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's system of internal accounting controls, which is supported by
formal financial and administrative policies, 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, modifies and improves these systems and
controls as changes occur in business conditions and operations. The Company's
worldwide internal audit function reviews the adequacy and effectiveness of
controls and compliance with policies.
The Audit Committee of the Board of Directors reviews the Company's financial
statements, accounting policies and internal controls. In performing its
reviews, the Committee meets periodically with the independent auditors,
management and internal auditors to discuss these matters.
The Company engages Ernst & Young LLP, an independent auditing firm, to audit
its financial statements and express an opinion thereon. The scope of the audit
is set by Ernst & Young LLP, which has full and free access to all Company
records and personnel in conducting its audits. Representatives of Ernst &
Young LLP are free to meet with the Audit Committee, with or 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 LLP, Independent Auditors
- -------------------------------------------------
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, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and cash flow for each
of the three years in the period ended December 31, 1998. These financial
statements, appearing on pages 37 through 57, are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1998 and 1997, and the consolidated results
of its operations and its cash flow for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Cincinnati, Ohio
February 9, 1999
-30-
MANAGEMENT'S ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
OPERATIONS
- ----------
This analysis of operations addresses Chiquita's operating results shown in the
Consolidated Statement of Income. The following analysis should be read in
conjunction with the segment information presented in Note 13 to the
Consolidated Financial Statements.
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------
Net sales
Fresh Produce $2,243,284 $2,198,939 $2,233,902
Processed Foods 477,077 234,787 201,346
---------- ---------- ----------
$2,720,361 $2,433,726 $2,435,248
========== ========== ==========
Operating income
Fresh Produce $53,085 $82,562 $66,491
Processed Foods 25,524 17,604 17,845
---------- ---------- ----------
$78,609 $100,166 $84,336
========== ========== ==========
Net sales in 1998 increased 12% over the prior two years' amounts primarily
as a result of the expansion of Chiquita's Processed Foods business through
acquisitions of vegetable canning operations in late 1997 and early 1998. (See
Note 15 to the Consolidated Financial Statements for additional discussion of
these acquisitions.)
Operating income in 1998 was $79 million compared to $100 million in 1997 and
$84 million in 1996. Operating income includes:
* In 1998, write-downs and costs of $74 million, net of minimum expected
insurance recoveries, as a result of significant flood damage to
operations in Honduras and Guatemala caused by Hurricane Mitch. This
includes write-downs of banana cultivations and farm infrastructure
assets, and costs for employee benefits and humanitarian aid.
* In 1996, write-downs and costs of $70 million from flooding in Costa Rica,
Guatemala and Honduras; modification of distribution logistics and the
wind-down of particular banana production facilities; and certain claims
relating to prior European Union ("EU") quota restructuring actions.
Excluding the effect of the items described above, operating income for Fresh
Produce improved in 1998 primarily as a result of lower delivered product costs
for bananas as the Company realized increased farm productivity and
transportation cost reductions on higher worldwide banana volume. The benefit
of lower delivered product costs more than offset the effects of lower dollar
price realizations in Europe and North America and unrecovered fixed costs
incurred as a result of a strike in the Company's western Panama division early
in the year. Increased volume of other fresh produce, especially tomatoes,
mushrooms and blueberries, also contributed to the Fresh Produce earnings
improvement. The increase in Processed Foods 1998 operating income over the
prior year amount resulted from acquisitions of vegetable canning operations in
late 1997 and early 1998.
-31-
The 1998 results also include write-offs of a non-operating investment and
of impaired banana cultivations in Chiquita's western Panama division, which
were damaged during a two-month strike. Full production at this division
resumed in December 1998. These write-offs were offset by a gain from a cash
settlement in excess of $10 million for claims against a newspaper concerning a
series of false and misleading articles about the Company. The write-off of the
investment and the settlement gain are included in Other income and the write-
off of banana cultivations is included in Cost of sales.
In 1997, Fresh Produce operating results were adversely affected by a
stronger dollar in relation to major European currencies (mitigated in part by
the Company's foreign currency hedging program) and by increased banana
production costs resulting primarily from industry-wide flooding in 1996.
Net interest expense decreased from $102 million in 1996 to $92 million in
1997 as a result of refinancing and debt reduction activities. The net loss in
1996 includes extraordinary charges of $23 million resulting from these
activities.
Income taxes consist principally of foreign income taxes currently paid or
payable. No tax benefit was recorded for unrealized U.S. net operating loss
carryforwards or other available tax credits.
HURRICANE MITCH
- --------------------
In late October and early November of 1998, the Company sustained significant
damage to its operations in Honduras and Guatemala as a result of widespread
flooding caused by Hurricane Mitch. Nearly all of the banana plantings on the
Company's 17,000 acres of cultivations in Honduras were destroyed; approximately
two-thirds of the plantings on the Company's 8,000 acres of cultivations in
Guatemala were destroyed or severely damaged. Nevertheless, the Company expects
it will be able to meet its banana volume requirements through improved
productivity in its other farm divisions, including the western Panama division
which returned to full production in December 1998, and through purchases of
fruit from associate producers. As a result of Hurricane Mitch, the Company
will incur some unrecovered fixed costs in 1999.
Industry-wide, the damage caused by Hurricane Mitch will significantly
reduce 1999 banana volume from Honduras and Guatemala. This lost banana
production may be offset by increased industry exports from Ecuador, whose 1998
banana exports were negatively affected by El Nino.
EUROPEAN UNION REGULATORY DEVELOPMENTS
- --------------------------------------
On July 1, 1993, the EU implemented a quota system effectively restricting the
volume of Latin American bananas imported into the EU, which had the effect of
decreasing the Company's overall volume and market share in Europe. The quota
regime is administered through a licensing system and grants preferred status to
producers and importers within the EU and its former colonies, while imposing
restrictive quotas and tariffs on bananas imported from other sources, including
Latin America, Chiquita's primary source of fruit. Since imposition of the EU
quota regime, prices within the EU increased and have remained at a higher level
than the levels prevailing prior to the quota. Banana prices in other worldwide
markets, however, declined as the displaced EU volume entered those markets and
have remained lower than in years prior to the EU quota.
In two separate rulings, General Agreement on Tariffs and Trade ("GATT")
panels found the EU banana policies to be illegal. In March 1994, four of the
five countries which had initiated GATT complaints, Costa Rica, Colombia,
Nicaragua and Venezuela, settled their GATT actions against the EU by entering
into a "Framework Agreement" which guaranteed them preferential EU market access
for bananas. The Framework
-32-
Agreement was implemented in 1995 and imposed additional restrictive and
discriminatory quotas and export licenses on U.S. banana marketing firms, while
leaving EU firms exempt. This significantly increased the Company's cost to
export bananas.
Since implementation of the quota system:
* In September 1994, Chiquita and the Hawaii Banana Industry Association
made a joint filing with the Office of the U.S. Trade Representative
("USTR") under Section 301 of the U.S. Trade Act of 1974 charging that the
EU quota and licensing regime and the Framework Agreement are
unreasonable, discriminatory, and a burden and restriction on U.S.
commerce.
* In September 1995, the United States, Guatemala, Honduras and Mexico
commenced a challenge against the EU quota regime using the procedures of
the World Trade Organization ("WTO"). Ecuador, the world's largest
exporter of bananas, joined these countries in filing a new WTO action in
February 1996.
* In May 1997, a WTO arbitration panel issued a report ruling that the
licensing and quota systems under the EU quota regime and the Framework
Agreement violate numerous international trade obligations to the
detriment of Latin American supplying countries and U.S. marketing firms
such as Chiquita.
* In September 1997, the WTO Appellate Body upheld the panel's report and
the full WTO body later adopted both the panel and Appellate Body reports.
* In January 1998, a WTO arbitrator ruled that the EU must fully implement
banana policies consistent with the WTO report findings not later than
December 31, 1998.
* In July 1998, the EU adopted a revised quota and license regime which was
implemented in January 1999. The five governments that filed the WTO
complaint, joined by Panama which became a WTO member after the initial
complaint was filed, have all indicated that they do not believe the
revised EU regime complies with the WTO rulings.
* In January 1999, the United states requested WTO authorization to impose
prohibitive (100% of value) duties on selected EU products accounting for
annual exports to the United States of $520 million, which the United
States calculates as the amount of harm to the United States caused by the
continuing failure of the revised EU banana regime to be WTO consistent.
