1
EXHIBIT 13
SELECTED FINANCIAL DATA
In thousands, except earnings per share and store operating data
The following selected financial data have been derived from the consolidated
financial statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto.
As of and for the OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 SEPT 29, 1996 OCT 1, 1995
fiscal year ended(1) (53 Wks) (52 Wks) (52 Wks) (52 Wks) (52 Wks)
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RESULTS OF OPERATIONS DATA
Net Revenues
Retail $1,423,389 $1,102,574 $836,291 $601,458 $402,655
Specialty(2) 256,756 206,128 139,098 96,414 62,558
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Total net revenues 1,680,145 1,308,702 975,389 697,872 465,213
Merger expenses(3) -- 8,930 -- -- --
Operating income 156,711 109,216 86,199 56,575 40,116
Gain on sale of investment(4) -- -- -- 9,218 --
Net earnings $ 101,693 $ 68,372 $ 55,211 $ 41,710 $ 26,102
Net earnings per common
share -- diluted(5) $ 0.54 $ 0.37 $ 0.33 $ 0.27 $ 0.18
Cash dividends per share -- -- -- -- --
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BALANCE SHEET DATA
Working capital $ 134,903 $ 157,805 $172,079 $239,365 $134,304
Total assets 1,252,514 992,755 857,152 729,227 468,178
Long-term debt
(including current portion) 9,057 1,803 168,832 167,980 81,773
Shareholders' equity 961,013 794,297 533,710 454,050 312,231
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STORE OPERATING DATA
Percentage change
in comparable store sales(6) 6% 5% 5% 7% 9%
Stores open at year-end
Continental North America
Company-operated stores 2,038 1,622 1,270 929 627
Licensed stores 179 133 94 75 49
International
Company-operated stores --
United Kingdom 97 66 31 9 1
Licensed stores 184 65 17 2 --
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Total stores 2,498 1,886 1,412 1,015 677
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(1) The Company's fiscal year ends on the Sunday closest to September 30.
Fiscal year 1999 included 53 weeks and fiscal years 1995 to 1998 each
included 52 weeks.
(2) Specialty revenues include product sales to and royalties and fees from
the Company's licensees.
(3) Merger expenses relate to the business combination with Seattle Coffee
Holdings Limited in fiscal 1998.
(4) Gain on sale of investment relates to the sale of Noah's New York
Bagels, Inc. stock in fiscal 1996.
(5) Earnings per share is based on the weighted average number of shares
outstanding during the period plus common stock equivalents consisting
of certain shares subject to stock options. In addition, the
presentation of diluted earnings per share assumes conversion of the
Company's formerly outstanding convertible subordinated debentures using
the "if converted" method when such securities were dilutive, with net
income adjusted for the after-tax interest expense and amortization
applicable to these debentures. Earnings per share data for fiscal years
1995 through 1998 have been restated to reflect the two-for-one stock
splits in fiscal 1999 and 1996.
(6) Includes only Company-operated stores open 13 months or longer.
2
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements set forth in this Annual Report, including anticipated store
openings, planned capital expenditures and trends in or expectations regarding
the Company's operations, specifically including the effect of problems
associated with the Year 2000, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Starbucks presently derives 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 and 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, and fiscal years 1998 and 1997 each had 52 weeks. The fiscal
year ending on October 1, 2000, will include 52 weeks.
The Company's net revenues increased from $1.3 billion in fiscal 1998 to $1.7
billion in fiscal 1999, due primarily to the Company's store expansion program
and comparable store sales increases. Comparable store sales increased by 6%, 5%
and 5% in fiscal 1999, 1998 and 1997, respectively. As part of its expansion
strategy of clustering stores in existing markets, Starbucks has experienced a
certain level of cannibalization of existing stores by new stores as store
concentration has increased. However, management believes such cannibalization
has been justified by the incremental sales and return on new store investments.
This cannibalization, as well as increased competition and other factors, may
continue to put downward pressure on the Company's comparable store sales growth
in future periods.
The following table sets forth the percentage relationship to total net
revenues, unless otherwise indicated, of certain items included in the Company's
consolidated statements of earnings:
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Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
(53 Wks) (52 Wks) (52 Wks)
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STATEMENTS OF EARNINGS DATA
Net revenues
Retail 84.7% 84.2% 85.7%
Specialty 15.3 15.8 14.3
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Total net revenues 100.0 100.0 100.0
Cost of sales and related occupancy costs 44.1 44.2 44.8
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Gross margin 55.9 55.8 55.2
Store operating expenses(1) 38.2 38.0 37.6
Other operating expenses(2) 20.0 21.1 20.3
Depreciation and amortization 5.8 5.5 5.4
General and administrative expenses 5.3 5.9 5.9
Merger expenses 0.0 0.7 0.0
Operating income 9.3 8.3 8.8
Interest and other income 0.5 0.7 1.3
Interest and other expense (0.0) (0.1) (0.7)
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Earnings before income taxes 9.8 8.9 9.4
Income taxes 3.7 3.7 3.7
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Net earnings 6.1 % 5.2% 5.7 %
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(1) Shown as a percentage of retail revenues.
(2) Shown as a percentage of specialty revenues.
3
BUSINESS COMBINATIONS
During the second quarter of fiscal 1999, Starbucks acquired the net assets of
Tazo, L.L.C. ("Tazo"), a Portland, Oregon-based tea company that produces
premium tea products, and Pasqua Inc. ("Pasqua"), a San Francisco,
California-based roaster and retailer of specialty coffee. Both of these
acquisitions were accounted for under the purchase method of accounting. The
results of operations for Tazo and Pasqua are included in the accompanying
consolidated financial statements from the dates of acquisition. During the
third quarter of fiscal 1998, Starbucks acquired the United Kingdom-based
Seattle Coffee Holdings Limited ("Seattle Coffee Company") in a
pooling-of-interests transaction (the "Transaction"). In conjunction with the
Transaction, Starbucks recorded pre-tax charges of $8.9 million in direct merger
costs and $6.6 million in other charges associated with the integration of
Seattle Coffee Company. The historical financial statements for the periods
prior to the Transaction were restated as though the companies had always been
combined.
RESULTS OF OPERATIONS -- FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES
Net revenues increased 28% to $1.7 billion for fiscal 1999, compared to $1.3
billion for fiscal 1998. Retail sales increased 29% to $1.4 billion from $1.1
billion. The increase in retail sales was due to the addition of new
Company-operated stores, comparable store sales growth of 6% and sales for the
53rd week of the fiscal year. Comparable store sales percentages have been
calculated excluding the 53rd week of fiscal 1999. The increase in comparable
store sales resulted from a 5% increase in the number of transactions and a 1%
increase in the average dollar value per transaction. During fiscal 1999, the
Company opened 424 stores in continental North America and 36 stores in the
United Kingdom. As of fiscal year-end, there were 2,038 Company-operated stores
in continental North America and 97 in the United Kingdom. During fiscal 2000,
the Company expects to open at least 350 Company-operated stores in North
America and 50 in the United Kingdom.
Specialty revenues increased 25% to $257 million for fiscal 1999 from $206
million for fiscal 1998. The increase was driven primarily by higher sales to
licensees and joint ventures and business dining customers. Licensees (including
those in which the Company is a joint venture partner) opened 44 stores in
continental North America and 121 stores in international markets. The Company
ended the year with 179 licensed stores in continental North America and 184
licensed stores in international markets. During fiscal 2000, the Company
expects to open at least 200 licensed stores.
GROSS MARGIN
Gross margin increased to 55.9% for fiscal 1999 from 55.8% in fiscal 1998. The
positive impact on gross margin of lower green coffee costs was partially offset
by lower gross margins associated with a change in the Company's strategy for
the grocery channel. In late fiscal 1998, the Company signed a long-term
licensing agreement with Kraft Foods, Inc. ("Kraft") to handle the U.S.
distribution, marketing and advertising for Starbucks whole bean and ground
coffee in grocery, warehouse club and mass merchandise stores. The transition to
Kraft occurred in the first quarter of fiscal 1999.
