Starbucks 2003 Annual Report Download - page 23

34฀ Fiscal฀2003฀Annual฀Report
Fiscal฀2003฀Annual฀Report฀ 35
In฀April฀2001,฀three฀members฀of฀the฀Board฀of฀Directors฀and฀
other฀ investors,฀ organized฀ as฀ The฀ Basketball฀ Club฀ of฀ Seattle,฀
LLC฀ (the฀ “Basketball฀ Club”),฀ purchased฀ the฀ franchises฀ for฀
The฀Seattle฀ Supersonics฀ and฀ The฀ Seattle฀ Storm฀ basketball฀
teams.฀An฀executive฀officer฀of฀the฀Company,฀Howard฀Schultz,฀
owns฀a฀controlling฀interest฀in฀the฀Basketball฀Club.฀Starbucks฀
paid฀ approximately฀ $0.7฀ million,฀ $0.7฀ million฀ and฀ $0.3฀
million฀ during฀ fiscal฀ 2003,฀ 2002฀ and฀ 2001,฀ respectively,฀ for฀
team฀sponsorships฀and฀ticket฀purchases฀while฀the฀related฀party฀
relationship฀existed.฀Terms฀of฀the฀team฀sponsorship฀agreements฀
did฀not฀change฀as฀a฀result฀of฀the฀related฀party฀relationship.
Note฀17:฀Commitments฀and฀Contingencies
The฀ Company฀ has฀ unconditionally฀ guaranteed฀ the฀
repayment฀ of฀ certain฀ yen-denominated฀ bank฀ loans฀ and฀
related฀ interest฀ and฀ fees฀ of฀ an฀ unconsolidated฀ equity฀
investee,฀ Starbucks฀ Coffee฀ Japan,฀ Ltd.฀ There฀ have฀ been฀
no฀ modifications฀ or฀ additions฀ to฀ the฀ loan฀ guarantee฀
agreements฀ since฀ the฀ Company’s฀ adoption฀of฀ FIN฀ No.฀ 45.฀
The฀guarantees฀continue฀until฀the฀loans,฀including฀accrued฀
interest฀ and฀ fees,฀ have฀ been฀ paid฀ in฀ full.฀ The฀ maximum฀
amount฀is฀limited฀to฀the฀sum฀of฀unpaid฀principal฀and฀interest฀
amounts,฀as฀well฀as฀other฀related฀expenses.฀These฀amounts฀
will฀vary฀based฀on฀f luctuations฀in฀the฀yen฀foreign฀exchange฀
rate.฀ As฀ of฀ September฀28,฀ 2003,฀ the฀ maximum฀ amount฀ of฀
the฀guarantees฀was฀approximately฀$11.8฀million.฀
Coffee฀ brewing฀ and฀ espresso฀ equipment฀ sold฀ to฀ customers฀
through฀ Company-operated฀ and฀ licensed฀ retail฀ stores,฀ as฀
well฀ as฀ equipment฀ sold฀ to฀ the฀ Company’s฀ licensees฀ for฀ use฀
in฀retail฀licensing฀operations,฀are฀under฀warranty฀for฀defects฀
in฀materials฀and฀workmanship฀for฀a฀period฀ranging฀from฀12฀
months฀ to฀ 24฀ months.฀ The฀ Company฀ establishes฀ a฀ reserve฀
for฀ estimated฀ warranty฀ costs฀ at฀ the฀ time฀ of฀ sale,฀ based฀ on฀
historical฀ experience.฀ The฀ following฀ table฀ summarizes฀ the฀
activity฀ related฀ to฀ product฀ warranty฀ reserves฀ during฀ fiscal฀
2003฀and฀2002฀(in฀thousands):
฀ Sept฀28,฀ Sept฀29,฀
Fiscal฀year฀ended฀ 2003฀ 2002
Balance฀at฀beginning฀of฀fiscal฀year฀ $฀ 1,842฀ $฀ 1,090
Provision฀for฀warranties฀issued฀ ฀ 2,895฀ ฀ 3,128
Warranty฀claims฀ ฀ (2,510฀)฀ ฀ (2,376฀)
Balance฀at฀end฀of฀fiscal฀year฀ $฀ 2,227฀ $฀ 1,842
The฀ Company฀ is฀ party฀ to฀ various฀ legal฀ proceedings฀
arising฀in฀the฀ordinary฀course฀of฀its฀business,฀but฀it฀is฀not฀
currently฀a฀party฀to฀any฀legal฀proceeding฀that฀management฀
believes฀ would฀ have฀ a฀ material฀ adverse฀ effect฀ on฀ the฀
consolidated฀financial฀position฀or฀results฀of฀operations฀of฀
the฀Company.
