 
2000 Annual Report
Notes to Consolidated Financial Statements
Note 1. Organizational Structure and
Significant Accounting Policies
Organizational Structure
Sunkist Growers, Inc. and Subsidiaries ("Sunkist" or
"the Company") is a membership corporation that acts as a
cooperative marketing association for its members. In such capacity, the Company acts as an exclusive agent
for the marketing of member fruit, including the administration of fresh fruit sales, as well as the processing and
sale of fruit products. Proceeds from fresh fruit sales are remitted to members, net of assessments for general
administrative and marketing expenses, as well as for advertising expenses.
Income or losses from activities other than the marketing of member fruit (such as from trademark licensing), net of applicable costs and expenses and income
tax, is retained or absorbed by Sunkist Such amounts are included in Unallocated Retained Earnings.
Principles of Consolidation
All material inter-company and inter-division transactions and balances have been eliminated in the consolidated financial statements of Sunkist Foreign currency
translation adjustments related to the operation of the Company's foreign subsidiaries are accumulated and
reported as a component of other comprehensive (loss) income, which is included in both the Consolidated
Statements of Operations and Comprehensive (Loss) Income and the Consolidated Statements of Changes
in Members' Equity. In addition, certain information in the consolidated financial statements for fiscal 1999 has
been reclassified for comparative purposes.
In preparing the consolidated financial statements, Management has made certain estimates and assumptions that affect certain amounts and disclosures
reported herein. Actual results could differ from those estimates and assumptions, although Management does not
believe that any differences would have a material effect on the Company's financial position or operating results.
Fruit Products
All of the products grade fruit received by Sunkist is accounted for under cooperative pooling principles, in
accordance with pooling plans established by the Board of Directors,
("the Board"). Payments on products fruit are generally made to members in at least two parts. The
first payment is an advance payment, and is made in the third month (sixth as to lemons) after fruit delivery. The
amount of the advance is based upon the projected market value of the fruit when delivered to the plant. The
second and normally the final part of the payment represents the net proceeds realized from the sales of products
less all costs incurred, including all advance payments. Final payments are made after most of the products have
been sold and the products pools settled and financially closed.
The market value of member fruit received for processing is included as part of fruit products inventory in
accordance with Statement of Position ("SOP") 85-3,
"Accounting by Agricultural Producers and Agricultural Cooperatives," as issued by the American Institute of
Certified Public Accountants. When such fruit inventory is sold, the fruit value is reflected as ~Payments on
products fruit delivered and sold" in the Consolidated Statements of Operations and Comprehensive (Loss)
Income.
Fruit products inventory is stated at the lower of fruit value, as described above, plus the average cost
incurred by Sunkist in producing products from its members' fruit, or market. Purchased ingredients and
materials and supplies, principally used in the production of fruit products, are stated at the lower of cost (on
a first-in, first-out basis) or market.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be
cash equivalents.
Receivables
Substantially all of the Company's trade receivables are related to the food industry~ The Company evaluates the
credit risk of its customers and, based on this evaluation, records an appropriate provision for bad debts. Bad
debts have historically been insignificant.
Property
Property is stated at cost. Depreciation and amortization are computed on the straight-line and declining-balance
methods at rates based upon the estimated useful lives of the assets. Such lives range from 3 to 50 years.
The Company reviews long-lived assets, such as plant and equipment, for impairment whenever events
or changes in circumstances indicate that the net book value of such assets may not be recoverable. This is in
accordance with Statement of Financial Accounting Standards No.121 'Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
In accordance with SOP 98-1, 'Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," Sunkist capitalizes certain internal and external costs incurred in the development of internal-use computer software. Such costs include external direct
costs of materials and services consumed in developing or obtaining internal-use computer software; internal
costs such as payroll and payroll-related costs for employees who are directly associated with and who
devote time to the internal-use computer software project; and interest costs incurred when developing
computer software for internal use. Amortization on capitalized software is computed using the straight-line method
over a five-year period.
Note 2. Cash and Cash Equivalents
At October 31, 1999, cash and cash equivalents included temporary investments amounting to $17.2 million.
