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Chiquita Brands International Inc – ‘10-Q’ for 6/30/07

On:  Monday, 8/6/07, at 4:26pm ET   ·   For:  6/30/07   ·   Accession #:  1193125-7-172026   ·   File #:  1-01550

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/06/07  Chiquita Brands International Inc 10-Q        6/30/07   11:1.4M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    389K 
 2: EX-10.1     Master Agreement Dated April 30, 2007               HTML    142K 
 3: EX-10.2     Form of Memorandum of Agreement for Four Container  HTML     75K 
                          Ship Sales                                             
 4: EX-10.3     Form of Memorandum of Agreement for Eight Reefer    HTML     81K 
                          Ship Sales                                             
 5: EX-10.4     Form of Time Charter for Container Vessels          HTML    252K 
 6: EX-10.5     Form of Refrigerated Vessel Time Charters           HTML    166K 
 7: EX-10.6     Form of Long-Period Charters                        HTML    147K 
 8: EX-10.7     Form of Change in Control Severance Agreement for   HTML     72K 
                          Executive Officers                                     
 9: EX-31.1     Section 302 CEO Certification                       HTML     12K 
10: EX-31.2     Section 302 CFO Certification                       HTML     12K 
11: EX-32       Section 906 CEO & CFO Certification                 HTML      9K 

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2007

OR

For the transition period from              to             

Commission file number 1-1550

CHIQUITA BRANDS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

250 East Fifth Street

Cincinnati, Ohio 45202

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (513) 784-8000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x.    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨.    No  x.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 31, 2007, there were 42,507,571 shares of Common Stock outstanding.

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CHIQUITA BRANDS INTERNATIONAL, INC.

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Part I - Financial Information

Item 1 - Financial Statements

CHIQUITA BRANDS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)

(In thousands, except per share amounts)

See Notes to Condensed Consolidated Financial Statements.

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CHIQUITA BRANDS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited)

(In thousands, except share amounts)

See Notes to Condensed Consolidated Financial Statements.

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CHIQUITA BRANDS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW (Unaudited)

(In thousands)

See Notes to Condensed Consolidated Financial Statements.

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CHIQUITA BRANDS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Interim results for Chiquita Brands International, Inc. (“CBII”) and subsidiaries (collectively, with CBII, the company) are subject to significant seasonal variations and are not necessarily indicative of the results of operations for a full fiscal year. Historically, the company’s results during the third and fourth quarters have been generally weaker than in the first half of the year due to increased availability of competing fruits and resulting lower banana prices. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair statement of the results of the interim periods shown have been made.

See Notes to Consolidated Financial Statements included in the company’s 2006 Annual Report on Form 10-K for additional information relating to the company’s financial statements.

Note 1 - Earnings Per Share

Basic and diluted earnings per common share (“EPS”) are calculated as follows:

The assumed conversions to common stock of the company’s 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.

Note 2 - Sale of Shipping Fleet

In June 2007, the company completed the sale of its twelve refrigerated cargo vessels and related spare parts for $227 million. The ships are being chartered back from an alliance formed by Eastwind Maritime Inc. and NYKLauritzenCool AB. The parties also entered a long-term strategic agreement in which the alliance will serve as Chiquita’s preferred supplier in ocean shipping to and from Europe and North America.

As part of the transaction, Chiquita is leasing back eleven of the vessels for a period of seven years, with options for up to an additional five years, and one vessel for a period of three years, with an option for up to an additional two years. The leases for all twelve vessels qualify as operating leases. The

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agreements also provide for the alliance to service the remainder of Chiquita’s core ocean shipping needs for North America and Europe, including, among other things, multiyear time charters commencing in late 2007 and early 2008 for seven additional reefer vessels.

The vessels sold consisted of eight specialized reefer ships and four refrigerated container ships, which collectively transported approximately 70 percent of Chiquita’s banana volume shipped to core markets in Europe and North America. At the date of the sale, the net book value of the assets sold was approximately $120 million, classified almost entirely in “Property, plant and equipment, net” in the Consolidated Balance Sheet. After approximately $3 million in transaction fees, the company realized a gain on the sale of the vessels of approximately $102 million, which will be deferred and amortized to the Consolidated Statement of Income over the initial leaseback periods (approximately $14 million per year). The company also recognized $4 million of expenses in the quarter ended June 30, 2007 for severance and write-off of deferred financing costs associated with the repayment of debt described below, and a $2 million gain on the sale of the related spare parts.

