cost of agricultural goods and services 98,886 100,318 99,989
Selling, general and administrative 106,821 99,097 88,270
Impairment loss on investment -- 28,600 --
Interest expense 11,680 18,658 24,252
------------- ------------- ------------
Total costs and expenses 1,020,653 1,007,393 938,981
------------- ------------- ------------
Income From Continuing Operations Before Income Taxes and
Cumulative Effect of Change in Accounting Method 68,232 181,759 117,198
Income taxes 21,734 65,377 42,350
------------- ------------- ------------
Income From Continuing Operations Before Cumulative Effect of
Change In Accounting Method 46,498 116,382 74,848
Income (loss) from discontinued operations, net of
income taxes (See Notes 2 and 3) 11,658 (5,754) 3,476
Cumulative effect of change in accounting method, net of
income taxes (See Note 2) -- -- 12,250
------------- ------------- ------------
Net Income 58,156 110,628 90,574
Other Comprehensive Income (Loss):
Minimum pension liability adjustment (net of taxes of
$16,010) (25,041) -- --
Change in valuation of derivatives (net of taxes of
$1,088) (1,774) -- --
Unrealized holding gains (losses) and reclassification of
realized gains on securities (net of income taxes of
$36,371, and $7,525) -- (61,937) 12,476
------------- ------------- ------------
Comprehensive Income $ 31,341 $ 48,691 $ 103,050
============= ============= ============
Basic Earnings per Share of Common Stock:
From continuing operations before cumulative effect of
change in accounting $ 1.13 $ 2.87 $ 1.83
Discontinued operations 0.29 (0.14) 0.09
Accounting change -- -- 0.29
------------- ------------- ------------
Net income $ 1.42 $ 2.73 $ 2.21
============= ============= ============
Diluted Earnings per Share of Common Stock:
From continuing operations before cumulative effect of
change in accounting $ 1.13 $ 2.86 $ 1.83
Discontinued operations 0.28 (0.14) 0.08
Accounting change -- -- 0.30
------------- ------------- ------------
Net income $ 1.41 $ 2.72 $ 2.21
============= ============= ============
Average Common Shares Outstanding 41,008 40,535 40,898
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31, 2002 2001 2000
---- ---- ----
Cash Flows from Operations:
Net income $ 58,156 $ 110,628 $ 90,574
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 70,717 75,433 72,304
Deferred income taxes 9,856 (7,389) 17,358
Gains on disposal of assets (20,713) (142,567) (26,495)
Equity in (income) loss of affiliates 5,422 13,166 (6,859)
Write-down of long-lived assets and investments -- 44,797 --
Change in accounting method -- -- (12,250)
Changes in assets and liabilities:
Accounts and notes receivable (23,379) 2,250 (4,161)
Inventories 1,330 857 (1,219)
Prepaid expenses and other assets (19,535) 7,823 (7,933)
Pension and post-retirement assets and obligations (1,516) (21,149) (26,169)
Accounts and income taxes payable (24,787) 62,205 9,305
Other liabilities (4,319) (2,766) 10,235
Real Estate Developments Held for Sale:
Real estate inventory sales 13,415 39,831 6,088
Expenditures for new real estate inventory (8,993) (32,151) (16,500)
----------- ----------- ----------
Net cash provided by operations 55,654 150,968 104,278
----------- ----------- ----------
Cash Flows from Investing Activities:
Capital expenditures for property and developments (44,613) (99,183) (84,201)
Receipts from disposal of income producing
property, investments and other assets 20,557 141,909 3,877
Deposits into Capital Construction Fund (58,163) (12,071) (12,220)
Withdrawals from Capital Construction Fund 4,500 4,217 8,574
(Increase) decrease in investments - net (6,050) (1,700) 894
----------- ----------- ----------
Net cash provided by (used in) investing (83,769) 33,172 (83,076)
activities ----------- ----------- ----------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 73,000 6,000 98,500
Payments of long-term debt (30,500) (137,000) (48,000)
Proceeds (payments) from short-term
borrowings - net (12,400) (3,100) 10,500
Repurchases of capital stock -- (2,270) (48,260)
Proceeds from issuance of capital stock 16,171 4,558 2,961
Dividends paid (36,889) (36,488) (36,785)
----------- ------------ ----------
Net cash provided by (used in) financing 9,382 (168,300) (21,084)
----------- ----------- ----------
activities
Cash and Cash Equivalents:
Net increase (decrease) for the year (18,733) 15,840 118
Balance, beginning of year 19,291 3,451 3,333
----------- ----------- ----------
Balance, end of year $ 558 $ 19,291 $ 3,451
=========== =========== ==========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (11,788) $ (19,546) $ (24,663)
Income taxes paid, net of refunds (51,949) (20,961) (31,807)
Non-cash Activities:
Tax-deferred property sales 68,045 29,963 35,569
Tax-deferred property purchases (60,375) (42,257) (22,703)
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per-share amount)
December 31
---------------------------------------
2002 2001
-------------- --------------
ASSETS
------
Current Assets
Cash and cash equivalents $ 558 $ 19,291
Accounts and notes receivable, less allowances of $10,988 and $7,252 155,544 130,491
Sugar and coffee inventories 5,274 4,875
Materials and supplies inventories 9,676 11,405
Real estate and other assets held for sale 33,417 35,584
Deferred income taxes 12,008 9,324
Prepaid expenses and other assets 17,194 13,044
Accrued deposits to Capital Construction Fund -- (4,000)
-------------- --------------
Total current assets 233,671 220,014
Investments 32,923 33,021
Real Estate Developments 42,050 47,840
Property - net 942,574 977,048
Capital Construction Fund 208,400 158,737
Pension Assets 64,716 63,300
Other Assets - net 73,235 44,459
-------------- --------------
Total $ 1,597,569 $ 1,544,419
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Notes payable and current portion of long-term debt $ 9,643 $ 19,900
Accounts payable 80,933 78,911
Payrolls and vacation due 19,820 17,058
Uninsured claims 13,169 13,017
Income taxes payable 4,096 42,899
Post-retirement benefit obligations-- current portion 2,492 2,317
Accrued and other liabilities 20,934 21,467
-------------- --------------
Total current liabilities 151,087 195,569
-------------- --------------
Long-term Liabilities
Long-term debt 247,789 207,378
Deferred income taxes 337,803 338,709
Post-retirement benefit obligations 42,640 42,915
Additional minimum pension obligation 49,283 1,888
Uninsured claims and other liabilities 45,319 47,293
-------------- --------------
Total long-term liabilities 722,834 638,183
-------------- --------------
Commitments and Contingencies
Shareholders' Equity
Capital stock - common stock without par value; authorized, 150,000 shares
($.75 stated value per share); outstanding,
41,268 shares in 2002 and 40,529 shares in 2001 33,846 33,328
Additional capital 84,756 66,659
Accumulated other comprehensive loss (26,815) --
Retained earnings 643,645 622,615
Cost of treasury stock (11,784) (11,935)
-------------- --------------
Total shareholders' equity 723,648 710,667
-------------- --------------
Total $ 1,597,569 $ 1,544,419
============== ==============
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
(In thousands, except per-share amounts)
Capital Stock Accumulated
------------------------------------------------- Other
Issued In Treasury Compre-
---------------------- ---------------------- hensive
Stated Additional Income Retained
Shares Value Shares Cost Capital (Loss) Earnings
------ ----- ------ ---- ------- ------ --------
Balance, December 31, 1999 46,579 $ 34,933 4,053 $ (12,404) $ 53,124 $ 49,461 $ 545,849
Shares repurchased (2,378) (1,783) - - - - (46,477)
Stock options exercised 126 94 - - 3,378 - (524)
Issued-- incentive plans 4 4 (75) 226 1,505 - -
Unrealized holding gain - - - - - 12,476 -
Net income - - - - - - 90,574
Cash dividends - - - - - (36,785)
------ --------- ----- --------- --------- ---------- ----------
Balance, December 31, 2000 44,331 33,248 3,978 (12,178) 58,007 61,937 552,637
Shares repurchased (105) (79) - - - - (2,192)
Stock options exercised - net 207 155 - - 6,908 - (1,970)
Issued-- incentive plans 4 4 (70) 243 1,744 - -
Unrealized holding gain - - - - - 15,851
Reversal of holding gains1 - - - - - (77,788) -
Net income - - - - - - 110,628
Cash dividends - - - - - - (36,488)
------ --------- ----- --------- --------- ---------- ----------
Balance, December 31, 2001 44,437 33,328 3,908 (11,935) 66,659 - 622,615
Stock options exercised - net 686 514 - - 16,835 - (237)
Issued-- incentive plans 4 4 (49) 151 1,262 - -
Minimum Pension Liability - - - - - (25,041) -
Valuation of Derivative - - - - - (1,774) -
Net income - - - - - - 58,156
Cash dividends - - - - - - (36,889)
------ --------- ----- --------- --------- ---------- ----------
Balance, December 31, 2002 45,127 $ 33,846 3,859 $ (11,784) $ 84,756 $ (26,815) $ 643,645
====== ========= ===== ========= ========= ========== ==========
1 See Note 5 for discussion of marketable equity securities sold during 2001.
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements
include the accounts of Alexander & Baldwin, Inc. and all wholly owned
subsidiaries ("Company"), after elimination of significant intercompany amounts.
Significant investments in businesses, partnerships, and joint ventures in which
the Company does not have control are accounted for under the equity method.
Generally, these are investments in businesses in which the Company's ownership
is between 20 and 50 percent.
Segment Information: The Company has three operating segments:
Transportation, Property Development and Management, and Food Products. The
Transportation segment is comprised of ocean transportation and intermodal
services components. The Property Development and Management segment is
comprised of property leasing and property development and sales components. The
Company reports segment information in the same way that management assesses
segment performance. Additional information regarding these segments is found in
Note 14.
Cash and Cash Equivalents: Cash equivalents are composed of all highly
liquid investments with an original maturity of three months or less and which
have no significant risk of change in value.
Allowances for Doubtful Accounts: The changes in allowances for
doubtful accounts, included on the Balance Sheets as an offset to "Accounts and
notes receivable," for 2002 were as follows.
Balance at Write-offs Balance at
12/31/2001 Expense and Other 12/31/2002
---------- ------- --------- ----------
$ 7,252 $ 5,303 $ (1,567) $ 10,988
Inventories: Raw sugar and coffee inventories are stated at the lower
of cost (first-in, first-out basis) or market value. Other inventories, composed
principally of materials and supplies, are stated at the lower of cost
(principally average cost) or market value.
Property: Property is stated at cost. Expenditures for major renewals
and betterments are capitalized. Replacements, maintenance, and repairs that do
not improve or extend asset lives are charged to expense as incurred. Gains or
losses from property disposals are included in the determination of net income.
Costs of regularly scheduled drydocking of vessels and planned major vessel
repairs performed during drydocking are capitalized and amortized over the
periods benefited.
Coffee Orchards: Costs of developing coffee orchards are capitalized
during the development period and depreciated over the estimated productive
lives.
Capitalized Interest: Interest costs incurred in connection with
significant expenditures for real estate developments or the construction of
assets are capitalized. Interest expense is shown net of capitalized interest on
the Statements of Income, because the amounts are not significant.
Construction Expenditures: Expenditures for real estate developments
are capitalized during construction and are classified as Real Estate
Developments on the Consolidated Balance Sheets. When construction is complete,
the costs are reclassified as either Real Estate Held for Sale or Property,
based upon the Company's intent to sell the completed asset or to hold it as an
investment. Cash flows related to real estate developments are classified as
either operating or investing activities, based upon the Company's intention to
sell the property or to retain ownership of the property as an investment
following completion of construction.
Depreciation: Depreciation is computed using the straight-line method.
Estimated useful lives of property are as follows:
Classification Range of Life (in years)
-------------- ------------------------
Buildings 10 to 40
Vessels 10 to 40
Marine containers 2 to 25
Terminal facilities 3 to 35
Machinery and equipment 3 to 35
Utility systems and other 5 to 50
Fair Value of Financial Instruments: The fair values of cash and cash
equivalents, receivables and short-term and long-term borrowings approximate
their carrying values.
Fair Value of Real-Estate Assets: Real estate is carried at the lower
of cost or fair value. Fair values generally are determined using the expected
market value for the property, less sales costs. For residential units and lots
held for sale, market value is determined by reference to the sales of similar
property, market studies, tax assessments, and cash flows. For commercial
property, market value is determined using recent comparable sales, tax
assessments, and cash flows. A large portion of the Company's real estate is
undeveloped land located in Hawaii on the Islands of Maui and Kauai. This land
has a cost basis that averages approximately $150 per acre, a value much lower
than fair value.
Impairments of Long-lived Assets: Long-lived assets are reviewed for
possible impairment when events or circumstances indicate that the carrying
value may not be recoverable. In such evaluation, the estimated future
undiscounted cash flows generated by the asset are compared with the amount
recorded for the asset to determine if a write-down may be required. If this
review determines that the recorded value will not be recovered, the amount
recorded for the asset is reduced to estimated fair value (see Note 4).
Voyage Revenue Recognition: Voyage revenue and variable costs and
expenses associated with voyages are included in income at the time each voyage
leg commences. This method of accounting does not differ materially from other
acceptable accounting methods. Freight rates are provided in tariffs filed with
the Surface Transportation Board of the U.S. Department of Transportation.
Real Estate Sales Revenue Recognition: Sales are recorded when the
risks and benefits of ownership have passed to the buyers (generally on closing
dates), adequate down payments have been received, and collection of remaining
balances is reasonably assured.
Sugar and Coffee Revenue Recognition: Revenue from bulk raw sugar sales
is recorded when delivered to the cooperative of Hawaiian producers, based on
the estimated net return to producers in accordance with contractual agreements.
Revenue from coffee is recorded when the title to the product and risk of loss
passes to third parties (generally this occurs when the product is shipped or
delivered to customers) and when collection is reasonably assured.
Non-voyage Ocean Transportation Costs: Depreciation, charter hire,
terminal operating overhead, and general and administrative expenses are charged
to expense as incurred.
Agricultural Costs: Costs of growing and harvesting sugar cane are
charged to the cost of production in the year incurred and to cost of sales as
raw sugar is delivered to the cooperative of Hawaiian producers, as permitted by
Statement of Position No. 85-3, "Accounting by Agricultural Producers and
Agricultural Cooperatives." Costs of growing coffee are charged to inventory in
the year incurred and to cost of sales as coffee is sold.
