chiquita brands international 2002annual
- 2. P R O G R E S S A G A I N S T O U R T H R E E - Y E A R S T R AT E G Y ANNOUNCEMENT — SEPTEMBER 24, 2002 P R O G R E S S T O D AT E — M A R C H 3 1 , 2 0 0 3 FOCUS ON THE CORE Improve Chiquita Fresh Restructure Chiquita Processed Foods Reached definitive agreement to s sell vegetable canning business (vegetable canning business) Sold non-core assets: five ships s Divest non-core businesses and two distribution companies Launched per formance improvement DRIVE BETTER PERFORMANCE s programs Ended subsidy to Armuelles, Panama, s division and negotiating its sale Reduce costs significantly P u rchased and beginning to s restructure Atlanta AG, our largest Grow top line moderately European customer Maintain EU market position Added new directors with consumer s products and international trade Increase financial flexibility exper tise STRENGTHEN BALANCE SHEET Reduce debt Reduced debt by $137 million from s M a rch 2002 to year-end Leverage existing assets into Completed and pending 2003 acquisitions s new businesses and divestitures would add net capacity to fur ther reduce debt by at least Pay dividends/Buy back stock $125 million 2003 - 2005 ANNUAL COST REDUCTION GOALS (IN MILLIONS) 2003 2004 2005 Gross cost reduction, September 2002 plan 45 90 150 $ $ $ Less sale of vegetable canning business (5) (25) (40) Gross cost reduction, excluding vegetable canning business 40 65 110 Potential industry offsets 1 (25) TBD TBD Net cost reductions from programs 15 TBD 70 One-time implementation costs (10-15) (10-15) (10-15) (1) Industry offsets include increased prices for purchased goods and services and events beyond the company’s control, such as floods and storms. In 2003, we currently expect offsets of $25 million from higher costs for purchased fruit, fuel and paper.
- 3. Dear Stakeholders: In March 2002, Chiquita’s emergence from bankruptcy gave us the opportunity to remake this 104-year-old company. Relieved of $700 million of debt and accrued interest and $60 million of annual interest expense, the new Chiquita began with a stronger balance sheet and a new, well-qualified board of directors. Following a thorough top-to-bottom review of the company’s operations, we unveiled in September 2002 a new strategy to rebuild Chiquita. As a company, we have committed to goals and intend to deliver on them. We already have made considerable progress. 2 0 0 2 F I N A N C I A L R E S U LT S In accordance with generally accepted accounting principles (GAAP) for companies emerging from Chapter 11 restructuring, Chiquita’s 2002 financial statements do not combine the results of the Predecessor Company, prior to March 31, 2002, and those of the Reorganized Company, after March 31, 2002, for the full year. However, for simplicity and clarity, this letter discusses certain financial results on a combined basis. The box at the bottom of the following page describes these combined results in GAAP terms. Net sales for 2002 on a combined basis totaled $2.0 billion, up six percent from 2001. While the initial impact of our cost-reduction programs, launched in the fourth quarter 2002, will not be felt until 2003, combined operating income rose to $75 million in 2002, from $33 million the prior year. The 2002 results benefited from a $34 million decrease in depreciation resulting from fresh-start accounting upon our emergence from Chapter 11. On a combined basis in 2002, Chiquita reported a net loss of $385 million, which included financial restructuring charges of $286 million and a $145 million write-down of goodwill.
- 4. O U R S T R AT E G I C F O C U S 2002 2003 Assess & Launch New Action Plan Reduce Costs Emerge from bankruptcy with Implement programs to reduce costs and s s “fresh star t ” improve organizational ef fectiveness Assess operations in detail Divest non-core or unproductive assets s s Launch new strategy Pay down debt s s Plant seeds for new business gro w t h s In 2001, Chiquita reported a net loss of $119 million, which included $34 million in financial restructuring charges. Benefiting from decreased depreciation and interest expense, net income for the Reorganized Company was $13 million for the nine months ended Dec. 31, 2002, compared with a loss of $123 million for the same nine months in 2001. Overall, 2002 was a year of transition for Chiquita, and our financial performance did not show significant improvement beyond what was enabled by the bankruptcy reorganization. We are on the right track to rebuild the company, but we recognize there will be setbacks and new challenges. In 2002, we had major floods in the spring and again in the late fall. We had a strike in Honduras and high costs in Armuelles, Panama. Prices fell abnormally in North America and Europe in the second half. Our vegetable canning business, which we have agreed to sell, had a weak processing season. Our job is to manage through these and other challenges without reducing our resolve or commitment to build a great enterprise. Certain figures presented in this letter combine results of the Predecessor Company for the three months ended March 31, 2002, with the results of the Reorganized Company for the nine months ended Dec. 31, 2002. The Castellini Group and Progressive Produce, which were sold in December 2002 and January 2003, respectively, are treated as discontinued operations and are excluded from net sales and operating income. Where combined results are used, following are the associated GAAP financial results for the Predecessor Company and Reorganized Company: Net sales for the Predecessor Company for the three months ended March 31, 2002, were $547 million, while net sales for s the Reorganized Company for the nine months ended Dec. 31, 2002, were $1.4 billion. Operating income for the Predecessor Company for the three months ended March 31, 2002, was $42 million, while s operating income for the Reorganized Company for the nine months ended Dec. 31, 2002, was $32 million. The net loss for the Predecessor Company for the three months ended March 31, 2002, was $398 million. Net income for the s Reorganized Company for the nine months ended Dec. 31, 2002, was $13 million.
- 5. 2004 2005 Reduce Costs & Begin to Grow Grow Continue programs to reduce costs and Generate significant revenues and s s improve organizational ef fectiveness profits from selected new businesses Continue debt reduction Continue debt reduction s s P repare for enlargement of European Pay dividends/Buy back stock s s Union in 2004 and tarif f-only market Continue programs to reduce costs and s in 2006 improve organizational ef fectiveness Launch selected new businesses s O U R S T R AT E G Y Our top-to-bottom review confirmed the company’s many strengths: the power of the Chiquita brand, our superb logistics network, our proprietary ripening technology and the cost competitiveness of most of our banana operations. However, it was obvious that our farms in Armuelles posed a significant challenge. Chiquita’s weak financial results underscored the need to reduce costs and to begin leveraging our strengths into profitable growth beyond our core banana operations. While we tackled our immediate cost and productivity challenges, we also developed a new strategy to increase shareholder value significantly over the next three years and to position Chiquita for long-term success. The strategy is simple and measurable: Focus on the core, by divesting non-core assets; s Drive better performance, by reducing costs significantly and increasing organizational s effectiveness; Strengthen the balance sheet and profitably invest the cash generated, by reducing debt, s leveraging existing assets into new businesses, and eventually, paying dividends or buying back stock. Here’s what we’ve done to focus on the core. We began by divesting non-core assets, selling two produce distribution companies in the United States and five ships. Proceeds from those sales, including assumed debt, totaled $106 million. In March 2003, we announced our largest divestiture – a definitive agreement to sell our vegetable canning business
- 6. to Seneca Foods Corp. for $125 million in cash and stock, plus the assumption of debt, which was $81 million at Dec. 31, 2002. The sale, which is subject to regulatory approval, will enable Chiquita to pay down its debt significantly. It will also enable management to concentrate all of its attention on Chiquita’s core fresh produce business. Here’s what we’re doing to drive better performance. In the latter half of 2002, we began a number of programs aimed at increasing productivity and organizational effectiveness as well as reducing overhead and purchasing costs. We originally committed to eliminate $150 million in overall costs and, after potential industry offsets, deliver $100 million of net cost reductions by 2005. With the completion of the pending sale of our vegetable canning business, our 2005 targets will become $110 million of gross cost reductions and $70 million in net cost reductions after industry offsets, as illustrated in the chart on the inside front cover. In 2003, we have targeted gross annual cost reductions of $40 million, excluding our canning business. Those reductions will be offset by one-time implementation costs of $10-$15 million and by higher market prices for purchased goods, including fruit, fuel and paper. From an operations perspective, the most pressing productivity issue we faced in 2002 was our banana division in Armuelles. Since 1997, strikes and inefficient work practices there have cost Chiquita more than $90 million, compared to the cost of equivalent volume of fruit from other owned and purchased sources. It was clear that Chiquita could no longer tolerate such losses, and in July, we announced our decision to either restructure or exit this division. At the start of 2003, we ceased subsidizing losses at the Armuelles operation.
