Starbucks 2004 Annual Report Download - page 23

34 Fiscal 2004 Annual Report
Short-term and long-term investments with unrealized losses as
of October 3, 2004, consist of the following (in thousands):
Gross Unrealized Fair
Less than 12 months: Losses Value
State and local government obligations $ (931) $ 376,318
U.S. government agency obligations (4) 6,651
Asset-backed securities (38) 7,097
Total $ (973) $ 390,066
The $1.0 million of gross unrealized losses as of October 3, 2004,
which pertains to 184 securities, was generated within the past
12 months and was primarily caused by changes in interest rates.
There were no realized losses generated from other-than-temporary
impairment for these securities during 2004, 2003 or 2002.
Trading securities are comprised mainly of marketable equity
mutual funds that approximate a portion of the Company’s
liability under the Management Deferred Compensation
Plan, a defi ned contribution plan. The corresponding deferred
compensation liability of $32.7 million in fi scal 2004 and $20.4
million in fi scal 2003 is included in “Accrued compensation and
related costs” on the accompanying consolidated balance sheets.
In fi scal years 2004 and 2003, the changes in net unrealized
holding gains in the trading portfolio included in earnings were
$1.1 million and $1.8 million, respectively.
Long-term investments generally mature in less than three years.
Note 5: Derivative Financial Instruments
Cash Flow Hedges
Starbucks and its subsidiaries, which include entities that use their
local currency as their functional currency, enter into cash fl ow
derivative instruments to hedge portions of anticipated revenue
streams and purchases. Current contracts hedge forecasted
transactions denominated in Japanese yen and Canadian dollars,
as well as in U.S. dollars for foreign operations. During fi scal years
2004, 2003 and 2002, derivative gains (losses) of ($1.5) million,
($1.7) million, and $2.9 million were reclassifi ed to revenues,
respectively. For hedges of foreign-denominated purchases,
derivative losses of $0.8 million were reclassifi ed into cost of sales
during fi scal 2004. There were no similar transactions reclassifi ed
into cost of sales in prior years.
The Company had accumulated net derivative losses of $3.9
million, net of taxes, in other comprehensive income (“OCI”)
as of October 3, 2004, related to cash fl ow hedges. Of this
amount, $2.5 million of net derivative losses will be reclassifi ed
into earnings within 12 months. No signifi cant cash fl ow hedges
were discontinued during fi scal years 2004, 2003 or 2002.
Current contracts will expire within 24 months.
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 31
months and are intended to minimize foreign currency exposure
to fl uctuations in the Japanese yen. As a result of using the spot-
to-spot method, the Company recognized net gains of $0.7
million, $1.4 million and $1.8 million during fi scal years 2004,
2003 and 2002, respectively. In addition, the Company had
accumulated net derivative losses of $4.3 million, net of taxes,
in OCI as of October 3, 2004.
Note 6: Inventories
Inventories consist of the following (in thousands):
Fiscal year ended Oct 3, 2004 Sept 28, 2003
Coffee:
Unroasted $ 233,903 $ 167,674
Roasted 46,070 41,475
Other merchandise held for sale 81,565 83,784
Packaging and other supplies 61,125 50,011
Total $ 422,663 $ 342,944
As of October 3, 2004, the Company had committed to fi xed-
price purchase contracts for green coffee totaling $271.7 million.
The Company believes, based on relationships established with
its suppliers in the past, the risk of nondelivery 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 Oct 3, 2004 Sept 28, 2003
Equity method investments $ 152,511 $ 134,341
Cost method investments 16,430 7,210
Other investments 2,806 2,706
Total $ 171,747 $ 144,257
Equity Method
The Company’s equity investees and ownership interests are
as follows:
Fiscal year ended Oct 3, 2004 Sept 28, 2003
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% 50.0%
Starbucks Coffee Switzerland AG 50.0% 50.0%
Starbucks Coffee España, S.L. 50.0% 50.0%
President Starbucks Coffee Taiwan Ltd. 50.0% 50.0%
Shanghai President Coffee Co. 50.0% 50.0%
Starbucks Coffee France SAS 50.0% 50.0%
Berjaya Starbucks Coffee Company Sdn. Bhd. 49.9% –
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 superpremium
ice creams. The remaining entities operate licensed Starbucks
retail stores, including Coffee Partners Hawaii, which is a
general partnership.
During fi scal 2004, Starbucks acquired an equity interest in its
licensed operations of Malaysia. During fi scal 2003, Starbucks
increased its ownership of its licensed operations in Austria,
Shanghai, Spain, Switzerland and Taiwan. The carrying
amount of these investments was $24.3 million more than the
underlying equity in net assets due to acquired goodwill, which
is not subject to amortization in accordance with SFAS 142.
The goodwill is evaluated for impairment in accordance with
APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock.” No impairment was recorded
during fi scal years 2004 or 2003. For additional information on
acquisitions, see Note 2.
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