Starbucks 2003 Annual Report Download - page 16

28฀ Fiscal฀2003฀Annual฀Report
Fiscal฀2003฀Annual฀Report฀ 29
provided฀ on฀ the฀straight-line฀ method฀ over฀ estimated฀ useful฀
lives,฀generally฀ranging฀from฀two฀to฀seven฀years฀for฀equipment฀
and฀ 30฀ to฀ 40฀ years฀ for฀ buildings.฀ Leasehold฀ improvements฀
are฀amortized฀over฀the฀shorter฀of฀their฀estimated฀useful฀lives฀
or฀ the฀ related฀ lease฀ life,฀ generally฀ 10฀ years.฀ The฀ portion฀ of฀
depreciation฀ expense฀ related฀ to฀ production฀ and฀ distribution฀
facilities฀is฀included฀in฀“Cost฀of฀sales฀and฀related฀occupancy฀
costs”฀ on฀ the฀ accompanying฀ consolidated฀ statements฀ of฀
earnings.฀The฀costs฀of฀repairs฀and฀maintenance฀are฀expensed฀
when฀ incurred,฀ while฀ expenditures฀ for฀ refurbishments฀
and฀ improvements฀ that฀ significantly฀ add฀ to฀ the฀ productive฀
capacity฀or฀extend฀the฀useful฀life฀of฀an฀asset฀are฀capitalized.฀
When฀ assets฀ are฀ retired฀ or฀ sold,฀ the฀ asset฀ cost฀ and฀ related฀
accumulated฀depreciation฀are฀eliminated฀with฀any฀remaining฀
gain฀or฀loss฀reflected฀in฀net฀earnings.฀
Goodwill฀and฀Other฀Intangible฀Assets
At฀ the฀ beginning฀ of฀ fiscal฀ 2003,฀ Starbucks฀ adopted฀ SFAS฀
No.฀142,฀“Goodwill฀and฀Other฀Intangible฀Assets.”฀As฀a฀result,฀
the฀Company฀discontinued฀amortization฀of฀its฀goodwill฀and฀
indefinite-lived฀ trademarks฀ and฀ determined฀ that฀ provisions฀
for฀ impairment฀ were฀ unnecessary.฀ Impairment฀ tests฀ are฀
performed฀ annually฀ on฀ June฀ 1฀ and฀ more฀ frequently฀ if฀ facts฀
and฀circumstances฀indicate฀goodwill฀carrying฀values฀exceed฀
estimated฀reporting฀unit฀fair฀values฀and฀if฀indefinite฀useful฀lives฀
are฀no฀longer฀appropriate฀for฀the฀Company’s฀trademarks.฀Had฀
the฀nonamortization฀provision฀of฀SFAS฀No.฀142฀been฀applied฀
to฀fiscal฀2002฀and฀fiscal฀2001,฀net฀earnings฀would฀have฀been฀
$214.7฀million฀and฀$182.2฀million,฀respectively,฀as฀compared฀
to฀ reported฀ net฀ earnings,฀ as฀ shown฀ in฀ Note฀ 2,฀ of฀ $212.7฀
million฀ and฀ $180.3฀million,฀ respectively.฀ Basic฀ earnings฀ per฀
share฀for฀fiscal฀2002฀would฀have฀increased฀to฀$0.56฀per฀share฀
from฀$0.55฀per฀share,฀while฀diluted฀earnings฀per฀share฀would฀
have฀remained฀unchanged.฀Basic฀earnings฀per฀share฀for฀fiscal฀
2001฀would฀have฀increased฀to฀$0.48฀per฀share฀from฀$0.47฀per฀
share,฀while฀diluted฀earnings฀per฀share฀would฀have฀remained฀
unchanged.฀Definite-lived฀intangibles,฀which฀mainly฀consist฀
of฀ contract-based฀ patents฀ and฀ copyrights,฀ are฀ amortized฀
over฀their฀estimated฀useful฀lives.฀For฀further฀information฀on฀
goodwill฀and฀other฀intangible฀assets,฀see฀Note฀9.
