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Chiquita Brands International Inc – ‘10-K’ for 12/31/02 – EX-13

On:  Monday, 3/31/03, at 9:09am ET   ·   For:  12/31/02   ·   Accession #:  1021408-3-5333   ·   File #:  1-01550

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

 3/31/03  Chiquita Brands International Inc 10-K       12/31/02   16:2.1M                                   Donnelley R… Fin’l/NY/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML    272K 
 2: EX-4.(B)    Warrant Agreement                                     28    107K 
 3: EX-10.(B)   Second Amended and Restated Credit Agreement         131    525K 
 4: EX-10.(E)   Form of Acquisition and Cancellation Agreement         6     24K 
 5: EX-10.(F)   Provisions of Agreement                                1      8K 
11: EX-10.(FF)  Provisions of Agreement                                1      7K 
 6: EX-10.(N)   Form of Stock Option Agreement                         2±    14K 
 7: EX-10.(P)   Form of Stock Option Agreement                         2±    13K 
 8: EX-10.(R)   Form of Stock Option Agreement                         2±    12K 
 9: EX-10.(T)   Form of Restricted Share Agreement                     2±    15K 
10: EX-10.(U)   Form of Restricted Share Agreement                     2±    11K 
12: EX-13       Annual Report                                       HTML    879K 
13: EX-21       Subsidiaries of Registrant                             2     14K 
14: EX-23       Consent of Independent Auditors                        1      9K 
15: EX-24       Powers of Attorney                                     2     13K 
16: EX-99.1     Certification Pursuant to Section 906 of the           1      9K 
                          Sarbanes-Oxley Act of 2002                             

Exhibit 13

Statement of Management Responsibility

The financial information presented in this Annual Report is the responsibility of Chiquita Brands International, Inc. management, which believes that it presents fairly the Company’s consolidated financial position and results of operations in accordance with generally accepted accounting principles.

The Company has a system of internal accounting controls, supported by formal financial and administrative policies. This system is designed to provide reasonable assurance that the financial records are reliable for preparation of financial statements and that assets are safeguarded against losses from unauthorized use or disposition. Management reviews these systems and controls at least quarterly to assess their effectiveness. In addition, the Company has a system of disclosure controls and procedures designed to ensure that material information relating to the Company and its consolidated subsidiaries is made known to Company representatives who prepare and are responsible for the Company’s financial statements and periodic reports filed with the Securities and Exchange Commission. The effectiveness of these disclosure controls and procedures is reviewed quarterly by management, including the Company’s Chief Executive Officer and Chief Financial Officer. Management will modify and improve these systems and controls as a result of the reviews or as changes occur in business conditions, operations or reporting requirements.

The Company’s worldwide internal audit function, which reports to the Audit Committee, reviews the adequacy and effectiveness of controls and compliance with policies.

The Audit Committee of the Board of Directors consists solely of directors who are considered independent under applicable New York Stock Exchange rules, and at least one member of the Audit Committee has been determined by the Board of Directors to be an “audit committee financial expert” as defined by SEC rules. The Audit Committee reviews the Company’s financial statements and periodic reports filed with the SEC, as well as the Company’s accounting policies and internal controls. In performing its reviews, the Committee meets periodically with the independent auditors, management and internal auditors, both together and separately, to discuss these matters.

The Audit Committee engages Ernst & Young, an independent auditing firm, to audit the financial statements and express an opinion thereon. The scope of the audit is set by Ernst & Young, following review and discussion with the Audit Committee. Ernst & Young has full and free access to all Company records and personnel in conducting its audits. Representatives of Ernst & Young meet regularly with the Audit Committee, with and without members of management present, to discuss their audit work and any other matters they believe should be brought to the attention of the Committee.

Report of Ernst & Young, Independent Auditors

To the Board of Directors and Shareholders of Chiquita Brands
International, Inc.

We have audited the accompanying consolidated balance sheets of Chiquita Brands International, Inc. as of December 31, 2002 (Reorganized Company) and 2001 (Predecessor Company), and the related consolidated statements of income, shareholders’ equity, and cash flow for the nine months ended December 31, 2002 (Reorganized Company), the three months ended March 31, 2002 (Predecessor Company), and the years ended December 31, 2001 and 2000 (Predecessor Company). These financial statements, appearing on pages 16 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, 2002 and 2001, and the consolidated results of its operations and its cash flows for the nine month period ended December 31, 2002, the three month period ended March 31, 2002, and the years ended December 31, 2001 and 2000, in conformity with accounting principles generally accepted in the United States.