- 7. We have been pursuing the sale of our farms to worker-owned cooperatives, with Chiquita continuing to purchase fruit at market prices under long-term contracts. This sale would result in $18 million in annualized savings. We have been negotiating in good faith with the union, local cooperatives and the Panamanian government, which has been supportive of our position. We believe our solution is fair, responsible and in the best interests of the company, investors, employees and the community. If we do not reach an agreement soon, we will leave Armuelles and purchase fruit from other sources. Another challenge – and opportunity – that we identified in 2002 was our stake in Atlanta AG of Germany, one of the largest fresh produce distributors in Europe and Chiquita’s largest customer there for many years. Atlanta has been underperforming, largely because of the distraction of unprofitable ventures outside its core markets. By exchanging loans for Atlanta’s underlying equity interests, we were able to acquire ownership in a virtually cashless transaction that closed in March 2003. To boost Atlanta’s profitability and maximize the value of our investment, we hired as president Peter Jung, who brings extensive restructuring, food industry and consumer products expertise. We have already begun streamlining Atlanta’s distribution network, selling certain assets and reducing its debt. The acquisition of Atlanta increased Chiquita’s debt by approximately $65 million and will increase our consolidated revenues on an annualized basis by about $1.1 billion. Here’s what we’ve done to strengthen our balance sheet. Given the volatile nature of the banana industry and Chiquita’s leverage, we place a high priority on reducing debt and increasing financial flexibility. We established a goal of reducing total debt to
- 8. $400 million by 2005. We made excellent progress in 2002, cutting debt by $137 million in the nine months ended Dec. 31, 2002, from $654 million upon emerging from bankruptcy. The net effect of our completed and pending 2003 acquisitions and divestitures will be to increase our capacity to reduce debt by at least $125 million. This will be in addition to our ability to repay debt from operating cash flow. Here’s what we’re doing to invest cash profitably. Our clear commitment is to transform Chiquita into a profitable and growing fresh produce business and increase long-term shareholder value. Debt reduction is our first priority in deploying cash from asset sales and operations. As we reach our debt targets, we will invest in potential growth opportunities that leverage the Chiquita brand and the company’s strategic strengths into related businesses, such as other whole and value-added fruit. We expect to plant the seeds for selected new businesses in 2003, to increase our efforts in 2004 and to begin generating significant revenue and profit contributions in 2005. As our cash-generation ability permits, the board will consider returning cash to shareholders through dividends and/or stock buybacks. Here’s what we’ve done to add independent expertise to our board. Important to building a highly successful Chiquita is having a board of directors with exemplary leadership, experience in consumer products and expertise in international trade. Since our last annual report, we are pleased to have welcomed Durk Jager, former chairman and chief executive officer of Procter & Gamble; Jaime Serra, Mexico’s former secretary of finance and secretary of trade and industry; and Steven Stanbrook, president of S.C. Johnson
- 9. Asia-Pacific and recent president of S.C. Johnson Europe, Africa and the Middle East. The willingness of business leaders of this caliber to join Chiquita, particularly at this time of intense scrutiny of corporate governance, is a testament to the company’s integrity, strength and potential. Our board is committed to leadership in corporate governance practices. I deeply appreciate the dedication and hard work of all of our directors. We wish to extend a special tribute to Carl H. Lindner, Jr., who retired from our board in May 2002 after a quarter-century of service. Carl served for many years as chairman and CEO. His vision and tireless efforts on behalf of the company, particularly for eight years during the ultimately successful struggle to bring about reform of the European Union’s banana import regime, were unmatched in our company’s history. Here’s what we’re doing to improve corporate responsibility. In 2002, Chiquita again demonstrated its commitment to high environmental and social standards. During the year, all Chiquita-owned farms earned re-certification to the strict environmental standards of the Rainforest Alliance, an international conservation organization. In March 2003, independent auditors certified our banana farms in Costa Rica, which employ more than 2,500 people, to Social Accountability International’s SA8000 labor standard. Our Costa Rican division is the first major agricultural operation in Central America to earn this certification. Our corporate responsibility reports also continue to earn recognition for their honesty, transparency and clear performance measurement. Our first report was ranked best in the world among food companies by SustainAbility and the United Nations Environmental Program, and our second report shared the first-ever
- 10. award for outstanding sustainability reporting from a coalition of more than 80 environ- mental and investment groups. I encourage you to review our corporate responsibility reports at www.chiquita.com. We are committed to managing Chiquita to the highest standards of integrity and propriety in all our affairs, from our farms to our boardroom. Our achievements are a great source of pride among our employees. We have confidence in Chiquita’s turnaround. With the power of the Chiquita brand, the clarity of our goals and the commitment of our employees, we will make Chiquita into a world-class leader. Though we may experience temporary setbacks from agricultural, weather, currency, political and global business risks, I am confident we will prevail and deliver on our commitments. Sincerely, C Y R U S F. F R E I D H E I M , J R . CHAIRMAN AND CHIEF EXECUTIVE OFFICER APRIL 10, 2003
- 11. 2002 ANNUAL REPORT CHIQUITA BRANDS INTERNATIONAL, INC.