Employee Benefit Plans: Certain ocean transportation subsidiaries are
members of the Pacific Maritime Association ("PMA") and the Hawaii Stevedoring
Industry Committee, which negotiate multi-employer pension plans covering
certain shoreside bargaining unit personnel. The subsidiaries directly negotiate
multi-employer pension plans covering other bargaining unit personnel. Pension
costs are accrued in accordance with contribution rates established by the PMA,
the parties to a plan or the trustees of a plan. Several trusteed,
noncontributory, single-employer defined benefit plans and defined contribution
plans cover substantially all other employees.
Accounting Method for Stock-based Compensation: As allowed by Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," and by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," the Company has elected to continue to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation cost is recognized in the
Company's net income for options granted with exercise prices that are equal to
the market values of the underlying common stock on the dates of grant.
Pro forma information regarding net income and earnings per share,
using the fair value method and reported below, has been estimated using a
Black-Scholes option-pricing model. This model was developed for use in
estimating the fair value of traded options which do not have vesting
requirements and which are fully transferable. The Company's options have
characteristics significantly different from those of traded options. The
following assumptions were used in determining the pro forma amounts:
2002 2001 2000
---- ---- ----
Stock volatility 23.4% 25.2% 25.0%
Expected term from grant date (in years) 5.5 6.2 6.7
Risk-free interest rate 2.8% 4.5% 6.0%
Forfeiture discount 2.9% 2.6% 0.3%
Dividend yield 3.4% 3.3% 3.4%
Based upon the above assumptions, the computed annual weighted average
fair values of employee stock options granted during 2002, 2001, and 2000 were
$4.44, $6.22, and $5.54, respectively, per option.
Had compensation cost for the stock options been based on the estimated
fair values at grant dates, the Company's pro forma net income and net income
per share in each of the three years ended December 31, 2002, would have been as
follows (in thousands, except per share amounts):
2002 2001 2000
---- ---- ----
Net Income:
As reported $ 58,156 $ 110,628 $ 90,574
Stock-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects (1,483) (1,780) (1,514)
---------- --------- ----------
Pro forma $ 56,673 $ 108,848 $ 89,060
========== ========== ==========
Net Income Per Share:
Basic, as reported $ 1.42 $ 2.73 $ 2.21
Basic, pro forma $ 1.38 $ 2.69 $ 2.18
Diluted, as reported $ 1.41 $ 2.72 $ 2.21
Diluted, pro forma $ 1.38 $ 2.67 $ 2.17
The pro forma disclosures of net income and earnings per share are not
likely to be representative of the pro forma effects on future net income or
earnings per share, because the number of future shares which may be issued is
not known, shares vest over several years, and assumptions used to determine the
fair value can vary significantly. Additional information about stock-based
compensation is included in Note 12.
Income Taxes: Deferred tax assets and liabilities are established for
temporary differences between the way certain income and expense items are
reported for financial reporting and tax purposes. Deferred tax assets and
liabilities are adjusted to the extent necessary to reflect tax rates in effect
when the temporary differences reverse. A valuation allowance is established for
deferred tax assets for which realization is uncertain.
Basic and Diluted Earnings per Share of Common Stock: Basic Earnings
per Share is determined by dividing Net Income by the weighted-average common
shares outstanding during the year. The calculation of Diluted Earnings per
Share includes the dilutive effect of unexercised options to purchase the
Company's stock.
Derivatives: All derivatives are recognized in the consolidated balance
sheets at their fair value. On the date the derivative contract is entered into,
the Company designates the derivative as either a fair value or a cash flow
hedge. Changes in the fair value of a derivative that is highly effective as,
and that is designated and qualifies as, a fair value hedge, are recorded in
current period earnings along with the gain or loss on the hedged asset or
liability. Changes in the fair value of a derivative that is highly effective
as, and that is designated and qualifies as, a cash flow hedge, are recorded in
Other Comprehensive Income (Loss) and are reclassified to earnings in the period
in which earnings are affected by the underlying hedged item. The ineffective
portion of hedges is recognized in earnings in the current period.
The Company's use of derivatives is generally limited to reducing its
exposure to interest rate risk by utilizing interest rate agreements that are
accounted for as hedges. The Company does not hold or issue derivative
instruments for trading purposes. Hedge accounting requires a high correlation
between changes in fair value of cash flows of the derivative instrument and the
specific item being hedged, both at inception and throughout the life of the
hedge. The Company discontinues hedge accounting prospectively when it is
determined that a derivative is no longer effective in offsetting changes in the
fair value or cash flows of the hedged item, the derivative expires or is sold,
terminated or exercised, or the derivative is discontinued as a hedge investment
because it is unlikely that a forecasted transaction will occur.
Comprehensive Income: Comprehensive Income includes all changes in
Stockholders' Equity, except those resulting from capital stock transactions.
Prior to 2002, the only difference between Net Income and Comprehensive Income
was the unrealized holding gains on securities available for sale (see Note 5).
For 2002, Other Comprehensive Income (Loss) includes the minimum pension
liability adjustments (see Note 10) and gains or losses on certain derivative
instruments used to hedge interest rate risk (see Note 8). Comprehensive Income
is not used in the calculation of Earnings per Share.
Environmental Costs: Environmental expenditures that relate to current
operations are expensed or capitalized, as appropriate. Expenditures that relate
to an existing condition caused by past operations or events, and which do not
contribute to current or future revenue generation, are charged to expense.
Liabilities are recorded when environmental assessments or remedial efforts are
probable and the costs can be estimated reasonably.
Use of Estimates: The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Future actual
amounts could differ from those estimates. The more significant of these include
(1) assumptions underlying the calculation of pension, post-retirement, and
non-qualified benefit obligations and costs, (2) assumptions underlying the
carrying value of investments and long-lived assets, (3) the estimation of
allowances for doubtful accounts, (4) the estimation of liabilities for
self-insurance programs, (5) the calculation and classification of tax
obligations and provisions prior to completion of tax returns and completion of
taxing authority audits, (6) the application of cost accounting methods for
sugar, molasses and coffee inventory and cost of sales, (7) depreciable lives
and salvage values for fixed assets, (8) liabilities for environmental
assessments and remedial efforts, (9) estimates of joint venture earnings or
losses prior to the issuance of final annual joint venture financial statements,
(10) accruals for obligations incurred but not yet billed to the Company, and
(11) recoverability of claims from losses under insurance coverage.
Impact of Newly Issued and Proposed Accounting Standards: SFAS No. 142,
"Goodwill and Other Intangible Assets," became effective and was adopted by the
Company on January 1, 2002. This statement addresses how intangible assets,
including goodwill, should be accounted for in the consolidated financial
statements. The adoption of the standard had no material effect on the Company's
consolidated financial statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations," became
effective in January 2003. This statement addresses accounting and reporting for
obligations and costs that will occur when long-term assets are retired. Among
other things, the statement requires that the present value of the liability
associated with future asset retirements be recorded on the balance sheet when
an obligation has been incurred and when it can be measured. The amortization of
the capitalized cost and increases in the present value of the obligation which
result from the passage of time, are recorded as charges to earnings. The
financial impacts of this standard, upon adoption in 2003, are not expected to
be material to the Company's consolidated financial statements.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," on January 1, 2001. This standard requires the
classification of the sales of certain income-producing assets as discontinued
operations, if the operations and cash flows of the assets clearly can be
distinguished from the remaining assets of the Company, if the cash flows for
the assets have been, or will be, eliminated from the ongoing operations of the
Company, if the Company will not have a significant continuing involvement in
the operations of the assets sold and if the amount is considered material.
Certain assets that are "held for sale," based on the likelihood and intention
of selling the property within 12 months, also are treated as discontinued
operations. Upon reclassification, depreciation of the assets is discontinued.
Sales of land and residential houses are generally considered inventory and are
not included in discontinued operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue No. 94-3. The Company
will adopt the provisions of the new standard for restructuring activities
initiated after December 31, 2002. The standard requires that the liability for
costs associated with an exit or disposal activity be recognized when the
liability is incurred. Under Issue 94-3, a liability for an exit cost was
recognized at the date of the Company's commitment to an exit plan. SFAS No. 146
also establishes that the liability initially should be measured and recorded at
fair value. Accordingly, this standard may affect the timing of recognizing
future restructuring costs, as well as the amounts recognized.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation specifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. This
applies to guarantees issued or modified after December 31, 2002. The
Interpretation also revises the disclosure requirements about a guarantor's
obligations under agreements, which are effective for the 2002 consolidated
financial statements. The Company is currently evaluating the provisions, which
are effective in 2003, and does not currently believe that they will affect the
consolidated financial statements materially.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure; an Amendment of FASB
Statement No. 123." SFAS No. 148 permits companies that choose to apply the
provisions of SFAS No. 123 to use several methods of transition to the
accounting provisions of SFAS No. 123. Those transition methods include adopting
the provisions only for new stock option grants, adopting the provisions for
unvested options and for new stock option grants, and adopting SFAS No. 123
retroactive to the earliest period presented in the financial statements. SFAS
No. 123 allows companies to treat the cost of stock options as expense during
the periods in which the stock option awards vest. Information regarding the
Company's stock options, including the disclosures required by SFAS No. 123 and
SFAS No. 148, is contained in Notes 1 and 12.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." The Interpretation defines variable interest
entities and addresses consolidation of such entities by the primary beneficiary
of the entity. The Interpretation is effective for interests in variable
interest entities created after January 31, 2003. For interests in variable
interest entities created before February 1, 2003, the Interpretation shall
apply to the first interim or annual reporting period beginning after June 15,
2003. The Company is currently assessing the impacts of the Interpretation, but
currently does not believe it will have a material effect on the consolidated
financial statements.
Reclassifications: Certain amounts in the 2001 and 2000 consolidated
financial statements have been reclassified to conform to the 2002 presentation.
2. CHANGES IN ACCOUNTING METHODS
2001 - Adoption of new accounting standard for reporting discontinued
operations: SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," was issued in August 2001 and became effective January 2002.
However, as permitted by the standard, the Company adopted SFAS No. 144
effective January 1, 2001. This statement replaces previous accounting standards
related to asset impairments and provides guidance concerning the recognition
and measurement of impairment losses for certain types of long-term assets. The
statement recommends the use of probability-weighted cash flow estimations,
precludes accruing future operating losses prior to asset disposal, expands the
scope of "discontinued operations" to include a component of an entity, and
eliminates the current exemption to consolidation when control over a subsidiary
is likely to be temporary. The statement changes how the Company analyzes and
accounts for asset impairments and discontinued operations, but upon adoption,
it had no immediate financial impacts. The standard also requires the
classification of the sales of certain income-producing assets as discontinued
operations if the operations and cash flows of the assets clearly can be
distinguished from the remaining assets of the Company, if the cash flows for
the assets have been, or will be, eliminated from the ongoing operations of the
Company, if the Company will not have a significant continuing involvement in
the operations of the assets sold and if the amount is considered material.
Certain assets that are "held for sale," based on the likelihood and intention
of selling the property within 12 months, are also treated as discontinued
operations. Depreciation on these assets is discontinued upon reclassification.
Sales of land and residential houses generally are considered inventory and are
not included in discontinued operations. During 2001, the Company recorded a
loss from the abandonment of its panelboard manufacturing facility, which it
classified as Discontinued Operations. During 2002, the Company designated
certain real-estate assets as discontinued operations, due to its intention to
sell the assets within 12 months. Discontinued operations are described in Note
3 to the consolidated financial statements.
2000 - Change in Accounting Method for Vessel Drydocking Costs: The
Company changed its method of accounting for vessel drydocking costs, as of
January 1, 2000, from the accrual method to the deferral method. Drydocking
costs had been accrued as a liability and an expense on an estimated basis, in
advance of the next scheduled drydocking. Subsequent payments for drydocking
were charged against the accrued liability. Under the deferral method, actual
drydocking costs are capitalized when incurred and amortized over the period
benefited; generally, this is the period between scheduled drydockings. This
method eliminates the uncertainty of estimating these costs. This change was
made to conform to prevailing industry accounting practices. The cumulative
effect of this accounting change, as of January 1, 2000, is shown separately in
the Consolidated Statements of Income and increased net income by $12,250,000
(net of income tax expense of $7,668,000), or $0.29 per basic share.
2000 - Change in Accounting for Certain Revenues and Expenses: The
Company changed its method of presentation for certain freight services that are
performed by third parties and billed by the Company to its customers. The
expenses and related revenue for these services previously were reported on a
net basis and were not reflected on the Consolidated Statements of Income.
Accordingly, operating revenue and expenses for 2000 was increased by
$38,059,000.
The Company also changed its method of presentation for common area
maintenance ("CAM") costs. These costs, which are incurred by the Company but
which are charged to tenants under various lease arrangements, previously were
netted against Property Leasing Revenue. The Company now records CAM amounts in
Costs of Leasing Services in the Consolidated Statements of Income. Accordingly,
Property Leasing Revenue and Costs of Leasing Services for 2000 were increased
by $11,246,000.
These two changes were in response to the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," which provides guidance about the classification, on a
gross basis, of revenues and expenses. These changes had no effect on earnings
or segment operating profit.
3. DISCONTINUED OPERATIONS
Real-estate: During the 2002, the sales of a shopping center and an
industrial complex in California, a seven-building distribution complex in
Texas, a shopping center in Colorado, four commercial properties on Maui and the
planned sale, within the next 12 months of a Nevada commercial property, met the
criteria for classification as discontinued operations. The revenue, operating
profit, and after-tax effects of these transactions for the three years ended
December 21, 2002 were as follows (in thousands, except per share amounts):
2002 2001 2000
---------- ---------- ---------
Sales Revenue $ 65,434 -- --
Leasing Revenue $ 6,501 $ 9,913 $ 10,010
Sales Operating Profit $ 14,559 -- --
Leasing Operating Profit $ 4,006 $ 5,446 $ 5,517
After-tax Earnings $ 11,658 $ 3,431 $ 3,476
Basic Earnings Per Share $ 0.29 $ 0.09 $ 0.09
The revenue and operating profit generated from these properties in
prior years were reclassified from continuing operations to discontinued
operations for consistency with the current treatment. Consistent with the
Company's intention to reinvest the sales proceeds into new investment property,
the proceeds from the sales of property treated as discontinued operations were
deposited in escrow accounts for tax-deferred reinvestment in accordance with
Section 1031 of the Internal Revenue Code.