As more fully described in Note 2 to the consolidated financial statements, effective March 19, 2002, the Company emerged from protection under Chapter 11 of the U.S. Bankruptcy Code pursuant to a Reorganization Plan that was confirmed by the Bankruptcy Court on March 8, 2002. In accordance with AICPA Statement of Position 90-7, the Company adopted “fresh start” accounting whereby its assets, liabilities and new capital structure were adjusted to reflect estimated fair value at March 31, 2002. As a result, the consolidated financial statements for the periods subsequent to March 31, 2002 reflect the Reorganized Company’s new basis of accounting and are not comparable to the Predecessor Company’s pre-reorganization consolidated financial statements.

Additionally, as discussed in Note 1, in 2002 the Company changed its method of accounting for goodwill and other intangible assets.

February 11, 2003, except for Notes 3, 8 and 11, for which the date is March 28, 2003

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MANAGEMENT’S DISCUSSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OPERATIONS

This analysis of operations presents and addresses Chiquita’s operating results on the basis used by the Company to evaluate its business segments, and should be read in conjunction with the segment information presented in Note 16 to the Consolidated Financial Statements.

The Company’s emergence from Chapter 11 bankruptcy proceedings in March 2002 resulted in a new reporting entity and the adoption of fresh start reporting (see Notes 1 and 2 to the Consolidated Financial Statements). Generally accepted accounting principles do not permit combining the results of the Reorganized Company with those of the Predecessor Company in the Consolidated Financial Statements. Accordingly, the Consolidated Statement of Income does not present results for the twelve months ended December 31, 2002. However, in order to provide investors with useful information and to facilitate understanding of 2002 results in the context of the annual prior year financial information presented, the following table combines net sales and operating income of the Predecessor Company for the three months ended March 31, 2002 and of the Reorganized Company for the nine months ended December 31, 2002. The only significant impact of fresh start reporting on operating income is that it was the primary cause of a $38 million decrease in 2002 depreciation and amortization expense compared to 2001.

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The Company evaluates the performance of its business segments based on operating income before unusual items. As a result of the pending divestiture of the Company’s vegetable canning operations (see Note 3 to the Consolidated Financial Statements) and the acquisition of Scipio/Atlanta in the first quarter of 2003 (see Note 8), the Company intends to re-evaluate its reportable segments, including the measurements used to evaluate segment results internally. The Company expects that, in 2003, it will begin including certain items in segment operating income that historically have been excluded from management’s evaluation of the business segments, such as charges associated with floods, severance costs and other unusual items.

Net Sales

Fresh Produce net sales for the year ended December 31, 2002 increased 8% versus 2001 due to favorable exchange rates, increased banana volume in Europe and increased volume of bananas and other fresh fruits in North America, partially offset by lower local banana pricing in both Europe and North America. Processed Foods net sales for 2002 decreased by 2% compared to 2001, as lower sales volume was partially offset by increased pricing.

Fresh Produce net sales in 2001 were comparable to 2000, as higher banana pricing and volume were offset by the effect of weak European currencies and the deconsolidation of the Company’s Australian operations in the second quarter of 2000. Processed Foods net sales decreased in 2001 primarily as a result of the sale of California Day-Fresh Foods, Inc. in the second quarter of 2000.

Operating Income

The improvement in Fresh Produce segment operating income in 2002 resulted from a $37 million benefit from the strengthening of major European currencies against the U.S. dollar, $20 million of import license savings, higher profits of approximately $12 million from the Company’s Asia Pacific operations due to higher banana prices, a $13 million improvement from higher sales volume and reduced costs for other fresh produce, and a $29 million decrease in depreciation and amortization expense primarily as a result of the Company’s financial restructuring. These improvements were partially offset by a $50 million effect of lower local banana pricing in the Company’s North American and European banana operations, higher advertising costs of $17 million, and a $7 million decline in results of Scipio/Atlanta, the Company’s German distributor and equity investee, in part due to a $3 million tax settlement. Additional profit from higher banana sales volume was offset by higher tropical production costs.

Core European average local banana prices for 2002 were 6% lower than the prior year, on 6% higher volume. The lower pricing resulted partly from an increase in volume of bananas sold under second labels (such as Consul) and particularly strong retail pricing pressure in the United Kingdom. In Central and Eastern Europe and Mediterranean countries, average local banana prices increased 4% on volume that increased 6.2 million boxes, or 66%, compared to 2001.

