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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
Commission File Number 0-20322
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STARBUCKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1325671
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2401 Utah Avenue South, Seattle, Washington 98134
(Address of Principal Executive Office, including Zip Code)
(206) 447-1575
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of May 15, 2000, there were 185,528,869 shares of the Registrant's Common
Stock outstanding.
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STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Financial Statements................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 13
Item 4. Submission of Matters to a Vote of Security Holders... 13
Item 5. Other Information..................................... 14
Item 6. Exhibits and Reports on Form 8-K...................... 14
Signature...................................................... 14
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3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
Three Months Ended Six Months Ended
April 2, March 28, April 2, March 28,
2000 1999 2000 1999
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------
Net revenues $504,698 $375,822 $1,031,680 $781,460
Cost of sales and related
occupancy costs 223,249 169,957 461,651 356,256
- ----------------------------------------------------------------------------------------------------
Gross margin 281,449 205,865 570,029 425,204
Store operating expenses 169,257 121,845 333,457 244,449
Other operating expenses 16,412 11,142 30,724 24,450
Depreciation and amortization 31,951 23,740 61,241 45,634
General and administrative
expenses 28,622 22,371 54,767 42,726
- ----------------------------------------------------------------------------------------------------
Operating income 35,207 26,767 89,840 67,945
Interest and other income, net 2,242 2,197 3,656 4,137
- ----------------------------------------------------------------------------------------------------
Earnings before income taxes 37,449 28,964 93,496 72,082
Income taxes 14,043 11,007 35,341 27,391
- ----------------------------------------------------------------------------------------------------
Net earnings $ 23,406 $ 17,957 $ 58,155 $ 44,691
====================================================================================================
Net earnings per common share - basic $ 0.13 $ 0.10 $ 0.32 $ 0.25
Net earnings per common share - diluted $ 0.12 $ 0.10 $ 0.30 $ 0.24
Weighted average shares outstanding:
Basic 184,785 181,370 184,106 180,706
Diluted 192,417 188,349 191,041 186,917
See notes to consolidated financial statements
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4
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 2, October 3,
2000 1999
(unaudited)
- ---------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 85,258 $ 66,419
Short-term investments 42,926 51,367
Accounts receivable 58,599 47,646
Inventories 151,948 180,886
Prepaid expenses and other
current assets 26,866 19,049
Deferred income taxes, net 26,369 21,133
- ---------------------------------------------------------------------------------
Total current assets 391,966 386,500
Joint ventures and other investments 104,988 68,060
Property, plant and equipment, net 840,944 760,289
Other assets 27,367 23,474
Goodwill, net 18,686 14,191
- ---------------------------------------------------------------------------------
Total $ 1,383,951 $ 1,252,514
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,130 $ 56,108
Checks drawn in excess of bank balances 50,463 64,211
Accrued compensation and related costs 62,185 43,872
Accrued occupancy costs 26,005 23,017
Accrued taxes 18,838 30,752
Other accrued expenses 50,552 33,637
- ---------------------------------------------------------------------------------
Total current liabilities 273,173 251,597
Deferred income taxes, net 35,921 32,886
Long-term debt 6,677 7,018
Shareholders' equity:
Common stock - Authorized, 300,000,000;
issued and outstanding, 186,282,959 and
183,282,095 shares, respectively, (includes
848,550 common stock units in both periods) 702,169 651,020
Retained earnings 372,094 313,939
Accumulated other comprehensive loss (6,083) (3,946)
- ---------------------------------------------------------------------------------
Total shareholders' equity 1,068,180 961,013
- ---------------------------------------------------------------------------------
Total $ 1,383,951 $ 1,252,514
=================================================================================
See notes to consolidated financial statements
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5
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
- ------------------------------------------------------------------------------