As permitted by SFAS No. 144, comparable property sales that were
initiated prior to the Company's adoption of this accounting standard on January
1, 2001 were not reported as discontinued operations. 2001 includes the sales of
three properties in Washington State for an aggregate price of $15.6 million and
a $2.1 million after-tax gain, all of which were initiated prior to the adoption
of the new standard.
Agribusiness: In 2001, the Company ceased the operations of and
abandoned its panelboard manufacturing business operated by Hawaiian DuraGreen,
Inc., a wholly owned subsidiary ("DuraGreen"). This subsidiary constructed a
production facility during 1999 and 2000 with an initial capital investment of
approximately $12,500,000. DuraGreen produced a panelboard product using
bagasse, a byproduct in the production of raw cane sugar, for use in various
furniture and construction applications. After nearly a year of production
issues, poor operating results and weaknesses in the panelboard market,
management determined that the Company's investment in the business would not be
recovered and profitability could not be achieved. The 2001 loss from
Discontinued Operations includes operating losses and closure costs of
$2,964,000 and an $11,387,000 write-down of the production assets to their
estimated salvage value, net of a total income tax benefit of approximately
$5,166,000. There were no operations in prior years. The Food Products
Identifiable Assets in Note 14, included assets of $11,616,000 for DuraGreen as
of December 31, 2000. This amount principally was machinery and equipment.
Income Taxes: The income tax expense (benefit) relating to discontinued
operations was $6,907,000 (including a deferred expense of $5,302,000) in 2002,
$(3,151,000) in 2001, and $2,041,000 in 2000.
4. IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
No impairment losses were recorded in 2002 or 2000. During 2001, the
Company recorded an impairment loss of $28,600,000 for its investments in C&H
and wrote off $4,823,000 of power generation equipment that no longer was needed
in the business.
C&H: As described in Note 5, the Company holds common and preferred
stock holdings in C&H Sugar Company, Inc. ("C&H"). As a result of operating
losses and declining cash flows at C&H, combined with adverse market changes,
the Company concluded that C&H's estimated future earnings and cash flows would
not allow recovery of the carrying value of the Company's investments. This loss
in value was considered an "other than temporary" impairment condition;
accordingly, the carrying values of the investments were written down by
$28,600,000 during the fourth quarter of 2001. The loss includes a write-down of
the common stock and junior preferred stock values to zero, and a write-down of
the senior preferred stock to approximately $11,500,000. The amount of the
write-down was based on the valuation of the common, and junior and senior
preferred stocks, as conducted by an independent valuation firm. Accepted
valuation practices were utilized in determining these investments' fair values,
including the market and income approaches, discounted cash flow method, and
market yield analysis. The valuation considered the Company's minority position,
the illiquidity of these types of investments in the public market, the ability
of future cash flows to fund future debt and preferred obligations, and sugar
industry conditions. The Company has no current plans to divest or sell its
investments in C&H.
Power Equipment: The Company wrote off $4,823,000 for power generation
equipment that is being removed from service. This equipment no longer was
needed in the Company's cane sugar refining operations on Maui, due to changes
in factory and power generation processes.
5. INVESTMENTS
At December 31, 2002 and 2001, investments consisted principally of
equity in affiliated companies, limited liability companies, and limited
partnership interests. These investments are summarized, by business segment, as
follows (in thousands):
2002 2001
---------- ----------
Equity in Affiliated Companies:
Transportation $ 18,766 $ 17,887
Food Products 11,504 11,504
Real Estate and Other 2,653 3,630
---------- ----------
Total Investments $ 32,923 $ 33,021
========== ==========
The Company's equity in income (loss) of unconsolidated affiliates for
the three years ended December 31, 2002, included in operating expenses and
operating profit, was as follows:
2002 2001 2000
---- ---- ----
Equity in Earnings (Losses) of
Unconsolidated Affiliates:
Transportation $ (5,422) $ (7,392) $ 3,626
Food Products -- (1,600) (1,169)
Real Estate and Other 268 -- --
--------- --------- ---------
Total $ (5,154) $ (8,992) $ 2,457
========= ========= =========
Transportation: Matson, a wholly owned subsidiary of the Company, has a
minority interest investment in a limited liability company ("LLC") with
Saltchuk Resources, Inc. and International Shipping Agency, Inc., named Sea Star
Line, LLC, ("Sea Star"), which operates an ocean transportation service between
Florida and Puerto Rico. The operating agreement for Sea Star was revised during
2002 when Matson chose not to participate with the other owners in capital calls
associated with the acquisition of the assets of a bankrupt competitor. As a
result, Matson's ownership interest in Sea Star was reduced from 45 percent to
approximately 20 percent during 2002. Matson has guaranteed obligations of
$29,700,000 of this unconsolidated affiliate. Through 2001, Matson chartered two
vessels to Sea Star. In January 2002, these two vessels were sold to Sea Star
for an aggregate sales price of $17,000,000, which was the approximate carrying
value of the vessels when they were sold. This amount is included in "Real
estate and other assets held for sale" on the Consolidated Balance Sheet at
December 31, 2001. This investment represents a minority interest and is
accounted for under the equity method of accounting.
Matson is part owner of an LLC with Stevedoring Services of America,
named SSA Terminals, LLC ("SSAT"), which provides stevedoring and terminal
services at six terminals in three West Coast ports to the Company and other
shipping lines. Matson's ownership interest in SSAT was reduced from 49.5
percent to 35 percent during 2002 because of an agreement to eliminate the
majority owner's preferred cash return. This investment represents a minority
interest and is accounted for under the equity method of accounting. The "Cost
of transportation services" included approximately $95,710,000, $89,551,000 and
$99,151,000 for 2002, 2001 and 2000, respectively, paid to this unconsolidated
affiliate for terminal services.
Food Products: The Company owns an equity interest in C&H, comprising
approximately 36 percent of the common stock, 40 percent of the junior preferred
stock and all of the senior preferred stock of C&H. Dividends on the senior and
junior preferred stocks are cumulative. Through December 2003, dividends on the
senior preferred stock may be paid either in cash or by issuance of additional
shares of senior preferred stock. C&H must redeem from the Company, at one
thousand dollars per share, the outstanding senior preferred stock in December
2009 and the outstanding junior preferred stock in December 2010. The Company
accounts for its investment in C&H under the equity method. For 2002, the
Company recorded no equity in earnings or losses of C&H, since C&H had estimated
break-even operations. Because the Company believes there is significant
uncertainty regarding realization of the cumulative dividend amounts, it has
established a valuation reserve approximately equal to the cumulative dividend
amounts. Additionally, as described in Note 4, the Company recorded, in 2001, an
impairment loss related to this investment that resulted from an "other than
temporary" decline in value. As described in Note 13, the Company has an
obligation to provide a security deposit for self-insurance workers'
compensation claims incurred by C&H employees prior to December 24, 1998. This
security deposit requirement, which is in the form of a letter of credit for
$4,340,000, expires in December 2003.
Other: The investments in real estate LLC's and limited partnerships
are recorded at the lower of cost or fair value. The values of these investments
are assessed annually.
Marketable Equity Securities: In May 2001, BNP Paribas SA, France's
largest bank, announced that, subject to regulatory, shareholder and other
approvals, it would purchase the remaining 55 percent of BancWest Corporation
("BancWest") which it did not already own for $35 per share. This offer was 40
percent higher than the market price of BancWest's stock at the time of the
offer. When the offer was made, the Company owned 3,385,788 shares of BancWest.
The transaction closed during the fourth quarter of 2001. As a result of the
sale, the Company received cash of $118,503,000, recorded a pre-tax gain of
$110,338,000, and recognized an after-tax gain of approximately $68,410,000
($1.69 per basic share).
During 2001, the Company also divested its holdings in Bank of Hawaii
Corporation (previously known as Pacific Century Financial Corporation). This
was completed through the donation of 360,000 shares to the Company's charitable
foundation and the sales of 749,000 shares of the stock. The fair value of the
donated stock was approximately $7,500,000 and the historical cost basis was
approximately $500,000. The net expense related to this contribution was
$500,000 and is included in "Selling, general and administrative expenses" in
the 2001 consolidated financial statements. The Company received $16,219,000 for
the sales of the shares, recognized a pre-tax gain of $15,140,000, and recorded
an after-tax gain of $9,378,000 ($0.23 per basic share).
Net unrealized holding gains, net of tax, for 2001 and 2000 were
$15,851,000 and $12,476,000, respectively. Cumulative holding gains, net of tax,
of $77,788,000 were reversed and charged to Other Comprehensive Income during
2001, due to the sales of the securities.
See Note 7 for a discussion of fair values of investments in the
Capital Construction Fund.
6. PROPERTY
Property on the Consolidated Balance Sheets includes the following (in
thousands):
2002 2001
------------ -----------
Vessels $ 698,992 $ 694,618
Machinery and equipment 481,048 545,298
Buildings 313,044 317,068
Land 113,474 104,135
Water, power and sewer systems 92,680 87,915
Other property improvements 64,826 67,645
------------ -----------
Total 1,764,064 1,816,679
Less accumulated depreciation and amortization 821,490 839,631
------------ -----------
Property - net $ 942,574 $ 977,048
============ ===========
7. CAPITAL CONSTRUCTION FUND
Matson is party to an agreement with the United States government that
established a Capital Construction Fund ("CCF") under provisions of the Merchant
Marine Act, 1936, as amended. The agreement has program objectives for the
acquisition, construction, or reconstruction of vessels and for repayment of
existing vessel indebtedness. Deposits to the CCF are limited by certain
applicable earnings. Such deposits are federal income tax deductions in the year
made; however, they are taxable, with interest payable from the year of deposit,
if withdrawn for general corporate purposes or other non-qualified purposes, or
upon termination of the agreement. Qualified withdrawals for investment in
vessels and certain related equipment do not give rise to a current tax
liability, but reduce the depreciable bases of the vessels or other assets for
income tax purposes.
Amounts deposited into the CCF are a preference item for calculating
federal alternative minimum taxable income. Deposits not committed for qualified
purposes within 25 years from the date of deposit will be treated as
non-qualified withdrawals over the subsequent five years. As of December 31,
2002, the oldest CCF deposits date from 1994. Management believes that all
amounts on deposit in the CCF at the end of 2002 will be used or committed for
qualified purposes prior to the expiration of the applicable 25-year periods.
Under the terms of the CCF agreement, Matson may designate certain
qualified earnings as "accrued deposits" or may designate, as obligations of the
CCF, qualified withdrawals to reimburse qualified expenditures initially made
with operating funds. Such accrued deposits to and withdrawals from the CCF are
reflected on the Consolidated Balance Sheets either as obligations of the
Company's current assets or as receivables from the CCF.
The Company has classified its investments in the CCF as
"held-to-maturity" and, accordingly, has not reflected temporary unrealized
market gains and losses on the Consolidated Balance Sheets or Consolidated
Statements of Income. The long-term nature of the CCF program supports the
Company's intention to hold these investments to maturity.
At December 31, 2002 and 2001, the balances on deposit in the CCF are
summarized as follows (in thousands):
2002 2001
-------------------------------------- ---------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gain Cost Value Gain
---- ----- ---- ---- ----- ----
Mortgage-backed securities $ 17,581 $ 18,504 $ 923 $ 26,180 $ 26,983 $ 803
Cash and cash equivalents 190,819 191,081 262 128,557 129,161 604
Accrued deposits -- -- -- 4,000 4,000 --
---------- ---------- --------- ---------- ---------- ---------
Total $ 208,400 $ 209,585 $ 1,185 $ 158,737 $ 160,144 $ 1,407
========== ========== ========= ========== ========== =========
Fair value of the mortgage-backed securities was determined by an
outside investment management company, based on experience trading identical or
substantially similar securities. No central exchange exists for these
securities; they are traded over-the-counter. The Company earned $2,009,000 in
2002, $2,476,000 in 2001, and $2,654,000 in 2000 on its investments in
mortgage-backed securities. The fair values of other CCF investments are based
on quoted market prices. These other investments mature no later than December
13, 2004. One security classified as "held-to-maturity" was sold during 2002 for
a loss of $375,000, and in 2001, one security was sold for a loss of $42,800.
The securities no longer met authorized credit requirements.
8. NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 2002 and 2001, long-term debt consisted of the
following (in thousands):
2002 2001
---- ----
Commercial paper, 2002 high 2.15%, low 1.25% $ 99,932 $ 99,878
Bank variable rate loans, due after 2002,
2002 high 4.69%, low 1.88% 55,000 17,400
Term loans:
7.36%, payable through 2007 37,500 45,000
7.42%, payable through 2010 20,000 20,000
7.43%, payable through 2007 15,000 15,000
7.57%, payable through 2009 15,000 15,000
7.55%, payable through 2009 15,000 15,000
-------- --------
Total 257,432 227,278
Less current portion 9,643 19,900
-------- --------
Long-term debt $247,789 $207,378
======== ========
Commercial Paper: At December 31, 2002, $99,932,000 of commercial paper
notes was outstanding under a commercial paper program used by a subsidiary to
finance the construction of a vessel. Maturities ranged from nine to 30 days.
The borrowings outstanding under this program are classified as long-term
because the subsidiary intends to continue the program and, eventually, to repay
the borrowings with qualified withdrawals from the Capital Construction Fund.
The commercial paper program is rated A-1, P-1, F-1 as of year-end.
Variable Rate Loans: The Company has a revolving credit and term loan
agreement with six commercial banks, whereby it may borrow up to $185,000,000
under revolving loans through November 2004, at market rates of interest. Any
revolving loan outstanding on that date may be converted into a term loan, which
would be payable in four equal quarterly installments. The agreement contains
certain restrictive covenants, the most significant of which requires the
maintenance of an interest coverage ratio of 2:1 and total debt to earnings
before interest, depreciation, amortization, and taxes of 3:1. At December 31,
2002, $22,500,000 was outstanding under this agreement and was classified as
long-term. No amount was drawn on this facility at December 31, 2001.
