 
2001 Annual Report
Notes to Consolidated Financial Statements (13-16)
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 adjustment in 2000 for depreciation was the result of the difference between the amount of depreciation calculated under the Modified Accelerated Cost Recovery System for tax purposes and the amount allowable under accounting principles generally accepted in the United States of America. In 2001, there was no such difference.
The valuation allowance relates to tax benefits on patronage-related expense items that are deductible for tax purposes in future years. The current year increase in the allowance reflects an increase in net deferred patronage assets, primarily related to the current year products-related charge to retained income.
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 $23.7 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: $7.4 million in 2010, $10.7 million in 2011, $433,000 in 2012, and $5.2 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.
Deferred taxes are included in trade payables and other accrued liabilities in the Company's Consolidated Statements of Financial Position and are comprised of the following components:
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 $1.7 million in 2001 and $1.5 in 2000. 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 did not record any net deferred compensation costs in 2001 due primarily to negative returns in the equity markets. Sunkist accrued deferred compensation costs totaling $786,000 in 2000. The accrued costs of the Sunkist Excess Benefits Retirement Plan were $343,000 in 2001 and $505,000 in 2000. In addition, the Company's contributions to the Match+ Savings Plan were $589,000 and $598,000 in 2001 and 2000, 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 $1.3 million and $1.4 million in 2001 and 2000, 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 $2.8 million in 2001 and $2.7 million in 2000.
Note 16. Additional Disclosures about the Financial Statements
Fair Value of Financial Instruments
Cash and cash equivalents, receivables, trade payables, short-term obligations, and long-term obligations - The carrying amounts of these items are a reasonable estimate of fair value due to the short-term nature or variable interest component of the instruments.
Investments - The fair value of the investments in marketable securities at October 31, 2001 and 2000 was $9.5 million and $10.4 million, respectively, and was determined based upon quoted market prices of investments.
Operating Assessments
At the beginning of each fiscal year, the Board 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 refundable are reported in payables to members - other in the Consolidated Statements of Financial Position.
Hedged Transactions
In 2001, Sunkist adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), as amended 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. The adoption of SFAS 133 did not have a material impact on the Company's financial statements.
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. As of October 31, 2001, the Company had 260 contracts outstanding, with a total contract value of $3.5 million. As of October 31, 2000, the Company had 550 contracts outstanding, with a total contract value of $6.7 million. A net gain of $3.1 million was recognized on hedging activities in 2001, compared to a net gain of $905,000 in 2000.
Other Current Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), but retains the fundamental provisions of SFAS 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. The provisions of SFAS 144 are effective in Sunkist's fiscal year ending October 31, 2003.
Sunkist's long-lived assets consist primarily of property and equipment. Such property and equipment is currently reviewed for impairment under the provisions of SFAS 121. The adoption of SFAS 144 is not expected to have a material impact on the Company's financial statements.
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