Long - lived฀Assets฀
When฀ facts฀ and฀ circumstances฀ indicate฀ that฀ the฀ carrying฀
values฀of฀long-lived฀assets฀may฀be฀impaired,฀an฀evaluation฀of฀
recoverability฀is฀performed฀by฀comparing฀the฀carrying฀value฀
of฀the฀assets฀to฀projected฀future฀cash฀flows฀in฀addition฀to฀other฀
quantitative฀ and฀ qualitative฀ analyses.฀ Upon฀ indication฀ that฀
the฀carrying฀value฀of฀such฀assets฀may฀not฀be฀recoverable,฀the฀
Company฀recognizes฀an฀impairment฀loss฀by฀a฀charge฀against฀
current฀operations.฀Property,฀plant฀and฀equipment฀assets฀are฀
grouped฀ at฀ the฀ lowest฀ level฀ for฀ which฀ there฀ are฀ identifiable฀
cash฀flows฀when฀assessing฀impairment.฀Cash฀f lows฀for฀retail฀
assets฀are฀identified฀at฀the฀individual฀store฀level.฀
Insurance฀Reserves
The฀ Company฀ uses฀ a฀ combination฀ of฀ insurance฀ and฀ self-
insurance฀mechanisms฀to฀provide฀for฀the฀potential฀liabilities฀for฀
workers’฀compensation,฀general฀liability,฀property฀insurance,฀
director฀and฀officers’฀liability฀insurance,฀vehicle฀liability฀and฀
employee฀health฀care฀benefits.฀Liabilities฀associated฀with฀the฀
risks฀that฀are฀retained฀by฀the฀Company฀are฀estimated,฀in฀part,฀
by฀ considering฀ historical฀ claims฀ experience,฀ demographic฀
factors,฀severity฀factors฀and฀other฀actuarial฀assumptions.฀The฀
estimated฀ accruals฀ for฀ these฀ liabilities฀ could฀ be฀ significantly฀
affected฀ if฀ future฀ occurrences฀ and฀ claims฀ differ฀ from฀ these฀
assumptions฀ and฀ historical฀ trends.฀ As฀ of฀ September฀ 28,฀
2003,฀ and฀ September฀ 29,฀ 2002,฀ these฀ reserves฀ were฀ $51.6฀
million฀ and฀ $33.1฀ million,฀ respectively,฀ and฀ were฀ included฀
in฀ “Accrued฀ compensation฀ and฀ related฀ costs”฀ and฀ “Other฀
accrued฀expenses”฀on฀the฀consolidated฀balance฀sheets.
Revenue฀Recognition
In฀most฀instances,฀retail฀store฀revenues฀are฀recognized฀when฀
payment฀ is฀ tendered฀ at฀ the฀ point฀ of฀ sale.฀ Revenues฀ from฀
stored฀ value฀ cards฀ are฀ recognized฀ upon฀ redemption.฀ Until฀
the฀ redemption฀ of฀ stored฀ value฀cards,฀ outstanding฀ customer฀
balances฀ on฀ such฀ cards฀ are฀ included฀ in฀ “Deferred฀ revenue”฀
on฀the฀accompanying฀ consolidated฀ balance฀sheets.฀Specialty฀
revenues,฀ which฀ consist฀ of฀ sales฀ of฀ coffee฀ and฀ tea฀ products฀
to฀ customers฀ other฀ than฀ through฀ Company-operated฀ retail฀
stores,฀are฀generally฀recognized฀upon฀shipment฀to฀customers,฀
depending฀ on฀ contract฀ terms.฀ Initial฀ non-refundable฀ fees฀
required฀ under฀ licensing฀ agreements฀ are฀ earned฀ upon฀
substantial฀performance฀of฀ services.฀ Royalty฀revenues฀ based฀
upon฀ a฀ percentage฀ of฀ sales฀ and฀ other฀ continuing฀ fees฀ are฀
recognized฀ when฀ earned.฀ Arrangements฀ involving฀ multiple฀
elements฀ and฀ deliverables฀ are฀ individually฀ evaluated฀ for฀
revenue฀recognition.฀Cash฀ payments฀received฀in฀advance฀of฀
product฀or฀service฀revenue฀are฀recorded฀as฀deferred฀revenue.฀
Consolidated฀revenues฀are฀net฀of฀all฀intercompany฀eliminations฀
for฀ wholly฀ owned฀ subsidiaries฀ and฀ for฀ licensees฀ accounted฀
