 
2002 Annual Report
Notes to Consolidated Financial Statements (14-16)
Note 14. 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, 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 $20.0 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 $18.8 million and $14.2 million of applicable lemon oil as of October 31, 2002 and 2001, respectively, 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. Management monitors the price at which it can obtain products in comparison to the predetermined prices in order to assess potential loss. As of October 31, 2002, Management has determined that no liability should be recorded, as the agreements are not in a loss position. With respect to its sales agreement with one of the parties, Sunkist is obligated to pay that party a fixed amount of annual cash rebates throughout the life of the agreement. A rebate totaling $6.25 million was paid in March 2002. Future annual rebates range in amounts from $4.0 million to $6.5 million. In addition, as a condition for entering into the long-term agreement, Sunkist made a payment of $5.0 million in October 2001. This payment is being amortized over the life of the agreement and the unamortized amount is included in other assets in the Company's Consolidated Statements of Financial Position. All rebates paid in conjunction with this agreement are recorded as a reduction of fruit products sales revenue in the corresponding year of payment.
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. Subsequent to that date, a two-year notice by either party to terminate the agreement is required.
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 difficulty and requested that Sunkist help address the problem of unpaid health-provider claims, which total approximately $10.0 million. The health benefit plans offered by SGP have since been terminated and SGP has filed for bankruptcy protection. In October 2002, the trustee in bankruptcy for SGP ("the Trustee") filed a complaint seeking to recoup the losses of SGP. Sunkist was named as the lead defendant. Bankruptcy proceedings have identified approximately $7.0 million of insurance coverage in the name of SGP.
The Company is negotiating a potential settlement with the Trustee under which it will obtain a release of claims against it. In light of the potential settlement, the Trustee withdrew the original complaint and filed an amended complaint, which does not name Sunkist as a defendant in any of its causes of action. During 2002, the Company recognized a liability in an amount which Management has determined to be adequate to cover the potential settlement. The liability is included in trade payables and other accrued liabilities in the Company's Consolidated Statements of Financial Position.
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, and the matter noted above, 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 2009. Total rent expense was $3.4 million for 2002 and $3.5 million for 2001. At October 31, 2002, the Company's aggregate minimum rental commitments for the years indicated are as follows: $2.8 million for 2003; $2.6 million for 2004; $2.5 million for 2005; $2.1 million for 2006; $2.0 million for 2007; and $2.0 million for 2008 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 $3.75 million each. SREI's obligation to CoBank was $3.6 million at October 31, 2002.
Note 15. 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 is subject to tax regardless of whether or not such income is so distributed.
The income tax provision, calculated in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," consists of the following:
The income tax provision differs from the amount that is computed by applying the statutory federal income tax rate to retained income before income tax expense. The difference is attributable to the following items:
Non-deductible expenses consist of various ordinary operating expenses that are not deductible for income tax purposes. Other adjustments include the impact of income generated by the Company's foreign subsidiaries being taxed at rates different than the federal rate.
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.
The Company has $23.1 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: $7.4 million in 2010; $10.7 million in 2011; $433,000 in 2012; and $4.6 million in 2020. The patronage net operating loss carryforwards arose from timing differences of income and expense recognition. This is primarily due to the timing differences between members' payments for tax and financial reporting purposes.
Income taxes totaled a payable of $417,000 at October 31, 2002 and a receivable of $428,000 at October 31, 2001. Such amounts are included in trade payables and other accrued liabilities in the Company's Consolidated Statements of Financial Position.
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 income tax is included in trade payables and other accrued liabilities in the Company's Consolidated Statements of Financial Position and is comprised of the following components:
Note 16. 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 and $3.1 million, respectively, in 2002. The Company contributed to the Plan and recognized pension expense of $1.7 million in 2001. 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.
Due to poor investment performance over the past several years, the actuarial present value of the benefit obligations of the Plan is substantially in excess of the plan assets currently available for such obligations as of October 31, 2002. As of October 31, 2002, the Company's estimated portion of the accumulated benefit obligation in excess of plan assets totaled $28.4 million. Such liabilities are not recorded in the Company's financial statements. This is in accordance with the accounting requirements for a multi-employer pension plan as specified in Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" ("SFAS 87").
The Company also provides retirement benefits to hourly employees of its Processed Products division through the Products Hourly Retirement Plan, a single-employer defined benefit plan ("the Hourly Plan"). The following disclosure sets forth the funded status of the Hourly Plan and the net accrued pension liability as of the October 31, 2002 and 2001 measurement dates. For 2001, the Company has recognized the additional pension liability as a $3.9 million charge against other comprehensive income. In 2002, the Company recognized additional pension liability as a $2.2 million charge against other comprehensive income. The pension liability is included in long-term obligations in the Company's Consolidated Statements of Financial Position. An intangible asset, equal to unrecognized prior service costs totaling $1.1 million and $1.2 million, is included in other assets in the Company's Consolidated Statements of Financial Position as of October 31, 2002 and 2001, respectively.
The following assumptions were used in determining the actuarial present value of the projected benefit obligation:
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 did not record any net deferred compensation costs in either 2002 or 2001 due primarily to negative returns in the equity markets. In addition, the Company's contributions to the Match+ Savings Plan were $547,000 and $589,000 in 2002 and 2001, respectively. No contributions have been made to either the Voluntary Investment Plan or the SITRA Plan since 1986.
The Company also sponsors the Sunkist Excess Benefits Retirement Plan ("the SERP"), which provides supplemental retirement income and survivor benefits to eligible employees of Sunkist. The SERP is funded through a separate trust account. Assets held in the trust account are available to the general creditors of the Company. Contributions to this plan are generally based on funding to approximate the accumulated benefit obligation. No contributions were made to this plan in 2002 or 2001. The periodic pension cost of the SERP was $448,000 in 2002 and $343,000 in 2001. As of October 31, 2002, the accumulated benefit obligation of $2.5 million was fully recognized in the Company's Consolidated Statements of Financial Position. The benefit obligation of $2.5 million exceeded trust assets allocated to the SERP by $860,000.
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