The Company has an uncommitted $70,000,000 short-term revolving credit
agreement with a commercial bank. The agreement extends through November 2003,
but may be canceled by the bank or the Company at any time. The amount which the
Company may draw under the facility is reduced by the amount drawn against the
bank under the previously referenced $185,000,000 multi-bank facility, in which
it is a participant, and by letters of credit issued under the $70,000,000
uncommitted facility. At December 31, 2002 and 2001, $3,000,000 and $5,000,000,
respectively, were outstanding under this agreement. Under the borrowing formula
for this facility, the Company could have borrowed an additional $59,577,000 at
December 31, 2002. For sensitivity purposes, if the $185,000,000 facility had
been drawn fully, the amount that could have been drawn under the borrowing
formula would have been $20,050,000.
Matson has two revolving credit agreements totaling $90,000,000 with
commercial banks. The first facility is a $50,000,000 two-year revolving credit
agreement that expires in December 2004. At December 31, 2002 and 2001, no
amounts were drawn on this facility. The second facility is a two-year
$40,000,000 revolving credit agreement that expires in July 2004. At December
31, 2002 and 2001, $29,500,000 and $12,400,000, respectively, were drawn on this
facility. Both of these facilities have one-year term options.
Matson also has a $25,000,000 one-year revolving credit agreement with
a commercial bank, expiring in November 2003, which serves as a commercial paper
liquidity back-up line. At December 31, 2002 and 2001, no amounts were
outstanding under this agreement.
Other Debt Agreements: The Company has a private shelf agreement for
$50,000,000, which expires in April 2004. Matson also has a $50,000,000 private
shelf offering which expires in June 2004. No amounts were drawn on either
facility at year-end.
Long-term Debt Maturities: At December 31, 2002, maturities and planned
prepayments of all long-term debt during the next five years are $9,643,000 for
2003, $12,500,000 for 2004, $17,500,000 for 2005, $17,500,000 for 2006, and
$17,500,000 for 2007. These repayment amounts do not include repayments of
amounts drawn on variable rate facilities, because the Company currently has the
ability and intent to refinance these facilities.
Interest Rate Hedging: The Company enters into interest rate lock
agreements to minimize exposure to interest rate risk associated with future
debt issuances for new vessel financing. Under an interest rate lock agreement,
the Company agrees to pay or receive an amount equal to the difference between
the net present value of the cash flows for a notional principal amount of
indebtedness based on the existing yield of a U.S. treasury bond at the date
when the agreement is established and the date when the agreement is settled.
To hedge the interest rate risk associated with obtaining financing for
the two new undelivered vessels discussed in Note 13, the Company entered into
two such interest rate lock agreements with notional amounts of $55 million each
with a bank in November 2002. The locks settle in 2003 and 2004, corresponding
to the planned issuance of the associated debt. Interest rate lock agreements
are reflected at fair value in the Company's consolidated financial statements
and the related gains and losses on these agreements are deferred in
shareholders' equity as a component of Accumulated Other Comprehensive Loss.
Upon issuance of the debt, the deferred gain or loss will be amortized as an
adjustment to interest expense over the same period that the related interest
costs on the new debt are recognized in income.
At 2002 year end, the fair values of the lock agreement settling in
2003, of $1,416,000, and the lock agreement settling in 2004, of $1,446,000,
have been recorded in current accrued liabilities and other long-term
liabilities, respectively. Fair value is determined as the amount the interest
rate locks can be settled for with a third party. The $1,774,000 cumulative
unrealized loss, net of taxes of $1,088,000, is included in Accumulated Other
Comprehensive Loss at December 31, 2002.
9. LEASES
The Company as Lessee: Principal operating leases include land, office
and terminal facilities, containers and equipment, leased for periods that
expire between 2004 and 2052. Management expects that, in the normal course of
business, most operating leases will be renewed or replaced by other similar
leases.
Rental expense under operating leases totaled $21,627,000, $19,748,000,
and $19,741,000 for the years ended December 31, 2002, 2001, and 2000,
respectively.
Future minimum payments under operating leases as of December 31, 2002
were as follows (in thousands):
Operating
Leases
------
2003 $ 12,951
2004 12,895
2005 9,872
2006 8,817
2007 8,805
Thereafter 102,174
-----------
Total minimum lease payments $ 155,514
===========
The Company is obligated to pay terminal facility rent equal to the
principal and interest on Special Facility Revenue Bonds issued by the
Department of Transportation of the State of Hawaii. Interest on the bonds is
payable semi-annually and principal of $16,500,000 is due in 2013. An accrued
liability of $10,974,000 and $10,431,000 at December 31, 2002 and 2001,
respectively, included in other long-term liabilities, provides for a pro-rata
portion of the principal due on these bonds.
The Company as Lessor: The Company leases land, buildings, land
improvements, and five vessels under operating leases. Two of the vessels were
chartered to an unconsolidated affiliate and were sold to that affiliate in
January 2002 (see Note 5). The historical cost of and accumulated depreciation
on leased property at December 31, 2002 and 2001 were as follows (in thousands):
2002 2001
---- ----
Leased property $616,017 $653,200
Less accumulated amortization 116,303 173,269
-------- --------
Property under operating leases--net $499,714 $479,931
======== ========
Total rental income under these operating leases for the three years
ended December 31, 2002 was as follows (in thousands):
2002 2001 2000
---- ---- ----
Minimum rentals $104,546 $105,251 $ 98,607
Contingent rentals (based on sales volume) 2,267 2,481 1,917
-------- -------- --------
Total $106,813 $107,732 $100,524
======== ======== ========
Future minimum rental income on non-cancelable leases at December 31,
2002 was as follows (in thousands):
Operating
Leases
------
2003 $ 98,666
2004 89,982
2005 84,298
2006 34,661
2007 25,242
Thereafter 177,498
-----------
Total $ 510,347
===========
10. EMPLOYEE BENEFIT PLANS
The Company has funded single-employer defined benefit pension plans
that cover substantially all non-bargaining unit employees. In addition, the
Company has plans that provide certain retiree health care and life insurance
benefits to substantially all salaried and to certain hourly employees.
Employees are generally eligible for such benefits upon retirement and
completion of a specified number of years of credited service. The Company does
not pre-fund these benefits and has the right to modify or terminate certain of
these plans in the future. Certain groups of retirees pay a portion of the
benefit costs.
The status of the funded defined benefit pension plans and the unfunded
accumulated post-retirement benefit plans, at December 31, 2002, 2001, and 2000,
is shown in Table 1. The net periodic benefit cost for the defined benefit
pension plans and the post-retirement health care and life insurance benefit
plans during 2002, 2001, and 2000, is summarized in Table 2.
The assumptions used to determine the benefit information were as
follows:
Pension Benefits Other Post-retirement Benefits
------------------------- ------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Discount rate 6.50% 7.25% 7.75% 6.50% 7.25% 7.75%
Expected return on plan assets 9.00% 9.00% 9.00% -- -- --
Rate of compensation increase 4.25% 4.25% 4.25% 4.25% 4.25% 4.25%
For the post-retirement benefit measurement purposes, a ten percent
annual rate of increase in the per capita cost of covered health care benefits
was assumed for 2001. The rate was assumed to decrease by one percent per year
through 2005 and then remain at five percent thereafter. For 2000 measurement
purposes, a ten percent annual rate of increase was assumed through 2001, after
which a constant 5 percent rate was assumed. Unrecognized gains and losses of
the post-retirement benefit plans are amortized over five years. Although
current health costs in many geographic areas are increasing, the Company
believes that these assumptions are reasonable because there are caps on certain
of its benefit plans, it uses lower cost health care plans where possible,
certain groups of employees pay a portion of the benefit costs, certain
insurance plans offered to employees are self-insured, wellness programs are
used by certain groups of employees, and the Company is implementing measures to
mitigate future increases in benefit costs.
If the assumed health care cost trend rate were increased or decreased
by one percentage point, the accumulated post-retirement benefit obligation, as
of December 31, 2002, 2001, and 2000, and the net periodic post-retirement
benefit cost for 2002, 2001 and 2000, would have increased or decreased as
follows (in thousands):
Other Post-retirement Benefits
One Percentage Point
---------------------------------------------------------------------------------
Increase Decrease
------------------------------------ -------------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Effect on total of service and
interest cost components $ 336 $ 296 $ 196 $ (275) $ (244) $ (226)
Effect on post-retirement
benefit obligation $ 4,361 $ 3,856 $ 1,664 $ (3,616) $ (3,199) $ (2,278)
The assets of the defined benefit pension plans consist principally of
listed stocks and bonds. Contributions are determined annually for each plan by
the Company's pension administrative committee, based upon the actuarially
determined minimum required contribution under the Employee Retirement Income
Security Act of 1974 ("ERISA"), as amended, and the maximum deductible
contribution allowed for tax purposes. For the plans covering employees who are
members of collective bargaining units, the benefit formulas are determined
according to the collective bargaining agreements, either using career average
pay as the base or a flat dollar amount per year of service. The benefit
formulas for the remaining defined benefit plans are based on final average pay.
The Company has non-qualified supplemental pension plans covering
certain employees and retirees, which provide for incremental pension payments
from the Company's general funds, so that total pension benefits would be
substantially equal to amounts that would have been payable from the Company's
qualified pension plans if it were not for limitations imposed by income tax
regulations. The obligation, included with other non-current liabilities,
relating to these unfunded plans, totaled $15,807,000 and $13,807,000 at
December 31, 2002 and 2001, respectively. These amounts include the additional
minimum pension liability described below. The expense associated with the
non-qualified plans was $2,744,000, $3,114,000, and $2,961,000 for 2002, 2001
and 2000, respectively.
The Company recorded a minimum pension liability of $44,906,000 for the
qualified plans and $4,377,000 for its non-qualified benefit plans at December
31, 2002, as required by SFAS No. 87. The 2002 charge was related to three of
its defined benefit pension plans and its four unfunded non-qualified
supplemental pension plans, representing an excess of unfunded accumulated
benefit obligations over previously recorded pension cost liabilities. The
increase in unfunded accumulated benefit obligations was attributed primarily to
lower pension assets combined with a reduction in the discount rate assumption.
The components of the charge at December 31, 2002 were as follows:
Other Non-current Asset (unrecognized prior service cost) $ 8,232,000
Deferred Tax Asset $ 16,010,000
Accumulated Other Comprehensive Loss $ 25,041,000
Other Non-current Liabilities (additional minimum liability) $(49,283,000)
Total contributions to the multi-employer pension plans covering
personnel in shoreside and seagoing bargaining units were $3,702,000 in 2002,
$4,028,000 in 2001, and $3,027,000 in 2000. Union collective bargaining
agreements provide that total employer contributions during the terms of the
agreements must be sufficient to meet the normal costs and amortization payments
required to be funded during those periods. Contributions are generally based on
union labor paid or cargo volume. A portion of such contributions is for
unfunded accrued actuarial liabilities of the plans being funded over periods of
25 to 40 years, which began between 1967 and 1976.
The multi-employer plans are subject to the plan termination insurance
provisions of ERISA and are paying premiums to the Pension Benefit Guarantee
Corporation ("PBGC"). The statutes provide that an employer who withdraws from,
or significantly reduces its contribution obligation to, a multi-employer plan
generally will be required to continue funding its proportional share of the
plan's unfunded vested benefits.
Under special rules approved by the PBGC and adopted by the Pacific
Coast longshore plan in 1984, the Company could cease Pacific Coast
cargo-handling operations permanently and stop contributing to the plan without
any withdrawal liability, provided that the plan meets certain funding
obligations as defined in the plan. The estimated withdrawal liabilities under
the Hawaii longshore plan and the seagoing plans aggregated approximately
$10,682,000, based on estimates by plan actuaries. Management has no present
intention of withdrawing from and does not anticipate termination of any of the
aforementioned plans.
