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chiquita brands international 2003annual

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  • 1. c h i q u i ta b r a n d s i n t e r n at i o n a l , i n c . 2 0 0 3 a n n ua l r e p o rt turnaround & transformation
  • 2. c h i q u i ta b r a n d s i n t e r n at i o n a l , i n c . Chiquita Brands International is a leading international marketer, producer and distributor of high-quality bananas and other fresh produce sold primarily under the premium Chiquita® brand. The company is one of the largest banana producers in the world and a major supplier of bananas in Europe and North America. The company also distributes and markets fresh-cut fruit and other branded, value-added fruit products. Additional information is available at www.chiquita.com. fi na nc i a l h i g h l i g h ts 3.021 2002 2003 2002 2003 12.02 12.03 $654 $75 $140 $517 2005 original $395 target Q2-Q4 $400 $26 million Q2-Q4 $27 Q1 $41 Q1 -$13 T O TA L D E BT 2 O P E R AT I N G I N C O M E C A S H F L O W F R O M O P E R AT I O N S (in millions) (in millions) (in millions) Predecessor Co. Reorganized Co. Predecessor Co. Reorganized Co. Reorganized Co. REORGANIZED PREDECESSOR C O M PA N Y C O M PA N Y 9 MOS. ENDED 3 MOS. ENDED 2003 DEC. 31, 2002 MARCH 3 1 , 2 0 02 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) I n co m e St a te m e n t Da t a $ 2,614 $ 1,140 $ 446 Net sales 140 26 41 Operating income Income (loss) from continuing operations before cumulative effect of accounting change3 96 (7) (190) Diluted per share income (loss) from continuing operations 2.38 (0.17) (2.42) before cumulative effect of accounting change 4 99 13 (398) Net income (loss) 2.46 0.33 (5.08) Diluted per share net income (loss) 40.4 40.0 78.3 Shares used to calculate diluted EPS Ca s h F l ow Da t a $ 75 $ 27 $ (13) Cash flow from operations 51 32 3 Capital expenditures B a l a n ce S h e e t Da t a DEC. 31, 2003 DEC. 31, 2002 $ 134 $ 53 Cash and cash equivalents 1,707 1,642 Total assets 757 629 Shareholders’ equity 1 Emergence from financial restructuring. 2 Total debt at March 31, 2002 and Dec. 31, 2002 includes debt of Chiquita Processed Foods, the company’s vegetable canning division, sold in May 2003. 3 2 0 03 i n co m e f ro m co n t i n u i n g o p e rat i o n s i n c l u d e s $4 1 m i l l i o n o f n e t ga i n s o n a s s e t s a l e s , a n d $25 m i l l i o n o f c h a rge s f o r s eve ra n ce, l o s s e s o n Atlanta AG asset disposals, and the shutdown of banana farms. Income from continuing operations for the nine months ended Dec. 31, 2002 includes $21 million of charges for the shutdown of Atlanta AG operations, floods and severance. Income from continuing operati ons for the three months ended March 31, 2002 includes $222 million in charges related to financial restructuring. 4 Net income (loss) includes results from discontinued operations: $3 million of income for 2003; $20 million of income for the nine months ended Dec. 31, 2002; and $63 million of losses for the three months ended March 31, 2002. The net loss for the three months ended March 31, 2002 also includes a $145 million charge for the cumulative effect of a change in the method of accounting for goodwill.
  • 3. A Chiquita banana is … Fat-free, cholesterol-free and sodium-free A good source* of Vitamins B6 & C, which support the body’s immune system Potassium, which may reduce the risk of high blood pressure and stroke Fiber, which is useful for weight management Chock-full of energy with 110 calories * A 126-gram (medium) banana has 20 percent of the recommended daily value for vitamin B6, 15 percent of vitamin C, 11 percent of potassium and 16 percent of dietary fiber, according to the U.S. Food and Drug Administration (FDA). Diets containing foods that are good sources of potassium and low in sodium may reduce the risk of high blood pressure and stroke, according to the FDA. A diet high in fruits and vegetables may help reduce the risk of some cancers. Chiquita bananas meet the American Heart Association’s food criteria for saturated fat and cholesterol for healthy people over age 2.
  • 4. Doubled operating income to $140 million, including asset sales1 Reduced debt by $122 million, achieving our $400 million target two years early d e a r s ta k e h o l d e r s : 2003 was an excellent year for Chiquita, as we consistently delivered on the commitments we had made to focus on the core, drive better performance and profitably invest cash. The turnaround of Chiquita is well underway. Our next step is transformation, in which growth and focusing on the consumer become top priorities as we continue to strengthen our core business. Revenue in 2003 was $2.6 billion, compared to $446 million in the three months ended March 31, 2002, prior to the company’s emergence from financial restructuring, and $1.1 billion in the nine months ended Dec. 31, 2002. Approximately 80 percent of the $1 billion increase in 2003 revenue from 2002 was due to our acquisition in March of Atlanta AG, a German fresh produce distributor. Operating income for 2003 rose to $140 million from $41 million in the first quarter of 2002 and $26 million for the nine months ended Dec. 31, 2002. Net income was $99 million or $2.46 a share. The company’s 2002 results consisted of a first-quarter loss of $398 million – after charges related to the bankruptcy and fresh start accounting, and a change in the method of accounting for goodwill – and net income of $13 million, $0.33 a share, in the nine months ended Dec. 31, 2002. Cash flow from operations was $75 million in 2003 compared to $27 million in the nine months ended Dec. 31, 2002 and $(13) million in the first quarter of 2002. 1 Operating income in 2003 was $140 million compared to $41 million in the first quarter of 2002 and $26 million for the nine months ended Dec. 31, 2002. Operating income in 2003 includes $41 million of net gains on asset and farm sales, and $25 million of charges for severance, losses on Atlanta asset disposals, and the shutdown of banana farms. Operating income for the nine months ended Dec. 31, 2002 includes $21 million in charges for the shutdown of Atlanta operations, floods and severance. 2 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 5. succeed
  • 6. Increased productivity 12 percent on owned banana farms Launched successfully our new Chiquita Fresh Cut Fruit business Earned certification to SA8000 labor and EUREPGAP® food safety standards The improvement in 2003 operating income was due to Chiquita’s success in cost-cutting, the benefit of a stronger euro, asset sales, increased banana and other fresh fruit sales, and improvements at Atlanta. The progress on our commitments was significant. We divested $270 million of noncore assets. We achieved our gross cost savings goal by reducing overhead and increasing productivity on our farms. As expected, our savings were largely offset by higher fuel, paper and purchased fruit prices that affected the industry. We also reduced our debt to $395 million, exceeding our target two years early. We acquired Atlanta, exited its underper- forming businesses and cut its costs. In fact, we’re ahead of schedule on improving Atlanta’s profitability. We also accomplished new milestones in corporate responsibility, earning certification for our banana farms in Colombia, Costa Rica and Panama to Social Accountability Interna- tional’s SA8000 labor standard and to EUREPGAP food safety standards. We maintained certification to Rainforest Alliance environmental standards on all our owned farms for the fourth consecutive year. Finally, 75 percent of the independent-grower farms from which we purchase bananas also achieved Rainforest Alliance certification in 2003. 4 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 7. deliver
  • 8. Divested $270 million of noncore assets Achieved gross cost savings of $51 million and net cost savings of $11 million2 Chiquita is the world’s premier banana brand and producer. In 2003, bananas made up 60 percent of our revenue, while other fresh produce made up the vast majority of the remaining 40 percent. With the divestiture of noncore assets, we have become more dependent on bananas. They are a good but volatile business. To increase shareholder value, we must leverage our world-recognized brand and expand outside bananas into higher-margin, greater value-added, fruit-based businesses. In the next five years, we are targeting 30 percent of revenues from new businesses. That means entering new fruit-based products and achieving leadership in the rapidly growing fresh-cut fruit industry. Early feedback from both consumers and retailers to Chiquita Fresh Cut Fruit, introduced in November, has been excellent. Our growth with several of our largest customers in the Midwestern United States is right on plan. Transformation also requires putting the right talent in the right roles. We started in 2003 by naming new heads of North America, Europe and Atlanta AG. All three managers bring strong marketing and consumer branding expertise to Chiquita. We continue to add talent in 2004, beginning with the hiring in February of a new chief information officer. As we transform Chiquita into a more consumer- and marketing-centric organization, testing our way into new markets and leveraging our recognized but underutilized brand, we will remain extremely profit-conscious. Every investment decision will be justified on profitability and shareholder-return measures. We will also continue to strengthen our 2 Net cost savings compared to 2002 are after offsets related to higher prices for fuel, purchased fruit and paper and one-time costs, such as severance, related to cost-reduction program implementation. 6 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 9. grow
  • 10. I would like to thank Cyrus for his It has been an honor to lead Chiquita. strong leadership over the past two When the board asked me to take over, years. There is no question that taking we had three goals: a strong financial the helm of Chiquita as it emerged position, a new direction for profitable from bankruptcy was one of the most growth, and a new leadership team for challenging assignments in his long the future. We have delivered on those and distinguished career. He helped commitments, in many cases ahead of the company deliver an impressive schedule. Consequently, the time is financial turnaround and has provided right for me to retire. I am grateful for a solid foundation for Chiquita’s con- employees’ support, proud to have tinuing transformation and growth. been a part of this turnaround and We wish Cyrus all the best in his well- confident Fernando will lead Chiquita deserved retirement. to ever greater success. Cyrus Freidheim Fernando Aguirre Fernando Aguirre (left) joined Chiquita as president and CEO on Jan. 12, 2004, succeeding Cyrus Freidheim, who will remain chairman of the board until May 25, 2004. core banana business. That commitment involves cutting costs further, improving prof- itability in North America, emerging as a stronger market leader after the enlargement of the European Union, and expanding in Asia where our growth opportunity is best. In 2004, we plan to cut another $20 million of costs, after industry offsets and implementation costs but before expenses associated with new businesses. We will also work to increase our financial flexibility through an improved capital structure. We are very pleased with Chiquita’s achievements in 2003, and we congratulate our employees on their hard work and dedication. Clearly though, there is plenty of serious work still to be done. For example, we face the uncertain impact on our banana business of the enlargement of the European Union in May 2004 and of this market’s transition to a tariff-only import regime by 2006. Although our progress may not always be linear, we are confident that over time we will succeed in all of our goals. f e r na n d o agu i r r e cy rus f. f r e i d h e i m , j r . President and Chief Executive Officer Chairman April 12, 2004 April 12, 2004 8 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 11. Q&A with president and chief executive officer fernando aguirre
  • 12. Q. Q. How would you describe What have been your your management style? first priorities as CEO? A. A. As you would expect after 23 years in consumer products, I am My first priority has been listening to our employees, managers, highly competitive. I expect myself to be the best at what I do customers and growers to learn our greatest strengths and and hold others to the same standard. I want the same for the weaknesses, especially as compared to our competitors. This company I lead. information has helped me understand our business, chal- lenges, goals, and most important, our plans for delivering on My core values include integrity and honesty in everything I do, them. Committing to a few priorities every year and focusing being straightforward and direct, demanding but fair. the organization to deliver on them are essential for success. Gathering opinions from many perspectives will be crucial as In business, I have found that basing my decisions on principles we begin transforming Chiquita into a much more consumer- and values is critical to success. Among the business principles and marketing-centric organization. that guide me are: Another priority has been to ensure that our financial systems focus on profits; provide adequate data to enable management to make good, well- concentrate on the consumer; informed decisions. We have hired a chief information officer with adapt and change to win; plenty of experience and put him on the management committee. make decisions based on good data; balance short- and long-term perspectives; and A third priority has been to make sure compensation at Chiquita deliver on commitments – always. is aligned with a high-performance organization that delivers on both individual and corporate goals to protect the interests My primary focus is on continuing improvement in a few key of our shareholders. profitability metrics, such as net income, operating cash flow and stock performance over time. I consider returns and I have seen many things I like at Chiquita so far, but what I like profitability more important than market share. A company most is the pride, commitment and passion of the Chiquita must live within its means. It must think big in a financially people. These traits, coupled with the company’s Core Values, viable way. are a powerful, winning combination. 10 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 13. Q. Q. What is your vision for Chiquita, and What in your career are you most is it different from the strategy laid out proud of, and how might it apply in December 2003? at Chiquita? A. A. After three months on the job, it is too soon to form a complete I am very proud of the turnaround I led of Procter & Gamble’s vision for Chiquita. By the annual shareholder meeting in late Brazil division, where I was president and general manager May, I expect to provide details on how the company will build between 1992 and 1995. This assignment spanned one of the on the business growth strategies outlined in December. toughest economic crises the country has faced, with galloping inflation (45 percent per month) and three currency and presi- So far, however, I have identified several elements of my vision dential changes in four years. that will shape our future. We will become a world-class consumer- and customer-centric company. Our products and When I took over Brazil, the division was losing money. I had a marketing execution will be based on consumer insights. We year to make a difference or the division would likely be shut will invest in innovation and build new revenue streams with down. The first thing we did was re-engineer the company better returns from higher value-added products. We’ll broaden structure by reducing costs, consolidating three factories into the scope of our world-recognized but underleveraged Chiquita one, focusing on growing our business with a few key customers brand beyond bananas. We will expand our presence in inter- and distributors, and stabilizing existing brands. Within a year, national markets, in a financially sensible way. We will recruit, the division was breakeven. train and retain talent with more diverse consumer-products Then, I began the process of working on growth. We developed backgrounds. We will execute with strict financial and operating a very close relationship with the country’s biggest wholesaler, discipline. In short, I want to make Chiquita one of the world’s Martins. This strategy allowed us to increase distribution most respected companies, one that consistently delivers significantly without raising costs. Ultimately, we launched sustainable, profitable growth with a disciplined group of com- three brands into the country. After four years, we had quintupled mitted, passionate professionals. sales and turned Brazil into the second most profitable P&G I am a believer in remaining flexible and changing based on new subsidiary in Latin America. realities. In fact, most strategic elements can be adapted – This experience has direct relevance to our North American except for the Core Values of the company. Integrity, Respect, banana business, which we must strengthen. While we’ve made Opportunity and Responsibility will remain at the center of tremendous strides in increased contract business and cost everything we do. I already feel the pride of a longstanding reduction, our profitability in this market is unacceptable due to an Chiquita employee. It’s contagious, and I plan to build on that. 1.5 percent average annual decline in prices during the last decade. 11 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 14. Q. Q. As a new CEO, how will you What is your view of communicate with investors? corporate responsibility? A. A. I believe in transparency and straightforward communication. As I explained earlier, I believe in decisions made on the basis However, I also believe we must keep in mind that ours is a of values and principles. I am impressed by Chiquita’s Core competitive business and that sometimes too much informa- Values and the company’s accomplishments in corporate tion can help competitors, thus hurting the company and its responsibility. Chiquita’s high standards of environmental and shareholders. We will strive to reach a fine balance between social performance enhance the company’s reputation and sharing the information our investors require while retaining ultimately its brand. There are a growing number of investors who data that might help our competitors in a meaningful way. I am seek companies with track records in corporate responsibility. very profit-conscious and delivering our financial goals will be Chiquita should benefit from this trend. I will continue to support Chiquita’s top priority. Better returns always help make the our corporate responsibility program, because it is the right communication with investors easier and more relevant. thing to do and it is good for Chiquita and our stakeholders. We are also evaluating ways to utilize corporate responsibility to benefit our business results in a more direct way. 12 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 15. At Chiquita, corporate responsibility is an essential part of our culture, a central element in our strategy and a defining aspect of our brand.
