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, 1998
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 12, 1999:
43,521,456
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES AT FEBRUARY 12,
1999:
$752,466,785
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. [x]
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S PROXY STATEMENT DATED MARCH 8, 1999 (PART III OF FORM
10-K).
PORTIONS OF REGISTRANT'S ANNUAL REPORT TO SHAREHOLDERS FOR THE YEAR ENDED
DECEMBER 31, 1998 (PARTS I, II AND IV OF FORM 10-K).
<PAGE>
TABLE OF CONTENTS
PART I
Page
Items 1. & 2. Business and Properties .............................. 1
A. Ocean Transportation ....................................... 2
(1) Freight Services ..................................... 2
(2) Vessels .............................................. 3
(3) Terminals ............................................ 5
(4) Other Services ....................................... 5
(5) Competition .......................................... 6
(6) Labor Relations ...................................... 7
(7) Rate Regulation ...................................... 8
B. Property Development and Management ........................ 8
(1) General .............................................. 8
(2) Planning and Zoning .................................. 9
(3) Residential Projects ................................. 10
(4) Commercial and Industrial Properties ................. 13
C. Food Products .............................................. 17
(1) Production ........................................... 17
(2) Sugar Refining; Marketing of Sugar
and Coffee ........................................... 18
(3) Competition and Sugar Legislation .................... 19
(4) Properties and Water ................................. 21
D. Employees and Labor Relations .............................. 23
E. Energy ..................................................... 25
Item 3. Legal Proceedings .......................................... 26
Item 4. Submission of Matters to a Vote of
Security Holders ........................................... 26
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ................................ 27
Item 6. Selected Financial Data .................................... 27
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of
Operations ................................................. 27
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk .......................................... 28
Item 8. Financial Statements and Supplementary Data ................ 29
Item 9. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure ................................................. 29
PART III
Item 10. Directors and Executive Officers of
the Registrant ............................................. 29
A. Directors .................................................. 29
B. Executive Officers of the Registrant ....................... 29
Item 11. Executive Compensation ..................................... 31
Item 12. Security Ownership of Certain Beneficial
Owners and Management ...................................... 31
Item 13. Certain Relationships and Related
Transactions ................................................31
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K .................................... 32
A. Financial Statements ....................................... 32
B. Financial Statement Schedules .............................. 32
C. Exhibits Required by Item 601 of
Regulation S-K ............................................. 32
D. Reports on Form 8-K ........................................ 40
Signatures .......................................................... 41
Independent Auditors' Report ........................................ 43
Schedule I .......................................................... 44
Independent Auditors' Consent ....................................... 48
<PAGE>
ALEXANDER & BALDWIN, INC.
-------------------------
FORM 10-K
----------
ANNUAL REPORT FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998
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, all of which are headquartered in
San Francisco. Real property and food products operations are conducted by a
wholly-owned subsidiary of A&B, A&B-Hawaii, Inc. ("ABHI"), and several ABHI
subsidiaries, all of which are headquartered in Hawaii or California.
The industry segments of A&B are as follows:
A. Ocean Transportation - carrying freight, primarily between various
--------------------
United States Pacific Coast ports, major Hawaii ports and Guam;
providing terminal, stevedoring, tugboat and container equipment
maintenance services in certain of those ports; chartering vessels to
third parties; arranging United States Mainland intermodal
transportation; and providing supply and distribution services.
B. Property Development and Management - developing real property in
-----------------------------------
Hawaii and on the U.S. Mainland; selling residential properties in
Hawaii and on the U.S. Mainland; and managing, leasing, selling and
purchasing commercial/industrial properties in Hawaii and on the U.S.
Mainland.
C. Food Products - growing sugar cane and coffee in Hawaii; producing
-------------
raw sugar, molasses and green coffee (and, until December 1998,
refining raw sugar and marketing and distributing refined sugar
products, primarily in the western United States); 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, 1998,
see "Industry Segment Information" on page 19 of the Alexander & Baldwin, Inc.
1998 Annual Report to Shareholders ("1998 Annual Report"), which information is
incorporated herein by reference.
DESCRIPTION OF BUSINESS AND PROPERTIES
A. OCEAN TRANSPORTATION
--------------------
(1) FREIGHT SERVICES
----------------
Matson's Hawaii Service offers containership freight services
between the ports of Los Angeles, Oakland, Seattle, and the major ports in
Hawaii, which are located on the islands of Oahu, Kauai, Maui and Hawaii.
Roll-on/roll-off service is provided between Los Angeles and the major ports in
Hawaii. Container cargo also is received at and delivered to Portland, Oregon,
and moved overland between Portland and Seattle at no extra charge.
Matson is the principal carrier of ocean cargo between the
United States Pacific Coast and Hawaii. In 1998, Matson carried 143,431
containers (compared with 149,734 in 1997) and 73,717 motor vehicles (compared
with 78,641 in 1997) between those destinations. Principal westbound cargoes
carried by Matson to Hawaii include dry containers of mixed commodities,
refrigerated cargoes, packaged foods, building materials and motor vehicles.
Principal eastbound cargoes carried by Matson from Hawaii include household
goods, canned pineapple, refrigerated containers of fresh pineapple, motor
vehicles and molasses. 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 service
between the United States Pacific Coast and Guam and Micronesia. Matson's Guam
Service is a component of the Pacific Alliance Service, a strategic alliance
established in 1996 by Matson and American President Lines, Ltd. ("APL") to
provide freight service between the United States Pacific Coast and Hawaii,
Guam, and several Far East ports. In 1998, Matson carried 18,418 containers
(compared with 19,122 in 1997) and 3,132 automobiles (compared with 3,595 in
1997) in the Guam Service. Modifications to the strategic alliance were
implemented in January 1998 to provide better service and reduce operating
costs. The restructured alliance now utilizes six vessels (three Matson
vessels and three APL vessels) in a schedule which provides service from the
United States Pacific Coast to Guam and Micronesia, continuing through Far East
ports, and returning to California.
Matson's Pacific Coast Service provides containership freight
service between Los Angeles, Oakland, Seattle and Vancouver, Canada. In 1998,
Matson carried 34,669 containers (compared with 39,390 in 1997) in the Pacific
Coast Service. The Pacific Coast Service benefited in 1998 from a relationship
with Canadian National Railway, commenced in August 1997, which enables Matson
to provide the railway and its customers with reliable, fixed-day service that
reduces overall transit time between western Canada and southern California.
Matson's Mid-Pacific Service offers container and conven-
tional freight service between the United States 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 with respect to Matson's freight
rates.
(2) VESSELS
-------
Matson's cargo fleet consists of eleven containerships, four
combination container/trailerships, one roll-on/roll-off barge, two container
barges equipped with cranes which serve the neighbor islands of Hawaii and one
container barge equipped with cranes in the Mid-Pacific Service. These
nineteen vessels represent an investment of approximately $850,300,000 expended
over the past 29 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.
In the second half of 1998, Matson agreed to bareboat charter
two container/trailerships in reserve status to Sea Star Line, LLC, a newly-
created entity which operates the vessels in the Florida-Puerto Rico trade.
The vessels were refitted to respond to the market requirements in that trade.
Matson's fleet units are described in the list on the
following page.
As a complement to its fleet, Matson owns approximately
16,500 containers, 9,000 container chassis, 590 auto-frames and miscellaneous
other equipment. Capital expenditures by Matson in 1998 for vessels, equipment
and systems totaled approximately $51,100,000.
<PAGE>
<TABLE>
<CAPTION>
MATSON NAVIGATION COMPANY, INC.
-------------------------------
FLEET - 3/1/99
--------------
Usable Cargo Capacity
-----------------------------------------------------------
Containers Vehicles Molasses
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 Short Tons
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- 2,600
MAUI 591709 1978 1993 720'5-1/2" 22.5 26,623 -- 458 538 300 1,626 -- -- 2,600
EL YUNQUE (3) 573223 1976 1990 790'9" 21.5 14,551 48 -- 420 120 960 323 112 --
EL MORRO (3) 557149 1974 1990 790'9" 21.5 14,976 48 -- 420 120 960 323 110 --
MATSONIA 553090 1973 1987 760'0" 21.5 22,501 -- 683 400 329 1,620 450 56 4,300
LURLINE 549900 1973 1982 826'6" 21.5 22,213 6 162 713 292 1,379 220 81 2,100
EWA (4) 530140 1972 1978 787'8" 21.0 38,656 294 -- 861 180 2,015 -- -- --
CHIEF GADAO 530138 1971 1978 787'8" 21.0 37,346 230 464 597 274 1,981 -- -- --
LIHUE (4) 530137 1971 1978 787'8" 21.0 38,656 286 276 681 188 1,979 -- -- --
MANULANI 528400 1970 720'5-1/2" 22.5 27,165 -- 537 416 251 1,476 -- -- 5,300
MANUKAI (4) 524219 1970 720'5-1/2" 22.5 27,107 -- 537 416 251 1,476 -- -- 5,300
Tugs and 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 -- -- 2,100
HALEAKALA (6) 676972 1984 350'0" -- 4,658 -- 144 72 84 316 -- -- 2,100
MAOI (7) 618705 1980 75'0" 10.0 --
JOE SEVIER (7) 500799 1965 80'0" 10.0 --
- ------------------------------------------------------
(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 to February 2006.
(3) Formerly Kaimoku and Kainalu. Bareboat-chartered to Sea Star Line, LLC until 2005 and 2006, respectively. Cargo-carrying
reconfigurations begun in 1998 will include the installation in each ship of tanks having the capacity to carry 252,000
gallons of liquid cargo.
(4) Reserve Status
(5) Roll-on/Roll-off Barge
(6) Container Barge
(7) Tug
</TABLE>
<PAGE>
(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
the ports of Honolulu, Los Angeles, Oakland and Seattle.
Matson Terminals is among the largest container stevedoring
and terminal operators on the United States Pacific Coast. A total of 852
vessel calls were served at all Matson Terminals container facilities in 1998.
The four terminals operated by Matson Terminals are as follows:
<TABLE>
<CAPTION>
Terminal Expiration of 1998 Usable
Terminal Size Terminal Throughput Container Crane Ship
Location (acres) Lease (# containers) Cranes (#) Ownership Berths (#)
-------- -------- ------------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Honolulu, HI 108 Sept 2016 351,119 7 Matson 3
Terminals
Los Angeles, CA 95 Jan 2002 205,844 4 Matson 3
Terminals
Oakland, CA 74 Dec 2008 109,727 3 Matson 3
Terminals
Seattle, WA 35 Dec 1999 90,835 3 Port of 2
Seattle
</TABLE>
Matson Terminals has lease agreements with the port
authorities for the use of the publicly-owned container terminal properties at
these locations and does not anticipate any difficulty in renewing such
agreements as they expire or in finding satisfactory alternative premises.
Besides owning or leasing the shoreside cranes identified in the above table,
Matson Terminals owns or leases supporting container-handling equipment at its
container facilities and owns all of the maintenance equipment used in
providing container equipment and terminal maintenance services.
Capital expenditures for terminals and equipment totaled
approximately $8,300,000 in 1998.
(4) OTHER SERVICES
--------------
Matson Intermodal System, Inc. ("Matson Intermodal"), a
wholly-owned subsidiary of Matson, is an intermodal marketing company which
arranges North American rail and truck transportation for shippers and
carriers, frequently in conjunction with ocean 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
currently has 11 offices and manages 30 equipment depots across the United
States Mainland.
Matson Services Company, Inc. ("Matson Services"), a
wholly-owned subsidiary of Matson, owns two tugboats, which are employed in
Hawaiian waters under operating agreements to provide harbor assistance to
vessels calling at the islands of Hawaii and Maui.
Matson Logistics Solutions, Inc. ("Matson Logistics"), a
wholly-owned subsidiary of Matson, was formed in 1998 to provide supply and
distribution services to Matson customers, including management of
transportation purchases, inventory and on-time deliveries.
(5) COMPETITION
-----------
Matson's Hawaii and Guam Services have one major container-
ship competitor which serves Long Beach, Oakland, Tacoma, Honolulu and Guam.
In an administrative proceeding in 1997, the purpose of which was to determine
the historic service levels to which that competitor would be limited as a
condition to its participation in the Maritime Security Program, the U.S.
Maritime Administration limited the annual capacity which the competitor may
offer in the Hawaii trade. The current limit on annual capacity is 162,378
TEUs (see footnote (1) on page 4 for an explanation of "TEU").
Other competitors in the Hawaii Service include two common
carrier barge services, unregulated proprietary and contract carriers of bulk
cargoes and air cargo services. 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. In
the summer of 1998, a temporary barge service offered competing service for
the summer movement of military household goods to and from Hawaii.
Competitors in the Pacific Coast Service include truck, rail and ocean carrier
services.
Matson vessels are operated on schedules which make available
to shippers and consignees regular day-of-the-week sailings from the United
States Pacific Coast and day-of-the-week arrivals in Hawaii. This service is
attractive to customers because it decreases their overall distribution costs.
In order to match better the fleet capacity with existing cargo volume in the
Hawaii Service, without a reduction in service quality, in September 1998
Matson reduced the number of vessel arrivals in Honolulu from four per week to
three. This reduction still left Matson with 156 Hawaii round-trip voyages per
year, 50 percent more than its closest competitor. In addition, Matson
competes by offering more comprehensive service to customers, supported by its
scope of equipment and its efficiency and experience in the handling of
containerized cargoes, and by competitive pricing.
The carriage of cargo between the United States 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 container freight service
between the United States Pacific Coast and Hawaii. Far East countries,
Australia and New Zealand have direct foreign-flag services to Hawaii.
In response to coordinated efforts by various interests over
the past several years 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
American 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 Terminals competes with numerous other companies which
perform the same or similar services. The container stevedoring and terminal
services business is extremely competitive. The primary considerations of
ocean carriers, when selecting stevedore and terminal operators, are rates,
quality of service, expertise and reputation. The industry is highly capital-
intensive because of the need for expensive container-handling equipment.
Matson Intermodal competes for freight with a number of large
and small companies engaged in intermodal transportation. Matson Services
competes with several larger operators of tugboats in Hawaiian waters. 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. Matson's operations have not been disrupted significantly by strikes
in the past 27 years. However, in 1996 and 1997, labor disruptions at some
United States Pacific Coast ports by longshore bargaining units of the
International Longshore and Warehouse Union, attributed to dissatisfaction with
collective bargaining agreements negotiated in 1996, adversely affected ocean
carriers, including Matson, calling at those ports. See "Employees and Labor
Relations" below for a description of labor agreements 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 ("Board"), an agency within the U.S. Department of
Transportation, with respect to its domestic rates. The Interstate Commerce
Commission Termination Act of 1995 ("Act") establishes a "Zone of
Reasonableness," as defined in the Act, within which rate adjustments are
deemed reasonable. Rate adjustments outside of the Zone of Reasonableness are
subject to investigation and/or suspension by the Board. In December 1998,
Matson filed a 2.5 percent across-the-board increase in its Hawaii Service,
effective February 14, 1999.
B. PROPERTY DEVELOPMENT AND MANAGEMENT
(1) GENERAL
-------
The property development and management operations of A&B are
conducted by ABHI, a wholly-owned subsidiary headquartered in Honolulu. A&B
and its subsidiaries own approximately 93,000 acres of land, consisting of
approximately 91,000 acres in Hawaii and approximately 2,000 acres elsewhere,
as follows:
LOCATION NO. OF ACRES
-------- ------------
Oahu ................................... 40
Maui ................................... 69,040
Kauai .................................. 21,910
California ............................. 1,957
Texas .................................. 64
Washington ............................. 24
Arizona ................................ 11
Nevada ................................. 21
Colorado ............................... 10
Florida ................................ 3
------
TOTAL ................................ 93,080
======
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
leased to ranchers, watershed and conservation reserves. The balance is used
or planned for development or other urban uses. An additional 3,200 acres on
Maui and Kauai are leased from third parties.
CURRENT USE NO. OF ACRES
----------- ------------
HAWAII
Fully-entitled urban (defined below) ............... 1,190
Agricultural, pasture and
miscellaneous .................................... 60,800
Watershed land/conservation ........................ 29,000
U.S. MAINLAND
California ranch land............................... 1,900
Fully-entitled urban ............................... 190
------
TOTAL .......................................... 93,080
======
ABHI is 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, the granting of
a Special Management Area permit by the County.
The entitlement process is complicated by the conditions, restrictions and
exactions that are placed on these approvals, such as 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.
ABHI 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. ABHI 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 1998 work to obtain
entitlements for urban use focused on (i) the Kukui'Ula residential development
on Kauai, (ii) the proposed master-planned community at Pilot Hill Ranch in
California, (iii) obtaining Community Plan designations for various ABHI lands
on Maui, and (iv) obtaining State "Urban" designation for two proposed single-
family subdivisions on Maui.
With regard to item (iii) in the preceding paragraph, ABHI
continues to participate actively in Maui County's decennial update of its
Community Plans, a process that began in 1992. The Community Plans serve to
guide planning and development activity over the next decade. ABHI has
obtained and continues to seek various urban designations for its undeveloped
lands within the following four Community Plans, where most of its Maui lands
are located: Pa'ia-Haiku Community Plan, Kihei-Makena Community Plan, Wailuku-
Kahului Community Plan, and Makawao-Pukalani-Kula ("Upcountry") Community Plan.
In March 1998, the Maui County Council adopted the Kihei-Makena Community Plan.
The Plan reflected the approval of "Project District" designation for 650 acres
in Maalaea as a master-planned residential community, consisting of up to 1,800
homes, a golf course and commercial uses. The County Council previously had
adopted the Pa'ia-Haiku and Upcountry Community Plans in 1995 and 1996,
respectively. Adoption of the Wailuku-Kahului Community Plan by the County
Council is expected in 1999.
(3) RESIDENTIAL PROJECTS
--------------------
ABHI is pursuing a number of residential projects in Hawaii
and on the U.S. Mainland, in particular:
(a) KUKUI'ULA. The 1,045-acre Kukui'Ula project was
---------
originally conceived to be a planned residential community on the island of
Kauai, comprising up to 3,000 dwelling units, an 18-hole golf course, hotels,
commercial areas, schools and parks. Construction of the wastewater treatment
plant, mass grading and drainage and certain roadway improvements were
completed in 1993. Since 1993, construction of major infrastructure to serve
the Kukui'Ula project has been suspended because of weak economic conditions on
Kauai.
Beginning in late 1997, and continuing throughout 1998, a
complete reevaluation of the Kukui'Ula project was undertaken. That work has
led to a revised strategy for the project and to subsequent write-downs of
costs previously incurred. The revised strategy recognizes that, as a result
of Hurricane Iniki and generally weak economic conditions on Kauai, the resi-
dential housing market will not provide the level of sales absorption needed
to support the planned residential community concept.
The revised strategy is to proceed with the development of
the residential component of the project on a reduced scale, through a series
of individual residential subdivisions designed in accordance with a master
development plan. This approach will allow infrastructure requirements to be
built on an incremental basis, rather than as a single large project, which
would be the case with a planned residential community.
The initial increment of this program, a 32-lot residential
subdivision known as "Koloa Estates," received tentative subdivision approval
from the County of Kauai in December 1997. Construction plans were prepared
and approved, and construction began in August 1998. Construction is
anticipated to be complete in mid-1999. A public offering statement has been
submitted to the State, and is expected to be approved in March 1999.
Marketing of the lots will commence upon approval of the public offering
statement.
The second aspect of the revised strategy is to expedite the
resort component of the project. A concept plan for the resort area at
Kukui'Ula was completed in early 1998. Based on that plan, a petition was
filed with the State Land Use Commission to add 77 acres of land, comprising
most of the planned resort, to the State "Urban" district. That petition was
approved in June 1998. As a result of that action, 837 acres at Kukui'Ula are
classified "Urban" and are available for development, while 208 acres are
conditionally designated "Urban," subject to a showing that substantial
progress has been made on providing infrastructure to the initial increment.
In October 1998, three petitions were submitted to the Kauai
County Planning Department to (i) amend the County General Plan, (ii) amend the
County Zoning Ordinance, and (iii) amend the County Visitor Destination Area
Ordinance to complete the basic entitlements needed to proceed with the resort
component of the project. Hearings on these petitions began in early 1999 and
final action is anticipated in mid-1999.
In 1998, in recognition of the reduced market support for the
project, previously-incurred and capitalized development costs of $20,216,000
were written off. These costs were primarily related to the wastewater
treatment plant, and recognized that the costs of that plant would not be
recoverable through the future cash flows of the plant. For additional
information, see Note 4 to A&B's financial statements on page 33 of the 1998
Annual Report, which Note is incorporated herein by reference.
(b) KU'AU BAYVIEW AT PA'IA. Since the completion and
----------------------
opening of the model homes in April 1996, 87 homes in this 92-lot single-family
subdivision on Maui (92% of the total) have been sold (19 homes in 1998). As
of March 15, 1999, three contracts were in escrow. The remaining two homes are
being marketed actively through brokers. It is anticipated that the project
will be sold out by the end of the second quarter of 1999.
(c) KAHULUI IKENA. Since the completion of the 102-unit
-------------
Maui condominium project in June 1995, a total of 82 units have been sold to
date (13 units in 1998). As of March 15, 1999, an additional 8 units were in
escrow. The remaining 12 units are being marketed through various brokers.
(d) OTHER MAUI SUBDIVISIONS. Four agricultural
-----------------------
subdivisions, which consist of a minimum lot size of two acres per lot, were in
various stages of design, development and sale in 1998. At the nine-lot
Kauhikoa Hill Ranch subdivision (located in Haiku), six lots were sold in 1998,
leaving two lots available for purchase. Site work construction for the 28-lot
Haiku Makai subdivision (also located in Haiku) was substantially completed in
April 1998. By year-end, 25 lots had been sold at an average sales price of
approximately $200,000 per lot, and sales contracts for the remaining three
lots were in escrow. The construction plans for the 37-lot Maunaolu sub-
division (located in Haliimaile) continue to be processed by the County.
Approval of the plans has been delayed due to inadequate availability of
water, and final approval will require a potable water source to be secured
for the project. The last of the four lots in the 10-acre Ku'au Beach Estates
subdivision (located in Pa'ia) was sold last year.
In addition, ABHI is seeking entitlements
for two single-family subdivisions on Maui: (i) an approximately 200-unit
subdivision on 45 acres in Haliimaile, and (ii) an approximately 400-unit
subdivision on 110 acres in Spreckelsville, which includes the possible
development of nine holes of golf in order to expand the nearby nine-hole Maui
Country Club golf course into an 18-hole course. In October 1998, State
"Urban" designation was obtained for the Haliimaile project. In December 1998,
an application was filed with the County for the re-zoning of the property, the
final entitlement required for the project's development. A Petition also was
filed in 1998 seeking State "Urban" designation for the Spreckelsville project.
The hearing on the Petition was substantially completed in October 1998, and
final action is expected in 1999.
(e) PILOT HILL RANCH. Pilot Hill Ranch, located in El
----------------
Dorado County, near Sacramento, California, is an 1,800-acre parcel designated
in the 1996 El Dorado County General Plan as a planned residential community.
In 1997 and 1998, completion of the entitlement process for the property was
pursued through the submission to the County of a Specific Plan and an
Environmental Impact Report. In December 1998, the County Board of Supervisors
considered the Specific Plan application, but was not able to reach a decision.
Action on the application was continued to sometime in 1999. In light of this,
several alternatives are being considered, including the sale of the project.
(4) COMMERCIAL AND INDUSTRIAL PROPERTIES
------------------------------------
An important source of property revenue is the lease rental
income A&B and its subsidiaries receive from nearly 3.6 million leasable square
feet of industrial and commercial building space, ground leases on 286 acres
for commercial/industrial use, and leases on 11,600 acres for agricultural/
pasture use.
(a) HAWAII COMMERCIAL/INDUSTRIAL PROPERTIES
---------------------------------------
In Hawaii, most of the nearly 839,000 square feet of income-
producing commercial and industrial properties owned by A&B and its subsi-
diaries are located in the central Kahului/Wailuku area of Maui. They consist
primarily of two shopping centers and four office buildings, as well as several
improved commercial and industrial properties.
The primary Hawaii commercial/industrial properties are as
follows:
LEASABLE AREA
PROPERTY LOCATION TYPE (SQUARE FT.)
-------- -------- ---- -------------
Maui Mall Kahului, Maui Retail 180,600
Kahului Shopping Kahului, Maui Retail 108,500
Center
One Main Plaza Wailuku, Maui Office 85,300
Wakea Business Kahului, Maui Warehouse/Retail 61,500
Center
Kahului Office Kahului, Maui Office 51,700
Building
Kahului Office Kahului, Maui Office 29,800
Center
Apex Building Kahului, Maui Retail 28,000
Stangenwald Building Honolulu, Oahu Office 28,200
In addition to the above-described properties, a number of
other commercial and industrial projects are being developed on Maui, Oahu and
Kauai, including:
(i) TRIANGLE SQUARE. Development and marketing
---------------
efforts are continuing for this 10.6-acre, light industrial zoned, commercial
subdivision in Kahului, Maui. Three lots have been leased, and the 28,000-
square-foot Apex Building is 95% occupied by retail users. A County Special
Management Area permit was secured in late 1998 to build Tri-Square One
Building, a proposed 15,000-square-foot, multi-tenant retail center on two of
the six remaining lots available for ground leases and retail development.
(ii) MAUI BUSINESS PARK. In 1998, the sale of the
------------------
final fee interest in the Maui Marketplace site was completed. Located in the
42-acre initial phase (Phase IA) of the Maui Business Park, Maui Marketplace is
a 300,000-square-foot retail center, owned by a third party, which occupies
20.3 acres of Phase IA's 37.4 salable acres. Maui Marketplace includes such
anchor tenants as Eagle Hardware and Garden, Office Max, Sports Authority and
Border's Books and Music. In addition, 13 Maui Business Park lots have been
sold to various commercial and retail businesses. There are 19 lots remaining
for sale or lease in Phase IA.
Steps taken by the State of Hawaii to extend the runway
at the nearby Kahului Airport have generated increased interest in the next
phase of Maui Business Park, Phase IB. As a result, the planning and design of
the onsite improvements for the 34-acre site have been accelerated to meet the
anticipated market demand.
The entire Maui Business Park development consists of a
planned total of 239 acres, and is planned to be developed in four phases. The
overall absorption of the property is expected to take 20 years.
(iii) MILL TOWN. Located in Waipahu, Oahu, near
---------
Honolulu, this 40-acre parcel of light industrial zoned land was acquired in
November 1998 for $8 million. All major entitlements had been secured for
development of the property, and 80% of the improvements had been completed for
the development of the first 17 acres. This two-phase project consists of 23
subdivided lots ready for sale in the first phase, a three-acre park expansion
area, and an additional 20 acres remaining for future subdivision in the second
phase. Construction commenced in November to complete the roadway improvements
for the sale of the lots within the first phase. Sales activities commenced in
December 1998.
