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2001 Annual Report
Notes to Consolidated Financial Statements (9-12)
Note 9. Payables to Members
Fresh Fruit Proceeds
Fresh fruit sales revenues were higher in September and October of 2001 compared to September and October of 2000, resulting in an increase in fresh fruit payables to members. Fresh fruit sales revenues totaled $92.7 million in September and October of 2001, compared to a total of $72.0 million in September and October of 2000. Sales revenues during September and October of 2001 reflect higher sales prices as compared to the same period in the prior year.
Product Pools
Under the products pooling plan currently in effect, the Company makes an initial payment of approximately 50% of market value for fruit received from its members, as estimated at the time of delivery. 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 product pools payables to members outstanding at any point in time represents the sum of any delivery payments not yet remitted, the net earnings or losses in the pools from products sold to that point in time and costs incurred on inventory that will be sold in subsequent years. The varietal components of product pools payables to members are shown in the following table:
The decrease in payables to members in 2001 was primarily the result of a lower price paid to members and a lower volume of valencia and lemon receipts.
Other
Comments regarding allocated retained earnings and the capital fund are contained in Note 11. "Members' Equity."
Note 10. Long-term Obligations
At October 31, 2001, the Company had $20 million of long-term borrowings outstanding under an unsecured revolving term loan agreement. Proceeds from such borrowings were used to finance the initial purchase of lemon oil under an agreement with several outside parties. (See Note 12. "Commitments and Contingencies" for additional information). The borrowings are to be paid in two equal installments of $10 million, due on January 20, 2005 and January 20, 2006, exclusive of interest charged at a rate indexed to the London Interbank Offered Rate ("LIBOR") plus a margin of 50 basis points. Such interest is paid monthly.
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 4. "Investments"). The year-to-year decrease in the liability represents the excess of losses on participants' accounts and payments made to retirees and terminees over amounts deferred in the current period.
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 are applied on a per-carton or per-carton equivalent basis for all grower fruit handled by Sunkist.
During fiscal 2001, the Board voted to suspend the capital fund assessment for the 2002 fiscal year. Under the current rolling 5-year retention period, such action will result in a refund of each member's fiscal 1997 capital fund assessment. As a result, members' equity is expected to decrease by approximately $769,000 in fiscal 2002.
Allocated Retained Earnings
In the 1980's, retained earnings were allocated by the Board to members based upon that proportionate volume of fruit handled each year by Sunkist. The allocations were accomplished by issuing non-qualified written notices of allocation which were not taxable to the recipients until redeemed in cash. 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 remaining outstanding allocations, a total of $9.4 million. Of that amount, $7.5 million was paid out during fiscal 2000 and $43,000 was paid in fiscal 2001. The remaining balance of $1.9 million is included in payables to members - other in the Consolidated Statements of Financial Position, pending ongoing efforts to locate the holders of the written 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 2001, a charge was made against current retained income to increase the fruit products inventory valuation reserve by $3.4 million. (See Note 3. "Inventory - net" for additional information). In 2000, a charge of $9.2 million was made against retained income. This charge was comprised of a $6.5 million increase in the fruit products inventory valuation reserve as well as $2.7 million of member payments in excess of margins earned relating to fruit delivered and sold. 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
In October 2001, the Company entered into a series
of long-term agreements with several outside parties that involve the sale and purchase of various forms of fruit products. The first such arrangement requires Sunkist to purchase, during calendar 2001 on behalf of one of its major customers, up to a certain quantity of lemon oil from two grower-processors at an amount totaling approximately $20 million. As part of the arrangement, Sunkist will sell, by no later than each of December 31, 2004 and December 31, 2005, one-half of the purchased lemon oil to the aforementioned customer at Sunkist's actual cost, excluding interest, with payment to be made to Sunkist within 45 days after each respective year-end.
In connection with the arrangement noted above, Sunkist had purchased $14.2 million of applicable lemon oil as of October 31, 2001, which is reflected in other assets in the Company's Consolidated Statements of Financial Position.
Other long-term agreements entered into separately between Sunkist and two multinational manufacturers are for Sunkist to sell to such customers, on an annual basis beginning in calendar 2002 and ending in calendar 2018, a fixed amount of fruit products inventory at predetermined prices. With respect to its sales agreement with one of the parties, Sunkist is obligated to pay that party a fixed amount of cash rebates on an annual basis, beginning in October 2001 and ending in March 2018. Such rebates range in amounts from $4 million to $6.5 million. Sunkist made a payment of $5 million in
October 2001. As no sales revenues have been realized under this agreement during fiscal 2001, against which to offset the rebate payment, this payment represents a deferred cost and, as such, is included in other assets in the Company's Consolidated Statements of Financial Position. This payment will be amortized over the life of the agreement and all future rebates paid in conjunction with this agreement will be recorded as a reduction of fruit products sales revenue in the corresponding year of sale.
Under a separate cooperative arrangement entered into in September 2001, Sunkist has agreed to supply a distributor of juice and related products with various citrus juices and citrus drink base for use in the distributor's products. The needs of the distributor and the supply of products to be provided by Sunkist will be determined by annual sales and supply forecasts provided by each respective party. Notwithstanding the foregoing, the projections, volumes and other data in the forecasts are not legally binding commitments. Sunkist's net proceeds under this arrangement will be based on the net profits realized on the sale of the supplied juice products. The agreement expires in 2006 and a two-year notice by either party to terminate the agreement is required.
As a means of fulfilling the supply commitments as indicated above, Sunkist has initiated discussions to lease a storage facility ("tank farm") that will have a storage capacity of up to 6 million gallons of juice products. Payments on the lease are expected to commence in April 2003 and end in October 2006. The total amount of the minimum lease payments over this period is expected to be approximately $16 million.
Sunkist had a trademark licensing agreement with SGP Benefit Plan, Inc. and SGP Benefit Plan Trust (collectively "SGP"). As a nonprofit health benefit organization, SGP offered self-funded health benefit plans to individuals engaged in agriculture. The licensing agreement allowed SGP to use the Sunkist name in exchange for royalty revenues.
In August 2001, SGP management informed Sunkist that it was in severe financial difficulties and requested that Sunkist help address the problem of unpaid health-provider claims, which total an estimated $10 million. The health benefit plans offered by SGP have since been terminated. Failure to satisfy the health-provider claims may lead to actions by the health providers against various parties, possibly including Sunkist. In addition, it is possible that certain defendants in such actions might cross-complain against Sunkist or that the California Department of Insurance might initiate legal action against the Company. To the Company's knowledge, no such claims have been asserted to date.
The Company believes that it has no liability or responsibility with respect to any of these claims, and as such, the Company intends to defend itself vigorously against any such claims.
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, that expire at various dates through 2008. Total rent expense was $3.5 million for 2001 and $3.0 million for 2000. At October 31, 2001, the Company's aggregate minimum rental commitments for the years indicated are as follows: $3.6 million for 2002; $3.4 million for 2003; $3.2 million for 2004; $3.1 million for 2005; $2.8 million for 2006 and $2.9 million for 2007 and thereafter.
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 $4.4 million at October 31, 2001.
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