  • 16. Our commitment to achieve high standards of environmental, social and ethical performance is rooted in our Core Values – Integrity, Respect, Opportunity and Responsibility – which, along with our Code of Conduct, guide our long-term strategies and everyday actions. We actively seek certification to credible, verifiable and R A I N F O R E ST A L L I A N C E C E RT I F I C AT I O N STAT U S (percentage of hectares certified, December 2003) appropriate third-party performance standards, and we encourage our suppliers and business partners to do the 100% same. We believe that such standards promote transparency, Colombia 96% drive better performance and strengthen accountability for 100% Costa Rica continuous improvement. 79% Ecuador* 82% Env i ro n m e n ta l Re s p o n s i b i l i ty: R a i n fo rest A l l i a n ce Ce r t i f i cat i o n 100% Guatemala 64% We committed in the mid-1990s to achieve certification of all our company-owned banana farms to the rigorous standards 100% Honduras 32% of the Rainforest Alliance, a leading international conserva- tion organization whose mission is to protect ecosystems and Nicaragua* 0% the people and wildlife that live within them by implementing 100% Panama better production practices for biodiversity, conservation and 93% sustainability. 100% Total 75% In 2003, for the fourth consecutive year, 100 percent of our owned farms in Latin America earned Rainforest Alliance owned farms purchased fruit certification on the basis of scheduled and surprise annual *Chiquita does not own farms in Ecuador or Nicaragua. audits. In addition, we work with our independent growers to continually improve performance and achieve certification to the standards we adopt for our owned farms. At year-end 2003, national, a nonprofit organization devoted to promoting human 75 percent of independent-grower banana farms supplying rights by improving workplace conditions and communities, Chiquita in Latin America were Rainforest Alliance certified, SA8000 is a voluntary standard for workplaces based on the up from 33 percent two years earlier. core International Labour Organization (ILO) conventions, the Universal Declaration of Human Rights and the United W W W. R A . O R G Nations Declaration of the Rights of the Child. So c i a l Re s p o n s i b i l i ty: So c i a l Acco u n ta b i l i ty 8 0 0 0 Today, more than 12,000 employees, on nearly 75 percent of We are committed to fair labor practices in all of our operations, our owned farms, work at SA8000-certified operations. Our and in 2000, we adopted SA8000 as the labor standard in our banana divisions were the first operations ever to earn Code of Conduct. Developed by Social Accountability Inter- 14 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 17. SA8000 certification in Costa Rica, Colombia and Panama, environmental and economic costs of using new pallets for and we remain committed to achieve certification of our every shipment. In North America, the company is part of a remaining owned Latin American banana divisions in 2005. retailer consortium that shares and reuses pallets produced for Chiquita. The pooling reduces the new pallets the consortium W W W. S A- I N T L . O R G needs each year by more than 50 percent. Fo o d S a f e t y : E u r o - R e t a i l e r s P r o d u c e Wo r k i n g Our efforts to achieve leading international labor standards G r o u p G o o d A g r i c u l t u ra l P ra c t i c e s ( E U R E P G A P ) are an investment to improve labor relations, which will allow Food safety is critically important to us. Our policy is to us to introduce innovative labor practices to improve quality, provide safe and healthy food products that meet high quality productivity and efficiency. Poor labor relations can result in standards. To provide added assurance of product safety and supply disruptions, low productivity and costly farm rehabil- quality, we are earning certification to the risk-based food itation expenses. As one example of our progress in this area, safety standards of the Euro-Retailer Produce Working the days on strike against Chiquita fell by 70 percent in 2003 Group, which adopted EUREPGAP as the production standard compared to 2001. for the agricultural and horticultural industry. Chiquita banana operations in Panama, Costa Rica and Colombia earned T h r e e M a j o r Aw a r d s EUREPGAP certification in 2003, and we expect the rest of our Chiquita is proud to have received three important corporate owned Latin American banana divisions to do so in 2004. responsibility awards: W W W. E U R E P. O R G The Corporate Citizen of the Americas Award from The Trust for the Americas, the nonprofit arm of the Organization Ex te n d i n g Sta n d a rd s t h ro u g h o u r Su p p ly C h a i n of American States, for our employee home-ownership Chiquita Supply Chain Operations measures its social and project in Honduras, which provided 600 families with environmental performance through internal and external new homes in 2003. assessments as well as leading industry certification programs. The International Maritime Organization and the American The Corporate Conscience Award for Innovative Partner- Bureau of Shipping (ABS) set marine safety, quality and ships from Social Accountability International for our environmental standards. In 2001, we were the first shipping work with the Rainforest Alliance and high standards of company in Europe to earn certification from the ABS for our environmental and social stewardship. Marine Safety, Quality and Environmental Management The first-ever Award for Outstanding Sustainability System (SQE), which our shipping fleet adopted in 1998. The Reporting from CERES-ACCA, a coalition of more than SQE system integrates the requirements of the International 80 environmental and investment groups. Safety Management code, ISO 9002 for quality management and ISO 14001 for environmental management. Key Challenges While we are making significant and steady progress, we W W W. I M O . O R G continue to address social and environmental challenges in W W W. E AG L E . O R G our operations. They include improving health and safety, extending environmental and social standards beyond bananas Reducing Risks and Lowering Costs At Chiquita, we believe that achieving high standards of and to independent growers and suppliers, reducing agri- corporate responsibility improves the company’s financial chemical usage on farms, and limiting marine and refrigerant performance, reduces risk, and increases the certainty of pollution from our ships. future cash flows to investors. We measure and report our environmental, social and financial Through sound environmental management, we realize performance in an open, honest and straightforward manner. significant cost savings, reduce environmental impacts, and We encourage you to visit our web site and review our corporate improve worker health and safety. In 2003, Chiquita generated responsibility reports for much more detail. more than $9 million in easily quantifiable savings through two W W W. C H I Q U I TA . C O M environmental programs. We saved approximately $5 million versus 1997 through lower use of agrichemicals, largely as a result of best practices implemented for the Rainforest Alliance certification program. In 2003, Chiquita’s pallet recycling programs reduced costs by approximately $4 million. We recycled 60 percent of the nearly one million pallets used in our European banana trade, which eliminates both the 15 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 18. 17 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 18 m a nag e m e n t ’s d i s c uss 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 28 r e p o rt o f i n d e p e n d e n t pu b l i c au d i t o r s 29 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 30 c o n s o l i d at e d b a l a n c e s h e e t 31 c o n s o l i d at e d s tat e m e n t of shareholders’ equity financial contents 32 c o n s o l i d at e d s tat e m e n t of cash flow 33 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 59 s e l e c t e d f i n a n c i a l d ata 60 b oa r d o f d i r e cto rs, o f fi c e rs 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 61 i n v e s t o r i n f o r m at i o n 16 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 19. s tat e m e n t o f m a n ag 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 con- solidated 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 modifies and improves 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 one member of the Audit Committee, Roderick M. Hills, 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 inde- pendent 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. f e r na n d o agu i r r e james b. riley w i l l i a m a . tsaca l i s Chief Executive Officer Chief Financial Officer Chief Accounting Officer 17 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 20. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 V E RV I E W In March 2002, Chiquita Brands International, Inc. completed a financial restructuring (limited to the parent holding company) when its pre-arranged Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Plan” or “Plan of Reorganization”) became effective. References 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 need for the Chapter 11 restructuring was caused by significantly diminished operating results primarily due to the implementation by the European Union (“EU”) of a discriminatory quota and licensing regime in the early 1990’s, which significantly decreased the Company’s banana volume sold into Europe, and by the weakness of major European currencies in relation to the U.S. dollar during the late 1990’s. The restructuring under Chapter 11 resulted in a new reporting entity and the election of a new board of directors and Chief Executive Officer. The new management undertook a thorough analysis of the entire Company and, in late 2002, announced plans to divest non-core assets, restructure or sell the Company’s canning subsidiary, Chiquita Processed Foods (“CPF”), reduce costs through targeted programs, reduce debt, maintain the Company’s market position in the EU, and, ultimately, leverage existing assets into new businesses. In accordance with these plans, during 2003 the Company sold several businesses and investments (including CPF), used the proceeds to significantly reduce debt, and launched a new fresh-cut fruit business. In addition, in March 2003 the Company completed the acquisition of a German distributor of fresh fruits and vegetables, Atlanta AG (“Atlanta”), which has annual sales of approximately $1.2 billion and had been Chiquita’s largest customer in Europe. Accordingly, the Company’s results of operations from 2001 to 2003 will not necessarily be indicative of future results. The EU regulatory regime relating to the importation of bananas, most recently revised in 2001, is subject to further revisions due to the addition of ten new countries to the EU in May 2004, and the scheduled conversion of the regulatory regime from a tariff rate quota to a tariff-only regime not later than 2006. In connection with the enlargement of the EU in 2004, the EU Commission has announced it will allocate new licenses in a manner consistent with the 2001 agreement, but it has not yet announced the size of the new quota. Until the details of the new regulatory framework are announced and implemented, the Company cannot predict the impact of new EU regime changes on its operations and financial results, and there can be no assurance the regulatory changes will not have a material adverse effect on the Company. Beginning in 2002, the euro began to strengthen against the dollar, causing the Company’s sales and profits to increase as a result of the favorable exchange rate conversion of euro-denominated sales to U.S. dollars. Partially in response to the favorable exchange rates, the euro price at which the Company’s products are sold in Europe has decreased, which has partially offset the impact of favorable exchange rate conversions. As such, the Company’s revenues have not changed in direct correlation to exchange rate movements. The Company’s results will continue to be significantly affected by currency changes in Europe and, should the euro begin to weaken against the dollar, there can be no assurance that the Company will be able to offset this unfavorable currency movement with an increase to its euro pricing for bananas and other fresh produce. The Company seeks to reduce its exposure to adverse effects of euro exchange movements in any given year by purchasing euro option, forward and zero-cost collar hedging contracts. Other factors, including prices, weather disruptions, and other market and competitive conditions, also impact the ability to predict financial results based on prior performance. For example, in 1998, flooding from Hurricane Mitch destroyed vast areas of banana cultivations in Honduras and Guatemala, which required $94 million in capital expendi- tures for farm rehabilitation. By contrast, the Company was not affected in 2003 by any significant weather disruptions. Generally accepted accounting principles do not permit combining the results of the Reorganized Company with those of the Predecessor Company in the financial statements. Accordingly, the Consolidated Statement of Income does not present results for the twelve months ended December 31, 2002. Financial highlights for 2003 compared to 2002 include the following: Net sales for 2003 were $2,614 million compared to $1,140 million for the nine months ended December 31, 2002 and $446 million for the three months ended March 31, 2002. Approximately 80% of the increase was due to the acquisi- tion of Atlanta, which was completed in March 2003. 18 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 21. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 Net income for 2003 was $99 million, or $2.46 per share. The Company’s 2002 results consisted of: (1) a first-quarter net loss of $398 million, which included $286 million of charges related to the Company’s bankruptcy and imple- mentation of fresh start accounting, and a charge of $145 million for a change in the method of accounting for goodwill; and (2) net income of $13 million, or $0.33 per share, for the nine months ended December 31, 2002. Operating income for 2003 was $140 million, compared to $26 million for the nine months ended December 31, 2002 and $41 million for the three months ended March 31, 2002, prior to the Company’s emergence from bankruptcy. Operating income for 2003 included $41 million of net gains on asset sales, primarily the Armuelles, Panama banana division and several equity method investment joint-ventures, and $25 million of charges related to severance, losses on sales and write-downs of Atlanta assets, and shut-down of banana farms. Operating income in 2002 included $21 million of charges, which resulted from the shut-down of poor-performing operations at Atlanta ($12 million); flooding in Costa Rica and Panama ($5 million); and severance associated with Company cost-reduction programs ($4 million). In 2003, the Company realized cost reductions of $51 million associated with tropical production, logistics, advertising and overhead, which were largely offset by $25 million of increased purchased fruit, fuel and paper costs, $11 million of increased incentive compensation, and $4 million of increased implementation expenses associated with cost- reduction programs ($8 million in 2003 versus $4 million in 2002). In 2003, Chiquita sold assets for approximately $270 million, including the sale of CPF for approximately $110 million in cash, $13 million in stock, and debt assumed by the buyer. The Company reduced its debt from $517 million at December 31, 2002, which included debt of discontinued operations such as CPF, to $395 million at December 31, 2003. O P E R AT I O N S The Company historically reported two business segments, Fresh Produce and Processed Foods. The Fresh Produce segment included the sourcing, transportation, marketing and distribution of bananas and a wide variety of other fresh fruits and vegetables. The Processed Foods segment consisted primarily of CPF, the Company’s vegetable canning division, which accounted for more than 90% of the net sales in the segment. In May 2003, the Company sold CPF (see Note 2 to the Consolidated Financial Statements) and, in March 2003, completed the acquisition of Atlanta (see Note 7). Chiquita’s operations in the other fresh produce business increased substantially with the acquisition of Atlanta, which has annual sales of approximately $1.2 billion, of which $900 million is non-banana fresh produce. As a result of the sale of CPF and the acquisition of Atlanta, the Company’s internal reporting of the results of its business units changed, and the Company now has the following reportable segments: Bananas and Other Fresh Produce. The acquisition of Atlanta was the primary cause of increases to the Company’s sales, cost of sales and selling, general and administrative costs in 2003 compared to previous years. The following table provides net sales and operating income on a segment basis: R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DEC. 31, DEC. 31, MAR. 31, DEC. 31, 2003 2002 2002 2001 (IN THOUSANDS) Ne t s a l e s $ 1,579,900 $ 989,214 $ 351,830 $ 1,242,558 Bananas 979,245 120,228 86,251 189,413 Other Fresh Produce 54,403 30,582 8,065 33,009 Other $ 2,613,548 $ 1,140,024 $ 446,146 $ 1,464,980 Total net sales Se g m e n t o p e ra t i n g i n co m e ( l o s s ) $ 132,618 $ 43,323 $ 38,059 $ 42,930 Bananas (3,868) (20,408) 1,768 (22,022) Other Fresh Produce 11,636* 2,586 751 1,714 Other $ 140,386 $ 25,501 $ 40,578 $ 22,622 Total operating income * Includes a $7 million gain on the sale of the Company’s investment in Mundimar Ltd., a Honduran palm-oil joint venture. 19 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 22. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 BA NA NA S EG M E NT Ne t s a l e s Banana segment net sales for 2003 increased 18% versus 2002 due to the acquisition of Atlanta, increased sales volume, and favorable European exchange rates, partially offset by lower local currency pricing for bananas in Europe. Banana net sales for 2002 increased 8% versus 2001 due to favorable currency exchange rates and increased volume in Europe and North America, partially offset by lower local pricing in both Europe and North America. O p e ra t i n g i n co m e 2003 compared to 2002. Banana segment operating income for 2003 was $133 million. Banana segment operating income was $43 million for the nine months ended December 31, 2002 and $38 million for the three months ended March 31, 2002. The improvement in banana segment operating income of $52 million is primarily due to the following items: $51 million from lower production, logistics, advertising and overhead costs; $21 million gain on the sale of the Armuelles banana production division; $6 million net benefit from European currency and banana pricing, comprised of $136 million of increased revenue from favorable European exchange rates, offset by $71 million in lower local pricing in the Company’s core Europe, Eastern European and Mediterranean markets, $30 million in increased hedging costs, $19 million in increased European costs due to the stronger euro, and $10 million less in balance sheet translation gains; $6 million from increased banana volume in Europe and North America; $5 million of charges incurred in 2002 related to flooding in Costa Rica and Panama (no significant flooding charges were incurred in 2003); and $8 million in lower depreciation expense, primarily related to reductions in asset values recorded in conjunction with the Company’s emergence from bankruptcy in March 2002. These favorable items were partially offset by: $25 million of higher costs associated with purchased fruit, fuel and paper; $11 million of higher personnel costs related to incentive compensation; $4 million of increased costs, primarily severance, associated with the Company’s cost-reduction programs; and $5 million adverse effect of North American banana pricing. The following tables present the 2003 percentage change compared to 2002 for the Company’s banana prices and banana volume: Q2 Q3 Q4 Q1 YEAR B a n a n a Pr i ce s 3% -4% -1% -2% -1% North America European Core Markets 11% 12% 3% 18% 12% U.S. Dollars -9% -10% -10% 0% -7% Local Currency Central and Eastern Europe/Mediterranean 4% -3% -8% 2% -2% U.S. Dollars -15% -22% -20% -14% -19% Local Currency Asia -7% 0% 1% 12% 0% U.S. Dollars -18% -7% -1% 6% -5% Local Currency B a n a n a Vo l u m e -5% 1% 3% 9% 2% North America 3% 10% -1% -1% 3% European Core Markets -16% -2% 40% 13% 6% Central and Eastern Europe/Mediterranean 7% 6% 23% 16% 14% Asia 20 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 23. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 The Company’s banana sales volumes of 40-pound boxes were as follows: 2003 2002 ( I N M I L L I O N S , E X C E P T P E R C E N TA G E S ) % CHANGE 47.5 46.2 2.8% European Core Markets 16.5 15.6 5.8% Central and Eastern Europe/Mediterranean 55.1 54.1 1.8% North America 119.1 115.9 2.8% Total The Company is a 50% owner of a joint venture serving the Far East, which had banana sales volume of 13.9 million and 12.2 million boxes during 2003 and 2002, respectively. The Company has entered into option, forward and zero-cost collar contracts to hedge its risks associated with euro exchange rate movements. Costs associated with the Company’s hedging program were $38 million in 2003 and $8 mil- lion in 2002. The increase in 2003 costs is associated with losses the Company sustained on forward and zero-cost collar contracts as the euro strengthened during 2003. These costs reduced the favorable impact of the exchange rate on U.S. dollar realizations of euro sales. At December 31, 2003, unrealized losses of $29 million on the Company’s forward, zero- cost collar and option contracts are included in accumulated other comprehensive income, and these losses are expect- ed to be reclassified to net income in 2004. Beginning in late 2003, the Company began to purchase put options rather than entering into forward and zero-cost collar contracts. Purchased put options require an upfront premium payment, and reduce the negative earnings impact that any significant decline in the value of the euro would have on the conver- sion of euro-based revenue into U.S. dollars. 