- 13. Q&A Q&A 1. A Y E A R A F T E R E M E R G I N G F R O M B A N K R U P T C Y, HOW’S THE TURNAROUND GOING? The bankruptcy reorganization provided us with an INTERVIEW WITH CYRUS FREIDHEIM oppor tunity to remake Chiquita. In my letter to Chairman and Chief Executive Officer stakeholders, I laid out what we committed to do and what we have delivered to date. We are proud of those accomplishments…but we have just star ted. We emerged from bankruptcy in need of new direction. Our team has developed a strategy for building Chiquita into a profitable, growing leader in its core fresh produce businesses. In 2003 and 2004, we will build a strong foundation for a highly cost-competitive, innovative, “Accountability, financially flexible company. By 2005, our plan is to add profits from new businesses by leveraging our brand and current capabilities. flexibility and cost The task in 2002 was clear: Emerge successfully from bankruptcy, set a new direction, launch the programs effectiveness are the necessary for rebuilding, restructure the por tfolio and reduce debt. Most impor tant, we needed to recognize we would face setbacks and challenges – and we did – cornerstones of our but we would not be deterred. Rebuilding takes time to do right. We are changing our organization, our systems, our approach to market, our new organization, relationships with our customers and consumers as well as our cost structure. We recognize that leadership must be which is leaner and earned. There is no magic wand. Rather, the necessary building blocks are a sound strategy and a team of highly competent, innovative people working together with a more focused.” common purpose. We believe the elements essential to our success are in place. 2002 ANNUAL REPORT 11
- 14. Q & A WITH CYRUS FREIDHEIM Q&A Q&A 2. 3. WHAT KIND OF COMPANY IS CHIQUITA GOING TO BE WITHOUT THE VEGETABLE WHAT ARE MAJOR CHALLENGES FACING CHIQUITA, CANNING BUSINESS? AND HOW ARE YOU ADDRESSING THEM? The banana is the world’s most popular fruit, and Chiquita Chiquita is a global company, with operations in more than has the most recognized brand. We are No. 1 in Europe in 40 countries and sales in 60 nations around the world. bananas market share and a close No. 2 in Nor th America. There are many challenges inherent in our business and in We intend to be the world leader by raising the category emerging from Chapter 11 over a year ago. I will address four. to new levels through product innovation, merchandising, First, we need to continue rebuilding Chiquita’s credibility promotion, new channels and new sources. with the financial and investment community. We have a Bananas are central to our history and to our future, but new board and a new CEO, but a change at the top isn’t we are not going to be a pure banana company. enough. We have to earn credibility. How? Our philosophy is simple: “Commit to goals and deliver on them consistently.” Without the vegetable canning business, we will be more That’s what we’re doing. We’ve laid out a strategy with vulnerable to the volatility of the banana industry, which is clear targets, and our stakeholders can track our progress. why we are expanding into other fresh produce businesses. As we deliver, we build credibility. Growing such businesses leverages our core competencies, assets, logistics capabilities – and, most impor tant, our Second, we must stop the losses at our farms in Armuelles, brand. Our research has consistently demonstrated the Panama, which I discussed at length in my letter. We have power and reach of the Chiquita brand. Chiquita is one of developed a solution that balances the interests of all the top 10 food brands in the world in terms of recognition stakeholders. We are close to a conclusion. and respect. The attributes consumers associate with Third, our business is subject to significant volatility. We Chiquita (quality, healthy, nutritious, fresh) extend well, face storms, strikes, plant diseases, fluctuating prices par ticularly to other fresh produce. and exchange rates, consolidation of retailers and tough We will offer products for which we can provide a consistent competition. Our challenge is to manage our finances so that supply of superior quality, predominantly on a year-round we remain vibrant regardless of what hits us. Our solution basis. We have begun using the Chiquita brand on several is to reduce our debt and improve our free cash flow fresh products, including melons, grapes, peaches, nectarines, sufficiently to provide the necessary financial flexibility. pineapples, avocados, grapefruit, kiwis, limes and a small Four th, the European Union is expected to expand to 25 line of vegetables. Atlanta AG, a recent acquisition that is member states in May 2004 with the addition of 10 central one of the largest fresh fruit distributors in Europe, gives and eastern European countries. This will increase the EU’s us the capability to expand the volume and varieties of banana impor t quota. The size of the increase and the rules Chiquita-branded produce. for distributing additional quota licenses will be announced Our goal is to expand our non-banana fresh produce businesses this year. We cannot predict the impact EU enlargement by at least 15-20 percent in 2003. will have on the company, market conditions or prices. However, we are working with governmental authorities to press for fair enlargement rules for bananas. We have also taken a number of commercial steps to prepare for enlargement, including building up our presence and market share in the new member states. CHIQUITA BRANDS INTERNATIONAL, INC. 12
- 15. Q&A Q&A 4. 5. WHY ARE YOU CONTINUING TO INVEST IN HOW DO YOU TRANSFORM A COMPANY INTO A CORPORATE RESPONSIBILITY? H I G H - P E R F O R M A N C E C U LT U R E ? Chiquita star ted with the Better Banana Project in Latin In my experience with a wide variety of organizations America in par tnership with the Rainforest Alliance, an around the world, creating a high-per formance culture international conservation organization, in 1992. The always star ts at the top. Management needs to commit objective was to dramatically improve the impact of banana to and communicate goals, set high expectations, assure farms on the environment. Then, in 1998, Chiquita took the necessary tools are available at every level, reward on corporate responsibility as a major priority following performance rather than tenure and instill a winning spirit. years of criticism from nongovernmental organizations We committed to the strategy and goals that we laid out and the media. Management decided to turn around the in September 2002. They have been communicated widely company’s reputation. That led to dialogue with our critics, to employees and built into the plans and objectives of measurement against strict third-par ty social standards, managers throughout Chiquita. Employee teams from across and transparent repor ting of our per formance. the company led our cost-reduction and productivity- Today, 100 percent of Chiquita’s owned farms are cer tified improvement projects. We set high expectations. by the Rainforest Alliance, and two of our joint venture Accountability, flexibility and cost effectiveness are the farms in the Philippines became the first in Asia to achieve cornerstones of our new organization, which is leaner Rainforest Alliance cer tification. We are also making and more focused. Chiquita’s new structure is also more significant progress with independent growers; in 2002, appropriate for a company with a single primary business 46 percent of the bananas we purchased also came from unit. For example, we are consolidating all the financial Rainforest Alliance-cer tified farms, up from 33 percent functions into one global group instead of decentralized, the prior year. regionally based systems. We have unified our supply chain In December 2002, independent auditors cer tified our organization to oversee all areas from packing stations to banana farms in Costa Rica to the strict SA8000 labor markets. We have put human resources capabilities at standard, and our divisions in Colombia and Bocas, Panama, the point of need. are on course to earn cer tification later in 2003. We are We are installing the tools that employees need to succeed. working toward SA8000 cer tification of all Chiquita-owned Chiquita has lacked integrated systems to collect, analyze banana divisions. and repor t key per formance metrics. We are replacing In delivering on our corporate responsibility goals, we have more than 100 systems used around the world today with gone from being a target of criticism to a focal point of global transaction processing technology. praise. We could not buy that kind of turnaround in corporate We have changed our compensation systems to align the reputation. We can only earn it, by committing to high interests of our managers with those of shareholders. For standards and living up to them. While we have had some our most senior managers, over half of their compensation financial benefits, we continue to invest in corporate is now at risk unless company and business unit financial responsibility because it is the right thing to do. targets are met. No one received per formance bonuses in 2002 because we did not meet our goals. We have tied a significant por tion of their compensation to share price performance through options and restricted stock. We also extended a new pay-for-per formance bonus program to nonmanagement employees in 2002. Taken together, these efforts are building a high-performance culture that I’m confident will make Chiquita successful for years to come. 2002 ANNUAL REPORT 13