4
EXPENSES
Store operating expenses as a percentage of retail sales increased to 38.2% for
fiscal 1999 from 37.5% for fiscal 1998, excluding costs associated with the
Transaction. This was due primarily to higher payroll-related expenditures
resulting from both an increase in average hourly wage rates and a continuing
shift in sales to handcrafted beverages, which are more labor intensive.
Including the Transaction costs, store operating expenses for fiscal 1998 were
38.0% of retail sales.
Other operating expenses (expenses associated with all operations other than
Company-owned retail stores, including the Company's share of joint venture
profits and losses) were 20.0% of specialty revenues during fiscal 1999,
compared to 21.1% for fiscal 1998. This decrease was attributable to lower
operating expenses associated with the grocery channel after the transition to
Kraft, partially offset by higher payroll expense supporting other channels.
Depreciation and amortization was 5.8% of net revenues, up from 5.5%
of net revenues for fiscal 1998, primarily due to depreciation on new
information systems put into service in late fiscal 1998 and during fiscal 1999.
General and administrative expenses were 5.3% of net revenues during fiscal 1999
compared to 5.9% for fiscal 1998, primarily due to proportionately lower
payroll-related expenses.
INCOME TAXES
The Company's effective tax rate for fiscal 1999 was 38.0% compared to 41.2% for
fiscal 1998. The effective tax rate in fiscal 1998 was impacted by
non-deductible losses of Seattle Coffee Company prior to the Transaction. Fiscal
1998's rate was also affected by Transaction-related costs. Management expects
the effective tax rate to be approximately 38% during fiscal 2000.
RESULTS OF OPERATIONS -- FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES
Net revenues increased 34% to $1.3 billion for fiscal 1998, compared to $975
million for fiscal 1997. Retail sales increased 32% to $1.1 billion from $836
million. The increase in retail sales was due primarily to the addition of new
Company-operated stores. In addition, comparable store sales increased 5% for
the 52 weeks ended September 27, 1998 compared to the same 52-week period in
fiscal 1997. Comparable store sales increases resulted from an increase in the
number of transactions combined with an increase in the average dollar value per
transaction. The increase in average dollar value per transaction was primarily
due to the sales price increases effected during fiscal 1997. During fiscal
1998, the Company opened 357 stores in continental North America and 37 stores
in the United Kingdom. By fiscal year-end, there were 1,622 Company-operated
stores in continental North America and 66 in the United Kingdom.
Specialty revenues increased 48% to $206 million for fiscal 1998 from $139
million for fiscal 1997. The increase was due primarily to increased sales and
license fees in the grocery category, increased sales to the Company's joint
ventures and licensees and higher wholesale club sales. The Company sells
roasted coffee to its joint venture with Pepsi-Cola Company, a division of
PepsiCo, Inc. (the "North American Coffee Partnership"), for use in the
manufacture of its bottled Frappuccino(R) coffee drink. The Company also sells
coffee extract to Dreyer's Grand Ice Cream, Inc. ("Dreyer's") for use in the
manufacture of Starbucks branded ice creams sold by the Company's joint venture
with Dreyer's (the "Ice Cream Joint Venture"). Licensees (including those in
which the Company is a joint venture partner) opened 45 stores in continental
North America and 48 stores in international markets. The Company ended the year
with 133 licensed stores in continental North America and 65 licensed stores in
international markets.
5
GROSS MARGIN
Gross margin increased to 55.8% for fiscal 1998 compared to 55.2% for fiscal
1997. This increase was primarily the result of prior year sales price increases
partially offset by higher green coffee costs.
Store operating expenses as a percentage of retail sales increased to 38.0% for
fiscal 1998 from 37.6% for fiscal 1997. This was due to integration costs
associated with the Transaction. Excluding these costs, store operating expenses
for fiscal 1998 would have been 37.5% of retail sales.
Other operating expenses (expenses associated with the Company's specialty
operations, as well as the Company's share of joint venture profits and losses)
increased to 21.1% of specialty revenues for fiscal 1998 from 20.3% for fiscal
1997. The increase was attributable to higher advertising expenses and higher
payroll-related costs for the Company's international and grocery businesses,
partially offset by improved results of both the North American Coffee
Partnership and the Ice Cream Joint Venture.
MERGER EXPENSES
Merger expenses of $8.9 million consisted mainly of investment banking, legal
and accounting fees.
INTEREST AND OTHER INCOME
Interest and other income for fiscal 1998 was $8.5 million, compared to $12.4
million for fiscal 1997. The decrease was primarily due to lower average
investment balances.
INTEREST AND OTHER EXPENSE
Interest and other expense for fiscal 1998 was $1.4 million compared to $7.3
million for fiscal 1997. The decrease was due to the conversion of the Company's
$165.0 million 4 1/4% Convertible Subordinated Debentures to common stock during
the first quarter of fiscal 1998.
INCOME TAXES
The Company's effective tax rate for fiscal 1998 was 41.2% compared to 39.5% in
fiscal 1997. The effective tax rate in both years was impacted by non-deductible
losses of Seattle Coffee Company prior to the Transaction. Fiscal 1998's rate
was also affected by Transaction-related costs. Excluding the impact of
Transaction-related costs, the effective tax rate for fiscal 1998 would have
been 38.3%.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended fiscal 1999 with $117.8 million in total cash and short-term
investments. Working capital as of October 3, 1999, totaled $134.9 million
compared to $157.8 million at September 27, 1998. Cash and cash equivalents
decreased by $35.2 million during fiscal 1999 to $66.4 million at October 3,
1999. This decrease was offset by an increase in short-term investments of $29.5
million during the same period.
Cash provided by operating activities for fiscal 1999 totaled $210.6 million and
resulted primarily from net earnings before non-cash charges of $210.1 million.
Cash used by investing activities for fiscal 1999 totaled $336.3 million. This
included capital additions to property, plant and equipment of $261.8 million
related to opening 460 new Company-operated retail stores and remodeling certain
existing stores, purchasing roasting and packaging equipment for the Company's
roasting and distribution facilities, enhancing information systems and
expanding existing office space. The purchases of Pasqua and Tazo used $15.7
million. During fiscal 1999, the Company made equity investments of $10.5
million in its international joint ventures. The Company received $5.7 million
in distributions from the North American Coffee Partnership and $3.3 million in
distributions from the Ice Cream Joint Venture. The Company also used $28.3
million to make minority investments in Living.com, Inc. and Talk City, Inc. 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 fiscal 1999 provided $34.1 million.
6
Cash provided by financing activities for fiscal 1999 totaled $90.5 million.
This included $29.9 million of checks issued but not presented for payment,
$52.4 million generated from the exercise of employee stock options and the
related income tax benefit available to the Company upon exercise of such
options and $9.4 million generated from the Company's employee stock purchase
plan. As options granted under the Company's stock option plans are exercised,
the Company will continue to receive proceeds and a tax deduction; however,
neither the amounts nor the timing thereof can be predicted.
Cash requirements for 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 fiscal 2000 to be approximately $300 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.
YEAR 2000 COMPLIANCE
The Year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Computer programs with
time-sensitive software, at the Company and elsewhere, may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to produce and distribute products,
process transactions or engage in similar normal business activities. To address
the Year 2000 issue and its risks, the Company formed a cross-functional Task
Force, headed by senior management, to evaluate the risks and implement
appropriate remediation and contingency plans.
The Company's preparations for the Year 2000 have been divided into two
categories, MIS-supported systems and other systems and issues. "MIS-supported"
systems are those telephone and computer systems that are acquired, installed
and maintained by the Company's Management Information Systems ("MIS")
department. These systems include all of the software applications generally
available on the Company's computer network, as well as many applications used
by particular departments or in connection with specific functions (for example,
payroll and general accounting software). Single-user applications and a few
specialized systems maintained by certain departments within the Company are not
considered MIS-supported systems. The Company's MIS department is primarily
responsible for addressing Year 2000 compliance issues arising from all
MIS-supported systems, while the Year 2000 Task Force is primarily responsible
for Year 2000 compliance issues arising from non-MIS-supported systems and from
relationships with critical product and service providers.
