Starbucks 2003 Annual Report Download - page 19

30฀ Fiscal฀2003฀Annual฀Report
Fiscal฀2003฀Annual฀Report฀ 31
For฀ available-for-sale฀ securities,฀ proceeds฀ from฀ sales฀ were฀
$88.9฀ million,฀ $144.8฀ million฀ and฀ $46.9฀ million,฀ in฀ fiscal฀
years฀2003,฀2002฀and฀2001,฀respectively.฀Gross฀realized฀gains฀
from฀ the฀ sales฀ were฀ $0.3฀ million฀ and฀ $1.7฀ million฀ in฀ 2003฀
and฀ 2002,฀ respectively.฀ There฀ were฀ no฀ gross฀ realized฀ losses฀
in฀2003฀or฀2002,฀and฀gross฀realized฀gains฀and฀losses฀were฀not฀
material฀ in฀ 2001.฀ Long-term฀ investments฀ generally฀ mature฀
between฀one฀and฀three฀years.
During฀ fiscal฀ 2001,฀ the฀ Company฀ recognized฀ a฀ loss฀ of฀
$0.9฀ million฀ on฀ its฀ investment฀ in฀ the฀ common฀ stock฀ of฀
Liveworld,฀ Inc.฀ (previously฀ known฀ as฀ Talk฀ City,฀ Inc.),฀ due฀
to฀impairments฀that฀were฀determined฀by฀management฀to฀be฀
other฀than฀temporary.฀There฀were฀no฀similar฀losses฀in฀fiscal฀
2003฀or฀2002.
Trading฀securities฀are฀comprised฀mainly฀of฀marketable฀equity฀
mutual฀ funds฀ designated฀ to฀ approximate฀ the฀ Company’s฀
liability฀ under฀ the฀ Management฀ Deferred฀ Compensation฀
Plan,฀a฀defined฀contribution฀plan.฀The฀corresponding฀deferred฀
compensation฀liability฀of฀$20.4฀million฀in฀fiscal฀2003฀and฀$10.4฀
million฀in฀fiscal฀2002฀is฀included฀in฀“Accrued฀compensation฀
and฀related฀costs”฀on฀the฀accompanying฀consolidated฀balance฀
sheets.฀In฀fiscal฀2003฀and฀2002,฀the฀changes฀in฀net฀unrealized฀
holding฀ gains฀ (losses)฀ in฀ the฀ trading฀ portfolio฀ included฀ in฀
earnings฀were฀$1.8฀million฀and฀($1.3)฀million,฀respectively.
Note฀5:฀Derivative฀Financial฀Instruments
Cash฀Flow฀Hedges
Cash฀flow฀derivative฀instruments฀hedge฀portions฀of฀anticipated฀
product฀and฀royalty฀revenues฀denominated฀in฀Japanese฀yen฀and฀
Canadian฀ dollars.฀ During฀fiscal฀years฀ 2003,฀2002,฀ and฀2001,฀
derivative฀ gains฀ (losses)฀ of฀ ($1.7)฀ million,฀ $2.9฀ million,฀ and฀
$1.7฀ million,฀ respectively,฀ were฀ reclassified฀ to฀ revenues.฀ As฀
of฀ September฀ 28,฀ 2003,฀ existing฀ forward฀ foreign฀ exchange฀
contracts฀had฀accumulated฀net฀derivative฀losses฀of฀$0.4฀million,฀
net฀of฀taxes,฀in฀other฀comprehensive฀income฀(“OCI”)฀and฀will฀
expire฀within฀24฀months.฀Of฀the฀amount฀in฀OCI,฀$0.3฀million฀
of฀ net฀ derivative฀ losses฀ will฀ be฀ reclassified฀ into฀ net฀ earnings฀
within฀ 12฀ months.฀ No฀ significant฀ cash฀ flow฀ hedges฀ were฀
discontinued฀during฀fiscal฀years฀2003,฀2002฀or฀2001.฀
Net฀Investment฀Hedges
Net฀investment฀derivative฀instruments฀hedge฀the฀Company’s฀
equity฀ method฀ investment฀ in฀ Starbucks฀ Coffee฀ Japan,฀ Ltd.฀
These฀ forward฀ foreign฀ exchange฀ contracts฀ expire฀ within฀
14฀ months฀ and฀ are฀ intended฀ to฀ minimize฀ foreign฀ currency฀
exposure฀ to฀ f luctuations฀ in฀ the฀ Japanese฀ yen.฀ As฀ a฀ result฀ of฀
using฀the฀spot-to-spot฀method,฀the฀Company฀recognized฀net฀
gains฀of฀ $1.4฀million,฀$1.8฀million฀and฀$1.4฀million฀during฀
the฀fiscal฀years฀2003,฀2002฀and฀2001,฀respectively.฀In฀addition,฀
the฀Company฀had฀accumulated฀net฀derivative฀losses฀of฀$3.8฀
million,฀net฀of฀taxes,฀in฀OCI฀as฀of฀September฀28,฀2003.