The cash proceeds from the transaction were used to repay approximately $170 million of debt, including $90 million of debt associated with the ships, $24 million of Term Loan B debt and $56 million of revolving credit borrowings. Under the terms of the company’s credit facility, any remaining proceeds not applied to qualifying investments within 180 days after the close of the transaction must be used to repay amounts outstanding under the credit facility.

Note 3 - Commitments and Contingent Liabilities

As previously disclosed, on March 14, 2007, the company and the U.S. Justice Department entered into a plea agreement relating to payments made by the company’s former Colombian subsidiary to a group designated under U.S. law as a foreign terrorist organization. The plea agreement was provisionally accepted by the United States District Court for the District of Columbia at a hearing on March 19, 2007. Under the terms of the agreement, the company pleaded guilty to one count of Engaging in Transactions with a Specially-Designated Global Terrorist Group and will pay a fine of $25 million, payable in five equal annual installments with interest. The company will pay the first installment of $5 million upon final acceptance of the plea agreement at sentencing. The company recorded a charge of $25 million in its financial statements for the quarter and year ended December 31, 2006 (included in “Commitments and contingent liabilities” in the Consolidated Balance Sheet at December 31, 2006). At June 30, 2007, $5 million of the liability is included in “Accrued liabilities” and $20 million in “Commitments and contingent liabilities” in the Condensed Consolidated Balance Sheet. In addition to the financial sanction, the plea agreement contains customary provisions that prohibit such future conduct or other violations of law and require the company to implement and/or maintain certain business processes and compliance programs, the violation of which could result in setting aside the principal terms of the plea agreement. The plea agreement does not affect the scope or outcome of any continuing investigation involving any individuals. During the quarter and six months ended June 30, 2007, the company incurred legal fees of approximately $3 million and $6 million, respectively, in connection with this matter.

Three separate lawsuits have been filed against the company in U.S. federal court claiming that the company is liable for alleged tort violations committed in Colombia. The plaintiffs in all three suits claim to be, or claim to be members of a class of, family members or legal heirs of individuals allegedly killed by armed groups that received payments from the company’s former Colombian subsidiary. The plaintiffs claim that, as a result of such payments, the company should be held legally responsible for the death of plaintiffs’ family members. The lawsuits seek unspecified monetary damages. The company believes it has meritorious defenses to the plaintiffs’ claims and intends to defend itself vigorously against the lawsuits.

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In October 2004 and May 2005, the company’s Italian subsidiary, Chiquita Italia, received separate notices from various customs authorities in Italy stating that it is potentially liable for an aggregate of approximately €26.9 million of additional duties and taxes on the import of certain bananas into the European Union from 1998 to 2000, plus interest currently estimated at approximately €15.8 million. The customs authorities claim that these amounts are due because the bananas were imported with licenses that were subsequently determined to have been forged. The company is contesting these claims through appropriate proceedings, principally on the basis of its good faith belief at the time the import licenses were obtained and used that they were valid. Chiquita Italia requested suspension of payment, pending appeal, of the approximately €13.8 million formally assessed thus far in these cases primarily in Trento and Genoa, and intends to request suspension of payment, when appropriate, of additional assessments as they are received. In October 2006, Chiquita Italia received notice in one proceeding in a court of first instance in Trento, that the court had determined that it was jointly liable for a claim of €4.7 million plus interest accrued from November 2004. Chiquita Italia intends to appeal this finding; the applicable appeal would involve a review of the entire factual record of the case as well as all of the legal arguments, including those presented during the appeals process, and the appellate court can render a decision on the case that disregards or substantially modifies the lower court’s opinion. Chiquita Italia issued a letter of credit to allow surety bonds to be posted in the amount of approximately €5 million (approximately $7 million), pending appeal, and may in the future be required to post additional surety bonds for up to the full amounts claimed. In March 2007, Chiquita Italia received notice in a separate proceeding that the court of first instance in Genoa had determined that it was not liable for a claim of €7.1 million plus interest; should customs authorities choose to appeal this decision, Chiquita Italia would not be required to post any bonds or issue letters of credit to support its continuing defense of this claim.

