Starbucks 2001 Annual Report Download - page 9

Fiscal 2001 Annual Report 25
Japan,Ltd.had 154 stores open as of October 1,2000, compared to 82 stores open as of October 3,1999.
The increase was also due to the improved profitability of the North American Coffee Partnership
attributed to increased sales volume resulting from expansion of its product line and geographic
distribution, as well as improvements in cost of goods sold primarily due to manufacturing efficiencies.
Internet-related Investment Losses
During fiscal 2000 and 1999, the Company made several minority investments in companies that
derive the majority of their revenue from Internet-related activities.
In fiscal 1999, the Company invested $8.0 million in Talk City, Inc. (“Talk City”), a publicly traded
interactive online chat site. The Company also invested $20.3 million in living.com Inc.
(“living.com”), an online furniture retailer. Also in fiscal 1999, the Company established an alliance
with Cooking.com, Inc. (“Cooking.com”), a privately held Web-based retailer of cookware,
accessories and specialty foods and provider of information about cooking.As part of this alliance, the
Company made a $10.0 million investment in Cooking.com.
In the second quarter of fiscal 2000, the Company invested $25.0 million in Kozmo.com, an Internet-
to-door delivery service for food, entertainment and convenience items. Starbucks and Kozmo.com
also entered into a commercial agreement to provide in-store return boxes in Starbucks stores in
exchange for cash, a channel for selling the Company’s products and other marketing opportunities.
In connection with this agreement, Starbucks received a $15.0 million payment that was recognized
as revenue on a straight-line basis over twelve months.
During the fourth quarter of fiscal 2000, the Company determined that its investments in Internet-
related companies had suffered declines in value that were other than temporary because of the
sustained weak condition of the Internet industry as reflected in the bankruptcy or liquidation
proceedings of numerous comparable companies and the significant decline in stock market valuation
of the sector, the declining financial condition of each company in which the Company had invested,
the unfavorable prospects of such companies obtaining additional funding, and the length of time and
extent to which the quoted market values had been less than cost for publicly traded companies.The
Company determined the aggregate fair value for privately held investments by using a variety of
methodologies, including comparing each security with securities of publicly traded companies in
similar lines of business,applying revenue multiples to estimated future operating results and estimating
discounted cash flows. Quoted market prices were used for publicly traded equity securities to
determine fair value.As a result, the Company recognized losses totaling $58.8 million to reduce its
investments in living.com,Talk City, Cooking.com and Kozmo.com to their aggregate fair value of
$4.8 million as of October 1, 2000.
Income Taxes
The Company’s effective tax rate for fiscal 2000 was 41.1% compared to 38.0% for fiscal 1999.The
increase is due in part to the establishment of a valuation allowance against a portion of the deferred
tax benefit resulting from Internet-related investment losses which management has determined may
ultimately not be realizable for tax purposes.
Liquidity and Capital Resources
The Company ended fiscal 2001 with $220.5 million in cash and cash equivalents and short-term
investments.Working capital as of September 30,2001,totaled $148.7 million compared to $146.6 million
at October 1, 2000. Cash and cash equivalents increased by $42.4 million during fiscal 2001 to $113.2
million at September 30, 2001.This increase was in addition to an increase in short-term investments of
$46.0 million during the same period.The Company intends to use its available cash resources to invest
in its core businesses and other new business opportunities related to its core businesses.
Cash provided by operating activities for fiscal 2001 totaled $460.8 million and resulted primarily from
net earnings and non-cash charges of $381.4 million.The increase in accounts payable contributed
$54.1 million primarily due to the timing of payments and the buildup of holiday inventory for a
larger number of Company-operated stores.The increase in accrued taxes contributed $34.5 million
primarily due to the extension of the deadline for quarterly income tax payments from September
15, 2001, to October 1, 2001. In addition, the increase in accrued compensation and related costs