* On March 2, 1999, a WTO arbitration panel hearing the EU's objections to
the proposed sanctions announced that it would rule on whether the revised
EU banana regime is WTO consistent as well as the level of permissible
sanctions if it finds the revised regime to be WTO inconsistent. The
panel indicated that its ruling will be issued soon after March 15, 1999
and will not be subject to appeal.
* Effective March 3, 1999, the United States conditionally imposed the
prohibitive duties for which it is seeking WTO authorization, but
announced that it would refrain from collecting the higher duties until
the WTO panel has ruled in the pending arbitration.
There can be no assurance as to the results of the WTO proceedings, including
the pending arbitration, the nature and extent of actions that may be taken by
the affected countries, the impact on the EU quota regime or the Framework
Agreement or the impact on the Company's business.
-33-
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flow from operations was $91 million in 1998, $67 million in 1997 and $123
million in 1996. The increase in 1998 operating cash flow compared to 1997 was
due to cost reductions in the Company's Fresh Produce business. Operating cash
flow in 1997 was less than in 1996 primarily as a result of the use of cash to
fund a short-term increase in working capital and the payment in 1997 of prior
year claims relating to earlier EU quota restructuring actions.
Capital expenditures were $118 million in 1998, $76 million in 1997 and $75
million in 1996. The 1998 capital expenditures include $40 million of spending
associated with rehabilitation of banana cultivations in the Company's western
Panama division following a two-month strike and the reconfiguration of
Chiquita's expanded vegetable canning operations. The 1997 and 1996 capital
expenditures include $19 million and $15 million, respectively, to rehabilitate
banana farms and other assets damaged by storms in 1996.
The Company plans during 1999 and 2000 to incur capital expenditures
aggregating in excess of $110 million to replant banana cultivations and to
rehabilitate farm infrastructure, such as levees, drainage and irrigation
systems, which were destroyed or damaged by Hurricane Mitch. The Company
expects to be able to finance the flood rehabilitation and its other 1999
capital expenditures with cash flow from operations and insurance proceeds, but
may choose to finance some of the spending with long-term borrowings. Insurance
recoveries are expected to be in the range of $60 million to $75 million.
At February 28, 1999, $85 million of borrowings were available to Chiquita or
its subsidiaries under committed lines of credit.
In accordance with its strategy to build upon its existing businesses, the
Company completed the following acquisitions:
* In late 1997 and early 1998, Chiquita issued $120 million of common and
preference stock and paid approximately $37 million of cash to acquire the
common stock and retire a portion of the outstanding debt of three
vegetable canning companies. These acquisitions expanded the capacity,
product line and geographic coverage of the Company's existing vegetable
canning business.
* In mid-1998, the Company expanded its fresh foods business in Australia by
acquiring the Australian mushroom business of Campbell Soup for $12 million
of Chiquita common stock and $5 million of cash.
In 1996, Chiquita raised a total of $255 million from public offerings of
preferred shares and senior notes and used the proceeds to prepay subordinated
debt, which carried effective interest rates of 11.5% to 12.1%, and to prepay
high cost subsidiary debt.
EU COMMON CURRENCY
- ------------------
On January 1, 1999, eleven European countries began implementation of the EU
common currency (the "Euro") by accepting the Euro in addition to their
respective national currencies as legal tender. After July 1, 2002, the Euro
will be the sole legal tender for these eleven countries. The Company's
affected customers have initially preferred to be invoiced in their
traditionally invoiced currencies. The Company is currently addressing Euro-
related issues and their impact on information systems, currency exchange rate
risk and other areas. Although the Company is not able to predict the full
implications of the Euro implementation on its European operations, the
implementation has not had, and the Company does not believe it will have, a
material adverse effect on it financial statements.
-34-
YEAR 2000 PROJECT
- -----------------
Chiquita's company-wide Year 2000 Project ("Project") is proceeding according to
schedule. The Project addresses the inability of computer and micro-processor
systems to distinguish between the year 1900 and the year 2000. When Chiquita
began the Project in the early 1990's, the primary goal was to make each Company
system Year 2000 compliant in the normal course of replacing and upgrading the
Company's systems. Many Company systems have been replaced or upgraded in the
normal course.
In 1996, the Project was expanded to include development of a company-wide
Year 2000 policy which outlined the scope and responsibility for resolution of
Year 2000 readiness issues. This policy covers computer hardware and operating
software, applications software, telephone hardware and software, networking
hardware and software, manufacturing equipment, vessel navigation and control
equipment and other embedded technology issues.
The Project has included the following phases: (1) inventorying the Company's
hardware, software and equipment; (2) assessing which items have Year 2000
issues; (3) determining critical versus non-critical items; (4) replacing or
repairing items that have Year 2000 issues; (5) testing material items; (6)
assessing the Year 2000 readiness of the Company's material customers and
suppliers; and (7) developing contingency plans. Critical items are defined as
those believed by the Company to have a risk involving the safety of
individuals, material damage to property or a material adverse effect on the
Company's financial statements.
As of December 31, 1998, the first five phases of the Project have been
substantially completed. The Company is assessing the Year 2000 readiness of
material customers and suppliers, including financial institutions,
telecommunications companies, public utility companies and commercial vendors.
Assessment has included obtaining written certifications of Year 2000 readiness
from the third parties, review of their Year 2000 readiness plan and site
visits. This assessment is substantially complete for those third parties whose
functions are most critical to the operations of the Company, such as financial
institutions. Assessment of risk regarding remaining material customers and
suppliers and development of necessary contingency plans for these customers and
suppliers and critical internal systems are expected to be completed before the
end of 1999.
The estimated total cost of the Project for systems that have not been
replaced or upgraded in the normal course is less than $10 million. Most of
this cost has already been incurred by the Company.
Due to widespread uncertainties inherent in the Year 2000 problem, resulting
primarily from the widely reported uncertainty of the Year 2000 readiness of
suppliers, customers and other third parties, including U.S. and foreign
governmental entities, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Company's financial statements. However, the Company believes the most
reasonably likely worst case scenario is that there could be some localized,
temporary disruptions to portions of business activities, such as shipping,
ripening and data processing, rather than systemic or long-term problems
affecting its business operations as a whole. Chiquita's contingency planning
is focusing on minimizing these disruptions, should they occur, by having
sufficient personnel and other resources in place to permit an appropriate
response to specific problems. The Project is expected to significantly reduce
the level of risk that the Year 2000 issue will cause significant interruptions
to the Company's operations.
-35-
MARKET RISK MANAGEMENT
- ----------------------
Chiquita uses derivatives to reduce its exposure to fluctuations in foreign
currency exchange rates, interest rates and, to a lesser extent, fuel oil
prices. The Company does not use derivatives for speculative purposes. Because
these derivatives are highly correlated with the underlying hedged exposures,
changes in the fair value of the derivatives are substantially offset by
reciprocal changes in the fair value of the underlying exposures. (See Note 7
to the Consolidated Financial Statements for additional discussion of the
Company's hedging activities.)
The Company's exposure to financial market risks was measured using a value
at risk ("VAR") model. The VAR model estimates the potential loss Chiquita
could incur as a result of adverse changes in foreign currency exchange and
interest rates, given a specified confidence level, over a given period of time.
The VAR calculations do not consider the potential effect of favorable changes
in these rates or the offsetting increase in the dollar realization of an
underlying foreign currency sale. The VAR calculations are not intended to
represent actual losses the Company expects to incur.
FOREIGN CURRENCY EXCHANGE RATES 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. Debt
denominated in currencies of countries other than the U.S. serves as a hedge of
the net investments in those countries.
The Company further reduces its exposure to exchange rate fluctuations by
purchasing foreign currency option contracts (principally European currencies)
to hedge sales denominated in foreign currencies. At December 31, 1998, based
on a 95% confidence level, the Company estimates that the fair value of these
contracts would decline by less than $2 million over a one-day period due to an
adverse change in foreign currency exchange rates. However, the Company expects
that any decline in the fair value of these contracts would typically be offset
by an increase in the dollar realization of the underlying foreign currency
sale.
INTEREST RATES Chiquita's interest rate risk arises primarily from its debt.
The Company reduces its exposure to interest rate fluctuations on its long-term
variable rate debt by entering into interest rate swap agreements. At December
31, 1998, based on a 95% confidence level, the Company estimates that the
combined adverse change in fair value of its debt and interest rate swaps would
be less than $3 million over a one-day period due to an unfavorable change in
interest rates.