Overall occupancy for the Hawaii improved commercial and
industrial properties owned by A&B and its subsidiaries averaged 68% in 1998,
compared with 78% in 1997. The lower occupancy level reflects the addition of
new properties having large amounts of untenanted space, the retenanting of a
major retail unit, and the continuing weak Hawaii economy. In particular, on
Maui, the addition of the large amounts of new retail space which slowed
absorption and depressed average rents in 1998 is expected to continue to
challenge this market in 1999. A&B is continuing its program to upgrade its
Hawaii properties, as demonstrated by the completion in 1998 of major reno-
vation to the interior of the Kahului Office Building and the planned
repositioning of the Maui Mall in order to complement the addition of a twelve-
screen movie theater to the property.
(b) U.S. MAINLAND COMMERCIAL/INDUSTRIAL PROPERTIES
----------------------------------------------
On the U.S. Mainland, A&B and its subsidiaries own a port-
folio of commercial and industrial properties, acquired primarily by way of
tax-deferred exchanges under Section 1031 of the Internal Revenue Code, as
amended ("IRC"), comprising a total of approximately 2.72 million square feet
of leasable area, as follows:
LEASABLE AREA
PROPERTY LOCATION TYPE (SQUARE FT.)
-------- -------- ---- -------------
Great Southwest Dallas, TX Industrial 842,900
Industrial
Valley Freeway Kent, WA Industrial 229,100
Corporate Park
Airport Square Reno, NV Retail 170,800
San Pedro Plaza San Antonio, TX Office 167,500
2868 Prospect Park Sacramento, CA Office 162,400
Arbor Park San Antonio, TX Retail 140,000
Moulton Plaza Laguna Hills, CA Retail 134,000
San Jose Avenue City of Industrial 126,000
Warehouse Industry, CA
Southbank II Phoenix, AZ Office 120,800
Bainbridge Bainbridge Retail 114,600
Properties Island, WA
4225 Roosevelt Seattle, WA Office 108,300
Building
Village at Indian Indian Wells, CA Retail 104,600
Wells
2450 Venture Oaks Sacramento, CA Office 98,800
Northwest Business San Antonio, TX Service Center/ 87,000
Center Warehouse
Wilshire Center Greeley, CO Retail 46,700
Market Square Greeley, CO Retail 43,300
Professional Gainesville, FL Office 24,200
Center
Office Plaza
TOTAL: 2,721,000
A&B took advantage of the strong real estate market in
California's Silicon Valley area by selling Ridgeview Court, a 246,000-square-
foot office/research facility located in Cupertino, CA, in June 1998 for
$51.5 million. Proceeds from this sale, together with proceeds from the sale
of other Mainland and Hawaii land parcels, were invested in six Mainland
properties by way of IRC 1031 and 1033 exchanges. Three of these properties
were acquired in San Antonio, TX: San Pedro Plaza, Northwest Business Center,
and Arbor Park. The other three acquisitions consisted of two office buildings
in Sacramento, CA (2868 Prospect Park and 2450 Venture Oaks), and an office
building in Phoenix, AZ (Southbank II), marking A&B's entry into these markets.
These office buildings are well positioned to realize the benefits of the
above-average population and business growth that is expected to occur in these
metropolitan areas over the next several years.
A&B's Seattle area properties continued to benefit from the
strength of the Pacific Northwest's economy. The 4225 Roosevelt Building and
the Valley Freeway Corporate Park warehouse complex maintained 100% occupancy,
while demand for retail space on Bainbridge Island, a suburb of Seattle,
enabled A&B to construct an 8,400-square-foot retail building next to its
existing Island Village shopping center. A&B has listed the 4225 Roosevelt
Building for sale, after securing a five-year lease extension for a major
tenant occupying 20% of the property.
In Texas, A&B sold Woodlands IV and V in October 1998, two
service center/warehouse properties that were part of its Great Southwest
Industrial portfolio. Proceeds from this sale were reinvested in accordance
with IRC Section 1031. The remaining properties in the Great Southwest
Industrial portfolio continued to perform well, despite increased competition
from new construction. As described above, A&B entered the San Antonio, TX
market in 1998 with the purchase of three properties. These properties all
maintained occupancy in excess of 90%, reflecting this market's strong demand.
In Reno, NV, A&B entered into an agreement with Costco
Wholesale Corporation, an anchor store at Airport Square, which enabled Costco
Wholesale Corporation to expand its store and thereby enhance this retail
shopping center's presence in the Reno market. Despite a large increase in
retail space in Reno, Airport Square's excellent location and strong anchor
stores enabled achievement of a 99% occupancy rate.
The U.S. Mainland leased property portfolio had an average
overall occupancy rate of 91%, as compared with 98% for the prior year, due to
the vacancy of two large warehouse spaces in City of Industry, CA and Dallas,
TX. The City of Industry property is now fully leased.
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. A&B's food products opera-
tions are conducted by ABHI. ABHI operates a sugar plantation on the island of
Maui, through its Hawaiian Commercial & Sugar Company ("HC&S") division, and a
coffee farm on the island of Kauai, through its Kauai Coffee Company, Inc.
("Kauai Coffee") subsidiary.
HC&S is Hawaii's largest producer of raw sugar, producing
216,188 tons of raw sugar in 1998, or 61% of the raw sugar produced in Hawaii,
compared with 198,037 tons of raw sugar in 1997. Total Hawaii sugar pro-
duction, in turn, amounted to approximately five percent of total United States
sugar production. HC&S harvested 17,210 acres of sugar cane in 1998, compared
with 17,005 acres in 1997. Yields averaged 12.7 tons of sugar per acre in
1998, compared with 11.6 tons per acre in 1997, due to changes in farming and
factory practices. The average cost per ton of sugar produced at HC&S,
including the cost of power production, was $373.89 in 1998, compared with
$446.92 in 1997. The decrease in cost per ton is attributable to the nine
percent increase in sugar production and to aggressive cost reduction efforts,
including personnel reductions, that had been initiated in January 1998. As a
by-product of sugar production, HC&S also produced 80,915 tons of molasses in
1998, compared with 77,960 tons in 1997.
During 1998, Kauai Coffee had approximately 3,800 acres of
coffee trees under cultivation. The harvest of the 1998 coffee crop is
expected to yield approximately 4.0 million pounds of green coffee, compared
with 4.7 million pounds in 1997. The reduction is attributable to fewer acres
harvested, due to pruning and to the natural cyclicality of coffee yields.
HC&S and McBryde Sugar Company, Limited ("McBryde"), 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 (sugarcane fiber), 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. In 1998, HC&S sold
72,589 megawatt hours ("MWH") of electric power, and McBryde sold 21,975 MWH.
Revenue from the sale of electricity depends on the amount of power produced
and sold, as well as the average price of fuel. (See "Energy" below.)
Kahului Trucking & Storage, Inc., a subsidiary of ABHI,
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 ABHI,
provides similar services on Kauai, as well as general trucking services.
(2) SUGAR REFINING; MARKETING OF SUGAR AND COFFEE
---------------------------------------------
Virtually all of the raw sugar produced in Hawaii is pur-
chased, refined and marketed by California and Hawaiian Sugar Company, Inc.
("C&H"). C&H processes the raw cane sugar into a full line of refined sugar
products for the grocery market, and a full range of industrial refined sugar
products for industrial bakers, confectioners and food processors. C&H is the
leading sugar brand in the western United States. Marketing of C&H's refined
products is conducted by C&H's sales staff and a network of brokers under
exclusive representation agreements. The refined products are marketed
primarily in the western and central United States.
C&H's profit margins declined in 1998 as a result of lower
selling prices driven by the large 1997/1998 beet sugar crop. The larger crop
created an intense period of price competition among beet processors in late
1997, which affected the performance of C&H in 1998. Consumer sugar sales are
seasonal in nature and, as a result, C&H's financial results are expected to be
better in the third and fourth quarters of each fiscal year, compared with the
first two quarters.
C&H has a ten-year supply contract, ending in 2003, with
Hawaiian Sugar & Transportation Cooperative ("HS&TC"), a cooperative consisting
of the three major sugarcane growers in Hawaii (including HC&S), pursuant to
which the growers sell their raw sugar to C&H at a price equal to the No. 14
Contract settlement price, less a discount and less costs of sugar vessel
discharge and stevedoring. This price becomes a cost to C&H and, 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. The No. 14 price is established by, among other things, the
supply of and demand for all forms of domestically-produced sweeteners,
government policies regarding the U.S. sugar import quota, and potential
changes in international trade programs which might affect the U.S. sugar
program. There are no minimum supply guarantees on the part of HS&TC.
During 1998, the supply contract with HS&TC provided approximately 50% of the
raw sugar used by C&H.
On December 24, 1998, A&B completed the recapitalization and
partial sale of approximately 60 percent of the equity interest in C&H to an
investor group that included Citicorp Venture Capital, Ltd. The transaction
will permit A&B to focus better on its core businesses. Beginning in 1999, the
results of A&B's remaining equity investment in C&H will be reported in A&B's
financial statements as an investment in an affiliate.
At Kauai Coffee, coffee marketing efforts currently are being
directed toward developing a market for premium-priced, estate-grown Kauai
green coffee. Most of the 1998 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 a roasted, packaged coffee
product in Hawaii under the "Kauai Coffee" trademark.
(3) COMPETITION AND SUGAR LEGISLATION
---------------------------------
Hawaii sugar growers produce more sugar per acre than other
major producing areas of the world, but that advantage is partially offset by
Hawaii's high labor costs and the distance to the U.S. Mainland market. C&H's
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 which produces more sugar than it consumes. Sugar from
sugar beets is the greatest source of competition for C&H.
The overall U.S. sweetener market continues to grow. In
1998, domestic consumption of caloric sweeteners comprised the following:
Refined sugar . . . . . . . 43%
High fructose corn syrup. . 40%
Other corn sweeteners . . . 16%
Other . . . . . . . . . . . 1%
----
TOTAL 100%
====
The use of non-caloric (artificial) sweeteners accounts for a relatively small
percentage of the domestic sweetener market. Although the use of high fructose
corn syrup and artificial sweeteners is expected to continue to grow, such in-
creased use is not expected to affect sugar markets significantly in the near
future.
Worldwide, most sugar is consumed in the country of origin.
Only about a quarter of world sugar is involved in international trade. A much
smaller amount is traded at the world sugar market price (the other sugar
involved in international trade is traded at negotiated prices under bilateral
trade agreements). Due to protective legislation, raw cane sugar prices in the
U.S. generally are substantially higher than the world price, and the amount of
foreign sugar allowed into the U.S. under import quotas is regulated by the
U.S. government. Such foreign sugar sells at U.S. domestic prices. As a
result, the world sugar price does not have material relevance to U.S. sugar
producers and refiners.
The U.S. Congress historically has sought, through legisla-
tion, to assure a reliable domestic supply of sugar at stable and reasonable
prices. Congress's most recent renewal of protective legislation for domestic
sugar, the Federal Agriculture Improvement and Reform Act (the "1996 Act"),
provides a sugar loan program for the 1996 through 2002 crops, with a loan rate
(support price) of 18 cents per pound for raw sugar. When the import quota is
1.5 million tons or less, the loans are recourse, meaning the producer is
liable for any losses the government incurs in remarketing any sugar forfeited
by the producer. When the import quota is greater than 1.5 million tons, the
loans are non-recourse, but in the event of forfeiture the producer must pay a
one-cent-per-pound penalty for the sugar forfeited to the government. The 1996
Act also eliminated marketing allotments, thereby removing the means of
limiting domestic production. The 1.25-million-ton minimum import quota set
under the General Agreement on Tariff and Trade ("GATT") is retained in the
1996 Act.
The loan rate represents the value of sugar given as
collateral for government price-support loans. The government is required to
administer the sugar program at no net cost, and this is accomplished by
adjusting fees and quotas for imported sugar to maintain the domestic price
at a level that discourages producers from defaulting on loans. The target
price established by the government is known as the market stabilization price
and is based on the loan rate plus transportation costs, interest and an
incentive factor. The market stabilization price was 21.8 cents per pound in
1988-89 and 21.9 cents per pound in 1990-91. No market stabilization price
has been announced since 1990-91. The actual U.S. domestic raw sugar price
(measured by the closing price of the quoted spot contract) averaged 22.07
cents per pound in 1998, compared with 21.94 cents per pound in 1997. A
chronological chart of the average U.S. domestic raw sugar prices, based on
the average daily New York Contract #14 price for domestic raw sugar, is shown
below:
[The printed document includes a graph of the prices; the data points for this
graph are shown below.]
U.S. Raw Sugar Prices
(New York Contract #14)
(Average cents per pound)
1996 1997 1998
---- ---- ----
January 22.39 21.88 22.11
February 22.58 21.87 21.79
March 22.57 21.81 21.74
April 22.59 21.73 22.20
May 22.59 21.70 22.28
June 22.49 21.63 22.30
July 21.80 22.04 22.32
August 22.35 22.26 22.30
September 22.38 22.30 22.25
October 22.36 22.25 22.15
November 22.12 21.90 22.03
December 22.10 21.89 21.97
Liberalized international trade agreements, such as the GATT,
include provisions relating to agriculture, but these agreements will not
affect the U.S. sugar or sweetener industries materially. A "side" agreement
that modified the North American Free Trade Agreement ("NAFTA") alleviated some
of the cane refiners' and sugar producers' concerns over NAFTA provisions which
could have allowed Mexico to export large quantities of sugar to the U.S.
starting in three years. Under the side agreement, if Mexico is projected to
be a net surplus producer of sugar, i.e., its production of sugar is expected
to exceed its consumption of both sugar and high fructose corn syrup, then it
is limited to 25,000 tons of sugar exports, in any form, to the U.S. This
export ceiling increases to 250,000 tons of sugar in the year 2000, and is
eliminated in the year 2007.
(4) PROPERTIES AND WATER
--------------------
C&H's refining operations are located at Crockett,
California. The Crockett refinery is one of the largest in the world, and is
the only cane sugar refinery on the U.S. West Coast. It is ideally located
next to a deep-water port, a major rail line and an interstate highway. The
refinery and administrative offices occupy a complex of buildings that contains
approximately 1,310,000 square feet and is located on approximately 55 acres.
C&H leases approximately 42 acres from the California State Lands Commission
under long-term ground leases, and owns the remaining area. The Lease
Agreement with the State of California covering the main refinery and wharf
facilities expires in 2022, and the Lease Agreement covering the area where the
secondary wastewater treatment facility is located expires in 2024.
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. Approximately
36,900 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 3,900 acres are used by Kauai Coffee, and the remaining
acreage is leased to various agriculture enterprises for cultivation of a
variety of crops and for pasturage.
Large quantities of water are necessary to grow sugar cane
and coffee. Because of the importance of water, access to water, reliable
sources of supply and efficient irrigation systems are crucial for the
successful growing of sugar cane and coffee. A&B's plantations use a "drip"
irrigation system that distributes water to the roots through small holes in
plastic tubes. Except for 55 acres expected to be converted to drip irriga-
tion by June 1999, all of the cultivated cane land owned by HC&S, a total of
34,378 acres, currently is drip irrigated. All of Kauai Coffee's fields are
drip irrigated.
ABHI owns 16,000 acres of watershed lands on Maui which
supply a portion of the irrigation water used by HC&S. ABHI 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 been extended as revocable permits that are renewable
annually. The State Board of Land and Natural Resources has indicated its
intention to replace these four permits with long-term licenses. The issuance
of such licenses currently is pending a hearing before the Board.
D. EMPLOYEES AND LABOR RELATIONS
-----------------------------
As of December 31, 1998, A&B and its subsidiaries had approximately
2,331 regular full-time employees (this figure does not include C&H's regular
full-time employees, who numbered 547 as of December 24, 1998, when a majority
of the equity interest in C&H was sold). About 1,009 regular full-time
employees were engaged in the growing of sugar cane and coffee and the
production of raw sugar and green coffee, 1,096 were engaged in ocean trans-
portation, 37 were engaged in property development and management, and the
balance was in administration and miscellaneous operations. Approximately 55%
were covered by collective bargaining agreements with unions.
As of December 31, 1998, Matson and its subsidiaries had approxi-
mately 1,096 regular full-time employees, 289 seagoing employees and 339 casual
employees. Approximately 37% of the regular full-time employees, all of the
seagoing employees and all of the casual employees were covered by collective
bargaining agreements. The casual employees are U.S. Pacific Coast longshore
workers who are employed through hiring halls and are not full-time employees
of either Matson or Matson Terminals.
Bargaining unit employees of Matson and Matson Terminals, other
than seagoing employees, are represented by 10 different unions, and Matson and
Matson Terminals are parties to 95 separate collective bargaining agreements.
Matson's seagoing employees are represented by six unions. Matson and Matson
Terminals are members of the Pacific Maritime Association ("PMA"), and Matson
Terminals also is a member of the Hawaii Stevedoring Industry Committee and the
Hawaii Employers Council, through which organizations various collective
bargaining agreements are negotiated. Matson also is a member of the Maritime
Service Committee ("MSC"), which engages in collective bargaining with three
unions representing licensed deck, engineer, and radio officers for Matson
vessels.
Historically, collective bargaining with the longshore and seagoing
unions has been complex and difficult. However, Matson and Matson Terminals
consider their respective relations with the International Longshore and
Warehouse Union ("ILWU"), other unions, and their non-union employees generally
to be satisfactory.
During 1998, collective bargaining agreements with the American
Radio Association, the United Brotherhood of Carpenters and Joiners of America
in Oakland, and the ILWU Office Clerical union in Los Angeles were renewed for
2-year, 3-year, and 3-year terms, respectively. Collective bargaining
agreements with the ILWU on the U.S. Pacific Coast, ILWU longshore workers in
Hawaii, ILWU clerical bargaining units in Honolulu and Oakland, and the three
unions representing unlicensed crew members are expected to be renewed in 1999
without service interruption.
In January 1997, the Acting Regional Director of the National Labor
Relations Board ("NLRB"), in response to the ILWU's petition requesting that it
be certified as the bargaining agent for employees who plan and supervise the
loading of ships at Seattle, ruled that these Seattle employees are supervisors
who are not subject to the National Labor Relations Act. The union's appeal of
that ruling to the NLRB in Washington, D.C. is pending.
Matson contributed during 1998 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, and, in the event of material disagreement
with such determination, 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 long-
shore employees. For a discussion of withdrawal liabilities under the Hawaii
longshore and seagoing plans, see Note 6 to A&B's financial statements on
pages 34 and 35 of the 1998 Annual Report, which Note is incorporated herein by
reference.
Matson pays, through Matson Terminals on the basis of cargo tons
carried, and Matson Terminals contributes as a direct employer, to a
multi-employer pension plan for Pacific Coast longshore workers. Under special
withdrawal liability rules in the plan, Matson Terminals could cease United
States Pacific Coast cargo handling operations permanently and stop making
contributions to the plan, without any withdrawal liability.
Bargaining unit employees of HC&S are covered by two collective
bargaining agreements with the ILWU. These agreements have been renegotiated
and expire January 31, 2000. The collective bargaining agreements covering the
three ILWU bargaining units at Kahului Trucking & Storage, Inc. have been
renegotiated, with two expiring June 30, 1999 and the third expiring March 31,
2000. The two collective bargaining agreements with Kauai Commercial Company,
Incorporated employees represented by the ILWU were renegotiated in 1998 and
will expire April 30, 2001. The collective bargaining agreement with the ILWU
for the production unit employees of Kauai Coffee has been renegotiated and
will expire on December 31, 1999.
The bargaining unit employees of C&H at Crockett, California are
represented by the Sugar Workers Union and the ILWU. Contracts covering these
employees have been renegotiated and expire May 31, 2003.
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 1998, Matson vessels consumed
approximately 2.0 million barrels of residual fuel oil, compared with
2.8 million barrels in 1997.
Residual fuel oil prices paid by Matson started 1998 at $101.50 per
metric ton and ended the year at $68.88 per metric ton. A high of $101.50 per
metric ton occurred in January, and a low of $55.00 per metric ton occurred in
March. Sufficient fuel for Matson's requirements is expected to be available
in 1999.
As has been the practice with sugar plantations throughout Hawaii,
HC&S uses bagasse, the residual fiber of the sugarcane 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, supple-
mental fuel is required to produce power, principally for pumping irrigation
water during the factory shutdown period when bagasse is not being produced.
No. 6 (heavy) oil and coal are the primary supplemental fuels used by HC&S.
Since 1992, when suppliers of oil to HC&S discontinued regular heavy oil
shipments as a result of unlimited liability concerns arising from federal and
state environmental laws, heavy oil has been provided to HC&S on a space-
available basis. In 1998, HC&S produced 203,755 MWH of electric power and sold
72,589 MWH, compared with 228,279 MWH produced and 85,680 MWH sold in 1997.
The reduction in power production was due to the failure of a turbogenerator in
1998. HC&S's oil use decreased to 155,966 barrels in 1998 from the 215,389
barrels used in 1997. Coal use for power generation also decreased, from
50,946 short tons in 1997 to 43,614 short tons in 1998. The decreased use of
oil and coal was due primarily to an improvement in the quality (in terms of
fuel value) of the bagasse and a decrease in the steam energy requirements for
raw sugar production.
In 1998, McBryde produced 34,400 MWH of hydroelectric power,
compared with 34,676 MWH of hydroelectric power produced in 1997. Power sales
in 1998 amounted to 21,975 MWH, compared with 23,712 MWH sold in 1997.
C&H relies primarily on steam to power its Crockett refinery.
Natural gas and electricity also are used, to a lesser extent, for refinery
operations. C&H obtains its steam from a 240 MW cogeneration plant, located
adjacent to its refinery, that was placed into operation by a third party in
May 1996. Pursuant to an agreement between C&H and the third party that
expires in 2026, C&H purchases the steam at prices that reflect a discount to
the prevailing market price for natural gas, thereby reducing C&H's total
energy costs. In 1998, C&H purchased 24,833,949 therms of steam from the
cogeneration plant, compared with 23,654,519 therms of steam in 1997.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
See "Business and Properties - Ocean Transportation - Rate Regulation"
above for a discussion of rate and other regulatory matters in which Matson is
routinely involved.
In February 1992, Pan Ocean Shipping Co., Ltd. ("Pan Ocean") served on
Matson an amended complaint alleging that a Matson vessel negligently dis-
charged contaminated ballast water into Los Angeles harbor on January 9, 1991.
In that amended complaint, Pan Ocean sought contribution and indemnification
for the in-harbor clean-up charges it had incurred as the result of a fuel oil
discharge into Los Angeles harbor on January 8, 1991 from a vessel which it
owned and operated. In January 1999, the parties settled the matter for an
amount covered by insurance.
On September 14, 1998, Matson was served with a complaint filed with the
Surface Transportation Board, alleging that Sea-Land Services, Inc., American
President Lines, Ltd. and Matson charged unreasonable rates in the Guam trade
from January 1991 to the present. Matson did not enter the trade until
February of 1996. Matson has filed an answer to the complaint denying that its
rates have been unreasonable, and it intends to defend vigorously against the
charges in the complaint.
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 consulta-
tion with counsel, would not have a material adverse effect on A&B's 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 paragraph B of "Directors and Executive Officers
of the Registrant" in Part III below, which is incorporated into Part I by
reference.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
This information is contained in the sections captioned "Common Stock"
and "Dividends" on the inside back cover of the 1998 Annual Report, which
sections are incorporated herein by reference.
At February 12, 1999, there were 5,088 record holders 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.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Information for the years 1988 through 1998 is contained in the
comparative table captioned "Eleven-Year Summary of Selected Financial Data" on
pages 20 and 21 of the 1998 Annual Report, which information is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
A&B's financial statements, including the results of operations discussed
herein, are based on the historical-cost method of accounting, in accordance
with generally accepted accounting principles. If estimated current costs of
property and inventory were applied to reflect the effects of inflation on
A&B's businesses, total assets would be higher and net income lower than shown
by the historical-cost financial statements. Additional information regarding
the fair values of A&B's assets and liabilities is included in Notes 1, 2, and
5 on pages 31 through 34 of the 1998 Annual Report, which Notes are incorpora-
ted herein by reference.
Additional information applicable to this Item 7 is contained in the
section captioned "Management's Discussion and Analysis" on pages 22 through 25
of the 1998 Annual Report, which section is incorporated herein by reference.
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 marketable equity securities
available for sale, a preferred stock investment in an affiliated company, and
an investment in mortgage-backed securities. Details regarding these financial
instruments are described in Notes 2 and 5 on pages 32 through 34 of the 1998
Annual Report, which Notes are incorporated herein by reference. A&B believes
that, as of December 31, 1998, its exposure to market risk fluctuations for
these financial instruments is not material.
A&B also 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. A&B does not hedge its interest rate
exposure. 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. The following table summarizes A&B's debt
obligations at December 31, 1998, presenting principal cash flows and related
interest rates by expected fiscal year of maturity. Variable interest rates
represent the weighted-average rates of the portfolio at December 31, 1998.
A&B estimates that the carrying value of its debt is not materially different
from its fair value. The information presented below should be read in
conjunction with Note 7 on page 37 of the 1998 Annual Report, which Note is
incorporated herein by reference.
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
--------------------------------
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(dollars in thousands)
--------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $30,533 $17,500 $15,000 $7,500 $7,500 $45,000 $123,033
Average interest 7.55% 7.32% 7.26% 7.23% 7.24% 7.27%
rate
Variable rate $57,000 -- -- -- -- $163,266 $220,266
Average interest 5.5% -- -- -- -- 5.5%
rate
</TABLE>
A&B's sugar plantation, HC&S, has a contract to sell its raw sugar
production to HS&TC until 2003. Under that contract, the price paid will
fluctuate with the #14 Contract settlement price for domestic raw sugar, less a
fixed discount rate. A&B is not exposed to foreign currency exchange rate
risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
This information is contained in the financial statements and
accompanying notes on pages 26 through 41 of the 1998 Annual Report, the
Independent Auditors' Report on page 18 of the 1998 Annual Report, the Industry
Segment Information for the years ended December 31, 1998, 1997 and 1996
appearing on page 19 of the 1998 Annual Report and incorporated into the
financial statements by Note 12 thereto, and the section captioned "Quarterly
Results (Unaudited)" on page 42 of the 1998 Annual Report, all of which are
incorporated herein by reference.
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" on pages 2 through 4 of A&B's proxy
statement dated March 8, 1999 ("A&B's 1999 Proxy Statement"), which section is
incorporated herein by reference.
B. EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The name of each executive officer of A&B (in alphabetical order),
age (in parentheses) as of March 31, 1999, 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" on page 8 of A&B's 1999 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" on pages 14 and 15 of A&B's 1999
Proxy Statement, which subsection is incorporated herein by reference.
Meredith J. Ching (42)
- ----------------------
Vice President (Government & Community Relations) of A&B, 10/92-present;
Vice President of ABHI (Government & Community Relations), 10/92-present; first
joined A&B or a subsidiary in 1982.