April 2, March 28,
2000 1999
(26 Weeks) (26 Weeks)
(unaudited)
- ------------------------------------------------------------------------------
Operating activities:
Net earnings $ 58,155 $ 44,691
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 67,594 50,630
Provision for store remodels
and losses on asset disposals 1,307 --
Deferred income taxes, net 84 2,479
Equity in (income)/losses of investees (5,055) 731
Cash provided/(used) by changes in
operating assets and liabilities:
Accounts receivable (10,814) 13,984
Inventories 29,882 11,485
Prepaid expenses and other
current assets (638) (4,473)
Accounts payable 8,140 1,523
Accrued compensation and
related costs 18,301 4,750
Accrued occupancy costs 2,984 2,342
Accrued taxes (18,954) (10,030)
Other accrued expenses 17,474 3,474
- ------------------------------------------------------------------------------
Net cash provided by operating activities 168,460 121,586
Investing activities:
Purchase of investments (55,314) (80,502)
Maturity of investments 28,000 59,053
Sale of investments 35,524 --
Purchases of businesses, net of cash acquired (8,242) (16,216)
Investments in joint ventures and other
investments (38,187) (10,002)
Distributions from joint ventures 4,556 5,500
Additions to property, plant
and equipment (148,005) (99,277)
Additions to deposits and other assets (3,986) (4,769)
- ------------------------------------------------------------------------------
Net cash used by investing activities (185,654) (146,213)
Financing activities:
Decrease in cash provided by checks
drawn in excess of bank balances (13,748) (114)
Proceeds from sale of common stock under
employee stock purchase plan 5,020 3,329
Exercise of stock options 32,853 29,789
Tax benefit from exercise of non-qualified
stock options 13,276 16,184
Payments on long-term debt (1,344) --
- ------------------------------------------------------------------------------
Net cash provided by financing activities 36,057 49,188
- ------------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents (24) 1,250
- ------------------------------------------------------------------------------
Net increase in cash and cash equivalents 18,839 25,811
Cash and cash equivalents:
Beginning of the period 66,419 101,663
- ------------------------------------------------------------------------------
End of the period $ 85,258 $ 127,474
==============================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 191 $ 90
Income taxes 32,710 18,789
Net unrealized holding(loss)/gain (1,409) 21
on investments
See notes to consolidated financial statements
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STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 26 Weeks Ended April 2, 2000 and
March 28, 1999
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of April 2, 2000 and October 3, 1999
and for the 13-week and 26-week periods ended April 2, 2000 and March 28, 1999
have been prepared by Starbucks Corporation ("Starbucks" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). The financial information for the 13-week and 26-week periods ended
April 2, 2000 and March 28, 1999 is unaudited, but, in the opinion of
management, reflects all adjustments (consisting only of normal recurring
adjustments and accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
The financial information as of October 3, 1999, is derived from the Company's
audited consolidated financial statements and notes thereto for the year ended
October 3, 1999, and should be read in conjunction with such financial
statements.
Certain reclassifications of prior year's balances have been made to conform to
the current format.
The results of operations for the 13-week and 26-week periods ended April 2,
2000 are not necessarily indicative of the results of operations that may be
achieved for the entire fiscal year ending October 1, 2000.
NOTE 2: OTHER ITEMS
On February 12, 2000, Starbucks entered into a strategic agreement with
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items. Under the agreement, Starbucks will receive $150 million
over a five-year period for in-store exposure and co-marketing opportunities.
Kozmo.com will locate drop boxes within Starbucks stores for return of videos,
DVDs, video games and other items delivered by Kozmo.com and will deliver
Starbucks coffee by the pound, Tazo teas and other Starbucks products. In
accordance with this agreement, Starbucks received $15 million which will be
recognized as revenue over 12 months, beginning in March 2000. On March 16,
2000, Starbucks made a minority investment of $25 million in Kozmo.com.
NOTE 3: EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of shares and common stock units outstanding during the period. The
computation of diluted earnings per share includes the dilutive effect of common
stock equivalents consisting of certain shares subject to stock options.