***************
This Annual Report contains certain information that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation 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. The
assumptions, risks and uncertainties include product pricing, cost to purchase
or grow (and availability of) fresh produce and other raw materials, currency
exchange rate fluctuations, natural disasters and unusual weather conditions,
operating efficiencies, labor relations, access to capital, actions of
governmental bodies, actions or failures to act of customers, suppliers and
other third parties with respect to the Year 2000 readiness issues, and other
market and competitive conditions. Actual results or developments may differ
materially from the expectations expressed or implied in the forward-looking
statements.
-36-
Chiquita Brands International, Inc.
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except
per share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------
Net sales $2,720,361 $2,433,726 $2,435,248
---------- ---------- ----------
Operating expenses
Cost of sales 2,206,047 1,935,870 1,947,888
Selling, general and
administrative 343,227 311,568 313,490
Depreciation 92,478 86,122 89,534
---------- ---------- ----------
2,641,752 2,333,560 2,350,912
---------- ---------- ----------
Operating income 78,609 100,166 84,336
Interest income 12,866 16,540 28,276
Interest expense (108,757) (108,913) (130,232)
Other income, net 7,370 750 892
---------- ---------- ----------
Income (loss) from
operations before
income taxes (9,912) 8,543 (16,728)
Income taxes (8,500) (8,200) (11,000)
---------- ---------- ----------
Income (loss) before
extraordinary item (18,412) 343 (27,728)
Extraordinary loss from
debt refinancing -- -- (22,838)
---------- ---------- ----------
Net income (loss) $(18,412) $343 $(50,566)
Less dividends on
preferred and
preference stock (17,102) (16,949) (11,955)
---------- ---------- ----------
Net loss attributed
to common shares $(35,514) $(16,606) $(62,521)
========== ========== ==========
Per common share -
basic and diluted
- Income (loss) before
extraordinary item $(.55) $(.29) $(.72)
- Extraordinary item -- -- (.41)
---------- ---------- ----------
- Net income (loss) $(.55) $(.29) $(1.13)
========== ========== ==========
See Notes to Consolidated Financial Statements.
-37-
Chiquita Brands International, Inc.
CONSOLIDATED BALANCE SHEET
December 31,
(In thousands, except share amounts) 1998 1997
- ------------------------------------------------------------------------------
ASSETS
Current assets
Cash and equivalents $88,906 $125,702
Trade receivables, less allowances of
$10,603 and $10,683, respectively 201,574 184,913
Other receivables, net 128,293 87,301
Inventories 387,293 349,948
Other current assets 34,168 35,602
--------- ---------
Total current assets 840,234 783,466
Property, plant and equipment, net 1,122,847 1,151,396
Investments and other assets 356,228 301,173
Intangibles, net 189,824 165,578
---------- ----------
Total assets $2,509,133 $2,401,613
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes and loans payable $131,768 $59,659
Long-term debt due within one year 37,511 92,905
Accounts payable 217,266 205,323
Accrued liabilities 144,884 125,231
---------- ----------
Total current liabilities 531,429 483,118
Long-term debt of parent company 683,294 689,080
Long-term debt of subsidiaries 319,312 272,892
Accrued pension and other
employee benefits 90,382 86,676
Other liabilities 90,736 89,761
---------- ----------
Total liabilities 1,715,153 1,621,527
---------- ----------
Shareholders' equity
Preferred and preference stock 253,475 253,239
Common stock - 65,447,875 shares,
$.01 par value in 1998; 61,167,990
shares, $.33 par value in 1997 654 20,389
Capital surplus 755,660 676,352
Accumulated deficit (214,967) (166,486)
Accumulated other comprehensive loss (842) (3,408)
---------- ----------
Total shareholders' equity 793,980 780,086
---------- ----------
Total liabilities and
shareholders' equity $2,509,133 $2,401,613
========== ==========
See Notes to Consolidated Financial Statements.
-38-
Chiquita Brands International, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
Preferred other comp- Total
and rehensive share-
preference CommonCapital Accumulated incomeholders'
(In thousands) stock stock surplus deficit (loss) equity
- ---------------------------------------------------------------------------
DECEMBER 31, 1995 $138,369 $18,256 $577,799$(65,437) $3,220$672,207
--------
Net loss - - - (50,566) - (50,566)
Unrealized translation
loss - - - - (2) (2)
--------
Comprehensive loss - - - - - (50,568)
--------
Share issuances
Option exercises - 182 5,097 - - 5,279
Preferred stock 110,887 - - - - 110,887
Other - 176 8,771 - - 8,947
Dividends
Common stock - - - (11,094) - (11,094)
Preferred stock - - - (11,405) - (11,405)
------------------------------------------------------
DECEMBER 31, 1996 249,256 18,614 591,667 (138,502) 3,218 724,253
--------
Net income - - - 343 - 343
Unrealized translation
loss (6,626) (6,626)
--------
Comprehensive loss - (6,283)
--------
Share issuances
Option exercises - 170 6,045 - - 6,215
Acquisitions of
businesses 3,983 1,528 67,258 - - 72,769
Other - 77 11,382 - - 11,459
Dividends
Common stock - - - (11,395) - (11,395)
Preferred and preference
stock - - - (16,932) - (16,932)
------------------------------------------------------
DECEMBER 31, 1997 253,239 20,389 676,352 (166,486) (3,408)780,086
---------
Net loss - - - (18,412) - (18,412)
Unrealized translation gain - - - - 2,566 2,566
--------
Comprehensive loss - - - - - (15,846)
--------
Reduction in par value of
common stock - (19,777) 19,777 - - -
Share issuances
Option exercises - 1 1,482 - - 1,483
Acquisitions of
businesses 236 41 58,049 - - 58,326
Dividends
Common stock - - - (12,970) - (12,970)
Preferred and preference
stock - - - (17,099) - (17,099)
------------------------------------------------------
DECEMBER 31, 1998 $253,475 $654 $755,660$(214,967) $(842)$793,980
======================================================
See Notes to Consolidated Financial Statements.
-39-
Chiquita Brands International, Inc.
CONSOLIDATED STATEMENT OF CASH FLOW
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
CASH PROVIDED (USED) BY:
OPERATIONS
Income (loss) before
extraordinary item $(18,412) $343 $(27,728)
Depreciation and amortization 99,138 91,588 96,455
Write-downs of banana
production assets, net of
expected insurance
recoveries 43,400 - 28,300
Changes in current assets
and liabilities
Trade receivables (19,089) (10,796) 22,626
Other receivables (23,052) (2,020) (11,982)
Inventories 3,556 4,062 12,402
Other current assets 10,408 (3,776) 7,943
Accounts payable and accrued
liabilities (15,359) (22,613) (6,375)
Other 10,620 10,155 1,694
---------------------------
CASH FLOW FROM OPERATIONS 91,210 66,943 123,335
---------------------------
INVESTING
Capital expenditures (118,250) (76,248) (74,641)
Acquisitions of businesses (26,199) (14,819) -
Long-term investments (4,563) (8,475) (1,831)
Proceeds from sales of
non-core businesses 18,249 - 81,504
Restricted cash deposits - - 39,520
Other (278) (1,480) 10,321
---------------------------
CASH FLOW FROM INVESTING (131,041) (101,022) 54,873
---------------------------
FINANCING
Debt transactions
Issuances of long-term debt 78,858 12,234 191,174
Repayments of long-term debt (108,627) (98,034) (377,349)
Increase (decrease) in notes
and loans payable 61,390 (17,865) (36,817)
Stock transactions
Issuances of preferred stock - - 110,887
Issuances of common stock 1,483 6,215 5,279
Dividends (30,069) (28,327) (22,499)
---------------------------
CASH FLOW FROM FINANCING 3,035 (125,777) (129,325)
---------------------------
Increase (decrease) in cash
and equivalents (36,796) (159,856) 48,883
Balance at beginning of year 125,702 285,558 236,675
---------------------------
Balance at end of year $88,906 $125,702 $285,558
===========================
See Notes to Consolidated Financial Statements.
-40-
Chiquita Brands International, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
- ------------------------------------------------------------------------
American Financial Group, Inc. and its subsidiaries owned approximately 37% of
the outstanding common stock of Chiquita Brands International, Inc. ("Chiquita"
or the "Company") as of December 31, 1998.