In North America, banana pricing for 2002 was 5% lower than 2001 on comparable volume, primarily as a result of lower pricing on sales to non-contract customers, which accounted for approximately one-third of the Company’s North American volume.

In the Asia Pacific region, where the Company operates through joint ventures and has a relatively small presence, a 21% local banana price increase generated a $12 million earnings improvement in 2002.

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Tropical production costs adversely impacted 2002 Fresh Produce segment operating income by approximately $20 million compared to the prior year, primarily as a result of lower productivity in Honduras and high costs associated with the Armuelles, Panama division. During 2002, a higher portion of bananas was sourced from the high-cost Armuelles division than in 2001. In the 2001 fourth quarter, fruit sourced from this division was minimal as a result of a labor strike, and was replaced by lower cost fruit from more efficient sources. Beginning January 1, 2003, the Company ceased funding the deficits incurred by the Armuelles division. There are adequate funds to operate for a brief period while the Company continues to work toward a resolution with the Panamanian government, the union, and worker-owned cooperatives. However, the Armuelles union has threatened to strike. If a viable long-term solution cannot be negotiated before funds run out, the Company will not continue operating in Armuelles. The Company still expects to have sufficient access to cost-competitive, high-quality bananas in the event Armuelles is closed.

In the Processed Foods segment, the 2001 and 2002 harvests, both of which were below expected levels, resulted in a less efficient utilization of plant capacity and higher unit costs for product sold in 2002. The resulting higher costs of $16 million, along with the effect of lower sales volume, were mostly offset by a 3% improvement in pricing and a $9 million reduction in depreciation and amortization expense as a result of the Company’s financial restructuring.

Fresh Produce segment operating income improved in 2001 as compared to 2000 primarily as a result of higher European banana pricing and volume, the benefits of which more than offset a substantial negative impact on earnings of weak European currencies in relation to the U.S. dollar. The Company’s Processed Foods operating results declined in 2001 primarily due to lower pricing on canned vegetables throughout the year, as the Company and industry were reducing inventory levels.

Unusual items included in operating income for the past three years are as follows:

•         In 2002, $12 million of charges and write-downs incurred by Scipio/Atlanta, the Company’s German distributor and equity investee, which 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. The Company completed its acquisition of Scipio/Atlanta in the first quarter of 2003 and may undertake additional restructuring activities with respect to Scipio/Atlanta to further improve and synergize its operations with those of Chiquita. 2002 unusual items also included $5 million associated with flooding in Costa Rica and Panama in early December and $5 million for severance in connection with the first stage of the Company’s strategic cost-reduction programs. Substantially all of these charges are related to the Company’s Fresh Produce operations.

•         In 2001, $28 million of charges primarily associated with the closure of farms, a third quarter labor strike and related labor issues at the Company’s Armuelles, Panama banana producing division. During 2001, the Company closed non-competitive farms that represented about 20% of this division.

•         In 2000, $35 million of charges primarily associated with the write-downs of production and sourcing assets in the Fresh Produce operations, including the curtailment in June 2000 of farm rehabilitation in Honduras originally planned following destruction by Hurricane Mitch in 1998. These charges were

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partially offset by a $15 million gain on the sale of California Day-Fresh Foods, Inc., a processor and distributor of natural fresh fruit and vegetable juices that was part of the Company’s Processed Foods operations.

Interest, Financial Restructuring and Taxes

Net interest expense in 2002 was $39 million, which was $74 million lower than the prior year. Parent company interest expense decreased by $60 million as a result of the significant reduction in parent company debt from the Company’s financial restructuring. The subsidiaries’ net interest expense decrease of $14 million resulted from lower interest rates and lower average debt outstanding.

Financial restructuring items totaled a net charge of $286 million for the quarter ended March 31, 2002. See “Critical Accounting Policies and Estimates-Fresh start reporting” below and Note 2 to the Consolidated Financial Statements for details of the 2002 charge. During 2001, the Company incurred $34 million of reorganization costs in connection with its financial restructuring. These costs primarily consisted of professional fees and a write-off of parent company debt issuance costs.

Income taxes consist principally of foreign income taxes currently paid or payable. In 2002, income tax expense includes a $4 million benefit of a 2002 tax law that changed the calculation of the Company’s 2001 U.S. alternative minimum tax liability.