W. Allen Doane (51)
- -------------------
President and Chief Executive Officer of A&B, and Director of A&B and
Matson, 10/98-present; Vice Chairman of Matson, 12/98-present; Director of
ABHI, 4/97-present; Chief Executive Officer of ABHI, 1/97-present; President of
ABHI, 4/95-present; Chief Operating Officer of ABHI, 4/91-12/96; Executive Vice
President of ABHI, 4/91-4/95; first joined A&B or a subsidiary in 1991.
Raymond J. Donohue (62)
- -----------------------
Senior Vice President of Matson, 4/86-present; Chief Financial Officer of
Matson, 2/81-present; first joined Matson in 1980.
John B. Kelley (53)
- -------------------
Vice President (Investor Relations) of A&B, 1/95-present; Vice President
(Corporate Planning & Development, Investor Relations) of A&B, 10/92-12/94;
Vice President (Community & Investor Relations) of A&B, 2/91-10/92; Vice
President of ABHI, 9/89-present; first joined A&B or a subsidiary in 1979.
Miles B. King (51)
- ------------------
Vice President and Chief Administrative Officer of A&B, 4/93-present;
Senior Vice President (Industrial Relations) of ABHI, 4/93-1/99; Senior Vice
President (Human Resources) of Matson, 10/92-1/99; first joined A&B or a
subsidiary in 1992.
Stanley M. Kuriyama (45)
- ------------------------
Vice President of A&B, 2/99-present; Executive Vice President of ABHI,
2/99-present; Vice President of ABHI, 1/92-1/99; first joined A&B or a
subsidiary in 1992.
Michael J. Marks (60)
- ---------------------
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-
present; first joined A&B or a subsidiary in 1975.
C. Bradley Mulholland (57)
- --------------------------
Executive Vice President of A&B, 8/98-present; President of Matson,
5/90-present; Chief Executive Officer of Matson, 4/92-present; Chief Operating
Officer of Matson, 7/89-4/92; Director of A&B, 4/91-present; Director of
Matson, 7/89-present; Director of ABHI, 4/91-present; first joined Matson in
1965.
Alyson J. Nakamura (33)
- -----------------------
Secretary of A&B, 2/99-present; Assistant Secretary of A&B, 6/94-1/98;
Secretary of ABHI, 6/94-present; Attorney, Cades Schutte Fleming & Wright,
10/91-5/94.
Robert J. Pfeiffer (79)
- -----------------------
Chairman of the Boards of A&B, ABHI and Matson, 7/98-present; President
and Chief Executive Officer of A&B, 7/98-10/98; Chairman Emeritus of the Boards
of A&B, ABHI, and Matson, 4/95-7/98; Chairman of the Boards of A&B (from 1980
until 1995), ABHI (from 1989 until 1995), and Matson (from 1979 until 1995);
previously held other executive positions with A&B and Matson; first joined A&B
or a subsidiary in 1956.
Glenn R. Rogers (55)
- --------------------
Executive Vice President of A&B, 7/97-present; Vice President of A&B,
4/93-7/97; Chief Financial Officer and Treasurer of A&B, 4/93-present; Senior
Vice President, Chief Financial Officer and Treasurer of ABHI, 1/96-present;
first joined A&B or a subsidiary in 1975.
Thomas A. Wellman (40)
- ----------------------
Controller of A&B, 1/96-present; Assistant Controller of A&B, 4/93-1/96;
Vice President of ABHI, 1/96-present; Controller of ABHI, 11/91-present; first
joined A&B or a subsidiary in 1989.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
See the section captioned "Executive Compensation" on pages 8 through 15
of A&B's 1999 Proxy Statement, which section is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
See the section titled "Security Ownership of Certain Shareholders" and
the subsection titled "Security Ownership of Directors and Executive Officers"
on pages 6 through 8 of A&B's 1999 Proxy Statement, which section and sub-
section are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
See the section titled "Compensation Committee Interlocks and Insider
Participation" on pages 17 and 18 of A&B's 1999 Proxy Statement, which section
is incorporated herein by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
A. FINANCIAL STATEMENTS
--------------------
Financial Statements of Alexander & Baldwin, Inc. and Subsidiaries
and Independent Auditors' Report (incorporated by reference to the pages of the
1998 Annual Report shown in parentheses below):
Balance Sheets, December 31, 1998 and 1997
(pages 28 and 29).
Statements of Income for the years ended
December 31, 1998, 1997 and 1996 (page 26).
Statements of Shareholders' Equity for the
years ended December 31, 1998, 1997 and
1996 (page 30).
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 (page 27).
Notes to Financial Statements (pages 31 through
41 and page 19 to the extent incorporated by
Note 12).
Independent Auditors' Report (page 18).
B. FINANCIAL STATEMENT SCHEDULES
-----------------------------
Financial Schedules of Alexander & Baldwin, Inc. and Subsidiaries
as required by Rule 5-04 of Regulation S-X (filed herewith):
I - Condensed Financial Information of
Registrant - Balance Sheets, December 31,
1998 and 1997; Statements of Income and
Cash Flows for the years ended December 31,
1998, 1997 and 1996; Notes to Condensed
Financial Statements.
NOTE: 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 a 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 Effec-
tive June 25, 1998) (Exhibit 3.c.(i) to A&B's Form 10-Q for the quarter
ended June 30, 1998).
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. (i) Second Amended and Restated Revolving Credit and Term Loan
Agreement, effective as of December 31, 1996, among Alexander & Baldwin,
Inc. and A&B-Hawaii, Inc. and First Hawaiian Bank, Bank of America
National Trust & Savings Association, Credit Lyonnais Los Angeles Branch,
Bank of Hawaii and The Union Bank of California, N.A. (Exhibit 4.b to
A&B's Form 10-K for the year ended December 31, 1996).
(ii) First Amendment to Second Amended and Restated Revolving
Credit and Term Loan Agreement, effective as of December 10, 1997, among
Alexander & Baldwin, Inc. and A&B-Hawaii, Inc. and First Hawaiian Bank,
Bank of America National Trust & Savings Association, Credit Lyonnais Los
Angeles Branch, Bank of Hawaii, The Union Bank of California, N.A. and
The Bank of New York (Exhibit 4.b(ii) to A&B's Form 10-K for the year
ended December 31, 1997).
(iii) Second Amendment to Second Amended and Restated Revolving
Credit and Term Loan Agreement, effective as of November 30, 1998, among
Alexander & Baldwin, Inc. and A&B-Hawaii, Inc. and First Hawaiian Bank,
Bank of America National Trust & Savings Association, Credit Lyonnais Los
Angeles Branch, Bank of Hawaii, The Union Bank of California, N.A. and The
Bank of New York.
10. Material contracts.
10.a. (i) Issuing and Paying Agent Agreement between Matson Naviga-
tion Company, Inc. and 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 10, 1993.
(xv) Note Agreement between Matson Leasing Company, Inc. and The
Prudential Insurance Company of America, dated as of June 28, 1991
(Exhibit 10.b.(x) to A&B's Form 10-Q for the quarter ended June 30, 1991).
(xvi) Amendment dated March 11, 1992 to the Note Agreement
between Matson Leasing Company, Inc. and The Prudential Insurance Company
of America, dated as of June 28, 1991 (Exhibit 10.a.(vii) to A&B's Form
10-K for the year ended December 31, 1992).
(xvii) Second Amendment dated as of August 31, 1993 to the Note
Agreement between Matson Leasing Company, Inc. and The Prudential
Insurance Company of America, dated as of June 28, 1991 (Exhibit
10.a.(viii) to A&B's Form 10-K for the year ended December 31, 1993).
(xviii) Note Agreement between Matson Leasing Company, Inc. and The
Prudential Insurance Company of America, dated as of March 11, 1992
(Exhibit 10.a.(x) to A&B's Form 10-Q for the quarter ended March 31,
1992).
(xix) First Amendment dated as of August 1, 1993 to the Note
Agreement between Matson Leasing Company, Inc. and The Prudential
Insurance Company of America, dated as of March 11, 1992 (Exhibit
10.a.(xi) to A&B's Form 10-K for the year ended December 31, 1993).
(xx)(a) Assignment and Assumption Agreement dated as of June 30,
1995, among Matson Leasing Company, Inc., Matson Navigation Company, Inc.
and The Prudential Insurance Company of America, with respect to the Note
Agreements between Matson Leasing Company, Inc. and The Prudential
Insurance Company of America dated as of June 28, 1991 and March 11, 1992
(Exhibit 10.a.(xxviii)(a) to A&B's Form 10-Q for the quarter ended June
30, 1995).
(xx)(b) Consent and Amendment Agreement dated as of June 30, 1995,
among Matson Leasing Company, Inc., Matson Navigation Company, Inc. and
The Prudential Insurance Company of America, with respect to the Note
Agreements between Matson Leasing Company, Inc. and The Prudential
Insurance Company of America dated as of June 28, 1991 and March 11, 1992
(Exhibit 10.a.(xxviii)(b) to A&B's Form 10-Q for the quarter ended June
30, 1995).
(xxi) 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).
(xxii) 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.
(xxiii) 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).
(xxiv) Amended and Restated Stock Sale Agree-
ment, 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).
(xxv) Pro forma financial information relative to the trans-
actions (Exhibit 10.a.1.(xxxviii) to A&B's Form 8-K dated December 24,
1998).
*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, effective as of January 27, 1994
(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, effective as of October 27, 1994
(Exhibit 10.b.1.(ix) to A&B's Form 10-K for the year ended December 31,
1994).
(v) 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).
(vi) 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).
(vii) 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).
(viii) 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).
(ix) 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).
_______________
* All exhibits listed under 10.b.1. are management contracts or compensatory
plans or arrangements.
(x) 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).
(xi) Second Amended and Restated Employment Agreement between
Alexander & Baldwin, Inc. and R. J. Pfeiffer, effective as of October 25,
1990 (Ex-hibit 10.c.1.(xiii) to A&B's Form 10-K for the year ended
December 31, 1990).
(xii) Employment Agreement between Alexander & Baldwin, Inc. and
Robert J. Pfeiffer, dated as of July 27, 1998 (Exhibit 10.b.1.(xli) to
A&B's Form 10-Q for the quarter ended September 30, 1998).
(xiii) Amendment, dated as of October 22, 1998, to Employment
Agreement between Alexander & Baldwin, Inc. and Robert J. Pfeiffer, dated
as of July 27, 1998.
(xiv) 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).
(xv) 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).
(xvi) 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).
(xvii) 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).
(xviii) 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).
(xix) 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).
(xx) 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).
(xxi) 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).
(xxii) Amendment No. 5 to the A&B Excess Benefits Plan, dated
December 9, 1998.
(xxiii) 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).
(xxiv) 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).
(xxv) 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).
(xxvi) 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).
(xxvii) 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).
(xxviii) Form of Severance Agreement entered into with certain
executive officers, as amended and restated effective August 22, 1991
(Exhibit 10.c.1.(xxiv) to A&B's Form 10-Q for the quarter ended
September 30, 1991).
(xxix) 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).
(xxx) Alexander & Baldwin, Inc. Three-Year Performance Improve-
ment 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).
(xxxi) 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).
(xxxii) 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).
(xxxiii) 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).
(xxxiv) 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).
(xxxv) 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).
(xxxvi) 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).
11. Statement re computation of per share earnings.
13. Annual report to security holders.
13. Alexander & Baldwin, Inc. 1998 Annual Report.
21. Subsidiaries.
21. Alexander & Baldwin, Inc. Subsidiaries as of February 28, 1999.
23. Consent of Deloitte & Touche LLP dated March 26, 1999 (included as last
page of A&B's Form 10-K for the year ended December 31, 1998).
27. Financial data schedule.
D. REPORTS ON FORM 8-K
-------------------
A report on Form 8-K, dated December 24, 1998, was filed on
January 8, 1999 to report, under Item 2 thereof, the consummation of a
recapitalization of California and Hawaiian Sugar Company, Inc. a wholly-owned
indirect subsidiary of A&B, in a transaction involving the participation of an
investor group that included Citicorp Venture Capital, Ltd.
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 26, 1999 By /s/ W. Allen Doane
---------------------------
W. Allen Doane, President
and Chief Executive Officer
and Director
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 March 26, 1999
W. Allen Doane Chief Executive
Officer and
Director
/s/ Glenn R. Rogers Executive March 26, 1999
Glenn R. Rogers Vice President,
Chief Financial
Officer and
Treasurer
/s/ Thomas A. Wellman Controller March 26, 1999
Thomas A. Wellman
/s/ R. J. Pfeiffer Chairman of March 26, 1999
R. J. Pfeiffer the Board and
Director
/s/ Michael J. Chun Director March 26, 1999
Michael J. Chun
/s/ John C. Couch Director March 26, 1999
John C. Couch
/s/ Leo E. Denlea, Jr. Director March 26, 1999
Leo E. Denlea, Jr.
/s/ Walter A. Dods, Jr. Director March 26, 1999
Walter A. Dods, Jr.
/s/ Charles G. King Director March 26, 1999
Charles G. King
/s/ Carson R. McKissick Director March 26, 1999
Carson R. McKissick
/s/ C. Bradley Mulholland Director March 26, 1999
C. Bradley Mulholland
/s/ Lynn M. Sedway Director March 26, 1999
Lynn M. Sedway
/s/ Maryanna G. Shaw Director March 26, 1999
Maryanna G. Shaw
/s/ Charles M. Stockholm Director March 26, 1999
Charles M. Stockholm
<PAGE>
INDEPENDENT AUDITORS' REPORT
Alexander & Baldwin, Inc.:
We have audited the financial statements of Alexander & Baldwin, Inc. and its
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, and have issued our report thereon dated
January 28, 1999; such financial statements and report are included in your
1998 Annual Report to Shareholders and are incorporated herein by reference.
Our audits also included the financial statement schedules of Alexander &
Baldwin, Inc. and its subsidiaries, listed in Item 14.B. These financial
statement schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, such financial statement schedules, when considered in relation to the
basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
January 28, 1999
<PAGE>
<TABLE>
ALEXANDER & BALDWIN, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ALEXANDER & BALDWIN, INC. (Parent Company)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands)
<CAPTION> 1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 885 $ -
Income tax receivable - 2,480
Accounts and notes receivable, net 220 760
Prepaid expenses and other 1,262 1,090
--------- ---------
Total current assets 2,367 4,330
--------- ---------
Investments:
Subsidiaries consolidated, at equity 602,368 619,963
Other 115,144 101,624
--------- ---------
Total investments 717,512 721,587
--------- ---------
Property, at Cost 94,052 91,873
Less accumulated depreciation and amortization 11,536 10,629
--------- ---------
Property -- net 82,516 81,244
--------- ---------
Other Assets 549 701
-------- --------
Total $ 802,944 $ 807,862
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Bank overdraft $ - $ 936
Accounts payable 493 359
Other 4,730 4,123
--------- ---------
Total current liabilities 5,223 5,418
--------- ---------
Long-term Liabilities 7,649 6,355
--------- ---------
Due to Subsidiaries 35,486 22,306
--------- ---------
Deferred Income Taxes 59,944 54,195
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Capital stock 36,098 36,769
Additional capital 51,946 49,437
Unrealized holding gains on securities 63,329 55,144
Retained earnings 555,820 591,135
Cost of treasury stock (12,551) (12,897)
--------- ---------
Total shareholders' equity 694,642 719,588
--------- ---------
Total $ 802,944 $ 807,862
========= =========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
ALEXANDER & BALDWIN, INC. (Parent Company)
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<CAPTION> 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenue:
Net revenue from goods and services $ 20,708 $ 17,784 $ 18,449
Interest, dividends and other 3,958 4,510 3,961
--------- --------- ---------
Total revenue 24,666 22,294 22,410
--------- --------- ---------
Costs and Expenses:
Cost of goods and services 11,390 10,013 4,331
Selling, general and administrative 9,303 7,055 7,331
Interest and other 774 872 1,019
Income taxes 462 239 3,008
--------- --------- ---------
Total costs and expenses 21,929 18,179 15,689
--------- --------- ---------
Income Before Equity in Net Income
of Subsidiaries Consolidated 2,737 4,115 6,721
Equity in Net Income of Subsidiaries
Consolidated 22,405 77,272 58,564
--------- --------- ---------
Net Income 25,142 81,387 65,285
Unrealized holding gains on securities
(Net of income taxes of $5,337 in
1998, $3,977 in 1997 and $3,961 in
1996) 8,185 6,939 8,375
--------- --------- ---------
Comprehensive Income $ 33,327 $ 88,326 $ 73,660
========= ========= =========
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
ALEXANDER & BALDWIN, INC. (Parent Company)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands)
<CAPTION> 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operations $ 9,664 $ 25,495 $ (5,892)
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures (1,437) (4,002) (353)
Proceeds from sale of investments - - 10,182
Dividends received from subsidiaries 40,000 50,000 50,000
-------- -------- --------
Net cash provided by investing activities 38,563 45,998 59,829
-------- -------- --------
Cash Flows from Financing Activities:
Increase (decrease) in due to subsidiaries 13,180 (18,171) (13,328)
Payments of long-term debt - - (850)
Proceeds from issuances of capital stock 1,575 2,132 1,291
Repurchases of capital stock (20,838) (16,585) (1,250)
Dividends paid (40,323) (39,789) (39,860)
-------- -------- --------
Net cash used in financing activities (46,406) (72,413) (53,997)
-------- -------- --------
Cash and Cash Equivalents:
Net increase (decrease) for the year 1,821 (920) (60)
Balance, beginning of year (936) (16) 44
-------- -------- --------
Balance, end of year $ 885 $ (936) $ (16)
======== ======== ========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ 263 $ 197 $ 152
Income taxes paid, net of refunds 34,672 29,775 26,360
Other Non-cash Information:
Depreciation 2,396 1,019 2,604
See accompanying notes.
</TABLE>
<PAGE>
ALEXANDER & BALDWIN, INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
(a) ORGANIZATION AND OPERATIONS
Alexander & Baldwin, Inc. is the parent company of A&B-Hawaii, Inc. (ABHI) and
Matson Navigation Company, Inc. (Matson). ABHI has principal business
operations of Food Products and Property Development and Management. Matson's
principal business operation is Ocean Transportation.
On December 24, 1998, ABHI sold a majority of its equity in a subsidiary
(California and Hawaiian Sugar Company, Inc. "C&H") to an investor group. ABHI
received approximately $45,000,000 in cash, after the repayment of certain C&H
indebtedness, $25,000,000 in senior preferred stock, $9,600,000 in junior
preferred stock, and retained an approximately 36 percent common stock interest
in the recapitalized C&H.
(b) INVESTMENTS
Subsidiaries consolidated, at equity consisted of ABHI and Matson at December
31, 1998 and 1997.
Investments - other consisted principally of marketable equity securities at
December 31, 1998 and 1997.
(c) LONG-TERM LIABILITIES
At December 31, 1998 and 1997, long-term liabilities of $7,649,000 and
$6,355,000, respectively, consisted principally of deferred compensation and
executive benefit plans.
(d) COMMITMENTS AND 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.
At December 31, 1998, the Company did not have any significant firm
commitments.
SECOND AMENDMENT TO
SECOND AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED REVOLVING CREDIT
AND TERM LOAN AGREEMENT (this "Agreement") is made effective as of the 30 day
of November, 1998, by and among ALEXANDER & BALDWIN, INC., a Hawaii corporation
(the "Parent"), a Hawaii corporation, A&B-HAWAII, INC., a Hawaii corporation
("A&B-Hawaii") (the Parent and A&B-Hawaii are hereinafter referred to jointly
and severally as the "Borrowers" and individually as a "Borrower"), the banks
(herein called, individually, a "Bank" and, collectively, the "Banks") from
time to time party to that certain Second Amended and Restated Revolving Credit
and Term Loan Agreement, dated as of December 31, 1996, (the "Credit Agree-
ment") and FIRST HAWAIIAN BANK, a Hawaii corporation, as agent for the Banks
(the "Agent").
I. BACKGROUND.
----------
A. All capitalized terms used herein shall have the meanings set forth
in the Credit Agreement except as otherwise expressly provided herein.
B. The Banks other than The Bank of New York extended a revolving
credit facility with a term loan feature to the Borrowers pursuant to the terms
and conditions of the Credit Agreement.
C. The Banks and the Borrowers entered into the First Amendment to the
Credit Agreement, dated as of December 10, 1997 (the "First Amendment"),
pursuant to which The Bank of New York became a Bank under the Credit
Agreement.
D. The Banks which shall have a Commitment hereunder from and after the
date hereof are set forth on Schedule I attached hereto and Union Bank of
California, N.A. shall not have any Commitment hereunder from and after the
date hereof.
E. The parties hereto intend that any outstanding Eurodollar Loan(s)
and CD Loan(s) be repaid and/or reallocated in such a manner as to avoid
prepayment before the expiration of their current Eurodollar Interest Period
and CD Interest Period, as applicable, and that after repayment of any out-
standing Loans from Union Bank of California, N.A. that Union Bank of
California, N.A. shall not be a party to the Credit Agreement or be a "Bank"
thereunder.
F. The parties hereto have agreed to amend the Credit Agreement to (i)
extend the Revolving Termination Date, (ii) specify the Revolving Commitments
of the Banks as set forth on Schedule I attached hereto, and (iii) amend
Sections 1.3, 1.6, and 7.1 A(ii) of the Credit Agreement as set forth herein.
G. The Banks are willing to so amend the Credit Agreement in accordance
with the terms and conditions of this Agreement.
II. AGREEMENTS.
----------
In consideration of the mutual covenants set forth herein, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
A. Termination Date. The definition of "Termination Date" in
---------------- ----------------
Subsection 9.1 of the Credit Agreement is hereby deleted in its entirety
and replaced with the following:
"Termination Date": shall mean November 30, 2000, or the date to
----------------
which such date is extended from time to time as provided in Section 1.1 B
hereof.
B. Schedule I. Schedule I to the Credit Agreement, as heretofore
----------
replaced by Schedule I to the First Amendment is hereby deleted and
replaced with Schedule I attached hereto. From and after the date hereof,
Union Bank of California, N.A. shall not have any Commitment under the Credit
Agreement.
C. Reallocation of Existing Loans and Repayment of Union Bank of
-------------------------------------------------------------
California, N.A.
- ----------------
1. If on the date hereof there shall be any outstanding Prime Loans, on
the date hereof with respect to each such Loan, as conditions to the
effectiveness of this Agreement:
(a) Not later than 8:00 am, Hawaii time, the Agent shall advise
each Bank of such Bank's Proportional Share of such outstanding Loans deter-
mined in accordance with the Commitments set forth on Schedule I attached
hereto (the "Revised Proportional Share") and the amount by which such Bank's
Revised Proportional Share exceeds or is less than such Bank's Proportional
Share determined in accordance with the Commitments set forth on Schedule I
to the First Amendment (the "Former Proportional Share").
(b) To the extent that any Bank's Revised Proportional Share
exceeds such Bank's Former Proportional Share, such Bank shall, not later than
10:00 am, Hawaii time, provide to the Agent at its office specified in Section
12.4 of the Credit Agreement, immediately available funds in Dollars such
amount together with any accrued but unpaid interest on such amount determined
in accordance with the Credit Agreement.
(c) To the extent that any Bank's Former Proportional Share exceeds
such Bank's Revised Proportional Share, the Agent shall, not later than 12:00
noon, Hawaii time, provide to such Bank immediately available funds in Dollars
in such amount together with any accrued but unpaid interest on such amount
determined in accordance with the Credit Agreement.
(d) The Agent shall, not later than 12:00 noon, Hawaii time,
provide to Union Bank of California, N.A., the outstanding principal amount of
its Proportional Share of such Loan(s) with immediately available funds in
Dollars together with any accrued but unpaid interest on such amount deter-
mined in accordance with the Credit Agreement.
2. If on the date hereof there shall be any outstanding CD Loans or
Eurodollar Loans, each such outstanding CD Loan and Eurodollar Loan shall
remain in effect until the expiration date(s) of the current related Eurodollar
Interest Period(s) or CD Interest Period(s), as applicable. If the Borrowers
have elected pursuant to Section 1.7 B. of the Credit Agreement to extend such
Loan(s), such outstanding Loan(s) shall be reallocated and repaid in the manner
specified in subsections (a) through (d) below. Any such Loan(s) converted to
a Prime Loan pursuant to said Section 1.7 B. shall be reallocated and repaid in
the manner specified in Subsections (a) through (d) of Section II. D. 1.,
above, on the last day of the relevant CD Interest Period or Eurodollar
Interest Period.
(a) Not later than 8:00 am, Hawaii time, on the second Business
Domestic Day or Eurodollar Business Day, as applicable, prior to the last day
of the relevant CD Interest Period or Eurodollar Interest Period, the Agent
shall advise each Bank of such Bank's Revised Proportional Share of such out-
standing Loan and the amount by which such Bank's Revised Proportional Share
exceeds or is less than such Bank's Former Proportional Share.
(b) To the extent that any Bank's Revised Proportional Share
exceeds such Bank's Former Proportional Share, such Bank shall, not later than
10:00 am, Hawaii time, on the last day of such CD Interest Period or Eurodollar
Interest Period provide to the Agent at its office specified in Section 12.4 of
the Credit Agreement, immediately available funds in Dollars such amount
together with any accrued but unpaid interest on such amount determined in
accordance with the Credit Agreement.
(c) To the extent that any Bank's Former Proportional Share exceeds
such Bank's Revised Proportional Share, the Agent shall, not later than 12:00
noon, Hawaii time, on the last day of such CD Interest Period or Eurodollar
Interest Period, provide to such Bank immediately available funds in Dollars in
such amount together with any accrued but unpaid interest on such amount
determined in accordance with the Credit Agreement.
(d) The Agent shall, not later than 12:00 noon, Hawaii time, on the
last day of such CD Interest Period or Eurodollar Interest Period, provide to
Union Bank of California, N.A., the outstanding principal amount of its
Proportional Share of such Loan(s) with immediately available funds in Dollars
together with any accrued but unpaid interest on such amount determined in
accordance with the Credit Agreement.
3. On the date on which Union Bank of California, N.A. shall have
received repayment in full of all Loans made by Union Bank of California, N.A.
and any other amounts payable to or on account of Union Bank of California,
N.A., Union Bank of California, N.A. shall cease to be a party to the Credit
Agreement, shall cease for all purposes to be a Bank hereunder and Union Bank
of California, N.A. shall return to the Agent for cancellation by the Borrowers
the Revolving Credit Note, dated April 1, 1989, in the amount of fifteen
million dollars ($15,000,000.00).
D. Facility Fee.
------------
1. Subsection 1.3 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
"Section 1.3 Fee for Revolving Credit Commitment. The Borrowers
-----------------------------------
agree to pay the Agent, for distribution to the Banks ratably
according to their respective Commitments, a facility fee computed on the
basis of the actual number of days elapsed and a 365-day year, payable
from time to time at the rate of one-eighth of one percent (0.125%) per
annum on the full amount of each Bank's Commitment. The facility fee
shall be determined at the aforesaid rate from the date of the Second
Amendment to Second Amended and Restated Revolving Credit and Term Loan
Agreement to and including the Termination Date. Except as otherwise
provided in Section 1.4 below, the facility fee will be payable quarterly
in arrears not later than the fifteenth day of each January, April, July
and October, for the quarter ending on the last day of the previous month
commencing April 15, 1998."