- 17. Q& A INTERVIEW WITH BOB KISTINGER P r e s i d e n t a n d C h i e f O p e r a t i n g O f f i c e r, C h i q u i t a F r e s h G r o u p “We are working to “As a result of the shift the retailers’ strength of our focus from the price brand…we have they pay for bananas recently won to the profits they important annual make by selling and multiyear Chiquita.” business in Europe and North America from several global retailers, including our largest customer Wal-Mart.” 2002 ANNUAL REPORT 15
- 18. Q & A WITH BOB KISTINGER Q&A Q&A 1. 2. WHAT IS YOUR MARKET STRATEGY FOR IS PRODUCTIVITY IMPROVING IN THE THE BANANA BUSINESS IN NORTH AMERICA BANANA DIVISIONS? WHERE ARE THE BEST AND EUROPE? PRODUCTIVITY OPPORTUNITIES? We are confident that our increased customer focus will be Improving farm productivity is complex. It requires both the key to our growth and success in all markets. Through increasing yields in production and reducing waste in consolidation, major retail chains continue to grow in both harvesting and packing. We are implementing numerous size and importance. That’s been the case in North America changes in planting, irrigation, drainage, pest and disease for years, and we see it now in Europe, where discount control, and other agricultural practices. We are also improving chains are becoming a bigger factor. We continue to realize a our harvesting and packing methods so we waste less fruit. significant premium in Europe, where we are the market leader. Everyone in the production organization is focused on these practices, including farm workers. Part of our effort involves In both markets, we are working to shift the retailers’ focus generating, testing and implementing waste-reduction ideas from the price they pay for bananas to the profits they make from our workers and supervisors. by selling Chiquita. Bananas are one of the most important products for supermarkets, accounting for as much as Productivity in farming is primarily dependent on people 1.5 percent of total profit. We help retailers increase the volume executing good practices consistently. The biggest impact of bananas they sell by satisfying consumers’ primary purchase on Chiquita’s productivity has come as a result of improved motivation, which is consistent, superior quality and color. We labor relations. In 2001, we signed an agreement with the work with retailers on supply chain best practices, in-store IUF (International Union of Foodworkers) and COLSIBA, a promotions and merchandising programs that help them achieve coalition of Latin American banana unions. As a result of this lower costs and higher banana sales. We are committed to agreement, we have improved communications, resolved enhance the value of the world’s most popular banana brand labor conflicts more quickly and introduced new, more flexible with targeted trade and consumer advertising. work practices that benefit both productivity and quality. Our value-added services have resulted in Chiquita being Though it presents a difficult labor issue, part of our targeted selected as the banana category captain by several of the increase will come from exiting the Armuelles, Panama, top 25 retailers in the United States. For four consecutive division, where we haven’t been cost competitive for years years, in a Progressive Grocer survey of retail executives, we as an owned-farm operator. Instead, we are negotiating have been recognized as a category management leader for to sell that operation to worker-owned cooperatives under driving customer profits in fresh produce. long-term purchase fruit contracts. That represents our single biggest oppor tunity in the shor t term to improve As a result of the strength of our brand, quality, service, category production costs. management expertise and corporate responsibility standards, we have recently won important annual and multiyear business Productivity on our company-owned farms increased by in Europe and North America from several global retailers, 5 percent in 2002, excluding the gain from restoring production including our largest customer Wal-Mart. in Armuelles after a long 2001 strike. By 2005, we plan a 20 percent productivity improvement over 2002 levels. We expect a 7 percent increase from our owned farms in 2003. CHIQUITA BRANDS INTERNATIONAL, INC. 16
- 19. Q&A Q&A 3. 4. WHAT ARE YOU DOING TO IMPROVE QUALITY? W H AT I S I N V O LV E D I N C H I Q U I TA’ S U N I Q U E HOW IS IT WORKING? BANANA RIPENING PROGRAM? Superior quality has been the hallmark of the Chiquita brand Bananas are harvested, loaded on refrigerated ships and sent for many years and one of the main reasons consumers prefer to their destinations when they’re still green. Typically, they our bananas. We have taken significant steps recently to raise turn yellow during a five-day process in traditional ripening our quality to the next level. rooms owned by retailers or distributors. In 2002, we created a single global organization with the Chiquita has developed a patented process, called low- responsibility for quality practices across the entire supply temperature ripening (LTR), that delivers a more uniform chain: the tropics, logistics and the markets. Our results show color than traditional ripening. The LTR process star ts that we are on the right track. Our largest retail customers are when the bananas are on the ships. Once the fruit reaches recognizing our improvements in quality, which we believe were its destination, it only needs two days in traditional ripening a significant factor in some of our recent contract successes. rooms to achieve peak color. Bananas ripened this way not only have more uniform color, but they also have an Our new quality control system focuses on proactively extended shelf life. correcting any problems as they occur in the supply chain, thereby significantly reducing quality complaints from our Consumer studies show that a critical decision driver for customers. For example, premature banana ripening has shoppers buying bananas is the color of the fruit. Retailers long been a primary cause of dissatisfaction. By measuring also pay more for Chiquita-ripened bananas. Over the next and addressing all warning signs of premature ripening from three years, we expect to significantly increase our business harvest through delivery, we improve customer satisfaction. in higher margin yellow bananas in Nor th America. In some key European markets, where we already sell a large amount In the past, we measured quality by the amount of claims of our volume yellow, we are also beginning to introduce we received from customers. Now we measure each step of low-temperature ripening. the supply chain against clear performance metrics. The results have been excellent, and I’m convinced we have yet to see the full benefit of it in the marketplace. 2002 ANNUAL REPORT 17
- 21. O U R C O R E VA L U E S Integrity W e live by our Core Values. s W e communicate in an open, honest and s straightfor w a rd manner. W e conduct business ethically and lawfully. s Respect W e treat people fairly and respectfully. s W e recognize the impor tance of family in the lives of s our employees. W e value and benefit from individual and cultural s dif ferences. W e foster individual expression, open dialogue and a s sense of belonging. Opportunity W e believe the continuous growth and development of s our employees is key to our success. W e encourage teamwork. s W e recognize employees for their contributions to the s company’s success. Responsibility W e take pride in our work, in our products and in s satisfying our customers. W e act responsibly in the communities and s environments in which we live and work. W e are accountable for the careful use of all resources s 2002 ANNUAL REPORT entrusted to us and for providing appropriate returns to our shareholders. 19