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
April 2, October 3,
2000 1999
- -------------------------------------------------------------------
Coffee:
Unroasted $ 59,112 $ 95,001
Roasted 26,683 28,065
Other merchandise held for sale 53,062 46,655
Packaging and other supplies 13,091 11,165
- -------------------------------------------------------------------
$ 151,948 $ 180,886
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As of April 2, 2000, the Company had fixed-price purchase commitments for green
coffee totaling approximately $112 million.
NOTE 5: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the following
(in thousands):
April 2, October 3,
2000 1999
- -------------------------------------------------------------------------------
Land $ 5,084 $ 5,084
Building 19,795 19,795
Leasehold improvements 668,877 591,640
Roasting and store equipment 309,571 273,612
Furniture, fixtures and other 140,967 130,223
- -------------------------------------------------------------------------------
1,144,294 1,020,354
Less accumulated depreciation
and amortization (386,372) (320,982)
- -------------------------------------------------------------------------------
757,922 699,372
Work in progress 83,022 60,917
- -------------------------------------------------------------------------------
$ 840,944 $ 760,289
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NOTE 6: COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during the period, except
those resulting from transactions with shareholders of the Company. It has two
components: net income and other comprehensive income. Accumulated other
comprehensive income (loss) reported on the Company's consolidated balance
sheets consists of foreign currency translation adjustments and the unrealized
gains and losses, net of applicable taxes, on available-for-sale securities.
Comprehensive income, net of related tax effects, is as follows (in thousands):
Three months ended Six months ended
April 2, March 28, April 2, March 28,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------
Net income $ 23,406 $17,957 $ 58,155 $44,691
Translation adjustment (4,270) 237 (577) 964
Unrealized holding gains/
(losses), net (12,547) 28 (1,409) 21
Reclassification adjustment
for net (gains)/losses
realized in net income (151) 62 (151) 62
-------- ------- -------- -------
Total comprehensive income $ 6,438 $18,284 $ 56,018 $45,738
====================================================================================
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NOTE 7: SEGMENT REPORTING
The Company is organized into a number of business units. The Company's North
American retail business sells primarily coffee beverages, whole bean coffees,
and related merchandise through Company-operated retail stores in the United
States and Canada. The Company also owns and operates retail stores in the
United Kingdom. These two retail segments are managed by different presidents
within the Company and are measured and evaluated separately by senior
management.
The Company operates through several other business units, each of which is
managed and evaluated independently. These other business units include domestic
wholesale, domestic retail store licensing, grocery channel licensing,
international retail store licensing and a direct-to-consumer business.
The tables below present information by operating segment (in thousands):
Three months ended Six months ended
April 2, March 28, April 2, March 28,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------
REVENUES
North American retail $ 408,525 $ 307,908 $ 830,589 $ 640,434
All other business units 102,319 70,582 211,373 145,362
Intersegment revenues (6,146) (2,668) (10,282) (4,336)
--------- --------- ----------- ---------
Total revenues $ 504,698 $ 375,822 $ 1,031,680 $ 781,460
=======================================================================================
- ---------------------------------------------------------------------------------------
OPERATING INCOME
North American retail $ 54,307 $ 41,514 $ 118,060 $ 94,282
All other business units 16,607 12,084 39,260 24,728
Unallocated corporate expenses (35,803) (26,696) (67,295) (50,932)
Intersegment eliminations 96 (135) (185) (133)
Interest, net 2,242 2,197 3,656 4,137
--------- --------- ----------- ---------
Earnings before income taxes $ 37,449 $ 28,964 $ 93,496 $ 72,082
=======================================================================================
NOTE 8: NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
pronouncement will require the Company to recognize derivatives on its balance
sheet at fair value. Changes in the fair values of derivatives that qualify as
cash flow hedges will be recognized in accumulated other comprehensive income
until the hedged item is recognized in earnings. The Company is in the process
of evaluating the impact of this new accounting standard and does not expect
that it will have a significant effect on its results of operations. The FASB
subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB No. 133", which
postpones initial application until fiscal years beginning after June 15, 2000.