for฀ under฀ the฀ equity฀ method฀ based฀ on฀ the฀ Company’s฀
percentage฀ ownership.฀ All฀ revenues฀ are฀ recognized฀ net฀ of฀
any฀discounts.฀
Advertising
The฀ Company฀ expenses฀ costs฀ of฀ advertising฀ the฀ first฀ time฀
the฀ advertising฀ campaign฀ takes฀ place,฀ except฀ for฀ direct-to-
consumer฀ advertising,฀ which฀ is฀ capitalized฀ and฀ amortized฀
over฀ its฀ expected฀ period฀ of฀ future฀ benefit,฀ generally฀ six฀ to฀
twelve฀ months.฀ The฀ Company฀ had฀ no฀ capitalized฀ direct-
to-consumer฀ advertising฀ costs฀ as฀ of฀ September฀ 28,฀ 2003,฀
due฀to฀its฀exit฀from฀these฀business฀activities.฀Net฀capitalized฀
direct-to-consumer฀advertising฀costs฀were฀$0.8฀million฀as฀of฀
September฀29,฀2002,฀and฀are฀included฀in฀“Prepaid฀expenses฀
and฀other฀current฀assets”฀on฀the฀accompanying฀consolidated฀
balance฀sheet.฀Total฀advertising฀expenses,฀recorded฀in฀“Store฀
operating฀expenses”฀and฀“Other฀operating฀expenses,”฀on฀the฀
accompanying฀ consolidated฀ statements฀ of฀ earnings฀ totaled฀
$49.5฀million,฀$25.6฀million฀and฀$28.8฀million฀in฀2003,฀2002฀
and฀2001,฀respectively.฀
Store฀Preopening฀Expenses
Costs฀incurred฀in฀connection฀with฀the฀start-up฀and฀promotion฀
of฀new฀store฀openings฀are฀expensed฀as฀incurred.
Rent฀Expense
Certain฀ of฀ the฀ Company’s฀ lease฀ agreements฀ provide฀ for฀
scheduled฀rent฀increases฀during฀the฀lease฀terms฀or฀for฀rental฀
payments฀commencing฀at฀a฀date฀other฀than฀the฀date฀of฀initial฀
occupancy.฀ Minimum฀ rental฀ expenses฀ are฀ recognized฀ on฀ a฀
straight-line฀basis฀over฀the฀terms฀of฀the฀leases.฀
Stock - based฀ Compensation
The฀ Company฀ maintains฀ several฀ stock฀ option฀ plans฀ under฀
which฀incentive฀stock฀options฀and฀non-qualified฀stock฀options฀
may฀be฀granted฀to฀employees,฀consultants฀and฀non-employee฀
directors.฀ Starbucks฀ accounts฀ for฀ stock-based฀ compensation฀
using฀ the฀ intrinsic฀ value฀ method฀ prescribed฀ in฀ Accounting฀
Principles฀ Board฀ (“APB”)฀ Opinion฀ No.฀25,฀ “Accounting฀
for฀ Stock฀ Issued฀ to฀ Employees,”฀ and฀ related฀ interpretations.฀
Accordingly,฀because฀the฀grant฀price฀equals฀the฀market฀price฀
on฀the฀date฀of฀grant,฀no฀compensation฀expense฀is฀recognized฀
by฀the฀Company฀for฀stock฀options฀issued฀to฀employees.฀
In฀December฀2002,฀the฀Financial฀Accounting฀Standards฀Board฀
(“FASB”)฀issued฀SFAS฀No.฀148,฀“Accounting฀for฀Stock-Based฀
Compensation฀ –฀ Transition฀ and฀ Disclosure,”฀ which฀ amends฀
SFAS฀No.฀123,฀“Accounting฀for฀Stock-Based฀Compensation.”฀
SFAS฀ No.฀148฀ provides฀alternative฀ methods฀of฀transition฀ for฀
voluntary฀ change฀ to฀ the฀ fair฀ value฀ method฀ of฀ accounting฀
for฀ stock-based฀ compensation.฀ In฀ addition,฀ SFAS฀ No.฀148฀
requires฀ more฀ prominent฀ disclosures฀ in฀ both฀ annual฀ and฀
interim฀financial฀statements฀about฀the฀method฀of฀accounting฀
for฀stock-based฀employee฀compensation฀and฀the฀effect฀of฀the฀
method฀used฀on฀reported฀results.฀Starbucks฀adopted฀the฀annual฀
and฀ interim฀ disclosure฀ requirements฀ of฀ SFAS฀ No.฀148฀ as฀ of฀
September฀30,฀2002.฀