Note฀6:฀Inventories฀
Inventories฀consist฀of฀the฀following฀(in฀thousands):
Fiscal฀year฀ended฀ Sept฀28,฀2003฀ Sept฀29,฀2002
Coffee:฀
฀ Unroasted฀ $฀ 167,674฀ $฀ 128,173
฀ Roasted฀ ฀ 41,475฀ ฀ 35,770
Other฀merchandise฀held฀for฀sale฀ ฀ 83,784฀ ฀ 65,403
Packaging฀and฀other฀supplies฀ ฀ 50,011฀ ฀ 33,828
Total฀ $฀ 342,944฀ $฀ 263,174
As฀ of฀ September฀ 28,฀ 2003,฀ the฀ Company฀ had฀ committed฀
to฀ fixed-price฀ purchase฀ contracts฀ for฀ green฀ coffee฀ totaling฀
approximately฀ $287.2฀ 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:฀Equity฀and฀Other฀Investments
The฀Company’s฀equity฀and฀other฀investments฀consist฀of฀the฀
following฀(in฀thousands):
Fiscal฀year฀ended฀ Sept฀28,฀2003฀ Sept฀29,฀2002
Equity฀method฀investments฀ $฀ 134,341฀ $฀ 94,620
Cost฀method฀investments฀ ฀฀ 7,210฀ ฀฀ 5,715฀
Other฀investments฀ ฀฀ 2,706฀ ฀ 2,202
Total฀ $฀ 144,257฀ $฀ 102,537
Equity฀Method
The฀ Company’s฀ equity฀ investees฀ and฀ ownership฀ interests฀ are฀
as฀follows:
Fiscal฀year฀ended฀ Sept฀28,฀2003฀ Sept฀29,฀2002
The฀North฀American฀Coffee฀Partnership฀ 50.0%฀ 50.0%
Starbucks฀Ice฀Cream฀Partnership฀ 50.0%฀ 50.0%
Starbucks฀Coffee฀Korea฀Co.,฀Ltd.฀ 50.0%฀ 50.0%
Starbucks฀Coffee฀Austria฀GmbH฀ 50.0%฀ 19.5%
Starbucks฀Coffee฀Switzerland฀AG฀ 50.0%฀ 19.5%
Starbucks฀Coffee฀España,฀S.L.฀ 50.0%฀ 18.0%
President฀Starbucks฀Coffee฀Taiwan฀Limited฀ 50.0%฀ 5.0%
Shanghai฀President฀Coffee฀Co.฀ 50.0%฀ 5.0%
Starbucks฀Coffee฀France฀SAS฀ 50.0%฀ –฀ ฀
Starbucks฀Coffee฀Japan,฀Ltd.฀ 40.1%฀ 40.1%
Coffee฀Partners฀Hawaii฀ 5.0%฀ 5.0%
The฀ Company฀ has฀ licensed฀ the฀ rights฀ to฀ produce฀ and฀
distribute฀Starbucks฀branded฀products฀to฀two฀partnerships฀in฀
which฀the฀Company฀holds฀a฀50%฀equity฀interest.฀The฀North฀
American฀Coffee฀Partnership฀with฀the฀Pepsi-Cola฀Company฀
develops฀and฀distributes฀bottled฀Frappuccino®฀and฀Starbucks฀
DoubleShot™฀ coffee฀ drinks.฀ The฀ Starbucks฀ Ice฀ Cream฀
Partnership฀ with฀ Dreyer’s฀ Grand฀ Ice฀ Cream,฀ Inc.฀ develops฀
and฀distributes฀premium฀ice฀creams.฀The฀remaining฀entities฀
in฀which฀the฀Company฀is฀an฀equity฀investee฀operate฀licensed฀
Starbucks฀ retail฀ stores,฀ including฀ Coffee฀ Partners฀ Hawaii,฀
which฀is฀a฀general฀partnership.