- 22. O U R C O M PA N Y Chiquita Brands International is a leading international marketer, producer and distributor of high-quality fresh and processed foods. Chiquita has marketed bananas, its best-known product, for more than 100 years. The company emerged from Chapter 11 bankruptcy reorganization in March 2002 and announced in March 2003 an agreement to sell its vegetable canning business, which represented approximately 20 percent of company revenues in 2002. FINANCIAL HIGHLIGHTS The figures below, except for total assets, exclude Castellini Group and Progressive Produce, sold in December 2002 and January 2003 respectively, and are presented as discontinued operations in the company’s Consolidated Financial Statements. REORGANIZED COMPANY PREDECESSOR COMPANY NINE MONTHS THREE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, ($ IN MILLIONS) 2002 2002 2001 2000 Net sales 1,443 547 1,882 1,893 Operating income 32 42 33 26 Interest expense 1 33 9 120 125 Depreciation and amortization 2 27 20 86 92 Operating cash flow 51 11 93 (4) Capital expenditures 3 44 5 28 54 CHIQUITA BRANDS INTERNATIONAL, INC. Total assets 2,4 1,642 1,779 2,262 2,417 Total debt 1 517 626 1,250 1,321 Shareholders’ equity 629 613 449 583 (1) On March 19, 2002, pursuant to its Plan of Reorganization, the parent company reduced its total debt and accrued interest by more than $700 million. (2) In connection with the company’s emergence from Chapter 11 bankruptcy, $545 million of property, plant and equipment write-downs were taken as of March 31, 2002, which was the primary cause of a significant reduction in depreciation and amortization expense in the following nine months. (3) Capital expenditures for the nine months ended December 31, 2002 included $14 million to purchase a ship formerly under operating lease to the company. The 2000 amount included $20 million for the rehabilitation of banana farms in Honduras and Guatemala which were destroyed or damaged by Hurricane Mitch in late 1998. (4) Assets of discontinued operations were $10 million at December 31, 2002, $70 million at March 31 2002, $113 million at December 31, 2001 and $120 million at December 31, 2000. . 20
- 23. FINANCIAL CONTENTS S TAT E M E N T O F M A N A G E M E N T R E S P O N S I B I L I T Y 22 REPORT OF INDEPENDENT AUDITORS 23 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S 24 C O N S O L I D AT E D S TAT E M E N T O F I N C O M E 34 C O N S O L I D AT E D B A L A N C E S H E E T 35 C O N S O L I D AT E D S TAT E M E N T O F S H A R E H O L D E R S ’ E Q U I T Y 36 C O N S O L I D AT E D S TAT E M E N T O F C A S H F L O W 37 N O T E S T O C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S 38 S E L E C T E D F I N A N C I A L D ATA 63 B O A R D O F D I R E C T O R S , O F F I C E R S A N D S E N I O R O P E R AT I N G M A N A G E M E N T 64 I N V E S T O R I N F O R M AT I O N 65 C O M PA N Y I N F O R M AT I O N 44 2002 ANNUAL REPORT 21
- 24. S TAT E M E N T O F M A N A G E M E N T R E S P O N S I B I L I T Y The financial information presented in this Annual Report is the responsibility of Chiquita Brands International, Inc. management, which believes that it presents fairly the Company’s consolidated financial position and results of operations in accordance with generally accepted accounting principles. The Company has a system of internal accounting controls, supported by formal financial and administrative policies. This system is designed to provide reasonable assurance that the financial records are reliable for preparation of financial statements and that assets are safeguarded against losses from unauthorized use or disposition. Management reviews these systems and controls at least quarterly to assess their effectiveness. In addition, the Company has a system of disclosure controls and procedures designed to ensure that material information relating to the Company and its consolidated subsidiaries is made known to Company representatives who prepare and are responsible for the Company’s financial statements and periodic reports filed with the Securities and Exchange Commission. The effectiveness of these disclosure controls and procedures is reviewed quarterly by management, including the Company’s Chief Executive Officer and Chief Financial Officer. Management will modify and improve these systems and controls as a result of the reviews or as changes occur in business conditions, operations or reporting requirements. The Company’s worldwide internal audit function, which reports to the Audit Committee, reviews the adequacy and effectiveness of controls and compliance with policies. The Audit Committee of the Board of Directors consists solely of directors who are considered independent under applicable New York Stock Exchange rules, and at least one member of the Audit Committee has been determined by the Board of Directors to be an “audit committee financial expert” as defined by SEC rules. The Audit Committee reviews the Company’s financial statements and periodic reports filed with the SEC, as well as the Company’s accounting policies and internal controls. In performing its reviews, the Committee meets periodically with the independent auditors, management and internal auditors, both together and separately, to discuss these matters. The Audit Committee engages Ernst & Young, an independent auditing firm, to audit the financial statements and express an opinion thereon. The scope of the audit is set by Ernst & Young, following review and discussion with the Audit Committee. Ernst & Young has full and free access to all Company records and personnel in conducting its audits. Representatives of Ernst & Young meet regularly with the Audit Committee, with and without members of management present, to discuss their audit work and any other matters they believe should be brought to the attention of the Committee. CHIQUITA BRANDS INTERNATIONAL, INC. C Y R U S F. F R E I D H E I M , J R . JAMES B. RILEY WILLIAM A. TSACALIS Chief Executive Officer Chief Financial Officer Chief Accounting Officer 22
- 25. R E P O RT O F E R N S T & Y O U N G , I N D E P E N D E N T A U D I T O R S To the Board of Directors and Shareholders of Chiquita Brands International, Inc. We have audited the accompanying consolidated balance sheets of Chiquita Brands International, Inc. as of December 31, 2002 (Reorganized Company) and 2001 (Predecessor Company), and the related consolidated statements of income, shareholders’ equity, and cash flow for the nine months ended December 31, 2002 (Reorganized Company), the three months ended March 31, 2002 (Predecessor Company), and the years ended December 31, 2001 and 2000 (Predecessor Company). These financial statements, appearing on pages 34 to 62, are the responsibility of the Company’s management. Our responsibility is to express an opinion on those financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chiquita Brands International, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for the nine month period ended December 31, 2002, the three month period ended March 31, 2002, and the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States. As more fully described in Note 2 to the consolidated financial statements, effective March 19, 2002, the Company emerged from protection under Chapter 11 of the U.S. Bankruptcy Code pursuant to a Reorganization Plan that was confirmed by the Bankruptcy Court on March 8, 2002. In accordance with AICPA Statement of Position 90-7, the Company adopted “fresh start” accounting whereby its assets, liabilities and new capital structure were adjusted to reflect estimated fair value at March 31, 2002. As a result, the consolidated financial statements for the periods subsequent to March 31, 2002 reflect the Reorganized Company’s new basis of accounting and are not comparable to the Predecessor Company’s pre-reorganization consolidated financial statements. Additionally, as discussed in Note 1, in 2002 the Company changed its method of accounting for goodwill and other intangible assets. ERNST & YOUNG LLP Cincinnati, Ohio February 11, 2003, except for Notes 3, 8 and 11, for which the date is March 28, 2003 2002 ANNUAL REPORT 23