CONSOLIDATION - The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. Intercompany balances and
transactions have been eliminated. Investments representing minority interests
are accounted for by the equity method when Chiquita has the ability to exercise
significant influence in the investees' operations; otherwise, they are
accounted for at cost.
USE OF ESTIMATES - The financial statements have been prepared in conformity
with generally accepted accounting principles, which require management to make
estimates and assumptions that affect the amounts and disclosures reported in
the financial statements and accompanying notes.
CASH AND EQUIVALENTS - Cash and equivalents include cash and highly liquid
investments with a maturity when purchased of three months or less.
INVENTORIES - Inventories are valued at the lower of cost or market. Cost for
growing crops and certain fresh produce inventories is determined principally on
the "last-in, first-out" (LIFO) basis. Cost for other inventory categories is
determined on the "first-in, first-out" (FIFO) or average cost basis.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost
and, except for land, are depreciated on a straight-line basis over their
estimated useful lives.
INTANGIBLES - Intangibles consist primarily of goodwill and trademarks which are
amortized over not more than 40 years. Accumulated amortization was $54 million
and $50 million at December 31, 1998 and 1997, respectively. The carrying value
of intangibles is evaluated periodically in relation to the operating
performance and future undiscounted cash flows of the underlying businesses.
REVENUE RECOGNITION - Revenue is recognized on sales of products when the
customer receives title to the goods, generally upon delivery.
INCOME TAXES - 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
or are intended to be permanently reinvested.
FOREIGN EXCHANGE - Chiquita generally utilizes the U.S. dollar as its functional
currency. Net foreign exchange gains (losses) of $6 million in 1998, $(7)
million in 1997 and $1 million in 1996 are included in income.
The Company enters into foreign currency option contracts and foreign
exchange forward contracts to hedge transactions denominated in foreign
currencies. These options and forward contracts are specifically designated as
hedges and offset the losses or gains from currency risk associated with the
hedged transactions. The Company does not enter into options or forward
contracts for speculative purposes. Amounts paid for options and any gains
realized thereon, as well as any gains or losses on forward contracts used to
hedge firm commitments, are deferred until the hedged transaction occurs. Gains
and losses on forward contracts used to hedge transactions where a firm
commitment does not exist are included in income on a current basis.
-41-
EARNINGS PER SHARE - Basic earnings per share is calculated on the basis of the
weighted average number of shares of common stock outstanding during the year
reduced by nonvested restricted stock. Diluted earnings per share also includes
the dilutive effect, if any, of assumed conversion of preferred and preference
stock and convertible debentures and of assumed exercise of stock options.
NEW ACCOUNTING PRONOUNCEMENTS - In 1998, Chiquita adopted Statement of Financial
Accounting Standards ("SFAS") No. 130 "Comprehensive Income" and applied this
standard to all periods presented in these financial statements. The adoption
of this Statement had no impact on the Company's net income or shareholders'
equity. Comprehensive income (loss) for all periods presented consists solely
of net income (loss) and unrealized foreign currency translation gains (losses).
In 1998, Chiquita also adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information" and SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" and applied these standards to
all periods presented.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." This standard
requires the recognition of all derivatives on the balance sheet at fair value.
Adoption of SFAS No. 133 is required by January 1, 2000 and is presently under
review by the Company.
Note 2 - Earnings Per Share
- ------------------------------------------------------------------------------
Basic and diluted earnings per share are calculated as follows:
(In thousands, except per
share amounts) 1998 1997 1996
- ------------------------------------------------------------------------------
Income (loss) before
extraordinary item $(18,412) $343 $(27,728)
Dividends on preferred
and preference stock (17,102) (16,949) (11,955)
---------------------------
Loss before extraordinary item
attributed to common shares $(35,514) $(16,606) $(39,683)
===========================
Weighted average common
shares outstanding 64,734 57,185 55,450
Nonvested restricted shares (71) (160) (255)
---------------------------
Shares used to calculate
basic and diluted
earnings per share 64,663 57,025 55,195
===========================
Basic and diluted loss
before extraordinary
item per share $(.55) $(.29) $(.72)
===========================
The assumed conversions to common stock of preferred stock, preference stock
and 7% convertible subordinated debentures and the assumed exercise of
outstanding stock options would have an anti-dilutive effect on diluted earnings
per share and, therefore, have not been included in the calculations. For
additional information regarding the 7% convertible subordinated debentures,
stock options and preferred and preference stock, see Notes 8, 10 and 11.
-42-
Note 3 - Inventories
- ------------------------------------------------------------------------
Inventories consist of the following:
December 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------
Fresh produce $43,052 $36,035
Processed food products 184,438 137,485
Growing crops 109,891 115,007
Materials, supplies and other 49,912 61,421
-------- --------
$387,293 $349,948
======== ========
The carrying value of inventories valued by the LIFO method was $115 million
at December 31, 1998 and $124 million at December 31, 1997. If these
inventories were stated at current costs, total inventories would have been
approximately $33 million and $45 million higher than reported at December 31,
1998 and 1997, respectively.
Note 4 - Property, Plant and Equipment
- ------------------------------------------------------------------------------
Property, plant and equipment consist of the following:
Weighted
average
December 31,depreciable
(In thousands) 1998 1997 lives
- ------------------------------------------------------------------------------
Land $104,212 $91,718
Buildings and improvements 240,016 226,331 25 years
Machinery and equipment 439,600 436,761 10 years
Ships and containers 678,861 673,605 24 years
Cultivations 235,500 293,942 29 years
Other 70,672 78,94618 years
---------- ----------
1,768,861 1,801,303
Accumulated depreciation (646,014) (649,907)
---------- ----------
$1,122,847 $1,151,396
========== ==========
-43-
Note 5 - Leases
- ------------------------------------------------------------------------------
Total rental expense consists of the following:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Gross rentals
Ships and containers $94,047 $79,746 $60,911
Other 36,854 35,509 35,893
--------- --------- ---------
130,901 115,255 96,804
Less sublease rentals (21,269) (14,359) (11,094)
--------- --------- ---------
$109,632 $100,896 $85,710
========= ========= =========
Future minimum rental payments required under operating leases having initial
or remaining non-cancelable lease terms in excess of one year at December 31,
1998 are as follows:
Ships and
(In thousands) containers Other Total
- ------------------------------------------------------------------------------
1999 $39,399 $22,495 $61,894
2000 35,207 19,718 54,925
2001 20,817 15,245 36,062
2002 20,980 12,929 33,909
2003 16,266 6,846 23,112
Later years 37,145 13,874 51,019
Portions of the minimum rental payments for ships constitute reimbursement
for ship operating costs paid by the lessor.
Note 6 - Equity Method Investments
- --------------------------------------------------------------------------------
The Company has investments in a number of affiliates which are accounted for by
the equity method. These affiliates are primarily engaged in the distribution
of fresh produce. Chiquita's share of the earnings of these affiliates was $8
million in 1998, $1 million in 1997 and $1 million in 1996, and its investment
in these companies totaled $112 million and $75 million at December 31, 1998 and
1997, respectively. The excess of the carrying value of Chiquita's investment
over its share of the fair value of the investees' net assets at the date of
acquisition is being amortized over periods ranging from 10 to 40 years ($25
million and $16 million, net of accumulated amortization, at December 31, 1998
and 1997, respectively).
-44-
Summarized unaudited financial information of these affiliates follows:
(In thousands): 1998 1997 1996
- ------------------------------------------------------------------------------
Revenue $707,358 $510,282 $399,114
Gross profit 104,836 78,225 70,831
Net earnings 22,289 6,909 6,694
Current assets 174,110 91,748
Total assets 345,119 217,634
Current liabilities 116,773 80,350
Total liabilities 175,061 99,824
Note 7 - Hedging Transactions
- ------------------------------------------------------------------------
Chiquita has interest rate swap agreements maturing between 1999 and 2001 to fix
the rate of interest on approximately $24 million of its variable rate ship
loans. At December 31, 1998, the Company had option contracts which ensure
conversion of approximately $325 million of foreign sales in 1999 at a rate not
higher than 1.76 Deutsche marks per U.S. dollar or lower than 1.59 Deutsche
marks per U.S. dollar.