In June 2005, Chiquita announced that its management had become aware that certain of its employees had shared pricing and volume information with competitors in Europe over many years in violation of European competition laws and company policies, and may have engaged in several instances of other conduct which did not comply with European competition laws or applicable company policies. The company promptly stopped the conduct and notified the European Commission (“EC”) and other regulatory authorities of these matters.

On July 24, 2007, the company received a Statement of Objections from the European Commission in relation to this matter. A Statement of Objections is a procedural document whereby the European Commission communicates its preliminary view in relation to a possible infringement of European Union competition laws and allows the companies identified in the document to present arguments in response. The company will study the Statement of Objections carefully and respond to the Commission in due course.

Based on the company’s voluntary notification and cooperation with the investigation, the EC notified Chiquita that it would be granted conditional immunity from any fines related to the conduct, subject to customary conditions, including the company’s continuing cooperation with the investigation and a continued determination of its eligibility for immunity. Accordingly, Chiquita does not expect to be subject to any fines by the EC. However, if at the conclusion of its investigation, which could continue until 2008 or later, the EC were to determine, among other things, that Chiquita did not continue to cooperate or was not otherwise eligible for immunity, then the company could be subject to fines, which, if imposed, could be substantial. The company does not believe that the reporting of these matters or the cessation of the conduct has had or should in the future have any material adverse effect on the regulatory or competitive environment in which it operates.

Other than the $25 million accrual noted above for liability related to the plea agreement with the Justice Department at June 30, 2007 and December 31, 2006, the Consolidated Balance Sheet does not reflect a liability for these contingencies for any of the periods presented.

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Note 4 - Inventories

Note 5 - Debt

Long-term debt consists of the following:

The company and Chiquita Brands L.L.C. (“CBL”), the main operating subsidiary of the company, have a senior secured credit facility with a syndicate of bank lenders (the “CBL Facility”) originally comprised of two term loans (the “Term Loan B” and the “Term Loan C”) (collectively, the “Term Loans”) and a revolving credit facility (the “Revolving Credit Facility”). In June 2006, in connection with an amendment to modify certain financial covenants, the Revolving Credit Facility was increased by $50 million to $200 million. In October 2006, the company was required to obtain a temporary waiver, for the period ended September 30, 2006, from compliance with certain financial covenants in the CBL Facility, with which the company otherwise would not have been in compliance. In November 2006, the company obtained a permanent amendment to the CBL Facility to cure the covenant violations that would have otherwise occurred when the temporary waiver expired. The amendment revised certain covenant calculations relating to financial ratios for leverage and fixed charge coverage, established new levels for compliance with those covenants to provide additional financial flexibility, and established new interest rates. Total fees of approximately $2 million were paid to amend the CBL Facility in November 2006. In March 2007, the company obtained further prospective covenant relief with respect to the financial sanction contained in the plea agreement with the Justice Department and other related costs. See Note 3 to the Condensed Consolidated Financial Statements for further information on the plea agreement.

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At June 30, 2007, no borrowings were outstanding under the Revolving Credit Facility and $29 million of credit availability was used to support issued letters of credit, leaving $171 million of credit available under the Revolving Credit Facility. The company repaid $80 million of borrowings under the Revolving Credit Facility in the 2007 second quarter, mostly through ship sale proceeds. In connection with the ship sale, the company also repaid $90 million of debt secured by the ships and $24 million of remaining Term Loan B debt, and recognized a $2 million charge to interest expense for the write-off of related deferred debt issue costs.

As more fully described in Note 3 to the Condensed Consolidated Financial Statements, the company may be required to issue letters of credit of up to approximately $40 million in connection with its appeal of certain claims of Italian customs authorities. The company issued a letter of credit in the fourth quarter 2006 to allow surety bonds to be posted in the amount of approximately €5 million (approximately $7 million), and may in the future be required to post surety bonds of up to the full amounts claimed. Such letters of credit, if required, would be issued under the company’s Revolving Credit Facility, which contains a $100 million sublimit for letters of credit.