Discontinued Operations

In December 2002, the Company sold its interest in the Castellini group of companies (“Castellini”), a wholesale produce distribution business in the midwestern United States, for approximately $45 million, consisting of $21 million in cash plus debt assumed by the buyer. During 2002, Castellini generated income from operations of approximately $4 million.

In January 2003, the Company sold Progressive Produce Corporation (“Progressive”), a California-based distributor of potatoes and onions, for approximately $7 million in cash. During 2002, Progressive generated approximately $1 million of income from operations.

The financial information of both Castellini and Progressive are included as discontinued operations for all years presented in the Consolidated Financial Statements. Discontinued operations for 2002 also includes a $10 million gain on the sale of Castellini. A gain of approximately $2 million on the sale of Progressive will be recognized in discontinued operations in the first quarter of 2003.

Cumulative Effect of a Change in Method of Accounting

As of January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets,” as discussed under “Critical Accounting Policies and Estimates” below.

Subsequent Events

In late March 2003, the Company acquired the equity interests in Scipio GmbH & Co. (“Scipio”), a German limited partnership that owns Atlanta AG (“Atlanta”). See Note 8 to the Consolidated Financial Statements for further information.

Chiquita’s vegetable canning operations, which represent over 90% of Processed Foods segment sales, are conducted by its subsidiary, Chiquita Processed Foods, L.L.C. (“CPF”). On March 6, 2003, the Company entered into a definitive agreement to sell CPF to Seneca Foods Corporation for approximately $125 million in cash and stock, plus assumption of CPF debt, which was $81 million at December 31, 2002. See Note 3 to the Consolidated Financial Statements for further information.

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Cost-Reduction Initiatives

In late 2002, the Company initiated a series of global performance-improvement programs with a goal of reducing gross costs by $150 million per year by the end of 2005. These programs include improvements in farm productivity and canning operations as well as reductions in global purchasing and overhead expenses. The gross cost reductions will be partially offset by one-time implementation costs and increased costs for items such as purchased fruit, fuel and paper. After these offsets, the Company’s target is to realize annual cost reductions of $100 million by 2005, but there can be no guarantee that these reductions will be achieved. The 2005 gross and net cost-reduction goals associated with the Company’s canning operations are $40 million and $30 million, respectively. If the announced pending sale of CPF is completed, the Company’s targets will be reduced accordingly.

7

LIQUIDITY AND CAPITAL RESOURCES

Parent Company Debt Restructuring

On March 19, 2002, Chiquita Brands International, Inc. (“CBII”), a parent holding company without business operations of its own, completed its financial restructuring when its pre-arranged Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Plan” or “Plan of Reorganization”) became effective.

For financial reporting purposes, the Company used an effective date of March 31, 2002. References in the financial statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations to “Predecessor Company” refer to the Company prior to March 31, 2002. References to “Reorganized Company” refer to the Company on and after March 31, 2002, after giving effect to the issuance of new securities in exchange for the previously outstanding securities in accordance with the Plan, and implementation of fresh start accounting. The securities issued pursuant to the Plan are described below, and the fresh start adjustments are described in “Critical Accounting Policies and Estimates-Fresh start reporting.”

Pursuant to the Plan, on March 19, 2002, $861 million of the Predecessor Company’s outstanding senior notes and subordinated debentures (“Old Notes”) and $102 million of accrued and unpaid interest thereon were exchanged for $250 million of 10.56% Senior Notes due 2009 (“New Notes”) and 95.5% (38.2 million shares) of newly issued common stock of the Reorganized Company (“New Common Stock”). Previously outstanding preferred, preference and common stock of the Predecessor Company was exchanged for 2% (0.8 million shares) of the New Common Stock as well as 7-year warrants, exercisable at $19.23 per share, to purchase up to 13.3 million additional shares of New Common Stock. In addition, as part of a management incentive program, certain executives were granted rights to receive 2.5% (1 million shares) of the New Common Stock. At December 31, 2002, 865,950 of these shares had been issued, 34,050 shares had been surrendered in satisfaction of tax withholding obligations, and 100,000 shares were held in a “rabbi trust.” Pursuant to the Plan, all outstanding stock options were cancelled, and a new stock option plan was adopted.

CBII’s general unsecured creditors (other than the holders of the Old Notes) were not affected by the Chapter 11 bankruptcy proceedings. None of CBII’s subsidiaries was a party to the Chapter 11 proceedings. Subsidiaries were able to meet their obligations with their own cash flow and credit facilities, and accordingly, continued to operate normally and without interruption during the Chapter 11 proceedings.

