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