The Revolving Credit Facility bears interest at LIBOR plus a margin of 1.25% to 3.00%, and CBL is required to pay a fee on the daily unused portion of the Revolving Credit Facility of 0.25% to 0.50% per annum, depending in each case on the company’s consolidated leverage ratio. At June 30, 2007, the interest rate on the Revolving Credit Facility was LIBOR plus 3.00%.

The Term Loans cannot be re-borrowed and require quarterly payments, which began in September 2005, amounting to 1% per year of the initial principal amount less any prepayments, for the first six years, with the remaining balance to be paid quarterly in the seventh year. As described above, Term Loan B was repaid in full in June 2007. At June 30, 2007, $368 million was outstanding under Term Loan C. Term Loan C bears interest at LIBOR plus a margin of 2.00% to 3.00%, depending on the company’s consolidated leverage ratio. At June 30, 2007, the interest rate on Term Loan C was LIBOR plus 3.00%.

The company’s borrowing capacity and its less-restrictive Senior Notes may be impacted by any failure to comply with the financial covenants in the CBL Facility. The company remains in compliance with these covenants, and expects to remain in compliance even though the covenants become more restrictive beginning in the quarter ended December 31, 2007. However, as a result of recent operating performance, the company has less covenant cushion than it had expected when it amended the covenant levels under the CBL Facility in November 2006. If the company does not achieve improvements in year-over-year operating performance sufficient to remain in compliance, it would be required to seek further covenant relief or to replace or modify the CBL Facility. Similar relief may be required if unanticipated events occur that have a material negative earnings impact on the company. In addition, in such events, the company could become further limited in its ability to fund discretionary market or brand-support activities, innovation spending, capital investments and/or acquisitions that had been planned as part of the execution of its long-term growth strategy. Although no assurance can be provided in this regard, the company continues to examine options to replace or modify the CBL Facility to provide further financial flexibility.

Under the amended CBL Facility, CBL may distribute cash to CBII for routine CBII operating expenses, interest payments on CBII’s 7 ¹/2% and 8 ⁷/ 8% Senior Notes and payment of certain other specified CBII liabilities. Until Chiquita meets certain financial ratios and elects to become subject to a reduced maximum CBL leverage ratio, (i) CBL’s distributions to CBII for other purposes, such as dividend payments to Chiquita shareholders and repurchases of CBII’s common stock, warrants and senior notes, are prohibited, and (ii) the ability of CBL and its subsidiaries to incur debt, dispose of assets, carry out mergers and acquisitions, and make capital expenditures is more limited than under the original CBL Facility.

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Note 6 - Segment Information

Beginning in 2007, the company modified its reportable business segments to better align with the company’s internal management reporting procedures and practices of other consumer food companies. The company now reports three business segments: Bananas, Salads and Healthy Snacks, and Other Produce. The Banana segment, which is essentially unchanged, includes the sourcing (purchase and production), transportation, marketing and distribution of bananas. The Salads and Healthy Snacks segment (formerly the Fresh Cut segment) includes value-added salads, fresh vegetable and fruit ingredients used in foodservice, fresh-cut fruit operations, as well as processed fruit ingredient products which were previously disclosed in “Other.” The Other Produce segment (formerly the Fresh Select segment) includes the sourcing, marketing and distribution of whole fresh fruits and vegetables other than bananas. In addition, to provide more transparency to the operating results of each segment, the company no longer allocates certain corporate expenses to the reportable segments. These expenses are included in “Corporate” below. Prior period figures have been reclassified to reflect these changes. The company evaluates the performance of its business segments based on operating income. Intercompany transactions between segments are eliminated.

Financial information for each segment follows:

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Note 7 - Shareholders’ Equity

See Note 12 to the Condensed Consolidated Financial Statements for a description of the company’s adoption of FSP AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” and its impact on retained earnings.