The majority of computer and telephony applications at Starbucks are relatively
recent purchases that are not expected to be affected by the Year 2000 problem.
All of the MIS-supported systems used at Starbucks have been identified and
evaluated. Where necessary, the Company has remediated such systems by
installing system upgrades or rewriting code. As the suppliers of telephone and
computer systems or software to the Company have worked to address Year 2000
issues with their own products, several have uncovered new or additional
problems relating to their systems or software and have so notified the Company.
In some cases, these new or additional issues have necessitated additional
remediation or testing of the Company's systems. As part of the remediation
process, the Company's MIS department has tested each critical system and
networked application.
To address issues arising from non-MIS-supported systems or embedded chips and
to evaluate the Company's exposure to third parties' failures to remediate their
Year 2000 problems, the
7
Company has identified the critical product and service suppliers for each of
its business units and departments. The Company has solicited information from
these critical suppliers and others about their remediation and contingency
plans and their ability to meet the Company's needs in the Year 2000. By the end
of fiscal 1999, the Company had received responses from approximately 93% of
these product and service suppliers, virtually all of which indicate that they
are actively addressing the Year 2000 issue. The Company has worked with these
suppliers to complete additional remediation steps and is working with all of
its critical product and service suppliers to develop appropriate contingency
plans. The contingency plans include, among other actions, purchasing additional
inventory prior to the end of 1999, identifying alternate sources of products
and services and establishing alternate ways to accomplish critical business
functions. The Company has prepared contingency plans for each of its critical
business units or departments and conducted tests of certain critical
non-MIS-supported systems. Despite these efforts, there can be no guarantee that
the other companies on which the Company relies will be prepared for the Year
2000 and that their Year 2000 problems will not have an adverse effect on the
Company.
The Company presently believes that the most reasonably likely worst case
scenario concerning the Year 2000 is that certain critical product and service
providers will not be Year 2000 compliant and will be unable to deliver products
and services in a timely manner. The Company believes that its geographically
dispersed retail stores and large supplier base will significantly mitigate any
adverse impact from suppliers' delays or failures, but that the Company remains
vulnerable to (i) delays in deliveries by a few suppliers who are the sole
source of certain products and services; (ii) disruption of the components of
its distribution operations, including ports, trucking and air freight services;
and (iii) local or regional retail store shutdowns as a result of problems with
infrastructure such as power, water and sewer service. To support the Company's
business, particularly the retail stores, in the event that any problems occur,
the Company has prepared a Year 2000 event room with backup generator power to
monitor the rollover of the Company's systems to the new year and address any
other Year 2000 issues.
The Company has spent approximately $1.4 million in direct costs for the Year
2000 compliance project through the end of fiscal 1999 and expects to spend
approximately $2.0 million for the project. The total cost of all remediation
efforts is management's best estimate, which is based on numerous assumptions
about future events, including the continued availability of certain resources,
third party modification plans and other factors. There can be no guarantee that
these estimates will prove true and actual results could differ significantly
from those projected.
COFFEE PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
The supply and price of 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 October 3, 1999, the Company had approximately
$84 million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee for the
majority 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.
8
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 "Financial Risk Management."
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 maintains investment portfolio holdings of various issuers, types
and maturities. These securities are classified as available-for-sale and are
recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income. As
of October 3, 1999, approximately 76% of the total portfolio was invested in
short-term marketable debt securities with maturities of less than one year. An
additional 15% was invested in long-term U.S. Government obligations with
maturities of 12 to 18 months and the remaining 9% was invested in marketable
equity securities. The Company does not hedge its interest rate exposure.
The Company is subject to foreign currency exchange rate exposure, primarily
related to its foreign 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 Statement of
Financial Accounting Standards ("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 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.
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 other seasonal
influences. Because of the seasonality of the Company's business, results for
any quarter are not necessarily indicative of the results that may be achieved
for the full fiscal year.
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 Statement 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.
9
CONSOLIDATED BALANCE SHEETS
In thousands, except share data
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OCT 3, 1999 SEPT 27, 1998
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ASSETS
Current assets
Cash and cash equivalents $ 66,419 $ 101,663
Short-term investments 51,367 21,874
Accounts receivable 47,646 50,972
Inventories 180,886 143,118
Prepaid expenses and other current assets 19,049 11,205
Deferred income taxes, net 21,133 8,448
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Total current assets 386,500 337,280
Joint ventures and other investments 68,060 38,917
Property, plant and equipment, net 760,289 600,794
Deposits and other assets 23,474 15,685
Goodwill, net 14,191 79
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Total $ 1,252,514 $ 992,755
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 56,108 $ 49,861
Checks drawn in excess of bank balances 64,211 33,634
Accrued compensation and related costs 43,872 35,941
Accrued occupancy costs 23,017 17,526
Accrued taxes 30,752 18,323
Other accrued expenses 33,637 24,190
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Total current liabilities 251,597 179,475
Deferred income taxes, net 32,886 18,983
Long-term debt 7,018 --
Commitments and contingencies (notes 5, 9 and 13)
SHAREHOLDERS' EQUITY
Common stock -- Authorized, 300,000,000 shares; issued and
outstanding, 183,282,095 and 179,266,956 shares, respectively
(includes 848,550 common stock units in both years) 651,020 589,214
Retained earnings 313,939 212,246
Accumulated other comprehensive loss (3,946) (7,163)
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Total shareholders' equity 961,013 794,297
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Total $ 1,252,514 $ 992,755
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See Notes to Consolidated Financial Statements.
10
CONSOLIDATED STATEMENTS OF EARNINGS
In thousands, except earnings per share
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Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
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Net revenues $ 1,680,145 $ 1,308,702 $ 975,389
Cost of sales and related occupancy costs 741,010 578,483 436,942
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Gross margin 939,135 730,219 538,447
Store operating expenses 543,572 418,476 314,064
Other operating expenses 51,374 43,479 28,239
Depreciation and amortization 97,797 72,543 52,801
General and administrative expenses 89,681 77,575 57,144
Merger expenses -- 8,930 --
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Operating income 156,711 109,216 86,199
Interest and other income 8,678 8,515 12,393
Interest and other expense (1,363) (1,381) (7,282)
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Earnings before income taxes 164,026 116,350 91,310
Income taxes 62,333 47,978 36,099
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Net earnings $ 101,693 $ 68,372 $ 55,211
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings per common share -- basic $ 0.56 $ 0.39 $ 0.35
Net earnings per common share -- diluted $ 0.54 $ 0.37 $ 0.33
Weighted average shares outstanding
Basic 181,842 176,110 159,289
Diluted 188,531 183,771 180,317
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
11
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings $ 101,693 $ 68,372 $ 55,211
Adjustments to reconcile net earnings
to net cash provided by operating activities
Depreciation and amortization 107,512 80,901 58,864
Provision for store remodels and losses on asset disposals 2,456 7,234 1,049
Conversion of compensatory options into common stock -- 1,158 --
Deferred income taxes, net 794 2,125 5,490
Equity in (income) losses of investees (2,318) 14 2,760
Cash (used) provided by changes in operating assets and liabilities
Accounts receivable 3,838 (19,790) (13,475)
Inventories (36,405) (23,496) (36,382)
Prepaid expenses and other current assets (7,552) (2,497) (2,236)
Accounts payable 4,711 4,601 9,559
Accrued compensation and related costs 7,586 9,943 10,871
Accrued occupancy costs 5,517 5,342 4,208
Accrued taxes 12,429 7,173 3,850
Other accrued expenses 10,313 1,799 525
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 210,574 142,879 100,294
INVESTING ACTIVITIES
Purchase of investments (122,800) (51,354) (171,631)
Sale of investments 3,633 5,138 9,257
Maturity of investments 85,053 112,080 173,665
