Starbucks 2000 Annual Report Download - page 12

In addition to fluctuating coffee prices, management believes that the Company’s future results of
operations and earnings could be significantly impacted by other factors such as increased competition
within the specialty coffee industry, the Company’s ability to find optimal store locations at favorable
lease rates, increased costs associated with opening and operating retail stores and the Company’s
continued ability to hire, train and retain qualified personnel.
Financial Risk Management
The Company is exposed to market risk related to changes in interest rates, equity security prices and
foreign currency exchange rates.
interest rate risk
The Company’s available-for-sale portfolio consists mainly of diversified fixed income instruments with
average maturities of three months. The primary objectives of these investments are to preserve capital
and liquidity without significantly increasing risk to the Company. Available-for-sale securities are of
investment grade and are recorded on the balance sheet at fair value with unrealized gains and losses
reported as a separate component of accumulated other comprehensive income. As of October 1, 2000,
this portfolio comprised 98% of “Short-term investments” on the accompanying consolidated balance
sheet. The Company does not hedge its interest rate exposure.
equity security price risk
The Company has minimal exposure to price fluctuations on equity mutual funds within the trading
portfolio, which comprised the remaining 2% of “Short-term investments” on the accompanying
consolidated balance sheet as of October 1, 2000. The trading securities are designated to approximate
the Company’s liability under the Management Deferred Compensation Plan (“MDCP”). A corresponding
liability is included in “Accrued compensation and related costs” on the accompanying consolidated
balance sheets. These investments are recorded at fair value with unrealized gains and losses
recognized in “Interest and other income, net.” The offsetting changes in the MDCP liability are recorded
in “General and administrative expenses” on the accompanying consolidated statements of earnings.
The Company also has equity investments in privately held Internet-related companies. These investments
are inherently risky as the products and services supplied by these companies could be considered in the
start-up or development stages and may never materialize. The Company could lose its entire investment
in these companies. During fiscal 2000, the Company recorded other-than-temporary write-downs of
$59 million. These investments are recorded on the accompanying consolidated balance sheet at a fair
value of $5 million as of October 1, 2000.
foreign currency exchange risk
The majority of the Company’s revenue, expense and capital purchasing activities are transacted in
United States dollars. However, because a portion of the Company’s operations consists of activities
outside of the United States, the Company has transactions in other currencies, primarily the Canadian
dollar, British pound and Japanese yen. Historically, this exposure has had a minimal impact on
the Company.
The Company did not hedge foreign currency risk or engage in any other hedging transactions during
fiscal 2000, 1999 or 1998. The Company has entered into forward foreign exchange contracts to hedge
foreign currency risk in fiscal 2001.
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