The Company expects to adopt SFAS No. 133 in fiscal 2001.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements herein, including anticipated store openings, planned capital
expenditures and trends in or expectations regarding the Company's operations,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based on currently
available operating, financial and competitive information, and are subject to
various risks and uncertainties. Actual future results and trends may differ
materially depending on a variety of factors, including, but not limited to,
coffee and other raw materials prices and availability, successful execution of
internal performance and expansion plans, the impact of competition, the effect
of legal proceedings, and other risks detailed herein and in the Company's
annual and quarterly filings with the Securities and Exchange Commission.
GENERAL
During the 26-week period ending April 2, 2000, Starbucks Corporation
("Starbucks" or the "Company") derived approximately 85% of net revenues from
its Company-operated retail stores. The remaining 15% of net revenues is derived
from the Company's specialty operations, which include sales to wholesale
accounts and licensees, royalty and license fee income, and sales through its
direct-to-consumer business including its on-line store at www.starbucks.com.
The Company's fiscal year ends on the Sunday closest to September 30. Fiscal
year 1999 had 53 weeks. The fiscal year ending on October 1, 2000 will include
52 weeks.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED APRIL 2, 2000,
COMPARED TO THE 13 WEEKS ENDED MARCH 28, 1999
REVENUES
Net revenues for the 13 weeks ended April 2, 2000 increased 34% to $505 million
from $376 million for the corresponding period in fiscal 1999. Retail revenues
increased 35% to $429 million from $319 million primarily due to the opening of
new retail stores plus an increase in comparable store sales of 10% for the
period. The increase in comparable store sales (stores open for at least 13
months) resulted from a 5% increase in the number of transactions combined with
a 5% increase in the average dollar value per transaction. During the 13 weeks
ended April 2, 2000, the Company opened 98 stores in continental North America
and 17 in the United Kingdom. The Company ended the period with 2,233
Company-operated stores in continental North America and 127 Company-operated
stores in the United Kingdom.
Specialty revenues increased 33% to $76 million for the 13 weeks ended April 2,
2000, compared to $57 million for the corresponding period in fiscal 1999. The
increase in specialty revenues was driven primarily by higher revenues from
foodservice accounts, the national expansion of whole bean and ground coffee in
supermarkets through a licensing agreement with Kraft, and increased revenues
from licensees. Licensees (including those in which the Company is a joint
venture partner) opened 58 stores in continental North America and 42 stores in
international markets. The Company ended the period with 265 licensed stores in
continental North America and 260 licensed stores in international markets.
GROSS MARGIN
Gross margin increased to 55.8% for the 13 weeks ended April 2, 2000 from 54.8%
for the corresponding period in fiscal 1999. The improvement in gross margin was
primarily due to lower green coffee costs and the impact of a beverage sales
price increase in the third quarter of 1999, partially offset by higher
occupancy costs.
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 39.5%
for the 13 weeks ended April 2, 2000, from 38.2% for the corresponding period in
fiscal 1999. The increase was primarily due to higher payroll-related
expenditures as a percent of retail revenues, resulting from both an increase in
average hourly wage rates and the continuing shift in sales to more
labor-intensive handcrafted beverages.
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Other operating expenses (expenses associated with all operations other than
Company-owned retail, as well as the Company's share of joint venture profits
and losses) were 21.7% of specialty revenues for the 13 weeks ended April 2,
2000, compared to 19.5% for the corresponding period in fiscal 1999. Higher
payroll-related expenses and higher marketing expenditures as a percent of
specialty revenues were partially offset by improved profitability from both
international and domestic joint venture activities.
General and administrative expenses as a percentage of net revenues were 5.7%
for the 13 weeks ended April 2, 2000, compared to 6.0% for the corresponding
period in fiscal 1999. The decrease was primarily due to leverage from the
acceleration of revenue growth.