2. The term "Commitment Fee" as it appears in the Credit Agreement is
hereby amended in each instance to "Facility Fee".
E. Term Notes.
----------
(a) Subsection 1.6 of the Credit Agreement is hereby deleted in its
entirety and replaced with the following:
"Section 1.6 Term Notes. The obligation of the Borrowers to repay
----------
the amount of their Term Loan to each Bank shall be evidenced by a
promissory note of the Borrowers (a "Term Note," and collectively, the
"Term Notes"), in substantially the form of Exhibit B hereto, with
appropriate insertions, dated the date of such Term Loan, which shall bear
interest on the unpaid principal amount of each installment thereof at the
rate provided in Section 1.7, and shall be payable in twelve substantially
equal quarterly installments, each equal to one-twelfth of the original
principal balances of such Term Note, on the last Business Day of
September, December, March and June of each year commencing the first such
day after the date of the Term Note, all as set forth in such Term Note;
provided, however, that the twelfth such installment shall be in an amount
sufficient to repay in full the unpaid principal amount thereof."
(b) The form of the Term Note attached as Exhibit B to the Credit
Agreement is hereby amended by the deletion of the word "twenty" in the first
paragraph thereof and its replacement with the word "twelve".
F. Financial Covenants. Subsection 7.1A (ii) of the Credit Agreement
-------------------
is hereby deleted in its entirety and replaced with the following:
(ii) Notwithstanding the provisions of Section 7.1 A (i), the
Parent's Consolidated Tangible Net Worth may decline below the amount then
permitted under Section 7.1 A (i), but in no event more than $125,000,000
below such amount, in an amount equal to the aggregate consideration paid
by the Parent to its shareholders to repurchase shares of its capital
stock as permitted by Section 7.8 B hereof; provided, that if Consolidated
--------
Tangible Net Worth has already declined by $125,000,000 below such amount,
it may decline by up to an additional $1,000,000 as a result of such
repurchases permitted under the second sentence of the second paragraph of
Section 7.8 B hereof."
G. Confirmation of Warranties and Covenants; No Event of Default. All
-------------------------------------------------------------
of the continuing warranties of the Borrowers contained in the Credit
Agreement, are hereby confirmed and reaffirmed by the Borrowers as being true,
valid and correct as of the date of this Agreement. The Borrowers represent
and warrant that no Event of Default exists as of the date of this Agreement.
H. No Defenses. The Borrowers acknowledge that the neither of them has
-----------
any offsets, counterclaims, deductions, or defenses to payment or
performance of its duties and obligations under the Credit Agreement.
I. Full Force and Effect. The provisions of the Credit Agreement and
---------------------
of the First Amendment are hereby amended to conform with this Agreement, and
in the event of any conflict between the provisions of this Agreement and the
provisions of the Credit Agreement or of the First Amendment, the provisions of
this Agreement shall control; but in all other respects, the provisions of the
Credit Agreement and of the First Amendment shall continue in full force and
effect.
J. Rights of the Banks. This Agreement is made on the express
-------------------
condition that nothing contained herein shall in any way be construed as
affecting, impairing, or waiving any rights of the Banks under the Credit
Agreement.
K. Bind and Inure. This Agreement shall be binding upon and inure to
--------------
the benefit of the Banks, the Borrowers and their respective successors and
assigns.
L. Applicable Law, Severability. This Agreement shall be governed by
----------------------------
and interpreted in accordance with the laws of the State of California. If any
provision of this Agreement is held to be invalid or unenforceable, the
validity or enforceability of the other provisions shall remain unaffected.
M. Paragraph Headings. The headings of paragraphs in this Agreement
------------------
are inserted only for convenience and shall in no way define, describe, or
limit the scope or intent of any provision of this Agreement.
N. Counterparts and Facsimile Signatures. The parties to this Agree-
-------------------------------------
ment agree that this Agreement may be executed in counterparts, each of which
shall be deemed an original, and said counterparts shall together constitute
one and the same agreement, binding all of the parties hereto, notwithstanding
all of the parties are not signatory to the original or the same counterparts.
In making proof of this Agreement, it shall not be necessary to produce or
account for more than one such counterpart. For all purposes, including,
without limitation, recordation and delivery of this Agreement, duplicate
unexecuted and unacknowledged pages of the counterparts may be discarded and
the remaining pages assembled as one document. The submission of a signature
page transmitted by facsimile telecopy (or similar electronic transmission
facility) shall be fully binding and in full effect for all purposes under this
Agreement. In such event, original signature pages shall be delivered within a
reasonable time and substituted for the facsimile signature pages in the
counterpart copies upon receipt.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ALEXANDER & BALDWIN, INC. FIRST HAWAIIAN BANK
By /s/ Thomas A. Wellman By /s/ Adolph F. Chang
Its Controller & Assistant Its Vice President
Treasurer
As a "Bank" and as "Agent"
By /s/ G. R. Rogers
Its Exec. Vice President,
Chief Financial Officer & BANK OF AMERICAN NATIONAL
Treasurer TRUST AND SAVINGS ASSOCIATION
By /s/ James P. Johnson
Its Managing Director
As a "Bank" and as "Co-Agent"
A&B-HAWAII, INC. BANK OF HAWAII
By /s/ Thomas A. Wellman By /s/ Robert M. Wheeler III
Its Vice President & Its Vice President
Asst. Treasurer
As a "Bank"
By /s/ G. R. Rogers
Its Sr. Vice President, THE BANK OF NEW YORK
Chief Financial Officer &
Treasurer By /s/ Elizabeth T. Ying
Its Vice President
"Borrowers"
As a "Bank"
UNION BANK OF CALIFORNIA, N.A.
By /s/ Susan D. Biba
Its Vice President
As a "Departing Bank"
<PAGE>
SCHEDULE I
Commitments
-----------
First Hawaiian Bank $ 45,000,000
Bank of America National
Trust and Savings Association 45,000,000
Bank of Hawaii 30,000,000
The Bank of New York 20,000,000
------------
TOTAL: $140,000,000
SIXTH AMENDMENT TO GRID NOTE
----------------------------
THIS AMENDMENT TO GRID NOTE executed this 30th day of November, 1998, and
effective as of the first day of December 1998, by and between ALEXANDER &
BALDWIN, INC., a Hawaii corporation, and A&B-HAWAII, INC., a Hawaii corpora-
tion, hereinafter collectively called the "Maker", and FIRST HAWAIIAN BANK, a
Hawaii corporation, hereinafter called the "Bank";
WITNESSETH THAT;
---------------
WHEREAS, the Bank has extended to the Maker that certain uncommitted line
of credit facility in the principal amount not to exceed FORTY MILLION AND
NO/100 DOLLARS ($40,000,000.00) which line of credit is evidenced by that
certain Grid Note (the "Note") dated December 30, 1993, with a final maturity
of said Note being November 30, 1994; and
WHEREAS, the Maker and the Bank subsequently entered into that certain
Amendment to Grid Note dated August 31, 1994, whereby the Note was increased to
SIXTY-FIVE MILLION AND NO/100 DOLLARS ($65,000,000.00), Section 4 of the Note,
entitled "Limitation" was deleted in its entirety and replaced, and the Note
----------
was extended to November 30, 1995; and
WHEREAS, the Maker and the Bank subsequently entered into that Second
Amendment to Grid Note dated March 29, 1995, whereby the Note was decreased to
FORTY-FIVE MILLION AND NO/100 DOLLARS ($45,000,000.00), and Section 4 of the
Note, entitled "Limitation" was deleted in its entirety and replaced; and
-----------
WHEREAS, the Maker and the Bank subsequently entered into that Third
Amendment to Grid Note dated November 17, 1995, whereby the Note was extended
to November 30, 1996; and
WHEREAS, the Maker and the Bank subsequently entered into that Fourth
Amendment to Grid Note dated November 25, 1996, whereby the Note was extended
to November 30, 1997; and
WHEREAS, the Maker and the Bank subsequently entered into that Fifth
Amendment to Grid Note dated November 28, 1997, whereby the Note was extended
to November 30, 1998; and
WHEREAS, the Maker and the Bank desire to further amend the Note as
hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the Maker and the Bank agree as follows:
1. THE NOTE, AS AMENDED SHALL BE AND HEREBY IS FURTHER AMENDED TO PROVIDE
THAT ALL UNPAID PRINCIPAL AND ACCRUED BUT UNPAID INTEREST SHALL BE DUE AND
PAYABLE ON NOVEMBER 30, 1999, UNLESS SOONER DUE AS OTHERWISE PROVIDED IN THE
NOTE, AS AMENDED.
2. PAYMENTS TO THE ORDER OF THE BANK SHALL BE MADE AT THE OFFICE AT 999
BISHOP STREET, HONOLULU, HAWAII
In all other respects, the Note, as amended, shall remain unmodified and
in full force and effect, and the Maker hereby reaffirms all of its obligations
under the Note, as previously amended, and as amended hereby. Without limiting
the generality of the foregoing, the Maker hereby expressly acknowledges and
agrees that, as of the date of this SIXTH AMENDMENT TO GRID NOTE, the Maker has
no offsets, claims or defenses whatsoever against the Bank or against any of
the Maker's obligations under the Note, as previously amended, and as amended
hereby.
IN WITNESS WHEREOF, this Sixth Amendment to Grid Note is executed by the
undersigned parties as of this 30th day of November, 1998.
ALEXANDER & BALDWIN, INC., FIRST HAWAIIAN BANK,
a Hawaii Corporation a Hawaii Corporation
By: /s/ Thomas A. Wellman By: /s/ Adolph F. Chang
----------------------- --------------------
Its: Controller & Asst. Treasurer Its: Vice President
By: /s/ G. R. Rogers
-----------------------
Its: Exec. VP, CFO & Treasurer
A&B-HAWAII, INC.,
a Hawaii Corporation
By: /s/ Thomas A. Wellman
-----------------------
Its: VP, Controller & Asst. Treasurer
By: /s/ G. R. Rogers
-----------------------
Its: Senior VP, CFO & Treasurer
February 5, 1999
ALEXANDER & BALDWIN, INC.
A & B HAWAII, INC.
822 Bishop Street
Honolulu, Hawaii 96801
Re: First Amendment to Private Shelf Agreement
------------------------------------------
Gentlemen:
Reference is made to the Private Shelf Agreement (the "Agreement") dated
as of August 2, 1996 between Alexander & Baldwin, Inc. and A&B-Hawaii, Inc.
(collectively, the "Companies"), on the one hand, and The Prudential Insurance
Company of America ("Prudential") and each Prudential Affiliate (as defined in
the Agreement) which may become bound by certain provisions of the Agreement,
on the other hand.
Pursuant to the request of the Companies and paragraph 11C, Prudential and
the Companies hereby agree that the Agreement shall be amended as follows:
1. Paragraph 1 is amended by deleting the reference therein to "$50
million" and substituting therefor a reference to "$65 million".
2. Paragraph 2B(2)(i) is amended by deleting clause (i) appearing
therein in its entirety and substituting therefor a reference to
"March 1, 2002".
3. Paragraph 2B(2)(ii) is amended by deleting the existing text thereof
in its entirety and substituting therefor the words "intentionally
omitted".
4. Paragraph 2B(5) is amended by deleting the reference therein to "30
minutes" and substituting a reference to "5 minutes".
5. Paragraph 2B(8)(ii) is amended by deleting the phrase "prior to
January 1, 1997" and substituting therefor the phrase "after March 1,
1999 and prior to March 1, 2000".
6. Clause (ii) of paragraph 3A is amended by adding the following phrase
immediately after the word "Agreement" appearing in the second line
of text thereof: ", the first amendment to this Agreement".
7. Paragraph 3D is amended by deleting the reference therein to
"Regulation G" and substituting therefor a reference to "Regulation
U".
8. Paragraph 6B(6) is amended by deleting the existing test of clause
(iii) in its entirety and substituting therefor the words
"intentionally omitted".
9. Paragraph 6B(9) is amended by deleting the existing text of clause
(i) thereof in its entirety and substituting therefor the words
"intentionally omitted".
10. Paragraph 8I is amended by (i) deleting each reference therein to
"Regulation G" and substituting in each case a reference to
"Regulation U" and (ii) deleting the reference therein to "12 CFR
Part 207" and substituting therefor a reference to "12 CFR Part 221".
11. The defined term "Prudential Affiliate" appearing in paragraph 10B is
amended and restated in its entirety as follows:
"PRUDENTIAL AFFILIATE" shall mean (i) any Person which, directly or
indirectly, controls, is controlled by, or is under common control
with, Prudential and (ii) any investment fund which is managed by
Prudential or a Prudential Affiliate described in clause (i) of this
definition.
The Companies and Prudential hereby acknowledge and agree that the current
Available Facility Amount (as such term is defined in the Agreement) is $50
million.
The foregoing amendments to the Agreement shall be effective as of March
1, 1999 upon Prudential's receipt of (i) an original counterpart of this letter
agreement as executed on behalf of each of the Companies and (ii) a check of
either of the Companies in the amount of $35,000 in payment of Prudential's
processing fee. Both such conditions must be satisfied on or before March 1,
1999.
Sincerely,
THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA
By: /s/ Stephen J. DeMartini
Its: Vice President
Accepted and agreed: Accepted and agreed:
ALEXANDER & BALDWIN, INC. A&B-HAWAII, INC.
By: /s/ G. R. Rogers By: /s/ G. R. Rogers
Title: Executive Vice Title: Senior Vice President
President and Chief and Chief Financial Officer
Financial Officer
AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------
AMENDMENT (this "Amendment"), dated as of October 22, 1998, to
---------
the Employment Agreement (the "Employment Agreement") by and between
--------------------
Alexander &Baldwin, Inc., a Hawaii corporation ("A&B"), and Robert J. Pfeiffer
---
(the "Executive"), dated as of July 27, 1998.
---------
WHEREAS, effective July 27,1998, A&B and the Executive entered
into the Employment Agreement which provided, among other things, for the
Executive to serve as Chairman of the Board, President and Chief Executive
Officer of A&B, and as Chairman of the Boards of Directors of A&B's principal
subsidiaries, Matson Navigation Company, Inc. ("Matson"), A&B-Hawaii, Inc.
------
("ABHI"), California and Hawaiian Sugar Company, Inc. ("C&H") and A&B
---- ---
Properties, Inc. ("A&B Properties"); and
--------------
WHEREAS, among the Executive's goals in entering into the
Employment Agreement were the mentoring of senior executives of A&B and its
subsidiaries and working with the Board of Directors of A&B (the "Board") to
-----
identify a successor Chief Executive Officer in the event that John C.
Couch was unable to return to his prior positions as Chairman of the Board,
President and Chief Executive Officer of A&B; and
WHEREAS, on October 22, 1998, the Board, acting, with the
assistance of the Executive, appointed a successor President and Chief
Executive Officer of A&B; and
WHEREAS, in light of the fact that the Executive, on October 22,
1998, voluntarily relinquished the positions of President and Chief Executive
Officer of A&B and Chairman of the Board of Directors of A&B Properties, while
continuing to serve as Chairman of the Boards of Directors of A&B, Matson,
ABHI and C&H, A&B and the Executive desire to amend the Employment Agreement
in certain respects.
NOW, THEREFORE, A&B and the Executive agree to amend the
Employment Agreement as follows:
1. Position and Duties. (a) Section 2(b) of the Employment
-------------------
Agreement is hereby amended by deleting subsection (i) thereof in its
entirety and inserting in lieu thereof the following:
"(i) During the Term, the Executive shall serve as Chairman of the Board
of A&B, and he shall have such duties and responsibilities consistent with
such position as may be assigned to him from time to time by the Board.
Among such duties and responsibilities shall be the mentoring of senior
executives of A&B and its subsidiaries. During the Term, the Executive
shall also serve as Chairman of the Boards of Directors of Matson, ABHI
and C&H (for so long as A&B shall hold a controlling interest in C&H)."
(b) Section 2(b) of the Employment Agreement is hereby amended
by deleting from subsection (ii) thereof the first sentence and inserting in
lieu thereof the following:
"During the Term and excluding any periods of vacation and sick leave to
which the Executive is entitled, the Executive agrees to devote such
attention and time during normal business hours as shall be reasonably
necessary to perform his duties hereunder."
2. Miscellaneous. (a) This Amendment constitutes a written
-------------
amendment to the Employment Agreement executed by the parties thereto
as contemplated by Section 7(a) of the Employment Agreement.
(b) The captions of this Amendment are not part of the
provisions hereof and shall have no force or effect.
(c) This Amendment shall be governed by and construed in
accordance with the laws of the State of Hawaii, without reference to
principles of conflicts of laws.
(d) This Amendment may be executed in counterparts, each of
which together shall constitute one and the same instrument.
3. Full Force and Effect. The Employment Agreement, as
---------------------
amended by this Amendment, shall remain in full force and effect. In addition,
as provided in Section 2(a) of the Employment Agreement, all of the Executive's
and A&B's rights and obligations under the Second Amended and Restated
Employment Agreement dated as of October 25, 1990 between the Executive and A&B
shall remain in full force and effect.
IN WITNESS WHEREOF, this Amendment has been duly executed by A&B
and the Executive on this 10th day of December, 1998, effective as of October
22, 1998.
ALEXANDER & BALDWIN, INC.
By: /s/ Charles M. Stockholm
Name: Charles M. Stockholm
Title: Chairman, Compensation and
Stock Option Committee
/s/ Robert J. Pfeiffer
ROBERT J. PFEIFFER
A&B EXCESS BENEFITS PLAN
Amendment No. 5
---------------
The A&B Excess Benefits Plan (the "Plan"), as amended and restated effective
February 1, 1995, is hereby amended, effective as of and contingent upon the
closing of the transactions contemplated by the Amended and Restated Asset
Purchase Agreement dated as of December ___, 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 ___, 1998, by and between California and
Hawaiian Sugar Company, Inc. and Citicorp Venture Capital, Ltd., as follows:
1. Section 4.01(d) is hereby amended in its entirety to read as follows:
"(d) SELECT BENEFITS PROVIDED TO RETIRED FORMER EMPLOYEES OF
-------------------------------------------------------
CALIFORNIA AND HAWAIIAN SUGAR COMPANY.
-------------------------------------
(1) Prior to the closing of the transactions contemplated
by the Asset Purchase Agreement by and among California and Hawaiian
Sugar Company, Inc., A&B-Hawaii, Inc., McBryde Sugar Company, Limited,
and Sugar Acquisition Corporation, and the Stock Sale Agreement by and
between California and Hawaiian Sugar Company, Inc. and Citicorp
Venture Capital, Ltd. (the "Closing Date"), all other provisions of
the Plan notwithstanding, the retired former employees of California
and Hawaiian Sugar Company who are listed in Appendix B of this Plan
shall be eligible to receive the benefits shown in Appendix B, and no
other benefits shall be paid to such retired former employees under
the provisions of this Plan. Payment of these benefits shall be
according to the terms shown in Appendix B, and no other provisions of
this Plan shall affect the amount or the form of payment of these
benefits.
(2) As of the Closing Date, all other provisions of this
Plan notwithstanding, the obligation of this Plan to pay any benefit
shown in Appendix B to the retired former employees of California and
Hawaiian Sugar Company, Inc. listed in Appendix B shall cease, and the
obligation to pay such benefits, with respect to any period on and
after such date, is assumed by Sugar Acquisition Company."
IN WITNESS WHEREOF, Alexander & Baldwin, Inc. has caused this Amendment to
be executed on its behalf by its duly authorized officers on this 9th day of
December, 1998.
ALEXANDER & BALDWIN, INC.
By /s/ Miles B. King
Its Vice President
By /s/ Alyson J. Nakamura
Its Assistant Secretary
<TABLE>
EXHIBIT 11
ALEXANDER & BALDWIN, INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share amounts)
<CAPTION>
1998 1997 1996
---- ---- ----
Basic Earnings Per Share
- ------------------------
<S> <C> <C> <C>
Net income $ 25,142 $ 81,387 $ 65,285
========= ========= =========
Average number of shares outstanding 44,760 45,182 45,303
========= ========= =========
Basic earnings per share $ 0.56 $ 1.80 $ 1.44
========= ========= =========
Diluted Earnings Per Share
- --------------------------
Net income $ 25,142 $ 81,387 $ 65,285
========= ========= =========
Average number of shares outstanding 44,760 45,182 45,303
Effect of assumed exercise of
outstanding stock options 75 127 72
--------- --------- ---------
Average number of shares outstanding
after assumed exercise of
outstanding stock options 44,835 45,309 45,375
========= ========= =========
Diluted earnings per share $ 0.56 $ 1.80 $ 1.44
========= ========= =========
</TABLE>
ALEXANDER & BALDWIN, INC. 1998 ANNUAL REPORT
TABLE OF CONTENTS 1998
CORPORATE PROFILE 1
LETTER TO SHAREHOLDERS 2
REVIEW OF OPERATIONS 6
FINANCIAL REPORT 17
INDUSTRY SEGMENT INFORMATION 19
QUARTERLY RESULTS 42
GENERAL INFORMATION 43
DIRECTORS AND OFFICERS 44
[ON COVER Viewed from 15,000 feet, and looking toward the island of Hawaii,
the sun rises on a new day. Peaking through the clouds are the summits of
Haleakala (foreground), Mauna Loa (left center), Mauna Kea (right center)
and Hualalai (far right).]
FINANCIAL HIGHLIGHTS
1998 1997 CHANGE
- ---------------------------------------------------------------------------
REVENUE $ 1,311,620,000 $ 1,275,445,000 3%
- ---------------------------------------------------------------------------
"CORE" EARNINGS* $ 59,735,000 $ 68,909,000 -13%
PER SHARE $ 1.33 $ 1.53 -13%
NET INCOME $ 25,142,000 $ 81,387,000 -69%
PER SHARE $ 0.56 $ 1.80 -69%
- ---------------------------------------------------------------------------
CASH DIVIDENDS $ 40,323,000 $ 39,789,000 1%
PER SHARE $ 0.90 $ 0.88 2%
- ---------------------------------------------------------------------------
AVERAGE SHARES
OUTSTANDING 44,760,000 45,182,000 -1%
- ---------------------------------------------------------------------------
TOTAL ASSETS $ 1,605,640,000 $ 1,704,798,000 -6%
- ---------------------------------------------------------------------------
SHAREHOLDERS'
EQUITY $ 694,642,000 $ 719,588,000 -3%
PER SHARE $ 15.78 $ 16.03 -2%
- ---------------------------------------------------------------------------
RETURN ON BEGINNING
SHAREHOLDERS' EQUITY 3.5% 11.9% --
- ---------------------------------------------------------------------------
DEBT/DEBT + EQUITY 0.33 0.32 --
- ---------------------------------------------------------------------------
EMPLOYEES 2,331 2,930 -20%
- ---------------------------------------------------------------------------
* "Core" Earnings exclude all one-time benefits and charges.
<PAGE>
ALEXANDER & BALDWIN CORPORATE PROFILE
Alexander & Baldwin, Inc. is a diversified corporation with most
of its operations centered in Hawaii. Its principal businesses are:
PROPERTY DEVELOPMENT & MANAGEMENT - Developing real
property, primarily in Hawaii\Selling residential and commercial
property\Managing a portfolio of commercial/industrial properties
OCEAN TRANSPORTATION - Carrying freight, primarily between Pacific
Coast ports, Hawaii ports and Guam\Conducting related shoreside
operations\Arranging domestic intermodal transportation
FOOD PRODUCTS - Growing sugar cane and producing raw
sugar\Growing, marketing and distributing coffee
A&B was founded in 1870 and incorporated in 1900. Alexander &
Baldwin's corporate headquarters are located in Honolulu, Hawaii. Its common
stock is traded on the NASDAQ Stock MarketSM under the symbol ALEX.
OPERATING PROFIT BY SEGMENT
(In Thousands)
93 94 95 96 97 98
$147,788 $141,729 $100,125 $150,883 $147,928 $134,618
LETTER TO SHAREHOLDERS
FELLOW SHAREHOLDERS
Alexander & Baldwin's earnings for 1998 can be summarized in one word -
disappointing. Before discussing 1998, let us assure you that we
are taking actions to improve earnings in 1999 and in future years. A&B has
great potential, and we are committed to realizing it.
1998 PERFORMANCE - The 1998 earnings results should be placed in context.
Before one-time items, earnings per share amounted to $1.33, which was
13-percent below the $1.53 earned in 1997. There was a one-time gain of 28
cents per share in 1997 from an insurance settlement. In 1998, there were
three one-time charges that totaled 77 cents per share. These charges included
the loss on the partial sale of California and Hawaiian Sugar Company, our
sugarcane refiner; the write-down of a real estate project; and the recognition
of a liability for future workers' compensation assessments as a result of a
new accounting directive. But, to reiterate the major issue, earnings from our
core operating businesses did decline 13 percent in 1998.
Matson, which comprises the ocean transportation segment of the Company,
experienced an 18-percent decrease in profit, again excluding one-time items.
The decrease was due to the continued weakness of Hawaii's economy, along with
stiffer competition. The food products segment dropped 21 percent from 1997,
principally because of reduced profitability at C&H. Partially offsetting these
two negatives was a strong 17-percent improvement in our property development
and management business, and a much better performance in the agricultural
portion of our food products segment.
BUSINESS DIRECTION
OCEAN TRANSPORTATION - The first and foremost priority is to increase Matson's
profit. Matson must become more cost-competitive. We took a major step in this
direction last fall by reducing the number of ships serving the Hawaii trade.
Matson has retained its leading position in the Hawaii trade even after cutting
costs by eliminating excess capacity. But this action, in and of itself, is not
sufficient to return Matson to an acceptable level of performance. Other
actions, large and small, either are under way or are under consideration.
SALE OF C&H - As 1998 ended, we accomplished the recapitalization of C&H and
sold a 60-percent equity interest to an investor group that included Citicorp
Venture Capital, Ltd. Divesting a majority interest in C&H was a significant
step, because we will be able to concentrate now on developing more productive
uses for A&B's capital.
[Photo Caption: Maui Marketplace is the retail anchor of A&B's Maui
Business Park development. Ultimately, Maui Business Park will comprise nearly
240 acres. Development of this well-located project still is at an early stage.
To date, a 42-acre portion of the first phase has been completed.]
Among the challenges faced by the Company during 1998 was the announcement in
late July that its Chairman, President and Chief Executive Officer, John C.
Couch, was taking a medical leave of absence. At the request of the A&B Board
of Directors, R. J. Pfeiffer accepted the appointment as A&B Chairman of the
Board, President and Chief Executive Officer. Mr. Pfeiffer previously served as
Chairman at A&B from 1980 to 1995. During the late '70s, the '80s, and early
'90s, Mr. Pfeiffer also served as A&B's President and Chief Executive Officer.
