Starbucks 2002 Annual Report Download - page 19

33
The Company’s valuations are based upon a multiple option
valuation approach, and forfeitures are recognized as they
occur. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective assumptions, including the expected stock-price
volatility. The Company’s employee stock options have
characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can
materially affect the fair value estimate. Because Company
stock options do not trade on a secondary exchange,
employees can receive no value nor derive any benefit from
holding stock options under these plans without an increase,
above the grant price, in the market price of the Company’s
stock. Such an increase in stock price would benefit all
stockholders commensurately.
As required by SFAS No. 123, the Company has determined
that the weighted average estimated fair values of options
granted during fiscal 2002, 2001 and 2000 were $6.48, $8.98
and $5.37 per share, respectively.
In applying SFAS No. 123, the impact of outstanding stock
options granted prior to 1996 has been excluded from the pro
forma calculations; accordingly, the 2002 pro forma
adjustments are not necessarily indicative of future period pro
forma adjustments.
Defined Contribution Plan
Starbucks maintains voluntary defined contribution plans
covering eligible employees as defined in the plan documents.
Participating employees may elect to defer and contribute a
portion of their compensation to the plan up to plan limits of
approximately 19%, not to exceed the dollar amounts set by
applicable laws. Effective January 1, 2003, participating
employees may elect to defer and contribute up to 50% of their
compensation. For certain plans, the Company matched 25%
of each employee’s eligible contribution up to a maximum of
the first 4% of each employee’s compensation. Beginning
April 1, 2002, the Company’s matching contributions for the
majority of its plans were increased to a maximum of 150%,
depending on participants’ years of service.
The Company’s matching contributions to all plans were
approximately $3.1 million, $1.6 million and $1.1 million in
fiscal 2002, 2001 and 2000, respectively.
Note 13: Income Taxes
A reconciliation of the statutory federal income tax rate with
the Company’s effective income tax rate is as follows:
Fiscal year ended Sept 29, Sept 30, Oct 1,
2002 2001 2000
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.4 3.8 3.7
Valuation allowance change
from prior year (0.9) 0.9 3.5
Other, net (0.5) (2.4) (1.1)
Effective tax rate 37.0% 37.3% 41.1 %
The provision for income taxes consists of the following
(in thousands):
Fiscal year ended Sept 29, Sept 30, Oct 1,
2002 2001 2000
Currently payable:
Federal $ 109,154 $ 91,750 $ 70,157
State 16,820 17,656 12,500
Foreign 5,807 3,198 1,601
Deferred tax asset, net (5,468) (4,892) (18,252)
Total $ 126,313 $ 107,712 $ 66,006
Deferred income taxes or tax benefits reflect the tax effect of
temporary differences between the amounts of assets and
liabilities for financial reporting purposes and amounts as
measured for tax purposes. The Company will establish a
valuation allowance if it is more likely than not these items will
either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain. Periodically,
the valuation allowance is reviewed and adjusted based on
management’s assessments of realizable deferred tax assets.The
valuation allowance as of September 29, 2002, was related to
losses from investments in majority-owned foreign
subsidiaries; the valuation allowance as of September 30, 2001,
was related to losses from investments in majority-owned
foreign subsidiaries and from Internet-related companies.The
tax effect of temporary differences and carryforwards that
cause significant portions of deferred tax assets and liabilities is
as follows (in thousands):
Sept 29, Sept 30,
2002 2001
Deferred tax assets:
Equity and other investments $ 14,026 $ 3,784
Capital loss carryforwards 6,077 17,448
Accrued occupancy costs 14,597 12,317
Accrued compensation and related costs 12,726 9,898
Other accrued expenses 16,608 7,245
Foreign tax credits 10,199 5,199
Other 6,971 164
Total 81,204 56,055
Valuation allowance (5,476) (8,704)
To tal deferred tax asset, net
of valuation allowance 75,728 47,351
Deferred tax liabilities:
Property, plant and equipment (50,819) (34,260)
Other (5,199) (355)
Total (56,018) (34,615)
Net deferred tax asset $ 19,710 $ 12,736
As of September 29, 2002, the Company had foreign tax credit
carryforwards of $10.2 million with expiration dates between
fiscal years 2004 and 2008.The Company also had capital loss
carryforwards of $15.8 million expiring in 2006.
Taxes currently payable of $32.8 million and $50.3 million are
included in “Accrued taxes” on the accompanying
consolidated balance sheets as of September 29, 2002, and
September 30, 2001, respectively.
The fair value of stock-based awards to employees is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Employee Stock Options Employee Stock Purchase Plan
2002 2001 2000 2002 2001 2000
Expected life (years) 2 – 5 2 – 5 2 – 6 0.25 0.25 0.25
Expected volatility 43% – 54% 57% 55% 33% – 51% 41% – 49% 42% – 82%
Risk-free interest rate 1.63% – 4.96% 2.37% – 5.90% 5.65% – 6.87% 1.93% – 2.73% 2.35% – 4.68% 5.97% – 6.40%
Expected dividend yield 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%