INCOME TAXES
The Company's effective tax rate for the 13 weeks ended April 2, 2000 was 37.5%
compared to 38.0% for the corresponding period in fiscal 1999. The decrease was
due to overall tax planning efforts and the reduction of losses by the Company's
joint venture in Japan, which are not deductible for U.S. tax purposes.
RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED APRIL 2, 2000,
COMPARED TO THE 26 WEEKS ENDED MARCH 28, 1999
REVENUES
Net revenues for the 26 weeks ended April 2, 2000, increased 32% to $1.0 billion
from $781 million for the corresponding period in fiscal 1999. Retail revenues
increased 31% to $870 million from $662 million primarily due to the opening of
new retail stores plus an increase in comparable store sales of 8% for the
period. The increase in comparable store sales resulted from a 4% increase in
the number of transactions combined with a 4% increase in the average dollar
value per transaction. During the 26 weeks ended April 2, 2000, the Company
opened 202 stores in continental North America and 32 in the United Kingdom.
Specialty revenues increased 35% to $162 million for the 26 weeks ended April 2,
2000, compared to $120 million for the corresponding period in fiscal 1999. The
increase in specialty revenues was driven primarily by higher revenues from
foodservice accounts, licensees, and the grocery channel. Licensees (including
those in which the Company is a joint venture partner) opened 89 stores in
continental North America and 76 stores in international markets.
GROSS MARGIN
Gross margin increased to 55.3% for the 26 weeks ended April 2, 2000 from 54.4%
for the corresponding period in fiscal 1999. The improvement in gross margin was
primarily due to lower green coffee costs and, to a lesser extent, the impact of
a beverage sales price increase implemented in the third quarter of fiscal 1999.
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 38.3%
for the 26 weeks ended April 2, 2000, from 37.0% for the corresponding period in
fiscal 1999. The increase was due almost entirely to higher payroll-related
expenditures as a percent of retail revenues resulting from an increase in
average hourly wage rates and a continuing shift in sales to more
labor-intensive handcrafted beverages.
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Other operating expenses were 19.0% of specialty revenues for the 26 weeks ended
April 2, 2000, compared to 20.4% for the corresponding period in fiscal 1999.
The decrease was primarily due to continued improvements in profitability from
joint venture activities, which were partially offset by increases in operating
expenses relating to accelerating the growth of the specialty businesses.
General and administrative expenses as a percentage of net revenues were 5.3%
for the 26 weeks ended April 2, 2000 compared to 5.5% for the corresponding
period in fiscal 1999. The decrease was primarily due to leverage from the
acceleration of revenue growth.
INCOME TAXES
The Company's effective tax rate for the 26 weeks ended April 2, 2000 was 37.8%
compared to 38.0% for the corresponding period in fiscal 1999. The decrease was
due to overall tax planning efforts and the reduction of losses by the Company's
joint venture in Japan, which are not deductible for U.S. tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with total cash and cash equivalents and short-term
investments of $128 million and working capital of $119 million. Cash and cash
equivalents increased by $19 million for the 26 weeks ended April 2, 2000 to $85
million. Cash provided by operating activities totaled $168 million for the
first 26 weeks of fiscal 2000, resulting primarily from net earnings before
non-cash charges of $122 million and a decrease in inventories of $30 million.
In addition, $15 million was received in accordance with the strategic agreement
with Kozmo.com, Inc.