Note฀18:฀Segment฀Reporting
Segment฀ information฀ is฀ prepared฀ on฀ the฀ basis฀ that฀
Company’s฀ management฀ internally฀ reviews฀ financial฀
information฀ for฀ operational฀ decision฀ making฀ purposes.฀
Starbucks฀ revised฀ its฀ segment฀ reporting฀ into฀ two฀ distinct,฀
geographically฀ based฀ operating฀ segments:฀ United฀ States฀
and฀International.฀This฀change฀was฀in฀response฀to฀internal฀
management฀realignments฀in฀the฀fiscal฀first฀quarter฀of฀2004฀
and฀ management’s฀evaluation฀of฀the฀requirements฀of฀ SFAS฀
No.฀131,฀“Disclosures฀about฀Segments฀of฀an฀Enterprise฀and฀
Related฀Information.”฀
United฀States
The฀ Company’s฀ United฀ States฀ operations฀ (“United฀ States”)฀
represent฀ 86%฀ of฀ total฀ retail฀ revenues,฀ 81%฀ of฀ specialty฀
revenues฀and฀85%฀of฀total฀net฀revenues.฀Company-operated฀
retail฀ stores฀ sell฀ coffee฀ and฀ other฀ beverages,฀ whole฀ bean฀
coffees,฀complementary฀food,฀coffee฀brewing฀equipment฀and฀
merchandise.฀ Non-retail฀ activities฀ within฀ the฀ United฀ States฀
include:฀licensed฀operations,฀foodservice฀accounts฀and฀other฀
initiatives฀related฀to฀the฀Company’s฀core฀businesses.
International฀
The฀ Company’s฀ international฀ operations฀ (“International”)฀
represent฀ the฀ remaining฀ 14%฀ of฀ retail฀ revenues,฀ 19%฀
of฀ specialty฀ revenues฀ and฀ 15%฀ of฀ total฀ net฀ revenues.฀
International฀ sells฀ coffee฀ and฀ other฀ beverages,฀ whole฀ bean฀
coffees,฀ complementary฀ food,฀ coffee฀ brewing฀ equipment฀
and฀ merchandise฀ through฀ Company-operated฀ retail฀ stores฀
in฀Canada,฀the฀United฀Kingdom,฀Thailand฀and฀Australia,฀as฀
well฀as฀through฀licensed฀operations฀and฀foodservice฀accounts฀
in฀these฀and฀other฀countries.฀Because฀International฀operations฀
are฀ in฀ the฀ early฀ phase฀ of฀ development฀ and฀ have฀ country-
specific฀ regulatory฀ requirements,฀ they฀ require฀ a฀ more฀
extensive฀ administrative฀ support฀ organization,฀ as฀ compared฀
to฀ the฀ United฀ States,฀ to฀ provide฀ resources฀ and฀ respond฀ to฀
business฀needs฀in฀each฀region.
The฀accounting฀policies฀of฀the฀operating฀segments฀are฀the฀same฀
as฀ those฀ described฀ in฀ Note฀ 1.฀ Operating฀ income฀ represents฀
earnings฀ before฀ “Interest฀ and฀ other฀ income,฀ net,”฀ “Gain฀ on฀
sale฀ of฀ investment”฀ and฀ “Income฀ taxes.”฀ No฀ allocations฀ of฀
corporate฀overhead,฀interest฀or฀income฀taxes฀are฀made฀to฀the฀
segments.฀Identifiable฀ assets฀by฀segment฀are฀those฀assets฀used฀
in฀ the฀ Company’s฀ operations฀ in฀ each฀ segment.฀ Unallocated฀
corporate฀ assets฀ include฀ cash฀ and฀ investments,฀ unallocated฀
assets฀ of฀ the฀ corporate฀ headquarters฀ and฀ roasting฀ facilities,฀
deferred฀ taxes฀ and฀ certain฀ other฀ intangibles.฀ Management฀
evaluates฀ performance฀ of฀ segments฀ based฀ on฀ direct฀ product฀
sales฀and฀operating฀costs.