The carrying values and estimated fair values of the Company's debt,
associated interest rate and foreign currency swap agreements and foreign
currency option contracts are summarized below:
December 31, 1998 December 31, 1997
----------------------------------------------
Carrying Estimated Carrying Estimated
(In thousands) value fair value value fair value
- ----------------------------------------------------------------------
Debt $(1,171,885) $(1,186,000) $(1,114,536) $(1,160,200)
Interest rate swap
agreements - (800) - (900)
Foreign currency swap
agreements - - - 6,200
Foreign currency option
contracts 5,890 (800) 7,014 20,600
Fair values for the Company's publicly traded debt and foreign currency option
contracts are based on quoted market prices. Fair value for other debt is
estimated based on the current rates offered to the Company for debt of similar
maturities. The fair values of interest rate and foreign currency swap
agreements are estimated based on the cost to terminate the agreements.
The Company is exposed to credit risk in the event of nonperformance by
counterparties on interest rate swap agreements. However, because the Company's
hedging activities are transacted only with highly rated institutions, Chiquita
does not anticipate nonperformance by any of these counterparties. The amount
of any credit exposure is limited to unrealized gains on these agreements.
-45-
<CAPTION
Note 8 - Debt
- -----------------------------------------------------------------------
Long-term debt consists of the following:
December 31,
(In thousands) 1998 1997
- -----------------------------------------------------------------------
PARENT COMPANY
9 1/8% senior notes, due 2004 $175,000 $175,000
9 5/8% senior notes, due 2004 247,341 248,004
10 1/4% senior notes, due 2006 148,943 148,861
7% subordinated debentures, due 2001 112,010 117,215
----------------
Long-term debt of parent company $683,294 $689,080
================
SUBSIDIARIES
Loans secured by ships and containers,
due in installments from 1999 to 2009
- average effective interest rate of
8.5% (8.6% in 1997) $221,546 $242,463
Loan secured by Costa Rican farm
assets, due in 2000 - variable
interest rate of 7.8% 55,000 -
Foreign currency loans maturing
through 2008 - average interest rate
of 7% (8% in 1997) 18,666 10,478
Caribbean Basin Projects Financing
Authority loan - variable interest
rate of 4.6% in 1997 - 38,000
Overseas Private Investment
Corporation loan - variable interest
rate of 8.0% in 1997 - 11,126
Other loans maturing through 2012
- average interest rate of 9% 61,611 63,730
Less current maturities (37,511) (92,905)
----------------
Long-term debt of subsidiaries $319,312 $272,892
================
The 7% subordinated debentures are callable at face value and convertible
into common stock at $43 per share. The 10 1/4% senior notes are callable
beginning in 2001 at a price of 105 1/8% of face value declining to face value
in 2004. Certain of the covenants under the Company's senior note agreements
contain restrictions on the payment of cash dividends. At December 31, 1998,
approximately $382 million was available for dividend payments under the most
restrictive convenants.
At December 31, 1998, $96 million of loans secured by ships, including $42
million of fixed rate ship debt denominated in pounds sterling, had interest
rates fixed at an average of 8.3% by the terms of the loans or by the operation
of interest rate swap agreements (see Note 7).
-46-
In 1996, proceeds from the issuance of $150 million of 10 1/4% senior notes
and from the sale of Series B preferred stock (see Note 11) were used to redeem
$220 million of 11 1/2% subordinated notes at a redemption premium of 5.7% of
the outstanding principal. The Company also redeemed $66 million of 10 1/2%
subordinated debentures at par. These prepayments resulted in extraordinary
losses totaling $23 million, including a $5 million non-cash write-off of
unamortized discount.
Maturities on long-term debt during the next five years are:
Parent
(In thousands) Company Subsidiaries Total
- -----------------------------------------------------------------------
1999 $- $37,511 $37,511
2000 - 119,679 119,679
2001 112,010 48,789 160,799
2002 - 36,286 36,286
2003 - 24,286 24,286
The Company has a $125 million senior unsecured revolving credit facility
available through January 2001. Interest on borrowings under the facility is
based on, at the Company's option, the bank corporate base rate, the federal
funds effective rate or prevailing interbank Eurodollar offering rates. An
annual fee of up to 1/2% is payable on the unused portion of the facility. The
credit facility contains covenants which require the Company to satisfy certain
ratios related to net worth, debt-to-equity and interest coverage.
Chiquita's vegetable canning subsidiary has a secured revolving credit
agreement which, as of December 31, 1998, provided for borrowings of up to $70
million through August 1999. The credit agreement restricts borrowings based on
accounts receivable and inventory balances of the subsidiary. At December 31,
1998, outstanding borrowings under this facility were $37 million, which were
included in Notes and loans payable. The agreement was amended in February 1999
to increase the amount of permitted borrowings to $85 million. Interest on
borrowings under the facility is based on, at the Company's option, either the
bank corporate base rate or prevailing interbank Eurodollar offering rates. An
annual fee of 1/4% per year is payable on the unused portion of the commitment.
This facility contains covenants that place limitations on the payment of
dividends by the subsidiary and require the subsidiary to maintain a minimum
tangible net worth.
The Company maintains various other lines of credit with domestic and foreign
banks for borrowing funds on a short-term basis. The average interest rate for
all short-term notes and loans payable outstanding was 7.9% at December 31, 1998
and 1997.
Certain of Chiquita's borrowing agreements restrict the payment of cash
dividends. At December 31, 1998, approximately $380 million was available for
dividend payments under the most restrictive convenants of the Company's long-
term debt agreements. Under Chiquita's revolving credit facility, which had $49
million of short-term borrowing included in Notes and loans payable at December
31, 1998, $144 million was available for dividend payments.
Cash payments relating to interest expense were $105 million in 1998, $104
million in 1997 and $126 million in 1996.
-47-
Note 9 - Pension and Severance Benefits
- ------------------------------------------------------------------------
The Company and its subsidiaries have several defined benefit and contribution
pension plans covering approximately 5,500 domestic and foreign employees.
Approximately 25,000 employees are covered by Central and South American
severance plans. Pension plans covering eligible salaried employees and Central
and South American severance plans for all employees call for benefits to be
based upon years of service and compensation rates.
Pension and severance expense consists of the following:
Foreign Plans
----------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Defined benefit and
severance plans:
Service cost $5,070 $4,795 $5,014
Interest on projected
benefit obligation 6,070 5,835 5,886
Expected return on plan assets (136) (89) (65)
Recognized actuarial loss 757 299 407
Amortization of prior service
costs and transition
obligation 1,556 1,239 1,239
------- ------- -------
13,317 12,079 12,481
Curtailment loss 14,061 - -
Settlement loss 4,666 - -
------- ------- -------
32,044 12,079 12,481
Defined contribution plans 768 654 554
------- ------- -------
Total pension and severance
expense $32,812 $12,733 $13,035
======= ======= =======
Domestic Plans
----------------------------------
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Defined benefit and
severance plans:
Service cost $1,057 $593 $636
Interest on projected benefit
obligation 2,838 2,561 2,129
Expected return on plan assets (2,697) (2,441) (2,224)
Recognized actuarial loss 365 501 28
Amortization of prior service costs
and transition obligation 91 62 97
------- ------- -------
1,654 1,276 666
Curtailment loss - - -
Settlement loss - - -
------- ------- -------
1,654 1,276 666
Defined contribution plans 3,726 3,234 2,870
------- ------- -------
Total pension and severance
expense $5,380 $4,510 $3,536
======= ======= =======
As a result of Hurricane Mitch, the Company recognized curtailment and
settlement losses in 1998 related to Central American employee benefit plans.
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. Plan assets consist primarily of corporate debt
securities, U.S. Government and agency obligations and collective trust funds.
