Starbucks 1999 Annual Report Download - page 10

To further reduce its exposure to rising coffee costs, the Company may, from time to time, enter
into futures contracts to hedge price-to-be-established coffee purchase commitments.The specific
risks associated with these activities are described below in “Financial Risk Management.”
In addition to fluctuating coffee prices, management believes that the Company’s future results
of operations and earnings could be significantly impacted by other factors such as increased
competition within the specialty coffee industry, the Company’s ability to find optimal store
locations at favorable lease rates, increased costs associated with opening and operating retail
stores and the Company’s continued ability to hire, train and retain qualified personnel.
FINANCIAL RISK MANAGEMENT
The Company maintains investment portfolio holdings of various issuers, types and maturities.
These securities are classified as available-for-sale and are recorded on the balance sheet at fair
value with unrealized gains or losses reported as a separate component of accumulated other
comprehensive income. As of October 3, 1999, approximately 76% of the total portfolio was
invested in short-term marketable debt securities with maturities of less than one year. An
additional 15% was invested in long-term U.S. Government obligations with maturities of 12 to
18 months and the remaining 9% was invested in marketable equity securities.The Company does
not hedge its interest rate exposure.
The Company is subject to foreign currency exchange rate exposure, primarily related to its
foreign retail operations in Canada and the United Kingdom. Historically, this exposure has had a
minimal impact on the Company. At the present time, the Company does not hedge foreign
currency risk, but may do so in the future.
The Company may, from time to time, enter into futures contracts to hedge price-to-be-fixed
coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations.
The Company does not hold or issue derivative instruments for trading purposes. In accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 80, “Accounting for Futures
Contracts,” these futures contracts meet the hedge criteria and are accounted for as hedges.
Accordingly, gains and losses are deferred and recognized as adjustments to the carrying value of
coffee inventory when purchased and recognized in results of operations as coffee products are sold.
Gains and losses are calculated based on the difference between the cost basis and the market value
of the coffee contracts.The market risk related to coffee futures is substantially offset by changes
in the costs of coffee purchased.
SEASONALITY AND QUARTERLY RESULTS
The Company’s business is subject to seasonal fluctuations. Significant portions of the Company’s
net revenues and profits are realized during the first quarter of the Company’s fiscal year, which
includes the December holiday season. In addition, quarterly results are affected by the timing of
the opening of new stores, and the Company’s rapid growth may conceal the impact of other
seasonal influences. Because of the seasonality of the Company’s business, results for any quarter
are not necessarily indicative of the results that may be achieved for the full fiscal year.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities”. This pronouncement will require
the Company to recognize derivatives on its balance sheet at fair value. Changes in the fair values
of derivatives that qualify as cash-flow hedges will be recognized in accumulated other
comprehensive income until the hedged item is recognized in earnings. The Company is in the
process of evaluating the impact of this new accounting standard and does not expect that it will
have a significant effect on its results of operations.The FASB subsequently issued SFAS No. 137,
“Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date
of FASB Statement No. 133”,which postpones initial application until fiscal years beginning after
June 15, 2000.The Company expects to adopt SFAS No. 133 in fiscal 2001.
.  STARBUCKS COFFEE COMPANY