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Note 7 - Shareholders’ Equity (continued)

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Note 8 - Hedging

The company enters into contracts to hedge its risks associated with euro exchange rate movements, primarily to reduce the negative earnings and cash flow impact that any significant decline in the value of the euro would have on the conversion of net euro-based cash flow into U.S. dollars. The company primarily purchases put options and collars to hedge these risks. Purchased put options, which require an upfront premium payment, can reduce the negative earnings impact on the company of a significant future decline in the value of the euro, without limiting the benefit received from a stronger euro. Collars include call options, the sale of which reduces the company’s net option premium expense but could limit the benefit received from a stronger euro. The company also enters into hedge contracts for fuel oil for its shipping operations, which permit it to lock in fuel purchase prices for up to three years and thereby minimize the volatility that changes in fuel prices could have on its operating results. Although the company sold its twelve vessels in June 2007, it is still responsible for purchasing fuel for these ships, which are being chartered back under long-term leases, and as a result, the company intends to continue its fuel hedging activities.

Currency hedging costs charged to the Condensed Consolidated Statement of Income were $7 million and $13 million for the quarter and six months ended June 30, 2007, compared to $6 million and $10 million for the quarter and six months ended June 30, 2006. At June 30, 2007, unrealized losses of $12 million on the company’s currency hedges were included in “Accumulated other comprehensive income,” $11 million of which is expected to be reclassified to net income during the next twelve months. Aggregate unrealized losses of $1 million on the fuel oil forward contracts were also included in “Accumulated other comprehensive income.” Included in this amount are gains of $1 million expected to be reclassified to net income during the next twelve months, with losses of $2 million beyond twelve months.

In October 2006, the company re-optimized its currency hedge portfolio for the first nine months of 2007. The company invested a net $4.5 million to replace €290 million of euro put options expiring in the first nine months of 2007 with an average rate of $1.20 per euro, with collars for €270 million notional amount, comprised of put options at an average strike price of $1.28 per euro and call options at an average strike price of $1.40 per euro. Gains or losses on the new collars, as well as the losses incurred on the original set of put options, will be deferred in accumulated OCI until the underlying transactions are recognized in net income.

In April 2007, the company again re-optimized its currency hedge portfolio for May through December 2007. The company invested a net $2 million to replace approximately €145 million of euro put options expiring between May and September 2007 with an average strike rate of $1.28 per euro, with put options at an average strike rate of $1.34 per euro. In addition, the company replaced approximately €65 million of euro put options expiring between October and December 2007 with an average strike rate of $1.27 per euro, with collars comprised of put options at an average strike rate of $1.34 per euro and call options at an average strike rate of $1.48 per euro. Gains or losses on the new instruments, as well as the losses incurred on the original set of options, will be deferred in accumulated OCI until the underlying transactions are recognized in net income.

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At June 30, 2007, the company’s hedge portfolio consisted of the following:

At June 30, 2007, the fair value of the foreign currency option and fuel oil forward contracts was a net asset of $2 million, substantially all of which is included in “Other current assets.” For the six months ended June 30, 2007 and 2006, the amount included in net income for the change in the fair value of the fuel oil forward contracts relating to hedge ineffectiveness was not material.

Note 9 - Stock-Based Compensation

On January 1, 2006, the company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which is a revision of SFAS No. 123, using the modified-prospective-transition method. Under that transition method, compensation cost recognized since January 1, 2006 includes (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or after January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). With the adoption of SFAS 123(R), stock-based awards granted on or after January 1, 2006 are being recognized as stock-based compensation expense over the period from the grant date to the date the employee is no longer required to provide service to earn the award, which could be immediately in the case of retirement-eligible employees.

The company recognized expense in its results of operations for stock options granted on or after January 1, 2003. For grants prior to that date (the “2002 Grants”), expense was included in pro forma disclosures rather than the Consolidated Statement of Income. SFAS 123(R) did not have an impact on pre-tax income as it relates to the 2002 Grants, which were fully vested as of the company’s January 1, 2006 adoption date of this standard.

Stock compensation expense totaled $2 million ($0.05 per basic and diluted share) and $5 million ($0.11 per basic and diluted share) for the quarter and six months ended June 30, 2007, compared to $2 million ($0.05 per basic and diluted share) and $6 million ($0.13 per basic and diluted share) for the quarter and six months ended June 30, 2006. This expense relates primarily to restricted stock awards.