Such level of investments was primarily due to the high level of fresh fruit payments that had been deferred as of
October 31, 1999, as requested by affiliated packing-houses. (See Note 7. "Short-term Obligations" for additional information).
Note 3. Receivables - Trade and Other - net
The decrease in fresh fruit receivables was primarily due to lower fresh fruit sales revenues in October of 2000,
compared to October of 1999. Sales revenues during October of 2000 reflect slightly higher sales volume,
offset by dramatically lower sales prices, as compared to the
same period in the prior year. In fiscal 1999, a shortage
of quality fruit due to a December 1998 freeze period led to significantly higher sales prices.
Licensing receivables are royalty fees due from third
parties for the use of the SUNKIST brand under the Company's trademark licensing program.
Under certain circumstances, packinghouses are allowed to borrow against their uncollected fruit
shipments. Interest (10.0 percent at October 31, 2000) is
charged on such loans and the amount of such borrowings varies from time to time, depending on the needs of
the respective packinghouses.
At the end of fiscal 2000, total operating assessments from various special purpose pools established by
the Board, netted against operating assessment refunds from the marketing, advertising and export pools,
resulted in a net assessment receivable of $2.5 million. At the
end of 1999, the result was a net operating assessment refund payable of $347,000. (See Note 9. "Payables to
Members" and Note 16. 'Additional Disclosures about the Financial Statements" for additional information).
Other receivables primarily include receivables
related to the Company's Research and Technical Services
division (the "Research Division"), receivables due to the
Company's foreign subsidiaries from their customers, and receivables related to hedging activities. (See Note
16. 'Additional Disclosures about the Financial Statements" for additional information regarding hedged
transactions).
Note 4. Inventory - net
The increase in fruit products inventory at October 31,
2000 was primarily the result of weak demand and a worldwide glut of orange concentrate. Fruit products
inventory included a total of $25 million and $16 million of gross fruit value at October 31, 2000 and 1999,
respectively.
During fiscal 2000, due to the poor quality
of Valencia not-from-concentrate products carried over from the
fiscal 1999 "freeze" year, the Board authorized the conversion into concentrate of most of this inventory. As a
result, the reserve for inventory write-down was increased $6.5 million to recognize the reduction in
value that had occurred since the product was initially produced in 1999.
Note
5. Investments
Marketable securities represent investments that are
being held in a fund principally to satisfy future retirement obligations to participants under the Company's
non-qualified deferred compensation plans. (See
Note 10. ~Long-term Obligations" for additional
information).
The investments are classified as "trading" securities
under Statement of Financial Accounting Standards No.
1 15, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS No.115") and are stated at
fair value as determined by quoted market prices. The
investments consist of a mutual fund that invests in
equity securities and a mutual fund that invests in debt
securities. The Company recorded $265,000 of unrealized gains on investments in 2000, compared to $1.2
million in 1999.
Sunkist Real Estate, Inc. ("SREI") is a joint venture
of Sunkist and Fruit Growers Supply Co. ("FGS"), each
of which owns a 50 percent interest in SREI. SREI provides real estate advisory services and financing to members and prospective members. Such services are made
available as a means of attracting additional citrus
acreage to and retaining existing acreage within the
Sunkist system.
The joint venture was initially capitalized by investments of $2.0 million each from Sunkist and
FGS. A
majority of the Board of Directors for Sunkist also serve
as board members for FGS. The investment is accounted
for under the equity method of accounting.
Note 6. Property - net
Depreciation and amortization expense was $7.3 million
for 2000 and $8.1 million for 1999.
In accordance with SOP 98-1, 'Accounting for the
Costs of Computer Software Developed or Obtained for
Internal Use," which the Company adopted in fiscal
2000, Sunkist capitalized $215,000 of certain internal
and external costs incurred in the development of internal-use computer software.
The Company's Research Division builds various
types of packinghouse machinery and equipment which
it leases to both member and non-member packinghouses. In addition, the Company leases excess office space at
its corporate headquarters location to various tenants.