Other Liquidity and Capital Resources Information

Operating cash flow was $51 million in the nine months ended December 31, 2002, $11 million in the three months ended March 31, 2002, $93 million in 2001 and $(4) million in 2000. The 2001 operating cash flow amount includes a $78 million benefit from non-payment of interest expense on parent company debt that was later restructured. Cash payments relating to interest expense were $27 million in the nine months ended December 31, 2002, $9 million in the three months ended March 31, 2002, $41 million in 2001 and $122 million in 2000.

The Company believes that the cash flow generated by operating subsidiaries, the reduction of interest expense provided by the financial restructuring, and its borrowing capacity provide sufficient cash reserves and liquidity to fund the Company’s working capital needs, capital expenditures and debt service requirements, including CBII’s New Notes.

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Capital expenditures were $44 million for the nine months ended December 31, 2002, $5 million for the three months ended March 31, 2002, $28 million in 2001 and $54 million in 2000. Capital expenditures in 2002 included $14 million to purchase a ship formerly under operating lease to the Company. The 2000 amount includes $20 million for the rehabilitation of banana farms in Honduras and Guatemala which were destroyed or damaged by Hurricane Mitch in late 1998.

The following table summarizes the Company’s contractual cash obligations associated with debt principal repayments and operating leases at December 31, 2002:

Total debt at December 31, 2002 was $517 million versus $654 million at March 31, 2002 upon CBII’s emergence from Chapter 11 bankruptcy. The reduction in debt resulted from operating cash flow and the sale of assets. During 2002, the Company sold assets for $99 million, including $54 million from the sale of five ships and $45 million from the sale of Castellini.

The $250 million of New Notes mature on March 15, 2009. These Notes were issued by CBII and are not secured by any of the assets of CBII and its subsidiaries. Interest payments of $13 million on the New Notes are payable semiannually. The indenture for the New Notes contains dividend payment restrictions that, at December 31, 2002, limited the aggregate amount of dividends that could be paid by CBII to approximately $25 million. The indenture has additional restrictions related to asset sales, incurrence of additional indebtedness, sale-leaseback transactions, and related-party transactions.

In March 2001, the Company’s operating subsidiary, Chiquita Brands, Inc. (“CBI”), obtained a three-year secured bank credit facility for up to $120 million to replace CBII’s expiring bank revolving credit agreement. Interest on amounts outstanding under the facility was based on the bank corporate base rate plus 5%, subject to a minimum of 14% per annum. An annual facility fee of 2% of the total credit facility was also payable.

In March 2002, this CBI facility was amended to increase the facility to $130 million, comprised of a $70 million term loan and a $60 million revolving credit facility, and the expiration date was extended to June 2004. Interest on borrowings under the amended facility is based on the prevailing LIBOR rates plus 3.75% or the bank corporate base rate plus 1%, at CBI’s option, subject to a minimum annual rate of 6%. The annual facility fee was eliminated, and the Company paid an amendment fee of 5% of the total credit facility. Substantially all U.S. assets of CBI (except for those of subsidiaries with their own credit facilities, such as Chiquita Processed Foods, L.L.C.) are pledged to secure the CBI credit facility. The CBI credit

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facility is also secured by liens on CBI’s trademarks as well as pledges of stock and guarantees by various subsidiaries worldwide. The facility contains covenants that limit the distribution of cash from CBI to CBII, the parent holding company, to amounts necessary to pay interest on the New Notes (provided CBI meets certain liquidity tests), income taxes and permitted CBII overhead. Because of these cash distribution restrictions from CBI to CBII, and because CBII currently has no source of cash except for distributions from CBI, any payment of common stock dividends to Chiquita shareholders would require approval from the CBI facility lenders. Similar approvals would be required for a Company buyback of common stock. The facility also has covenants that require CBI to maintain certain financial ratios related to debt coverage and income, and that limit capital expenditures and investments. Beginning October 2002, monthly principal repayments of $1.2 million commenced on the term loan. As the term loan is repaid, the capacity under the revolving credit portion of the facility increases by the amount of the term loan repayments, except for cases in which the term loan repayments are mandated as a result of specified events, generally sales of major assets. At March 15, 2003, $50 million was outstanding under the term loan. Under the revolving credit facility, $16 million was outstanding, $4 million of capacity had been used to issue letters of credit and $52 million was available to the Company.