-48-
Financial information with respect to the Company's foreign and domestic defined
benefit pension and severance plans is as follows:
Foreign Plans Domestic Plans
-----------------------------------
(In thousands) 1998 1997 1998 1997
- -----------------------------------------------------------------------------
Fair value of plan assets at
beginning of year $2,803 $1,427 $35,912 $26,031
Actual return on plan assets 40 75 5,650 2,101
Acquisitions of businesses - - - 7,946
Employer contributions 28,080 13,711 2,374 1,742
Benefits paid (27,895)(12,410) (2,451) (2,091)
Other - - 168 183
--------------------------------
Fair value of plan assets at
end of year $3,028 $2,803 $41,653 $35,912
================================
Projected benefit obligation at
beginning of year $67,188 $68,613 $39,904 31,881
Service and interest cost 11,140 10,630 3,895 3,154
Acquisitions of businesses - - - 4,749
Actuarial loss 409 355 1,456 2,144
Benefits paid (27,895)(12,410) (2,451) (2,091)
Curtailment 12,515 - - -
Settlement 1,499 - - -
Other - - 610 67
--------------------------------
Projected benefit obligation
at end of year $64,856 $67,188 $43,414 $39,904
================================
Excess of projected benefit
obligation over plan
assets $(61,828)$(64,385)$(1,761)$(3,992)
Unrecognized actuarial loss10,401 13,070 5,682 7,046
Unrecognized prior
service cost 1,229 2,287 494 60
Unrecognized transition
obligation 543 3,404 518 601
Adjustment required to recognize
minimum pension liability - (3,151) (3,099) (5,657)
--------------------------------
$(49,655)$(48,775) 1,834 (1,942)
Prepaid pension asset - - 5,064 3,917
--------------------------------
Accrued pension liability$(49,655)$(48,775)$(3,230)$(5,859)
================================
Included in the table above are plans whose benefit obligation exceeds plan
assets. These plans are primarily foreign pension and severance plans that are
generally not required to be funded until benefits are paid. The accumulated
benefit obligation, projected benefit obligation and fair value of assets of
plans for which benefits exceed assets were $72 million, $88 million and $19
million, respectively, as of December 31, 1998 and $80 million, $98 million and
$27 million, respectively, as of December 31, 1997.
The projected benefit obligations of Central and South American pension and
severance plans in 1998 and 1997 were determined using discount rates of
approximately 9 1/4%. The assumed long-term rate of compensation increase was
6% for both years. The projected benefit obligations of the Company's domestic
pension plans were determined using a discount rate of approximately 7 1/4%.
The assumed long-term rate of compensation increase was 5 1/2% in 1998 and 5
3/4% in 1997 and the assumed long-term rates of return on plan assets were
approximately 8% in 1998 and 8 1/2% in 1997.
-49-
Note 10 - Stock Options
- ------------------------------------------------------------------------
Under its non-qualified Stock Option and Incentive Plans, the Company may grant
up to an aggregate of 25 million shares of common stock, including 10 million
additional shares approved by shareholders in 1998, in the form of stock
options, stock appreciation rights and stock awards. Under these plans, options
have been granted to directors, officers and other key employees to purchase
shares of the Company's common stock at the fair market value at the date of
grant. The options generally vest over ten years and may be exercised over a
period not in excess of 20 years.
A summary of the Company's stock option activity and related information
follows:
- ------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------------
Weighted Weighted Weighted
average average average
(In thousands, except exercise exercise exercise
per share amounts) Shares price Shares priceShares price
- ------------------------------------------------------------------------
Under option at
beginning of year 8,403 $13.44 6,893 $13.09 5,993$12.71
Options granted 1,858 12.92 2,539 14.08 1,953 13.40
Options exercised (123) 12.06 (509) 12.21 (546) 9.68
Options canceled or expired (659) 13.86 (520) 13.15 (507)13.41
------ ------ ------ ------------------
Under option at end of year 9,479 $13.32 8,403 $13.44 6,893$13.09
====== ====== ====== ==================
Options exercisable at
end of year 3,705 $13.30 2,943 $13.45 2,381$13.20
====== ====== ====== ==================
Shares available for
future grants 11,041 2,536 4,811
====== ====== ======
Options outstanding as of December 31, 1998 have exercise prices ranging from
$9.44 to $34.44 and a weighted average remaining contractual life of 16 years.
More than 95% of these options have exercise prices in the range of $9.44 to
$15.69.
Under Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees," because the exercise price of the Company's stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized. SFAS No. 123 "Accounting for Stock-Based Compensation"
requires disclosure of the estimated fair value of stock options granted after
1994 and pro forma financial information assuming compensation expense was
recorded using these fair values.
The estimated weighted average fair value per option share granted is $5.24
for 1998, $6.34 for 1997 and $5.93 for 1996 using a Black-Scholes option pricing
model with the following assumptions: weighted average risk-free interest rates
of 5.6% for 1998, 6.5% for 1997 and 5.8% for 1996; dividend yield of 1.5%;
volatility factor for the Company's common stock price of approximately 37%; and
a weighted average expected life of eight years for options not forfeited. The
estimated pro forma compensation expense based on these option fair values would
be approximately $4 million ($.06 per share) in 1998, $3 million ($.05 per
share) in 1997 and $2 million ($.04 per share) in 1996. Because SFAS No. 123
applies only to options granted after 1994, the effect of applying this standard
to current year pro forma information is not necessarily indicative of the
effect in future years.
-50-
Note 11 - Shareholders' Equity
- ------------------------------------------------------------------------
In 1998, the Company's shareholders approved a change of title and par value
of the Company's Capital Stock, $.33 par value, to Common Stock, $.01 par value.
Also, the shareholders approved an increase in the number of authorized common
shares from 150 million to 200 million. At December 31, 1998, unissued common
shares were reserved for the following purposes:
Issuance under stock option and employee
benefit plans 23 million
Conversion of 7% subordinated debentures 3 million
Conversion of preferred and preference stock 26 million
In 1997, Chiquita issued 4,585,210 shares of common stock and 79,659 shares
of $2.50 Convertible Preference Stock, Series C to the former owners of acquired
canning companies. In 1998, Chiquita issued 182,735 shares of common stock and
4,712 shares of Series C preference stock as final payment for the 1997
acquisitions and issued 2,966,533 common shares in connection with the 1998
acquisition of another canning company. In 1998, Chiquita also issued 873,710
shares to acquire a fresh mushroom business. (See Note 15.)
At December 31, 1998, three series of preferred and preference stock are
outstanding, each share of which has a liquidation preference of $50.00, and has
an annual dividend rate and is convertible at the holder's option into a number
of shares of Chiquita common stock as follows:
Annual Holders'
Shares dividendconversion
outstanding rate rate
- ---------------------------------------------------------------------
$2.875 Non-Voting Cumulative
Preferred Stock, Series A 2,875,000 $2.875 2.6316
$3.75 Convertible Preferred
Stock, Series B 2,300,000 3.750 3.3333
$2.50 Convertible Preference
Stock, Series C 84,371 2.500 2.9220
- ---------------------------------------------------------------------
Each Series A share is convertible at the Company's option (provided the
market value of Chiquita common stock exceeds $24.70 per share) into 2.6316
shares of common stock through February 2001 and thereafter into a number of
shares of common stock (not exceeding 10 shares) having a total market value of
$50.00.
Series B shares were issued in 1996 for aggregate net proceeds of $111
million. Each of these shares is convertible at the Company's option beginning
in September 1999 into a number of shares of common stock (not exceeding 10
shares) having a total market value of $51.50 (decreasing thereafter to $50.00
if converted in or after September 2001).
Each Series C share is convertible at the Company's option beginning in July
2000 into a number of shares of common stock (not exceeding 10 shares) having a
total market value of $51.50 (decreasing thereafter to $50.00 if converted after
June 2002).
The Series A and Series B shares are non-voting. The Series C shares have
one vote per share, voting with the common stock. In certain circumstances if
the Company fails to pay quarterly dividends on Series A, B and C shares, the
holders of such shares, voting as a class, have the right to elect two directors
in addition to the regular directors. The Board of Directors has the authority
to fix the terms of 4,825,000 additional shares of Non-Voting Cumulative
Preferred Stock and 3,915,629 additional shares of Cumulative Preference Stock.