All such leases are classified as operating leases under the
provisions of Statement of Financial Accounting
Standards No.13, "Accounting for Leases". Rental income recognized on these leases totaled $8.6 million
and $7.2 million in 2000 and 1999, respectively. At
October 31, 2000, the Company's minimum future
rental income on noncancelable operating leases, for the
years indicated, was as follows: $6.2 million for 2001;
$2.0 million for 2002; $1.8 million for 2003; $800,000
for 2004; and $100,000 for 2005. These minimum
future amounts do not include contingent rentals,
which may be received under certain leases of equipment
on the basis of the amount of fruit handled on such
equipment. Such income totaled $659,000 and
$394,000 in 2000 and 1999, respectively.
The Company's investment in equipment leased to
packinghouses subject to these operating leases totaled
$16 million as of October 31, 2000, and is included in
machinery, equipment, and fixtures in the above table.
Accumulated depreciation on such assets totaled $11
million as of October 31, 2000.
Note 7. Short-term Obligations
Short-term obligations outstanding as of October 31,
2000 and 1999 included $7.6 million and $20.3 million, respectively, relating to the Company's deferred
payment program, under which member and affiliated
packinghouses may request that the Company defer, on
a short-term basis, fruit and other payments that are
otherwise due them. Such future payments, and the
interest thereon (5.99 percent at October 31, 2000), are
made by the Company at the request of the respective
packinghouses.
The Company is authorized by its Board to utilize
short-term debt, including lines of credit with the
National Bank for Cooperatives ("CoBank") and several
commercial banks, up to a combined maximum amount
outstanding at any one time of $62.5 million. At
October 31, 2000, the Company had $17.4 million of
unsecured debt outstanding at an interest rate of 6.94%.
Note 8. Trade Payables and Other
Accrued Liabilities
Trade payables and accrued liabilities include various
outstanding payments due to the Company's vendors, its
trade partners, and various agencies as of October 31,
2000 and 1999. These payables and accrued liabilities
result primarily from the Company's normal operating
activities.
Note 9. Payables to Members
Fresh Fruit Proceeds
Fresh fruit sales revenues were lower in September and
October of 2000 compared to September and October
of 1999, resulting in a decrease in fresh fruit payables to members. Fresh fruit sales revenues totaled $72.0 million
in September and October of 2000, compared to a total
of $102.7 million in September and October of 1999.
Sales revenues during September and October of 2000
reflect dramatically lower sales prices as compared to the
same period in the prior year. In fiscal 1999, a shortage
of quality fruit due to a December 1998 freeze period
led to significantly higher sales prices.
Products Pools
Under the products pooling plan currently in effect, the
Company pays market value for fruit received from its
members, as estimated at the time of delivery thereof.
Upon closure of a pool, which occurs when a substantial
portion of the pool's inventory has been sold, a final settlement is made with respect to the difference between
actual pool earnings, calculated in accordance with the
pooling plan, and amounts previously paid. The total of
products pools payables to members outstanding at any
point in rime represents the sum of any delivery payments not yet remitted and the net earnings or losses in
the pools from products sold to that point in time. The
varietal components of products pools payables to members are shown in the following table:
The increase in payables to members in 2000 was primarily the result of a higher volume of lemon receipts as
well as a higher price paid for such fruit during the second half of fiscal 2000.
Other
Comments regarding allocated retained earnings and the
capital fund are contained in Note 11. "Members' Equity."
Net operating assessment refunds payable as of
October 31, 1999 reflects the net refund due to the
Company's grower-members in relation to settlement of
that year's marketing, and advertising assessments, as
well as for other special purpose pools established by the
Board. In 2000, all of these final pool settlements resulted in a net operating assessment receivable of $2.5
million outstanding as of October 31, 2000. (See Note 3.
"Receivables Trade and Other - net" and Note 16.
"Additional Disclosures about the Financial Statements"
for additional information).
Note 10. Long-term Obligations
The deferred compensation and pensions payable is primarily related to the liability to participants under the
Company's non-qualified deferred compensation plans.
(See also Note 5. "Investments"). The year-to-year
increase in the liability represents the excess of amounts
deferred in the current period and earnings on participants' accounts over payments made to retirees and
terminees.
The subsidiary company retirement benefits is the
Company's obligation to certain employees of Sunkist's
Japanese subsidiary. Payments are due to such employees
upon their separation from the subsidiary company.