Table 1 (in thousands)
Pension Benefits Other Post-retirement Benefits
------------------------------------------ --------------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Change in Benefit Obligation
Benefit obligation at
beginning of year $ 256,927 $ 235,000 $ 218,189 $ 41,072 $ 37,910 $ 47,836
Service cost 5,305 4,844 4,877 525 443 504
Interest cost 18,066 17,549 16,882 2,841 2,720 2,939
Plan participants'
contributions -- -- -- 1,358 1,137 1,165
Actuarial (gain) loss 23,601 13,130 (2,016) 5,283 2,314 (2,652)
Benefits paid (14,663) (14,094) (13,146) (3,851) (3,452) (3,635)
Amendments -- 498 1,137 -- -- --
Settlements -- -- 8,602 -- -- (8,247)
Special or contractual
termination benefits -- -- 475 -- -- --
------------ ------------ ----------- ---------- ---------- ----------
Benefit obligation at
end of year 289,236 256,927 235,000 47,228 41,072 37,910
------------ ------------ ----------- ---------- ---------- ----------
Change in Plan Assets
Fair value of plan assets at
beginning of year 314,593 364,299 381,090 -- -- --
Actual return on plan assets (46,156) (35,747) (3,645) -- -- --
Employer contribution -- 135 -- -- -- --
Benefits paid (14,663) (14,094) (13,146) -- -- --
------------ ------------ ----------- ---------- ---------- ----------
Fair value of plan assets
at end of year 253,774 314,593 364,299 -- -- --
------------ ------------ ----------- ---------- ---------- ----------
Accrued Asset (Obligation)
Plan assets greater than
benefit obligation (35,462) 57,666 129,299 (47,228) (41,072) (37,910)
Unrecognized net actuarial
(gain) loss 92,045 (4,963) (91,307) 2,005 (4,232) (9,134)
Unrecognized transition asset -- -- (63) -- -- --
Unrecognized prior
service cost 8,133 10,597 12,547 91 72 79
------------ ------------ ----------- ---------- ---------- ----------
Accrued asset (obligation) $ 64,716 $ 63,300 $ 50,476 $ (45,132) $ (45,232) $ (46,965)
============ ============ =========== ========== ========== ==========
Table 2 (in thousands)
Benefits Pension Other Post-retirement Benefits
----------------------------------------- ---------------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
Components of Net Periodic
Benefit Cost/(Income)Service cost $ 5,305 $ 4,844 $ 4,877 $ 525 $ 443 $ 504
Interest cost 18,066 17,549 16,882 2,841 2,720 2,939
Expected return on plan
assets (27,601) (32,107) (33,651) -- -- --
Recognition of net gain 349 (5,360) (9,083) (974) (2,522) (2,872)
Amortization of prior
service cost 2,464 2,448 2,528 7 7 7
Amortization of unrecognized
transition asset -- (63) (119) -- -- --
Recognition of settlement
(gain)/loss -- -- 8,602 -- -- (14,800)
----------- ----------- ----------- ---------- ---------- ----------
Net periodic benefit
cost/(income) $ (1,417) $ (12,689) $ (9,964) $ 2,399 $ 648 $ (14,222)
=========== =========== =========== ========== ========== ==========
Cost of termination benefits
recognized $ -- $ -- $ 475 $ -- $ -- $ --
=========== =========== =========== ========== ========== ==========
11. INCOME TAXES
The income tax expense on income from continuing operations for the
three years ended December 31, 2002 consisted of the following (in thousands):
2002 2001 2000
---- ---- ----
Current:
Federal $ 14,795 $ 63,975 $ 24,255
State (2,917) 8,791 737
---------- ----------- -----------
Current 11,878 72,766 24,992
Deferred 9,856 (7,389) 17,358
---------- ----------- -----------
Income tax expense $ 21,734 $ 65,377 $ 42,350
========== =========== ===========
Income tax expense for the three years ended December 31, 2002 differs
from amounts computed by applying the statutory federal rate to pre-tax income,
for the following reasons (in thousands):
2002 2001 2000
---- ---- ----
Computed federal income tax expense $ 23,882 $ 63,616 $ 41,019
State income taxes (1,900) 5,176 2,858
Dividend exclusion (110) (867) (954)
Prior years' tax settlement (1,300) -- --
Low income housing credits (27) (859) (1,124)
Fair market value over cost of donations -- (1,481) --
Other--net 1,189 (208) 551
---------- ---------- ----------
Income tax expense $ 21,734 $ 65,377 $ 42,350
========== ========== ==========
State taxes include credits for low-income housing, capital goods
excise tax, residential construction and research activities, net of related
federal taxes.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability at December 31, 2002 and 2001 were as
follows (in thousands):
2002 2001
---- ----
Property basis and depreciation $ 164,575 $ 172,838
Tax-deferred gains on real estate transactions 112,564 106,993
Capital Construction Fund 76,222 61,998
Benefit plans (13,345) 564
Insurance reserves (7,971) (9,301)
Other--net (6,250) (3,707)
--------- ---------
Total $ 325,795 $ 329,385
========= =========
In 2002, the Internal Revenue Service completed its audit of the
Company's 1998 and 1999 tax returns and the State of California completed its
audit of the Company's 1996-1999 California income tax returns. This resulted in
a one-time reduction of income tax expense of $1,300,000, due to the reversal of
previously accrued income tax liabilities. The Company's 2002 effective tax rate
on continuing operations would have been 33.8 percent, excluding this item.
For 2002, the Company will receive approximately $400,000 of Hawaii tax
credits, net of federal tax, from an investment it made in a qualified high-tech
business, which is reflected as a reduction in Income Taxes Payable.
In 2002 and 2001, income tax benefits attributable to employee stock
option transactions of $950,000 and $500,000, respectively, were not included in
the tax provision, but were allocated directly to stockholders' equity.
12. STOCK OPTIONS
Employee Stock Option Plans: The Company has two stock option plans
under which key employees are granted options to purchase shares of the
Company's common stock.
Adopted in 1998, the Company's 1998 Stock Option/Stock Incentive Plan
("1998 Plan") provides for the issuance of non-qualified stock options to
employees of the Company. Under the 1998 Plan, option prices may not be less
than the fair market value of the Company's common stock on the dates of grant,
the options become exercisable over periods determined, at the dates of grant,
by the committee that administers the plan (generally ratably over three years),
and the options generally expire ten years from the date of grant. Payments for
options exercised may be made in cash or in shares of the Company's stock. If an
option to purchase shares is exercised within five years of the date of grant
and if payment is made in shares of the Company's stock, the option holder may
receive, under a reload feature, a new stock option grant for such number of
shares as is equal to the number surrendered, with an option price not less than
the greater of the fair market value of the Company's stock on the date of
exercise or one and one-half times the original option price.
Adopted in 1989, the Company's 1989 Stock Option/Stock Incentive Plan
("1989 Plan") is substantially the same as the 1998 Plan, except that each
option is generally exercisable in full one year after the date granted. The
1989 Plan terminated in January 1999, but options granted through 1998 remain
exercisable.
The 1998 and 1989 Plans also permit the issuance of shares of the
Company's common stock as a reward for past service rendered to the Company or
one of its subsidiaries or as an incentive for future service with such
entities. The recipients' interest in such shares may be vested fully upon
issuance or may vest in one or more installments, upon such terms and conditions
as are determined by the committee that administers the plans. No shares were
issued during 2002. At December 31, 2002, approximately 15,000 shares had been
awarded but had not yet vested.
Director Stock Option Plans: The Company has two Directors' stock
option plans. Under the 1998 Non-Employee Director Stock Option Plan ("1998
Directors' Plan"), each non-employee Director of the Company, elected at an
Annual Meeting of Shareholders, is automatically granted, on the date of each
such Annual Meeting, an option to purchase 3,000 shares of the Company's common
stock at the fair market value of the shares on the date of grant. Each option
to purchase shares becomes exercisable in three successive annual installments
of 1,000 shares beginning one year after the date granted.
The 1989 Non-Employee Directors Stock Option Plan ("1989 Directors'
Plan") is substantially the same as the 1998 Directors' Plan, except that each
option generally becomes exercisable in-full one year after the date granted.
This plan terminated in January 1999, but options granted through termination
remain exercisable.
Changes in shares and the weighted average exercise prices for the
three years ended December 31, 2002, were as follows (shares in thousands):
Employee Plans Directors' Plans
----------------------- ------------------------ Weighted
1998 1989 Average
1998 1989 Directors' Directors' Total Exercise
Plan Plan Plan Plan Shares Price
---- ---- ---- ---- ------ -----
December 31, 1999 613 2,886 24 189 3,712 $ 25.43
Granted 511 -- 24 -- 535 $ 21.70
Exercised (7) (139) -- -- (146) $ 23.79
Canceled (31) (340) -- (21) (392) $ 29.49
-------- -------- ------ ------ --------- -------
December 31, 2000 1,086 2,407 48 168 3,709 $ 24.52
Granted 590 -- 24 -- 614 $ 27.23
Exercised (35) (244) -- -- (279) $ 23.53
Canceled (14) (21) -- (21) (56) $ 25.81
-------- -------- ------ ------ --------- -------
December 31, 2001 1,627 2,142 72 147 3,988 $ 24.99
Granted 431 -- 24 -- 455 $ 26.56
Exercised (263) (410) -- (21) (694) $ 23.65
Canceled (56) (522) -- -- (578) $ 28.67
-------- -------- ------ ------ --------- -------
December 31, 2002 1,739 1,210 96 126 3,171 $ 24.84
======== ======== ====== ====== ========= =======
Exercisable 795 1,210 48 126 2,179 $ 24.37
-------- -------- ------ ------ --------- -------
As of December 31, 2002, the Company had reserved 1,957,000 and 34,000
shares of its common stock for the exercise of options under the 1998 Plan and
1998 Directors' Plan, respectively. At the Company's Annual meeting in April
2002, shareholders approved the addition of 1,900,000 shares of common stock to
the 1998 Plan. Additional information about stock options outstanding as of 2002
year-end is summarized below (shares in thousands):
Weighted Weighted
Range of Shares Average Weighted Shares Average
Exercise Outstanding Remaining Average Exercisable Price of
as of Contractual Exercise as of Exercisable
Price 12/31/2002 Years Price 12/31/2002 Options
- ------------------ ---------- ------------- ------------ ---------- -------
$ 0.00 - 20.00 15 8.2 $ 0.00 -- --
$20.01 - 22.00 963 5.6 $21.35 804 $21.32
$22.01 - 24.00 280 4.3 $23.20 241 $23.18
$24.01 - 26.00 222 1.1 $24.45 219 $24.44
$26.01 - 28.00 1,136 5.5 $26.85 714 $27.03
$28.01 - 30.00 551 7.8 $28.37 198 $28.47
$30.01 - 34.88 4 6.1 $31.31 3 $32.63
----- --- ------ ----- ------
$ 0.00 - 34.88 3,171 5.5 $24.84 2,179 $24.37
----- --- ------ ----- ------
13. RELATED PARTY TRANSACTIONS, COMMITMENTS, GUARANTEES, AND CONTINGENCIES
Commitments, excluding the operating lease commitments that are
described in Note 9, that were in effect at the end of 2002 included the
following (in thousands):
Arrangement 2002
----------- ----
Appropriations for capital expenditures (a) $ 103,600
Vessel purchases (b) $ 220,000
Guarantee of Sea Star debt (c) $ 29,700
Guarantee of HS&TC debt (d) $ 15,000
Standby letters of credit (e) $ 21,393
Bonds (f) $ 13,987
Benefit plan withdrawal obligations (g) $ 10,682
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception item (a) and
(b), it is not expected that the Company or its subsidiaries will be called upon
to advance funds under these commitments.
(a) At December 31, 2002, the Company and its subsidiaries had an
unspent balance of total appropriations for capital expenditures
of approximately $103,600,000. There are, however, no
contractual obligations to spend the entire amount.
(b) During 2002, Matson entered into an agreement with Kvaerner
Philadelphia Shipyards, Inc., to purchase two container ships.
The total project cost for each ship is approximately $110
million. The cost is expected to be funded with a combination of
cash from the Capital Construction Fund, the issuance of new
debt, and operations. The first ship is expected to be delivered
in the third quarter of 2003 and the second ship is expected to
be delivered in the second quarter of 2004. No significant
payments are required until the acceptance and delivery of the
ships. No obligation for these ships is recorded on the
financial statements because conditions necessary to record
either a liability or an asset have not yet been met.
(c) Matson has guaranteed $29,700,000 of the debt of Sea Star and
would be required to perform under the guarantee should Sea Star
be unable to meet its obligations. It is expected that the
guarantee will be reduced, over time, following the change
described in Note 5 that reduced Matson's ownership interest in
that venture and by scheduled repayments of the debt by Sea
Star. Certain assets of Sea Star serve as collateral for these
borrowings and would reduce Matson's guarantee obligations. The
Company has not recorded any liability for its obligations under
the guarantee because it believes that the likelihood of making
any payments is not probable.
(d) The Company guarantees up to $15,000,000 of Hawaiian Sugar &
Transportation Cooperative's ("HS&TC") $30,000,000 revolving
credit line. That credit line is used primarily to fund
purchases of raw sugar from the Hawaii growers and is fully
secured by the inventory, receivables and transportation
assets of the cooperative. The amount that may be drawn
by HS&TC under the facility is limited to 95 percent of its
inventory value plus up to $15,000,000 of HS&TC's
receivables. The Company's guarantee is limited to the
lesser of $15,000,000 or the actual amounts drawn. Although
the amount drawn by HS&TC on its credit line varies, as of
December 31, 2002, the amount drawn was $19,000,000. The
Company has not recorded any liability for its obligation
under the guarantee because it believes that the likelihood
of making any payment is not probable.
(e) The Company has arranged for standby letters of credit totaling
$21,393,000. This includes letters of credit, totaling
approximately $15,100,000, which enable the Company to qualify
as a self-insurer for state and federal workers' compensation
liabilities. The amount also includes a letter of credit of
$4,340,000 for workers' compensation claims incurred by C&H
employees, under a now-closed self-insurance plan, prior to
December 24, 1998 (see Note 5). The Company only would be called
upon to honor this letter of credit in the event of C&H's
insolvency. The obligation to provide this letter of credit
expires on December 24, 2003. The remaining letters of credit
are for insurance-related matters, construction performance
guarantees, and other routine operating matters.
(f) Of the $13,987,000 in bonds, $5,871,000 consists of subdivision
bonds related to real estate construction projects in Hawaii.
These bonds are required either by the state or by county
governments to ensure that certain infrastructure work required
as part of real-estate development is completed as required. The
Company has the financial ability and intention to complete
these improvements. Also included in the total are $5,270,000 of
customs bonds and $2,607,000 of non-real estate performance
bonds.
(g) As described in Note 10, the estimated withdrawal liabilities
under a Hawaii longshore plan and certain Mainland seagoing
plans aggregated approximately $10,682,000 as of December 31,
2002, based on estimates by plan actuaries. Management has no
present intention of withdrawing from and does not anticipate
termination of any of the aforementioned plans.
C&H is a party to a sugar supply contract with Hawaiian Sugar &
Transportation Cooperative ("HS&TC"), a raw sugar marketing and transportation
cooperative that the Company uses to market and transport its sugar to C&H.
Under the terms of this contract, which expires in June 2003, C&H (an
unconsolidated entity in which the Company has a minority ownership equity
interest - see Notes 4 and 5) is obligated to purchase, and HS&TC is obligated
to sell, all of the raw sugar delivered to HS&TC by the Hawaii sugar growers, at
prices determined by the quoted domestic sugar market. Revenue from raw sugar
sold to HS&TC was $72,420,000, $70,149,000, and $64,455,000, during 2002, 2001,
and 2000, respectively.
The State of Hawaii, Department of Taxation ("State") has informed the
Company that it believes a portion of the Company's ocean transportation revenue
is subject to the Public Service Company tax. The Company strongly disagrees
with the State's tax position. If the State were to prevail fully, the amount of
the claim could be material. Management believes, after consultation with legal
counsel, that the ultimate disposition of this matter will not have a material
adverse effect on the Company's results of operations or financial position.
Note 5 contains additional information about transactions with
unconsolidated affiliates, which affiliates are also related parties, due to the
Company's minority interest investments.
The Company and certain subsidiaries are parties to various legal
actions and are contingently liable in connection with claims and contracts
arising in the normal course of business, the outcome of which, in the opinion
of management after consultation with legal counsel, will not have a material
adverse effect on the Company's financial position or results of operations.
14. INDUSTRY SEGMENTS
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision-making group is made up of the president and lead executives of the
Company and each of the Company's segments. The lead executive for each
operating segment manages the profitability, cash flows, and assets of his or
her respective segment's various product or service lines and businesses. The
operating segments are managed separately, because each operating segment
represents a strategic business unit that offers different products or services
and serves different markets. The Company's reportable operating segments
include Transportation, Property Development and Management, and Food Products.