Purchase of businesses, net of cash acquired (15,662) -- --
Investments in joint ventures and other investments (30,780) (12,418) (27,624)
Distributions from joint ventures 8,983 2,750 --
Additions to property, plant and equipment (261,781) (201,855) (174,363)
Proceeds from sales of property, plant and equipment 3,927 -- --
Additions to deposits and other assets (6,866) (3,184) (4,604)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (336,293) (148,843) (195,300)
FINANCING ACTIVITIES
Increase in cash provided by checks drawn in excess of bank balances 29,912 4,846 12,287
Proceeds from sale of common stock
under employee stock purchase plan 9,386 4,649 4,009
Exercise of stock options 33,799 20,755 13,629
Tax benefit from exercise of nonqualified stock options 18,621 9,332 9,626
Payments on long-term debt (1,189) (1,993) (1,566)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 90,529 37,589 37,985
Effect of exchange rate changes on cash and cash equivalents (54) (88) (18)
- ------------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (35,244) 31,537 (57,039)
CASH AND CASH EQUIVALENTS
Beginning of year 101,663 70,126 127,165
- ------------------------------------------------------------------------------------------------------------------------------------
End of year $ 66,419 $ 101,663 $ 70,126
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for
Interest $ 442 $ 4,130 $ 7,179
Income taxes 35,366 32,643 19,679
NONCASH FINANCING AND INVESTING TRANSACTIONS
Liabilities assumed in conjunction with the acquisition
of land and building 7,746 -- --
Net unrealized holding gains (losses) on investments 683 (595) (1,983)
Conversion of convertible debt into common stock,
net of unamortized issue costs and accrued interest -- 162,036 --
Common stock tendered in settlement of stock
options exercised -- 4,859 --
Equipment acquired under capital lease -- -- 2,434
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands, except share data
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 157,422,976 $364,020 $ 88,663 $ 1,367 $ 454,050
Net earnings -- -- 55,211 -- 55,211
Unrealized holding losses, net -- -- -- (1,983) (1,983)
Translation adjustment -- -- -- (832) (832)
---------
Comprehensive income 52,396
---------
Exercise of stock options,
including tax benefit of $9,626 2,763,830 23,255 -- -- 23,255
Sale of common stock 931,240 4,009 -- -- 4,009
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 28, 1997 161,118,046 391,284 143,874 (1,448) 533,710
Net earnings -- -- 68,372 -- 68,372
Unrealized holding losses, net -- -- -- (595) (595)
Translation adjustment -- -- -- (5,120) (5,120)
---------
Comprehensive income 62,657
---------
Conversion of convertible debt
into common stock 14,194,054 162,036 -- -- 162,036
Common stock units issued
under deferred stock
plan, net of shares tendered 848,550 -- -- -- --
Exercise of stock options,
including tax benefit of $9,332 2,834,528 31,245 -- -- 31,245
Sale of common stock 271,778 4,649 -- -- 4,649
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 27, 1998 179,266,956 589,214 212,246 (7,163) 794,297
Net earnings -- -- 101,693 -- 101,693
Unrealized holding gains, net -- -- -- 683 683
Translation adjustment -- -- -- 2,534 2,534
---------
Comprehensive income 104,910
---------
Exercise of stock options,
including tax benefit of $18,621 3,522,908 52,420 -- -- 52,420
Sale of common stock 492,231 9,386 -- -- 9,386
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, October 3, 1999 183,282,095 $651,020 $313,939 $(3,946) $ 961,013
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended October 3, 1999, September 27, 1998 and September 28, 1997
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Starbucks Corporation and its subsidiaries (collectively "Starbucks" or the
"Company") purchases and roasts high quality whole bean coffees and sells them,
along with fresh, rich-brewed coffees, Italian-style espresso beverages, a
variety of pastries and confections, coffee-related accessories and equipment
and a line of premium teas, primarily through its Company-operated retail
stores. In addition to sales through its Company-operated retail stores,
Starbucks sells coffee and tea products through other channels of distribution
(collectively, "specialty operations"). Starbucks, through its joint venture
partnerships, also produces and sells bottled Frappuccino(R) coffee drink and a
line of premium ice creams. The Company's objective is to establish Starbucks as
the most recognized and respected brand in the world. To achieve this goal, the
Company plans to continue to rapidly expand its retail operations, grow its
specialty operations and selectively pursue other opportunities to leverage the
Starbucks brand through the introduction of new products and the development of
new distribution channels.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements reflect the financial position and
operating results of Starbucks and its subsidiaries. Material intercompany
transactions have been eliminated.
Investments in unconsolidated joint ventures are accounted for under the equity
method, as the Company does not exercise control over the operating and
financial policies of such joint ventures.
FISCAL YEAR-END
The Company's fiscal year ends on the Sunday closest to September 30.
The fiscal year ended October 3, 1999, included 53 weeks. Fiscal years 1998 and
1997 each included 52 weeks.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results may differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less at the time of purchase to be cash equivalents.
CASH MANAGEMENT
The Company's cash management system provides for the reimbursement of all major
bank disbursement accounts on a daily basis. Checks issued but not presented for
payment to the bank are reflected as "Checks drawn in excess of bank balances"
in the accompanying consolidated financial statements.
INVESTMENTS
The Company's investments consist primarily of investment-grade marketable debt
and equity securities, all of which are classified as available-for-sale and
recorded at fair value. Unrealized holding gains and losses are recorded, net of
any tax effect, as a separate component of accumulated other comprehensive
income.
14
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents approximates fair value because
of the short-term maturity of those instruments. The fair value of the Company's
investments in marketable debt and equity securities is based upon the quoted
market price on the last business day of the fiscal year plus accrued interest,
if any. The fair value and amortized cost of the Company's investments (short-
and long-term) at October 3, 1999, were $56.4 million and $56.2 million,
respectively. The fair value and amortized cost of the Company's investments at
September 27, 1998, were $21.9 million and $22.7 million, respectively. For
further information on investments, see Note 4. The carrying value of long-term
debt approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost (primarily moving average cost) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation of property, plant and equipment, which includes
amortization of assets under capital leases, is provided on the straight-line
method over estimated useful lives, generally ranging from two to seven years
for equipment and 40 years for buildings. Leasehold improvements are amortized
over the shorter of their estimated useful lives or the related lease life,
generally ten years. The portion of depreciation expense related to production
and distribution facilities is included in "Cost of sales and related occupancy
costs" in the accompanying consolidated statements of earnings.
GOODWILL
The excess purchase price paid over net assets of businesses acquired is
amortized on a straight-line basis over the period of expected benefit, which
ranges from ten to twenty years.
LONG-LIVED ASSETS
When facts and circumstances indicate that the cost of long-lived assets may be
impaired, an evaluation of recoverability is performed by comparing the carrying
value of the assets to projected future cash flows. Upon indication that the
carrying value of such assets may not be recoverable, the Company recognizes an
impairment loss by a charge against current operations.
HEDGING AND FUTURES CONTRACTS
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 Statement of
Financial Accounting Standards ("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 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. The Company
had no open futures contracts as of October 3, 1999, or September 27, 1998.
ADVERTISING
The Company expenses costs of advertising the first time the advertising
campaign takes place, except for direct-response advertising, which is
capitalized and amortized over its expected period of future benefit, generally
three to twelve months.
STORE PREOPENING EXPENSES
Costs incurred in connection with the start-up and promotion of new store
openings are expensed as incurred.
15
RENT EXPENSE
Certain of the Company's lease agreements provide for scheduled rent increases
during the lease terms or for rental payments commencing at a date other than
the date of initial occupancy. Minimum rental expenses are recognized on a
straight-line basis over the terms of the leases.
FOREIGN CURRENCY TRANSLATION
The Company's international operations use their local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date and income and expense accounts at the average
exchange rates during the year. Resulting translation adjustments are recorded
as a separate component of accumulated other comprehensive income.
INCOME TAXES
The Company computes income taxes using the asset and liability method, under
which deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities.
STOCK SPLIT
On March 19, 1999, the Company effected a two-for-one stock split for its
holders of record on March 5, 1999. All applicable share and per-share data in
these consolidated financial statements have been restated to give effect to
this stock split.
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
numbers of shares resulting from this computation for fiscal 1999, 1998 and 1997
were 181.8 million, 176.1 million and 159.3 million, respectively.
