 
2001 Annual Report
Notes to Consolidated Financial Statements (1-4)
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 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, which is included in both the Consolidated Statements of Operations and Comprehensive Income (Loss) and the Consolidated Statements of Changes in Members' Equity. In addition, certain information in the consolidated financial statements for fiscal 2000 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.
Revenue Recognition
In July 2000, the Emerging Issues Task Force ("the EITF") issued EITF No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", which requires the Company to report its domestic fresh fruit sales revenue net of amounts remitted to its members. Sunkist has elected not to adopt the provisions of EITF 99-19 and continues to report its sales revenue based on the gross amount billed to the customer, believing that such reporting is a better reflection of business conducted on behalf of its members. Accounting for revenue and related costs on a net basis would have resulted in a decrease in both revenue and related costs of $536 million and $479 million for the years ended October 31, 2001 and 2000, respectively.
In 2001, Sunkist adopted the provisions of EITF 00-10, "Accounting for Shipping and Handling Fees and Costs". As a result, all amounts related to shipping and handling that are billed to a customer in a sale transaction are now classified as transportation revenue in the Company's Consolidated Statements of Operations and Comprehensive Income (Loss). In addition, related costs incurred for shipping and handling are classified as transportation expenses in the Consolidated Statements of Operations. Prior to 2001, Sunkist reported its shipping and handling costs net of any applicable shipping and handling amounts that were billed to customers. Prior year amounts have been reclassified to reflect this change in reporting.
In the marketing of its domestic fresh fruit, Sunkist offers sales incentives and rebates to customers that meet certain sales volume criteria. Prior to 2001, the Company classified sales volume incentives paid as operating expenses. In 2001, the Company changed the classification of sales volume incentives by recording such incentives as a reduction to domestic fresh fruit sales revenue. Prior year amounts have been reclassified to reflect this change in reporting. Such amounts totaled $2.7 million and $1.8 million in 2001 and 2000, respectively.
In 2001, the Company entered into a long-term sales agreement that requires Sunkist to make certain rebate payments over a period of 18 years. (See "Commitments and Contingencies" for additional information).
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 equal to approximately 50% of 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," 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 Income (Loss).
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 internal-use computer software projects; 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. Receivables - Trade and Other - net
The increase in fresh fruit receivables was primarily due to higher fresh fruit sales revenues in October of 2001, compared to October of 2000. Sales revenues during October of 2001 reflect higher sales prices for valencias and lemons, as compared to the same period in the prior year. The increase in fruit products receivables was due to higher sales volume in October of 2001, compared to sales of October 2000.
Licensing receivables are royalty fees due from third parties for the use of the SunkistŪ brand under the Company's trademark licensing program.
Under certain circumstances, packinghouses are allowed to borrow against their uncollected fruit shipments. Interest (6.5 percent at October 31, 2001) 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 2001, total operating assessments from the marketing pool and from various other special purpose pools established by the Board, netted against operating assessment refunds from the advertising pool, resulted in a net assessment receivable of $5.7 million as compared to $2.5 million at the end of fiscal 2000.
Other receivables decreased $3.1 million as of October 31, 2001, compared to October 31, 2000. Areas of reduction included a $1.1 million reduction in leased equipment and wax service receivables in the Company's Research and Technical Services division (the "Research Division") and a decline in receivables due to the Company's foreign subsidiaries from their customers.
Note 3. Inventory - net
The decrease in fruit products inventory at October 31, 2001 was primarily the result of adopting a more aggressive pricing strategy in 2001, leading to a more rapid turnover in inventory, and a reduction in fruit deliveries. Fruit products inventory included a total of $13 million and $25 million of gross fruit value at October 31, 2001 and 2000, respectively.
During fiscal 2001, the reserve for inventory write-down decreased by $3.5 million, due to a net reduction in reserves related to the valencia products inventory.
Note 4. 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. 115, "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 $739,000 of unrealized loss on investments in 2001, compared to $265,000 of unrealized gains in 2000. Investment losses and gains are significantly offset by decreases and increases in amounts due participants in the deferred compensation plan.
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.
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