The Transportation segment comprises two components. Ocean
Transportation carries freight between various United States West Coast, Hawaii
and other Pacific ports; holds investments in ocean transportation entities that
are considered integral to its operations and terminal service businesses (see
Note 5); and provides terminal services. The Intermodal Services component of
Transportation provides intermodal marketing and trucking brokerage services
throughout North America.
The Property Development and Management segment also comprises two
components operating principally in Hawaii and the western United States.
Property Leasing owns, operates, and manages commercial properties. Property
Sales develops and sells commercial and residential properties.
The Food Products segment grows and processes raw sugar and molasses;
invests in a sugar refining and marketing business (see Note 5); grows, mills,
and markets coffee; generates and sells electricity; and has local trucking and
storage services.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Reportable segments
are measured based on operating profit, exclusive of non-operating or unusual
transactions, interest expense, general corporate expenses, and income taxes.
Industry segment information for each of the five years ended December
31, 2002 is summarized below (in thousands):
For the Year 2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 686,927 $ 682,272 $ 714,663 $ 661,507 $ 620,610
Intermodal services 195,114 121,960 132,403 119,271 127,787
Property development and management:
Leasing 73,087 70,685 62,105 53,910 44,433
Sales 92,965 89,156 46,322 48,036 82,382
Less amounts reported in
discontinued (9,139) (8,762)
operations (71,935) (9,913) (10,010)
Food products 112,727 105,976 107,510 116,151 465,661
Other -- 129,016 3,186 3,155 2,878
------------- ------------ ------------ ---------- ----------
Total revenue $ 1,088,885 $ 1,189,152 $ 1,056,179 $ 992,891 $1,334,989
============= ============ ============ ========== ==========
Operating Profit:
Transportation:
Ocean transportation $ 42,430 $ 60,704 $ 94,025 $ 88,499 $ 62,118
Intermodal services 3,068 1,560 (293) (4,721) 4,180
Property development and management:
Leasing 32,905 34,139 30,120 27,497 22,634
Sales 19,418 17,926 24,228 17,402 21,663
Less amounts reported in
discontinued (4,993) (4,709)
operations (18,565) (5,446) (5,517)
Food products 13,841 5,660 7,522 11,310 21,327
Other -- 127,635 2,974 2,944 2,696
------------- ------------ ------------ ---------- ----------
Total operating profit 93,097 242,178 153,059 137,938 129,909
Write-down of long-lived assets -- (28,600) -- (15,410) (20,216)
Loss on partial sale of subsidiary -- -- -- -- (19,756)
Interest expense, net (11,680) (18,658) (24,252) (17,774) (24,799)
General corporate expenses (13,185) (13,161) (11,609) (14,207) (14,552)
------------- ------------ ------------ ---------- ----------
Income from continuing
operations before income taxes and
accounting changes $ 68,232 $ 181,759 $ 117,198 $ 90,547 $ 50,586
============= ============ ============ ========== ==========
Identifiable Assets:
Transportation $ 915,129 $ 888,161 $ 911,109 $ 894,607 $ 898,277
Property development and management 500,264 476,126 440,416 384,515 338,090
Food products 163,425 153,307 197,143 173,069 261,712
Other 18,751 26,825 117,344 109,269 107,561
------------- ------------ ------------ ---------- ---------
Total assets $ 1,597,569 $ 1,544,419 $ 1,666,012 $1,561,460 $1,605,640
============= ============ ============ ========== ==========
Capital Expenditures:
Transportation $ 10,451 $ 59,669 $ 40,190 $ 19,232 $ 60,403
Property development and management1 83,656 72,050 44,821 66,752 107,408
Food products 9,943 9,454 21,677 17,271 18,237
Other 938 267 216 258 441
------------- ------------ ------------ ---------- ----------
Total capital expenditures $ 104,988 $ 141,440 $ 106,904 $ 103,513 $ 186,489
============= ============ ============ ========== ==========
Depreciation and Amortization:
Transportation $ 50,994 $ 55,359 $ 54,586 $ 56,174 $ 61,543
Property development and management 9,988 8,646 6,892 5,341 4,431
Food products 8,505 9,118 8,285 9,962 20,086
Other 402 470 461 466 514
------------- ------------ ------------ ---------- ----------
Total depreciation and
amortization $ 69,889 $ 73,593 $ 70,224 $ 71,943 $ 86,574
============= ============ ============ ========== ==========
See Note 2 for information regarding changes in presentation for certain
revenues and expenses. See Note 3 for information regarding discontinued
operations. See Note 4 for discussion of the write-down of long-lived assets and
investments.
1 Includes tax-deferred property purchases that are considered non-cash
transactions in the Consolidated Statements of Cash Flows; excludes capital
expenditures for real estate developments held for sale.
15. QUARTERLY INFORMATION (Unaudited)
Segment results by quarter for 2002 are listed below (in thousands,
except per-share amounts):
2002
-----------------------------------------------------------------
Q1 Q2 Q3 Q4
-- -- -- --
Revenue:
Transportation:
Ocean transportation $ 155,269 $ 175,695 $ 181,258 $ 174,705
Intermodal services 40,298 48,636 53,754 52,426
Property development and management:
Leasing 17,828 17,392 18,760 19,107
Sales 37,271 16,636 7,205 31,853
Less amounts reported in discontinued
operations (31,972) (6,979) (3,287) (29,697)
Food products 16,602 27,555 35,091 33,479
----------- ----------- ----------- -----------
Total revenue $ 235,296 $ 278,935 $ 292,781 $ 281,873
=========== =========== =========== ===========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 2,372 $ 13,921 $ 16,894 $ 9,243
Intermodal services 135 897 1,413 623
Property development and management:
Leasing 8,242 7,616 8,647 8,400
Sales 8,878 2,974 2,346 5,220
Less amounts reported in discontinued
operations (7,953) (1,981) (2,522) (6,109)
Food products 2,095 1,033 4,849 5,864
----------- ----------- ----------- -----------
Total operating profit 13,769 24,460 31,627 23,241
Interest Expense (2,957) (3,060) (2,945) (2,718)
General Corporate Expenses (2,948) (3,256) (3,351) (3,630)
----------- ----------- ----------- -----------
Income From Continuing Operations
before Income Taxes 7,864 18,144 25,331 16,893
Income taxes (3,051) (6,191) (9,089) (3,403)
----------- ----------- ----------- -----------
Income From Continuing Operations 4,813 11,953 16,242 13,490
Discontinued Operations 1 4,994 1,244 1,583 3,837
----------- ----------- ----------- -----------
Net Income $ 9,807 $ 13,197 $ 17,825 $ 17,327
=========== =========== =========== ===========
Earnings Per Share:
Basic $ 0.24 $ 0.32 $ 0.43 $ 0.43
Diluted $ 0.24 $ 0.32 $ 0.43 $ 0.42
1 See Note 3 for discussion of discontinued operations.
Segment results by quarter for 2001 are listed below (in thousands,
except per-share amounts):
2001
------------------------------------------------------------------
Q1 Q2 Q3 Q4
-- -- -- --
Revenue:
Transportation:
Ocean transportation $ 168,585 $ 174,205 $ 179,161 $ 160,321
Intermodal services 30,224 30,650 30,177 30,909
Property development and management:
Leasing 17,096 17,490 18,103 17,996
Sales 43,084 29,155 5,063 11,854
Less amounts reported in discontinued
operations (2,493) (2,490) (2,450) (2,480)
Food products 20,284 28,398 31,874 25,420
Other 857 16,188 803 111,168
----------- ---------- ----------- -----------
Total revenue $ 277,637 $ 293,596 $ 262,731 $ 355,188
=========== ========== =========== ===========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 17,248 $ 18,223 $ 23,653 $ 1,580
Intermodal services 207 490 592 271
Property development and management:
Leasing 8,740 8,679 8,704 8,016
Sales 12,216 3,551 (405) 2,564
Less amounts reported in discontinued
operations (1,309) (1,400) (1,362) (1,375)
Food products1 5,802 1,509 2,235 (3,886)
Other 840 16,107 767 109,921
----------- ---------- ----------- -----------
Total operating profit 43,744 47,159 34,184 117,091
Write-down of Investments1 -- -- -- (28,600)
Interest Expense (5,779) (4,870) (4,330) (3,679)
General Corporate Expenses (3,791) (3,191) (2,878) (3,301)
----------- ---------- ----------- -----------
Income From Continuing Operations
before Income Taxes 34,174 39,098 26,976 81,511
Income taxes (12,119) (14,978) (9,971) (28,309)
----------- ---------- ----------- -----------
Income From Continuing Operations 22,055 24,120 17,005 53,202
Discontinued Operations2:
Real Estate 825 882 858 866
Agriculture (446) (488) (551) (7,700)
----------- ---------- ----------- -----------
Net Income $ 22,434 $ 24,514 $ 17,312 $ 46,368
=========== ========== =========== ===========
Earnings Per Share:
Basic $ 0.55 $ 0.61 $ 0.42 $ 1.15
Diluted $ 0.55 $ 0.60 $ 0.42 $ 1.15
1 See Note 4 for discussion of the write-down of the Company's investment in
C&H and certain power equipment.
2 See Note 3 for discussion of discontinued operations.
Fourth quarter 2001 results include the sale of the Company's BancWest
stock holdings (see Note 5; amount included in the "Other" segment), the
impairment loss related to the Company's investment in C&H (see Note 4) and a
write-off of power generation assets (see Note 4). In addition, during the
fourth quarter, the Company ceased the operations of and abandoned its
panelboard business, and restated previously reported quarters (see Notes 2 and
3).
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Set forth below are the unconsolidated condensed financial statements
of Alexander & Baldwin, Inc. ("Parent Company"). The significant accounting
policies used in preparing these financial statements are substantially the same
as those used in the preparation of the consolidated financial statements as
described in Note 1, except that, for purposes of the tables presented in this
footnote, subsidiaries are carried under the equity method.
The following table presents the Parent Company's condensed Balance
Sheets as of December 31, 2002 and 2001 (in thousands):
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 10 $ 15,509
Accounts and notes receivable, net 14,397 11,971
Prepaid expenses and other 12,216 13,157
--------- ---------
Total current assets 26,623 40,637
--------- ---------
Investments:
Subsidiaries consolidated, at equity 547,196 545,819
Other 1,073 1,630
--------- ---------
Total investments 548,269 547,449
--------- ---------
Property, at Cost 364,799 367,332
Less accumulated depreciation and amortization 166,225 167,445
--------- ---------
Property -- net 198,574 199,887
--------- ---------
Due from Subsidiaries 157,943 162,118
--------- ---------
Other Assets 39,879 31,592
--------- ---------
Total $ 971,288 $ 981,683
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 9,643 $ 7,500
Accounts payable 5,819 4,157
Income taxes payable 10,641 55,034
Other 14,468 15,572
--------- ---------
Total current liabilities 40,571 82,263
--------- ---------
Long-term Debt 118,357 107,500
--------- ---------
Other Long-term Liabilities 27,800 16,184
--------- ---------
Deferred Income Taxes 60,912 65,069
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Capital stock 33,846 33,328
Additional capital 84,756 66,659
Accumulated other comprehensive loss (26,815) --
Retained earnings 643,645 622,615
Cost of treasury stock (11,784) (11,935)
--------- ---------
Total shareholders' equity 723,648 710,667
--------- ---------
Total $ 971,288 $ 981,683
========= =========
The following table presents the Parent Company's condensed Statements
of Income for the years ended December 31, 2002, 2001 and 2000 (in thousands):
2002 2001 2000
---- ---- ----
Revenue:
Food products $ 90,543 $ 84,428 $ 77,190
Property leasing 19,050 13,572 11,118
Property sales 4,468 15,569 19,732
Interest, dividends and other 15,092 131,672 5,055
-------------- -------------- --------------
Total revenue 129,153 245,241 113,095
-------------- -------------- --------------
Costs and Expenses:
Cost of agricultural goods and services 81,243 78,491 77,302
Cost of property sales and leasing services 10,675 14,868 6,311
Selling, general and administrative 13,300 13,160 11,609
Interest and other 12,439 20,852 20,220
Income taxes 1,037 41,919 (1,790)
-------------- -------------- --------------
Total costs and expenses 118,694 169,290 113,652
-------------- -------------- --------------
Income (Loss) from Continuing Operations 10,459 75,951 (557)
Discontinued Operations, net of income taxes 1,877 601 879
-------------- -------------- --------------
Income Before Equity in Income
of Subsidiaries Consolidated 12,336 76,552 322
Equity in Income from Continuing Operations of
Subsidiaries Consolidated 36,039 40,431 87,655
Equity in Income (Loss) from Discontinued
Operations of Subsidiaries Consolidated 9,781 (6,355) 2,597
-------------- -------------- --------------
Net Income 58,156 110,628 90,574
Other Comprehensive Income (Loss), net of income taxes (26,815) (61,937) 12,476
-------------- -------------- --------------
Comprehensive Income $ 31,341 $ 48,691 $ 103,050
============== ============== ==============
The following table presents the Parent Company's condensed Statements
of Cash Flows for the years ended December 31, 2002, 2001 and 2000 (in
thousands):
2002 2001 2000
---- ---- ----
Cash Flows from Operations $ (35,279) $ 6,180 $ (5,634)
-------------- -------------- --------------
Cash Flows from Investing Activities:
Capital expenditures (10,711) (22,800) (18,107)
Proceeds from disposal of property and investments 1,233 138,222 3,705
Dividends received from subsidiaries 40,000 40,000 50,000
Increase in investments (50) -- --
-------------- -------------- --------------
Net cash provided by investing activities 30,472 155,422 35,598
-------------- -------------- --------------
Cash Flows from Financing Activities:
Increase (decrease) in intercompany payable (2,974) 11,481 (8,507)
Proceeds from (repayments of) long-term debt, net 13,000 (123,500) 60,500
Proceeds from issuance of capital stock 16,171 4,558 2,961
Repurchases of capital stock -- (2,270) (48,260)
Dividends paid (36,889) (36,488) (36,785)
-------------- -------------- --------------
Net cash used in financing activities (10,692) (146,219) (30,091)
-------------- -------------- --------------
Cash and Cash Equivalents:
Net increase (decrease) for the year (15,499) 15,383 (127)
Balance, beginning of year 15,509 126 253
-------------- -------------- --------------
Balance, end of year $ 10 $ 15,509 $ 126
============== ============== ==============
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (9,368) $ (14,386) $ (16,485)
Income taxes paid (51,949) (20,961) (31,807)
Other Non-cash Information:
Depreciation expense (11,464) (12,216) (11,037)
Tax-deferred property sales 27,070 12,415 18,692
Tax-deferred property purchases (27,070) (12,076) (18,459)
General Information: Alexander & Baldwin, Inc. ("Parent Company"),
headquartered in Honolulu, Hawaii, is engaged in the operations that are
described in Note 14, "Industry Segments." Additional information related
to the Parent Company is described in the foregoing notes to the consolidated
financial statements.