The computation of diluted earnings per share includes the dilutive effect of
common stock equivalents consisting of certain shares subject to stock options.
The computation of diluted earnings per share also assumes conversion of the
Company's formerly outstanding convertible subordinated debentures using the "if
converted" method when such securities were dilutive, with net income adjusted
for the after-tax interest expense and amortization applicable to these
debentures. The numbers of shares resulting from this computation for fiscal
1999, 1998 and 1997 were 188.5 million, 183.8 million and 180.3 million,
respectively. Options with exercise prices greater than the average market price
were not included in the computation of diluted earnings per share. These
options totaled 0.6 million, 0.3 million and 0.6 million for fiscal 1999, 1998
and 1997, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
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 Statement 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.
RECLASSIFICATIONS
Certain reclassifications of prior years' balances have been made to conform to
the fiscal 1999 presentation.
16
NOTE 2: BUSINESS COMBINATIONS
During the second quarter of fiscal 1999, Starbucks acquired the net assets of
Tazo, L.L.C. ("Tazo"), a Portland, Oregon-based tea company that produces
premium tea products, and the stock of Pasqua Inc. ("Pasqua"), a San Francisco,
California-based roaster and retailer of specialty coffee. The combined purchase
price for these two acquisitions was $16.5 million. The excess purchase price
over the net assets acquired was recorded to goodwill and is being amortized
over a period of ten to twenty years. Both of these acquisitions were accounted
for under the purchase method of accounting. The results of operations of Tazo
and Pasqua have been included in the consolidated financial statements of the
Company from the dates of acquisition. Pro forma results of operations have not
been presented because the effects of these acquisitions were not material on
either an individual or aggregate basis.
On May 28, 1998, the Company acquired all of the equity interests of Seattle
Coffee Holdings Limited ("Seattle Coffee Company"), a United Kingdom-based
roaster and retailer of specialty coffee, in exchange for 3.6 million shares of
Starbucks common stock. This business combination (the "Transaction") was
accounted for as a pooling-of-interests for accounting and financial reporting
purposes. Accordingly, the historical financial statements for the periods prior
to the business combination were restated as though the companies had always
been combined. The restated financial statements were adjusted to conform the
accounting policies and fiscal reporting periods of Seattle Coffee Company to
Starbucks accounting policies and fiscal reporting periods. The Transaction
resulted in pre-tax charges of $8.9 million in direct merger costs and $6.6
million in other costs associated with the integration of Seattle Coffee
Company.
The following summarizes the Company's net revenues, net earnings and earnings
per share for the periods prior to and following the Transaction (in thousands,
except earnings per share):
SEATTLE
COFFEE
STARBUCKS COMPANY COMBINED
- --------------------------------------------------------------------------------------------------------------------
1998
34 Weeks prior to the Transaction
Net revenues $805,151 $ 15,675 $820,826
Net earnings 45,811 (3,312) 42,499
Net earnings per share -- diluted 0.25 (0.02) 0.23
- --------------------------------------------------------------------------------------------------------------------
18 Weeks after the Transaction
Net revenues $487,876
Net earnings 25,873
Net earnings per share -- diluted 0.15
- --------------------------------------------------------------------------------------------------------------------
1997
Net revenues $966,946 $ 8,443 $975,389
Net earnings 57,412 (2,201) 55,211
Net earnings per share -- diluted 0.35 (0.02) 0.33
- --------------------------------------------------------------------------------------------------------------------
17
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (in thousands):
OCT 3, 1999 SEPT 27, 1998
- ----------------------------------------------------------------------------------------
Operating funds and interest-bearing deposits $ 39,926 $ 26,564
Commercial paper 7,980 67,024
Money market funds 18,513 8,075
- ----------------------------------------------------------------------------------------
$ 66,419 $101,663
- ----------------------------------------------------------------------------------------
NOTE 4: INVESTMENTS
The Company's investments consist of the following (in thousands):
- ------------------------------------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
FAIR AMORTIZED HOLDING HOLDING
October 3,1999 VALUE COST GAINS LOSSES
- ------------------------------------------------------------------------------------------------------------
Current investments
Corporate debt securities $17,233 $17,123 $ 155 $ (45)
U.S. Government obligations 4,988 4,976 13 (1)
Commercial paper 18,706 18,751 -- (45)
Mutual funds 2,056 2,002 73 (19)
Marketable equity securities 8,384 8,258 313 (187)
- ------------------------------------------------------------------------------------------------------------
$51,367 $51,110 $ 554 $ (297)
- ------------------------------------------------------------------------------------------------------------
Non-current investments
U.S. Government obligations $ 5,028 $ 5,044 $ -- $ (16)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
FAIR AMORTIZED HOLDING HOLDING
September 27, 1998 VALUE COST GAINS LOSSES
- ------------------------------------------------------------------------------------------------------------
Current investments
Corporate debt securities $11,356 $11,373 $ 20 $ (37)
U.S. Government obligations 10,410 10,409 1 --
Marketable equity securities 108 958 -- (850)
- ------------------------------------------------------------------------------------------------------------
$21,874 $22,740 $ 21 $ (887)
- ------------------------------------------------------------------------------------------------------------
All investments are classified as available-for-sale as of October 3,1999 and
September 27, 1998. Securities with remaining maturities of one year or less are
classified as short-term investments. Securities with remaining maturities
longer than one year are classified as long-term and are included in the line
item "Joint ventures and other investments" in the accompanying consolidated
balance sheets. The specific identification method is used to determine a cost
basis for computing realized gains and losses.
In fiscal 1999, 1998 and 1997, proceeds from the sale of investment securities
were $3.6 million, $5.1 million and $9.3 million, respectively. Gross realized
gains and losses were not material in 1999, 1998 and 1997.
18
NOTE 5: INVENTORIES
Inventories consist of the following (in thousands):
- ----------------------------------------------------------------------------------
OCT 3, 1999 SEPT 27, 1998
- ----------------------------------------------------------------------------------
Coffee
Unroasted $ 95,001 $ 77,400
Roasted 28,065 18,996
Other merchandise held for sale 46,655 36,850
Packaging and other supplies 11,165 9,872
- ----------------------------------------------------------------------------------
$180,886 $143,118
- ----------------------------------------------------------------------------------
As of October 3, 1999, the Company had fixed-price inventory purchase
commitments for green coffee totaling approximately $84 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 remote.
NOTE 6: JOINT VENTURES AND OTHER INVESTMENTS
Starbucks has several joint ventures that are accounted for using the equity
method. The Company's share of joint venture income or losses is included in
"Other operating expenses" in the accompanying consolidated statements of
earnings.
The Company has two joint ventures to produce and distribute Starbucks branded
products: a 50/50 joint venture and partnership agreement with Pepsi-Cola
Company ("Pepsi") to develop ready-to-drink coffee-based beverages and a 50/50
joint venture agreement with Dreyer's Grand Ice Cream, Inc. to develop and
distribute premium ice creams.
The Company is a partner in several other joint ventures that operate licensed
Starbucks retail stores. The Company has a 50/50 joint venture partnership with
SAZABY Inc., a Japanese retailer and restauranteur, to develop Starbucks retail
stores in Japan. The Company also has a 5% interest in a joint venture to
develop Starbucks retail stores in Hawaii and a 5% interest in a joint venture
to develop Starbucks retail stores in Taiwan.
The Company's investments in these joint ventures are as follows (in thousands):
- --------------------------------------------------------------------------------------------------
PEPSI ALL OTHER
JOINT JOINT
VENTURE VENTURES TOTAL
- --------------------------------------------------------------------------------------------------
Balance, September 29, 1996 $ 2,618 $ 1,781 $ 4,399
Allocated share of losses (2,384) (376) (2,760)
Capital contributions 27,259 365 27,624
- --------------------------------------------------------------------------------------------------
Balance, September 28, 1997 27,493 1,770 29,263
Allocated share of (losses) income (30) 16 (14)
Distributions from joint ventures -- (2,750) (2,750)
Capital contributions 7,616 4,802 12,418
- --------------------------------------------------------------------------------------------------
Balance, September 27, 1998 35,079 3,838 38,917
Allocated share of (losses) income 3,046 (728) 2,318
Distributions from joint ventures (5,733) (3,250) (8,983)
Capital contributions -- 10,466 10,466
- --------------------------------------------------------------------------------------------------
Balance, October 3, 1999 $ 32,392 $ 10,326 $ 42,718
- --------------------------------------------------------------------------------------------------
In addition, the Company has a consolidated 50/50 joint venture with Johnson
Development Corporation to develop retail stores in under-served urban
communities.