- 26. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S O P E R AT I O N S This analysis of operations presents and addresses Chiquita’s operating results on the basis used by the Company to evaluate its business segments, and should be read in conjunction with the segment information presented in Note 16 to the Consolidated Financial Statements. The Company’s emergence from Chapter 11 bankruptcy proceedings in March 2002 resulted in a new reporting entity and the adoption of fresh start reporting (see Notes 1 and 2 to the Consolidated Financial Statements). Generally accepted accounting principles do not permit combining the results of the Reorganized Company with those of the Predecessor Company in the Consolidated Financial Statements. Accordingly, the Consolidated Statement of Income does not present results for the twelve months ended December 31, 2002. However, in order to provide investors with useful information and to facilitate understanding of 2002 results in the context of the annual prior year financial information presented, the following table combines net sales and operating income of the Predecessor Company for the three months ended March 31, 2002 and of the Reorganized Company for the nine months ended December 31, 2002. The only significant impact of fresh start reporting on operating income is that it was the primary cause of a $38 million decrease in 2002 depreciation and amortization expense compared to 2001. REORGANIZED PREDECESSOR COMPANY COMPANY PREDECESSOR COMPANY NINE MONTHS THREE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED DECEMBER 31, MARCH 31, COMBINED DECEMBER 31, DECEMBER 31, (IN THOUSANDS) 2002 2002 2002 2001 2000 Net sales Fresh Produce $ 438,080 $1,109,442 $1,547,522 $1,431,971 $1,426,931 Processed Foods 333,607 108,910 442,517 450,197 466,436 Total net sales $ 546,990 $1,443,049 $1,990,039 $1,882,168 $1,893,367 Segment operating income Fresh Produce 48,426 $ 41,049 89,475 $ 52,436 $ 15,452 $ $ Processed Foods 6,090 1,252 7,342 8,709 30,540 Unusual items (22,134) – (22,134) (27,870) (20,060) Total operating income 32,382 $ 42,301 74,683 $ 33,275 $ 25,932 $ $ The Company evaluates the performance of its business segments based on operating income before unusual items. As a result of the pending divestiture of the Company’s vegetable canning operations (see Note 3 to the Consolidated Financial Statements) and the acquisition of Scipio/Atlanta in the first quarter of 2003 (see Note 8), the Company intends to re-evaluate its reportable segments, including the measurements used to evaluate segment results internally. The Company expects that, in 2003, it will begin including certain items in segment operating income that historically have been excluded from management’s evaluation of the business segments, such as charges associated with floods, severance costs and other unusual items. CHIQUITA BRANDS INTERNATIONAL, INC. Net Sales Fresh Produce net sales for the year ended December 31, 2002 increased 8% versus 2001 due to favorable exchange rates, increased banana volume in Europe and increased volume of bananas and other fresh fruits in North America, partially offset by lower local banana pricing in both Europe and North America. Processed Foods net sales for 2002 decreased by 2% compared to 2001, as lower sales volume was partially offset by increased pricing. Fresh Produce net sales in 2001 were comparable to 2000, as higher banana pricing and volume were offset by the effect of weak European currencies and the deconsolidation of the Company’s Australian operations in the second quarter of 2000. Processed Foods net sales decreased in 2001 primarily as a result of the sale of California Day-Fresh Foods, Inc. in the second quarter of 2000. 24
- 27. Operating Income The improvement in Fresh Produce segment operating income in 2002 resulted from a $37 million benefit from the strengthening of major European currencies against the U.S. dollar, $20 million of import license savings, higher profits of approximately $12 million from the Company’s Asia Pacific operations due to higher banana prices, a $13 million improvement from higher sales volume and reduced costs for other fresh produce, and a $29 million decrease in depreciation and amortization expense primarily as a result of the Company’s financial restructuring. These improvements were partially offset by a $50 million effect of lower local banana pricing in the Company’s North American and European banana operations, higher advertising costs of $17 million, and a $7 million decline in results of Scipio/Atlanta, the Company’s German distributor and equity investee, in part due to a $3 million tax settlement. Additional profit from higher banana sales volume was offset by higher tropical production costs. Core European average local banana prices for 2002 were 6% lower than the prior year, on 6% higher volume. The lower pricing resulted partly from an increase in volume of bananas sold under second labels (such as Consul) and particularly strong retail pricing pressure in the United Kingdom. In Central and Eastern Europe and Mediterranean countries, average local banana prices increased 4% on volume that increased 6.2 million boxes, or 66%, compared to 2001. In North America, banana pricing for 2002 was 5% lower than 2001 on comparable volume, primarily as a result of lower pricing on sales to non-contract customers, which accounted for approximately one-third of the Company’s North American volume. In the Asia Pacific region, where the Company operates through joint ventures and has a relatively small presence, a 21% local banana price increase generated a $12 million earnings improvement in 2002. Tropical production costs adversely impacted 2002 Fresh Produce segment operating income by approximately $20 million compared to the prior year, primarily as a result of lower productivity in Honduras and high costs associated with the Armuelles, Panama division. During 2002, a higher portion of bananas was sourced from the high-cost Armuelles division than in 2001. In the 2001 fourth quarter, fruit sourced from this division was minimal as a result of a labor strike, and was replaced by lower cost fruit from more efficient sources. Beginning January 1, 2003, the Company ceased funding the deficits incurred by the Armuelles division. There are adequate funds to operate for a brief period while the Company continues to work toward a resolution with the Panamanian government, the union, and worker-owned cooperatives. However, the Armuelles union has threatened to strike. If a viable long-term solution cannot be negotiated before funds run out, the Company will not continue operating in Armuelles. The Company still expects to have sufficient access to cost-competitive, high-quality bananas in the event Armuelles is closed. In the Processed Foods segment, the 2001 and 2002 harvests, both of which were below expected levels, resulted in a less efficient utilization of plant capacity and higher unit costs for product sold in 2002. The resulting higher costs of $16 million, along with the effect of lower sales volume, were mostly offset by a 3% improvement in pricing and a $9 million reduction in depreciation and amortization expense as a result of the Company’s financial restructuring. Fresh Produce segment operating income improved in 2001 as compared to 2000 primarily as a result of higher European banana pricing and volume, the benefits of which more than offset a substantial negative impact on earnings of weak European currencies in relation to the U.S. dollar. The Company’s Processed Foods operating results declined in 2001 primarily due to lower pricing on canned vegetables throughout the year, as the Company and industry were reducing inventory levels. Unusual items included in operating income for the past three years are as follows: In 2002, $12 million of charges and write-downs incurred by Scipio/Atlanta, the Company’s German distributor and I equity investee, which were primarily related to severance, asset write-downs and costs associated with the closure of 2002 ANNUAL REPORT poor performing units, and the disposal of non-core assets. The Company completed its acquisition of Scipio/Atlanta in the first quarter of 2003 and may undertake additional restructuring activities with respect to Scipio/Atlanta to further improve and synergize its operations with those of Chiquita. 2002 unusual items also included $5 million associated with flooding in Costa Rica and Panama in early December and $5 million for severance in connection with the first stage of the Company’s strategic cost-reduction programs. Substantially all of these charges are related to the Company’s Fresh Produce operations. 25