2002 compared to 2001. The $38 million improvement in banana segment operating income in 2002 compared to 2001 pri- marily 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 Far East joint ven- ture operations due to higher banana prices, and a $28 million decrease in depreciation and amortization expense pri- marily 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 and higher advertising costs of $15 million. Additional profit from higher banana sales volume was offset by higher tropical produc- tion costs. Banana results in 2002 also included charges of $19 million primarily related to flooding in the tropics, sever- ance and other cost-reduction program costs, and Atlanta losses on asset sales. In 2001, banana results include $28 million of charges primarily related to the closure of farms and a labor strike and related labor issues at the Company’s Armuelles division. OTHER FRESH PRODUCE SEGMENT Ne t s a l e s Other Fresh Produce net sales increased by $773 million to $979 million in 2003, primarily due to the acquisition of Atlanta in March 2003. Net sales for 2002 increased by 9% compared to 2001 due to increased volumes, particularly in melons and grapes. O p e ra t i n g i n co m e 2003 compared to 2002. The Other Fresh Produce segment incurred an operating loss of $4 million in 2003. The operating loss was $20 million for the nine months ended December 31, 2002 and operating income of $2 million was generated for the three months ended March 31, 2002. Other Fresh Produce operating results benefited by $15 million in 2003 compared to 2002 from the following favorable items: $11 million from improvements and consolidation of Atlanta’s other fresh produce business and increased pineapple and grape sales; and $8 million of gains associated with the sale of shares of Chiquita Brands South Pacific and other equity method investments. These favorable items were partially offset by $4 million of increased charges at Atlanta related to severance and losses on asset sales and write-downs. See Note 7 to the Consolidated Financial Statements for further information on the Atlanta charges. 21 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 24. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 2002 compared to 2001. The $3 million improvement in Other Fresh Produce results in 2002 compared to 2001 primarily relates to higher sales volumes and reduced operating costs. These improvements were mostly offset by a $3 million tax settlement and $8 million of charges and write-downs incurred by Atlanta, which prior to its acquisition in 2003 was accounted for as an equity investee. These charges were primarily related to severance, asset write-downs and costs associated with the closure of poor-performing units, and the disposal of non-core assets. I n te re s t , Fi n a n c i a l Re s t r u c tu r i n g a n d Ta xe s Interest expense in 2003 was $42 million, which was $5 million higher than the prior year. Interest expense increased $4 million due to the acquisition of Atlanta and related debt and $6 million due to higher interest expense on parent company debt because no interest was accrued on parent company debt while the Company was in Chapter 11 proceedings during the first quarter of 2002. These items were offset by a $5 million decrease in subsidiary interest expense due to 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, $63 million of which was associated with discontinued operations. See Note 16 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. U.S. federal income tax expense is low because most of the Company’s corporate overhead costs and interest expense are U.S.-based and deductible for federal tax purposes against U.S. income. In 2002, income tax expense includes a $4 million benefit from a 2002 tax law that changed the calculation of the Company’s 2001 U.S. alternative minimum tax liability. See Note 14 to the Consolidated Financial Statements for further information about the Company’s income taxes. D i s co n t i n u e d O p e ra t i o n s In May 2003, the Company sold CPF to Seneca Foods Corporation for $110 million of cash and approximately 968,000 shares of Seneca preferred stock convertible into an equal number of shares of Seneca Common Stock Class A. Seneca also assumed CPF debt, which was $61 million on the sale date ($81 million at December 31, 2002). The Company recognized a $9 million gain on the transaction, and the gain is included in discontinued operations for 2003. In April 2003, the Company sold a port operation of Atlanta for approximately $10 million in cash. A gain of $3 million was recognized in discontinued operations during the 2003 second quarter. Additionally, throughout 2003 the Company has sold or agreed to sell several other Atlanta subsidiaries for a loss of $4 million. In January 2003, the Company sold Progressive Produce Corporation (“Progressive”), a California packing and distribution company, for approximately $7 million in cash. A $2 million gain on this sale was recognized in discontinued operations in the 2003 first quarter. 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. The Company recognized a gain of $10 million on this transaction in discontinued operations in the fourth quarter of 2002. In addition to the gains on sale, the discontinued operations caption includes the operating results of these companies for all income statement periods presented in which they were owned. Su b s e q u e n t Eve n t In January 2004, the Company confirmed it is having discussions regarding the potential sale of its banana-producing and port operations in Colombia to Invesmar Ltd., the holding company of C.I. Banacol S.A., a Colombian-based producer and exporter of bananas. The discussions also involve a potential long-term agreement for Chiquita’s purchase of Colombian bananas. There can be no assurance that these discussions will lead to an agreement or a transaction. Chiquita currently produces approximately 11 million boxes of bananas in Colombia, which represents about 10% of its volume sourced from Latin America. C u m u l a t ive E f f e c t o f a C h a n g e i n M e t h o d o f Acco u n t i n g As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets,” as described under “Critical Accounting Policies and Estimates” below. 22 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 25. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 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 L i q u i d i ty a n d Ca p i t a l Re s o u rce s I n f o r m a t i o n Cash received from the sales of CPF and other assets caused the Company’s cash balance to increase to $134 million at December 31, 2003. Other balance sheet amounts increased at December 31, 2003 compared to December 31, 2002 as a result of the acquisition of Atlanta (these are described in detail in Note 7 to the Consolidated Financial Statements). Operating cash flow was $75 million in 2003, $27 million in the nine months ended December 31, 2002, $(13) million in the three months ended March 31, 2002 and $26 million in 2001. Operating cash flow in 2003 reflects $17 million in statutory severance payments made to approximately 3,000 employees whose employment was terminated upon completion of the sale of the Armuelles division in June 2003. 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. Capital expenditures were $51 million for 2003, $32 million for the nine months ended December 31, 2002, $3 million for the three months ended March 31, 2002 and $14 million in 2001. Prior to and during the bankruptcy, the Company minimized its capital expenditures, while the 2003 capital expenditures reflected a more normal level of capital spending. Capital expenditures included $14 million in 2003 and $14 million in 2002 to purchase a ship in each period; the ships were formerly under operating lease to the Company. Capital expenditures in 2003 included $8 million to set up and equip a fresh-cut fruit processing facility; the Company expects to continue to expand its fresh-cut fruit business. Capital expenditures in 2003 also included $7 million for implementation of a global business processing system; this system implementation will continue throughout 2004 and 2005. The following table summarizes the Company’s contractual obligations for future cash payments at December 31, 2003, which are primarily associated with debt principal repayments, operating leases and long-term banana purchase contracts: 2-3 4-5 AFTER 5 WITHIN 1 YEAR (IN THOUSANDS) T O TA L YEARS YEARS YEARS Long-term debt $ 250,000 $ – $ – $ – $ 250,000 Parent company 135,365 38,875 48,695 30,290 17,505 Subsidiaries 9,195 9,195 – – – Notes and loans payable 129,626 48,658 43,004 19,257 18,707 Operating leases 939,165 249,654 212,025 170,436 307,050 Purchase commitments $ 1,463,351 $ 346,382 $ 303,724 $ 219,983 $ 593,262 The Company’s purchase commitments consist primarily of long-term contracts to purchase bananas from third party producers. The terms of these contracts, which set the price for the committed fruit to be purchased, range from one to fifteen years. However, many of these contracts are subject to price renegotiations every one to two years. Therefore, the Company is only committed to purchase bananas at the contract price until the renegotiation date. The purchase obligations included in the table are based on the estimated production volume the Company is committed to purchase until the renegotiation date and the contract purchase price. The banana purchase commitments reflected in the table above represent normal and customary operating commitments in the industry. Most of the 2004 banana volume to be purchased is reflected above, as the Company has secured and committed to its banana sources for the upcoming year. Substantially all of the contracts provide for minimum penalty payments that are less than the amounts included in the table above in situations in which the Company purchases less than the committed volume of bananas. Total debt at December 31, 2003 was $395 million versus $517 million (including discontinued operations) at December 31, 2002. The reduction in debt resulted from the sales of assets and operating cash flow. During 2003, the Company sold assets for approximately $270 million, including the sale of CPF for approximately $110 million in cash, $13 million in stock, and debt assumed by the buyer. The reductions were offset by the addition of a new $65 million term loan upon the acquisition of Atlanta in March 2003, $14 million for the purchase of a ship that had previously been under operating lease to the Company, and $16 million resulting from the consolidation of Chiquita-Enza (described in Note 8 to the Consolidated Financial Statements). 23 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 26. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 The following table illustrates the change in the debt balances from December 31, 2002 to December 31, 2003: DECEMBER 31, 2003 2002 (IN THOUSANDS) Pa re n t Co m p a ny $ 250,000 $ 250,000 10.56% Senior Notes Su b s i d i a r i e s CBI facility – – Revolver – 64,350 Term loan 9,798 – New term loan for Atlanta 108,436 109,917 Shipping 16,123 – Chiquita-Enza 10,203 12,230 Other 394,560 436,497 Total debt, excluding CPF – 80,954 CPF - sold in May 2003 $ 394,560 $ 517,451 Total debt, including CPF The $250 million of Senior Notes mature on March 15, 2009. Beginning in March 2005, the Notes are callable by the Company at a price of 105.28%, declining to par value in 2008. Prior to March 2005, substantial premiums are associated with any call of the Notes by the Company, as described in Note 10 to the Consolidated Financial Statements. These Notes were issued by Chiquita Brands International, Inc. (“CBII”), the parent holding company, and are not secured by any of the assets of CBII or any of its subsidiaries. Interest payments of $13 million on the Senior Notes are payable semiannually. The indenture for the Senior Notes contains dividend payment restrictions that, at December 31, 2003, limited the aggregate amount of dividends that could be paid by CBII to $25 million. The indenture has additional restrictions related to asset sales, incurrence of additional indebtedness, granting of liens, sale-leaseback transactions, investments and acquisitions, business activities, and related-party transactions. Of the subsidiary debt, $108 million is indebtedness secured by the Company’s ships. This indebtedness matures in installments of $19-$25 million per year from 2004 through 2007, and $8-$10 million per year from 2008 to 2010. The Company’s ships were built through a series of capital expenditures in the late 1980s and early 1990s and have remaining useful lives of 10-15 years. The Company’s operating subsidiary, Chiquita Brands, Inc. (“CBI”), now known as Chiquita Brands L.L.C., has a secured bank credit facility (“the CBI facility”) comprised of the following parts: An $86 million revolving line of credit, of which $9 million had been used to issue letters of credit and no borrowings were outstanding at December 31, 2003 (letters of credit were $4 million and no borrowings were outstanding at December 31, 2002); A term loan to support the operations of CBI, which had been paid in full at December 31, 2003 ($64 million at December 31, 2002) and cannot be re-borrowed; and A term loan to a subsidiary of CBI to support the operations of Atlanta (“Term B Loan”), which had an outstanding balance of $10 million at December 31, 2003 (the Term B Loan was not in place at December 31, 2002). The CBI facility contains covenants that limit the distribution of cash from CBI to CBII, the parent holding company, to amounts necessary to pay interest on the Senior Notes (provided CBI meets certain liquidity tests), income taxes and permitted CBII overhead (see Note 10 to the Consolidated Financial Statements). 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 CBI 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. This variable rate debt expires in June 2004 and, accordingly, the Term B Loan amount outstanding is classified as long-term debt due within one year. The Company has held discussions with lenders relating to negotiating a new revolving credit facility or extending the term of the existing facility. 24 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 27. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 Chiquita sold CPF to Seneca Foods Corporation in May 2003 as previously described. Other significant amounts of cash proceeds from asset sales during 2003 included $21 million from the sale of a Honduran palm oil joint venture, $15 million from the sale of the Armuelles, Panama banana production division, $14 million from the sale of shares in Chiquita Brands South Pacific, $7 million from the sale of Progressive Produce Company, $10 million from the sale of a port operation of Atlanta, and $7 million from the sale of two domestic distribution facilities. The Company believes that the cash flow generated by operating subsidiaries, the cash received from the sale of CPF and other assets, and its borrowing capacity provide sufficient cash reserves and liquidity to fund the Company’s working capital needs, capital expenditures and debt service requirements. Pa re n t Co m p a ny D e b t Re s t r u c tu r i n g 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. The securities issued pursuant to the Plan and the fresh start adjustments are described in Note 16 to the Consolidated Financial Statements. CBII’s general unsecured creditors (other than the holders of the Predecessor Company’s senior notes and subordinated debentures) 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, and none of their creditors were affected. 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 to the Consolidated Financial Statements. The additional discussion below addresses major judgments used in: reviewing the carrying values of intangibles; reviewing the carrying values of property, plant and equipment; and accounting for pension and tropical severance plans. Rev i ew o f Ca r r y i n g Va l u e s o f I n t a n g i b l e s Trademark – At December 31, 2003, the Company’s Chiquita trademark had a carrying value of $388 million. The value of this asset was established in connection with fresh start reporting in March 2002, and was determined through inde- pendent appraisal using a “relief-from-royalty” method. The year-end 2003 carrying value was supported by an updated appraisal which indicated that no impairment was present and no write-down was required. A Company-determined revenue growth rate of 3.0% was used in the appraisal. Other assumptions, as determined by the outside appraiser, include a royalty rate of 3.5%, a discount rate of 11.75%, and an income tax rate of 37% applied to the royalty cash flows. The valuation is sensitive to the royalty rate assumption. A one-half percentage point change to the royalty rate could impact the appraisal by up to $70 million. Goodwill – Substantially all of the Company’s $43 million of goodwill relates to its acquisition of Atlanta during 2003. The Company estimated the fair value of Atlanta based on expected future cash flows generated by Atlanta discounted at 12%. Based on this calculation, there was no indication of impairment and, as such, no write-down of the goodwill carrying value was required. A change to the discount rate of one percentage point would affect the calculated fair value of Atlanta by approximately $5 million. Also, a $1 million change per year in the expected future cash flows would affect the calculated fair value of Atlanta by approximately $5 million. Rev i ew o f Ca r r y i n g Va l u e s o f Pro p e r ty, P l a n t a n d E q u i p m e n t The Company also reviews the carrying value of its property, plant and equipment when impairment indicators are noted, as prescribed by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” by comparing estimates of undiscounted future cash flows, before interest charges, included in the Company’s operating plans with the carrying values of the related assets. These reviews at December 31, 2003 and 2002 did not reveal any instances in which an impairment charge was required. 25 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 28. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 Pe n s i o n a n d Tro p i ca l Seve ra n ce P l a n s Significant assumptions used in the actuarial calculation of the Company’s defined benefit pension and tropical pension plans include the discount rate, long-term rate of compensation increase, and the long-term rate of return on plan assets. The weighted average discount rate assumptions were 6.0% and 6.5% at December 31, 2003 and 2002, respectively, for domestic pension plans, which represents the rate on high quality, fixed income investments in the U.S., such as Moody’s Aa rated corporate bonds. The discount rate assumptions for the tropical severance plans were 8.5% and 9.0% at December 31, 2003 and 2002, respectively, which represents the rate on high quality, fixed income investments in the Latin American countries in which the Company operates, such as government bonds. The long-term rate of compensation increase for domestic plans was decreased to 5.0% in 2003 from 6.0% in 2002. The long-term rate of compensation increase assumed for tropical severance plans was lowered in 2002 to 5.0% from 6.0%. Both decreases reflected the Company’s expectations regarding wage increases. The long-term rate of return on plan assets was assumed to be 8.0% for domestic plans for each of the last three years. Actual rates of return were substantially higher during 2003, but annual returns under this long-term rate assumption are inherently subject to year-to-year variability. A one percentage point change to the discount rate, long-term rate of compensation increase, or long-term rate of return on plan assets affects pension expense by less than $1 million annually. R I S K S O F I N T E R N AT I O N A L O P E R AT I O N S The Company conducts operations in many foreign countries. Information about the Company’s operations by geographic area is in Note 15 to the Consolidated Financial Statements. The Company’s foreign operations are subject to a variety of risks inherent in doing business abroad. In 1993, the European Union (“EU”) implemented a discriminatory quota and licensing regime governing the importation of bananas into the EU. This regime significantly decreased the Company’s banana volume sold into the EU and resulted in significantly decreased operating results for the Company as compared to prior years. During nine years of legal challenges through the World Trade Organization (“WTO”) and its predecessor, the EU quota and licensing regime was determined in several rulings to be in violation of the EU’s international trade obligations. In April 2001, the European Commission agreed to reform the EU banana import regime. The agreement led to a partial redistribution of licenses for the import of Latin American bananas under a tariff rate quota system for historical operators that went into effect on July 1, 2001. As a result, the Company has not needed to purchase as many import licenses as had been required prior to July 1, 2001 in order to meet its customer demand. On May 1, 2004, ten Central and Eastern European countries are scheduled to join the EU. This EU enlargement will lead to an increase in the EU’s banana tariff rate quota volume and the issuance of additional banana import licenses. In March 2004, the European Commission published regulations governing the allocation of the new licenses and stated that the allocation will be consistent with the 2001 agreement. However, the Commission did not announce the size of the quota increase and may not do so before April 2004. At this stage, management cannot predict the number or share of new licenses it will receive or the impact that the EU’s decisions on enlargement will have on prices and other market conditions for the sale of bananas in the EU, and there can be no assurance that the 2004 enlargement will not have a material adverse effect on the Company. Under the April 2001 agreement, the EU banana tariff rate quota system is scheduled to be followed by a tariff-only system no later than 2006. The EU has previously indicated to the WTO that under a tariff-only system, African and Caribbean bananas would need a tariff preference of 300 euro per metric ton relative to Latin American bananas to remain competitive in the EU marketplace. A 300 euro per metric ton tariff on Latin American bananas would represent a substantial increase over the EU’s 75 euro per metric ton tariff now applicable to Latin American bananas entering within the tariff rate quota system. In order to remain consistent with WTO principles, any new EU banana tariff is required under a November 2001 WTO decision to “maintain total market access” for Latin American suppliers. That decision establishes consultation and arbitration procedures for determining whether Latin American market access would be maintained and requires that those procedures be completed before any new EU tariff-only system takes effect. In February 2004, the Commission informally indicated its intention to seek implementation of a tariff-only system prior to 2006. Accordingly, there can be no assurance that the tariff rate quota system will remain unchanged through 2005, that a tariff-only system will not be implemented until after 2005 or that, if implemented, the tariff levels established will not be materially adverse to marketers of Latin American bananas, such as the Company. 26 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 29. m a n ag e m e n t ’ s d i s c u s s i o n a n d a n a lys 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 The Company has international operations in many foreign countries, including those in Central and South America, the Philippines and La Côte d’Ivoire. The Company must continually evaluate the risks in these countries, including Colombia, where an unstable environment has made it increasingly difficult to do business. The Company’s activities are subject to risks inherent in operating in these countries, including government regulation, currency restrictions and other restraints, burdensome taxes, risks of expropriation, threats to employees, political instability and terrorist activities, including extortion, and risks of action by U.S. and foreign governmental entities in relation to the Company. Should such circumstances occur, the Company might need to curtail, cease or alter its activities in a particular region or country. Chiquita’s ability to deal with these issues may be affected by applicable U.S. laws. The Company is currently dealing with one such issue, which it has brought to the attention of the appropriate U.S. authorities who are reviewing the matter. Management currently believes that the matter can be resolved in a manner that is not material to the Company, although there can be no assurance in this regard. M A R K ET R I S K M A NAG E M E N T - FI NA N C I A L I N ST RU M E N TS Chiquita’s products are distributed in more than 60 countries. Its international sales are made primarily in U.S. dollars and major European currencies. The Company reduces currency exchange risk from sales originating in currencies other than the dollar by exchanging local currencies for dollars promptly upon receipt. The Company further reduces its exposure to exchange rate fluctuations by purchasing foreign currency option, forward and zero-cost collar contracts (principally euro contracts) to hedge sales denominated in foreign currencies. The potential loss on these contracts from a hypothetical 10% increase in euro currency rates at both December 31, 2003 and 2002 would be approximately $24 million. However, the Company expects that any loss on these contracts would tend to be more than offset by an increase in the dollar realization of the underlying sales denominated in foreign currencies. Chiquita’s interest rate risk arises from its fixed and variable rate debt (see Note 10 to the Consolidated Financial State- ments). Of the $395 million total debt at December 31, 2003, approximately $320 million, or 81%, was fixed-rate debt, and $75 million, or 19%, was variable-rate debt. Fixed-rate debt was primarily comprised of the Company’s $250 million 10.56% Senior Notes. The adverse change in fair value of the Company’s fixed-rate debt from a hypothetical 10% decrease in interest rates would be approximately $4 million at both December 31, 2003 and 2002. The Company’s transportation costs are exposed to the risk of rising fuel prices. To reduce this risk, the Company enters into fuel swap contracts that would offset potential increases in the market fuel prices. The potential loss on these swap contracts from a hypothetical 10% decrease in fuel oil prices would be approximately $2 million at December 31, 2003 and $1 million at December 31, 2002. However, the Company expects that any decline in the fair value of these contracts would be offset by a decrease in the cost of underlying fuel purchases. The Company changed its method of market risk presentation from using a value-at-risk model to using the sensitivity analysis presented above in order to provide further clarity and understanding regarding the Company’s financial instrument market risks. (See Note 9 to the Consolidated Financial Statements for additional discussion of the Company’s hedging activities.) ******* This Annual Report contains certain information that may be deemed to be statements that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect management’s current views and estimates of future economic circumstances, industry conditions and Company performance. They are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of Chiquita, including: the impact of changes in the European Union banana import regime expected to occur in connection with the enlargement of the EU in 2004 and the anticipated conversion to a tariff-only regime not later than 2006; prices for Chiquita products; availability and costs of products and raw materials; currency exchange rate fluctuations; natural disasters and unusual weather conditions; operating efficiencies; labor relations; actions of governmental bodies; the continuing availability of financing; the Com- pany’s ability to realize its announced cost-reduction goals; risks inherent in operating in foreign countries, including government regulation, currency restrictions and other restraints, burdensome taxes, risks of expropriation, threats to employees, political instability and terrorist activities, including extortion, and risks of action by U.S. and foreign governmental entities in relation to the Company; and other market and competitive conditions. See Risks of International Operations for further information. The forward-looking statements speak as of the date made and are not guarantees of future performance. Actual results or developments may differ materially from the expectations expressed or implied in the forward-looking statements, and the Company undertakes no obligation to update any such statements. 27 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 30. r e p o rt o f e r n s t & yo u n g , i n d e p e n d e n t au d i t o r s To t h e B o a rd o f D i re c to rs a n d S h a re h o l d e rs o f C h i q u i t a B ra n d s I n te r n a t i o n a l , I n c . We have audited the accompanying consolidated balance sheets of Chiquita Brands International, Inc. as of December 31, 2003 and 2002 (Reorganized Company) , and the related consolidated statements of income, shareholders’ equity, and cash flow for the year ended December 31, 2003 (Reorganized Company), the nine months ended December 31, 2002 (Reorganized Company), the three months ended March 31, 2002 (Predecessor Company), and the year ended December 31, 2001 (Predecessor Company). These financial statements, appearing on pages 29 to 58, 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, 2003 and 2002, and the consolidated results of its operations and its cash flows for the year ended December 31, 2003, the nine month period ended December 31, 2002, the three month period ended March 31, 2002, and the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. As more fully described in Note 16 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 described in Note 1 to the Consolidated Financial Statements, in 2003 the Company changed its method of accounting for employee stock options and variable interest entities, and in 2002 the Company changed its method of accounting for goodwill and other intangible assets. e r n st & yo u n g l l p Cincinnati, Ohio February 12, 2004 28 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 31. c o n s o l i dat e d s tat e m e n t o f i n c o m e R E O R G A N I Z E D C O M PA N Y * P R E D E C E S S O R C O M PA N Y * NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) $ 2,613,548 $ 1,140,024 $ 446,146 $ 1,464,980 Net sales Operating expenses 2,224,658 941,469 346,500 1,201,549 Cost of sales 249,668 150,605 42,191 174,150 Selling, general and administrative 36,823 22,449 16,877 66,659 Depreciation (16,829) – – – Gain on sale of equity method investments (21,158) – – – Gain on sale of Armuelles division 2,473,162 1,114,523 405,568 1,442,358 140,386 25,501 40,578 22,622 Operating income 3,227 2,937 624 7,830 Interest income (42,450) (30,260) (7,555) (111,235) Interest expense – – (222,341) (33,604) Financial restructuring items Income (loss) from continuing operations before income taxes 101,163 (1,822) (188,694) (114,387) and cumulative effect of a change in method of accounting (5,300) (4,800) (1,000) (5,800) Income taxes Income (loss) from continuing operations before cumulative 95,863 (6,622) (189,694) (120,187) effect of a change in method of accounting Discontinued operations: – – (63,481) – Financial restructuring items (6,161) 9,994 (125) 1,419 Income (loss) from operations 9,504 9,823 – – Gain on disposal of discontinued operations Income (loss) before cumulative effect of 99,206 13,195 (253,300) (118,768) a change in method of accounting Cumulative effect of a change in – – (144,523) – method of accounting for goodwill $ 99,206 $ 13,195 $ (397,823) $ (118,768) Net income (loss) – – – (11,809) Dividends in arrears on old preferred and preference stock $ 99,206 $ 13,195 $ (397,823) $ (130,577) Net income (loss) attributed to common shares Net income (loss) per common share - basic: $ 2.40 $ (0.17) $ (2.42) $ (1.80) Continuing operations 0.08 0.50 (0.81) 0.02 Discontinued operations 2.48 0.33 (3.23) (1.78) Before cumulative effect of a change in method of accounting – – (1.85) – Cumulative effect of a change in method of accounting $ 2.48 $ 0.33 $ (5.08) $ (1.78) Net income (loss) Net income (loss) per common share - diluted: $ 2.38 $ (0.17) $ (2.42) $ (1.80) Continuing operations 0.08 0.50 (0.81) 0.02 Discontinued operations 2.46 0.33 (3.23) (1.78) Before cumulative effect of a change in method of accounting – – (1.85) – Cumulative effect of a change in method of accounting $ 2.46 $ 0.33 $ (5.08) $ (1.78) Net income (loss) Pro forma for accounting change: $ 11,408 $ (207,724) Continuing operations 19,817 (63,606) Discontinued operations 31,225 (271,330) Before cumulative effect of a change in method of accounting – (144,523) Cumulative effect of a change in method of accounting $ 31,225 $ (415,853) Net income (loss) Pro forma for accounting change (per share): $ 0.28 $ (2.65) Continuing operations 0.50 (0.81) Discontinued operations 0.78 (3.46) Before cumulative effect of a change in method of accounting – (1.85) Cumulative effect of a change in method of accounting $ 0.78 $ (5.31) Net income (loss) * See Notes to Consolidated Financial Statements, including Note 1 describing the Reorganized Company and Predecessor Company. 29 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 32. c o n s o l i dat e d b a l a n c e s h e e t DECEMBER 31, 2003 2002 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) As s e ts Current assets $ 134,296 $ 52,885 Cash and equivalents 292,522 186,280 Trade receivables, less allowances of $13,066 and $7,023, respectively 84,289 73,137 Other receivables, net 193,968 173,368 Inventories 17,528 14,045 Prepaid expenses 15,347 4,588 Other current assets 737,950 504,303 Total current assets 440,978 308,316 Property, plant and equipment, net 93,377 146,083 Investments and other assets, net 387,585 387,585 Trademark 43,219 – Goodwill 3,610 295,954 Assets of discontinued operations $ 1,706,719 $ 1,642,241 Total assets L i a b i l i t i e s a n d S h a re h o l d e rs ’ E q u i ty Current liabilities $ 9,195 $ 5,375 Notes and loans payable 38,875 36,326 Long-term debt of subsidiaries due within one year 264,373 130,829 Accounts payable 144,230 87,813 Accrued liabilities 456,673 260,343 Total current liabilities 250,000 250,000 Long-term debt of parent company 96,490 144,796 Long-term debt of subsidiaries 81,899 98,069 Accrued pension and other employee benefits 62,414 80,982 Other liabilities 1,897 178,762 Liabilities of discontinued operations 949,373 1,012,952 Total liabilities Shareholders’ equity Common stock, $.01 par value 400 398 (40,037,281 and 39,846,755 shares outstanding, respectively) 630,868 625,589 Capital surplus 112,401 13,195 Retained earnings 13,677 (9,893) Accumulated other comprehensive income (loss) 757,346 629,289 Total shareholders’ equity $ 1,706,719 $ 1,642,241 Total liabilities and shareholders’ equity See Notes to Consolidated Financial Statements. 30 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 33. c o n s o l i dat 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 PREFERRED ACCUMULATED AND RETAINED OTHER COMP- TOTAL SHARE- COMMON PREFERENCE COMMON CAPITAL EARNINGS REHENSIVE HOLDERS’ (IN THOUSANDS) SHARES STOCK STOCK SURPLUS (DEFICIT) INCOME (LOSS) EQUITY Pre d e ce s s o r Co m p a ny * 66,705 $ 253,475 $ 667 $ 766,217 $ (411,300) $ (26,516) $ 582,543 December 31, 2000 – – – – (118,768) – (118,768) Net loss – – – – – (2,633) (2,633) Unrealized translation loss – – – – – (7,830) (7,830) Change in minimum pension liability – – – – – (1,183) (1,183) Changes in fair value of derivatives Losses reclassified from – – – – – 2,095 2,095 OCI into net loss Comprehensive loss before cumulative (128,319) effect of adopting SFAS No. 133 Cumulative effect of adopting – – – – – (6,975) (6,975) SFAS No. 133 (135,294) Comprehensive loss Share issuances Preferred stock 11,508 (113,746) 115 113,631 – – – conversion to common stock 60 – 1 1,344 – – 1,345 Other 78,273 139,729 783 881,192 (530,068) (43,042) 448,594 December 31, 2001 – – – – (397,823) – (397,823) Net loss – – – – – 485 485 Unrealized translation gain – – – – – (1,200) (1,200) Changes in fair value of derivatives Losses reclassified from – – – – – 2,958 2,958 OCI into net loss (395,580) Comprehensive loss (39,207) (139,729) (392) (268,830) 927,891 40,799 559,739 Reorganization adjustments Re o rg a n i z e d Co m p a ny * 39,066 – 391 612,362 – – 612,753 March 31, 2002 – – – – 13,195 – 13,195 Net income – – – – – 12,680 12,680 Unrealized translation gain – – – – – (7,634) (7,634) Change in minimum pension liability – – – – – (14,939) (14,939) Changes in fair value of derivatives 3,302 Comprehensive income 781 – 7 13,227 – – 13,234 Share issuances 39,847 – 398 625,589 13,195 (9,893) 629,289 December 31, 2002 – – – – 99,206 – 99,206 Net income – – – – – 32,340 32,340 Unrealized translation gain – – – – – 2,774 2,774 Change in minimum pension liability – – – – – (4,548) (4,548) Sale of equity method investments Change in fair value of cost – – – – – 7,265 7,265 investment available for sale – – – – – (39,494) (39,494) Changes in fair value of derivatives Losses reclassified from OCI into – – – – – 25,233 25,233 net income 122,776 Comprehensive income 190 – 2 5,279 – – 5,281 Share and stock option issuances 40,037 $ – $ 400 $ 630,868 $ 112,401 $ 13,677 $ 757,346 December 31, 2003 * See Notes to Consolidated Financial Statements, including Note 1 describing the Reorganized Company and Predecessor Company. 31 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 34. c o n s o l i dat e d s tat e m e n t o f c a s h f l o w R E O R G A N I Z E D C O M PA N Y * P R E D E C E S S O R C O M PA N Y * NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) Ca s h Prov i d e d ( u s e d ) by : O p e ra t i o n s Income (loss) from continuing operations before $ 95,863 $ (6,622) $ (189,694) $ (120,187) cumulative effect of a change in method of accounting – – 209,480 16,991 Financial restructuring items 36,823 22,449 16,877 70,023 Depreciation and amortization – – – 77,672 Parent company interest expense not paid 3,158 1,677 2,279 15,147 Banana sourcing asset write-downs and charges 8,100 – – – Atlanta write-downs and losses on asset sales – – – 9,456 Collection of tax refund (16,829) – – – Gain on sale of equity method investments (21,158) – – – Gain on sale of Armuelles division (16,713) – – – Severance payments for Armuelles division Changes in current assets and liabilities (10,865) 6,050 (61,610) (9,550) Trade receivables (4,768) 2,761 2,518 7,388 Other receivables (15,891) 3,400 (6,090) (1,327) Inventories (1,881) 23,566 (20,055) (1,217) Prepaid expenses and other current assets 23,236 (16,504) 28,747 (40,516) Accounts payable and accrued liabilities (4,206) (9,741) 4,125 2,525 Other 74,869 27,036 (13,423) 26,405 Cash flow from operations I nve s t i n g (51,044) (31,925) (2,561) (14,208) Capital expenditures – – – 6,393 Hurricane Mitch insurance proceeds – (2,534) – (16,543) Long-term investments Proceeds from sale of: 38,942 – – – Equity method investments 14,953 – – – Armuelles division – 54,150 – – Ships 15,057 4,183 164 9,687 Other property, plant and equipment 7,579 – – – Consolidation of Chiquita-Enza 2,391 14,777 1,269 (14,500) Refundable cash deposits 1,128 1,863 (1,526) 238 Other 29,006 40,514 (2,654) (28,933) Cash flow from investing Fi n a n c i n g 79,351 13,915 200 73,874 Issuances of long-term debt (224,351) (87,163) (7,933) (94,030) Repayments of long-term debt (4,478) (374) (7,393) – CBI credit facility amendment and other fees 124 (19,905) 18,554 (11,702) Increase (decrease) in notes and loans payable 1,911 – – – Proceeds from exercise of stock options (147,443) (93,527) 3,428 (31,858) Cash flow from financing 124,979 24,202 (1,289) 13,727 Discontinued operations 81,411 (1,775) (13,938) (20,659) Increase (decrease) in cash and equivalents 52,885 54,660 68,598 89,257 Balance at beginning of period $ 134,296 $ 52,885 $ 54,660 $ 68,598 Balance at end of period * See Notes to Consolidated Financial Statements, including Note 1 describing the Reorganized Company and Predecessor Company. 32 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 35. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 1 . Su m m a r y o f Si g n i f i ca n t Acco u n t i n g Po l i c i e s B A S I S O F P R E S E N TAT I O N On March 19, 2002, Chiquita Brands International, Inc. (“CBII”), a parent holding company without business operations of its own, completed its previously announced 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 these financial statements 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. In accordance with financial reporting requirements for companies emerging from a Chapter 11 restructuring, financial information for the twelve months ended December 31, 2002 is not presented in the Consolidated Financial Statements since such information would combine the results of the Predecessor Company and Reorganized Company. The securities issued pursuant to the Plan and the fresh start adjustments are described in Note 16. C O N S O L I D AT I O N The Consolidated Financial Statements include the accounts of CBII, controlled majority-owned subsidiaries and any entities that are not controlled but require consolidation in accordance with FASB Interpretation No. 46, “Consolidation of Variable Interest Entities - an interpretation of ARB No. 51,” (collectively, “Chiquita” or the “Company”). Intercompany balances and transactions have been eliminated. U S E O F E S T I M AT E S The financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. C A S H A N D E Q U I VA L E N T S Cash and equivalents include cash and highly liquid investments with a maturity when purchased of three months or less. T R A D E R E C E I VA B L E S Trade receivables less allowances reflect the net realizable value of the receivables, and approximate fair value. To reduce credit risk, the Company performs credit investigations prior to establishing customer credit limits and reviews customer credit profiles on an ongoing basis. An allowance against the trade receivables is established based on the Company’s knowledge of customers’ financial condition and historical loss experience. An allowance is recorded and charged to expense when an account is deemed to be uncollectible. Recoveries of trade receivables previously reserved in the allowance are credited to income. INVENTORIES Inventories are valued at the lower of cost or market. Cost for growing crops and certain fresh produce inventories is determined on the “last-in, first-out” (LIFO) basis. Cost for other inventory categories, including other fresh produce, is determined on the “first-in, first-out” (FIFO) or average cost basis. Banana and other fresh produce inventories repre- sent costs associated with boxed bananas and other fresh produce not yet sold. Growing crop inventories represent the costs associated with growing banana plants on Company-owned farms that have not yet been harvested. Materials and supplies primarily represent growing and packaging supplies maintained on Company-owned farms. Inventory costs are comprised of the purchase cost of materials and, in addition, for bananas and other fresh produce grown on Company farms, tropical production labor and overhead. INVESTMENTS Investments representing minority interests are accounted for by the equity method when Chiquita has the ability to exercise significant influence over the investees’ operations. Investments not publicly traded that the Company does not significantly influence are valued at cost. Publicly traded investments that the Company does not have the ability to significantly influence are accounted for as available-for-sale securities at fair value. Unrealized holding gains or losses on available-for-sale securities are excluded from operating results and are recognized in shareholders’ equity (accu- mulated other comprehensive income) until realized. The Company assesses declines in the fair value of individual investments to determine whether such declines are other-than-temporary and the investment impaired. 33 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 36. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s P R O P E R T Y, P L A N T A N D E Q U I P M E N T With the adoption of fresh start reporting, property, plant and equipment carrying values were stated at fair value as of March 31, 2002. Property, plant and equipment purchased subsequent to the adoption of fresh start reporting are stated at cost. Property, plant and equipment, except for land, are depreciated on a straight-line basis over their estimated remaining useful lives. The Company generally uses 25 years to depreciate ships, 30 years for cultivations, 10 to 40 years for buildings and improvements, and 3 to 20 years for machinery and equipment. Cultivations represent the costs to plant and care for the banana plant until such time that the root system can support commercial quantities of fruits, as well as the costs to build levees, drainage canals, and other farm infrastructure to support the banana plants. The Company reviews the carrying value of its property, plant and equipment when impairment indicators are noted. No impairment indicators were noted at December 31, 2003 and 2002. I N TA N G I B L E S As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” To give effect to the new standard, the Company recorded a goodwill write-down of $145 million as a cumulative effect of a change in method of accounting. The write-down resulted from applying the SFAS No. 142 requirement to evaluate goodwill using discounted cash flows rather than the undiscounted cash flow methodology prescribed by the previous standard. In addition, under this new standard, goodwill and other intangible assets with an indefinite life are no longer amortized but are reviewed at least annually for impairment. Reviews for impairment at December 31, 2003 and 2002 of goodwill and the Chiquita trademark indicated that no impairment charges were necessary. The Company supports its trademark value on a fair value basis through an independent appraisal using a “relief-from- royalty” method. Goodwill is associated with the Company’s Atlanta reporting unit (see Note 7), and is tested for impairment by comparing the market value of Atlanta, based on discounted future cash flows, with its carrying value. Net income for 2001 would have been $6 million ($0.08 per share) higher if the non-amortization provisions of SFAS No. 142 had been adopted as of January 1, 2001. REVENUE RECOGNITION The Company records revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectibility is reasonably assured. For the Company, this point occurs when the product is delivered to, and title to the product passes to, the customer. S T O C K - B A S E D C O M P E N S AT I O N Effective January 1, 2003, on a prospective basis, the Company began using the fair value method under SFAS No. 123, “Accounting for Stock-Based Compensation,” to recognize stock option expense in its results of operations for new stock options granted after December 31, 2002. Prior to January 1, 2003, the Company accounted for stock options using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company also grants restricted stock awards. Fair value of the option and stock awards are determined at the grant date and expensed over the vesting period of the award. With respect to stock appreciation rights (“SARs”), the Company records expense over the life of the SARs to the extent that the price of the underlying stock is greater than the stated price of the SAR. 34 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 37. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s The table below illustrates the effect of stock compensation expense on all periods as if the Company had always applied the fair value method: R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) $ 102,103 $ 13,195 $ (397,823) $ (118,768) Income (loss) before stock compensation expense (2,897) – – – Stock compensation expense included in net income (loss) 99,206 13,195 (397,823) (118,768) Net income (loss) (7,452) (7,452) (902) (3,607) Pro forma stock compensation expense* $ 91,754 $ 5,743 $ (398,725) $ (122,375) Pro forma net income (loss) Basic earnings per common share: $ 2.55 $ 0.33 $ (5.08) $ (1.78) Income (loss) before stock compensation expense (0.07) – – – Stock compensation expense included in net income (loss) 2.48 0.33 (5.08) (1.78) Net income (loss) (0.19) (0.19) (0.01) (0.05) Pro forma stock compensation expense* $ 2.29 $ 0.14 $ (5.09) $ (1.83) Pro forma net income (loss) Diluted earnings per common share: $ 2.53 $ 0.33 $ (5.08) $ (1.78) Income (loss) before stock compensation expense (0.07) – – – Stock compensation expense included in net income (loss) 2.46 0.33 (5.08) (1.78) Net income (loss) (0.19) (0.19) (0.01) (0.05) Pro forma stock compensation expense* $ 2.27 $ 0.14 $ (5.09) $ (1.83) Pro forma net income (loss) * Represents the additional amount of stock compensation expense that would have been included in net income (loss) had the Company applied the fair value method under SFAS No. 123 for awards issued prior to 2003, when the Company began expensing options. I N C O M E TA X E S Deferred income taxes are recognized at currently enacted tax rates for temporary differences between the financial reporting and income tax bases of assets and liabilities. Deferred taxes are not provided on the undistributed earnings of subsidiaries operating outside the U.S. that have been permanently reinvested. EARNINGS PER SHARE Basic earnings per share is calculated on the basis of the weighted average number of common shares outstanding during the year. The assumed conversion, exercise or contingent issuance of securities that would, on an individual basis, have an anti-dilutive effect on diluted earnings per share are not included in the diluted earnings per share computation. FOREIGN EXCHANGE Chiquita utilizes the U.S. dollar as its functional currency, except for its Atlanta AG operations and operations in France, which use the euro as their functional currency. On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended. This standard requires the recognition of all derivatives on the balance sheet at fair value, and recognition of the resulting gains or losses as adjustments to net income if the derivative does not qualify for hedge accounting or other comprehensive income (“OCI”) if the derivative does qualify for hedge accounting. The effect of adopting SFAS No. 133 was not material to the Company’s net income and resulted in a charge of $7 million to OCI. The Company is exposed to currency exchange risk on foreign sales and price risk on purchases of fuel oil used in the Company’s ships. The Company reduces these exposures by purchasing option, forward and zero-cost collar contracts. These options, forwards and zero-cost collars qualify for hedge accounting as cash flow hedges. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. To the extent that these hedges are effective in offsetting the 35 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 38. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s Company’s underlying risk exposure, gains and losses are deferred in accumulated OCI until the underlying transaction is recognized in net income. Gains or losses on effective hedges that have been terminated prior to maturity are also deferred in accumulated OCI until the underlying transaction is recognized in net income. For the ineffective portion of the hedge, gains or losses are charged to net income in the current period. The earnings impact of the option, forward and zero-cost collar contracts are recorded in net sales for currency hedges, and in cost of sales for fuel oil hedges. The Company does not hold or issue derivative financial instruments for speculative purposes. See Note 9 for additional discussion of the Company’s hedging activities. N EW ACCOU NT I NG P RO NOU NC E M E NTS FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51,” was issued in January 2003. This interpretation addresses consolidation by business enterprises of variable interest entities. The interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiary. The Company’s investment in Chiquita-Enza Chile Ltda. (“Chiquita-Enza”), a producer and distributor of non-banana fresh fruit, which was previously accounted for as an equity method investment, qualifies for consolidation under the interpretation and, as a result, the Company began consolidating Chiquita-Enza on July 1, 2003. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclo- sure.” SFAS No. 148 provides transitional guidance for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. Beginning January 1, 2003, the Company started to recognize stock option expense based on the fair value method for new stock options granted after December 31, 2002. See “Stock-Based Compensation” above and Note 12 for additional information. ACCOU NT I NG C H A NG E In the first quarter of 2003, the Company changed its method of accounting for certain tropical production and logistics expenses of its banana operations during interim periods. Previously, the Company used a standard costing method which allocated those costs evenly throughout the year on a per box basis. The Company has now adopted a costing method which recognizes costs as incurred. The accounting change has no effect on total-year costs or results. No te 2 . D i s co n t i n u e d O p e ra t i o n s a n d D ive s t i tu re s D I S C O N T I N U E D O P E R AT I O N S In May 2003, the Company sold Chiquita Processed Foods (“CPF”) to Seneca Foods Corporation for $110 million in cash and approximately 968,000 shares of Seneca preferred stock convertible into an equal number of shares of Seneca Common Stock Class A, which was recorded at its estimated fair value of $13 million on the sale date. At any time after January 1, 2004, Chiquita has the rights to request Seneca to register either the preferred stock, or the common stock into which it is convertible, under the Securities Act of 1933, and Seneca (subject to certain exceptions) has the obligation to use its best efforts to effect the registration; this would enable Chiquita to sell the shares. Seneca also assumed CPF debt, which was $61 million on the sale date ($81 million at December 31, 2002). The Company recognized a $9 million gain on the transaction, and the gain is included in discontinued operations for 2003. CPF had income (loss) from operations of $(5) million during 2003 and $5 million during 2002. In April 2003, the Company sold an Atlanta port operation for approximately $10 million in cash, resulting in a gain of $3 million during the 2003 second quarter. Also in 2003, the Company sold or agreed to sell certain other Atlanta operations, including Atlanta fresh produce operations in Italy and in France, for losses totaling $4 million. Goodwill write-offs included in these amounts were $5 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. A $2 million gain on this sale was recognized in discontinued operations in the 2003 first quarter. During 2002, Progressive generated approximately $1 million of income from 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. The Company recognized a gain of $10 million on this transaction in discontinued operations in the fourth quarter of 2002. During 2002, Castellini generated income from operations of approximately $4 million. 36 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 39. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s Beginning with the 2003 third quarter, the Company revised its business segments (see Note 15). The financial information of Castellini, Progressive and the Atlanta operations were previously included in the old Fresh Produce business segment, and CPF was previously included in the old Processed Foods business segment. Their results are now included as dis- continued operations in the Consolidated Financial Statements for all periods presented in which they were owned. Income (loss) from discontinued operations presented below includes interest expense on debt assumed by the buyers for amounts of $2 million for 2003, $4 million for the nine months ended December 31, 2002, $2 million for the three months ended March 31, 2002 and $11 million for 2001. Financial information for Castellini, Progressive, the Atlanta operations and CPF follows: R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) $ 156,286 $ 601,236 $ 185,756 $ 787,489 Net sales $ –$ – $ (63,481) $ – Financial restructuring items (6,161) 9,994 (125) 1,419 Income (loss) from operations 9,504 9,823 – – Gain on sale $ 3,343 $ 19,817 $ (63,606) $ 1,419 Income (loss) from discontinued operations DECEMBER 31, 2003 2002 (IN THOUSANDS) Assets of discontinued operations: $ 2,696 $ 247,692 Current assets 868 41,451 Property, plant and equipment 46 6,811 Investments and other assets $ 3,610 $ 295,954 Liabilities of discontinued operations: $ 1,897 $ 120,685 Current liabilities – 47,007 Long-term debt – 11,070 Other liabilities $ 1,897 $ 178,762 OTHER DIVESTITURES In June 2003, the Company sold the assets of its Armuelles, Panama banana production division for $20 million to a worker cooperative led by members of the Armuelles banana workers’ union. In connection with this transaction, the cooperative signed a 10-year contract to supply Chiquita with fruit at market prices. Sales proceeds included $15 million in cash financed by a Panamanian bank and a $5 million note from the worker cooperative. This note will be repaid to the Company through an agreed-upon discount to the price per box payable by Chiquita during the first half of the fruit purchase contract. As part of the transaction, Chiquita paid $20 million in workers’ severance and certain other liabilities of the Armuelles division, which had been previously accrued. The Company recognized a gain of $21 million on the sale of Armuelles assets and settlement of its severance liabilities. The Company recorded a net gain on the sale of equity method investments of $17 million in 2003 (see Note 8). During 2002, the Company sold five ships used in the Fresh Produce business for $54 million, which approximated the carrying value of the ships. The sale was completed in October 2002, and the proceeds from the sale were used to repay approxi- mately $52 million of related debt. SUBSEQUENT EVENT In January 2004, the Company confirmed it is having discussions regarding the potential sale of its banana-producing and port operations in Colombia to Invesmar Ltd., the holding company of C.I. Banacol S.A., a Colombian-based producer and exporter of bananas. The discussions also involve a potential long-term agreement for Chiquita’s purchase of Colombian bananas. There can be no assurance that these discussions will lead to an agreement or a transaction. Chiquita currently produces approximately 11 million boxes of bananas in Colombia, which represents about 10% of its volume sourced from Latin America. 37 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 40. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 3 . E a r n i n gs Pe r S h a re Basic and diluted earnings per common share (“EPS”) are calculated as follows: R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income (loss) from continuing operations before $ 95,863 $ (6,622) $ (189,694) $ (120,187) cumulative effect of a change in method of accounting 3,343 19,817 (63,606) 1,419 Discontinued operations Income (loss) before cumulative effect 99,206 13,195 (253,300) (118,768) of a change in method of accounting Cumulative effect of a change in – – (144,523) – method of accounting for goodwill 99,206 13,195 (397,823) (118,768) Net income (loss) – – – (11,809) Dividends in arrears on preferred and preference stock $ 99,206 $ 13,195 $ (397,823) $ (130,577) Net income (loss) attributed to common shares Weighted average common shares outstanding 39,989 39,967 78,273 73,347 (used to calculate basic EPS) 410 – – – Stock options, warrants and other stock awards 40,399 39,967 78,273 73,347 Shares used to calculate diluted EPS Basic net income (loss) per common share: $ 2.40 $ (0.17) $ (2.42) $ (1.80) Continuing operations 0.08 0.50 (0.81) 0.02 Discontinued operations Before cumulative effect of a change 2.48 0.33 (3.23) (1.78) in method of accounting Cumulative effect of a change – – (1.85) – in method of accounting for goodwill $ 2.48 $ 0.33 $ (5.08) $ (1.78) Net income (loss) Diluted net income (loss) per common share: $ 2.38 $ (0.17) $ (2.42) $ (1.80) Continuing operations 0.08 0.50 (0.81) 0.02 Discontinued operations Before cumulative effect of a change in 2.46 0.33 (3.23) (1.78) method of accounting Cumulative effect of a change in – – (1.85) – method of accounting for goodwill $ 2.46 $ 0.33 $ (5.08) $ (1.78) Net income (loss) The weighted average common shares outstanding for the Reorganized Company include 40,999 shares held in a “rabbi trust” for certain members of management. The earnings per share calculations for the Predecessor Company are based on shares of common stock outstanding prior to the Company’s emergence from Chapter 11 proceedings on March 19, 2002. Upon emergence, these shares were cancelled and the Company issued 40 million shares of a new series of common stock (“Common Stock”). The assumed conversions to common stock of the Company’s previously outstanding stock options, preferred stock and preference stock, and the Company’s currently outstanding warrants, stock options and other stock awards, are excluded from the diluted EPS computations for periods in which these items, on an individual basis, have an anti-dilutive effect on diluted EPS. The Company’s previously outstanding stock options and preferred and preference stock were all cancelled pursuant to the Company’s Plan of Reorganization (see Note 16). In connection with and following the financial restructuring, new stock options, stock awards and warrants to purchase common stock were issued. 38 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 41. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s The Company discontinued payment of dividends on its preferred and preference stock in the fourth quarter of 2000, and accrued but unpaid dividends were cancelled as part of the Plan of Reorganization. These dividends were deducted from net income to calculate EPS for 2001. These dividends were not deducted from net income to calculate EPS for the three months ended March 31, 2002 because of the Company’s bankruptcy petition filing on November 28, 2001. No te 4 . I nve n to r i e s Inventories consist of the following: DECEMBER 31, 2003 2002 (IN THOUSANDS) $ 41,635 $ 32,446 Bananas 10,135 2,929 Other fresh produce 7,592 6,318 Processed food products 91,456 93,518 Growing crops 43,150 38,157 Materials, supplies and other $ 193,968 $ 173,368 The carrying value of inventories valued by the LIFO method was approximately $113 million at December 31, 2003 and $99 million at December 31, 2002. At current costs, these inventories would have been approximately $8 million and $34 million higher than the LIFO values at December 31, 2003 and 2002, respectively. No te 5 . Pro p e r ty, P l a n t a n d E q u i p m e n t Property, plant and equipment consist of the following: DECEMBER 31, 2003 2002 (IN THOUSANDS) $ 32,761 $ 18,087 Land 143,756 36,621 Buildings and improvements 180,739 59,955 Machinery and equipment 173,834 173,965 Ships and containers 50,824 40,714 Cultivations 581,914 329,342 (140,936) (21,026) Accumulated depreciation $ 440,978 $ 308,316 The property, plant and equipment balances were significantly affected by the acquisition of Atlanta (see Note 7). 