As of October 3,1999, the Company had a $20.3 million investment in convertible
securities of Living.com, Inc. Subsequent to year-end, the investment was
converted into shares of Living.com, Inc. Series B Preferred Stock.
19
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and consist of the following
(in thousands):
OCT 3, 1999 SEPT 27, 1998
- ----------------------------------------------------------------------------------------------
Land $ 5,084 $ 3,602
Building 19,795 8,338
Leasehold improvements 591,640 460,020
Roasting and store equipment 273,612 218,744
Furniture, fixtures and other 130,223 79,953
- ----------------------------------------------------------------------------------------------
1,020,354 770,657
Less accumulated depreciation and amortization (320,982) (218,455)
- ----------------------------------------------------------------------------------------------
699,372 552,202
Work in progress 60,917 48,592
- ----------------------------------------------------------------------------------------------
$ 760,289 $ 600,794
- ----------------------------------------------------------------------------------------------
NOTE 8: LONG-TERM DEBT
In September 1999, the Company purchased the land and building comprising its
York County, Pennsylvania roasting plant and distribution facility. The total
purchase price was $12.9 million. In connection with this purchase, the Company
assumed loans totaling $7.7 million from the York County Industrial Development
Corporation. Maturities of these loans range from 9.5 to 10.5 years, with
interest rates from 0.0% to 2.0%.
Scheduled principal payments on long-term debt are as follows (in thousands):
- --------------------------------------------------------------------------------
Fiscal year ending
- --------------------------------------------------------------------------------
2000 $ 673
2001 685
2002 697
2003 710
2004 722
Thereafter 4,204
- --------------------------------------------------------------------------------
Total principal payments $7,691
- --------------------------------------------------------------------------------
During fiscal 1996, the Company issued $165.0 million in principal amount of
4 1/4% Convertible Subordinated Debentures due 2002. On October 21, 1997, the
Company called these debentures for redemption. The total principal amount
converted, net of unamortized issue costs, accrued but unpaid interest and costs
of conversion, was credited to common stock.
NOTE 9: LEASES
The Company leases retail stores, roasting and distribution facilities and
office space under operating leases expiring through 2023. Most lease agreements
contain renewal options and rent escalation clauses. Certain leases provide for
contingent rentals based upon gross sales.
Rental expense under these lease agreements was as follows (in thousands):
- -----------------------------------------------------------------------------------
Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
- -----------------------------------------------------------------------------------
Minimum rentals $95,613 $75,912 $54,093
Contingent rentals 1,581 1,406 1,193
- -----------------------------------------------------------------------------------
$97,194 $77,318 $55,286
- -----------------------------------------------------------------------------------
20
Minimum future rental payments under non-cancelable lease obligations as of
October 3, 1999, are as follows (in thousands):
- --------------------------------------------------------------------------------
Fiscal year ending
- --------------------------------------------------------------------------------
2000 $ 98,515
2001 99,459
2002 99,133
2003 95,827
2004 90,405
Thereafter 321,941
- --------------------------------------------------------------------------------
Total minimum lease payments $805,280
- --------------------------------------------------------------------------------
NOTE 10: SHAREHOLDERS' EQUITY
The Company has authorized 7,500,000 shares of its preferred stock, none of
which was outstanding at October 3, 1999.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of the
first quarter of fiscal 1999. 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):
- ---------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $101,693 $ 68,372 $ 55,211
Unrealized holding gains (losses) on
investments, net of tax (provision)
benefit of ($155), $373 and $1,242
in 1999, 1998 and 1997, respectively 252 (595) (1,983)
Reclassification adjustment for losses
realized in net income, net of tax benefit of $270 431 -- --
- ---------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) 683 (595) (1,983)
- ---------------------------------------------------------------------------------------------------------------------
Translation adjustment 2,534 (5,120) (832)
- ---------------------------------------------------------------------------------------------------------------------
Total comprehensive income $104,910 $ 62,657 $ 52,396
- ---------------------------------------------------------------------------------------------------------------------
21
NOTE 11: EMPLOYEE STOCK AND BENEFIT PLANS
STOCK OPTION PLANS
The Company maintains several stock option plans under which the Company may
grant incentive stock options and non-qualified stock options to employees,
consultants and non-employee directors. Stock options have been granted at
prices at or above the fair market value on the date of grant. Options vest and
expire according to terms established at the grant date.
The following summarizes all stock option transactions from September 30, 1996,
through October 3, 1999.
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE SHARES AVERAGE
SHARES EXERCISE SUBJECT TO EXERCISE
SUBJECT TO PRICE EXERCISABLE PRICE
OPTIONS PER SHARE OPTIONS PER SHARE
- ---------------------------------------------------------------------------------------------------------------------
Outstanding, September 30, 1996 15,572,456 $ 6.35 6,633,934 $ 4.22
Granted 5,859,592 16.62
Exercised (2,763,830) 4.96
Cancelled (760,896) 10.65
- ---------------------------------------------------------------------------------------------------------------------
Outstanding, September 28, 1997 17,907,322 9.66 7,427,352 5.43
Granted 6,508,632 18.52
Exercised (3,683,078) 6.13
Cancelled (1,229,478) 11.79
- ---------------------------------------------------------------------------------------------------------------------
Outstanding, September 27, 1998 19,503,398 13.10 7,560,806 8.49
Granted 8,051,998 22.97
Exercised (3,522,908) 9.53
Cancelled (1,461,937) 18.99
- ---------------------------------------------------------------------------------------------------------------------
Outstanding, October 3, 1999 22,570,551 $ 16.84 12,080,825 $ 13.55
- ---------------------------------------------------------------------------------------------------------------------
At October 3, 1999, there were 10,620,149 shares of common stock available for
issuance pursuant to future stock option grants.
Additional information regarding options outstanding as of October 3, 1999, is
as follows:
- ---------------------------------------------------------------------------------------------------------------------------
OPTIONS
OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED ---------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- ---------------------------------------------------------------------------------------------------------------------------
$ 0.37 $ 6.28 2,483,329 3.71 $ 4.58 2,469,329 $ 4.57
6.31 9.41 2,480,518 5.68 8.57 2,191,796 8.51
9.69 18.41 9,148,398 7.51 16.93 5,281,766 16.43
19.42 26.25 7,948,806 9.09 21.96 2,137,934 21.98
35.31 35.31 509,500 9.68 35.31 -- --
- ---------------------------------------------------------------------------------------------------------------------------
$ 0.37 $ 35.31 22,570,551 7.50 $ 16.84 12,080,825 $ 13.55
- ---------------------------------------------------------------------------------------------------------------------------
22
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan which provides that eligible
employees may contribute up to 10% of their base earnings, up to $25,000
annually, toward the quarterly purchase of the Company's common stock. The
employee's purchase price is 85% of the lesser of the fair market value of the
stock on the first business day or the last business day of the quarterly
offering period. No compensation expense is recorded in connection with the
plan. The total number of shares issuable under the plan is 8,000,000. There
were 492,231 shares issued under the plan during fiscal 1999 at prices ranging
from $14.05 to $25.18. There were 271,778 shares issued under the plan during
fiscal 1998 at prices ranging from $15.99 to $19.58. There were 185,492 shares
issued under the plan during fiscal 1997 at prices ranging from $11.79 to
$12.86. Of the 18,555 employees eligible to participate, 4,972 were participants
in the plan as of October 3, 1999.