Coinciding with the acquisition of Scipio/Atlanta late in March 2003, the CBI facility was amended and restated to add a new $65 million term loan to repay Scipio/Atlanta’s existing lenders. Interest on the $65 million loan accrues at the bank corporate base rate plus 3.25%, subject to a minimum of 7.5%. A facility fee of $2 million was paid. The new loan is secured with pledges of equity of Scipio/Atlanta and its subsidiaries and liens on certain assets of Scipio/Atlanta. This debt is expected to be reduced in the future as a result of the sales of certain assets of Scipio/Atlanta.

Chiquita Processed Foods, L.L.C. (“CPF“), the Company’s vegetable canning subsidiary, has a $135 million senior secured revolving credit facility. Interest under the facility is based on, at the Company’s option, either the bank corporate base rate or prevailing LIBOR rates. An annual fee of up to 1/2% is payable on the unused portion of the facility. This facility contains covenants that limit capital expenditures and the payment of dividends by CPF and require CPF to maintain certain financial ratios related to net worth and debt coverage. At March 15, 2003, $58 million was outstanding under the facility, $2 million of capacity had been used to issue letters of credit, and $55 million of borrowings were available to CPF for working capital purposes. Under the terms of this facility, the payment of dividends by CPF was limited to $4 million.

In January 2003, the Company acquired a ship formerly under operating lease to the Company, adding $14 million to debt. This was partially offset by a $6 million reduction to debt from the sale of Progressive, also in January 2003. See Notes 3 and 7 to the Consolidated Financial Statements for a further description of these transactions.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s significant accounting policies are summarized in Note 1. The additional discussion below addresses:

•         the use of fresh start reporting upon the Company’s emergence from Chapter 11 proceedings;

•         the application of the new accounting standard for goodwill and other intangibles; and

•         major judgments used in applying these policies.

Fresh start reporting

The Company’s emergence from Chapter 11 bankruptcy proceedings on March 19, 2002 resulted in a new reporting entity and adoption of fresh start reporting in accordance with Statement of Position (“SOP”) No. 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code.” The Consolidated Financial Statements as of and for the quarter ended March 31, 2002 reflect reorganization adjustments for the discharge of debt and adoption of fresh start reporting. Accordingly, the estimated reorganization value of the Company of $1,280 million, which served as the basis for the Plan approved by the bankruptcy court, was used to determine the equity value allocated to the assets and liabilities of the Reorganized Company in proportion to their relative fair values in conformity with Statement of Financial Accounting Standards No. 141, “Business Combinations.”

Financial restructuring items for the quarter ended March 31, 2002, totaling a net charge of $286 million, resulted from the following:

•         Exchange of Old Notes and accrued interest for 95.5% of the New Common Stock and $250 million of New Notes, resulting in a gain of $154 million;

•         Reduction of property, plant and equipment carrying values by $545 million, including reduction of the Company’s tropical farm assets by $320 million, shipping vessels by $158 million, and vegetable canning assets by $55 million;

•         Reduction of long-term operating investments and other asset carrying values by $186 million;

•         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;

•         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; and

•         Reduction of $5 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

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relative fair values of the Company’s assets and liabilities. Significant valuation assumptions used in fresh start include:

Tropical farm assets – An internally generated discounted cash flow analysis was prepared assuming cash inflows based on projected farm productivity and projected per box market prices for bananas purchased from associate producers in the tropics, and assuming cash outflows based on projected costs per box. These net cash flows were discounted at 15%.

Ships – The valuation of the ships was provided by an outside appraisal firm.

Long-term operating investments – These investments were primarily comprised of equity method investees engaged in the distribution of fresh produce. Valuations were calculated from internally generated discounted cash flow analyses based on projected cash flows obtained from management of the investee, which were discounted at 12% to 15%, depending on the nature and location of the investment.

Trademark – The Company’s trademark was valued by outside appraisers using a method similar to the December 31, 2002 valuation process described below.

Accounting for Goodwill and Other Intangibles

The Company reviews the carrying values of its intangible assets at least annually. In 2002, the Company conducted its reviews in accordance with Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets.” Under this standard, goodwill and other intangible assets with an indefinite life are no longer amortized but are reviewed at least annually for impairment. As of January 1, 2002, 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. The elimination of goodwill amortization results in an annual increase to net income of $6 million.

Review of Carrying Values of Intangibles and Property, Plant and Equipment

At December 31, 2002, 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 independent appraisal using a “relief-from-royalty” method. Under SFAS No. 142, the Company is required to support its trademark value on a fair value basis at least annually. The year-end 2002 carrying value was supported by an updated appraisal that 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 11.5%, and an income tax rate of 37% applied to the royalty cash flows. The valuation is most sensitive to the royalty rate. A 1/2 percentage point change to the royalty rate could impact the valuation by up to $40 million.