Note 11. Members' Equity
Capital Fund
To provide a portion of the capital required to operate
Sunkist's business, a non-interest bearing fund is maintained through annual assessments against members' fruit
shipments. The Company's total capital requirements
from this source are determined annually by the Board.
Each member's capital obligation is determined based
upon the member's proportionate use of the facilities and
services furnished by Sunkist Once the member's proportionate assessment shares are calculated, each member's
capital fund obligation is determined. The capital fund
retention period is a rolling five-year period. As such, for
growers who have an existing five-year capital fund balance, the net assessment or refund in the sixth year will be
the difference between the sixth-year (current) assessment
and the first-year refund.
The amounts assessed and refunded, both in aggregate and for individual members, are based upon the following: 1) comparative volumes of fresh fruit marketed
and products fruit processed; 2) the assessment rates
applied to such volumes; and 3) the length of the capital
retention periods. The assessment rates and the length of
the retention periods are established by the Board and
have not changed for several years. The assessments are
applied on a per-carton or per-carton equivalent basis for
all grower fruit handled by Sunkist
Allocated Retained Earnings
This represents retained earnings that were allocated by
the Board in 1985 and 1986. The allocations were
accomplished by issuing non-qualified written notices of
allocation which are not taxable to the recipient until
redeemed in cash. Such allocations were made to members on the basis of relative equivalent carton volumes of
both fresh and products citrus fruit handled by Sunkist
for all members during the fiscal year corresponding to
the year of the income. Since the 1987 fiscal year,
retained earnings have not been allocated in the year in
which they have arisen, but they have instead been taken
into unallocated retained earnings.
During 2000, the Board authorized the redemption
of the entire balance of outstanding allocated retained
earnings, a total of $9.4 million. Of that amount, $7.5
million was paid out during 2000. The remaining balance of $1.9 million that was outstanding as of October
31, 2000 is included in "Payables to Members - Other"
in the Consolidated Statements of Financial Position,
pending ongoing efforts to locate the holders of the writ-
ten notices and the receipt of necessary tax reporting
information therefrom.
Unallocated Retained Earnings
Amounts include accumulated income derived from the
Trademark Licensing Division, the Research Division
and other non-member activities.
In addition, during fiscal 2000, the Board authorized a $9.2 million charge against current retained
income which consisted of a $6.5 million increase in the
fruit products inventory valuation reserve, (see Note 4.
"Inventory - net" for additional information), as well as
$2.7 million of member payments in excess of margins
earned relating to fruit delivered and sold during the
current year. The $2.7 million of excess member payments was a result of the Board's decision to pay a flat
rate per ton for Valencia fruit receipts rather than paying
based on the projected market value of the fruit when
delivered to the plant.
Note 12. Commitments and Contingencies
The Company is engaged in a number of lawsuits arising
from its normal business activities. In the opinion of
Management, the outcome of these matters will not have
a material adverse impact on the Company's financial
statements.
The Company has obligations under non-cancelable
operating leases, primarily for office facilities and certain
equipment. Total rent expense was $1.7 million for 2000
and $~.8 million for 1999. At October 31, 2000, the
Company's aggregate minimum rental commitments for
the years indicated were as follows: $3.5 million for
2001; $2.0 million for 2002; $1.8 million for 2003;
$1.7 million for 2004; and $1.5 million for 2005.
SREI has a short-term line-of-credit agreement with
CoBank. Sunkist and FGS provide CoBank with a continuing guaranty that each company would separately
assume responsibility for half of any unpaid obligations
of SREI under the credit agreement, up to a maximum
of $5 million each. SREI's obligation to CoBank was
$5.5 million at October 31, 2000.
Note 13. Income Taxes
Sunkist is taxable under the provisions of sub-chapter T of the Internal Revenue Code. Accordingly, income that
is derived from member sources is deductible for income
tax purposes upon distribution to members, whereas
income derived from non-member sources, such as
royalty income, is subject to tax regardless of whether
or not such income is so distributed.