DEFERRED STOCK PLAN
The Company has a Deferred Stock Plan for certain key employees that enables
participants in the plan to defer receipt of ownership of common shares from the
exercise of non-qualified stock options. The minimum deferral period is five
years. As of October 3, 1999, receipt of 848,550 shares was deferred under the
terms of this plan. The rights to receive these shares, represented by common
stock units, are included in the calculation of basic and diluted earnings per
share as common stock equivalents.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based awards using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure
of pro forma net income and net income per share as if the Company adopted the
fair-value method of accounting for stock-based awards as of the beginning of
fiscal 1996. The fair value of stock-based awards to employees is calculated
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
- ---------------------------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Expected life (years) 1.5 - 6 1.5 - 6 1.5 - 6 .25 .25 .25
Expected volatility 50% 45% 40% 44 - 66% 37 - 45% 45 - 47%
Risk-free interest rate 4.60 - 6.21% 5.28 - 6.05% 5.41 - 6.54% 4.26 - 5.63% 5.26 - 5.74% 5.27 - 5.53%
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
- ---------------------------------------------------------------------------------------------------------------------------
The Company's valuations are based upon a multiple option valuation approach and
forfeitures are recognized as they occur. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock-price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate.
23
As required by SFAS No. 123, the Company has determined that the weighted
average estimated fair values of options granted during fiscal 1999, 1998 and
1997 were $8.86, $7.20 and $5.42 per share, respectively. Had compensation costs
for the Company's stock-based compensation plans been accounted for using the
fair value method of accounting described by SFAS No. 123, the Company's net
earnings and earnings per share would have been as follows (in thousands, except
earnings per share):
- --------------------------------------------------------------------------------
PRO FORMA
UNDER SFAS
Fiscal year ended AS REPORTED NO. 123
- --------------------------------------------------------------------------------
October 3, 1999
Net earnings $ 101,693 $ 75,326
Net earnings per common share
Basic $ 0.56 $ 0.41
Diluted $ 0.54 $ 0.40
September 27, 1998
Net earnings $ 68,372 $ 51,595
Net earnings per common share
Basic $ 0.39 $ 0.30
Diluted $ 0.37 $ 0.28
September 28, 1997
Net earnings $ 55,211 $ 45,808
Net earnings per common share
Basic $ 0.35 $ 0.29
Diluted $ 0.33 $ 0.28
- --------------------------------------------------------------------------------
In applying SFAS No. 123, the impact of outstanding stock options granted prior
to 1996 has been excluded from the pro forma calculations; accordingly, the
1999, 1998 and 1997 pro forma adjustments are not necessarily indicative of
future period pro forma adjustments.
DEFINED CONTRIBUTION PLANS
Starbucks maintains voluntary defined contribution plans covering eligible
employees as defined in the plan documents. Participating employees may elect to
defer and contribute a percentage of their compensation to the plan, not to
exceed the dollar amount set by law. For certain plans, the Company matches 25%
of each employee's eligible contribution up to a maximum of the first 4% of each
employee's compensation.
The Company's matching contributions to the plans were approximately $0.9
million, $0.8 million and $0.6 million for fiscal 1999, 1998 and 1997,
respectively.
24
NOTE 12: INCOME TAXES
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
- -------------------------------------------------------------------------------------------------------
Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
- -------------------------------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.7 3.8 3.6
Non deductible losses and merger costs -- 2.6 1.0
Other, net (0.7) (0.2) (0.1)
- -------------------------------------------------------------------------------------------------------
Effective tax rate 38.0% 41.2% 39.5%
- -------------------------------------------------------------------------------------------------------
The provision for income taxes consists of the following (in thousands):
- --------------------------------------------------------------------------------------
Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
- --------------------------------------------------------------------------------------
Currently payable
Federal $52,207 $39,267 $25,884
State 9,332 6,586 4,725
Deferred liability 794 2,125 5,490
- --------------------------------------------------------------------------------------
$62,333 $47,978 $36,099
- --------------------------------------------------------------------------------------
Deferred income taxes (benefits) reflect the tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and amounts as measured for tax purposes. The tax effect of temporary
differences and carryforwards that cause significant portions of deferred tax
assets and liabilities are as follows (in thousands):
- ---------------------------------------------------------------------------------------
Oct 3, 1999 Sept 27, 1998
- ---------------------------------------------------------------------------------------
Depreciation $ 29,826 $ 24,240
Accrued rent (8,234) (6,252)
Investments in joint ventures 3,990 2,400
Accrued compensation and related costs (5,622) (4,096)
Other, net (8,207) (5,757)
- ---------------------------------------------------------------------------------------
$ 11,753 $ 10,535
- ---------------------------------------------------------------------------------------
Taxes payable of $16.3 million and $8.7 million are included in "Accrued taxes"
in the accompanying consolidated balance sheets as of October 3, 1999, and
September 27, 1998, respectively.
NOTE 13: COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has various legal claims and other
contingent matters outstanding. Management believes that any ultimate liability
arising from these actions would not have a material adverse effect on the
Company's results of operations or financial condition as of and for the fiscal
year ended October 3, 1999.
NOTE 14: SEGMENT REPORTING
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes reporting and
disclosure standards for an enterprise's operating segments. Operating segments
are defined as components of an enterprise for which separate financial
information is available and regularly reviewed by the Company's senior
management.
The Company is organized into a number of business units. The Company's North
American retail business sells coffee beverages, whole bean coffees and related
hardware and equipment through Company-operated retail stores in the United
States and Canada. The Company also has a subsidiary that 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 are organized
around the strategic relationships that govern the distribution of products to
the customer. These relationships include domestic
25
wholesale accounts, domestic retail store and grocery channel licensing
agreements, international licensing agreements and direct-to-consumer business.
Revenues from these segments include both sales to unaffiliated customers and
intersegment sales, which are accounted for on a basis consistent with sales to
unaffiliated customers. Intersegment sales and other intersegment transactions
have been eliminated in the accompanying consolidated financial statements.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in Note 1. Operating
income represents earnings before interest and other income/expense and income
taxes. No allocations of 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. General corporate assets include cash and
investments, unallocated assets of the corporate headquarters and deferred tax
assets. Management evaluates performance of the segments based upon direct
product sales and operating costs.
The tables below present information by operating segment (in thousands):
- ------------------------------------------------------------------------------------------------------------------------
Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
- ------------------------------------------------------------------------------------------------------------------------
REVENUES
North American retail $ 1,375,018 $ 1,076,731 $ 828,074
All other business units 320,604 238,798 152,564
Intersegment revenues (15,477) (6,827) (5,249)
- ------------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,680,145 $ 1,308,702 $ 975,389
- ------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
North American retail $ 209,338 $ 161,334 $ 121,673
All other business units 55,998 45,943 29,566
Unallocated corporate expenses (107,460) (89,069) (65,040)
Merger expenses -- (8,930) --
Intersegment eliminations (1,165) (62) --
Interest, net 7,315 7,134 5,111
- ------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes $ 164,026 $ 116,350 $ 91,310
- ------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
North American retail $ 72,252 $ 56,328 $ 42,526
All other business units 7,766 4,721 2,379
Unallocated corporate expenses 17,779 11,494 7,896
- ------------------------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 97,797 $ 72,543 $ 52,801
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSSES) FROM EQUITY METHOD INVESTEES
All other business units $ 2,318 $ (14) $ (2,760)
Intersegment eliminations 874 1,048 718
- ------------------------------------------------------------------------------------------------------------------------
Total income (losses) from
equity method investees $ 3,192 $ 1,034 $ (2,042)
- ------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
OCT 3, 1999 SEPT 27, 1998
- -----------------------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
North American retail $ 587,823 $ 465,626
All other business units 97,544 107,115
General corporate assets 567,147 420,014
- -----------------------------------------------------------------------------------------------
Total assets $1,252,514 $ 992,755
- -----------------------------------------------------------------------------------------------
26
The tables below present information by geographic area (in thousands):
- ------------------------------------------------------------------------------------------------------
Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997
- ------------------------------------------------------------------------------------------------------
REVENUES FROM EXTERNAL CUSTOMERS
United States $1,490,133 $1,173,982 $ 884,314
Foreign countries 190,012 134,720 91,075
- ------------------------------------------------------------------------------------------------------
Total $1,680,145 $1,308,702 $ 975,389
- ------------------------------------------------------------------------------------------------------
Revenues from foreign countries are based on the location of the customers and
consist primarily of revenues from Canada and the United Kingdom. No customer
accounts for 10% or more of the Company's revenues.