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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, 2002 and 2001 did not reveal any instances in which an impairment charge was required.

Review of Carrying Values of Long Term Investments

The Company also reviews the carrying values of its long-term investments at least annually. Substantially all of the investments are privately owned companies or joint ventures that have no publicly traded or readily determinable market value. These reviews are performed to test for the existence of a decline in value below the carrying value of an investee that is other than temporary, which would require a write-down to fair value under the provisions of APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

In performing these reviews, the Company considers both qualitative and quantitative factors. Before December 31, 2002, qualitative factors included the long-term nature of these investments and operating interests, their strategic importance and degree of integration in the Company’s Fresh Produce operations, and the indirect benefit of these businesses beyond their reported earnings. These indirect benefits could include those derived from an investee serving as a source of fruit that helps sustain existing profitable customer relationships as well as those derived from an investee serving as a distribution channel to extend the sales of Chiquita products to additional customers that might not otherwise be available to the Company. Quantitative factors included the use of undiscounted cash flow analyses. Although these investments were written down by $170 million to estimated fair value as of March 31, 2002 following fresh start accounting principles appropriate to companies emerging from Chapter 11, no write-down was taken by the Predecessor Company in periods prior to emergence in light of the Company’s conclusion, based on the results of the above reviews and the Company’s understanding of APB Opinion No. 18, that any decline in value that may have occurred in prior periods was not “other than temporary.” As such, no estimation of the fair value of these investments was made at those dates.

The Company disclosed the use of undiscounted cash flows as a critical accounting policy in its 2001 annual report and described the distinction between the use of undiscounted cash flows to support equity method investment carrying values and the use of discounted cash flows in the application of current fair value estimates as part of the implementation of fresh start accounting in anticipation of the Company’s emergence from Chapter 11. The Company also presented pro-forma financial information indicating the impact of the fresh start adjustments in the same document.

After discussions with the SEC staff, the Company understands that its methodology of assessing impairment of these investments prior to fresh start accounting was inappropriate, and that a fair value analysis should have been undertaken at earlier times. Had such a review been undertaken, a portion of the write-down taken as of March 31, 2002 might have been recognized in earlier periods.

However, a) the Company emerged from bankruptcy in March 2002 with a new Audit Committee and Board of Directors, which is not able to reliably reassess the judgments made at earlier dates; b) any such adjustments which may have resulted would relate solely to periods prior to the Company’s emergence from Chapter 11; c) all such investments were written down to fair value as of March 31, 2002; and d) the Company and its Audit Committee do not believe, in light of the foregoing, that restating the Company’s historical financial statements to reflect any adjustments which might have resulted from such a fair value review would be material, or provide valuable information, to investors. For these reasons, the Company is not restating its historical financial statements.

The Company intends to use fair value concepts in evaluating the carrying value of its equity method investments in the future. This change will have no effect on the financial statements of the Reorganized Company as of and for the nine months ended December 31, 2002.

Pension and Tropical Severance Plans

The Company accounts for its defined benefit pension and tropical severance plans in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” which requires that amounts recognized in financial statements be determined on an actuarial basis. Significant assumptions used in this actuarial calculation 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 6.5% and 7.0% at December 31, 2002 and 2001 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 were 9% and 9.25% at December 31, 2002 and 2001 for the tropical severance plans, 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 was assumed to be 6% for domestic plans for all years presented. In 2002, the long-term rate of compensation increase assumed for foreign plans was lowered from 6% to 5% to reflect the Company’s expectations regarding wage increases in the tropics. The long-term rate of return on plan assets was assumed to be 8% for domestic plans for each of the last three years. Actual rates of return have been below this expected rate for the last few years, 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.

EUROPEAN UNION REGULATORY DEVELOPMENTS

In 1993, the European Union (“EU”) implemented a discriminatory quota and license 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 years prior to the regime’s implementation.

During nine years of legal challenges through the World Trade Organization 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

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American bananas under a tariff rate quota system for historical operators that went into effect on July 1, 2001 and is to continue through the end of 2005. As a result, the Company has not needed to purchase as many import licenses as were required prior to July 1, 2001 in order to meet its customer demand. The April 2001 agreement also contemplates movement to a tariff-only system starting in 2006, a process which will require future consultations between the EU and the banana supplying interests.