-51-
Note 12 - Income Taxes
Income taxes consist of the following:
- ----------------------------------------------------------------------
(In thousands) U.S. FederalU.S. State Foreign Total
- ----------------------------------------------------------------------
1998
Current tax expense $369 $1,100 $8,006 $9,475
Deferred tax benefit - - (975) (975)
----- ------ ------ -------
$369 $1,100 $7,031 $8,500
===== ====== ====== =======
1997
Current tax expense $375 $1,125 $6,076 $7,576
Deferred tax expense - - 624 624
----- ------ ------ -------
$375 $1,125 $6,700 $8,200
===== ====== ====== =======
1996
Current tax expense $181 $1,210 $9,026 $10,417
Deferred tax expense - - 583 583
----- ------ ------ -------
$181 $1,210 $9,609 $11,000
===== ====== ====== =======
Income tax expense differs from income taxes computed at the U.S. federal
statutory rate for the following reasons:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------
Income tax expense (benefit)
computed at U.S. federal
statutory rate $(3,469) $2,990 $(5,855)
State income taxes, net of
federal benefit 715 731 787
U.S. losses for which no tax
benefit has been recognized 20,734 13,723 18,819
Foreign tax differential (8,816) (12,728) (4,954)
Goodwill amortization 1,850 1,148 1,154
Other (2,514) 2,336 1,049
------- ------- -------
Income tax expense $8,500 $8,200 $11,000
======= ======= =======
-52-
Income (loss) from operations before income taxes consists of the following:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------
Subject to tax in:
United States $(51,326) $(39,211) $(54,575)
Foreign jurisdictions 41,414 47,754 37,847
--------- --------- ---------
$(9,912) $8,543 $(16,728)
========= ========= =========
The components of deferred income taxes included on the balance sheet are as
follows:
December 31,
------------------
(In thousands) 1998 1997
- ---------------------------------------------------------------------
Deferred tax benefits
Employee benefits $31,726 $28,311
Accrued expenses 25,143 17,140
Other 24,631 31,424
--------- ---------
81,500 76,875
Valuation allowance (23,795) (10,658)
--------- ---------
57,705 66,217
--------- ---------
Deferred tax liabilities
Depreciation and amortization (25,452) (29,338)
Growing crops (19,601) (20,968)
Long-term debt (6,167) (8,284)
Other (7,227) (9,344)
--------- ---------
(58,447) (67,934)
--------- ---------
Net deferred tax liability $(742) $(1,717)
========= =========
Net deferred taxes do not reflect the benefit that would be available to the
Company from the use of its U.S. operating loss carryforwards of $291 million,
capital loss carryforwards of $38 million and alternative minimum tax credits of
$6 million. The operating loss carryforwards expire from 2007 through 2013 and
the capital loss carryforwards expire in 2000. Undistributed earnings of
foreign subsidiaries which have been, or are intended to be, permanently
reinvested in operating assets, if remitted, are expected to result in little or
no tax by operation of relevant statutes and the carryforward attributes
described above. Cash payments for income taxes, net of refunds, were $7
million in 1998, $5 million in 1997 and $10 million in 1996.
-53-
Note 13 - Segment Information
- ------------------------------------------------------------------------
The Company conducts business in two business segments, organized primarily on a
product line basis, with each segment offering a variety of different but
related products. The Fresh Produce segment includes the production,
transportation, distribution and marketing of Chiquita bananas and a wide
variety of other fresh fruit and vegetables. The Processed Foods segment
consists of the Company's private-label and branded canned vegetables, branded
fruit and vegetable juices and beverages, processed bananas and edible oil based
consumer products. The Company evaluates the performance of its business
segments based on operating income before unusual items. Intercompany
transactions between segments are eliminated. Financial information for each
segment follows:
Fresh Processed
Produce Foods Consolidated
- ------------------------------------------------------------------------------
1998
Net sales $2,243,284 $477,077 $2,720,361
Operating income before
unusual items (1) 126,685 25,524 152,209
Depreciation and amortization 82,722 16,416 99,138
Income from equity investments 6,515 1,221 7,736
Total assets 2,055,854 453,279 2,509,133
Net operating assets (2) 1,512,185 364,774 1,876,959
Investment in equity affiliates 91,170 20,947 112,117
Expenditures for long-lived
assets 116,042 36,018 152,060
1997
Net sales $2,198,939 $234,787 $2,433,726
Operating income 82,562 17,604 100,166
Depreciation and amortization 84,562 7,026 91,588
Income from equity investments (245) 1,263 1,018
Total assets 2,083,080 318,533 2,401,613
Net operating assets (2) 1,517,076 251,844 1,768,920
Investment in equity affiliates 57,135 17,716 74,851
Expenditures for long-lived
assets 88,000 29,224 117,224
1996
Net sales $2,233,902 $201,346 $2,435,248
Operating income before
unusual items (1) 136,791 17,845 154,636
Depreciation and amortization 90,518 5,937 96,455
Income from equity investments 338 228 566
Expenditures for long-lived
assets 65,835 13,053 78,888
(1)Fresh Produce operating income before unusual items excludes the following:
in 1998, write-downs and costs totaling $74 million, net of minimum of the
range of expected insurance recoveries of $60 million to $75 million,
resulting from widespread flooding in Honduras and Guatemala caused by
Hurricane Mitch; in 1996, write-downs and costs totaling $70 million
primarily from flooding in Central America; certain strategic undertakings
designed to achieve further long-term reductions in the delivered product
cost of bananas; and certain claims relating to prior EU quota restructuring
actions.
(2)Net operating assets consist of total assets less (i) cash and equivalents
and (ii) total liabilities other than debt.
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Financial information by geographic area is as follows:
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------
Net sales
North America $1,602,557 $1,327,168 $1,286,096
Central and South America 47,336 54,946 67,228
Europe and other
international 1,070,468 1,051,612 1,081,924
------------------------------
$2,720,361 $2,433,726 $2,435,248
==============================
Long-lived assets
North America $410,232 $341,993 $313,167
Central and South America 507,641 534,836 527,985
Europe and other
international 278,363 242,976 254,569
Shipping operations 472,663 498,342 526,902
------------------------------
$1,668,899 $1,618,147 $1,622,623
==============================
The Company's products are sold throughout the world and its principal
production and processing operations are conducted in Central, South and North
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 and burdensome taxes. Certain of these
operations are substantially dependent upon leases and other agreements with
these governments.
The Company is also subject to a variety of government regulations in certain
countries where it markets bananas and other products, including import quotas
and tariffs, currency exchange controls and taxes.
Note 14 - 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.
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Note 15 - Acquisitions and Divestitures
- ------------------------------------------------------------------------
In January 1998, Chiquita acquired Stokely USA, Inc. previously a publicly-owned
vegetable canning business with annual net sales of approximately $150 million.
In connection with the acquisition, Chiquita issued $11 million of common stock
(.8 million shares) in exchange for all outstanding Stokely shares, and issued
$33 million of common stock (2.2 million shares) and paid $18 million of cash to
retire corresponding amounts of Stokely debt.
During 1997, the Company acquired separately the Owatonna Canning group of
companies and American Fine Foods, Inc., privately-owned companies engaged
primarily in the vegetable canning business. Chiquita issued $72 million (4.8
million shares) of common stock, including $3 million (.2 million shares) issued
in 1998, and preference stock valued at $4 million (.1 million shares) to
acquire these companies, and paid $19 million to retire debt of the acquired
businesses.
The following unaudited pro forma information presents a summary of the
Company's 1997 and 1996 consolidated results of operations as if the
acquisitions of Stokely, Owatonna and AFF had occurred on January 1, 1996:
(In thousands, except per share amounts)
(Unaudited) 1997 1996
- ---------------------------------------------------------------------
Net sales $2,707,000 $2,736,000
Loss before extraordinary item (700) (33,000)
Net loss (700) (56,000)
Net loss per common share (.28) (1.07)
In June 1998, the Company acquired Campbell Soup Company's Australian fresh
mushroom business, which had annual net sales of approximately $30 million. In
connection with this acquisition, Chiquita issued $12 million (.9 million
shares) of common stock and paid $5 million of cash in exchange for all of the
outstanding capital stock of this business.
Each of these transactions was accounted for as a purchase. The assets
acquired and liabilities assumed in the 1998 acquisitions of Stokely and the
Australian fresh mushroom business and the 1997 acquisitions of Owatonna and AFF
are summarized below:
(In thousands) 1998 1997
- ---------------------------------------------------------------------
<S)
Trade receivables $13,728 $11,978
Inventories 62,020 77,221
Property, plant and equipment 49,936 27,135
Intangibles 44,479 9,775
Accounts payable and accrued
liabilities (48,101) (35,297)
Debt (36,414) (2,719)
Other, net (2,351) 5,334
---------- ----------
Net assets acquired $83,297 $93,427
========== ==========
In December 1998, the Company sold its Central American plastic products
operations for $18 million in cash, which approximated carrying value. In 1996,
Chiquita sold 1.1 million shares of Smithfield Foods, Inc. common stock for $32
million and collected approximately $50 million of cash as repayment of secured
notes. These shares and notes were received in 1995 as part of the proceeds
from the sales of the Company's former Meat Division and the Costa Rican
operations of the Numar edible oils group, respectively.