Investments: Other investments on the Parent Company Balance Sheet at
December 31, 2002 and 2001, consisted of real estate LLC's (see Note 5).
Long-term Debt: The Parent Company's long-term debt at December 31,
2002 consisted of all the debt that is described in Note 8, with the exceptions
of $99,932,000 of commercial paper notes and $29,500,000 of variable rate loans.
At December 31, 2002, maturities and planned prepayments of long-term debt
during the next five years are $9,643,000 for 2003, $12,500,000 for 2004,
$17,500,000 for 2005, $17,500,000 for 2006, and $17,500,000 for 2007.
Other Long-term Liabilities: Other Long-term Liabilities at December
31, 2002 and 2001 consisted principally of deferred compensation, executive
benefit plans, additional minimum pension liability, and self-insurance
liabilities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors
For information about the directors of A&B, see the section captioned
"Election of Directors" in A&B's proxy statement dated March 10, 2003 ("A&B's
2003 Proxy Statement"), which section is incorporated herein by reference.
B. Executive Officers
The name of each executive officer of A&B (in alphabetical order), age
(in parentheses) as of March 31, 2003, and present and prior positions with A&B
and business experience for the past five years are given below.
Generally, the term of office of executive officers is at the pleasure
of the Board of Directors. For a discussion of compliance with Section 16(a) of
the Securities Exchange Act of 1934 by A&B's directors and executive officers,
see the subsection captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" in A&B's 2003 Proxy Statement, which subsection is incorporated
herein by reference. For a discussion of severance agreements between A&B and
certain of A&B's executive officers, see the subsection captioned "Severance
Agreements" in A&B's 2003 Proxy Statement, which subsection is incorporated
herein by reference.
James S. Andrasick (59)
Executive Vice President of A&B, 4/02-present; Chief Financial Officer
and Treasurer of A&B, 6/00-present; President and Chief Executive Officer of
Matson, 7/02-present; Senior Vice President of A&B, 6/00-4/02; President and
Chief Operating Officer, C. Brewer and Company, Limited, 9/92-3/00.
Meredith J. Ching (46)
Vice President (Government & Community Relations) of A&B,
10/92-present; Vice President (Government & Community Relations) of A&B-Hawaii,
Inc. ("ABHI"), 10/92-12/99; first joined A&B or a subsidiary in 1982.
Matthew J. Cox (41)
Senior Vice President and Chief Financial Officer of Matson,
6/01-present; Controller of Matson, 6/01-1/03; Executive Vice President and
Chief Financial Officer, Distribution Dynamics, Inc., 8/99-6/01; Vice
President, American President Lines, Ltd., 12/86-7/99.
W. Allen Doane (55)
President and Chief Executive Officer of A&B, and Director of A&B and
Matson, 10/98-present; Chairman of Matson, 7/02-present; Vice Chairman of
Matson, 12/98-7/02; Executive Vice President of A&B, 8/98-10/98; Director of
ABHI, 4/97-12/99; Chief Executive Officer of ABHI, 1/97-12/99; President of
ABHI, 4/95-12/99; first joined A&B or a subsidiary in 1991.
John F. Gasher (69)
Vice President (Human Resources) of A&B, 12/99-present; Vice President
(Human Resources Development) of ABHI, 1/97-12/99; first joined A&B or a
subsidiary in 1960.
G. Stephen Holaday (58)
Vice President of A&B, 12/99-present; Senior Vice President of ABHI,
4/89-12/99; Vice President and Controller of A&B, 4/93-1/96; first joined A&B or
a subsidiary in 1983.
John B. Kelley (57)
Vice President (Investor Relations) of A&B, 8/01-present; Vice
President (Corporate Planning & Investor Relations) of A&B, 10/99-8/01; Vice
President (Investor Relations) of A&B, 1/95-10/99; Vice President of ABHI,
9/89-12/99; first joined A&B or a subsidiary in 1979.
Stanley M. Kuriyama (49)
Vice President (Properties Group) of A&B, 2/99-present; Chief Executive
Officer and Vice Chairman of A & B Properties, Inc., 12/99-present; Executive
Vice President of ABHI, 2/99-12/99; Vice President of ABHI, 1/92-1/99; first
joined A&B or a subsidiary in 1992.
Michael J. Marks (64)
Vice President and General Counsel of A&B, 9/80-present; Secretary of
A&B, 8/84-1/99; Senior Vice President and General Counsel of ABHI, 4/89-12/99;
first joined A&B or a subsidiary in 1975.
C. Bradley Mulholland (61)
Executive Vice President of A&B, 8/98-present; Vice Chairman of Matson,
7/02-present; President of Matson, 5/90-7/02; Chief Executive Officer of Matson,
4/92-7/02; Director of A&B, 4/91-present; Director of Matson, 7/89-present;
Director of ABHI, 4/91-12/99; first joined Matson in 1965.
Alyson J. Nakamura (37)
Secretary of A&B, 2/99-present; Assistant Secretary of A&B, 6/94-1/99;
Secretary of ABHI, 6/94-12/99; first joined A&B or a subsidiary in 1994.
Thomas A. Wellman (44)
Controller of A&B, 1/96-present; Assistant Treasurer, 1/96-12/99,
6/00-present; Treasurer of A&B, 1/00-5/00; Vice President of ABHI, 1/96-12/99;
Controller of ABHI, 11/91-12/99; first joined A&B or a subsidiary in 1989.
ITEM 11. EXECUTIVE COMPENSATION
See the section captioned "Executive Compensation" in A&B's 2003 Proxy
Statement, which section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See the section captioned "Security Ownership of Certain Shareholders"
and the subsection titled "Security Ownership of Directors and Executive
Officers" in A&B's 2003 Proxy Statement, which section and subsection are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the subsection captioned "Certain Relationships and Transactions"
in A&B's 2003 Proxy Statement, which subsection is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
A. Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Exchange
Act) as of a date within 90 days prior to the filing date of this annual report
(the "Evaluation Date"). Based on such evaluation, such officers have concluded
that, as of the Evaluation Date, the Company's disclosure controls and
procedures are effective in alerting them on a timely basis to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's reports filed or submitted under the
Exchange Act.
B. Changes in Internal Controls
Since the Evaluation Date, there have not been any significant changes
in the Company's internal controls or in other factors that could significantly
affect such controls.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Financial Statements
The financial statements are set forth in Item 8 of Part II above.
B. Financial Statement Schedules
The financial schedules for Alexander & Baldwin, Inc. (Parent Company)
are set forth in Note 16 ("Parent Company Condensed Financial Information") to
A&B's financial statements in Item 8 of Part II above. All other schedules are
omitted because of the absence of the conditions under which they are required
or because the information called for is included in the financial statements or
notes thereto.
C. Exhibits Required by Item 601 of Regulation S-K
Exhibits not filed herewith are incorporated by reference to the
exhibit number and previous filing shown in parentheses. All previous exhibits
were filed with the Securities and Exchange Commission in Washington, D.C.
Exhibits filed pursuant to the Securities Exchange Act of 1934 were filed under
file number 0-565. Shareholders may obtain copies of exhibits for a copying and
handling charge of $0.15 per page by writing to Alyson J. Nakamura, Secretary,
Alexander & Baldwin, Inc., P. O. Box 3440, Honolulu, Hawaii 96801.
3. Articles of incorporation and bylaws.
3.a. Restated Articles of Association of Alexander & Baldwin, Inc., as
restated effective May 5, 1986, together with Amendments dated April
28, 1988 and April 26, 1990 (Exhibits 3.a.(iii) and (iv) to A&B's Form
10-Q for the quarter ended March 31, 1990).
3.b. Revised Bylaws of Alexander & Baldwin, Inc. (as Amended Effective
February 22, 2001) (Exhibit 3.b.(i) to A&B's Form 10-K for the year
ended December 31, 2000).
4. Instruments defining rights of security holders, including indentures.
4.a. Equity.
4.a. Rights Agreement, dated as of June 25, 1998 between Alexander
& Baldwin, Inc. and ChaseMellon Shareholder Services, L.L.C. and Press
Release of Alexander & Baldwin, Inc. (Exhibits 4 and 99 to A&B's Form
8-K dated June 25, 1998).
4.b. Debt.
4.b. Third Amended and Restated Revolving Credit and Term Loan
Agreement, dated November 19, 2001, among Alexander & Baldwin,
Inc. and First Hawaiian Bank, Bank of America, N.A., Bank of
Hawaii, The Bank of New York, Wells Fargo Bank, National
Association, American Savings Bank, F.S.B., and First Hawaiian Bank,
as Agent (Exhibit 4.b. to A&B's Form 10-K for the year ended December
31, 2001).
10. Material contracts.
10.a. (i) Issuing and Paying Agent Agreement between Matson Navigation
Company, Inc. and U.S. Bank National Association, as
successor-in-interest to Security Pacific National Trust (New York),
with respect to Matson Navigation Company, Inc.'s $150 million
commercial paper program dated September 18, 1992 (Exhibit
10.b.1.(xxviii) to A&B's Form 10-Q for the quarter ended September 30,
1992).
(ii) Note Agreement among Alexander & Baldwin, Inc., A&B-Hawaii, Inc.
and The Prudential Insurance Company of America, effective as of
December 20, 1990 (Exhibit 10.b.(ix) to A&B's Form 10-K for the year
ended December 31, 1990).
(iii) Note Agreement among Alexander & Baldwin, Inc., A&B-Hawaii, Inc.
and The Prudential Insurance Company of America, dated as of June 4,
1993 (Exhibit 10.a.(xiii) to A&B's Form 8-K dated June 4, 1993).
(iv) Amendment dated as of May 20, 1994 to the Note Agreements among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of December 20, 1990 and June 4,
1993 (Exhibit 10.a.(xviv) to A&B's Form 10-Q for the quarter ended June
30, 1994).
(v) Amendment dated January 23, 1995 to the Note Agreement among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of December 20, 1990 (Exhibit
10.a.(xvi) to A&B's Form 10-K for the year ended December 31, 1994).
(vi) Amendment dated as of June 30, 1995 to the Note Agreements, among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of December 20, 1990 and June 4,
1993 (Exhibit 10.a.(xxvii) to A&B's Form 10-Q for the quarter ended
June 30, 1995).
(vii) Amendment dated as of November 29, 1995 to the Note Agreements
among Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of December 20, 1990 and June 4,
1993 (Exhibit 10.a.(xvii) to A&B's Form 10-K for the year ended
December 31, 1995).
(viii) Revolving Credit Agreement between Alexander & Baldwin, Inc.,
A&B-Hawaii, Inc., and First Hawaiian Bank, dated December 30, 1993
(Exhibit 10.a.(xx) to A&B's Form 10-Q for the quarter ended September
30, 1994).
(ix) Amendment dated August 31, 1994 to the Revolving Credit Agreement
between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and First Hawaiian
Bank dated December 30, 1993 (Exhibit 10.a.(xxi) to A&B's Form 10-Q for
the quarter ended September 30, 1994).
(x) Second Amendment dated March 29, 1995 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xxiii) to
A&B's Form 10-Q for the quarter ended March 31, 1995).
(xi) Third Amendment dated November 30, 1995 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xvii) to
A&B's Form 10-K for the year ended December 31, 1996).
(xii) Fourth Amendment dated November 25, 1996 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xviii) to
A&B's Form 10-K for the year ended December 31, 1996).
(xiii) Fifth Amendment dated November 28, 1997 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xix) to
A&B's Form 10-K for the year ended December 31, 1997).
(xiv) Sixth Amendment dated November 30, 1998 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xiv) to
A&B's Form 10-K for the year ended December 31, 1998).
(xv) Seventh Amendment dated November 23, 1999 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xv) to
A&B's Form 10-K for the year ended December 31, 1999).
(xvi) Eighth Amendment dated May 3, 2000 to the Revolving Credit
Agreement ("Agreement") between Alexander & Baldwin, Inc. and First
Hawaiian Bank, dated December 30, 1993 (A&B-Hawaii, Inc., an original
party to the Agreement, was merged into Alexander & Baldwin, Inc.
effective December 31, 1999) (Exhibit 10.a.(xxvii) to A&B's Form 10-Q
for the quarter ended June 30, 2000).
(xvii) Ninth Amendment dated November 16, 2000 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc. and First Hawaiian Bank,
dated December 30, 1993 (Exhibit 10.a.(xvii) to A&B's Form 10-K for the
year ended December 31, 2000).
(xviii) Tenth Amendment dated November 30, 2001 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc. and First Hawaiian Bank,
dated December 30, 1993 (Exhibit 10.a.(xviii) to A&B's Form 10-K for
the year ended December 31, 2001).
(xix) Eleventh Amendment dated November 21, 2002 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993.
(xx) Private Shelf Agreement between Alexander & Baldwin, Inc.,
A&B-Hawaii, Inc., and Prudential Insurance Company of America, dated as
of August 2, 1996 (Exhibit 10.a.(xxxiii) to A&B's Form 10-Q for the
quarter ended September 30, 1996).
(xxi) First Amendment, dated as of February 5, 1999, to the Private
Shelf Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and Prudential Insurance Company of America, dated as of August 2, 1996
(Exhibit 10.a.(xxii) to A&B's Form 10-K for the year ended December 31,
1998).
(xxii) Private Shelf Agreement between Alexander & Baldwin, Inc. and
Prudential Insurance Company of America, dated as of April 25, 2001
(Exhibit 10.a.(xlvii) to A&B's Form 10-Q for the quarter ended June 30,
2001).