Subsequently, on October 22, 1998, the Board appointed W. Allen Doane President
and Chief Executive Officer, with Mr. Pfeiffer remaining as Chairman of the
Board. At the time of publication of this report, Mr. Couch continues his
treatment.
REAL ESTATE - Our property development and management business continues to
perform strongly in spite of extremely weak conditions in the Hawaii real
estate market. The majority of A&B Properties' earnings are still derived from
Hawaii, and we are pleased with how well this business has performed year-in
and year-out for more than a decade. In 1998, there were $82 million of
property sales and $97 million of acquisitions. These acquisitions comprised
seven properties on the Mainland and in Hawaii. The challenge here is to take
a strong business and to grow it more aggressively. We made progress in this
direction during 1998, and plan continued growth for 1999.
REAL ESTATE ENTITLEMENTS - The Company owns over 90,000 acres in Hawaii. We are
working to increase the value of these substantial holdings by moving land
through Hawaii's complex entitlement process. Note that the Company's Hawaii
landholdings are recorded on the balance sheet at historical cost, which
averages approximately $150 an acre. From the standpoint of potential value
creation, our Maui landholdings of 69,000 acres could not be located better.
Ranked as the number one island travel destination in the world, Maui has a
bright future. We are accelerating our efforts to realize increased value from
the Company's landholdings. Nearly 3,000 acres in Hawaii either are fully
entitled and available for development, or proceeding through the entitlement
process.
AGRIBUSINESS - Recovering from a difficult 1997, Hawaiian Commercial & Sugar
Company, our sugar-growing business on Maui, was able to increase its yields
significantly and lower its unit production costs. This success increases our
confidence that HC&S indeed will have a long-term future as a grower of sugar
cane.
FUTURE VALUE - A&B possesses a number of inherent strengths that we can use to
build future value.
OCEAN TRANSPORTATION - Matson has a strong and stable market position in Hawaii
as a result of its excellent service. Matson carries more than two-thirds of
Hawaii's freight. Its shipping network is almost irreplaceable. The current
economic malaise in Hawaii, however, makes it imperative for Matson to reduce
its cost structure.
REAL ESTATE - Property Development and Management has provided a highly
reliable source of earnings, despite Hawaii's economic problems. There is a
good ability to grow the business and to continue to capitalize on the
Company's highly valuable Hawaii landholdings.
FINANCIAL POSITION - Our financial position is favorable, with a
debt-to-capital ratio of 33 percent and consistently positive free cash flow.
The key will be finding investment opportunities, especially in real estate,
that provide assurance of returns above A&B's cost of capital. We are committed
to making such capital allocations in the interest of our shareholders.
HAWAII - The state and its economy are at a low ebb--a condition compounded by
the recent financial problems in Asia. While no immediate turnaround is
expected, ultimately, we expect that the economy will recover, and A&B's
businesses will benefit as a result.
During 1998, A&B was able to increase its dividend modestly, from 88 cents per
share to 90 cents, and to repurchase almost one million shares of A&B stock.
Seventy percent of these shares were repurchased in the fourth quarter of 1998.
While work continues on the long-term issues, management recognizes that
improvement in performance must be demonstrated in the short term. 1999 will be
a start. As noted at the beginning of this letter, we are committed to taking
the necessary operating and strategic actions to realize the Company's
potential. We cannot wait for the Hawaii economy to improve. When it does,
though, it only will add to the benefits realized from actions the Company
already is taking to improve earnings. We will keep you informed of our
progress.
A&B has employees who are extraordinarily capable, talented and dedicated to
our Company's success. We are convinced that, as a team, we have the
capability to achieve at a much higher level. Going forward, we are confident
that the Company's goals will be realized.
The Board of Directors deserves special acknowledgment this year for its active
and valued role in helping A&B deal with the many challenges it faced. We
extend a warm welcome to Lynn M. Sedway, the newest independent member of the
Board. Her broad experience has added to the Board's strength. We continue to
wish John Couch well on his extended medical leave. We are pleased to report
that his health has improved, and that the prospects for his recovery remain
good.
Finally, we thank you, our shareholders, for your continuing commitment to and
belief in A&B.
/s/ R. J. Pfeiffer /s/ W. Allen Doane
Chairman of the Board President and Chief Executive Officer
February 19, 1999
REAL ESTATE
A&B strives to put its land to the highest and best use that is consistent with
community needs. At year-end 1998, the Company owned a total of about 93,000
acres. Of these, about 1,380 acres were fully zoned for urban use. At least one
step in the value-adding entitlement process has been completed for an
additional 1,600 acres, and about 8,900 acres have long-term urban-use
potential. Most of the remaining acreage will be in agricultural use for many
years.
ENTITLEMENTS - In March 1998, the Maui County Council gave final approval to an
update of the community plan for the Kihei-Makena region. Included in the
update were 650 acres of A&B-owned land at Maalaea designated as a master-
planned community. In 1999, the Company will seek approval to have approxi-
mately 170 acres included in the Wailuku-Kahului Community Plan as light
industrial/commercial property. It also will seek approval for other properties
to be included under residential and industrial designations.
A&B'S LANDHOLDINGS BY CATEGORY
HAWAII MAINLAND TOTAL
-------------------------------- -------- -----
(In acres, rounded) MAUI KAUAI OAHU TOTAL
- -------------------------------------------------------------------------------
Fully Entitled Urban 340 810 40 1,190 190 1,380
Agric./Pasture/Misc. 52,700 8,100 - 60,800 1,900 62,700
Conservation 16,000 13,000 - 29,000 - 29,000
- -------------------------------------------------------------------------------
TOTAL 69,040 21,910 40 90,990 2,090 93,080
- -------------------------------------------------------------------------------
Designated Urban 1,300 300 - 1,600 - 1,600
Urban Potential 5,400 3,500 - 8,900 - 8,900
In October 1998, the State Land Use Commission granted an urban designation to
a 200-unit single-family subdivision on 45 acres at Haliimaile, Maui.
Subsequently, an application for the appropriate zoning change was filed with
the County. A Land Use Commission decision is expected in 1999 on a proposal
for 400 residential units on 110 acres at Spreckelsville, Maui.
Plans to lengthen the runway of Maui's principal airport advanced during 1998,
with approval by the Governor and federal authorities of environmental filings.
The airport is in the immediate vicinity of A&B's Maui Business Park develop-
ment, and is near several other Company landholdings.
The State Land Use Commission also gave an urban designation to an additional
77 acres of A&B's 1,045-acre Kukui'Ula development on Kauai. The project's
urban lands now total 837 acres. This 77-acre portion of the project is
proposed for hotel and time-share development.
SALES AND DEVELOPMENT - In June 1998, the Company sold a 246,000-square-foot
research and office complex in Cupertino, Calif. The proceeds from this large
sale were combined with proceeds from other property sales and reinvested, on a
tax-deferred basis, in a total of six income-producing properties. The six
properties comprised 776,200 square feet of leasable space and were purchased
for $89 million.
[Photo caption: When a product is "virtually irresistible," it will sell well.
Haiku Makai, a large-lot, agricultural subdivision developed by A&B on the
scenic North Shore of Maui, enjoyed high demand and rapid sales in 1998.]
[Photo Caption: Located on the striking leeward coast of Kauai, A&B's
Kukui'Ula project is near Poipu Beach. Construction associated with its first
residential parcel - called Koloa Estates - began in November 1998.]
A&B also acquired a 40-acre, industrial property on Oahu in November 1998 for
$8 million. Construction of the first 23 lots at this property - the Mill Town
Center - commenced in November 1998. Lot sales began early in the first quarter
of 1999.
[Photo caption: Sacramento is sharing in California's rapid economic
expansion. A&B acquired this 98,800-square-foot office building during 1998.]
[Photo caption: During 1998, A&B used tax-deferred funds to acquire six
properties on the U.S. mainland. This attractive 167,500-square-foot office
building, called San Pedro Plaza, located in San Antonio, Texas, is one of the
properties acquired.]
A&B's HAWAII RESIDENTIAL PROJECT STATUS
TOTAL AVAILABLE SOLD AVAILABLE SOLD AVAILABLE
PROJECT UNITS IN 1997 IN 1997 IN 1998 IN 1998 IN 1999
Ku'au Bayview 92 62 35 27 19 8
Kahului Ikena 102 50 17 33 13 20
Haiku Makai 28 - - 28 25 3
Kauhikoa Hill Ranch 9 9 1 8 6 2
Koloa Estates 30 - - - - 30
At A&B's Maui Business Park, the developer of the 300,000-square-foot Maui
Marketplace Shopping Center purchased the remaining fee interest in the land
underlying the Marketplace in mid-1998. Another large lot nearby was sold
earlier in the year. The 19 remaining lots in phase IA of Maui Business Park,
totaling about 10 net salable acres, continue to be marketed actively.
On Maui, grading, roads and utility installations were completed in May 1998
for Haiku Makai, a 28-lot agricultural subdivision. Haiku Makai enjoyed rapid
sales. Twenty-five of the 28 lots in the project were sold between May and
year-end, at an average sales price of $201,000 per lot. In the 92-lot Ku'au
Bayview single-family development, 84 of the homes had been sold by year-end
1998. The 19 sales in 1998 averaged $240,000 per unit. At the Kahului Ikena
condominium project, 82 of 102 units have been sold. The prices of the 13 units
sold in 1998 averaged $139,000 per unit.
On Kauai, construction began in August 1998 at Koloa Estates, the initial
residential project at Kukui'Ula. There are 30 residential lots and two church
sites in the 28-acre project. Sales are scheduled to begin in May 1999.
PROPERTY MANAGEMENT
MAINLAND PORTFOLIO - At year-end 1998, A&B's portfolio of 16 properties in six
Western states consisted of 2.7 million square feet of leasable space.
Occupancies averaged 91 percent throughout 1998.
HAWAII PORTFOLIO - The Hawaii commercial-property portfolio consisted of
839,000 square feet of leasable space, plus ground leases of 286 acres for
commercial uses and 11,600 acres for agricultural uses. During 1998, lease
rates continued to be very competitive, due to the lackluster Hawaii economy.
Occupancy of the commercial properties averaged 68 percent.
PROPERTY DEVELOPMENT & MANAGEMENT
OUTLOOK - Operating profit from property leasing is forecast to improve in
1999, primarily due to the new leased properties added during 1998. Residential
and commercial developments likely will continue to sell steadily, but slowly,
in 1999. Sales of developed properties deemed to be fully valued also will
continue. The Company will consider accelerating the development of Maui
Business Park in response to interest in potential multi-lot projects at phases
IA and IB of the development. The Company also will continue to pursue
entitlements of land-holdings as well as investment opportunities in income and
development properties.
TRANSPORTATION
HAWAII SERVICE - The core business of Matson Navigation Company, Inc. (Matson)
is its Hawaii service. Last year was the eighth consecutive year of slow
economic growth in Hawaii. During this period, marked declines have occurred in
certain industries - construction foremost among them - that normally provide
Matson with substantial volume. Matson's cargo volume declined in 1998 because
of this economic weakness, and also because of increased competition,
especially from a barge competitor that operated temporarily during the
seasonal peak period for movements of household goods.
To match fleet capacity with cargo volume better, Matson implemented a major
service change in mid-September 1998, reducing the number of vessels serving
Hawaii from eight to six. The change was intended to cut costs without a
corresponding reduction in service quality. Although the number of vessel
arrivals in Honolulu has been reduced from four per week to three, Matson
still has 156 Hawaii round-trip voyages per year - 50 percent more than its
closest competitor.
In recognition of the weak economic conditions in Hawaii, Matson did not take
an across-the-board increase in its Hawaii service rates during 1998. Also,
as bunker fuel prices moderated, an existing fuel surcharge was reduced from
1.75 percent to 1.5 percent, effective January 15, 1998. It was reduced again
to 1.0 percent, effective March 15, and then was eliminated on September 6.
In mid-December 1998, the Company announced that it would increase rates by 2.5
percent, effective February 14, 1999, in order to offset cost increases and to
support necessary capital investments.
GUAM SERVICE - Matson and American President Lines, Ltd. (APL) renegotiated the
terms of their transpacific operating alliance late in 1997, and implemented
the resulting new vessel schedules in January 1998. The new alliance agreement
produced the benefits projected for both Matson and APL, and also resulted in
better service to Guam customers. Matson now offers the only direct service
from the U.S. mainland to Guam, with transit times reduced from 13 to 10 days.
During 1998, Guam's economic growth continued to moderate, affected by many of
the same Asian economic factors that affected Hawaii. Although construction
activity benefited from rebuilding after Typhoon Paka, which struck Guam in
December 1997, the overall amount of cargo declined somewhat in 1998.
HAWAII CARGO VOLUME
1998 1997 1996
Freight (Units) 143,400 149,700 152,100
Automobiles 73,700 78,600 83,100
HAWAII SERVICE
FREIGHT (units)
93 94 95 96 97 98
171,600 173,300 157,200 152,100 149,700 143,400
[Photo caption: A "Day in the Life" of the Matson fleet. S.S. Lurline is shown
inbound to Honolulu, with Diamond Head in the background. The ship carries a
vast array of cargo, from highly perishable food products to automobiles.]
HAWAII SERVICE
AUTOMOBILES
93 94 95 96 97 98
109,400 116,600 107,100 83,100 78,600 73,700
[Photo caption: Guam is another island community served by Matson. In early
1998, a change in Matson's operating alliance with APL allowed the start of
direct, non-stop service to Guam from the U.S. West Coast.]
[Photo caption: Trade growth and solid customer service have combined to
propel Matson Intermodal's volume and revenue higher. Nationwide overland
transportation needs of outside customers and of Matson are fulfilled
economically and efficiently by this Matson subsidiary.]
[Photo caption: Matson's newest business is Matson Logistics Solutions. Its
role is to handle highly specialized transportation needs, such as this
observatory mirror destined for a new telescope atop Mauna Kea.]
PACIFIC COAST SERVICE (PCS) - During 1998, Matson's West Coast shuttle vessel
made 51 voyages, connecting the ports of Los Angeles, Seattle and Vancouver,
B.C. Customer support for the five-year-old service continues to grow. However,
the number of empty containers moved, to reposition them for transpacific ocean
carriers, declined substantially - the direct result of changes in trade flows
to and from Asia. The PCS made a modest contribution to Matson's profitability
during 1998.
MID-PACIFIC SERVICE - Matson's container-barge service to Johnston Island,
Majuro, Ebeye and Kwajalein experienced modestly lower volume in 1998 than in
1997. Lower freight rates also unfavorably affected the results for this
service.
MATSON INTERMODAL SYSTEM, INC. - Management of the transportation function
continues to gain greater recognition for its role in adding value, especially
in businesses where reliability and immediate response are critical competitive
factors. Matson has capitalized on this trend through Matson Intermodal, its
overland transportation subsidiary. In 1998, Matson Intermodal's annual revenue
exceeded $100 million and it was named one of the top 10 intermodal marketing
companies in the U.S. Matson Intermodal manages overland transportation for
Matson's shipping customers, as well as for more than a dozen ocean shipping
companies. As Matson increases its participation in the U.S. domestic shipping
trades, substantial opportunities are expected to arise for Matson Intermodal
and Matson to serve the same customers with a greater variety of services.
MATSON LOGISTICS SOLUTIONS, INC. - Matson's newest subsidiary, Matson Logistics
Solutions, Inc. was formed in early 1998 to provide project logistics,
construction logistics and supply-chain-management services to customers.
MATSON TERMINALS, INC. (MTI) - MTI is the stevedore for Matson and outside
customers at Matson-operated container terminals. In 1998, as part of a
Companywide effort to increase productivity and lower costs, Matson's container
terminal in Oakland, Calif. converted its primary method of container handling
from straddle carriers to yard tractors.
TRANSPORTATION OUTLOOK - The performance of this segment is expected to improve
in 1999, as the operation of a smaller fleet and other initiatives reduce costs
in the Hawaii service. Labor contracts with the longshore union on the Pacific
Coast expire at midyear. The employer group, of which Matson is a member,
anticipates that negotiations will be concluded without any work stoppage.
Results in 1999 also will benefit from the revised alliance with APL and from
the charter of two previously idle vessels in a new service from Florida to
Puerto Rico. During 1998, Matson concluded that, with appropriate maintenance
and selective improvements, its present fleet would be suitable for at least 10
more years of service. Capital investments, therefore, should be relatively
modest in 1999.
FOOD PRODUCTS
RAW SUGAR PRODUCTION - Hawaiian Commercial & Sugar Company (HC&S), located on
Maui, is Hawaii's largest producer of raw cane sugar, with 61 percent of the
state's 1998 crop. HC&S made significant progress during 1998, increasing raw
sugar yields and lowering unit costs. Changes in farming and factory practices
improved raw sugar yields from a disappointing 11.6 tons sugar per acre in 1997
to 12.7 in 1998. Total production - 216,200 tons of raw sugar - was the second
highest this decade. Contributing to the lower costs was a January 1998
reorganization that eliminated about six percent of HC&S's nearly 1,000
employees.
COFFEE PRODUCTION AND MARKETING - Kauai Coffee Company, Inc. is the largest
coffee grower in the United States, producing over half of the coffee grown in
Hawaii. Green (unroasted) coffee production in 1998 was about four million
pounds, down somewhat from 1997's record harvest. The reduced output was due to
scheduled pruning of maturing coffee trees and normal biennial yield
fluctuation. Kauai Coffee continues to broaden its customer base by emphasizing
product quality and building consumer awareness of Kauai's distinctiveness as a
coffee-producing region. Although coffee operations do not yet contribute to
operating profit, the results are improving steadily.
POWER, TRUCKING - The Company's hydroelectric plants on Maui and Kauai, as well
as cogeneration units at its sugar mills on Maui, continue to generate surplus
electricity, which is sold to the local public utilities. During 1998, a total
of 95,000 megawatt-hours (MWH) were sold, compared with 109,000 MWH in 1997.
The reduction was due to increased use of electric power by the Company to
irrigate its crops during periods of low rainfall, and to the catastrophic
failure of a generating unit. The Company also has trucking operations on both
Maui and Kauai that support its agricultural operations and serve independent
customers in each community.
SUGAR REFINING AND MARKETING - California and Hawaiian Sugar Company, Inc.
(C&H), the only raw cane sugar refiner in the western United States, produces
about eight percent of the national supply of refined sugar.
Through most of 1998, margins in the cane sugar refining industry were lower
than in 1997. Supplies of beet sugar were higher during the year, and supplies
of raw cane sugar were relatively scarce, due to a low sugar import quota. On
the positive side, at mid-year 1998, two principal labor contracts were
renegotiated successfully for five-year terms without any work interruption.
In December 1998, the Company recapitalized C&H and sold approximately 60
percent of its equity to an investor group that included Citicorp Venture
Capital, Ltd. In 1999 and thereafter, the pretax income of A&B's remaining
equity investment in C&H will be reported as an investment in an affiliate,
under the heading "Food Products."
FOOD PRODUCTS OUTLOOK - Because of the recent improvements in yields and
costs, HC&S should continue to make a greater contribution to consolidated
results in 1999 and thereafter. Kauai Coffee should continue its progress
toward profitability. Even without the contribution from C&H, food products
still represents a business with about $100 million in annual sales and
operating margins between five and seven percent. A&B's share of total C&H
results will reflect its lower ownership, but total C&H results are projected
to improve modestly over those of 1998.
[Photo caption: If you cannot come to Kauai, and you don't use
www.kauaicoffee.com, then one of the best ways to buy Kauai Coffee is at
Trader Joe's.]
[Photo caption: It's a long way from the field to the sugar bowl. The trip
begins when these 37,000 lush, green acres are harvested and the sugar cane
is milled in one of HC&S's two factories.]
<PAGE>
FINANCIAL REPORT
Independent Auditors' Report 18
Industry Segment Information 19
Eleven-Year Summary of Selected Financial Data 20
Management's Discussion and Analysis 22
Statements of Income 26
Statements of Cash Flows 27
Balance Sheets 28
Statements of Shareholders' Equity 30
Notes to Financial Statements 31
Quarterly Results 42
<PAGE>
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management has prepared and is responsible for the Company's consolidated
financial statements and related notes. They have been prepared in accordance
with generally accepted accounting principles and necessarily include amounts
based on judgments and estimates made by management. All financial information
in this Annual Report is consistent with these financial statements.
The Company maintains internal control systems, and related policies and
procedures designed to provide reasonable assurance that assets are safe-
guarded, 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 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 financial statements have been audited by 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 generally accepted accounting principles (see Independent
Auditors' Report on page 18).
The Board of Directors, through its Audit Committee (composed of non-employee
directors), oversees management's responsibilities in the preparation of the
financial statements and nominates the independent auditors, subject to
shareholder election. 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/ R. J. Pfeiffer /s/ W. Allen Doane
R. J. Pfeiffer W. Allen Doane
Chairman of the Board President and Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF ALEXANDER & BALDWIN, INC.:
We have audited the accompanying balance sheets of Alexander & Baldwin, Inc.
and its subsidiaries as of December 31, 1998 and 1997, and the related state-
ments of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998 (pages 19 and 26 to 41). 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 generally accepted auditing
standards. 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 financial statements present fairly, in all material
respects, the financial position of Alexander & Baldwin, Inc. and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, in 1998 the Company changed
its method of accounting for assessments from a second injury workers'
compensation fund.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
January 28, 1999
<PAGE>
<TABLE>
<CAPTION>
INDUSTRY SEGMENT INFORMATION (In thousands)
For the Year 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Ocean transportation $ 722,744 $ 692,689 $ 661,586 $ 593,807 $ 604,754
Property development and management:
Leasing 37,955 37,148 35,916 34,073 33,387
Sales 82,382 35,916 31,909 25,835 60,767
Food products 465,661 486,912 506,909 377,082 441,209
Other 2,878 2,815 3,490 2,796 3,916
- --------------------------------------------------------------------------------------------------------
Total revenue $1,311,620 $1,255,480 $1,239,810 $1,033,593 $1,144,033
========================================================================================================
OPERATING PROFIT:
Ocean transportation $ 66,298 $ 80,385 $ 81,618 $ 87,769 $ 97,319
Property development and management:
Leasing 22,634 24,559 23,875 23,063 23,163
Sales 21,663 13,262 15,307 14,497 18,522
Food products 21,327 27,083 26,863 (27,797) (418)
Other 2,696 2,639 3,220 2,593 3,143
- --------------------------------------------------------------------------------------------------------
Total operating profit 134,618 147,928 150,883 100,125 141,729
Insurance settlement -- 19,965 -- -- --
Write-down of real estate assets (20,216) -- -- -- --
Loss on partial sale of subsidiary (19,756) -- -- -- --
Interest expense, net (24,799) (28,936) (34,081) (33,429) (27,702)
General corporate expenses (14,552) (11,745) (12,769) (14,742) (17,396)
- --------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes and
accounting change $ 55,295 $ 127,212 $ 104,033 $ 51,954 $ 96,631
========================================================================================================
IDENTIFIABLE ASSETS:
Ocean transportation $ 898,277 $ 930,636 $1,005,741 $ 997,230 $ 853,933
Property development and management 338,090 317,622 312,829 297,927 271,073
Food products 261,712 382,109 386,986 413,675 399,717
Other 107,561 74,431 90,559 92,405 87,362
- --------------------------------------------------------------------------------------------------------
Assets of continuing operations 1,605,640 1,704,798 1,796,115 1,801,237 1,612,085
Discontinued operations -
container leasing -- -- -- -- 313,690
- --------------------------------------------------------------------------------------------------------
Total assets $1,605,640 $1,704,798 $1,796,115 $1,801,237 $1,925,775
========================================================================================================
CAPITAL EXPENDITURES:
Ocean transportation $ 60,403 $ 20,828 $ 171,110 $ 46,872 $ 29,676
Property development and management* 118,552 30,790 7,275 48,890 15,709
Food products 18,237 18,806 12,058 13,650 18,665
DEPRECIATION AND AMORTIZATION:
Ocean transportation $ 61,543 $ 62,192 $ 62,055 $ 57,619 $ 55,663
Property development and management 6,357 6,281 6,214 5,561 5,246
Food products 20,086 19,538 20,144 20,390 21,340
*Including tax-deferred property purchases.
See Notes 2 and 4 for discussion of the partial sale of California
and Hawaiian Sugar Company, Inc. and the write-down of real estate
assets in 1998.
</TABLE>
<TABLE>
Eleven-Year Summary of Selected Financial Data
(Dollars and shares in thousands, except per-share amounts)
Alexander & Baldwin Inc. and Subsidiaries
<CAPTION>
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Annual Operations:
Net sales and other operating revenue $1,311,620 $1,275,445 $1,239,810 $1,033,593 $1,144,033 $ 923,804
Deduct:
Cost of goods sold and operating expenses 1,143,026 1,030,739 1,012,745 863,083 935,663 716,562
Depreciation and amortization 88,500 88,558 88,951 85,127 84,037 78,318
Interest expense 24,799 28,936 34,081 33,429 27,702 28,802
Income taxes 24,352 45,825 38,748 19,535 32,652 41,386
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations 30,943 81,387 65,285 32,419 63,979 58,736
Income (loss) from discontinued operations - - - 23,336 10,629 8,253
Cumulative effect of change
in accounting principle (5,801) - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 25,142 $ 81,387 $ 65,285 $ 55,755 $ 74,608 $ 66,989
========== ========== ========== ========== ========== ==========
Comprehensive income $ 33,327 $ 88,326 $ 73,660 $ 66,512 $ 70,031 -
========== ========== ========== ========== ========== ==========
Basic and diluted Earnings per Share
from continuing operations $0.69 $1.80 $1.44 $0.72 $1.39 $1.27
Return on beginning equity 3.5% 11.9% 10.0% 8.8% 12.7% 12.0%
Cash dividends per share $ 0.90 $ 0.88 $ 0.88 $ 0.88 $ 0.88 $ 0.88
Average number of shares outstanding 44,760 45,182 45,303 45,492 46,059 46,338
Gross profit percentage 17.4% 20.6% 20.0% 20.2% 21.2% 24.9%
Effective income tax rate 45.4% 36.0% 37.3% 37.6% 33.8% 41.3%
Market price range per share:
High $ 31.125 $ 29.375 $ 29.250 $ 25.500 $ 28.250 $ 28.000
Low 18.813 24.375 22.500 20.500 21.250 22.500
Close 23.250 27.313 25.000 23.000 22.250 26.750
At Year End:
Shareholders of record 5,125 5,481 5,881 6,357 6,729 7,056
Shares outstanding 44,028 44,881 45,339 45,280 45,691 46,404
Shareholders' equity $ 694,642 $ 719,588 $ 684,328 $ 649,678 $ 632,614 $ 587,006
Per-share 15.78 16.03 15.09 14.35 13.85 12.65
Total assets 1,605,640 1,704,798 1,796,115 1,801,237 1,925,775 1,904,742
Working capital 67,113 114,806 95,579 84,399 58,392 64,884
Cash and cash equivalents 86,818 21,623 23,824 32,150 8,987 32,295
Real estate developments-noncurrent 57,690 68,056 70,144 56,104 66,371 54,919
Investments 159,068 102,813 91,602 82,246 64,913 17,449
Capital Construction Fund 143,303 148,610 178,616 317,212 176,044 175,194
Long-term debt and capital lease obligations-
noncurrent 255,766 292,885 357,657 404,575 554,879 620,885
Current ratio 1.4 to 1 1.7 to 1 1.4 to 1 1.4 to 1 1.3 to 1 1.3 to 1
Capital stock price/earnings
ratio at December 31 41.5 to 1 15.2 to 1 17.4 to 1 18.7 to 1 13.7 to 1 18.5 to 1
All share and per-share amounts reflect the 2-for-1 stock split in 1988.