- ----------------------------------------------------------------------------------
OCT 3, 1999 SEPT 27, 1998
- ----------------------------------------------------------------------------------
LONG-LIVED ASSETS
United States $680,344 $549,730
Foreign countries 79,945 51,064
- ----------------------------------------------------------------------------------
Total $760,289 $600,794
- ----------------------------------------------------------------------------------
Assets attributed to foreign countries are based on the country in which those
assets are located.
NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal years 1999 and 1998 is as
follows (in thousands, except earnings per share):
- ----------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
- ----------------------------------------------------------------------------------------------------------------------
1999 quarter
Net revenues $405,638 $375,822 $423,792 $474,893
Gross margin 219,338 205,865 238,772 275,160
Net earnings 26,733 17,957 24,635 32,368
Net earnings per common share -- diluted $ 0.14 $ 0.10 $ 0.13 $ 0.17
- ----------------------------------------------------------------------------------------------------------------------
1998 quarter
Net revenues $321,325 $295,243 $334,429 $357,705
Gross margin 175,090 161,742 189,348 204,039
Net earnings 20,955 13,962 7,899 25,556
Net earnings per common share -- diluted $ 0.12 $ 0.08 $ 0.04 $ 0.14
- ----------------------------------------------------------------------------------------------------------------------
27
STARBUCKS CORPORATION
(Seattle, Washington)
We have audited the accompanying consolidated balance sheets of Starbucks
Corporation and subsidiaries (the Company) as of October 3, 1999, and September
27, 1998, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for each of the three years in the period ended October
3, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Starbucks Corporation and
subsidiaries as of October 3, 1999, and September 27, 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended October 3, 1999, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
December 10, 1999
28
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Starbucks Corporation is responsible for the preparation and
integrity of the financial statements included in this Annual Report to
Shareholders. The financial statements have been prepared in conformity with
generally accepted accounting principles and include amounts based on
management's best judgment where necessary. Financial information included
elsewhere in this Annual Report is consistent with these financial statements.
Management maintains a system of internal controls and procedures designed to
provide reasonable assurance that transactions are executed in accordance with
proper authorization, that transactions are properly recorded in the Company's
records, that assets are safeguarded and that accountability for assets is
maintained. The concept of reasonable assurance is based on the recognition that
the cost of maintaining our system of internal accounting controls should not
exceed benefits expected to be derived from the system. Internal controls and
procedures are periodically reviewed and revised, when appropriate, due to
changing circumstances and requirements.
Independent auditors are appointed by the Company's Board of Directors and
ratified by the Company's shareholders to audit the financial statements in
accordance with generally accepted auditing standards and to independently
assess the fair presentation of the Company's financial position, results of
operations and cash flows. Their report appears in this Annual Report.
The Audit Committee, all of whose members are outside directors, is responsible
for monitoring the Company's accounting and reporting practices. The Audit
Committee meets periodically with management and the independent auditors to
ensure that each is properly discharging its responsibilities. The independent
auditors have full and free access to the Committee without the presence of
management to discuss the results of their audits, the adequacy of internal
accounting controls and the quality of financial reporting.
/s/ HOWARD SCHULTZ /s/ ORIN SMITH /s/ MICHAEL CASEY
HOWARD SCHULTZ ORIN SMITH MICHAEL CASEY
chairman and president and executive vice president,
chief executive officer chief operating officer chief financial officer and
chief administrative officer
29
SHAREHOLDER INFORMATION
MARKET INFORMATION AND DIVIDEND POLICY
The Company's Common Stock is traded on the National Market tier of The Nasdaq
Stock Market, Inc. ("Nasdaq"), under the symbol "SBUX". The following table sets
forth the quarterly high and low closing sale prices per share of the Common
Stock as reported by Nasdaq for each quarter during the last two fiscal years.
All prices shown reflect the two-for-one stock split effected March 19, 1999.
- --------------------------------------------------------------------------------
HIGH LOW
- --------------------------------------------------------------------------------
October 3, 1999
First Quarter $26 11/16 $16 9/16
Second Quarter 30 11/16 23 9/32
Third Quarter 39 3/4 28 1/16
Fourth Quarter 37 9/16 20 1/16
September 27, 1998
First Quarter $20 29/32 $15 23/32
Second Quarter 21 17/32 16 13/16
Third Quarter 27 1/16 21 9/16
Fourth Quarter 29 9/32 14 19/32
- --------------------------------------------------------------------------------
As of December 1, 1999, the Company had 8,904 shareholders of record. The
Company has never paid any dividends on its Common Stock. The Company presently
intends to retain earnings for use in its business and, therefore, does not
anticipate paying a cash dividend in the near future.
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 3,
1999, WITHOUT THE EXHIBITS THERETO, MAY BE OBTAINED WITHOUT CHARGE BY ACCESSING
THE COMPANY'S FILINGS AT WWW.SEC.GOV OR BY SENDING A REQUEST TO INVESTOR
RELATIONS AT THE ADDRESS OR PHONE NUMBER BELOW.
Quarterly information is available to all shareholders immediately upon its
release, free of charge, via fax, by calling (800) 239-0317 or through access on
the Internet at www.businesswire.com/cnn/sbux.htm. To receive a copy by mail,
please send your request to:
INVESTOR RELATIONS
Investor Relations -- M/S S-FP1
Starbucks Corporation
P.O. Box 34067
Seattle, WA 98124-1067
(206) 447-1575, ext. 87118
30
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
BOARD OF DIRECTORS
Howard Schultz
Starbucks Corporation,
chairman of the board and
chief executive officer
Orin C. Smith
Starbucks Corporation,
president and
chief operating officer
Arlen I. Prentice
Kibble & Prentice,
co-chairman and
chief executive officer
Barbara Bass
Gerson Bakar Foundation,
president
Craig J. Foley
Wickham Capital Corp.,
president
Craig E. Weatherup
The Pepsi Bottling Group,
chairman and
chief executive officer
Gregory B. Maffei
Microsoft Corporation,
senior vice president and
chief financial officer
Howard P. Behar
director
James G. Shennan, Jr.
Trinity Ventures,
general partner
EXECUTIVE OFFICERS
PRESIDENTS
John B. Richards
president,
North American Operations
Paul D. Davis
president,
Retail North America
Peter Maslen
president,
Starbucks Coffee International, Inc.
EXECUTIVE VICE PRESIDENTS
Deidra Wager
executive vice president, Retail
Eduardo R. Garcia
executive vice president,
Supply Chain and Coffee Operations
Michael Casey
executive vice president,
chief financial officer and
chief administrative officer
SENIOR VICE PRESIDENTS
Arthur Rubinfeld
senior vice president,
Store Development
Bruce Craig
senior vice president,
Retail Field Operations
David W. Frost
senior vice president,
New Business Development
David Olsen
senior vice president
Deborah Gillotti
senior vice president and
general manager, Starbucks X
Engle Saez
senior vice president,
Retail Marketing and
Product Management
Howard Wollner
senior vice president,
Administration and Strategic
Alliance Management
James Alling
senior vice president,
Business Alliances
Mark Wesley
senior vice president,
Store Development and
Asset Management
Mary Williams
senior vice president, Coffee
Michael T. Sweeney
senior vice president and president,
Starbucks Coffee Company (UK) Limited
Pedro Y.K. Man
senior vice president and president,
Starbucks Coffee Asia Pacific Ltd.
Sharon Elliott
senior vice president,
Human Resources
Shelley B. Lanza
senior vice president,
Law and Corporate Affairs,
and general counsel
Wanda Herndon
senior vice president,
Communications and Public Affairs
SECRETARY OF CORPORATION
G. Scott Greenburg
secretary