Sunkist - About

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 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 income (loss). In addition, certain information in the consolidated financial statements for fiscal 2001 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.

In 2002, Sunkist entered into a lease agreement with a Special Purpose Entity ("SPE") that was formed to act as the owner and lessor of a juice products storage facility ("tank farm") in addition to being the sub-lessor of the real property, owned by a third party, upon which the tank farm was constructed. Sunkist is the sole lessee. Emerging Issues Task Force ("EITF") 90-15, "Impact of Non-substantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions," requires that a lessee consolidate a special-purpose entity lessor when certain conditions exist as follows: (1) substantially all of the activities of the SPE involve assets that are to be leased to a single lessee; (2) the expected substantive residual risks and substantially all the residual rewards of the leased asset(s) and the obligation imposed by the underlying debt of the SPE reside directly or indirectly with the lessee; and (3) the owner(s) of record of the SPE has not made an initial substantive residual equity capital investment that is at risk during the entire term of the lease.

As the above conditions exist with respect to the Company's arrangement with the SPE, the assets, liabilities, and results of operations of the SPE have been consolidated with the accounts of Sunkist. (See Note 7. "Property - net" and Note 12. "Long-term Obligations" for additional information).

Revenue Recognition
EITF 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent," requires the Company to report certain 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 $632 million and $630 million for the years ended October 31, 2002 and 2001, respectively.

In accordance with the provisions of EITF 00-10, "Accounting for Shipping and Handling Fees and Costs," all amounts related to shipping and handling that are billed to a customer in a sale transaction are classified as transportation revenue in the Company's Consolidated Statements of Operations and Comprehensive (Loss) Income. In addition, related costs incurred for shipping and handling are classified as transportation expenses in the Consolidated Statements of Operations and Comprehensive (Loss) Income.

In the marketing of its domestic fresh fruit, Sunkist offers sales incentives and rebates to customers that meet certain sales volume criteria. The value of such incentives paid is recorded as a reduction to domestic fresh fruit sales revenue. Such amounts totaled $2.1 million and $2.7 million in 2002 and 2001, 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 Note 14. "Commitments and Contingencies" for additional information).

Advertising Expenses
The Company's policy is to expense advertising costs as incurred.

Comprehensive (Loss) Income
Accounting principles generally require that recognized revenues, expenses, gains and losses be included in retained income. However, certain changes in assets and liabilities, such as the recognition of additional pension liability as well as foreign currency translation adjustments, are reported as a separate component of members' equity.

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." 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. Management periodically evaluates the adequacy of the reserve for inventory write-down.

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. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."

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.