39 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 42. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 6 . Leases Total rental expense consists of the following: R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) Gross rentals $ 69,682 $ 52,307 $ 18,345 $ 60,553 Ships and containers 28,317 14,711 4,990 18,541 Other 97,999 67,018 23,335 79,094 (807) (5,527) (2,207) (1,140) Sublease rentals $ 97,192 $ 61,491 $ 21,128 $ 77,954 In December 2002, the Company paid $14 million to exercise the purchase option on a ship that had previously been under an operating lease. In January 2003, the Company paid an additional $14 million to exercise the purchase option on another ship. No other purchase options exist on ships under operating leases. Future minimum rental payments required under operating leases having initial or remaining non-cancelable lease terms in excess of one year at December 31, 2003 are as follows: SHIPS AND (IN THOUSANDS) C O N TA I N E R S OTHER T O TA L 2004 $ 30,160 $ 18,498 $ 48,658 2005 10,188 13,886 24,074 2006 6,952 11,978 18,930 2007 4,036 8,737 12,773 2008 488 5,996 6,484 1,003 17,704 18,707 Later years Portions of the minimum rental payments for ships constitute reimbursement for ship operating costs paid by the lessor. No te 7. Ac q u i s i t i o n o f G e r m a n D i s t r i b u to r On March 27, 2003, the Company acquired the remaining equity interests in Scipio GmbH & Co., a German limited partnership that owns Atlanta AG and its subsidiaries (collectively, “Atlanta”). Atlanta is the primary distributor of Chiquita products in Germany and Austria and had been the Company’s largest customer in Europe for many years. Prior to the acquisition, Chiquita had held a 5% limited partnership interest in Atlanta and loans secured by pledges of sub- stantially all of its other limited partnership interests, and accounted for this investment under the equity method. Chiquita had made the loans in the late 1980s and early 1990s in order to strengthen its relationship with Atlanta. The loans had been made to four companies that had used the proceeds to purchase substantially all of the limited partnership interests in Atlanta. Under the terms of the acquisition, the Company exchanged its interests in the loans for the corre- sponding underlying Atlanta limited partnership interests. After this exchange, Chiquita owned 97% of Atlanta. The Company also acquired the general partnership interest and all of the remaining limited partnership interests in a step- acquisition. The total cash paid by the Company to acquire all of the equity interests in Atlanta was approximately $1 million. Coinciding with the acquisition, the CBI credit facility was amended and restated to add a new $65 million term loan (the “Term B Loan”) to a subsidiary of CBI, the proceeds of which were loaned to Atlanta and used to repay existing Atlanta lenders. The Term B Loan was paid down to $10 million during 2003. See Note 10 for more information on the CBI credit facility. 40 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 43. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s Starting with the second quarter of 2003, Atlanta’s results were fully consolidated in Chiquita’s financial statements. The acquisition of Atlanta increased the Company’s 2003 net sales by $828 million. For the nine months ended December 31, 2003, Atlanta’s operating loss was $8 million, which included $13 million of charges comprised of losses of $8 million on sales and write-downs of investments and $5 million of severance and other costs. The Atlanta losses on sales and write-downs of investments were non-cash charges that were expensed to cost of sales as incurred. Severance and other costs associated with the restructuring program were primarily included in selling, general and administrative expenses, and substantially all amounts expensed were paid in cash by the end of the year. Approximately two-thirds of the charges were associated with the Other Fresh Produce segment, and the remainder was related to the Banana segment. The Company expects to incur $7 million to $10 million of charges related to completion of the Atlanta restructuring in 2004. Atlanta’s first quarter 2003 net loss of $4 million, which was primarily due to severance costs and asset write-downs, was included in Chiquita’s cost of sales because Atlanta was an investment accounted for under the equity method prior to the March 27, 2003 acquisition. Atlanta’s net income (loss) of $(14) million for the nine months ended December 31, 2002, $0 for the three months ended March 31, 2002 and $2 million for the year ended December 31, 2001 were included in Chiquita’s cost of sales. Atlanta’s net loss for the nine months ended December 31, 2002 included $12 million of charges related to severance, asset write-downs and costs associated with the closure of poor performing units, and the disposal of non-core assets. The balance sheet of Atlanta is consolidated in the Company’s Consolidated Balance Sheet at December 31, 2003. At December 31, 2002, prior to acquisition of Atlanta, the Company’s balance sheet included an equity method investment in Atlanta of $44 million, and trade receivables from Atlanta of $45 million. Summarized balance sheet information for Atlanta, including the subsidiary of CBI that incurred the Term B Loan to repay Atlanta lenders, follows: DECEMBER 31, 2003 2002 (IN THOUSANDS) $ 17,400 $ 4,500 Cash 151,400 131,600 Other current assets, primarily trade receivables 102,300 95,400 Property, plant and equipment, net 8,200 28,200 Investments and other long-term assets 43,200 30,900 Goodwill $ 322,500 $ 290,600 Total assets $ 9,000 $ 52,200 Notes payable 9,800 – Long-term debt due within one year 196,600 156,500 Other current liabilities, primarily trade payables* 12,000 43,900 Long-term liabilities $ 227,400 $ 252,600 Total liabilities * Includes amounts owed to Chiquita subsidiaries at December 31, 2003 and December 31, 2002 of approximately $55 million and $45 million, respectively. No te 8 . E q u i ty M e t h o d I nve s t m e n ts The following information relates to all Company investments accounted for using the equity method, including Atlanta through the date of its acquisition in March 2003 (see Note 7). The Company’s share of the net income or loss associated with these equity method investments is included in cost of sales. Chiquita’s share of the income (loss) of these affiliates, excluding gains and losses on the sales of the investments, was $8 million in 2003, $(5) million in the nine months ended December 31, 2002, $3 million in the three months ended March 31, 2002 and $(3) million in 2001, and its investment in these companies totaled $30 million at December 31, 2003 and $103 million at December 31, 2002. The Company’s share of undistributed earnings from equity method investments totaled $18 million at December 31, 2003 and $33 million at December 31, 2002. The Company’s carrying value of equity method investments held at December 31, 2002 was approximately $36 million less than the Company’s proportionate share of the investees’ underlying net assets. Of this amount, $22 million was associated with the property, plant and equipment of the underlying investees 41 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 44. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s and was being amortized over the associated remaining useful lives of the underlying assets. As a result of the Company’s sale or consolidation of its interest in several of the equity method investments described below, at December 31, 2003, the carrying value was $21 million less than the Company’s proportionate share of the investees’ underlying net assets, and the amount associated with the property, plant and equipment of the underlying investees was not significant. The Company recorded a net gain on the sale of equity method investments of $17 million in 2003, as a result of the following transactions: Sale of its 50% interest in Mundimar Ltd., a Honduran producer and distributor of palm-oil based products, for $21 million in cash, which resulted in a $7 million gain in the fourth quarter 2003; Reduction of the Company’s ownership of Chiquita Brands South Pacific (“CBSP”), an Australian fresh produce distributor, to approximately 10% from approximately 28%. The Company received $14 million in cash from the sale of the shares and realized a $10 million gain on the sale in the third quarter 2003; Sale of its minority interest in Keelings Ltd., a fruit and vegetable distributor in Ireland, in exchange for 100% own- ership of Keelings’ banana subsidiaries in Scotland and England. This transaction resulted in a $1 million loss in the third quarter 2003; Sale of its minority interest in a small German fruit distributor in exchange for a ship and $1 million in cash, which resulted in a $3 million gain in the third quarter 2003; and Sale of its joint venture interest in The Packers of Indian River Ltd., a Florida citrus producer and packer for $3 million in cash. The Company recognized a $2 million loss in the 2003 second quarter associated with this sale. Because of the reduction in ownership of CBSP at the end of the third quarter, the Company no longer has significant influence over the operating and financial policies of CBSP. As such, the Company no longer uses the equity method of accounting for this investment. These publicly-traded CBSP shares are considered available-for-sale securities and, at December 31, 2003, have a market value of $10 million. FASB Interpretation No. 46, “Consolidation of Variable Interest Entities – an interpretation of ARB No. 51” was issued in January 2003. This interpretation addresses consolidation by business enterprises of variable interest entities. The interpretation requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiary. The Company’s investment in Chiquita-Enza Chile Ltda. (“Chiquita-Enza”), a producer and distributor of non-banana fresh fruit, which was previously accounted for as an equity method investment, qualifies for consolidation under the interpretation and, as a result, the Company began consolidating Chiquita-Enza on July 1, 2003. This consolidation resulted in an increase in the Company’s long-term debt, including the portion due within one year, of approximately $18 million. After repayments of $2 million in the third quarter 2003, Chiquita-Enza’s debt was $16 million at December 31, 2003. This debt is secured by the consolidated assets of Chiquita-Enza, which were $34 million at December 31, 2003, and is non-recourse to other Chiquita subsidiaries. The consolidation did not result in any change to the Company’s equity. Chiquita-Enza has approximately $70 million in annual sales, about half of which are made to other Chiquita subsidiaries. The Company has investments in a number of companies (collectively, the “Chiquita-Unifrutti JV”) that purchase and produce bananas and pineapples in the Phillippines, and market and distribute these products in Japan and other parts of Asia. The Chiquita-Unifrutti JV is 50%-owned by Chiquita. Following the 2003 dispositions described above, the investment in Chiquita-Unifrutti JV comprises the majority of the Company’s equity method investment balance at December 31, 2003. Including sales to Atlanta, sales by Chiquita to equity method investees were approximately $120 million in 2003 and approximately $200 million for 2002 and 2001. The decrease occurred as a result of the acquisition of Atlanta in March 2003. Purchases from equity method investees were approximately $20 million annually for the periods presented. The Company had short-term receivables of $59 million and long-term receivables of $7 million due from these equity method investees as of December 31, 2002. Receivable amounts from equity method investees were not significant at December 31, 2003. 42 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 45. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 9 . Fi n a n c i a l I n s t r u m e n ts At December 31, 2003, the Company had euro-denominated options which allow for conversion of approximately 185 million euro of sales in 2004 at rates ranging from $1.10 per euro to $1.20 per euro. Additionally, the Company had zero-cost collar contracts which ensure conversion of approximately 155 million euro of sales in 2004 at average rates between $1.08 and $1.12 per euro, and euro-denominated forward contracts requiring the conversion of approximately 30 million euro of sales in 2004 at an average rate of $1.04 per euro. The Company had 3.5% Rotterdam barge fuel oil forward contracts at December 31, 2003 that require conversion of approximately 125,000 metric tons of fuel oil in 2004 at prices ranging from $130 to $140 per metric ton in 2004, and a combination of Singapore and New York Harbor fuel oil forward contracts that require conversion of approximately 25,000 metric tons of fuel oil in 2004 at prices ranging from $145 to $160 per metric ton. At December 31, 2003, the fair value of the foreign currency forward and zero-cost collar contracts was included in accrued liabilities, and the fair value of the foreign currency option and fuel oil forward contracts was included in other current assets. Substantially all of the $29 million unrealized loss on all contracts deferred in accumulated other comprehensive income (loss) at the end of 2003 is expected to be reclassified to net income during the next twelve months. During 2003, the change in the fair value of these contracts relating to hedge ineffectiveness was not signifi- cant. The carrying values and estimated fair values of the Company’s debt, fuel oil contracts and foreign currency option, forward, and zero-cost collar contracts are summarized below: DECEMBER 31, 2003 DECEMBER 31, 2002 C A R RY I N G E S T I M AT E D C A R RY I N G E S T I M AT E D (ASSETS (LIABILITIES), IN THOUSANDS) VA L U E FA I R VA L U E VA L U E FA I R VA L U E $ (250,000) $ (280,000) $ (250,000) $ (260,000) Parent company debt (144,560) (146,000) (186,497) (189,000) Subsidiary debt 1,453 1,453 856 856 Fuel oil forward contracts 1,590 1,590 166 166 Foreign currency option contracts (20,917) (20,917) – – Foreign currency zero-cost collars (6,245) (6,245) (15,161) (15,161) Foreign currency forward contracts The fair value of the Company’s publicly-traded debt is based on quoted market prices. Fair values for the foreign currency forward, option and zero-cost collar contracts, and fuel oil contracts are based on estimated amounts that the Company would pay or receive upon termination of the contracts at December 31, 2003 and 2002. Fair value for other debt is estimated based on the current rates offered to the Company for debt of similar maturities. The Company is exposed to credit risk on its hedging investments in the event of nonperformance by counterparties. However, because the Company’s hedging activities are transacted only with highly rated institutions, Chiquita does not anticipate nonperformance by any of these counterparties. Additionally, the Company has entered into agreements which limit its credit exposure to the amount of unrealized gains on the option, forward and zero-cost collar contracts. Excluding the effect of the Company’s foreign currency forward, option and zero-cost collar contracts, net foreign exchange gains (losses) were $8 million in 2003, $24 million in the nine months ended December 31, 2002, $(2) million in the three months ended March 31, 2002 and $(5) million in 2001. 43 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 46. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 1 0 . Debt Long-term debt consists of the following: DECEMBER 31, 2003 2002 (IN THOUSANDS) Pa re n t Co m p a ny $ 250,000 $ 250,000 10.56% Senior Notes, due 2009 Su b s i d i a r i e s Loans secured by ships and containers, due in installments from 2004 to 2010 $ 108,436 $ 109,917 - average effective interest rate of 4.8% (4.9% in 2002) 9,798 – Loan secured by equity and assets of Atlanta, due 2004 - variable interest rate of 7.5% – 64,350 Loan secured by substantially all U.S. assets - variable interest rate of 6% in 2002 Loans secured by assets of Chiquita-Enza Chile (see Note 8) maturing through 2007 16,123 – - average interest rate of 3.9% 1,008 6,855 Other loans (38,875) (36,326) Less current maturities $ 96,490 $ 144,796 Long-term debt of subsidiaries Maturities on subsidiary long-term debt during the next five years are as follows: (IN THOUSANDS) $ 38,875 2004 24,438 2005 24,257 2006 22,413 2007 7,877 2008 The 10.56% Senior Notes (“Senior Notes”) mature on March 15, 2009. These Senior Notes were issued by CBII and are not secured by any of the assets of CBII or its subsidiaries. The indenture for the Senior Notes contains dividend payment restrictions that, at December 31, 2003, limited the aggregate amount of dividends that could be paid by CBII to $25 million. The indenture has additional restrictions related to asset sales, incurrence of additional indebtedness, granting of liens, sale-leaseback transactions, investments and acquisitions, business activities and related-party transactions. The Senior Notes are callable on or after March 15, 2005 at 105.28% of face value, declining to face value in 2008. In addition, the Company may redeem some or all of the Senior Notes prior to March 15, 2005 at a redemption price equal to the greater of (a) 100% of the face value of the Senior Notes to be redeemed, or (b) the sum of the present values of (i) 105.28% of face value of the Senior Notes, and (ii) interest payments due from the date of redemption through March 15, 2005, in each case discounted to the redemption date on a semiannual basis at the applicable U.S. Treasury rates plus 0.25%; plus, in the case of either clause (a) or (b) above, any accrued and unpaid interest as of the redemption date. In addition, in the event of a change of control, the Company is required to offer holders the right to sell their Senior Notes to the Company. 44 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 47. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s The Company’s operating subsidiary, Chiquita Brands, Inc. (“CBI”), now known as Chiquita Brands L.L.C., has a secured bank credit facility (“the CBI facility”) comprised of three parts: An $86 million revolving line of credit, of which $9 million had been used to issue letters of credit and no borrowings were outstanding at December 31, 2003 (letters of credit were $4 million and no borrowings were outstanding at December 31, 2002); A term loan to support the operations of CBI (“Term A Loan”), which had been paid in full at December 31, 2003 ($64 million at December 31, 2002). The Term A Loan cannot be re-borrowed; and A term loan to a subsidiary of CBI to support the operations of Atlanta (“Term B Loan”). In March 2003, coinciding with the acquisition of Atlanta, the CBI facility was amended to add the Term B Loan for $65 million, the proceeds of which were used to repay existing Atlanta lenders. This facility had been paid down to an outstanding balance of $10 million at December 31, 2003. The Term B Loan cannot be re-borrowed. Substantially all U.S. assets of CBI and its subsidiaries (except for those of subsidiaries with their own credit facilities) are pledged to secure the revolving line of credit. This portion of 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 Term B Loan is guaranteed by CBI, and is secured with pledges of equity of Atlanta and its subsidiaries and liens on certain assets of Atlanta. The CBI facility contains covenants that limit the distribution of cash from CBI to CBII, the parent holding company, to amounts necessary to pay interest on the 10.56% Senior 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 share- holders would require approval from the CBI facility lenders. Similar approvals would be required for a Company buyback of common stock. The CBI facility also has covenants that require CBI to maintain certain financial ratios related to debt coverage and income, that limit capital expenditures, investments, additional indebtedness, liens and guarantees, and that restrict certain corporate changes, affiliate transactions and sale and leaseback transactions. The CBI facility expires in June 2004 and, accordingly, the Term B Loan amount outstanding at December 31, 2003 is classified as long- term debt due within one year. Interest on the revolving line of credit 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%. Interest on the Term B Loan accrues at the bank corporate base rate plus 3.25%, subject to a minimum annual rate of 7.5%. In March 2002, the Company paid an amendment fee of 5% of the total credit facility to eliminate the annual facility fee and to increase the facility to $130 million, which at that time was comprised of the Term A Loan in the amount of $70 million and a $60 million revolving credit facility. The Company’s loans secured by its shipping assets are comprised of the following: (i) $39 million are U.S. dollar denominated with variable rates based on prevailing LIBOR rates; (ii) $39 million are euro or British pound denominated with average fixed interest rates of 6.3%; and (iii) the remaining $30 million are U.S. dollar denominated with average fixed rates of 5.4%. These loans have covenants requiring the Company’s shipping entity, Great White Fleet Ltd., to maintain minimum equity levels. A subsidiary of CBI has a ¤25 million uncommitted credit line for bank guarantees of the Company’s payments for licenses used to import bananas into Europe. The subsidiary issues bank guarantees from this credit line to European government agencies in lieu of providing cash collateral. The Company maintains various other lines of credit with domestic and foreign banks for borrowing funds on a short-term basis. The average interest rates for all short-term notes and loans payable outstanding were 4.5% at December 31, 2003 and 5.1% at December 31, 2002. Cash payments relating to interest expense were $43 million in 2003, $24 million for the nine months ended December 31, 2002, $7 million for the three months ended March 31, 2002 and $32 million in 2001. 