Cash used by investing activities for the first 26 weeks of fiscal 2000 totaled
$186 million. This included capital additions to property, plant and equipment
of $148 million related to opening 234 new Company-operated retail stores,
enhancing information systems, purchasing roasting and packaging equipment for
the Company's roasting and distribution facilities, and remodeling certain
existing stores. The Company used $25 million to make a minority investment in
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items and $10 million to make a minority investment in
Cooking.com, a leading web-based retailer of cookware, accessories, and
specialty foods and provider of information about cooking. The purchase of
Tympanum, Inc. (d/b/a Hear Music) used $8 million. During the 26-week period
ending April 2, 2000, the Company made equity investments of $3 million in its
international joint ventures and received $4.5 million in distributions from its
domestic joint ventures. The Company invested excess cash primarily in
short-term, investment-grade marketable debt securities. The net activity in the
Company's marketable securities portfolio during the 26-week period provided $8
million.
Cash provided by financing activities for the first 26 weeks of fiscal 2000
totaled $36 million. This included $51 million generated from the exercise of
employee stock options, the related income tax benefit available to the Company
upon exercise of such options, and cash generated from the Company's employee
stock purchase plan. As options granted under the Company's stock option plans
vest and are exercised, the Company will continue to receive proceeds and a tax
deduction; however, neither the amounts nor timing can be predicted. This was
offset by a $14 million decrease in checks outstanding.
Cash requirements for the remainder of fiscal 2000, other than normal operating
expenses, are expected to consist primarily of capital expenditures related to
the addition of new Company-operated retail stores. The Company plans to open at
least 400 Company-operated stores during fiscal 2000. The Company also
anticipates incurring additional expenditures for enhancing its production
capacity and information systems and remodeling certain existing stores. While
there can be no assurance that current expectations will be realized, management
expects capital expenditures for the remainder of fiscal 2000 to be
approximately $157 million.
Management believes that existing cash and investments plus cash generated from
operations should be sufficient to finance capital requirements for its core
businesses through fiscal 2000. New joint ventures, other new business
opportunities or store expansion rates substantially in excess of that presently
planned may require outside funding.
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COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
The supply and price of green (unroasted) coffee are subject to significant
volatility. Although most coffee trades in the commodity market, coffee of the
quality sought by the Company tends to trade on a negotiated basis at a
substantial premium above commodity coffee prices, depending upon the supply and
demand at the time of purchase. Supply and price can be affected by multiple
factors in the producing countries, including weather, political and economic
conditions. In addition, green coffee prices have been affected in the past, and
may be affected in the future, by the actions of certain organizations and
associations that have historically attempted to influence commodity prices of
green coffee through agreements establishing export quotas or restricting coffee
supplies worldwide. The Company's ability to raise sales prices in response to
rising coffee prices may be limited and the Company's profitability could be
adversely affected if coffee prices were to rise substantially.
The Company enters into fixed-price purchase commitments in order to secure an
adequate supply of quality green coffee and bring greater certainty to the cost
of sales in future periods. As of April 2, 2000, the Company had approximately
$112 million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee for the
remainder of fiscal 2000. The Company believes, based on relationships
established with its suppliers in the past, that the risk of non-delivery on
such purchase commitments is remote.
To further reduce its exposure to rising coffee costs, the Company may, from
time to time, enter into futures contracts to hedge price-to-be-established
coffee purchase commitments. The specific risks associated with these activities
are described below in Item 3 "Quantitative and Qualitative Disclosures about
Market Risk."
In addition to fluctuating green 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 in new markets, increases in the cost of dairy products and the
Company's continued ability to hire, train and retain qualified personnel.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Significant portions
of the Company's net revenues and profits are realized during the first quarter
of the Company's fiscal year, which includes the December holiday season. In
addition, quarterly results are affected by the timing of the opening of new
stores, and the Company's rapid growth may conceal the impact of seasonal
influences. Because of the seasonality of the Company's business and its overall
growth, results for any quarter are not necessarily indicative of the results
that may be achieved for the full fiscal year.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains investment portfolio holdings of various issuers, types
and maturities. These securities are classified as either trading or
available-for-sale. Trading securities are recorded on the balance sheet at fair
value, with unrealized gains and losses included in earnings. Available-for-sale
securities are recorded on the balance sheet at fair value, with unrealized
gains or losses reported as a separate component of accumulated other
comprehensive income. The Company does not hedge its interest rate exposure.