</TABLE>
<TABLE>
Eleven-Year Summary of Selected Financial Data, Continued
(Dollars and shares in thousands, except per-share amounts)
Alexander & Baldwin Inc. and Subsidiaries
<CAPTION>
1992 1991 1990 1989 1988
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Annual Operations:
Net sales and other operating revenue $ 703,948 $ 715,984 $ 747,550 $ 845,936 $ 701,908
Deduct:
Cost of goods sold and operating expenses 538,627 497,106 491,241 458,677 447,703
Depreciation and amortization 69,769 67,999 60,995 53,822 47,531
Interest expense 23,881 24,575 29,602 26,965 27,406
Income taxes 19,044 42,359 58,820 107,461 61,535
---------- ---------- ---------- ---------- ----------
Income from continuing operations 52,627 83,945 106,892 199,011 117,733
Income (loss) from discontinued operations 7,878 4,861 1,075 (310) -
Cumulative effect of change
in accounting principle (41,551) - - - -
---------- ---------- ---------- ---------- ----------
Net income $ 18,954 $ 88,806 $ 107,967 $ 198,701 $ 117,733
========== ========== ========== ========== ==========
Comprehensive income - - - - -
========== ========== ========== ========== ==========
Basic and diluted Earnings per Share
from continuing operations $1.14 $1.82 $2.32 $4.30 $2.35
Return on beginning equity 3.3% 16.7% 23.5% 45.2% 31.7%
Cash dividends per share $ 0.88 $ 0.88 $ 0.86 $ 0.80 $ 0.77
Average number of shares outstanding 46,294 46,213 46,133 46,326 50,079
Gross profit percentage 29.1% 31.9% 36.0% 48.5% 38.8%
Effective income tax rate 26.6% 33.5% 35.5% 35.1% 34.3%
Market price range per share:
High $ 30.500 $ 29.500 $ 38.000 $ 39.500 $ 36.750
Low 21.500 21.000 19.000 31.250 20.875
Close 24.750 28.250 22.250 37.500 31.500
At Year End:
Shareholders of record 7,507 7,749 7,860 7,650 7,201
Shares outstanding 46,333 46,229 46,201 46,096 50,099
Shareholders' equity $ 559,099 $ 578,669 $ 530,298 $ 459,712 $ 439,729
Per-share 12.07 12.52 11.48 9.97 8.78
Total assets 1,676,635 1,547,648 1,364,165 1,141,671 1,070,483
Working capital 40,013 23,195 55,340 33,906 35,974
Cash and cash equivalents 20,827 18,675 47,351 23,389 22,794
Real estate developments-noncurrent 50,977 36,362 14,156 - -
Investments 28,733 24,535 23,679 10,558 113,626
Capital Construction Fund 264,435 271,874 266,256 285,515 276,625
Long-term debt and capital lease obligations-
noncurrent 609,776 521,996 402,243 292,195 275,021
Current ratio 1.4 to 1 1.2 to 1 1.5 to 1 1.4 to 1 1.4 to 1
Capital stock price/earnings
ratio at December 31 60.4 to 1 14.7 to 1 9.5 to 1 8.7 to 1 13.4 to 1
All share and per-share amounts reflect the 2-for-1 stock split in 1988.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
CONSOLIDATED EARNINGS
Net income in 1998 was $25,142,000, or $0.56 per share, versus $81,387,000, or
$1.80 per share, in 1997. Net income in 1998 was reduced by three one-time
factors. First, the recapitalization and partial sale of a subsidiary,
California and Hawaiian Sugar Company, Inc. (C&H) resulted in a $15,955,000, or
$0.36 per share, after-tax loss. Second, changes in development plans for the
1,045-acre Kukui'Ula real estate project on Kauai, resulting from extended weak
real estate market conditions, led to a $12,837,000, or $0.29 per share, after-
tax charge, to reduce the carrying value of certain assets associated with that
project. Third, the cumulative effect of a required accounting change, related
to longshore labor second injury workers' compensation funds, resulted in an
after-tax charge of $5,801,000, or $0.13 per share. In contrast, net income in
1997 included an after-tax benefit of $12,478,000, or $0.28 per share,
resulting from the favorable settlement of protracted litigation related to an
insurance claim for earthquake damage to port facilities. Before all of these
one-time factors, the Company's earnings per share in 1998 was $1.33, versus
$1.53 in 1997, a decrease of 13 percent.
1998 COMPARED WITH 1997
OCEAN TRANSPORTATION revenue of $722,744,000 for 1998 increased four percent
compared with 1997; however, operating profit of $66,298,000 decreased 18
percent.
Matson Navigation Company's (Matson) Hawaii service revenue declined by nearly
$29 million in 1998. The revenue decline primarily reflected lower container
volume and lower average revenue per container. Matson's total Hawaii
container volume, at 143,400 units in 1998, was four-percent lower than 1997
container volume of 149,700 units. This follows a three-year trend of
declining container volume, from 173,300 units in 1994, to 157,200 in 1995 and
152,100 in 1996. Although 1994 volume was significantly enhanced due to a
competitor's work stoppage, the continuing decline in both container average
revenue yield and volume resulted primarily from continuing weakness in the
Hawaii economy, combined with competitive pressures. While a significant
portion of the container decline has been due to a nearly 40-percent
contraction in recent years of Hawaii's construction industry, other types of
cargo have been affected as well. A barge competitor, that operated
temporarily during the summer months in 1998, had an adverse impact on
household goods volumes and rates.
Operating expenses rose in 1998, reflecting primarily a decline in terminal
productivity and higher labor costs. The master agreement between stevedoring
companies, including Matson, and labor, represented by the International
Longshore and Warehouse Union, expires at mid-year in 1999. Negotiations
leading up to a new agreement are expected to focus on increasing productivity.
Fuel expenses declined significantly in 1998 as the average price paid for fuel
dropped to approximately $12 per barrel from $16.70 per barrel in 1997.
The unfavorable trends in operating margins in the Hawaii service continue to
be of concern to the Company. Late in 1998, Matson reduced the number of ships
serving the Hawaii trade from eight to six vessels, to better balance the
capacity offered with the demand for cargo space. Matson still remains the
service leader to Hawaii. In addition, Matson chartered two idle
vessels to a new joint venture operating between Florida and Puerto Rico; a
venture in which Matson has a 27.5-percent equity interest. Matson is
currently evaluating other ways in which it can reduce its operating costs
while maintaining a high level of service to shippers.
Matson announced a 2.5-percent increase in Hawaii service rates effective in
February 1999. Matson did not take any general rate increases in 1998.
Increases in revenue from Matson's Guam and intermodal services and from the
American President Lines, Ltd. (APL) Alliance more than offset the revenue
decline from the Hawaii service. These increases were led by a restructuring
of the APL Alliance charter agreements and increased intermodal revenue.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING revenue of $37,955,000 for 1998
rose two percent compared with 1997; however, operating profit of $22,634,000
for 1998 decreased eight percent compared with 1997. The decrease was due
primarily to lower occupancy rates, especially in the Hawaii market. Occupancy
rates for the Mainland properties averaged 91 percent in 1998, versus 98
percent in 1997. The lower Mainland average rate primarily reflected a shift
in the composition of the portfolio toward more multi-tenant properties,
following the sale of a large, single-tenant property in 1998. Occupancy
levels for the Hawaii properties averaged 68 percent in 1998, versus 78 percent
in 1997. The lower Hawaii average rate reflected ongoing weak economic
conditions in Hawaii as well as low occupancy rates for properties acquired
during 1997.
PROPERTY DEVELOPMENT AND MANAGEMENT - SALES revenue of $82,382,000 for 1998
considerably exceeded the $35,916,000 in sales recorded in 1997. Operating
profit from property sales in 1998 of $21,663,000 was 63-percent higher than
the $13,262,000 achieved in 1997. The increases resulted from the sales of a
large single-tenant research and office complex in Cupertino, California for
$51,500,000 and of the Company's remaining interest in a 14-acre parcel at Maui
Business Park. Other significant sales in 1998 included five developed
business parcels and 64 residential properties. Sales in 1997 included four
leased parcels in Maui Business Park, an undeveloped 24-acre residential
parcel, several developed and undeveloped business parcels, an industrial
warehouse in California and 59 residential units. Sales totaling $67,258,000
in 1998 were completed on a tax-deferred basis compared with 1997 tax-deferred
sales of $17,388,000. Purchases, utilizing proceeds from tax-deferred sales,
totaled $85,896,000 and $22,170,000 for 1998 and 1997, respectively.
The mix of property transactions in any year can be diverse. Sales can include
property sold under threat of condemnation, developed residential real estate,
commercial properties, developable subdivision lots and undeveloped land. The
sales of undeveloped land and subdivision lots generally provide a greater
contribution margin than the sales of developed and commercial property, due to
the low historical-cost basis of the Company's Hawaii land, which averages
approximately $150 per acre. Consequently, historical property sales and the
amount of real estate held for sale currently on the balance sheets do not
necessarily indicate future profitability trends for this segment. Because the
Company sells a significant amount of property on a tax-deferred basis, the
proceeds of which must be reinvested in similar property within time periods
specified by the Internal Revenue Code, property sales may not necessarily be
indicative of cash flows.
FOOD PRODUCTS revenue of $465,661,000 in 1998 was four-percent lower than the
1997 revenue of $486,912,000. Operating profit of $21,327,000 in 1998 was 21-
percent lower than the $27,083,000 earned in 1997. Several factors contributed
to these lower results. Refined sugar prices declined in 1998 as a result of a
large beet sugar crop. The average per-ton cost to purchase raw sugar was
about the same in 1998 as it was in 1997, but refining and direct operating
expenses increased. While the volume of refined sugar sales increased slightly
in 1998, the mix of sales resulted in a lower margin than last year. The
continued low cane sugar import quota made it difficult for C&H to purchase raw
sugar at attractive prices. Additionally, a majority interest in C&H was sold
on December 24, 1998, resulting in one less week of operations as a consoli-
dated business than in 1997. The combined impact of these items reduced
operating profit by approximately $13,000,000.
Results from Hawaiian Commercial & Sugar Company (HC&S), the Company's Maui
sugarcane plantation, showed significant improvement in 1998. Changes in
cultivation and ripening processes for a recently introduced cane-sugar variety
occurred during the year, increasing sugar yields to 216,200 tons in 1998 from
198,000 tons a year earlier. The higher sugar production, combined with cost
reduction efforts, resulted in an 18-percent margin improvement, partially
offsetting the lower operating profit from C&H. During 1998, HC&S wrote off
several abandoned and obsolete items of equipment, which had a total carrying
cost of approximately $4,500,000, and also recognized a $3,000,000 involuntary
conversion gain, due to insurance proceeds received in settlement of an insured
turbine generator failure which occurred earlier in the year.
1997 COMPARED WITH 1996
OCEAN TRANSPORTATION revenue of $692,689,000 for 1997 increased five percent
and operating profit of $80,385,000 for 1997 decreased two percent, compared
with 1996. Excluding a one-time vessel charter hire, which contributed
$5,634,000 to 1996 results, operating profit for the ocean transportation
segment rose six percent. Hawaii service container and automobile volumes
were two- and five-percent lower, respectively, due to weak economic
conditions in Hawaii. Terminal labor costs increased by six percent in 1997
compared with 1996.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING revenue and operating profit rose
three percent compared with 1996. The leased-property portfolio benefited from
continuing high occupancy levels for Mainland properties. Occupancy rates in
1997 averaged 98 percent for the Mainland portfolio, versus 97 percent in 1996.
Occupancy levels for the Company's Hawaii-leased real estate portfolio averaged
78 percent in 1997, versus 86 percent in 1996. That decrease was due primarily
to properties acquired in early 1997 that had relatively low occupancy rates
and to the weak Hawaii economy.
PROPERTY DEVELOPMENT AND MANAGEMENT - SALES revenue of $35,916,000 for 1997 was
13-percent higher than in 1996; however, operating profit decreased 13 percent
for 1997 compared with 1996. Sales in 1997 included four leased parcels in
Maui Business Park, an undeveloped 24-acre residential parcel, several
developed and undeveloped business parcels, an industrial warehouse in
California and 59 esidential properties. Significant sales in 1996 included
two leased parcels, a 66-acre unimproved parcel to a Maui utility, four lots
in the Company's Maui Business Park and 73 residential properties.
FOOD PRODUCTS revenue of $486,912,000 in 1997 was four-percent lower than the
1996 revenue of $506,909,000. Operating profit of $27,083,000 in 1997,
however, was one-percent higher than the operating profit of $26,863,000 for
the prior year. Improved sugar refining margins were offset substantially by
the effects of lower sugar yields at the Company's Maui plantation.
During most of 1997, margins in the cane sugar refining industry benefited from
relatively low supplies of beet sugar. However, margins tightened late in the
year, following projections for a larger sugar beet crop and lower refined beet
sugar prices.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal liquid resources, comprising cash and cash equivalents,
receivables, inventories and unused lines of credit, less accrued deposits to
the Capital Construction Fund (CCF), totaled $365,393,000 at December 31, 1998,
a decrease of $143,783,000 from December 31, 1997. This decrease was due
primarily to lower amounts available under lines of credit, lower receivables,
and lower inventories, partially offset by increased cash and a decrease in
accrued deposits to the CCF. Amounts available under lines of credit decreased
$130,999,000, primarily due to a decrease in credit facilities, resulting from
the partial sale of C&H and the expiration of a $35 million unused credit
facility. The decreases in receivables and inventories were mostly due to the
C&H transaction. Cash increased $65,195,000, primarily due to the cash
receipts from the C&H transaction, which had not yet been fully used to repay
debt at year-end. Accrued deposits to the CCF decreased $930,000.
Working capital was $67,113,000 at December 31, 1998, a decrease of $47,693,000
from the amount at the end of 1997. This was primarily due to decreases in
inventories and accounts receivable and an increase in short-term debt,
partially offset by a decrease in accounts payable. The C&H transaction was
the primary reason for these changes. At December 31, 1997, C&H provided
working capital of approximately $31,327,000.
Net cash provided by operations, before capital expenditures for real estate
developments held for sale, was $137,244,000 and $187,505,000 for 1998 and
1997, respectively. Net operating cash flows were used principally for
capital expenditures, payments of debt, dividends, repurchases of capital
stock and deposits into the CCF. Withdrawals from the CCF in 1998 were used to
purchase a leased vessel and to invest in a joint venture shipping operation.
(See Note 2 to the Company's financial statements.)
In 1998, capital additions were $197,633,000, compared with $70,666,000 in
1997. Ocean transportation capital additions in 1998 of $60,403,000 were
primarily for the acquisition of container and terminal equipment and the
purchase of a vessel which previously was leased by Matson. Property develop-
ment and management capital additions in 1998 of $118,552,000, which included
the reinvestment of tax-deferred sales proceeds, were for real estate develop-
ments held for investment purposes and for improvements to leased properties.
Food products capital additions in 1998 of $18,237,000 were primarily for sugar
refinery modifications, power generation, and harvesting and factory equipment
for sugar plantation and coffee orchard operations.
Capital expenditures approved, but not yet spent, were $60,294,000 at December
31, 1998. These expenditures are primarily for container equipment, real
estate developments held for investment purposes, improvements to leased
properties, Year-2000 computer remediation, and irrigation, factory and power
generation equipment for the Company's sugar-growing operations. For 1999,
internal cash flows and short-term borrowing facilities are expected to be
sufficient to finance working capital needs, dividends, capital expenditures
and debt service.
OTHER MATTERS
NEW ACCOUNTING STANDARD: In 1998, the Company adopted the American Institute
of Certified Public Accountants Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." This
standard required that the Company accrue the present value of future
assessments from a United States Department of Labor second injury workers'
compensation fund as a liability. Previously, the annual assessments were
charged to expense in the year paid. The after-tax, cumulative effect of the
change in accounting method was a reduction of 1998 net income by $5,801,000,
or $0.13 per share. (See Note 3 to the Company's financial statements.)
C&H RECAPITALIZATION AND PARTIAL SALE: On December 24, 1998, the Company
recapitalized and sold a majority of its equity in C&H, recognizing a loss of
$19,756,000. The after-tax impact of the loss on 1998 net income was
$15,955,000, or $0.36 per share. C&H is included in the consolidated results
of the Company up to the date of sale. Effective December 24, 1998, the
Company began accounting for its investment in C&H under the equity method.
(See Note 2 to the Company's financial statements.)
WRITE-DOWN OF REAL ESTATE ASSETS: In 1998, the Company changed the strategic
direction of its Kukui'Ula real estate development project on Kauai. As a
result, the Company determined that the total present capitalized investment
could not be recovered through future cash flows and, accordingly, reduced the
carrying value by $20,216,000. The after-tax impact to 1998 net income of this
write-down was $12,837,000, or $0.29 per share. (See Note 4 to the Company's
financial statements.)
INSURANCE LITIGATION: In 1997, Matson received $33,650,000 in settlement of
litigation involving a contested insurance claim for earthquake damage to port
facilities in 1989. After recovering repair and litigation costs of
approximately $13,650,000, the Company recorded, in 1997, $9,700,000 of
interest revenue and $10,300,000 of other revenue. The after-tax impact of the
settlement on 1997 net income was $12,478,000, or $0.28 per share.
TAX-DEFERRED REAL ESTATE EXCHANGES: In 1998, the Company sold eight parcels of
land for $67,258,000. Proceeds of $85,896,000 were reinvested in 1998 on a
tax-deferred basis from sales completed in 1998 and earlier years. The
proceeds from these sales and amounts reinvested are reflected in the State-
ments of Cash Flows under the caption "Non-cash Activities." The purchases of
real estate using tax-deferred monies are included in capital expenditures on
the Industry Segment Information (page 19).
ENVIRONMENTAL MATTERS: As with most industrial and land-development companies
of its size, the Company's operations have certain risks, which 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. Management believes that appropriate liabilities have been accrued
for environmental matters.
OUTLOOK: Information about the Company's outlook for 1999 and its plans to
address issues affecting primary business units is included in the Letter to
Shareholders on pages 2 through 5 and in the business unit discussions included
on pages 6 through 15 of the Annual Report to Shareholders, which sections are
incorporated herein by reference.
YEAR-2000 INFORMATION AND READINESS DISCLOSURE ACT OF 1998
In 1995, the Company and its subsidiaries commenced an evaluation of its
computer systems and applications to prepare for the Year-2000. Following this
evaluation, implementation plans for all business segments were prepared and
are currently being executed. Programs that recognize "00" as a date other
than "2000" might result in data errors or system problems if not corrected
before December 31, 1999. Not all systems used by the Company and its subsi-
diaries are sensitive to this issue.
The work related to primary systems and applications, which have the greatest
risk of adversely affecting operations, is substantially complete as of 1998
year-end. The Company and its subsidiaries are currently testing the corrected
systems for undetected program errors. In addition, the Company and its
subsidiaries are continuing work on correcting secondary support applications,
embedded systems and applications at smaller business units to ensure that they
will be Year-2000 compliant before the end of 1999. The Company and its
subsidiaries are working with primary vendors, customers, lenders, suppliers
and other appropriate third parties to assess their compliance efforts and the
potential risks to the Company and its subsidiaries in the event that they are
not Year-2000 compliant. Contingency plans for potential significant problems
that may occur in the Year-2000 will be completed by the end of 1999.
Staffing for the remaining Year-2000 work is expected to be adequate. Work on
this project has not affected other systems-related activities adversely. The
implementation plans, which consist of upgrading, modifying or replacing
various systems, are expected to cost approximately $6,000,000 to $8,000,000.
At the end of 1998, the Company and its subsidiaries had expended approximately
$3,600,000 for this work.
The Year-2000 risk to the Company and its subsidiaries is substantially the
same as that of other companies in the same industries. The Company and its
subsidiaries believe that their systems and applications necessary to operate
and manage their businesses will be replaced, modified or upgraded successfully
in advance of the year 2000.
Despite the preparations being taken by the Company and its subsidiaries, the
Year-2000 issue presents risks and uncertainties. In the most reasonably
likely worst case scenario, there could be temporary disruptions in customer
services (including ocean transportation) and product deliveries, temporary
billing and collection delays, and temporary delays in payrolls and vendor
payments. The Company believes that a worse case scenario is not likely;
however, if it did occur, it could have a material adverse effect on the
Company's results of operations, liquidity and financial condition.
Although there can be no absolute assurance that the Company and its
subsidiaries will be successful in identifying and avoiding all possible
problems, the Company and its subsidiaries continue to identify and address
potential negative consequences which may result from not being Year-2000
ready. In particular, there can be no assurance that the Company will not be
affected adversely by the failure of a vendor, customer, or other third party
to address the Year-2000 issue adequately. However, in the context of the
uncertainties inherent in dealing with the Year-2000 issue, the Company
believes, based on available information, that the impact of the Year-2000
issue and its associated costs will not have a material impact on the results
of operations, liquidity and financial condition.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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. Such forward-looking statements may be contained in,
among other things, Securities and Exchange Commission (SEC) filings, such as
the Forms 10-K, press releases made by the Company 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) economic
conditions in Hawaii and elsewhere; (2) market demand; (3) competitive factors
and pricing pressures in the Company's primary markets; (4) 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 retention of cabotage laws; (5) dependence on
third-party suppliers; (6) fuel prices; (7) labor relations; (8) the ability to
locate and correct or replace, on a timely basis, all relevant computer codes
prior to the Year-2000; and (9) other risk factors described elsewhere in these
communications and from time to time in the Company's filings with the SEC.
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME (In thousands, except per-share amounts)
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Ocean transportation $ 708,735 $ 678,319 $ 645,499
Property development and management 119,304 72,226 67,035
Food products 464,625 482,799 504,858
Interest 11,278 23,131 15,085
Gain on sale of property and other 4,800 16,119 4,577
Dividends 2,878 2,851 2,756
- ---------------------------------------------------------------------------------
Total revenue 1,311,620 1,275,445 1,239,810
- ---------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of goods and services 1,083,836 1,011,718 988,721
Selling, general and administrative 107,718 107,579 112,975
Write-down of real estate assets 20,216 -- --
Loss on partial sale of subsidiary 19,756 -- --
Interest 24,799 28,936 34,081
- ---------------------------------------------------------------------------------
Total costs and expenses 1,256,325 1,148,233 1,135,777
- ---------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING METHOD 55,295 127,212 104,033
Income Taxes 24,352 45,825 38,748
- ---------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING METHOD 30,943 81,387 65,285
Cumulative Effect of Change in Accounting
Method for Insurance-related Assessments
(net of income taxes of $3,481) (5,801) -- --
- ---------------------------------------------------------------------------------
NET INCOME 25,142 81,387 65,285
Unrealized holding gains on securities
(Net of income taxes of $5,337 in 1998,
$3,977 in 1997 and $3,961 in 1996) 8,185 6,939 8,375
- ---------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 33,327 $ 88,326 $ 73,660
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
Before cumulative effect of accounting
change $ 0.69 $ 1.80 $ 1.44
Accounting change (0.13) - -
- ---------------------------------------------------------------------------------
Net Income $ 0.56 $ 1.80 $ 1.44
=================================================================================
AVERAGE COMMON SHARES OUTSTANDING 44,760 45,182 45,303
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net Income $ 25,142 $ 81,387 $ 65,285
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 88,500 88,558 88,951
Write-down of real estate assets 20,216 -- --
Reversal of plantation closure reserve -- (990) (4,624)
Equity in loss of affiliate 276 -- --
Loss on partial sale of subsidiary 19,756 -- --
Gain on disposal of assets (10,259) (872) (1,686)
Accounting change for insurance-related
assessments 5,801 -- --
Changes in assets and liabilities:
Accounts and notes receivable 7,859 (5,532) (5,225)
Inventories 4,605 24,276 (16,616)
Pension assets or obligations (10,663) (4,843) (9,694)
Prepaid expenses and other assets (9,213) 1,973 103
Accounts and income taxes payable 5,345 (672) 7,062
Deferred income taxes payable (8,248) 13,168 10,420
Other liabilities (1,873) (8,948) 15,825
Capital expenditures for real estate
developments held for sale (1,972) (5,636) (16,799)
- --------------------------------------------------------------------------------------
Net cash provided by operations 135,272 181,869 133,002
- --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property (98,510) (45,598) (185,142)
Capital expenditures for real estate developments
held for investment (13,227) (2,898) (2,579)
Receipts from disposal of income producing
property, investments and other assets 4,818 728 10,897
Proceeds from recapitalization of subsidiary 83,841 -- --
Proceeds from partial sale of subsidiary 14,940 -- --
Deposits into Capital Construction Fund (10,000) (11,656) (11,481)
Withdrawals from Capital Construction Fund 14,377 50,000 145,500
Reduction (increase) in investments - net (7,745) (822) 1,184
- --------------------------------------------------------------------------------------
Net cash used in investing activities (11,506) (10,246) (41,621)
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 30,000 34,500 43,000
Payments of long-term debt (68,985) (109,082) (81,888)
Proceeds (payments) from short-term
borrowings - net 40,000 (45,000) (21,000)
Repurchases of capital stock (20,838) (16,585) (1,250)
Proceeds from issuance of capital stock 1,575 2,132 1,291
Dividends paid (40,323) (39,789) (39,860)
- --------------------------------------------------------------------------------------
Net cash used in financing activities (58,571) (173,824) (99,707)
- --------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) for the year 65,195 (2,201) (8,326)
Balance, beginning of year 21,623 23,824 32,150
- --------------------------------------------------------------------------------------
Balance, end of year $ 86,818 $ 21,623 $ 23,824
======================================================================================
OTHER CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 26,890 $ 30,956 $ 36,472
Income taxes paid, net of refunds 34,672 29,775 26,360
NON-CASH ACTIVITIES:
-- Tax-deferred property sales 67,258 17,388 12,325
-- Tax-deferred property purchases 85,896 22,170 3,134
-- Securities retained in connection with
partial sale of subsidiary 34,960 -- --
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
(In thousands, except per-share amounts)
December 31, 1998 1997
- --------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 86,818 $ 21,623
Accounts and notes receivable:
Trade, less allowances of $6,272 and $18,005 114,885 152,098
Other 14,923 24,067
Inventories:
Sugar and coffee 6,336 38,888
Materials and supplies 13,436 30,321
Real estate held for sale 8,535 12,563
Deferred income taxes 9,524 9,404
Prepaid expenses and other assets 9,407 9,977
Accrued deposits to Capital Construction Fund (9,070) (10,000)
- ---------------------------------------------------------------------------------
Total current assets 254,794 288,941
- ---------------------------------------------------------------------------------
INVESTMENTS 159,068 102,813
- ---------------------------------------------------------------------------------
REAL ESTATE DEVELOPMENTS 57,690 68,056
- ---------------------------------------------------------------------------------
PROPERTY:
Land 77,272 66,161
Buildings 213,713 218,116
Vessels 757,730 815,805
Machinery and equipment 565,577 697,095
Water, power and sewer systems 80,601 83,334
Other property improvements 92,531 94,512
- ---------------------------------------------------------------------------------
Total 1,787,424 1,975,023
Less accumulated depreciation and amortization 837,704 938,508
- ---------------------------------------------------------------------------------
Property - net 949,720 1,036,515
- ---------------------------------------------------------------------------------
CAPITAL CONSTRUCTION FUND 143,303 148,610
- ---------------------------------------------------------------------------------
PENSION ASSETS 24,212 1,192
- ---------------------------------------------------------------------------------
OTHER ASSETS - NET 16,853 58,671
- ---------------------------------------------------------------------------------
Total $1,605,640 $1,704,798
=================================================================================
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 45,533 $ 24,453
Current portion of capital lease obligations -- 10,032
Short-term commercial paper borrowings 42,000 17,000
Accounts payable 37,781 46,835
Payrolls and vacation pay 14,935 20,561
Uninsured claims 13,398 15,265
Post-retirement benefit obligations - current portion 3,115 5,164
Taxes other than income 4,096 4,551
Accrued and other liabilities 26,823 30,274
- ---------------------------------------------------------------------------------
Total current liabilities 187,681 174,135
- ---------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 255,766 290,885
Capital lease obligations -- 2,000
Post-retirement benefit obligations 61,929 112,125
Uninsured claims 18,180 9,249
Other 34,413 37,062
- ---------------------------------------------------------------------------------
Total long-term liabilities 370,288 451,321
- ---------------------------------------------------------------------------------
DEFERRED INCOME TAXES 353,029 359,754
- ---------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Capital stock - common stock without par value;
authorized, 150,000 shares ($.75 stated value
per share); outstanding, 44,028 shares in 1998
and 44,881 shares in 1997 36,098 36,769
Additional capital 51,946 49,437
Unrealized holding gains on securities 63,329 55,144
Retained earnings 555,820 591,135
Cost of treasury stock (12,551) (12,897)
- ---------------------------------------------------------------------------------
Total shareholders' equity 694,642 719,588
- ---------------------------------------------------------------------------------
Total $1,605,640 $1,704,798
=================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except per-share amounts)
Three Years Ended December 31, 1998
- ---------------------------------------------------------------------------------------------------------------
Capital Stock
-----------------------------------------
Issued In Treasury
--------------------- -----------------
Unrealized
Additional Holding Retained
Shares Stated Value Shares Cost Capital Gains Earnings
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 49,510 $37,133 4,230 $(13,817) $40,138 $39,830 $546,394
CHANGES IN 1996:
Shares repurchased and retired (50) (38) (1,213)
Stock options exercised 125 94 2,690
Acquired in payment of options (59) (44) (1,637)
Issued -- incentive plans 7 5 (36) 444 549
Unrealized holding gains on
securities 8,375
Net income 65,285
Cash dividends -- $.88 per share (39,860)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 49,533 37,150 4,194 (13,373) 43,377 48,205 568,969
CHANGES IN 1997:
Shares repurchased and retired (624) (468) (16,117)
Stock options exercised 234 175 5,098
Acquired in payment of options (123) (92) (3,315)
Issued -- incentive plans 6 4 (49) 476 962
Unrealized holding gains on
securities 6,939
Net income 81,387
Cash dividends -- $.88 per share (39,789)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 49,026 36,769 4,145 (12,897) 49,437 55,144 591,135
CHANGES IN 1998:
Shares repurchased and retired (969) (727) (20,111)
Stock options exercised 68 51 1,558
Acquired in payment of options (1) (1) (23)
Issued -- incentive plans 8 6 (41) 346 951
Unrealized holding gains on
securities 8,185
Net income 25,142
Cash dividends -- $.90 per share (40,323)
- ---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 48,132 $36,098 4,104 $(12,551) $51,946 $63,329 $555,820
===============================================================================================================
See notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ALEXANDER & BALDWIN, INC.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Alexander & Baldwin, Inc. and all wholly-owned subsidiaries, after
elimination of significant intercompany amounts. Investments in 20 to 50
percent owned companies are accounted for using the equity method.