- 28. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S In 2001, $28 million of charges primarily associated with the closure of farms, a third quarter labor strike and related I labor issues at the Company’s Armuelles, Panama banana producing division. During 2001, the Company closed non-competitive farms that represented about 20% of this division. In 2000, $35 million of charges primarily associated with the write-downs of production and sourcing assets in the I Fresh Produce operations, including the curtailment in June 2000 of farm rehabilitation in Honduras originally planned following destruction by Hurricane Mitch in 1998. These charges were partially offset by a $15 million gain on the sale of California Day-Fresh Foods, Inc., a processor and distributor of natural fresh fruit and vegetable juices that was part of the Company’s Processed Foods operations. Interest, Financial Restructuring and Taxes Net interest expense in 2002 was $39 million, which was $74 million lower than the prior year. Parent company interest expense decreased by $60 million as a result of the significant reduction in parent company debt from the Company’s financial restructuring. The subsidiaries’ net interest expense decrease of $14 million resulted from lower interest rates and lower average debt outstanding. Financial restructuring items totaled a net charge of $286 million for the quarter ended March 31, 2002. See “Critical Accounting Policies and Estimates – Fresh Start Reporting” below and Note 2 to the Consolidated Financial Statements for details of the 2002 charge. During 2001, the Company incurred $34 million of reorganization costs in connection with its financial restructuring. These costs primarily consisted of professional fees and a write-off of parent company debt issuance costs. Income taxes consist principally of foreign income taxes currently paid or payable. In 2002, income tax expense includes a $4 million benefit of a 2002 tax law that changed the calculation of the Company’s 2001 U.S. alternative minimum tax liability. Discontinued Operations In December 2002, the Company sold its interest in the Castellini group of companies (“Castellini”), a wholesale produce distribution business in the midwestern United States, for approximately $45 million, consisting of $21 million in cash plus debt assumed by the buyer. During 2002, Castellini generated income from operations of approximately $4 million. In January 2003, the Company sold Progressive Produce Corporation (“Progressive”), a California-based distributor of potatoes and onions, for approximately $7 million in cash. During 2002, Progressive generated approximately $1 million of income from operations. The financial information of both Castellini and Progressive are included as discontinued operations for all years presented in the Consolidated Financial Statements. Discontinued operations for 2002 also includes a $10 million gain on the sale of Castellini. A gain of approximately $2 million on the sale of Progressive will be recognized in discontinued operations in the first quarter of 2003. Cumulative Effect of a Change in Method of Accounting As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets,” as discussed under “Critical Accounting Policies and Estimates” below. CHIQUITA BRANDS INTERNATIONAL, INC. Subsequent Events In late March 2003, the Company acquired the equity interests in Scipio GmbH & Co. (“Scipio”), a German limited partnership that owns Atlanta AG (“Atlanta”). See Note 8 to the Consolidated Financial Statements for further information. Chiquita’s vegetable canning operations, which represent over 90% of Processed Foods segment sales, are conducted by its subsidiary, Chiquita Processed Foods, L.L.C. (“CPF”). On March 6, 2003, the Company entered into a definitive agreement to sell CPF to Seneca Foods Corporation for approximately $125 million in cash and stock, plus assumption of CPF debt, which was $81 million at December 31, 2002. See Note 3 to the Consolidated Financial Statements for further information. 26
- 29. Cost-Reduction Initiatives In late 2002, the Company initiated a series of global performance-improvement programs with a goal of reducing gross costs by $150 million per year by the end of 2005. These programs include improvements in farm productivity and canning operations as well as reductions in global purchasing and overhead expenses. The gross cost reductions will be partially offset by one-time implementation costs and increased costs for items such as purchased fruit, fuel and paper. After these offsets, the Company’s target is to realize annual cost reductions of $100 million by 2005, but there can be no guarantee that these reductions will be achieved. The 2005 gross and net cost-reduction goals associated with the Company’s canning operations are $40 million and $30 million, respectively. If the announced pending sale of CPF is completed, the Company’s targets will be reduced accordingly. L I Q U I D I T Y A N D C A P I TA L R E S O U R C E S Parent Company Debt Restructuring On March 19, 2002, Chiquita Brands International, Inc. (“CBII”), a parent holding company without business operations of its own, completed its financial restructuring when its pre-arranged Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Plan” or “Plan of Reorganization”) became effective. For financial reporting purposes, the Company used an effective date of March 31, 2002. References in the financial statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations to “Predecessor Company” refer to the Company prior to March 31, 2002. References to “Reorganized Company” refer to the Company on and after March 31, 2002, after giving effect to the issuance of new securities in exchange for the previously outstanding securities in accordance with the Plan, and implementation of fresh start accounting. The securities issued pursuant to the Plan are described below, and the fresh start adjustments are described in “Critical Accounting Policies and Estimates – Fresh Start Reporting.” Pursuant to the Plan, on March 19, 2002, $861 million of the Predecessor Company’s outstanding senior notes and subordinated debentures (“Old Notes”) and $102 million of accrued and unpaid interest thereon were exchanged for $250 million of 10.56% Senior Notes due 2009 (“New Notes”) and 95.5% (38.2 million shares) of newly issued common stock of the Reorganized Company (“New Common Stock”). Previously outstanding preferred, preference and common stock of the Predecessor Company was exchanged for 2% (0.8 million shares) of the New Common Stock as well as 7-year warrants, exercisable at $19.23 per share, to purchase up to 13.3 million additional shares of New Common Stock. In addition, as part of a management incentive program, certain executives were granted rights to receive 2.5% (1 million shares) of the New Common Stock. At December 31, 2002, 865,950 of these shares had been issued, 34,050 shares had been surrendered in satisfaction of tax withholding obligations, and 100,000 shares were held in a “rabbi trust.” Pursuant to the Plan, all outstanding stock options were cancelled, and a new stock option plan was adopted. CBII’s general unsecured creditors (other than the holders of the Old Notes) were not affected by the Chapter 11 bankruptcy proceedings. None of CBII’s subsidiaries was a party to the Chapter 11 proceedings. Subsidiaries were able to meet their obligations with their own cash flow and credit facilities, and accordingly, continued to operate normally and without interruption during the Chapter 11 proceedings. Other Liquidity and Capital Resources Information Operating cash flow was $51 million in the nine months ended December 31, 2002, $11 million in the three months ended March 31, 2002, $93 million in 2001 and $(4) million in 2000. The 2001 operating cash flow amount includes a $78 million benefit from non-payment of interest expense on parent company debt that was later restructured. Cash payments relating to interest expense were $27 million in the nine months ended December 31, 2002, $9 million in the three months ended March 31, 2002, $41 million in 2001 and $122 million in 2000. 2002 ANNUAL REPORT The Company believes that the cash flow generated by operating subsidiaries, the reduction of interest expense provided by the financial restructuring, and its borrowing capacity provide sufficient cash reserves and liquidity to fund the Company’s working capital needs, capital expenditures and debt service requirements, including CBII’s New Notes. 27
