Starbucks 2001 Annual Report Download - page 22

on the balance sheet at fair value.The accounting for changes in the fair value of derivative instruments
depends on the intended use and resulting designation.The Company designates its derivatives based
upon the criteria established by SFAS No. 133. For a derivative designated as a fair value hedge, the
gain or loss generated from the change in fair value is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item. For a derivative designated as a cash flow
hedge,the effective portion of the derivative’s gain or loss is initially reported as a component of other
comprehensive income (“OCI”) and subsequently reclassified into earnings when the hedged
exposure affects earnings. For a derivative designated as a net investment hedge, the effective portion
of the derivative’s gain or loss is reported as a component of the foreign currency translation
adjustment, a component of OCI. The ineffective portions of all derivatives are recognized
immediately into earnings. For a derivative not designated as a hedging instrument, the gain or loss is
recognized in earnings in the period of change.The Company classifies the cash flows from hedging
transactions in the same category as the cash flows from the respective hedged items.The adoption of
SFAS No. 133 did not have a material impact on the Company’s consolidated results of operations,
financial position or cash flows.
During the 52-week period ended September 30, 2001, the Company entered into forward foreign
exchange contracts that qualify as cash flow hedges under SFAS No. 133 to hedge a portion of
anticipated foreign currency denominated revenue. In accordance with SFAS No. 133, cash flow
hedges related to anticipated transactions are designated and documented at the inception of each
hedge by matching the terms of the contract to the underlying transaction.Once established,cash flow
hedges are generally not removed until maturity.The Company also entered into a forward foreign
exchange contract that qualifies as a hedge of a net investment in a foreign operation.These contracts
expire within 14 months and are intended to minimize certain foreign currency exposures that can
be confidently identified and quantified.
Forward contract effectiveness for cash flow hedges is calculated by comparing the fair value of the
contract to the change in value of the anticipated transaction using forward rates on a monthly basis.
Any ineffectiveness is recognized immediately in “Interest and other income, net” on the accompanying
consolidated statement of earnings.There was no ineffectiveness related to cash flow hedges for the 52-
week period ended September 30, 2001. For net investment hedges, the spot-to-spot method is used
by the Company to calculate effectiveness.As a result of using this method, net gains of $1.4 million
were recognized in earnings during the 52-week period ended September 30, 2001.
The Company had accumulated derivative gains of $1.3 million, net of taxes, in OCI as of September
30, 2001, related to cash flow and net investment hedges. Of this amount, $1.2 million is expected to
be reclassified into earnings within 12 months.
Note 6: Inventories
Inventories consist of the following (in thousands):
Sept 30, 2001 Oct 1, 2000
Coffee:
Unroasted $ 98,557 $ 90,807
Roasted 33,958 27,880
Other merchandise held for sale 63,458 59,420
Packaging and other supplies 25,280 23,549
Total $ 221,253 $ 201,656
As of September 30, 2001, the Company had fixed-price inventory purchase commitments for green
coffee totaling approximately $283.8 million.The Company believes,based on relationships established
with its suppliers in the past, that the risk of non-delivery on such purchase commitments is low.
Note 7: Joint Ventures
The Company has two joint ventures to produce and distribute Starbucks branded products. The
North American Coffee Partnership is a 50/ 50 joint venture partnership with the Pepsi-Cola
Company to develop and distribute bottled Frappuccino coffee drink. The Starbucks Ice Cream
Partnership is a 50/ 50 joint venture partnership with Dreyer’s Grand Ice Cream, Inc. to develop and
distribute premium ice creams.