COMPREHENSIVE INCOME: Comprehensive Income includes changes from either
recognized transactions or other economic events, excluding capital stock
transactions, which impact Shareholders' Equity. For the Company, the only
difference between Net Income and Comprehensive Income is the unrealized
holding gains on securities available for sale. Comprehensive Income is not
used in the calculation of Earnings per Share.
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 impact on earnings per share of the Company's
stock options is immaterial; consequently, Diluted Earnings per Share is the
same amount as Basic Earnings per Share.
OCEAN TRANSPORTATION: Voyage revenue and variable costs and expenses are
included in income at the time each voyage leg commences. This method of
accounting does not differ materially from other acceptable accounting methods.
Vessel depreciation, charter hire, terminal operating overhead and general and
administrative expenses are charged to expense as incurred. Expected costs of
regularly-scheduled dry docking of vessels and planned major vessel repairs
performed during dry docking are accrued.
PROPERTY DEVELOPMENT AND MANAGEMENT: Sales are recorded when the risks and
benefits of ownership have passed to the buyers (generally at closing dates),
adequate down payments have been received and collection of remaining balances
is reasonably assured.
Expenditures for real estate developments are capitalized during construction
and are classified as Real Estate Developments on the Balance Sheets. When
construction is complete, the costs are reclassified either as 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 operating or investing activities, based upon
the Company's intention either to sell the property or to retain ownership of
the property as an investment following completion of construction.
FOOD PRODUCTS: Revenue is recorded when refined sugar products and coffee are
sold to third parties.
Costs of growing sugar cane are charged to the cost of production in the year
incurred and to cost of sales as refined products are sold. The cost of raw
cane sugar purchased from third parties is recorded as inventory at the
purchase price.
Costs of developing coffee orchards are capitalized during the development
period and depreciated over the estimated productive lives. Costs of growing
coffee are charged to inventory in the year incurred and to cost of sales as
coffee is sold.
CASH AND CASH EQUIVALENTS: The Company considers highly liquid investments
purchased with original maturities of three months or less, which have no
significant risk of change in value, to be cash equivalents.
INVENTORIES: Sugar inventory, consisting of raw and refined sugar products,
and coffee inventory, are stated at the lower of cost (first-in, first-out
basis) or market. Other inventories, composed principally of materials and
supplies, are stated at the lower of cost (principally average cost) or market.
PROPERTY: Property is stated at cost. Major renewals and betterments are
capitalized. Replacements, maintenance and repairs which do not improve or
extend asset lives are charged to expense as incurred. Assets held under
capital leases are included with property owned. Gains or losses from property
disposals are included in income.
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.
DEPRECIATION: Depreciation is computed using the straight-line method.
Depreciation expense includes amortization of assets under capital leases.
Estimated useful lives of property are as follows:
Buildings 10 to 50 years
Vessels 10 to 40 years
Marine containers 15 years
Machinery and equipment 3 to 35 years
Utility systems and other depreciable property 5 to 60 years
PENSION PLANS: Certain ocean transportation subsidiaries are members of the
Pacific Maritime Association (PMA), the Maritime Service Committee or the
Hawaii Stevedore Committee, which negotiate multi-employer pension plans
covering certain seagoing and shoreside bargaining unit personnel. The
subsidiaries 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 cover
substantially all other employees.
INCOME TAXES: Income tax expense is based on revenue and expenses in the
Statements of Income. Deferred income tax liabilities and assets are computed
at current tax rates for temporary differences between the financial statement
and income tax bases of assets and liabilities.
FAIR VALUES: The carrying values of current assets (other than inventories,
real estate held for sale, deferred income taxes and prepaid and other assets)
and of debt instruments, are reasonable estimates of their fair values. Real
estate is carried at the lower of cost or fair value. Fair values are
generally 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. This land has a cost basis which averages approximately $150 per acre,
a value which is much lower than fair value.
FUTURES CONTRACTS: Realized and unrealized gains and losses on commodity
futures contract hedges are recorded in inventory and subsequently charged to
cost of sales when the related inventory is sold. These amounts are not
significant.
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.
YEAR-2000 COSTS: Computer and related costs necessary to prepare for the Year-
2000 date change are treated as an operating expense in the year incurred
unless a computer system is being replaced for operating reasons as well as for
Year-2000 compliance, in which case the costs are capitalized. The annual
amounts charged to expense were not significant. (See Management's Discussion
and Analysis, unaudited, for additional information.)
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Future actual amounts could differ from those estimates.
RECLASSIFICATIONS: Certain amounts in the 1997 and 1996 financial statements
have been reclassified to conform with the 1998 presentation.
2. INVESTMENTS AND PARTIAL SALE OF SUBSIDIARY
At December 31, 1998 and 1997, investments consisted principally of marketable
equity securities, equity in affiliated companies, limited partnership
interests and purchase-money mortgages, as follows (in thousands):
1998 1997
- -----------------------------------------------------------------------
Marketable equity securities $ 110,119 $ 96,597
Equity in affiliated companies 42,568 --
Limited partnership interests,
purchase-money mortgages and other 6,381 6,216
- -----------------------------------------------------------------------
Total Investments $ 159,068 $ 102,813
=======================================================================
MARKETABLE EQUITY SECURITIES: The marketable equity securities are classified
as "available for sale" and are stated at quoted market values. The unrealized
holding gains on these securities, net of deferred income taxes, have been
recorded as a separate component of Shareholders' Equity.
The components of the net unrealized holding gains at December 31, 1998 and
1997 were as follows (in thousands):
1998 1997
- -----------------------------------------------------------------------
Market value $ 110,119 $ 96,597
Less historical cost 9,851 9,851
- -----------------------------------------------------------------------
Unrealized holding gains 100,268 86,746
Less deferred income taxes 36,939 31,602
- -----------------------------------------------------------------------
Net unrealized holding gains $ 63,329 $ 55,144
=======================================================================
EQUITY IN AFFILIATED COMPANIES: On December 24, 1998, the Company recognized a
loss of $19,756,000 for the partial sale of its sugar refining and marketing
unit, California and Hawaiian Sugar Company, Inc. (C&H) and the sale of a
majority of its equity in that company. The Company received approximately
$45,000,000 in cash, after the repayment of certain C&H indebtedness,
$25,000,000 in senior preferred stock, $9,600,000 in junior preferred stock,
and retained an approximately 36 percent common stock interest in the
recapitalized C&H. The Company holds all of C&H's senior preferred stock and
40 percent of C&H's junior preferred stock. The carrying amounts of these
investments approximated their fair values at December 31, 1998. C&H is
included in the consolidated results of the Company up to the date of the sale.
Effective December 24, 1998, the Company began accounting for its investment in
C&H under the equity method. The equity in earnings of C&H for the last seven
days of 1998 was not significant. Condensed balance sheet information for C&H
as of December 31, 1998 was as follows (in thousands):
1998
- --------------------------------------------------
Assets:
Current $ 77,109
Property and other 139,191
- --------------------------------------------------
Total $ 216,300
==================================================
Liabilities
Current $ 36,092
Long-term debt and other 123,845
Shareholders' equity, including
preferred stock 56,363
- --------------------------------------------------
Total $ 216,300
==================================================
In September 1998, the Company invested approximately $7,284,000 in a joint
venture which carries cargo between Florida and Puerto Rico, in which the
Company has a 27.5-percent interest. The Company charters two of its ships to
that venture.
LIMITED PARTNERSHIP INTERESTS AND PURCHASE-MONEY MORTGAGES: The investments in
limited partnership interests and purchase-money mortgages are recorded at
cost, which approximated market values at December 31, 1998 and 1997. The
purchase-money mortgages are intended to be held to maturity. The value of the
underlying investments of the limited partnership interests is assessed
annually.
See Note 5 for a discussion of market values of investments in the Capital
Construction Fund.
3. CHANGE IN ACCOUNTING METHOD FOR INSURANCE- RELATED ASSESSMENTS
The Company self-insures a portion of its federal workers' compensation
liability. As such, the Company utilizes the U.S. Department of Labor (DOL)
second injury fund, as authorized by Section 8(f) of the U.S. Longshore and
Harborworkers' Act. Under this Act, the DOL annually assesses self-insurers
for their share of the related cost. Through 1997 these assessments were
recorded as expense in the year the amounts were assessed and paid. Effective
January 1, 1998, the Company adopted the provisions of the American Institute
of Certified Public Accountants Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments." This
statement requires that the Company record as a liability, the expected cost of
future assessments relating to existing compensation claims made prior to the
end of the current fiscal year. In adopting this statement, the Company
recorded a one-time, non-cash charge to earnings of $9,282,000 ($5,801,000 net
of income tax, $0.13 per share), representing the cumulative effect of the
accounting change as of the beginning of the year. The discount rate used in
estimating the liability was 5.43%. On an undiscounted basis, the liability
was approximately $13,869,000 as of December 31, 1998. The effect of the
change on operating costs was not significant for the current or prior years.
4. WRITE-DOWN OF REAL ESTATE ASSETS
During 1998, the Company changed the strategic direction of its 1,045 acre
Kukui'Ula real estate development, from a single master-planned residential
community to a series of individual subdivisions with fewer units, as a result
of continued weaknesses in the State's and Kauai's economy and real estate
markets. As a result, the Company determined that its investment in a waste
water treatment plant (WWTP) could not be recovered through the WWTP's future
cash flows; accordingly, the costs of the WWTP were reduced by $15,900,000 to
the plant's fair value, which was based on the present value of estimated
future cash flows. Under the original higher-density Kukui'Ula development
plan, the cost of the WWTP would have been recoverable from its future cash
flows. The changes in the development plan also resulted in the write-off of
$4,316,000 for design and study costs which were determined to have no future
economic benefit. The remaining carrying cost of the Kukui'Ula project is
approximately $29,650,000 and, based on current development plans, the Company
has determined that this amount is recoverable from the project's future cash
flows.
5. CAPITAL CONSTRUCTION FUND
A subsidiary is party to an agreement with the United States Government which
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 having adequate tax bases 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 year-end, the
oldest CCF deposits date from 1994. Management believes that all amounts on
deposit in the CCF at the end of 1998 will be used or committed for qualified
purposes prior to the expiration of the applicable 25-year periods.
<TABLE>
<CAPTION>
TABLE 1 (In thousands)
- ------------------------------------------------------------------- ----------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gain Cost Value Loss
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $ 52,606 $ 53,108 $ 502 $ 69,451 $ 68,738 $ (713)
Cash and cash equivalents 81,627 81,627 -- 69,159 69,159 -
Accrued deposits 9,070 9,070 -- 10,000 10,000 -
- ---------------------------------------------------------------------------------------------------------
Total $143,303 $143,805 $ 502 $148,610 $147,897 $ (713)
=========================================================================================================
</TABLE>
Under the terms of the CCF agreement, the subsidiary 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 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 Balance Sheets or 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, 1998 and 1997, the balances on deposit in the CCF are
summarized in Table 1.
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 $4,514,000 in
1998, $5,897,000 in 1997 and $6,838,000 in 1996 on its investments in mortgage-
backed securities. The fair values of other CCF investments are based on
quoted market prices. These other investments mature in 1999. There were no
sales of securities classified as "held-to-maturity" during 1998 or 1997.
6. EMPLOYEE BENEFIT PLANS
The Company has funded single-employer defined benefit pension plans which
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, 1998, 1997 and 1996
is shown in Table 2 (page 36).
The net periodic benefit cost for the defined benefit pension plans and the
post-retirement health care and life insurance benefit plans during 1998, 1997
and 1996 is summarized in Table 3 (page 36).
As described in Note 2, the Company sold a majority of its interest in C&H
during 1998. The impact of this transaction on the benefit obligation and the
plan assets is noted in Table 2. At the time of the transaction, C&H had
recorded in its financial statements net obligations of $12,300,000 and
$46,500,000 for its pension and post-retirement benefit plans, respectively.
The assumptions used to determine the components of the net periodic benefit
cost were as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Post-retirement Benefits
--------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.75% 7.25% 7.50% 6.75% 7.25% 7.50%
Expected return on
plan assets 9.00% 9.00% 9.00% - - -
Rate of compensation
increase 4.25% 4.25% 4.50% 4.25% 4.25% 4.50%
</TABLE>
For post-retirement benefit measurement purposes, a 10-percent annual rate of
increase in the per capita cost of covered health care benefits was assumed
through 2001. The rate was assumed to decrease to 5-percent for 2002 and
remain at that level thereafter. For 1998 and 1997, gains and losses of the
post-retirement benefit plans were amortized over five years. For 1996 and
previous years, gains and losses for the post-retirement benefit plans were
amortized using the minimum method allowed by Statement of Financial Accounting
Standards (SFAS) No. 106, "Employer's Accounting for Post-retirement Benefits
other than Pensions." This change did not significantly affect financial
results.
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, 1998, 1997 and 1996, and the net periodic post-retirement benefit
cost for 1998, 1997 and 1996, would have increased or decreased as follows (in
thousands):
<TABLE>
<CAPTION>
Other Post-retirement Benefits
One Percentage Point
--------------------------------------------------------------
Decrease Increase
----------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Effect on total of service and
interest cost components $ (583) $(1,016) $(1,052) $ 689 $ 1,172 $ 1,208
Effect on post-retirement
benefit obligation $(4,387) $(9,786) $(9,833) $ 5,157 $11,113 $11,105
</TABLE>
The assets of the defined benefit pension plans consist principally of listed
stocks and bonds. Gains and losses are amortized using the minimum method
allowed by SFAS No. 87, "Employer's Accounting for Pensions." 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, as amended, (ERISA)
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 agree-
ments, 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 $11,860,000 and $10,654,000 at December 31, 1998 and
1997, respectively. The annual expense associated with the non-qualified plans
was not significant.
Total contributions to the multi-employer pension plans covering personnel in
shoreside and seagoing bargaining units were $5,633,000 in 1998, $5,828,000 in
1997 and $5,552,000 in 1996. 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 $809,000 as of December
31, 1998, 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>
<CAPTION>
Table 2 (In thousands)
Pension Benefits Other Post-retirement Benefits
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at
beginning of year $ 354,883 $ 326,095 $ 285,579 $ 91,112 $ 93,596 $ 91,052
Service cost 7,182 6,692 6,326 1,154 1,310 1,351
Interest cost 25,024 23,807 23,295 5,474 6,250 6,605
Plan participants' contributions -- -- -- 1,615 1,635 1,851
Actuarial (gain) loss 20,682 16,567 30,512 (8,482) (4,198) 3,425
Sale of subsidiary (158,758) -- -- (29,615) -- --
Acquisition -- -- 303 -- -- --
Benefits paid (22,631) (21,687) (20,736) (6,326) (6,933) (7,147)
Amendments 3,191 2,997 417 366 (548) (1,066)
Curtailments -- -- -- -- -- (2,475)
Special or contractual
termination benefits -- 412 399 -- -- --
- -------------------------------------------------------------------------------------------------------------
Benefit obligation at
end of year 229,573 354,883 326,095 55,298 91,112 93,596
- -------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 443,249 380,909 348,208 -- -- --
Actual return on plan assets 72,646 84,027 47,980 -- -- --
Acquisition -- -- 303 -- -- --
Sale of subsidiary (154,997) -- -- -- -- --
Employer contribution -- -- 5,154 -- -- --
Benefits paid (22,631) (21,687) (20,736) -- -- --
- -------------------------------------------------------------------------------------------------------------
Fair value of plan assets
at end of year 338,267 443,249 380,909 -- -- --
- -------------------------------------------------------------------------------------------------------------
Plan assets less benefit
obligation 108,694 88,366 54,814 (55,298) (91,112) (93,596)
Unrecognized net actuarial gain (88,373) (91,012) (59,119) (10,104) (22,353) (24,518)
Unrecognized transition asset (876) (1,869) (2,864) -- -- --
Unrecognized prior
service cost (benefit) 4,767 5,707 3,518 358 (3,824) (3,643)
- -------------------------------------------------------------------------------------------------------------
Accrued asset (obligation) $ 24,212 $ 1,192 $ (3,651) $ (65,044) $(117,289) $(121,757)
=============================================================================================================
_____________________________________________________________________________________________________________
</TABLE>
<TABLE>
<CAPTION>
Table 3 (In thousands)
Pension Benefits Other Post-retirement Benefits
----------------------------------- -----------------------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 7,182 $ 6,692 $ 6,326 $ 1,154 $ 1,310 $ 1,351
Interest cost 25,024 23,807 23,295 5,474 6,250 6,605
Expected return on plan
assets (38,862) (33,309) (30,557) -- -- --
Recognition of net gain (4,128) (2,258) (2,284) (7,221) (6,315) (1,598)
Amortization of prior
service cost 1,105 808 550 (359) (368) (419)
Amortization of unrecognized
transition asset (992) (996) (1,090) -- -- --
Recognition of settlement gain -- -- -- -- -- (2,475)
Recognition of curtailment gain -- -- (1,178) -- -- --
- -------------------------------------------------------------------------------------------------------------
Net periodic benefit
cost/(income) $ (10,671) $ (5,256) $ (4,938) $ (952) $ 877 $ 3,464
=============================================================================================================
Cost of termination benefits
recognized $ -- $ 412 $ 399 -- -- --
=============================================================================================================
</TABLE>
7. LONG-TERM DEBT, CREDIT AGREEMENTS
At December 31, 1998 and 1997, long-term debt consisted of the following (in
thousands):
1998 1997
- --------------------------------------------------------------------
Commercial paper, 1998 high 6%, low 5.05% $ 141,766 $ 130,852
Bank variable rate loans, due after 1998,
1998 high 6.2%, low 5.2% 78,500 41,500
Term loans:
7.18%, payable through 2007 67,500 67,500
8%, payable through 2000 17,500 27,500
7.43%, payable through 2007 15,000 15,000
7.65%, payable through 2001 10,000 10,000
9.05%, payable through 1999 7,739 14,815
9%, payable through 1999 5,294 10,588
9.8%, payable through 2004 -- 14,583
- --------------------------------------------------------------------
Total 343,299 332,338
Less current portion 45,533 24,453
Commercial paper classified as current 42,000 17,000
- --------------------------------------------------------------------
Long-term debt $ 255,766 $ 290,885
====================================================================
COMMERCIAL PAPER: At December 31, 1998, there were two commercial paper
programs. The first program was used by a subsidiary to finance the
construction of a vessel. At December 31, 1998, $99,766,000 of commercial
paper notes was outstanding under this program. Maturities ranged from 7 to
25 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 second commercial paper program, which was used by C&H, before the partial
sale of that business (see Note 2), to fund the purchases of raw sugar
inventory and to provide working capital for sugar refining and marketing
operations, was terminated on January 19, 1999 as a result of the partial sale
of C&H. At December 31, 1998, $42,000,000 of commercial paper notes was
outstanding under this program, all of which was classified as current.
Maturities ranged from 6 to 19 days. The interest cost and certain fees on the
borrowings relating to sugar inventory advances to growers were reimbursed by
the growers. The commercial paper was supported by an $85,000,000 backup
revolving credit facility with four commercial banks, which also was terminated
in January 1999.
VARIABLE RATE LOANS: The Company has a revolving credit and term loan
agreement with four commercial banks, whereby it may borrow up to $140,000,000,
under revolving loans to November 30, 2000, at varying rates of interest. Any
revolving loan outstanding on that date may be converted into a term loan,
which would be payable in 12 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. At December 31, 1998 and
1997, $50,000,000 and $25,000,000, respectively, were outstanding under this
agreement.
The Company has an uncommitted $45,000,000 short-term revolving credit
agreement with a commercial bank. The agreement extends to November 30, 1999,
but may be canceled by the bank or the Company at any time. At December 31,
1998 and 1997, $3,500,000 and $11,500,000, respectively, were outstanding under
this agreement.
The Company has an uncommitted $25,000,000 revolving credit agreement with a
commercial bank. The agreement extends to September 8, 2000. At December 31,
1998 and 1997, $10,000,000 and $5,000,000, respectively, were outstanding under
this agreement.
The Company has a $50,000,000 one-year revolving credit agreement with a two-
year term option. At December 31, 1998, $15,000,000 was outstanding. No
amounts were outstanding under this agreement at December 31, 1997.
The Company has an uncommitted $15,000,000 revolving credit agreement with a
commercial bank. The Agreement extends to November 28, 2000. At December 31,
1998 and 1997, there were no amounts outstanding under this agreement.
In 1998, the Company entered into a $25,000,000 one-year revolving credit
agreement with a commercial bank which serves as a commercial paper liquidity
back-up line. At December 31, 1998, no amounts were outstanding under this
agreement.
LONG-TERM DEBT MATURITIES: At December 31, 1998, maturities and planned
prepayments of all long-term debt during the next five years totaled
$45,533,000 for 1999, $17,500,000 for 2000, $15,000,000 for 2001, $7,500,000
for 2002 and $7,500,000 for 2003.
8. LEASES
THE COMPANY AS LESSEE: Principal operating leases include office and terminal
facilities leased for periods which expire between 1999 and 2026. 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 $45,519,000, $45,560,000 and
$45,559,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
There were no assets recorded under capital leases at December 31, 1998.