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The company can issue awards as stock options, stock awards (including restricted stock awards), performance awards and stock appreciation rights under its stock incentive plan; at June 30, 2007, 3.0 million shares were available for future grants. Awards may be granted to directors, officers, other key employees and consultants. Stock options provide for the purchase of shares of common stock at fair market value at the date of grant. The company issues new shares when options are exercised under the stock plan.

Stock Options

Approximately 2 million options were outstanding at June 30, 2007 under the plan. These options generally vest over four years and are exercisable for a period not in excess of 10 years. In addition to the options granted under the plan, an inducement stock option grant for 325,000 shares was made to the company’s chief executive officer in January 2004.

Options outstanding as of June 30, 2007 had a weighted average remaining contractual life of 5 years and had exercise prices ranging from $11.73 to $23.43. At June 30, 2007, there was less than $1 million of total unrecognized pre-tax compensation cost related to unvested stock options. This cost is expected to be recognized over the remainder of 2007.

No options have been granted since 2004. Approximately 34,000 options were exercised in the first half of 2007, resulting in a cash inflow of less than $1 million. During the first half of 2006, options for approximately 66,000 shares were exercised, resulting in a cash inflow of approximately $1 million.

Restricted Stock

Since 2004, the company’s share-based awards have primarily consisted of restricted stock awards. These awards generally vest over 1-4 years, and the fair value of the awards at the grant date is expensed over the period from the grant date to the date the employee is no longer required to provide service to earn the award. Prior to vesting, grantees are not eligible to vote or receive dividends on the restricted shares.

The company granted 85,410 shares on April 15, 2007 to its chief executive officer. This award vests over three years.

At June 30, 2007, there was $13 million of total unrecognized pre-tax compensation cost related to unvested restricted stock awards. This cost is expected to be recognized over a weighted-average period of approximately 3 years.

Long-Term Incentive Program

The company has established a Long-Term Incentive Program (“LTIP”) for certain executive level employees. Awards are intended to be performance-based compensation as defined in Section 162(m) of the Internal Revenue Code. The program allows for awards to be issued at the end of each three-year period based on cumulative earnings per share of the company for that time period. Awards are expensed over the three-year performance period. For the three-year period of 2006-2008, based on current cumulative earnings per share estimates, the company does not expect to achieve the minimum threshold for awards to be issued at the end of 2008. As a result, no expense is being recognized for this portion of the program. For the three-year period of 2007-2009, the company will expense approximately $1 million annually if 100% target levels are achieved. The company will continue to evaluate its earnings per share performance for purposes of determining expense under this program.

Approximately 250,000 shares were issued in the 2007 first quarter upon vesting of the grants for the 2005 LTIP program.

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Note 10 - Pension and Severance Benefits

Net pension expense from the company’s defined benefit and severance plans, primarily comprised of the company’s severance plans covering Central American employees, consists of the following:

During 2006, the company recognized a settlement loss related to the Central American benefit plans, under which it made severance payments to a significant number of employees terminated in late 2005 as a result of flooding and subsequent closure of some of the company’s farms in Honduras.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position, recognize through comprehensive income changes in that funded status in the year in which the changes occur, and measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year. The company adopted the provisions of SFAS No. 158 on December 31, 2006. See Note 10 to the Consolidated Financial Statements included in the company’s 2006 Annual Report on Form 10-K for a further description of the effect of adopting SFAS No. 158.

Note 11 - Income Taxes

The company’s effective tax rate varies from period to period due to the level and mix of income generated in its various domestic and foreign jurisdictions. The company currently does not generate U.S. federal taxable income. The company’s taxable earnings are substantially from foreign operations being taxed in jurisdictions at a net effective rate lower than the U.S. statutory rate. No U.S. taxes have been accrued on foreign earnings because such earnings have been or are expected to be permanently invested in foreign operating assets.

Income tax expense reflects benefits of zero and $4 million for the quarter and six months ended June 30, 2007, compared to $1 million and $3 million for the quarter and six months ended June 30, 2006, due to the resolution of tax contingencies in various jurisdictions.

In July 2006, the FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes,” which clarified the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation was effective for the company beginning January 1, 2007, and required any adjustments as of this date to be charged to beginning retained earnings rather than the Consolidated Statement of Income.