The Company is subject to foreign currency exchange rate exposure, primarily
related to its retail operations in Canada and the United Kingdom. Historically,
this exposure has had a minimal impact on the Company. At the present time, the
Company does not hedge foreign currency risk, but may do so in the future.
The Company may, from time to time, enter into futures contracts to hedge
price-to-be-fixed coffee purchase commitments with the objective of minimizing
cost risk due to market fluctuations. The Company does not hold or issue
derivative instruments for trading purposes. In accordance with SFAS No. 80
"Accounting for Futures Contracts," these futures contracts meet the hedge
criteria and are accounted for as hedges. Accordingly, gains and losses are
deferred and recognized as adjustments to the carrying value of the coffee
inventory when purchased and recognized in results of operations as coffee
products are sold. Gains and losses are calculated based on the difference
between the cost basis and the market value of the coffee contracts. The market
risk related to coffee futures is substantially offset by changes in the costs
of coffee purchased.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the ordinary
course of its business, but is not currently a party to any legal proceeding
that management believes would have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on February 14, 2000
for the purposes of (i) electing three Class 1 directors to serve until the
Annual Meeting of Shareholders to be held in early 2003; (ii) approving the
amendment and restatement of the Starbucks Corporation Key Employee Stock Option
Plan to increase by 9,000,000 the number of shares of the Company's Common Stock
reserved for issuance under the plan, add provisions prohibiting the granting of
stock options with an exercise price below the fair market value of a share of
the Company's Common Stock on the date of grant or the repricing of stock
options below such fair market value without shareholder approval, and update
the plan to permit more effective administrative practices; and (iii) ratifying
the selection of the independent auditors for fiscal 2000. All proposals were
approved. The table below shows the results of the shareholders' voting:
Votes in Votes Votes Withheld
Favor Against Abstentions
----------- ---------- --------------
Election of Directors
Class 1 Directors:
Howard P. Behar 165,069,643 0 1,562,104
James G. Shennan, Jr. 165,085,210 0 1,546,537
Craig E. Weatherup 165,036,842 0 1,594,905
Approve the amendment and
restatement of the Company's
Key Employee Stock Option
Plan - 1994 147,167,794 18,498,175 965,778
Ratification of
independent auditors 165,812,940 361,880 456,927
Because all proposals were routine, there were no broker non-votes.
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The following members of the Board of Directors, who were not up for re-election
during the current year, have terms that expire at the annual meeting of
shareholders to be held in early 2001 and 2002:
Director Term expires at the
annual meeting held in:
- ------------------------------- ------------------------------
Gregory B. Maffei 2001
Arlen I. Prentice 2001
Orin C. Smith 2001
Barbara Bass 2002
Craig J. Foley 2002
Howard Schultz 2002
ITEM 5. OTHER INFORMATION
On February 12, 2000, Starbucks entered into a strategic agreement with
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items. Under the agreement, Starbucks will receive $150 million
over a five-year period for in-store exposure and co-marketing opportunities.
Kozmo.com will locate drop boxes within Starbucks stores for return of videos,
DVDs, video games and other items delivered by Kozmo.com and will deliver
Starbucks coffee by the pound, Tazo teas and other Starbucks products. In
accordance with this agreement, Starbucks received $15 million which will be
recognized as revenue over 12 months, beginning in March 2000. On March 16,
2000, Starbucks made a minority investment of $25 million in Kozmo.com.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10.18* Strategic Agreement dated February 12, 2000 between
Starbucks Corporation and Kozmo.com, Inc.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Current Reports on Forms 8-K filed during the 26 weeks ended April 2,
2000:
None
*Confidential treatment requested
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARBUCKS CORPORATION
Dated: May 17, 2000 By: /s/ Michael Casey
----------------------
Michael Casey
executive vice president and
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
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