- 30. M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S O F F I N A N C I A L C O N D I T I O N A N D R E S U LT S O F O P E R AT I O N S Capital expenditures were $44 million for the nine months ended December 31, 2002, $5 million for the three months ended March 31, 2002, $28 million in 2001 and $54 million in 2000. Capital expenditures in 2002 included $14 million to purchase a ship formerly under operating lease to the Company. The 2000 amount includes $20 million for the rehabilitation of banana farms in Honduras and Guatemala which were destroyed or damaged by Hurricane Mitch in late 1998. The following table summarizes the Company’s contractual cash obligations associated with debt principal repayments and operating leases at December 31, 2002: WITHIN 2-3 4-5 AFTER 5 (IN THOUSANDS) TOTAL 1 YEAR YEARS YEARS YEARS Long-term debt Parent company $ 250,000 – – – $ 250,000 $ $ $ Subsidiaries 236,126 44,323 136,258 37,651 17,894 Notes and loans payable 31,325 31,325 – – – Operating leases 119,299 40,623 55,217 19,849 3,610 $ 636,750 $ 116,271 $ 191,475 57,500 $ 271,504 $ Total debt at December 31, 2002 was $517 million versus $654 million at March 31, 2002 upon CBII’s emergence from Chapter 11 bankruptcy. The reduction in debt resulted from operating cash flow and the sale of assets. During 2002, the Company sold assets for $99 million, including $54 million from the sale of five ships and $45 million from the sale of Castellini. The $250 million of New Notes mature on March 15, 2009. These Notes were issued by CBII and are not secured by any of the assets of CBII and its subsidiaries. Interest payments of $13 million on the New Notes are payable semiannually. The indenture for the New Notes contains dividend payment restrictions that, at December 31, 2002, limited the aggregate amount of dividends that could be paid by CBII to approximately $25 million. The indenture has additional restrictions related to asset sales, incurrence of additional indebtedness, sale-leaseback transactions, and related-party transactions. In March 2001, the Company’s operating subsidiary, Chiquita Brands, Inc. (“CBI”), obtained a three-year secured bank credit facility for up to $120 million to replace CBII’s expiring bank revolving credit agreement. Interest on amounts outstanding under the facility was based on the bank corporate base rate plus 5%, subject to a minimum of 14% per annum. An annual facility fee of 2% of the total credit facility was also payable. In March 2002, this CBI facility was amended to increase the facility to $130 million, comprised of a $70 million term loan and a $60 million revolving credit facility, and the expiration date was extended to June 2004. Interest on borrowings under the amended facility is based on the prevailing LIBOR rates plus 3.75% or the bank corporate base rate plus 1%, at CBI’s option, subject to a minimum annual rate of 6%. The annual facility fee was eliminated, and the Company paid an amendment fee of 5% of the total credit facility. Substantially all U.S. assets of CBI (except for those of subsidiaries with their own credit facilities, such as Chiquita Processed Foods, L.L.C.) are pledged to secure the CBI credit facility. The CBI credit facility is also secured by liens on CBI’s trademarks as well as pledges of stock and guarantees by various subsidiaries worldwide. The facility contains covenants that limit the distribution of cash from CBI to CBII, the parent holding company, to amounts necessary to CHIQUITA BRANDS INTERNATIONAL, INC. pay interest on the New Notes (provided CBI meets certain liquidity tests), income taxes and permitted CBII overhead. Because of these cash distribution restrictions from CBI to CBII, and because CBII currently has no source of cash except for distributions from CBI, any payment of common stock dividends to Chiquita shareholders would require approval from the CBI facility lenders. Similar approvals would be required for a Company buyback of common stock. The facility also has covenants that require CBI to maintain certain financial ratios related to debt coverage and income, and that limit capital expenditures and investments. Beginning October 2002, monthly principal repayments of $1.2 million commenced on the term loan. As the term load is repaid, the capacity under the revolving credit portion of the facility increases by the amount of the term loan repayments, except for cases in which the term loan repayments are mandated as a result of specified events, generally sales of major assets. At March 15, 2003, $50 million was outstanding under the term loan. Under the revolving credit facility, $16 million was outstanding, $4 million of capacity had been used to issue letters of credit and $52 million was available to the Company. 28
- 31. Coinciding with the acquisition of Scipio/Atlanta late in March 2003, the CBI facility was amended and restated to add a new $65 million term loan to repay Scipio/Atlanta’s existing lenders. Interest on the $65 million loan accrues at the bank corporate base rate plus 3.25%, subject to a minimum of 7.5%. A facility fee of $2 million was paid. The new loan is secured with pledges of equity of Scipio/Atlanta and its subsidiaries and liens on certain assets of Scipio/Atlanta. This debt is expected to be reduced in the future as a result of the sales of certain assets of Scipio/Atlanta. Chiquita Processed Foods, L.L.C. (“CPF”), the Company’s vegetable canning subsidiary, has a $135 million senior secured revolving credit facility. Interest under the facility is based on, at the Company’s option, either the bank corporate base rate or prevailing LIBOR rates. An annual fee of up to 1/2% is payable on the unused portion of the facility. This facility contains covenants that limit capital expenditures and the payment of dividends by CPF and require CPF to maintain certain financial ratios related to net worth and debt coverage. At March 15, 2003, $58 million was outstanding under the facility, $2 million of capacity had been used to issue letters of credit, and $55 million of borrowings were available to CPF for working capital purposes. Under the terms of this facility, the payment of dividends by CPF was limited to $4 million. In January 2003, the Company acquired a ship formerly under operating lease to the Company, adding $14 million to debt. This was partially offset by a $6 million reduction to debt from the sale of Progressive, also in January 2003. See Notes 3 and 7 to the Consolidated Financial Statements for a further description of these transactions. C R I T I C A L A C C O U N T I N G P O L I C I E S A N D E S T I M AT E S The Company’s significant accounting policies are summarized in Note 1. The additional discussion below addresses: the use of fresh start reporting upon the Company’s emergence from Chapter 11 proceedings; I the application of the new accounting standard for goodwill and other intangibles; and I major judgments used in applying these policies. I Fresh Start Reporting The Company’s emergence from Chapter 11 bankruptcy proceedings on March 19, 2002 resulted in a new reporting entity and adoption of fresh start reporting in accordance with Statement of Position (“SOP”) No. 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” The Consolidated Financial Statements as of and for the quarter ended March 31, 2002 reflect reorganization adjustments for the discharge of debt and adoption of fresh start reporting. Accordingly, the estimated reorganization value of the Company of $1,280 million, which served as the basis for the Plan approved by the bankruptcy court, was used to determine the equity value allocated to the assets and liabilities of the Reorganized Company in proportion to their relative fair values in conformity with Statement of Financial Accounting Standards No. 141, “Business Combinations.” Financial restructuring items for the quarter ended March 31, 2002, totaling a net charge of $286 million, resulted from the following: Exchange of Old Notes and accrued interest for 95.5% of the New Common Stock and $250 million of New Notes, I resulting in a gain of $154 million; Reduction of property, plant and equipment carrying values by $545 million, including reduction of the Company’s I tropical farm assets by $320 million, shipping vessels by $158 million, and vegetable canning assets by $55 million; Reduction of long-term operating investments and other asset carrying values by $186 million; I Increase in the carrying value of the Chiquita trademark of $375 million; I 2002 ANNUAL REPORT Increase of $33 million in accrued pension and other employee benefits primarily associated with tropical I pension/severance obligations; Increase in other liabilities of $16 million for unfavorable lease obligations; I Reorganization costs of $30 million in the first quarter of 2002 primarily associated with professional fees and grants I of New Common Stock to certain executives as part of the Chapter 11 restructuring agreement; and 29