(xxiii) Amendment, dated as of April 25, 2001, to the Note Agreement
among Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993, and the Private
Shelf Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and Prudential Insurance Company of America, dated as of August 2, 1996
(Exhibit 10.a.(xlviii) to A&B's Form 10-Q for the quarter ended June
30, 2001).
(xxiv) Private Shelf Agreement between Matson Navigation Company, Inc.
and Prudential Insurance Company of America, dated as of June 29, 2001
(Exhibit 10.a.(xlix) to A&B's Form 10-Q for the quarter ended June 30,
2001).
(xxv) Amended and Restated Asset Purchase Agreement, dated as of
December 24, 1998, by and among California and Hawaiian Sugar Company,
Inc., A&B-Hawaii, Inc., McBryde Sugar Company, Limited and Sugar
Acquisition Corporation (without exhibits or schedules) (Exhibit
10.a.1.(xxxvi) to A&B's Form 8-K dated December 24, 1998).
(xxvi) Amended and Restated Stock Sale Agreement, dated as of December
24, 1998, by and between California and Hawaiian Sugar Company, Inc.
and Citicorp Venture Capital, Ltd. (without exhibits) (Exhibit
10.a.1.(xxxvii) to A&B's Form 8-K dated December 24, 1998).
(xxvii) Pro forma financial information relative to the Amended and
Restated Asset Purchase Agreement, dated as of December 24, 1998, by
and among California and Hawaiian Sugar Company, Inc., A&B-Hawaii,
Inc., McBryde Sugar Company, Limited and Sugar Acquisition Corporation,
and the Amended and Restated Stock Sale Agreement, dated as of December
24, 1998, by and between California and Hawaiian Sugar Company, Inc.
and Citicorp Venture Capital, Ltd. (Exhibit 10.a.1.(xxxviii) to A&B's
Form 8-K dated December 24, 1998).
(xxviii) Vessel Construction Contract between Matson Navigation
Company, Inc. and Kvaerner Philadelphia Shipyard Inc., dated May 29,
2002 (Exhibit 10.a.(xxvii) to A&B's Form 10-Q for the quarter ended
June 30, 2002).
(xxix) Vessel Purchase and Sale Agreement between Matson Navigation
Company, Inc. and Kvaerner Shipholding, Inc., dated May 29, 2002
(Exhibit 10.a.(xxviii) to A&B's Form 10-Q for the quarter ended June
30, 2002).
(xxx) Waiver of Cancellation Provisions Vessel Construction Contracts
among Matson Navigation Company, Inc., Kvaerner Philadelphia Shipyard
Inc. and Kvaerner Shipholding Inc., dated December 30, 2002.
*10.b.1. (i) Alexander & Baldwin, Inc. 1989 Stock Option/Stock Incentive
Plan (Exhibit 10.c.1.(ix) to A&B's Form 10-K for the year ended
December 31, 1988).
(ii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xxvi) to A&B's Form 10-Q
for the quarter ended June 30, 1992).
(iii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(iv) to A&B's Form 10-Q for
the quarter ended March 31, 1994).
(iv) Amendment No. 3 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(ix) to A&B's Form 10-K for
the year ended December 31, 1994).
(v) Amendment No. 4 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(v) to A&B's Form 10-K for
the year ended December 31, 2000).
(vi) Alexander & Baldwin, Inc. 1989 Non-Employee Director Stock Option
Plan (Exhibit 10.c.1.(x) to A&B's Form 10-K for the year ended December
31, 1988).
(vii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1989
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xxiv) to A&B's
Form 10-K for the year ended December 31, 1991).
(viii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1989
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xxvii) to
A&B's Form 10-Q for the quarter ended June 30, 1992).
(ix) Amendment No. 3 to the Alexander & Baldwin, Inc. 1989 Non-Employee
Director Stock Option Plan (Exhibit 10.b.1.(ix) to A&B's Form 10-K for
the year ended December 31, 2000).
(x) Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan
(Exhibit 10.b.1.(xxxii) to A&B's Form 10-Q for the quarter ended March
31, 1998).
(xi) Amendment No. 1 to the Alexander & Baldwin, Inc. 1998 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xi) to A&B's Form 10-K for
the year ended December 31, 2000). (xii) Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xxxiii) to
A&B's Form 10-Q for the quarter ended March 31, 1998).
(xiii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xiii) to A&B's
Form 10-K for the year ended December 31, 2000).
(xiv) Alexander & Baldwin, Inc. Non-Employee Director Stock Retainer
Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxiv) to A&B's Form 10-Q
for the quarter ended June 30, 1998).
(xv) Amendment No. 1 to Alexander & Baldwin, Inc. Non-Employee Director
Stock Retainer Plan, effective December 9, 1999 (Exhibit 10.b.1.(xi) to
A&B's Form 10-K for the year ended December 31, 1999).
(xvi) Second Amended and Restated Employment Agreement between
Alexander & Baldwin, Inc. and R. J. Pfeiffer, effective as of October
25, 1990 (Exhibit 10.c.1.(xiii) to A&B's Form 10-K for the year ended
December 31, 1990).
(xvii) A&B Deferred Compensation Plan for Outside Directors (Exhibit
10.c.1.(xviii) to A&B's Form 10-K for the year ended December 31,
1985).
(xviii) Amendment No. 1 to A&B Deferred Compensation Plan for Outside
Directors, effective October 27, 1988 (Exhibit 10.c.1.(xxix) to A&B's
Form 10-Q for the quarter ended September 30, 1988).
(xix) A&B Life Insurance Plan for Outside Directors (Exhibit
10.c.1.(xix) to A&B's Form 10-K for the year ended December 31, 1985).
(xx) A&B Excess Benefits Plan, Amended and Restated effective February
1, 1995 (Exhibit 10.b.1.(xx) to A&B's Form 10-K for the year ended
December 31, 1994).
(xxi) Amendment No. 1 to the A&B Excess Benefits Plan, dated June 26,
1997 (Exhibit 10.b.1.(xxxi) to A&B's Form 10-Q for the quarter ended
June 30, 1997).
(xxii) Amendment No. 2 to the A&B Excess Benefits Plan, dated December
10, 1997 (Exhibit 10.b.1.(xx) to A&B's Form 10-K for the year ended
December 31, 1997).
(xxiii) Amendment No. 3 to the A&B Excess Benefits Plan, dated April
23, 1998 (Exhibit 10.b.1.(xxxv) to A&B's Form 10-Q for the quarter
ended June 30, 1998).
(xxiv) Amendment No. 4 to the A&B Excess Benefits plan, dated June 25,
1998 (Exhibit 10.b.1.(xxxvi) to A&B's Form 10-Q for the quarter ended
June 30, 1998).
(xxv) Amendment No. 5 to the A&B Excess Benefits Plan, dated December
9, 1998 (Exhibit 10.b.1.(xxii) to A&B's Form 10-K for the year ended
December 31, 1998).
(xxvi) Amendment No. 6 to the A&B Excess Benefits Plan, dated October
25, 2000 (Exhibit 10.b.1.(xxviii) to A&B's Form 10-K for the year ended
December 31, 2000).
(xxvii) Restatement of the A&B Executive Survivor/Retirement Benefit
Plan, effective February 1, 1995 (Exhibit 10.b.1.(xxii) to A&B's Form
10-K for the year ended December 31, 1994).
(xxviii) Amendment No. 1 to the A&B Executive Survivor/Retirement
Benefit Plan, dated October 25, 2000 (Exhibit 10.b.1.(xxx) to A&B's
Form 10-K for the year ended December 31, 2000).
(xxix) Restatement of the A&B 1985 Supplemental Executive Retirement
Plan, effective February 1, 1995 (Exhibit 10.b.1.(xxiv) to A&B's Form
10-K for the year ended December 31, 1994).
(xxx) Amendment No. 1 to the A&B 1985 Supplemental Executive Retirement
Plan, dated August 27, 1998 (Exhibit 10.b.1.(xliii) to A&B's Form 10-Q
for the quarter ended September 30, 1998).
(xxxi) Amendment No. 2 to the A&B 1985 Supplemental Executive
Retirement Plan, dated October 25, 2000 (Exhibit 10.b.1.(xxxiii) to
A&B's Form 10-K for the year ended December 31, 2000).
(xxxii) Restatement of the A&B Retirement Plan for Outside Directors,
effective February 1, 1995 (Exhibit 10.b.1.(xxvi) to A&B's Form 10-K
for the year ended December 31, 1994).
(xxxiii) Amendment No. 1 to the A&B Retirement Plan for Outside
Directors, dated August 27, 1998 (Exhibit 10.b.1.(xlii) to A&B's Form
10-Q for the quarter ended September 30, 1998).
(xxxiv) Amendment No. 2 to the A&B Retirement Plan for Outside
Directors, dated October 25, 2000 (Exhibit 10.b.1.(xxxvi) to A&B's Form
10-K for the year ended December 31, 2000).
(xxxv) Form of Severance Agreement entered into with certain executive
officers, as amended and restated effective August 24, 2000 (Exhibit
10.b.1.(xli) to A&B's Form 10-Q for the quarter ended September 30,
2000).
(xxxvi) Alexander & Baldwin, Inc. One-Year Performance Improvement
Incentive Plan, as restated effective October 22, 1992 (Exhibit
10.b.1.(xxi) to A&B's Form 10-K for the year ended December 31, 1992).
(xxxvii) Amendment No. 1 to the Alexander & Baldwin, Inc. One-Year
Performance Improvement Incentive Plan, dated December 13, 2001
(Exhibit 10.b.1.(xxxvii) to A&B's Form 10-K for the year ended December
31, 2001).
(xxxviii) Alexander & Baldwin, Inc. Three-Year Performance Improvement
Incentive Plan, as restated effective October 22, 1992 (Exhibit
10.b.1.(xxii) to A&B's Form 10-K for the year ended December 31, 1992).
(xxxix) Alexander & Baldwin, Inc. Deferred Compensation Plan effective
August 25, 1994 (Exhibit 10.b.1.(xxv) to A&B's Form 10-Q for the
quarter ended September 30, 1994).
(xl) Amendment No. 1 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, effective July 1, 1997 (Exhibit 10.b.1.(xxxii) to
A&B's Form 10-Q for the quarter ended June 30, 1997).
(xli) Amendment No. 2 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxvii) to
A&B's Form 10-Q for the quarter ended June 30, 1998).
(xlii) Amendment No. 3 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, dated October 25, 2000 (Exhibit 10.b.1.(xliii) to
A&B's Form 10-K for the year ended December 31, 2000).
(xliii) Alexander & Baldwin, Inc. Restricted Stock Bonus Plan, as
restated effective April 28, 1988 (Exhibit 10.c.1.(xi) to A&B's Form
10-Q for the quarter ended June 30, 1988).
(xliv) Amendment No. 1 to the Alexander & Baldwin, Inc. Restricted
Stock Bonus Plan, effective December 11, 1997 (Exhibit 10.b.1.(ii) to
A&B's Form 10-K for the year ended December 31, 1997).
(xlv) Amendment No. 2 to the Alexander & Baldwin, Inc. Restricted Stock
Bonus Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxviii) to A&B's Form
10-Q for the quarter ended June 30, 1998). (xlvi) Amendment No. 2 to
the Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan
(Exhibit 10.b.1.(xlvi) to A&B's Form 10-Q for the quarter ended March
31, 2002).
11. Statement re computation of per share earnings.
21. Subsidiaries.
21. Alexander & Baldwin, Inc. Subsidiaries as of February 13, 2003.
23. Consent of Deloitte & Touche LLP dated March 10, 2003 (included
as the last page of A&B's Form 10-K for the year ended
December 31, 2002).
99. Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
D. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
(Registrant)
Date: March 10, 2003 By /s/ W. Allen Doane
----------------------------------------
W. Allen Doane, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ W. Allen Doane President and Chief March 10, 2003
- -------------------------------------------- Executive Officer and
W. Allen Doane Director
/s/ James S. Andrasick Executive Vice President, March 10, 2003
- -------------------------------------------- Chief Financial Officer
James S. Andrasick and Treasurer
/s/ Thomas A. Wellman Controller and March 10, 2003
- -------------------------------------------- Assistant Treasurer
Thomas A. Wellman
/s/ Charles M. Stockholm Chairman of the Board March 10, 2003
- -------------------------------------------- and Director
Charles M. Stockholm
/s/ Michael J. Chun Director March 10, 2003
- --------------------------------------------
Michael J. Chun
/s/ Leo E. Denlea, Jr. Director March 10, 2003
- --------------------------------------------
Leo E. Denlea, Jr.
/s/ Walter A. Dods, Jr. Director March 10, 2003
- --------------------------------------------
Walter A. Dods, Jr.
/s/ Charles G. King Director March 10, 2003
- --------------------------------------------
Charles G. King
/s/ Carson R. McKissick Director March 10, 2003
- --------------------------------------------
Carson R. McKissick
/s/ C. Bradley Mulholland Director March 10, 2003
- --------------------------------------------
C. Bradley Mulholland
/s/ Lynn M. Sedway Director March 10, 2003
- --------------------------------------------
Lynn M. Sedway
/s/ Maryanna G. Shaw Director March 10, 2003
- --------------------------------------------
Maryanna G. Shaw
CERTIFICATION
I, W. Allen Doane, certify that:
1. I have reviewed this annual report on Form 10-K of Alexander &
Baldwin, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
By /s/ W. Allen Doane
------------------------------------------
W. Allen Doane, President and
Chief Executive Officer
CERTIFICATION
I, James S. Andrasick, certify that:
1. I have reviewed this annual report on Form 10-K of Alexander &
Baldwin, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
By /s/ James S. Andrasick
----------------------------------------
James S. Andrasick, Executive Vice President,
Chief Financial Officer and Treasurer
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
33-31922, 33-31923, 33-54825, and 333-69197 of Alexander & Baldwin, Inc. and
subsidiaries on Form S-8 of our report dated January 22, 2003 (which report
expresses an unqualified opinion and includes an explanatory paragraph
concerning the adoption of new accounting standards in 2001 and 2000), appearing
in this Annual Report on Form 10-K of Alexander & Baldwin, Inc. and subsidiaries
for the year ended December 31, 2002.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Honolulu, Hawaii
March 10, 2003
- --------
*All exhibits listed under 10.b.1. are management contracts or compensatory
plans or arrangements.