During฀fiscal฀2003,฀Starbucks฀ increased฀its฀ownership฀of฀its฀
licensed฀operations฀in฀Austria,฀Shanghai,฀Spain,฀Switzerland฀
and฀ Taiwan.฀ The฀ carrying฀ amount฀ of฀ these฀ investments฀
was฀ $21.7฀ million฀ more฀ than฀ the฀ underlying฀ equity฀ in฀ net฀
assets฀ due฀ to฀ acquired฀ goodwill,฀ which฀ is฀ not฀ subject฀ to฀
amortization฀ in฀ accordance฀ with฀ SFAS฀ No.฀ 142.฀ Goodwill฀
will฀ be฀ evaluated฀ for฀ impairment฀ in฀ accordance฀ with฀ APB฀
Opinion฀ No.฀ 18,฀ “The฀ Equity฀ Method฀ of฀ Accounting฀ for฀
Investments฀in฀Common฀Stock.”฀For฀additional฀information฀
on฀these฀equity฀ownership฀increases,฀see฀Note฀2.฀
On฀ October฀ 10,฀ 2001,฀ the฀ Company฀ sold฀ 30,000฀ of฀ its฀
shares฀ of฀ Starbucks฀ Coffee฀ Japan,฀ Ltd.฀ (“Starbucks฀ Japan”)฀
at฀ approximately฀ $495฀ per฀ share,฀ net฀ of฀ related฀ costs.฀ In฀
connection฀ with฀ this฀ sale,฀ the฀ Company฀ received฀ cash฀
proceeds฀ of฀ $14.8฀ million฀ and฀ recorded฀ a฀ gain฀ of฀ $13.4฀
million฀ on฀ the฀ accompanying฀ consolidated฀ statement฀ of฀
earnings.฀ The฀ Company’s฀ ownership฀ interest฀ in฀ Starbucks฀
Japan฀was฀reduced฀from฀50.0%฀to฀47.5%฀following฀the฀sale฀of฀
the฀shares.฀Also฀on฀October฀10,฀2001,฀Starbucks฀Japan฀issued฀
220,000฀shares฀of฀common฀stock฀at฀approximately฀$495฀per฀
share,฀net฀of฀related฀costs,฀in฀an฀initial฀public฀offering฀in฀Japan.฀
In฀connection฀with฀this฀offering,฀the฀Company’s฀ownership฀
interest฀in฀Starbucks฀Japan฀was฀reduced฀from฀47.5%฀to฀40.1%.฀
Starbucks฀recorded฀“Other฀additional฀paid-in฀capital”฀on฀the฀
accompanying฀ consolidated฀ balance฀ sheet฀ of฀ $39.4฀ million,฀
ref lecting฀the฀increase฀in฀value฀of฀its฀share฀of฀the฀net฀assets฀of฀
Starbucks฀Japan฀related฀to฀the฀stock฀offering.฀As฀of฀September฀
28,฀2003,฀the฀quoted฀closing฀price฀of฀Starbucks฀Japan฀shares฀
was฀approximately฀$153฀per฀share.฀
The฀ Company’s฀ share฀ of฀ income฀ and฀ losses฀ is฀ included฀
in฀ “Income฀ from฀ equity฀ investees”฀ on฀ the฀ accompanying฀
consolidated฀ statements฀ of฀ earnings.฀ Also฀ included฀ is฀ the฀
Company’s฀ proportionate฀ share฀ of฀ gross฀ margin฀ resulting฀
from฀coffee฀and฀other฀product฀sales฀to,฀and฀royalty฀and฀license฀
fee฀ revenues฀ generated฀ from,฀ equity฀ investees.฀ Revenues฀
generated฀ from฀ these฀ related฀ parties,฀ net฀ of฀ eliminations,฀
were฀$68.0฀million,฀$67.7฀million฀and฀$48.9฀million฀in฀fiscal฀
2003,฀2002฀and฀2001,฀respectively.฀Related฀costs฀of฀sales,฀net฀
of฀eliminations,฀were฀$35.7฀million,฀$37.9฀million฀and฀$30.3฀
million฀in฀fiscal฀2003,฀2002฀and฀2001,฀respectively.฀
Cost฀Method
Starbucks฀has฀equity฀interests฀in฀entities฀to฀develop฀Starbucks฀
retail฀stores฀in฀other฀Chinese฀markets,฀Puerto฀Rico,฀Germany,฀
Mexico,฀ Chile฀ and฀ Greece.฀ Starbucks฀ has฀ the฀ ability฀ to฀
acquire฀ additional฀ interests฀ in฀ its฀ cost฀ method฀ investees฀ at฀
certain฀intervals฀during฀each฀respective฀development฀period.฀
Depending฀ on฀ the฀ Company’s฀ total฀ percentage฀ ownership฀
interest฀ and฀ its฀ ability฀ to฀ exercise฀ significant฀ inf luence,฀
additional฀investments฀may฀require฀the฀retroactive฀application฀
of฀the฀equity฀method฀of฀accounting.฀