45 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 48. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 1 1 . Pe n s i o n a n d Seve ra n ce B e n e f i ts The Company and its subsidiaries have several defined benefit and contribution pension plans covering domestic and foreign employees and have severance plans covering Central and South American employees. Pension plans covering eligible salaried and hourly employees and Central and South American severance plans for all employees call for benefits to be based upon years of service and compensation rates. The Company uses a December 31 measurement date for all of its plans. Pension and severance expense consists of the following: D O M EST I C P L A NS R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) Defined benefit and severance plans: $ 339 $ 296 $ 140 $ 360 Service cost 1,551 1,161 406 1,579 Interest on projected benefit obligation (1,590) (1,150) (386) (1,431) Expected return on plan assets – – 143 455 Recognized actuarial loss – – (2) (8) Amortization of prior service cost and transition obligation 300 307 301 955 2,700 2,106 859 2,907 Defined contribution plans $ 3,000 $ 2,413 $ 1,160 $ 3,862 Total pension and severance expense FOREIGN PLANS R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) Defined benefit and severance plans: $ 4,027 $ 2,754 $ 1,021 $ 4,310 Service cost 5,779 4,476 1,802 4,543 Interest on projected benefit obligation (762) (151) (44) (186) Expected return on plan assets (718) (417) 921 1,099 Recognized actuarial (gain) loss 551 – 541 571 Amortization of prior service cost and transition obligation 8,877 6,662 4,241 10,337 (4,943) – – – Curtailment gain (3,010) – – 2,000 Settlement (gain) loss 924 6,662 4,241 12,337 466 363 133 533 Defined contribution plans $ 1,390 $ 7,025 $ 4,374 $ 12,870 Total pension and severance expense The Company’s pension and severance benefit obligations relate primarily to Central and South American benefits which, in accordance with local government regulations, are generally not funded until benefits are paid. Domestic pension plans are funded in accordance with the requirements of the Employee Retirement Income Security Act. 46 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 49. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s Financial information with respect to the Company’s foreign and domestic defined benefit pension and severance plans is as follows: D O M EST I C P L A NS REORGANIZED PREDECESSOR C O M PA N Y C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , 2003 2002 2002 (IN THOUSANDS) $ 17,863 $ 19,223 $ 18,729 Fair value of plan assets at beginning of period 4,010 (1,897) 710 Actual return on plan assets 1,458 1,890 224 Employer contributions (1,813) (1,353) (440) Benefits paid $ 21,518 $ 17,863 $ 19,223 Fair value of plan assets at end of period $ 24,083 $ 23,697 $ 23,203 Projected benefit obligation at beginning of period 1,890 1,457 546 Service and interest cost 1,542 282 388 Actuarial loss (1,813) (1,353) (440) Benefits paid $ 25,702 $ 24,083 $ 23,697 Projected benefit obligation at end of period $ (4,184) $ (6,220) $ (4,474) Plan assets less than projected benefit obligation 2,450 3,328 – Unrecognized actuarial loss (2,128) (2,948) – Adjustment to recognize minimum pension and severance liability $ (3,862) $ (5,840) $ (4,474) Accrued pension and severance liability FOREIGN PLANS REORGANIZED PREDECESSOR C O M PA N Y C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , 2003 2002 2002 (IN THOUSANDS) $ 4,817 $ 4,431 $ 4,298 Fair value of plan assets at beginning of period 723 116 44 Actual return on plan assets 27,891 9,280 2,713 Employer contributions (30,252) (9,010) (2,624) Benefits paid 901 – – Foreign exchange 5,390 – – Acquisition of Atlanta $ 9,470 $ 4,817 $ 4,431 Fair value of plan assets at end of period $ 69,163 $ 78,780 $ 49,703 Projected benefit obligation at beginning of period 9,806 7,230 2,823 Service and interest cost 1,023 (7,837) 18,098 Actuarial (gain) loss (30,252) (9,010) (2,624) Benefits paid 2,202 – 10,780 Amendments (4,943) – – Curtailment gain 2,018 – – Foreign exchange 12,013 – – Acquisition of Atlanta $ 61,030 $ 69,163 $ 78,780 Projected benefit obligation at end of period $ (51,560) $ (64,346) $ (74,349) Plan assets less than projected benefit obligation (2,013) (7,320) – Unrecognized actuarial gain 1,651 – – Unrecognized prior service cost (4,383) (463) – Adjustment to recognize minimum pension and severance liability $ (56,305) $ (72,129) $ (74,349) Accrued pension and severance liability 47 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 50. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s The accumulated benefit obligation was $80 million, $86 million and $91 million as of December 31, 2003, December 31, 2002 and March 31, 2002, respectively. In connection with the sale of the Armuelles banana production division (see Note 2), the Company paid severance amounts of $17 million to the workers of this division, and recognized curtailment and settlement gains of $7 million, which were included in the $21 million gain on sale of Armuelles division in the Consolidated Statement of Income. In conjunction with the adoption of fresh start reporting, pension and severance liabilities were increased by $33 million to reflect the projected benefit obligation (net of plan assets) at March 31, 2002. Effective January 1, 2002, the Company made amendments and assumption changes regarding benefit payments and employee service lives used to calculate the projected benefit obligation for the Central and South American severance plans. These changes resulted in an increase in the projected benefit obligation of approximately $28 million. This increase is reflected in the table above in the progression of the projected benefit obligation for the three months ended March 31, 2002. The following weighted-average assumptions were used to determine the projected benefit obligations for the Company’s domestic pension plans and foreign pension and severance plans: D O M EST I C P L A NS FOREIGN PLANS DEC. 31, DEC. 31, MAR. 31, DEC. 31, DEC. 31, MAR. 31, 2003 2002 2002 2003 2002 2002 6.00% 6.50% 7.00% 8.00% 9.00% 9.25% Discount rate Long-term rate of 5.00% 6.00% 6.00% 4.75% 5.00% 6.00% compensation increase Long-term rate of return 8.00% 8.00% 8.00% 8.25% 4.00% 4.00% on plan assets The Company’s long-term rate of return on plan assets is based on the strategic asset allocation and future expected returns on plan assets. The changes from 2002 to 2003 in the weighted-average assumptions for the foreign plans are primarily due to the acquisition of Atlanta (see Note 7). The weighted-average asset allocations of the Company’s domestic pension plans by asset category are as follows: DECEMBER 31, 2003 2002 As s e t Ca te g o r y 74% – Equity securities 24% – Fixed income securities – 99% Interest in master trust 2% 1% Cash and equivalents From October 2002 to May 2003, the plan assets were combined with the plan assets of CPF in the master trust. The master trust was dissolved upon the sale of CPF (see Note 2). At December 31, 2002, the assets of the master trust were com- prised of 68% equity securities, 29% fixed income securities and 3% cash and equivalents. The primary investment objective for the fund is preservation of capital with a reasonable amount of long-term growth and income without undue exposure to risk. This is provided by a balanced strategy using fixed income, equities and cash equivalents. The target allocation of the overall fund is 70% equities and 30% fixed income. The cash position is maintained at a level sufficient to provide for the liquidity needs of the fund. The Company expects to contribute $663,000 to its domestic pension plan in 2004. 48 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 51. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 1 2 . Sto c k- B a s e d Co m p e n s a t i o n In accordance with the Plan of Reorganization (see Note 16), in March 2002, the Company’s then-existing stock option and incentive plans and all options and awards issued thereunder were cancelled upon emergence from Chapter 11 bank- ruptcy. The Company adopted a new stock option plan, under which the Company may issue up to an aggregate of 5.9 million shares of Common Stock as stock options, stock awards (including restricted stock awards), performance awards and stock appreciation rights (“SARs”). The options may be granted to directors, officers and other key employees and consultants to purchase shares of Common Stock at fair market value at the date of the grant. Under the stock option plan, options for approximately 4.3 million shares were outstanding at December 31, 2003. Additionally, 193,250 SARs granted to certain non-U.S. employees were outstanding at year-end. These options and SARs generally vest over four years and will be exercisable for a period not in excess of 10 years. A summary of the activity and related information for the Company’s new stock options follows: 2003 2002 WEIGHTED WEIGHTED AV E R A G E AV E R A G E (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SHARES EXERCISE PRICE SHARES EXERCISE PRICE 4,303 $ 16.83 –$ – Under option at beginning of year 391 12.94 4,751 16.84 Options granted (112) 16.95 – – Options exercised (256) 16.92 (448) 16.95 Options cancelled or expired 4,326 $ 16.47 4,303 $ 16.83 Under option at end of year 1,315 $ 16.78 – $ – Options exercisable at end of year 1,209 1,352 Shares available for future grants Options outstanding as of December 31, 2003 had a weighted average remaining contractual life of 8.5 years at December 31, 2003 and had exercise prices ranging from $9.22 to $18.70. The following table summarizes further information on the range of exercise prices: O P T I O N S O U T S TA N D I N G WEIGHTED WEIGHTED AV E R A G E AV E R A G E EXERCISE REMAINING (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SHARES PRICE LIFE E xe rc i s e Pr i ce $ 9.22 - $13.00 280 $ 11.17 9 years 13.01 - 16.91 334 15.54 9 years 16.92 - 16.97 3,681 16.94 8 years 16.98 - 18.70 31 18.03 10 years The estimated weighted average fair value per option share granted was $6.89 for 2003 and $7.84 for 2002 using a Black- Scholes option pricing model based on market prices and the following assumptions at the date of option grant: weighted average risk-free interest rates of 2.8% for 2003 and 4.4% for 2002, dividend yield of 0% for 2003 and 2002, volatility factor for the Company’s Common Stock price of 60% for 2003 and 47% for 2002, and a weighted average expected life of five years for 2003 and 2002 for options not forfeited. Effective January 1, 2003, the Company began recognizing stock option expense in its results of operations for stock options granted after December 31, 2002. Prior to January 1, 2003, the Company accounted for stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” With respect to SARs, the Company records expense over the life of the SARs to the extent that the price of the underlying stock is greater than the stated price of the SAR. During 2003, $773,000 of expense was recorded for the SARs. 49 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 52. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 13 . S h a re h o l d e rs ’ E q u i ty In accordance with the Company’s Plan of Reorganization (see Note 16), all previously outstanding preferred, preference and common stock of the Predecessor Company were cancelled. In accordance with the Plan, 150 million shares of new Common Stock are authorized, including 40 million shares which were issued in 2002. In addition, the Company issued warrants representing the right to purchase 13.3 million shares of new Common Stock. The warrants have an exercise price of $19.23 per share and are exercisable through March 19, 2009. The warrants, valued at $41 million for purposes of the Plan of Reorganization, are included in capital surplus at December 31, 2003 and 2002. At December 31, 2003, shares of Common Stock were reserved for the following purposes: 5.8 million Issuance under new stock option plan (see Note 12) 13.3 million Issuance for exercise of warrants The Company’s shareholders’ equity includes accumulated other comprehensive income at December 31, 2003 comprised of unrealized losses on derivatives of $29 million, unrealized translation gains of $40 million, a $7 million adjustment to increase the fair value of a cost investment and a minimum pension liability adjustment of $4 million. The accumulated other comprehensive loss balance at December 31, 2002 includes unrealized losses on derivatives of $15 million, unrealized translation gains of $13 million, and a minimum pension liability adjustment of $8 million. No te 1 4 . I n co m e Ta xe s Income taxes related to continuing operations consist of the following: (IN THOUSANDS) U. S . F E D E R A L U . S . S TAT E FOREIGN T O TA L Reorganized Company 2003 $ 255 $ 1,459 $ 4,651 $ 6,365 Current tax expense – 919 (1,984) (1,065) Deferred tax expense (benefit) $ 255 $ 2,378 $ 2,667 $ 5,300 N i n e m o n t h s e n d e d D e ce m b e r 3 1 , 2 0 0 2 $ 1,380 $ 165 $ 3,062 $ 4,607 Current tax expense – 224 (31) 193 Deferred tax expense (benefit) $ 1,380 $ 389 $ 3,031 $ 4,800 Predecessor Company T h re e m o n t h s e n d e d M a rc h 3 1 , 2 0 0 2 $ (855) $ 132 $ 1,864 $ 1,141 Current tax expense (benefit) – – (141) (141) Deferred tax benefit $ (855) $ 132 $ 1,723 $ 1,000 2001 $ 840 $ 684 $ 4,269 $ 5,793 Current tax expense – 7 – 7 Deferred tax expense $ 840 $ 691 $ 4,269 $ 5,800 50 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 53. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s Income tax expense related to continuing operations differs from income taxes computed at the U.S. federal statutory rate for the following reasons: R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) Income tax expense (benefit) computed $ 35,407 $ (638) $ (66,043) $ (40,035) at U.S. federal statutory rate 1,546 236 86 449 State income taxes, net of federal benefit (34,646) (18,143) (4,579) 33,940 Impact of foreign operations – – – 1,656 Goodwill amortization – – 53,996 – Fresh start adjustment (3,166) 9,401 9,592 (43,594) Change in valuation allowance Gain on transfer of trademark rights from – – – 62,953 U.S. subsidiary to foreign subsidiary 1,675 9,641 7,319 (10,871) Change in tax attributes 4,484 4,303 629 1,302 Other $ 5,300 $ 4,800 $ 1,000 $ 5,800 Income tax expense The components of deferred income taxes included on the balance sheet are as follows: DECEMBER 31, 2003 2002 (IN THOUSANDS) Deferred tax benefits $ 129,281 $ 101,140 Net operating loss carryforwards 445 6,306 Other tax carryforwards 2,080 11,774 Employee benefits 11,117 14,664 Accrued expenses 48,918 71,296 Depreciation 9,608 40,531 Investments 1,530 5,545 Other 202,979 251,256 Deferred tax liabilities (10,500) (10,500) Growing crops (74,912) (74,912) Trademark (7,021) (5,584) Other (92,433) (90,996) 110,546 160,260 (124,605) (171,621) Valuation allowance $ (14,059) $ (11,361) Net deferred tax liability U.S. net operating loss carryforwards (“NOLs”) were $162 million as of December 31, 2003 and $155 million as of December 31, 2002. The 2003 U.S. NOLs will expire between 2017 and 2024. The foreign NOLs were $230 million in 2003 and $150 million in 2002. $156 million of the NOLs will expire between 2004 and 2009. The remaining $74 million of NOLs has an indefinite life carryforward period. The change in the valuation allowance of $47 million reflected in the above table results primarily from the following items: (i) $40 million reduction due to the elimination of U.S. NOLs and tax credit carryforwards as a result of the Company’s bankruptcy reorganization; (ii) $20 million reduction related to foreign NOLs that expired in 2003; and (iii) $16 million increase related to the acquisition of Atlanta. 51 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 54. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s Income (loss) before taxes attributable to foreign operations was $118 million in 2003, $86 million for the nine months ended December 31, 2002, $(345) million for the three months ended March 31, 2002 and $71 million in 2001. Undistributed earnings of foreign subsidiaries, approximately $650 million at December 31, 2003, have been permanently reinvested in foreign operating assets. Accordingly, no provision for U.S. federal and state income taxes has been provided on these earnings. Cash payments for income taxes were $8 million in 2003, $4 million for the nine months ended December 31, 2002, $1 million for the three months ended March 31, 2002 and $4 million in 2001. Additionally, the Company received $9 million of refunds in 2001 related to audits of the Company’s federal income tax returns for 1989 through 1991. Income tax expense (benefit) associated with discontinued operations was $600,000 in 2003, $(400,000) for the nine months ended December 31, 2002, $0 for the three months ended March 31, 2002, and $1,200,000 in 2001. No income tax expense is associated with the cumulative effect of a change in method of accounting, or any of the items included in other comprehensive income. No te 15 . Se g m e n t I n f o r m a t i o n The Company had previously reported two business segments prior to the 2003 third quarter, Fresh Produce and Processed Foods. The Fresh Produce segment included the sourcing, transportation, distribution and marketing of bananas, as well as a wide variety of other fresh fruits and vegetables. The Processed Foods segment consisted primarily of the Company’s vegetable canning division, which accounted for more than 90% of the net sales in this segment and was sold in May 2003. As a result of the sale of CPF and the acquisition of Atlanta, the Company’s internal reporting of the results of its business units has changed, and the Company determined that it had the following two reportable segments: Bananas and Other Fresh Produce. The Company’s Banana segment includes the sourcing (production and purchase), transportation, marketing, and distribution of bananas, including those marketed by Atlanta. The Company’s Other Fresh Produce segment includes the sourcing, marketing and distribution of fresh fruits and vegetables other than bananas. In most cases, Chiquita does not grow the other fresh produce sold, but rather sources it from independent growers. Chiquita’s Other Fresh Produce business increased substantially with the acquisition of Atlanta, which has annual sales of approximately $900 million in non-banana fresh produce. The Other Fresh Produce segment also includes Chiquita’s new fresh-cut fruit business. Remaining operations from the old Processed Foods segment consist of processed fruit ingredient products, which are produced in Latin America and sold elsewhere, and other consumer products. These operations are reported in “Other.” The Company evaluates the performance of its business segments based on operating income. Intercompany transactions between segments are eliminated. 52 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 55. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s Financial information for each segment follows: OTHER FRESH (IN THOUSANDS) BA NA NA S PRODUCE OTHER C O N S O L I D AT E D Reorganized Company 2003 $ 1,579,900 $ 979,245 $ 54,403 $ 2,613,548 Net sales 132,618 (3,868) 11,636 140,386 Segment operating income (loss) 30,341 5,983 499 36,823 Depreciation 6,502 (2,006) 3,064 7,560 Income (loss) from equity investments1 1,285,027 394,880 23,202 1,703,109 Total assets2 22,152 6,982 1,047 30,181 Investment in equity affiliates1 39,075 11,136 833 51,044 Expenditures for long-lived assets 787,549 211,181 17,167 1,015,897 Net operating assets As o f a n d fo r t h e n i n e m o n t h s e n d e d D e ce m b e r 3 1 , 2 0 02 $ 989,214 $ 120,228 $ 30,582 $ 1,140,024 Net sales 43,323 (20,408) 2,586 25,501 Segment operating income (loss) 21,704 356 389 22,449 Depreciation 1,679 (8,843) 1,939 (5,225) Income (loss) from equity investments1 1,161,908 151,136 33,243 1,346,287 Total assets 37,934 54,505 10,905 103,344 Investment in equity affiliates1 32,007 2,282 170 34,459 Expenditures for long-lived assets 753,903 114,388 27,418 895,709 Net operating assets Predecessor Company Fo r t h e t h re e m o n t h s e n d e d M a rc h 3 1 , 2 0 0 2 $ 351,830 $ 86,251 $ 8,065 $ 446,146 Net sales 38,059 1,768 751 40,578 Segment operating income 16,425 120 332 16,877 Depreciation 2,051 899 364 3,314 Income from equity investments1 2,330 133 98 2,561 Expenditures for long-lived assets 2001 $ 1,242,558 $ 189,413 $ 33,009 $ 1,464,980 Net sales 42,930 (22,022) 1,714 22,622 Segment operating income (loss) 66,408 1,537 2,078 70,023 Depreciation and amortization (2,242) (2,217) 1,953 (2,506) Income (loss) from equity investments1 20,914 9,234 603 30,751 Expenditures for long-lived assets 1 See Note 8 for further information related to investments in and income from equity method investments. 2 At December 31, 2003, goodwill of $14 million and $29 million are allocated to the Banana and Other Fresh Produce segments, respectively. 53 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 56. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s The reconciliation of Consolidated Balance Sheet total assets to amounts in the segment reporting table above follows: DECEMBER 31, 2003 2002 (IN THOUSANDS) $ 1,706,719 $ 1,642,241 Total assets per the Consolidated Balance Sheet (3,610) (295,954) Less assets of discontinued operations $ 1,703,109 $ 1,346,287 Total assets per the segment reporting table The reconciliation of Consolidated Statement of Cash Flow captions to expenditures for long-lived assets follows: R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) Per Consolidated Statement of Cash Flow: $ 51,044 $ 31,925 $ 2,561 $ 14,208 Capital expenditures – 2,534 – 16,543 Long-term investments $ 51,044 $ 34,459 $ 2,561 $ 30,751 Expenditures for long-lived assets The reconciliation of the Consolidated Balance Sheet total assets to net operating assets follows: DECEMBER 31, 2003 2002 (IN THOUSANDS) $ 1,706,719 $ 1,642,241 Total assets Less: (134,296) (52,885) Cash (3,610) (295,954) Assets of discontinued operations (264,373) (130,829) Accounts payable (144,230) (87,813) Accrued liabilities (81,899) (98,069) Accrued pension and other employee benefits (62,414) (80,982) Other liabilities $ 1,015,897 $ 895,709 Net operating assets Financial information by geographic area is as follows: R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, MARCH 3 1 , DECEMBER 31, 2003 2002 2002 2001 (IN THOUSANDS) Net sales $ 702,854 $ 459,060 $ 203,083 $ 648,876 United States 181,850 106,505 34,746 130,227 Italy 824,618 115,927 38,642 131,376 Germany 904,226 458,532 169,675 554,501 Other international $ 2,613,548 $ 1,140,024 $ 446,146 $ 1,464,980 DECEMBER 31, 2003 2002 (IN THOUSANDS) Long-lived assets $ 272,186 $ 259,016 United States 139,674 134,282 Central and South America 150,149 46,600 Germany 250,407 237,195 Other international 152,743 164,891 Shipping operations $ 965,159 $ 841,984 54 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 57. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s The Company’s products are sold throughout the world and its principal production and processing operations are conducted in Central and South America. Chiquita’s earnings are heavily dependent upon products grown and purchased in Central and South America. These activities, a significant factor in the economies of the countries where Chiquita produces bananas and related products, are subject to the risks that are inherent in operating in such foreign countries, including government regulation, currency restrictions and other restraints, risk of expropriation, risk of political instability and burdensome taxes. Certain of these operations are substantially dependent upon leases and other agree- ments with these governments. The Company is also subject to a variety of government regulations in most countries where it markets bananas and other fresh products, including health, food safety, and customs requirements, import quotas and tariffs, currency exchange controls and taxes. No te 1 6 . Pa re n t Co m p a ny D e b t Re s t r u c tu r i n g On March 19, 2002, 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 became effective. Pursuant to the Plan, on March 19, 2002, $861 million of the Predecessor Company’s outstanding senior notes and subor- dinated debentures (“Old Notes”) and $102 million of accrued and unpaid interest thereon were exchanged for $250 million of 10.56% Senior Notes due 2009 (“Senior Notes”) and 95.5% (38.2 million shares) of 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, 2003, 909,865 of these shares had been issued, 49,136 shares had been surrendered in satisfaction of tax withholding obligations, and 40,999 shares were held in a “rabbi trust.” No interest payments on the Old Notes were made in 2002 and 2001. The Company recorded interest expense on the Old Notes until November 28, 2001, the date the Company filed its Chapter 11 petition, but not thereafter. As a result, interest expense for the first quarter of 2002 does not include $20 million which would have been payable under the terms of the Old Notes. 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.” This reorganization value of $1,280 million is before consideration of indebtedness of the Company. 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 Senior Notes, resulting in a gain of $154 million; Reduction of property, plant and equipment carrying values by $491 million, including $320 million relating to the Company’s tropical farm assets and $158 million relating to the Company’s shipping vessels; Reduction of long-term operating investments and other asset carrying values by $182 million; Increase in the carrying value of the Chiquita trademark of $375 million; Increase of $33 million in accrued pension and other employee benefits primarily associated with tropical pension/ severance obligations; 55 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 58. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s Increase in other liabilities of $16 million for unfavorable lease obligations; Reorganization costs of $30 million in the first quarter of 2002 primarily associated with professional fees and grants of new Common Stock to certain executives as part of the Chapter 11 restructuring agreement. Cash payments in the first quarter of 2002 associated with reorganization costs were $13 million; and Reduction of $63 million in long-term assets of subsidiaries that were subsequently classified as discontinued operations. The fresh start adjustments to the carrying values of the Company’s assets and liabilities were based upon the work of outside appraisers, actuaries and financial consultants, as well as internal valuation estimates using discounted cash flow analyses, to determine the relative fair values of the Company’s assets and liabilities. The following table reflects reorganization adjustments to the Company’s Consolidated Balance Sheet as of March 31, 2002: B A L A N C E S H E E T AT M A R C H 3 1 , 2 0 0 2 ( U N A U D I T E D ) R E O R G A N I Z AT I O N A D J U S T M E N T S BEFORE AFTER R E O R G A N I Z AT I O N D E BT F R E S H S TA R T R EO RGA N I ZAT I O N (IN THOUSANDS) A D J UST M E NTS DISCHARGE A D J UST M E NTS A D J UST M E NTS $ 557,380 $ – $ –$ 557,380 Current assets 383,763 – (63,481) 320,282 Assets of discontinued operations 861,845 – (490,734) 371,111 Property, plant and equipment, net 325,128 – (182,467) 142,661 Investments and other assets, net 11,804 – 375,781 387,585 Intangibles $ 2,139,920 $ – $ (360,901) $ 1,779,019 Total assets $ 25,280 $ –$ – $ 25,280 Notes and loans payable 39,650 – – 39,650 Long-term debt due within one year 221,921 – 13,685 235,606 Accounts payable and accrued liabilities 194,079 – – 194,079 Liabilities of discontinued operations – 250,000 – 250,000 Long-term debt of parent company 217,315 – – 217,315 Long-term debt of subsidiaries 67,092 – 33,020 100,112 Accrued pension and other employee benefits 87,874 – 16,350 104,224 Other liabilities 962,820 (962,820) – – Liabilities subject to compromise 1,816,031 (712,820) 63,055 1,166,266 Total liabilities (657,016) 154,046 502,970 – Retained earnings (deficit) 612,753* 980,905 558,774 (926,926) Other shareholders’ equity $ 2,139,920 $ – $ (360,901) $ 1,779,019 Total liabilities and shareholders’ equity * After deducting $654 million of indebtedness from the Company’s $1,280 million estimated reorganization value, the total equity value of the Company was $626 million. Indebtedness of $654 million is composed of notes and loans payable of $25 million, long-term debt due within one year of $40 million, long-term debt of parent company of $250 million, long-term debt of subsidiaries of $217 million, and indebtedness included in liabilities of discontinued operations of $122 million. The total shareholders’ equity in the March 31, 2002 Reorganized Company balance sheet excludes $13 million related to restricted management shares subject to delayed delivery, which are reflected in accounts payable and accrued liabilities above. These shares were issued in the second quarter of 2002 and are included in equity for all periods after March 31, 2002. No te 17. Litigation A number of legal actions are pending against the Company. Based on information currently available to the Company and advice of counsel, management does not believe such litigation will, individually or in the aggregate, have a material adverse effect on the financial statements of the Company. 56 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 59. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s No te 1 8 . Q u a r te rly Fi n a n c i a l Da t a ( Un a u d i te d ) The following quarterly financial data are unaudited, but in the opinion of management include all necessary adjustments for a fair presentation of the interim results, which are subject to significant seasonal variations. Amounts presented differ from previously filed Quarterly Reports on Form 10-Q because of reclassifications for discontinued operations. R E O R G A N I Z E D C O M PA N Y MARCH 3 1 JUNE 30 S E P. 3 0 DEC. 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 $ 471,329 $ 829,173 $ 627,511 $ 685,535 Net sales (381,507) (716,021) (546,033) (581,097) Cost of sales 37,677 60,924 22,693 19,092 Operating income 26,504 48,513 10,645 10,201 Income from continuing operations (1,623) 8,042 (760) (2,316) Discontinued operations 24,881 56,555 9,885 7,885 Net income Basic earnings (loss) per share: 0.66 1.21 0.27 0.26 Continuing operations (0.04) 0.20 (0.02) (0.06) Discontinued operations 0.62 1.41 0.25 0.20 Net income Diluted earnings (loss) per share: 0.66 1.21 0.27 0.25 Continuing operations (0.04) 0.20 (0.02) (0.06) Discontinued operations 0.62 1.41 0.25 0.19 Net income Common stock market price 15.45 15.29 18.72 22.90 High 8.77 11.05 14.30 17.43 Low PREDECESSOR C O M PA N Y R E O R G A N I Z E D C O M PA N Y MARCH 3 1 JUNE 30 S E P. 3 0 DEC. 31 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2002 $ 446,146 $ 442,955 $ 334,177 $ 362,892 Net sales (346,500) (324,765) (282,585) (334,119) Cost of sales 40,578 57,489 (2,582) (29,406) Operating income (loss) Income (loss) from continuing operations (189,694) 46,134 (12,841) (39,915) before cumulative effect of a change in method of accounting (63,606) 1,580 4,611 13,626 Discontinued operations Income (loss) before cumulative effect of a (253,300) 47,714 (8,230) (26,289) change in method of accounting (144,523) – – – Cumulative effect of a change in method of accounting (397,823) 47,714 (8,230) (26,289) Net income (loss) Basic and diluted earnings (loss) per share: (2.42) 1.15 (0.32) (1.00) Continuing operations (0.81) 0.04 0.11 0.34 Discontinued operations (3.23) 1.19 (0.21) (0.66) Before cumulative effect of a change in method of accounting (1.85) – – – Cumulative effect of a change in method of accounting (5.08) 1.19 (0.21) (0.66) Net income (loss) Reorganized Company: Common stock market price – 18.60 17.55 15.40 High – 15.64 14.01 11.10 Low Predecessor Company: Common stock market price 0.87 – – – High 0.63 – – – Low 57 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 60. n o t e s t o c o n s o l i dat e d f i n a n c i a l s tat e m e n t s In the first quarter of 2003, the Company changed its method of accounting for certain tropical production and logistics expenses of its banana operations during interim periods. Previously, the Company used a standard costing method which allocated those costs evenly throughout the year on a per box basis. The Company has now adopted a costing method which recognizes costs as incurred. The accounting change has no effect on total-year costs or results. Under the former accounting policy, $18 million of costs incurred in the 2002 first quarter and $3 million of costs incurred in the 2002 second quarter were deferred and fully expensed in the second half of 2002, $4 million in the third quarter and $17 million in the fourth quarter. Second quarter operating income in 2003 includes a $21 million gain on the sale of the assets of the Armuelles banana production division. Gains (losses) on the sale of equity method investments of $(2) million, $12 million and $7 million are included in operating income for the 2003 second, third and fourth quarters, respectively. Financial restructuring charges for continuing operations of $222 million and for discontinued operations of $63 million, and a cumulative effect of $145 million from the change in method of accounting for goodwill are included in net loss in the first quarter of 2002. Per share results include the effect, if dilutive, of assumed conversion of preferred and preference stock, convertible debentures, options and warrants into common stock during the period presented. The effects of assumed conversions are determined independently for each respective quarter and year and may not be dilutive during every period due to variations in operating results. Therefore, the sum of quarterly per share results will not necessarily equal the per share results for the full year. ******* 58 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 61. s e l e c t e d f i n a n c i a l data R E O R G A N I Z E D C O M PA N Y P R E D E C E S S O R C O M PA N Y NINE MONTHS THREE MONTHS YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED YEAR ENDED (IN THOUSANDS, DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, EXCEPT PER SHARE AMOUNTS) 2003 2002 2002 2001 2000 1999 Fi n a n c i a l Co n d i t i o n $ 281,277 $ 243,960 $ 256,844 $ 240,925 $ 77,917 $ 279,268 Working capital 51,044 31,925 2,561 14,208 45,828 120,720 Capital expenditures 1,706,719 1,642,241 1,779,019 2,262,492 2,416,790 2,596,127 Total assets Capitalization 48,070 41,701 64,930 52,865 188,986 42,223 Short-term debt* 346,490 394,796 467,315 216,973 960,681 1,120,187 Long-term debt* Liabilities subject – – – 962,820 – – to compromise* 757,346 629,289 612,753 448,594 582,543 705,286 Shareholders’ equity O p e ra t i o n s $ 2,613,548 $ 1,140,024 $ 446,146 $ 1,464,980 $ 1,504,894 $ 1,792,579 Net sales 140,386 25,501 40,578 22,622 (633) 22,643 Operating income (loss)* Income (loss) from continuing operations before cumulative effect of a change in method 95,863 (6,622) (189,694) (120,187) (109,059) (71,510) of accounting 3,343 19,817 (63,606) 1,419 14,192 13,128 Discontinued operations Income (loss) before cumulative effect of a change in method 99,206 13,195 (253,300) (118,768) (94,867) (58,382) of accounting Cumulative effect of a – – (144,523) – – – change in method of accounting 99,206 13,195 (397,823) (118,768) (94,867) (58,382) Net income (loss)* S h a re Da t a Shares used to calculate diluted earnings (loss) 40,399 39,967 78,273 73,347 66,498 65,768 per common share Diluted earnings (loss) per common share: $ 2.38 $ (0.17) $ (2.42) $ (1.80) $ (1.89) $ (1.35) Continuing operations 0.08 0.50 (0.81) 0.02 0.21 0.20 Discontinued operations Before cumulative effect of a change in 2.46 0.33 (3.23) (1.78) (1.68) (1.15) method of accounting Cumulative effect of a change in method of – – (1.85) – – – accounting 2.46 0.33 (5.08) (1.78) (1.68) (1.15) Net income (loss) – – – – – 0.20 Dividends per common share Market price per common share: Reorganized Company: 22.90 18.60 – – – – High 8.77 11.10 – – – – Low 22.53 13.26 – – – – End of period Predecessor Company: – – 0.87 3.06 5.63 11.75 High – – 0.63 0.42 0.88 3.38 Low – – 0.71 0.64 1.00 4.75 End of period * In the Notes to the Consolidated Financial Statements, see Note 1 for information on an interim period accounting change, Note 2 for discon- tinued operations and other divestitures information, Note 7 for information on the Atlanta acquisition, and Note 16 for information related to the parent company Chapter 11 restructuring. See Management’s Discussion and Analysis of Financial Condition and Results of Operations for information related to significant items affecting operating income for the full year 2003, the nine months ended December 31, 2002, the three months ended March 31, 2002 and the full year 2001. 59 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 62. b oa 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 ag e m e n t B a r r y H . M o r r i s ** B OA R D O F D I R E CTO R S OFFICERS AND SENIOR O P E R AT I N G M A N A G E M E N T Vice President, Human Resources C y r u s F. Fr e i d h e i m , J r. 3 ** Fe r n a n d o A g u i r r e Chairman of the Board* Wa h e e d Z a m a n * * President and Chief Executive Officer Vice President and Fe r n a n d o A g u i r r e 3 Chief Information Officer ** R o b e r t F. K i s t i n g e r President and Chief Executive Officer* President and Chief Operating Officer J o s e p h W. B ra d l e y M o r t e n A r n t z e n 1,4 Chiquita Fresh Group and Vice President, Taxation Chairman of the Nominating & Chiquita Fresh Group - North America Governance Committee Steve n M . K re ps Je f f E . Fi l l i a te r President and Chief Executive Officer Vice President, Internal Audit Senior Vice President Overseas Shipholding Group, Inc. Manuel Rodriguez Chiquita Fresh Group - North America (oceangoing vessel operator) Vice President, Government Affairs Michel Loeb J e f f r e y D . B e n j a m i n 1,2,3 and Associate General Counsel President Senior Advisor, Apollo Management, L.P. Wi l l i a m A . Ts a c a l i s Chiquita Fresh Group - Europe (private investment firm) Vice President, Controller and Pe t e r J u n g R o b e r t W. F i s h e r 3 Chief Accounting Officer President Private Investor Je f f rey M . Z a l l a Atlanta AG Former President, Dole Food Company Vice President, Treasurer and C ra i g A . S t e p h e n R o d e r i c k M . H i l l s 1,3,4 Corporate Responsibility Officer President Chairman of the Audit Committee Chiquita Fresh Group - Chairman of Hills Enterprises, Ltd. * Mr. Freidheim is retiring from the Board Far and Middle East/Australia Region (investment consulting firm) e f f e c t ive M ay 25 , 2 0 04 , at wh i c h t i m e Mr. Aguirre is also to become Chairman Former Chairman of the Securities and J i l l M . A l b r i n c k ** of the Board. Exchange Commission Senior Vice President, ** Member of Management Committee 1 Member of Audit Committee Fresh Cut Fruit 2,4 Durk I. Jager 2 Member of Compensation & Private Investor and Consultant Organization Development Committee R o b e r t W. O l s o n * * 3 Member of Executive Committee Former Chairman, President Senior Vice President, General 4 Member of Nominating & and Chief Executive Officer, Counsel and Secretary Governance Committee The Procter & Gamble Company J a m e s B . R i l e y ** J a i m e S e r ra 2 , 4 Senior Vice President and Senior Partner of Serra Chief Financial Officer Associates International (consulting firm in law and economics) Mexico’s former Secretary of Finance and Secretary of Trade and Industry S t e v e n P. S t a n b r o o k 1 , 2 Chairman of the Compensation & Organization Development Committee President, Asia S.C. Johnson & Son, Inc. (manufacturer of household products) From left in front: Cyrus Freidheim, Fernando Aguirre, Robert Fisher and Roderick Hills. From left in back row: Jaime Serra, Morten Arntzen, Durk Jager, Jeffrey Benjamin and Steven Stanbrook. 60 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 63. i n v e s t o r i n f o r m at i o n Publicly Issued Securities Investor Inquiries Governance and Code of Conduct Information Common Stock, par value $0.01 per share For other questions concerning your The Investors/Governance section of Warrants to Subscribe for Common Stock investment in Chiquita, contact www.chiquita.com provides access to: 10.56% Senior Notes due 2009 Investor Relations at (513) 784-6366. Governance Standards and Policies Exchange Listing Tra n s f e r A g e n t a n d R e g i s t ra r - of the Board of Directors C o m m o n S t o c k , Wa r ra n t s a n d New York Stock Exchange Senior Notes Charter of the Audit Committee Tra d i n g Sy m b o l s Chiquita Brands International, Inc. Charter of the Compensation & CQB (for the common stock) c/o Securities Transfer Company Organization Development CQB WS (for the warrants) One East Fourth Street Committee CQB 09 (for the senior notes) Cincinnati, Ohio 45202 Charter of the Nominating & (513) 579-2414 S h a re h o l d e rs o f Re co rd Governance Committee (800) 368-3417 As of March 29, 2004, there were 1,400 Code of Conduct holders of record of Common Stock. Wa r ra n t A g e n t SEC certifications under Sections Securities Transfer Company 302 and 906 of the Sarbanes-Oxley Annual Meeting One East Fourth Street May 25, 2004 Act that are exhibits to our Forms Cincinnati, Ohio 45202 10 a.m., Eastern Daylight Time 10-K and 10-Q. (513) 579-2414 Hilton Cincinnati Netherland Plaza (800) 368-3417 35 West Fifth Street Cincinnati, Ohio 45202 Tr u s t e e - S e n i o r N o t e s Wells Fargo Bank Minnesota, National Association Sixth Street and Marquette Avenue Minneapolis, Minnesota 55479 17.5% MINIMUM At least 17.5 percent of the fiber used in the manufacturing process of this paper comes from well-managed forests independently certified according to the rules of the Forest Stewardship Council (“FSC”), and 20 percent is from recycled post-consumer waste paper. The FSC trademark identifies forests that have been certified in accordance with the rules of the Forest Stewardship Council. FSC trademark © 1996 Forest Stewardship Council A.C. SW-COC-681. Pr i n t i n g Wendling Printing, Inc. has earned Forest Stewardship Council Chain-of-Custody certification from the Rainforest Alliance’s SmartWood program. In addition, the printer uses environmentally friendly nontoxic soy-based inks. 61 Chiquita Brands International, Inc. 2003 a n n u a l r e p o r t
  • 64. www.chiquita.com Chiquita Brands International, r e e t 62i n c i n n at ia lo h i o r4 5 2 0 2 2 5 0 e a s t f i f t h s t Inc. c 2003 a n n u , r e p o t

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