-56-
Note 16 - Quarterly Financial Data (Unaudited)
- ------------------------------------------------------------------------
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.
1998
(In thousands, except per
share amounts) March 31 June 30 Sep. 30 Dec. 31
- -----------------------------------------------------------------------
Net sales $717,217 $744,191 $632,126 $626,827
Cost of sales (540,587) (561,900) (509,973) (593,587)
Operating income (loss) 69,770 74,216 12,548 (77,925)
Net income (loss) 41,078 52,842 (10,756) (101,576)
Basic earnings (loss)
per share .58 .75 (.23) (1.62)
Diluted earnings (loss)
per share .52 .66 (.23) (1.62)
Dividends per common share .05 .05 .05 .05
Common stock market price
High 16.00 14.44 14.25 12.44
Low 12.63 13.06 10.25 9.50
1997
(In thousands, except per
share amounts) March 31 June 30 Sep. 30 Dec. 31
- -----------------------------------------------------------------------
Net sales $631,410 $646,233 $556,261 $599,822
Cost of sales (464,071) (484,036) (463,993) (523,770)
Operating income (loss) 71,386 67,897 (5,376) (33,741)
Net income (loss) 43,294 41,083 (28,015) (56,019)
Basic earnings (loss)
per share .70 .66 (.57) (1.01)
Diluted earnings (loss)
per share .60 .57 (.57) (1.01)
Dividends per common share .05 .05 .05 .05
Common stock market price
High 16.00 15.88 16.13 18.00
Low 12.75 13.75 13.94 15.50
The 1998 Cost of sales includes $74 million of fourth quarter write-downs and
costs, net of minimum expected insurance recoveries, resulting from widespread
flooding in Honduras and Guatemala caused by Hurricane Mitch.
Per share results include the dilutive effect of assumed conversion of preferred
and preference stock, convertible debentures and options 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.
-57-
Chiquita Brands International, Inc.
SELECTED FINANCIAL INFORMATION
(In thousands, except
per share amounts) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------
FINANCIAL CONDITION
Working capital $308,805 $300,348 $379,977 $366,893 $230,434
Capital expenditures 118,250 76,248 74,641 64,640 136,981
Total assets 2,509,133 2,401,613 2,466,934 2,623,533 2,774,239
Capitalization
Short-term debt 169,279 152,564 135,089 172,333 221,051
Long-term debt 1,002,606 961,972 1,079,251 1,242,046 1,364,836
Shareholders' equity 793,980 780,086 724,253 672,207 644,809
OPERATIONS
Net sales $2,720,361 $2,433,726 $2,435,248 $2,565,992 $2,505,826
Operating income 78,609 100,166 84,336 175,770 71,185
Income (loss) from
continuing operations (18,412) 343 (27,728) 27,969 (84,311)
Discontinued operations - - - (11,197) 35,611
Extraordinary loss from
debt refinancing - - (22,838) (7,560) (22,840)
Net income (loss) (18,412) 343 (50,566) 9,212 (71,540)
SHARE DATA
Shares used to calculate
diluted earnings (loss)
per common share 64,663 57,025 55,195 53,650 52,033
Diluted earnings (loss)
per common share:
- Continuing operations $(.55) $(.29) $(.72) $.37 $(1.76)
- Discontinued operations - - - (.21) .69
- Extraordinary items - - (.41) (.14) (.44)
- Net income (loss) (.55) (.29) (1.13) .02 (1.51)
Dividends per common share .20 .20 .20 .20 .20
Market price per common share:
High 16.00 18.00 16.38 18.00 19.25
Low 9.50 12.75 11.50 12.25 11.25
End of year 9.56 16.31 12.75 13.75 13.63
-58-
DIRECTORS, OFFICERS and SENIOR OPERATING MANAGEMENT
SENIOR OPERATING
BOARD OF DIRECTORS OFFICERS MANAGEMENT
- ----------------- ------------------- --------------
CARL H. LINDNER 1* CARL H. LINDNER 1* ROBERT F. KISTINGER
Chairman of the Board Chairman of the Board, President and Chief
Chief Executive Officer Chief Executive Officer Operating Officer
and Chairman of the and Chairman of the Chiquita Banana
Executive Committee Executive Committee Group
KEITH E. LINDNER 1* KEITH E. LINDNER 1* PETER A. HOREKENS
Vice Chairman of the Vice Chairman of the President and Chief
Board Board Operating Officer
Chiquita Banana
STEVEN G. WARSHAW 1 STEVEN G. WARSHAW 1 Group - Europe
President and Chief President and Chief
Operating Officer Operating Officer BENJAMIN PAZ
President and Chief
FRED J. RUNK * CARLA A. BYRON Operating Officer
Senior Vice President Vice President, Chiquita Banana
and Treasurer, Corporate Planning Group - North
American Financial America
Group, Inc. JOSEPH W. HAGIN II
Vice President, DENNIS M. DOYLE
JEAN HEAD SISCO 2,3 Corporate Affairs President - Far and
Partner in Sisco Middle East,
Associates JEFFREY T. KLARE Austral/Asia Region
(management Vice President,
consultants) Information Systems ANTHONY D. BATTAGLIA
President
WILLIAM W. VERITY 2,3 GERALD R. KONDRITZER Diversified Foods
Chairman and Chief Vice President and Group
Executive Officer, Treasurer
ENCOR Holdings, Inc.
(developer and manu- WARREN J. LIGAN
facturer of plastic Senior Vice President
molded components) and Chief Financial
Officer
OLIVER W. WADDELL 2,3
Retired Chairman, ROBERT W. OLSON
President and Chief Senior Vice President,
Executive Officer, General Counsel and
Star Banc Corporation Secretary
MICHAEL B. SIMS
1 Member of Executive Vice President,
Committee Investor Relations
2 Member of Audit
Committee WILLIAM A. TSACALIS
3 Member of Vice President and
Compensation Controller
Committee
STEVEN A. TUCKER
* Associated as a Vice President,
director or officer Internal Audit
of American Financial
Group, Inc. (engaged in
property and casualty
insurance and the sale
of annuities) which owns
approximately 37% of the
voting stock of Chiquita
Brands International,
Inc. as of February 26,
1999.
-59-
INVESTOR INFORMATION
- ----------------------------
STOCK EXCHANGE LISTINGS
- ----------------------------
New York, Boston and Pacific
STOCK SYMBOL
- ------------
CQB
SHAREHOLDERS OF RECORD
- -------------------------------------------------------------------
At February 26, 1999 there were 5,580 common shareholders of record.
TRANSFER AGENT AND REGISTRAR -
PREFERRED, PREFERENCE AND COMMON STOCK
- --------------------------------------
Chiquita Brands International, Inc.
c/o Securities Transfer Company
One East Fourth Street
Cincinnati, Ohio 45202
(513) 579-2414
(800) 368-3417
DIVIDEND REINVESTMENT
- -------------------------------------------------------------------
Shareholders who hold at least 100 common shares may increase their investment
in Chiquita shares through the Dividend Reinvestment Plan without payment of any
brokerage commission or service charge. Full details concerning the Plan may be
obtained from Investor Relations or the Transfer Agent.
ANNUAL MEETING
- ------------------------------
May 12, 1999
10 a.m. Eastern Daylight Time
Omni Netherland Plaza Hotel
35 West Fifth Street
Cincinnati, Ohio 45202
INVESTOR INQUIRIES
- -------------------------------------------------------------------
For other questions concerning your investment in Chiquita, contact Investor
Relations at (513) 784-6366
TRUSTEES AND TRANSFER AGENTS -
DEBENTURES/NOTES
- ------------------------------------------
7% Convertible Subordinated Debentures due
March 28, 2001
Trustee-
The Chase Manhattan Bank
450 West 33rd Street
New York, New York 10001
Transfer, Paying and Conversion Agents -
The Chase Manhattan Bank -
New York, New York
The Chase Manhattan Bank -
London, England
Banque Paribas Luxembourg S.A. -
Luxembourg
Banque Bruxelles Lambert S.A. -
Brussels, Belgium
Bank Leu, Ltd. -
Zurich, Switzerland
9 1/8% Senior Notes due March 1, 2004*
9 5/8% Senior Notes due January 15, 2004*
10 1/4% Senior Notes due November 1, 2006*
Trustee
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45263
* Chiquita Brands International, Inc., c/o Securities Transfer Company, is
transfer agent for these Notes.
-60-