Assets recorded under capital lease obligations which were included in property
at December 31, 1997 were as follows (in thousands):
1997
- ---------------------------------------------------------------
Vessel $ 55,253
Machinery and equipment 42,039
- ---------------------------------------------------------------
Total 97,292
Less accumulated amortization 95,866
- ---------------------------------------------------------------
Property under capital leases--net $ 1,426
===============================================================
Future minimum payments under operating leases as of December 31, 1998 were as
follows (in thousands):
Operating
Leases
- ---------------------------------------------------------------
1999 $ 25,025
2000 14,595
2001 11,799
2002 11,952
2003 11,919
Thereafter 79,386
- ---------------------------------------------------------------
Total minimum lease payments $ 154,676
===============================================================
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, in the amount of $16,500,000, is due in 2013. An
accrued liability of $8,800,000 and $8,257,000 at December 31, 1998 and 1997,
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 vessels under operating leases. Five vessels were leased under new
agreements commencing in 1998. The historical cost of and accumulated
depreciation on leased property at December 31, 1998 and 1997 were as follows
(in thousands):
1998 1997
- --------------------------------------------------------------------------
Leased property $530,967 $267,569
Less accumulated amortization 113,358 47,253
- --------------------------------------------------------------------------
Property under operating leases--net $417,609 $220,316
==========================================================================
Total rental income under these operating leases for the three years ended
December 31, 1998 was as follows (in thousands):
1998 1997 1996
- --------------------------------------------------------------------------
Minimum rentals $ 79,268 $ 35,535 $ 34,556
Contingent rentals (based on sales volume) 1,079 1,048 1,232
- --------------------------------------------------------------------------
Total $ 80,347 $ 36,583 $ 35,788
==========================================================================
Future minimum rental income on non-cancelable leases at December 31, 1998 was
as follows (in thousands):
Operating
Leases
- -------------------------------------------------------
1999 $ 83,149
2000 79,513
2001 77,961
2002 75,349
2003 71,343
Thereafter 229,763
- ------------------------------------------------------
Total $ 617,078
======================================================
9. INCOME TAXES
The income tax expense for the three years ended December 31, 1998 consisted of
the following (in thousands):
1998 1997 1996
- --------------------------------------------------------------------------
Current:
Federal $ 28,877 $30,181 $ 23,549
State 3,723 2,476 4,779
- --------------------------------------------------------------------------
Total 32,600 32,657 28,328
Deferred (8,248) 13,168 10,420
- --------------------------------------------------------------------------
Income tax expense $ 24,352 $45,825 $ 38,748
==========================================================================
Total income tax expense for the three years ended December 31, 1998 differs
from amounts computed by applying the statutory Federal rate to pre-tax income
for the following reasons (in thousands):
1998 1997 1996
- ---------------------------------------------------------------------------
Computed income tax expense $ 19,353 $ 44,525 $ 36,412
State tax on income, less applicable
Federal tax 1,824 3,732 2,605
Low-income housing credits (1,204) (1,214) (1,219)
Fair market value over cost of donations -- (1,306) (11)
Bases differences in net assets acquired 3,114 -- --
Other-net 1,265 88 961
- ---------------------------------------------------------------------------
Income tax expense $ 24,352 $ 45,825 $ 38,748
===========================================================================
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liability at December 31, 1998 and 1997 were as follows
(in thousands):
1998 1997
- --------------------------------------------------------------------------
Accelerated depreciation $144,537 $178,570
Capital Construction Fund 102,741 104,408
Tax-deferred gains on real estate transactions 85,181 77,784
Unrealized holding gains on securities 36,939 31,602
Post-retirement benefits (27,027) (48,014)
Insurance reserves (10,771) (6,907)
Other-net 11,905 12,907
- --------------------------------------------------------------------------
Total $343,505 $350,350
==========================================================================
The Internal Revenue Service (IRS) has completed its audits of the Company's
tax returns through 1995 and, with the exception of the valuation of three land
donations, has settled all substantive issues raised during the audits. No
settlement has had a material effect on the Company's financial position or
results of operations. The IRS has commenced an audit of the Company's tax
returns for 1996 and 1997. Management believes that the ultimate resolution of
the outstanding audit issues and other matters which may result from the
current audits will not have a material effect on the Company's financial
position or results of operations.
10. CAPITAL STOCK AND STOCK OPTIONS
EMPLOYEE STOCK OPTION PLANS: During 1998, the Company had two stock option
plans under which key employees were granted options to purchase shares of the
Company's common stock.
Under the 1998 Plan, approved at the 1998 Annual Meeting of Shareholders,
option prices may not be less than the fair market value of the Company's
common stock on the dates of grant, and the options become exercisable over
periods determined, at the dates of grant, by the committee that administers
the plan. 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 the number of shares equal to that 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.
During 1998, options to purchase 100,000 shares were granted. At December 31,
1998, these were the only options outstanding under the 1998 Plan.
The 1989 Plan is substantially the same as the 1998 Plan, except that each
option generally becomes exercisable in-full one year after the date granted.
The 1989 Plan terminated in January 1999, but options granted through 1998
remain exercisable. During 1998, options to purchase 485,400 shares were
granted, no reload options to purchase shares were granted, options to purchase
65,850 shares were exercised, and options to purchase 17,950 shares were
canceled. At December 31, 1998, options to purchase 3,263,438 shares were
outstanding under the 1989 Plan.
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 fully vested upon issuance or may
vest in one or more installments, upon such terms and conditions as are
determined by the committee which administers the plans. The number of
incentive shares issued during 1998 or outstanding at the end of the year was
not material.
A third plan, the 1983 Plan, terminated in 1993, but options to purchase shares
previously granted under the 1983 Plan are still exercisable. At December 31,
1998, options to purchase 161,200 shares were outstanding under this plan.
These options expire in January 1999.
DIRECTOR STOCK OPTION PLANS: The Company also has two Directors' stock option
plans. Under the 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 six
months after the date granted. At December 31, 1998, no options to purchase
shares had been granted under this plan.
The 1989 Directors' Plan is substantially the same as the 1998 Directors' Plan.
This plan terminated in January 1999, but options granted through termination
remain exercisable. During 1998, options to purchase 21,000 shares were
granted and no options to purchase shares were exercised or canceled. At
December 31, 1998, options to purchase 204,000 shares were outstanding under
the 1989 Directors' Plan.
Changes in shares under all option plans, for the three years ended December
31, 1998, were as follows:
Price Range
Shares Per Share
- -----------------------------------------------------------------------
1995 Outstanding, December 31 2,586,751 $17.375-37.875
1996: Granted 495,264 21.750-32.625
Exercised (125,188) 17.375-24.750
Canceled (15,800) 24.250-36.250
- -----------------------------------------------------------------------
Outstanding, December 31 2,941,027 17.375-37.875
1997: Granted 586,212 25.100-34.875
Exercised (263,351) 17.375-24.750
Canceled (57,850) 24.750-37.875
- -----------------------------------------------------------------------
Outstanding, December 31 3,206,038 21.750-37.875
1998: Granted 606,400 22.750-29.769
Exercised (65,850) 21.750-27.000
Canceled (17,950) 26.250-34.000
- -----------------------------------------------------------------------
OUTSTANDING, DECEMBER 31 3,728,638 $21.750-37.875
EXERCISABLE, DECEMBER 31 3,143,238 $21.750-37.875
=======================================================================
ACCOUNTING METHOD FOR STOCK-BASED COMPENSATION: The Company applies Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations, in accounting for its stock-based compensation
plans. Accordingly, no compensation cost is recognized in the Company's income
statement for stock option plans at the time grants are awarded. If the
compensation costs for the stock option grants had been determined consistent
with SFAS No. 123, "Accounting for Stock-based Compensation," the after-tax
cost for grants made in 1998, 1997 and 1996 would have been approximately
$2,015,000, $1,800,000 and $900,000, respectively. Earnings per share for
1998, 1997 and 1996 would have declined by $0.05, $0.04 and $0.02,
respectively.
SHAREHOLDER RIGHTS PLAN: 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 to purchase
additional shares of the Company's stock or shares of an acquiring company's
stock at prices below market value.
SHARE REPURCHASES: During 1998, the Company purchased and retired 969,200
shares of its stock, at an average per-share price of $21.50. During 1997, the
Company purchased and retired 624,050 shares, at an average per-share price of
$26.58.
11. RELATED PARTY TRANSACTIONS, COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company and its subsidiaries had an unspent balance
of total appropriations for capital expenditures of approximately $60,294,000.
However, there is no contractual obligation to spend this entire amount.
The Company has arranged for standby letters of credit of approximately
$14,100,000, necessary to qualify as a self-insurer for state and federal
workers' compensation liabilities. In addition, the Company guarantees a
letter of credit of $10,432,000 for workers' compensation claims incurred by
C&H employees, under a now-closed self insurance plan, prior to December 24,
1998 (see Note 2). The Company would only be called upon to honor this
guarantee in the event of C&H's insolvency. The Company also has
approximately $3,600,000 of letters of credit outstanding for normal operating
matters.
C&H, in which A&B has a 36 percent common stock interest, is party to a long-
term sugar supply contract with Hawaiian Sugar & Transportation Cooperative
(HSTC), a raw sugar marketing and transportation cooperative owned by the
Company and by two other Hawaii sugar growers. Under the terms of this
contract, C&H is obligated to purchase, and HSTC is obligated to sell, all of
the raw sugar delivered to HSTC by the Hawaii sugar growers, at prices
determined by the quoted domestic sugar market. Prior to the partial sale of
C&H, it made purchases of raw sugar totaling $141,018,000, $126,629,000 and
$190,188,000 under the contract during 1998, 1997 and 1996, respectively.
A subsidiary has guaranteed obligations of up to $13 million of a joint venture
shipping operation (see Note 2) in which it has a 27.5-percent interest.
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.
12. INDUSTRY SEGMENTS
Industry segment information for 1998, 1997 and 1996, on page 19, is
incorporated herein by reference.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. 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 each
of the Company's segments. The lead executive for each operating segment
manages the profitability and cash flow of each 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 Ocean Transportation,
Property Development and Management and Food Products. The Ocean Trans-
portation segment carries freight between various United States and Canadian
West Coast, Hawaii and other Pacific ports, and provides terminal and cargo
logistics services. The Property Development and Management segment develops,
manages and sells residential, commercial and industrial properties. The Food
Products segment grows and processes raw sugar and molasses; invests in a
sugar refining and marketing business (see Note 2); grows, mills and markets
coffee; and generates and sells electricity.
The accounting policies of the operating segments are the same as those
described in the summary of significant policies. Reportable segments are
measured based on operating profit, exclusive of non-operating or unusual
transactions, interest expense, general corporate expenses and income taxes.
PARENT COMPANY, PRINCIPAL SUBSIDIARIES AND AFFILIATES1
Alexander & Baldwin, Inc. Honolulu, Hawaii
A&B-Hawaii, Inc. (Honolulu, Hawaii)
Division:
Hawaiian Commercial & Sugar Company Puunene, Maui
Subsidiaries:
A&B Development Company (California) San Francisco
A&B Properties, Inc. Honolulu
East Maui Irrigation Compnay, Limited Puunene, Maui
McBryde Sugar Company, Limited Eleele, Kauai
Subsidiary:
Kauai Coffee Company, Inc. Eleele, Kauai
Kahului Trucking & Storage, Inc. Kahului, Maui
Kauai Commercial Company, Incorporated Puhi, Kauai
Matson Navigation Company, Inc. (San Francisco, California)
Subsidiaries:
Matson Intermodal System, Inc. San Francisco
Matson Services Company, Inc. San Francisco
Matson Terminals, Inc. San Francisco
Matson Logistics Solution, Inc. San Francisco
Hawaiian Sugar & Transportation Cooperative2 Puunene, Maui
C&H Sugar Company, Inc.3 Crockett, California
_______________________________
1 Wholly owned unless otherwise indicated
2 A cooperative owned with other Hawaii sugar companies
3 An affiliated company, approximately 40% owned by A&B
<PAGE>
<TABLE>
<CAPTION>
Quarterly Results (Unaudited)
Segment results by quarter for 1998 and 1997 are listed below (in thousands, except per-share amounts):
1998 1997
----------------------------------------- -----------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Ocean Transportation $181,618 $180,202 $182,124 $178,800 $177,423 $179,106 $174,977 $161,183
Property Development
& Management:
Leasing 9,946 9,576 9,198 9,235 9,103 9,320 9,609 9,116
Sales 7,563 6,246 60,792 7,781 13,245 4,080 14,480 4,111
Food Products 128,173 129,620 112,994 94,874 134,777 132,816 118,131 101,188
Other 726 718 717 717 711 684 703 717
- ------------------------------------------------------------------------------------------------------------------------
Total Revenue $328,026 $326,362 $365,825 $291,407 $335,259 $326,006 $317,900 $276,315
========================================================================================================================
Operating Profit:
Ocean Transportation $ 15,941 $ 16,200 $ 16,787 $ 17,370 $ 19,088 $ 24,405 $ 22,779 $ 14,113
Property Development
& Management:
Leasing 5,360 5,786 5,589 5,899 5,787 6,105 6,433 6,234
Sales 1,394 1,633 13,994 4,642 7,345 1,257 3,080 1,580
Food Products 7,725 7,557 3,047 2,998 5,913 11,778 6,949 2,443
Other 691 642 685 678 653 652 671 663
- ------------------------------------------------------------------------------------------------------------------------
Total Operating Profit 31,111 31,818 40,102 31,587 38,786 44,197 39,912 25,033
Kukui'Ula Write-Down* (20,216) -- -- -- -- -- -- --
Loss on Partial Sale of C&H* (19,756) -- -- -- -- -- -- --
Benefit of Insurance Settlement -- -- -- -- -- -- 28 19,937
Interest Expense (6,197) (6,229) (6,293) (6,080) (6,421) (6,770) (7,803) (7,942)
General Corporate Expenses (4,085) (3,539) (3,459) (3,469) (2,925) (2,865) (2,891) (3,064)
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income
Taxes and Accounting Change (19,143) 22,050 30,350 22,038 29,440 34,562 29,246 33,964
Income Taxes 3,562 (8,270) (11,380) (8,264) (9,429) (12,690) (10,967) (12,739)
Cumulative Effect of Change in
Accounting Method** -- -- -- (5,801) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $(15,581) $ 13,780 $ 18,970 $ 7,973 $ 20,011 $ 21,872 $ 18,279 $ 21,225
========================================================================================================================
Basic and Diluted
Earnings (Loss) Per Share $ (0.35) $ 0.31 $ 0.42 $ 0.18 $ 0.45 $ 0.48 $ 0.40 $ 0.47
========================================================================================================================
* See Notes 2 and 4 for discussion of the partial sale of California and Hawaiian Sugar Company, Inc.
and the write-down of real estate assets in 1998.
**See Note 3 regarding accounting change adopted in fourth quarter of 1998.
Certain amounts have been reclassified to conform with the current presentation.
</TABLE>
<PAGE>
BOARD OF DIRECTORS
Members of the Board of Directors, including one advisory director,
beneficially own approximately 7 percent of A&B shares.
At the Annual Meeting of Shareholders on April 23, 1998, shareholders elected a
total of nine directors, all of whom were nominated by the Board. Reelected
were Michael J. Chun, John C. Couch, Leo E. Denlea, Jr., Walter A. Dods, Jr.,
Charles G. King, Carson R. McKissick, C. Bradley Mulholland, Maryanna G. Shaw
and Charles M. Stockholm. Alexander C. Waterhouse continues to serve as an
advisory director at the pleasure of the Board.
On June 25, 1998, Lynn M. Sedway, a recognized authority on urban and real
estate economics, was appointed to the Board of Directors of A&B, ABHI and
Matson.
R. J. Pfeiffer, Chairman of the Board from 1980 to 1995 and a director from
1978 to 1995, held the honorary position of Chairman Emeritus from 1995 until
July 27, 1998.
MANAGEMENT, ORGANIZATION
On July 27, 1998, the Company announced that John C. Couch, Chairman of the
Board, President and Chief Executive Officer since April 1995, was beginning
an extended leave of absence to undergo medical treatment. At the request of
the Board, R. J. Pfeiffer assumed Mr. Couch's duties.
On October 22, 1998, the Board named W. Allen Doane President and Chief
Executive Officer of A&B, and appointed him to the Boards of both A&B and
Matson. On December 10, 1998, Mr. Doane also was appointed Vice Chairman of
Matson. Mr. Pfeiffer remains Chairman of the Boards of A&B, ABHI and Matson.
C. Bradley Mulholland, President and Chief Executive Officer of Matson, was
named an Executive Vice President of A&B, effective August 27, 1998.
A number of organization changes were made, effective February 1, 1999.
Stanley M. Kuriyama, a Vice President of ABHI, was named a Vice President of
A&B and Executive Vice President of ABHI. Alyson J. Nakamura, Secretary of
ABHI, was named Secretary of A&B. Norbert M. Buelsing, a Vice President of
ABHI, was named a Senior Vice President of ABHI. Judith A. Williams, a Vice
President of A&B and ABHI, was named a Vice President of Matson.
David G. Koncelik, President and Chief Executive Officer of C&H, resigned his
title of Senior Vice President of ABHI in the course of the recapitalization
of C&H, effective December 25, 1998.
CREDIT RATINGS
As discussed in Note 7 to the financial statements, Matson had outstanding
commercial paper notes totaling $99.8 million at December 31, 1998. The Matson
notes are rated A-1, P-1 and D-1 by Standard & Poor's, Moody's and Duff &
Phelps, respectively. Standard & Poor's rates Matson's senior debt as A-.
STOCK INDEXES
The stock of A&B is included in the Dow Jones Transportation Index, the Dow
Jones Composite Index, the Dow Jones Marine Transportation Index and the
S&P MidCap 400 Index.
<PAGE>
DIRECTORS AND OFFICERS
ALEXANDER & BALDWIN, INC.
DIRECTORS
MICHAEL J. CHUN (55)**
President, The Kamehameha Schools
(educational institution)
JOHN C. COUCH (59)
Former Chairman of the Board, President
and Chief Executive Officer,
Alexander & Baldwin, Inc.
Former Chairman of the Board
A&B-Hawaii, Inc.
Former Chairman of the Board,
Matson Navigation Company, Inc.
LEO E. DENLEA, JR. (67)**
Retired Chairman of the Board, President
and Chief Executive Officer,
Farmers Group, Inc. (insurance)
W. ALLEN DOANE (51)
President and Chief Executive Officer,
Alexander & Baldwin, Inc.
President and Chief Executive Officer,
A&B-Hawaii, Inc.
Vice Chairman,
Matson Navigation Company, Inc.
WALTER A. DODS, JR. (57)*
Chairman of the Board and
Chief Executive Officer,
BancWest Corporation
Chairman of the Board and
Chief Executive Officer,
First Hawaiian Bank (banking)
CHARLES G. KING (53)**
President, King Auto Center
(automobile dealership)
CARSON R. MCKISSICK (66)*
Managing Director,
The Corporate Development Company
(financial advisory services)
C. BRADLEY MULHOLLAND (57)
Executive Vice President,
Alexander & Baldwin, Inc.
President and Chief Executive Officer,
Matson Navigation Company, Inc.
R. J. PFEIFFER (79)
Chairman of the Board,
Alexander & Baldwin, Inc.
Chairman of the Board,
A&B-Hawaii, Inc.
Chairman of the Board,
Matson Navigation Company, Inc.
LYNN M. SEDWAY (57)*
President and Chief Executive Officer,
Sedway Group
(real estate consulting)
MARYANNA G. SHAW (60)*
Private investor
CHARLES M. STOCKHOLM (66)**
Managing Director,
Trust Company of the West
(investment management services)
Advisory Director
ALEXANDER C. WATERHOUSE (87)
Vice Chairman,
Waterhouse Properties, Inc.
(private investments)
* Audit Committee Members
** Compensation and Stock Option Committee Members
ALEXANDER & BALDWIN, INC.
OFFICERS
R. J. PFEIFFER (79)
Chairman of the Board
W. ALLEN DOANE (51)
President and Chief Executive Officer
C. BRADLEY MULHOLLAND (57)
Executive Vice President
GLENN R. ROGERS (55)
Executive Vice President, Chief
Financial Officer and Treasurer
MEREDITH J. CHING (42)
Vice President
(Government & Community Relations)
JOHN B. KELLEY (53)
Vice President (Investor Relations)
MILES B. KING (51)
Vice President and Chief Administrative
Officer
MICHAEL J. MARKS (60)
Vice President, General Counsel and
Secretary
ROBERT K. SASAKI (58)
Vice President (Properties)
JUDITH A. WILLIAMS (55)
Vice President
(Corporate Planning & Development)
THOMAS A. WELLMAN (40)
Controller
A&B-HAWAII, INC.
OFFICERS
R. J. PFEIFFER (79)
Chairman of the Board
W. ALLEN DOANE (51)
President and Chief Executive Officer
G. STEPHEN HOLADAY (54)
Senior Vice President
(Plantation General Manager, HC&S)
MILES B. KING (51)
Senior Vice President (Industrial Relations)
MICHAEL J. MARKS (60)
Senior Vice President and General Counsel
GLENN R. ROGERS (55)
Senior Vice President,
Chief Financial Officer and Treasurer
ROBERT K. SASAKI (58)
Senior Vice President (Properties)
NORBERT M. BUELSING (48)
Vice President (Property Management)
MEREDITH J. CHING (42)
Vice President
(Government & Community Relations)
JOHN F. GASHER (65)
Vice President
(Human Resources Development)
KEITH A. GOTO (55)
Vice President (Labor Relations)
JOHN B. KELLEY (53)
Vice President
STANLEY M. KURIYAMA (45)
Vice President
(Land Planning & Entitlements)
THOMAS A. WELLMAN (40)
Vice President and Controller
JUDITH A. WILLIAMS (55)
Vice President
(Corporate Planning & Development)
ALYSON J. NAKAMURA (33)
Secretary
MATSON NAVIGATION COMPANY, INC.
OFFICERS
R. J. PFEIFFER (79)
Chairman of the Board
W. ALLEN DOANE (51)
Vice Chairman of the Board
C. BRADLEY MULHOLLAND (57)
President and Chief Executive Officer
RAYMOND J. DONOHUE (62)
Senior Vice President and
Chief Financial Officer
MILES B. KING (51)
Senior Vice President (Human Resources)
GARY J. NORTH (54)
Senior Vice President (Operations)
(President and Chief Operating Officer,
Matson Terminals, Inc.)
KEVIN C. O'ROURKE (52)
Senior Vice President and General Counsel
PAUL E. STEVENS (46)
Senior Vice President (Marketing)
RICHARD S. BLISS (60)
Vice President
(Area Manager, Pacific Northwest)
ROBERT L. DAWDY (54)
Vice President (West Coast Operations)
BRANTON B. DREYFUS (45)
Vice President (Area Manager, Hawaii)
RONALD J. FOREST (43)
Vice President
(Area Manager, Southern California)
PHILIP M. GRILL (51)
Vice President (Government Relations)
DALE B. HENDLER (45)
Vice President
(Area Manager, Northern California)
MERLE A. K. KELAI (67)
Vice President (Community Relations and
Government Affairs)
MICHAEL J. MARKS (60)
Secretary
TIMOTHY H. REID (52)
Treasurer
JOSEPH A. PALAZZOLO (50)
Controller
All positions as of December 31, 1998
All ages as of March 31, 1999
<PAGE>
INVESTOR INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held in the Plaza Meeting Room on
the ground floor of Amfac Center, 745 Fort Street, Honolulu, Hawaii at 10 a.m.
on Thursday, April 22, 1999.
INVESTOR INFORMATION
Shareholders having questions about A&B are encouraged to write to W. Allen
Doane, President and Chief Executive Officer; or Michael J. Marks, Vice
President, General Counsel and Secretary.
Inquiries from professional investors may be directed to John B. Kelley,
Vice President, Investor Relations. Phone (808) 525-8422
E-mail: [email protected]
FORM 10-K
Shareholders may obtain a copy of the Company's Annual Report on Form 10-K,
as filed with the Securities and Exchange Commission, without charge, by
writing to Michael J. Marks, Vice President, General Counsel and Secretary,
Alexander & Baldwin, Inc., P.O. Box 3440, Honolulu, HI 96801-3440.
TRANSFER AGENT & REGISTRAR
CHASEMELLON SHAREHOLDER
SERVICES
San Francisco, California and Ridgefield Park, New Jersey
For questions regarding stock certificates, dividends, or other transfer-
related matters, representatives of the Transfer Agent may be reached at
1-800-356-2017 between 9 a.m. and 7 p.m., Eastern Time. Correspondence may
be sent to: P.O. Box 3315, So. Hackensack, NJ 07606.
AUDITORS
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
COMMON STOCK
A&B common shares trade under the symbol ALEX on the NASDAQ Stock MarketSM.
A summary of daily stock transactions is listed in the NASDAQ National Market
Issues section of major newspapers. Trading volume averaged 109,380 shares a
day in 1998, compared with 68,734 shares a day in 1997 and 67,425 in 1996.
Currently, 16 firms make a market in ALEX.
High and low sales prices per share, by quarter, for 1998 and 1997 were:
Quarter 1998 1997
- ----------------------------------------------------------
First $ 30-3/4 - 25 $ 29-3/8 - 24-1/2
Second 31-1/8 - 25-7/8 27-3/4 - 24-3/8
Third 29-7/8 - 19-3/4 28-1/8 - 25-3/8
Fourth 23-1/4 - 18-13/16 28-1/4 - 26
DIVIDENDS
The Company has paid cash dividends in every quarter since 1903. The most
recent increase in the quarterly dividend rate was effective in the first
quarter of 1998, from 22 cents a share to 22.5 cents. In 1998, total dividend
payments to shareholders were $40.3 million.
The following dividend schedule for 1999 has been set, subject to final
approval by the A&B Board of Directors:
Quarterly Declaration Record Payment
Dividend Date Date Date
- -----------------------------------------------------------
First Jan. 28 Feb. 12 March 4
Second April 22 May 6 June 3
Third June 24 Aug. 5 Sept. 2
Fourth Oct. 28 Nov. 10 Dec. 2
ALEXANDER & BALDWIN, INC.
822 BISHOP STREET HONOLULU, HI 96813-3924
P. O. BOX 3440 HONOLULU, HI 96801-3440
TELEPHONE: 808-525-6611 FAX: 808-525-6652
WEBSITE: www.alexanderbaldwin.com
<PAGE>
ALEXANDER & BALDWIN, INC.
SUBSIDIARIES AS OF FEBRUARY 28, 1999
State or Other
Jurisdiction Under
Name of Subsidiary Which Organized
- ------------------ ------------------
A&B-Hawaii, Inc. Hawaii
Subsidiaries:
A & B Development Company (California) California
A & B Properties, Inc. Hawaii
ABHI-Crockett, Inc. Hawaii
McBryde Sugar Company, Limited Hawaii
Kauai Coffee Company, Inc. Hawaii
East Maui Irrigation Company, Limited Hawaii
Kahului Trucking & Storage, Inc. Hawaii
Kauai Commercial Company, Incorporated Hawaii
Kukui'Ula Development Company, Inc. Hawaii
South Shore Community Services LLC Hawaii
South Shore Resources LLC Hawaii
WDCI, INC. Hawaii
Matson Navigation Company, Inc. Hawaii
Subsidiaries:
Matson Intermodal System, Inc. Hawaii
Matson Logistics Solutions, Inc. Hawaii
Matson Services Company, Inc. Hawaii
Matson Terminals, Inc. Hawaii
NOTE: Certain A&B subsidiaries, which considered in the aggregate do not
constitute a significant subsidiary, have been omitted.
INDEPENDENT AUDITORS' CONSENT
Alexander & Baldwin, Inc.:
We consent to the incorporation by reference in Registration Statements No.
2-72008, 2-84179, 33-31922, 33-31923, 33-54825, and 333-69197 of Alexander &
Baldwin, Inc. and its subsidiaries on Form S-8 of our reports dated January
28, 1999, appearing in and incorporated by reference in the Annual Report on
Form 10-K of Alexander & Baldwin, Inc. and its subsidiaries for the year ended
December 31, 1998.
/s/ Deloitte & Touche LLP
March 26, 1999
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