Income tax expense, calculated in accordance
with Statement of Financial Accounting Standards
No.109, "Accounting for Income Taxes," consists of
the following:
Income tax expense differs from the amount that is computed by applying the statutory federal income tax rate
to retained income (loss) before income tax expense. The
difference is attributable to the following items:
The Company uses the Modified Accelerated Cost
Recovery System ("MACRS") for determining depreciation for both federal tax reporting and the determination
of member returns. The adjustment for depreciation is
the result of the difference between the amount of
depreciation calculated under the MACRS method and
that allowable under accounting principles generally
accepted in the United States of America.
The valuation allowance relates to tax benefits on
patronage-related items that are deductible for tax purposes in future years. The current year increase in the
allowance reflects an increase in deferred patronage
assets, primarily related to the $9.2 million
products-related charge against current retained income.
(See Note 11. "Members' Equity" for additional
information).
Non-deductible expenses consist of various ordinary
operating expenses that are not deductible for income
tax purposes. Other adjustments include prior year tax
adjustments and the impact of income generated by the
Company's foreign subsidiaries being taxed at rates
different than the federal rate.
The Company has $30.1 million of patronage net
operating loss carryforwards, which can be used to offset
future net taxable patronage income. If left unused, these
carryforwards will expire in the following amounts and
years: $12.7 million in 2010; $10.7 million in 2011;
$434,000 in 2012 and $6.3 million in 2020. The
patronage net operating loss carryforwards arose principally from timing differences in expense recognition
of member payments for tax and financial reporting
purposes.
Deferred taxes are recorded based upon differences
between the financial statement basis and tax basis of
certain assets and liabilities. These differences arise when
an item of income or expense is recognized in a different
period for accounting purposes than for
income tax purposes.
The components of deferred taxes are as follows:
Note 14. Retirement Plans and Other Benefits
The Company participates in a non-contributory,
defined benefit, multi-employer pension plan, the
Sunkist Retirement Plan-A ("the Plan"). The Plan provides retirement benefits for all eligible employees of
Sunkist and other participating companies and is funded
consistent with the funding requirements of federal law
and regulations. Benefits paid by the Plan are calculated
based on years of service, highest consecutive five-year
average earnings, retirement age, and the primary Social
Security benefit.
Service costs plus amortized actuarial gains and losses, net of earnings on Plan assets and interest costs, are
funded currently for the Plan. The Company contributed to the Plan and recognized pension expense of
$1.5 million in both 2000 and 1999. Plan assets are
invested in a group trust, consisting primarily of stocks
(domestic and international), bonds, real-estate trust
funds, short-term investment funds, and cash. Sunkist is
the largest participating employer in the Plan and constitutes approximately two-thirds of the active participants.
The Company sponsors several other plans that provide retirement and related benefits to the employees of
Sunkist and other related companies. The Deferred
Compensation Plan, the Match+ Savings Plan, the
Voluntary Investment Plan, and the SITRA Plan are all
defined contribution plans. The Company also sponsors
the Sunkist Excess Benefits Retirement Plan, which provides supplemental retirement income and survivor benefits to eligible employees of Sunkist.
The Company accrued deferred compensation costs
totaling $786,000 in 2000 and $1.1 million in 1999.
The accrued costs of the Sunkist Excess Benefits
Retirement Plan were $505,000 in 2000 and $245,000
in 1999. In addition, the Company's contributions to the Match+ Savings Plan were $598,000 and $589,000
in 2000 and 1999, respectively. No contributions have
been made to either the Voluntary Investment Plan or
the SITRA Plan since 1986.
The Products Hourly Retirement Plan, a defined
benefit plan, received Company contributions of $1.4
million and $738,000 in 2000 and 1999, respectively.
Note 15. Research and Development
The cost of research and development for both processed
products and fresh fruit operations is charged to the
Company's operations when incurred and amounted to
$2.7 million in 2000 and $2.8 million in 1999.
Note 16. Additional Disclosures about the
Financial Statements
Fair Value of Financial Instruments
Cash and
cash equivalents, receivables, trade payables, and
short-term obligations - The carrying
amounts of these items are a reasonable estimate of fair
value due to the short-term nature of the instruments.
Investments - The fair value of the investments in
marketable securities at October 31, 2000 and 1999
was $10.4 million and $9.6 million, respectively, and
was determined based upon quoted market prices of
investments.