There can be no assurance that the tariff rate quota system will remain unchanged through 2005, that a tariff-only system will be implemented after 2005 or that, if implemented, the tariff levels established will not be adverse to marketers of Latin American bananas, such as the Company. In addition, the Company cannot predict the impact on the banana import regime or on market conditions of the enlargement of the EU by ten member states that is expected to be implemented during 2004 and there can be no assurance that the 2004 enlargement will not have an adverse effect on the Company. For further information, see “Part I, Item 1 – Business” of the Company’s Form 10-K.

EU COMMON CURRENCY

In 1999, most of the EU member countries began implementation of the EU common currency (the “euro”) by accepting the euro as legal tender in addition to their respective national currencies. On January 1, 2002, euro coins and notes were put into circulation in participating countries and, since February 28, 2002, the euro has been the sole legal tender for these countries. Chiquita has adjusted the day-to-day operations and information systems of its European business to allow the use of the euro at no significant cost.

MARKET RISK MANAGEMENT – FINANCIAL INSTRUMENTS

Chiquita’s products are distributed in more than 60 countries. Its international sales are made primarily in U.S. dollars and major European currencies (see “EU Common Currency”). 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 and forward contracts (principally euro contracts) to hedge sales denominated in foreign currencies.

Chiquita’s interest rate risk arises from its fixed and variable rate debt (see Note 11). Of the $517 million total debt at December 31, 2002, approximately $328 million, or 63%, was fixed-rate debt, and $189 million, or 37%, was variable-rate debt. Fixed-rate debt was primarily comprised of the $250 million of 10.56% parent company senior notes.

The Company’s transportation costs are exposed to the risk of rising fuel prices. To reduce this risk, the Company enters into fuel oil option and forward contracts that would offset potential increases in the market fuel prices.

The foreign currency and the fuel oil option and forward contracts are derivative financial instruments that change in value in the opposite direction of the underlying transactions being hedged. Chiquita uses a value at risk (“VAR”) model to estimate the potential loss the Company could incur as a result of adverse changes in foreign currency exchange, interest rates and fuel oil prices, based on historical volatility rates. The range of volatility data used is selected to produce estimates with a 95% confidence level; however,

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future volatility rates may differ from those experienced in the past. The VAR calculations do not consider the potential effect of favorable changes in these rates or the offsetting change in the dollar amount of an underlying foreign currency denominated sale or fuel oil purchase. Therefore, the VAR calculations are not intended to represent actual losses the Company expects to incur.

As of December 31, 2002 and 2001 and for the nine months ended December 31, 2002 and the three months ended March 31, 2002, the Company estimates that the fair value of foreign currency option and forward contracts would decline by less than $3 million over a one-day period due to a change in foreign currency exchange rates. However, the Company expects that any decline in the fair value of these contracts would tend to be offset by an increase in the dollar realization of the underlying sales denominated in foreign currencies.

As of December 31, 2002 and 2001 and for the nine months ended December 31, 2002 and the three months ended March 31, 2002, the Company estimates that the adverse change in fair value of its debt would be less than $2 million over a one-day period due to an unfavorable change in interest rates.

As of December 31, 2002 and 2001 and for the nine months ended December 31, 2002 and the three months ended March 31, 2002, the Company estimates that the fair value of fuel oil option and forward contracts would decline by less than $1 million over a one-day period due to an adverse change in fuel oil prices. 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.

(See Note 10 to the Consolidated Financial Statements for additional discussion of the Company’s hedging activities.)

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This Annual Report contains certain information that may be deemed to be “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 anticipated enlargement of the EU in 2004 and the anticipated conversion to a tariff-only regime in 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 Company’s ability to realize its announced cost-reduction goals, and other market and competitive conditions. 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.

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Chiquita Brands International, Inc.
CONSOLIDATED STATEMENT OF INCOME

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*          See Notes to Consolidated Financial Statements, including Note 1 describing the Reorganized Company and Predecessor Company.

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Chiquita Brands International, Inc.
CONSOLIDATED BALANCE SHEET

*          See Notes to Consolidated Financial Statements, including Note 1 describing the Reorganized Company and Predecessor Company.

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Chiquita Brands International, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

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*          See Notes to Consolidated Financial Statements, including Note 1 describing the Reorganized Company and Predecessor Company.

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Chiquita Brands International, Inc.
CONSOLIDATED STATEMENT OF CASH FLOW