>
Operating Assessments
At the beginning of each fiscal year, the B6ard determines fresh fruit assessment rates, on a per carton basis,
for the following expenses: 1) general administrative and
marketing; and 2) advertising and promotion. The
assessments are based upon the total budgeted expenditures and the anticipated shipments of fruit and are
applied to the actual number of cartons shipped
throughout the year. The dollar amount of the assessments are deducted from the sales proceeds of domestic
fruit and from the purchase price paid to members for
export fruit prior to such proceeds being remitted to the
members. The Board has also established special purpose
pools for operating assessment purposes, which include a
fresh fruit export pool, a special sales incentive compensation pool, a transportation services pool, and a pool
for the marketing of lemons during a particularly competitive time of the year. At the end of the year,
marketing and advertising assessments, along with the results of
the special purpose pools are settled with members.
Resulting net operating assessments receivable are reported in "Receivables - Trade and Other - net" and net
operating assessments payable are reported in "Payables
to Members - Other" in the Consolidated Statements of
Financial Position.
Hedged Transactions
In connection with certain sales of frozen concentrated
orange juice, the Company, at times, enters into commodity forward contracts to reduce the risk of future
price fluctuations. The forward contracts are accounted
for as hedges of specific inventory quantities. Accordingly, changes in market value are recognized as an
adjustment to the carrying value of the hedged items.
As of October 31, 2000, the Company had 550 contracts outstanding, with a total contract value of $6.7
million. As of October 31, 1999, the Company had 90
contracts outstanding, with a total contract value of $1.3 million. A net gain of $905,000 was recognized on
hedging activities in 2000, compared to a net gain of
$1.2 million in 1999. Such gains and losses are reflected
as increases or decreases to inventory.
In June 1998, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial
Accounting Standards No.133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 was amended in June 2000 by
Statement of Financial Accounting Standards No.138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" ("SFAS 138"). SFAS 133
and SFAS 138 provide a comprehensive framework for
accounting and reporting for derivative instruments and
hedging activities, which includes recognizing all derivative instruments as either assets or liabilities at fair value
in the statements of financial position. Sunkist is
required and expects to apply the provisions of these
accounting pronouncements no later than in its fiscal
2001 financial statements. The adoption of these pronouncements is not expected to have a material impact
on the Company's 2001 financial statements.
Other Current Accounting Pronouncements
Emerging Issues Task Force Issue No.99-19, ~~Reporting
Revenue Gross as a Principal versus Net as an Agent" ("EITF 99-19"), addresses the issue of whether a
company should report revenue based on (a) the gross amount
billed to a customer because it has earned revenue from
the sale of the goods or services or (b) the net amount
retained (that is, the amount billed to the customer less
the amount paid to a supplier) because it has earned a
commission or fee. Sunkist currently reports its sales revenues based on the gross amount billed to the customer.
In May 2000, the Emerging Issues Task Force ("the EITF ") reached a tentative conclusion, which the EITF
affirmed as a consensus in July 2000, that revenue recognition on a gross or net basis is a matter of
judgment that depends on relevant facts and circumstances and the
consideration of certain factors or indicators as outlined
by the EITF Management is in the process of considering such factors and indicators as outlined by the EITF
to determine the effect of this consensus on the
Company's financial statements. Sunkist is required to
apply the provisions of EITF 99-19 no later than in its
fiscal 2001 financial statements.
In July 2000, the EITF reached a consensus on Issue
No.00-10, "Accounting for Shipping and Handling Fees
and Costs" ("EITF 00-10"), that all amounts related to
shipping and handling that are billed to a customer in a
sale transaction represent revenues earned for the goods
provided and should be classified as revenue in the statement of operations. In addition, related costs incurred
for shipping and handling should be classified as expenses in the statement of operations. Sunkist currently
reports it's shipping and handling revenues net of any
applicable shipping and handling costs that are incurred. Shipping and handling revenues were $49.5 million and
$28.2 million in 2000 and 1999, respectively. Shipping
and handling costs were $75.7 million and $47.7 million in 2000 and 1999, respectively. Sunkist is required
and expects to apply the provisions of EITF 00-10 no
later than in its fiscal 2001 financial statements.
 |
