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 December 31, 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 February 9, 2001, there were 189,372,216 shares of the Registrant's Common Stock outstanding. - ----------------------------------------------------------------------------
2 STARBUCKS CORPORATION INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements. . . . . . . . . . . . . . . . . 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 15 Item 2. Changes in Securities and Use of Proceeds. . . . . . 15 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 15 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 15 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 December 31, January 2, 2000 2000 (13 Weeks) (13 Weeks) (unaudited) - --------------------------------------------------------------------------- <S> <C> <C> Net revenues: Retail $562,407 $440,785 Specialty 104,980 88,547 - ---------------------------------------------------------------------------- Total net revenues 667,387 529,332 Cost of sales and related occupancy costs 292,220 240,714 - ---------------------------------------------------------------------------- Gross margin 375,167 288,618 Joint venture income 4,805 3,395 Store operating expenses 209,690 164,200 Other operating expenses 21,786 17,745 Depreciation and amortization 37,562 29,290 General and administrative expenses 34,877 26,145 - --------------------------------------------------------------------------- Operating income 76,057 54,633 Interest and other income, net 1,713 1,414 - --------------------------------------------------------------------------- Earnings before income taxes 77,770 56,047 Income taxes 28,775 21,298 - --------------------------------------------------------------------------- Net earnings $ 48,995 $ 34,749 =========================================================================== Net earnings per common share - basic $ 0.26 $ 0.19 Net earnings per common share - diluted $ 0.25 $ 0.18 Weighted average shares outstanding: Basic 188,645 183,427 Diluted 196,830 189,340 </TABLE> See notes to consolidated financial statements 3
4 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) <TABLE> <CAPTION> December 31, October 1, 2000 2000 (unaudited) - ---------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 177,441 $ 70,817 Available-for-sale securities 44,593 57,573 Trading securities 5,695 3,763 Accounts receivable, net of allowances of $3,741 and $2,941, respectively 78,349 76,385 Inventories 168,438 201,656 Prepaid expenses and other current assets 22,417 20,321 Deferred income taxes, net 30,358 29,304 - ---------------------------------------------------------------------- Total current assets 527,291 459,819 Joint ventures 63,898 52,051 Other investments 3,832 3,788 Property, plant and equipment, net 960,383 930,759 Other assets 23,366 25,403 Goodwill, net 23,078 21,311 - ---------------------------------------------------------------------- Total $ 1,601,848 $ 1,493,131 ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 84,281 $ 73,653 Checks drawn in excess of bank balances 58,301 56,332 Accrued compensation and related costs 82,036 75,250 Accrued occupancy costs 31,012 29,117 Accrued taxes 46,738 35,841 Other accrued expenses 34,692 35,053 Deferred revenue 3,449 7,320 Current portion of long-term debt 688 685 - ---------------------------------------------------------------------- Total current liabilities 341,197 313,251 Deferred income taxes, net 22,609 21,410 Long-term debt 6,310 6,483 Minority interest 4,030 3,588 Shareholders' equity: Common stock and additional paid-in capital - $0.001 par value; authorized, 300,000,000; issued and outstanding, 189,266,659 and 188,157,651 shares, respectively, (includes 848,550 common stock units in both periods) 779,337 750,872 Retained earnings 457,501 408,503 Accumulated other comprehensive loss (9,136) (10,976) - ---------------------------------------------------------------------- Total shareholders' equity 1,227,702 1,148,399 - ---------------------------------------------------------------------- Total $ 1,601,848 $ 1,493,131 ====================================================================== </TABLE> See notes to consolidated financial statements 4
5 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Three Months Ended - ---------------------------------------------------------------------- December 31, January 2, 2000 2000 (13 Weeks) (13 Weeks) (unaudited) - ---------------------------------------------------------------------- <S> <C> <C> Operating activities: Net earnings $ 48,995 $ 34,749 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 40,664 31,976 Provision for losses on asset disposals 9,542 613 Deferred income taxes, net (47) (2,240) Equity in income of investees (2,822) (2,798) Tax benefit from exercise of non-qualified stock options 10,198 1,081 Cash provided/(used) by changes in operating assets and liabilities: Net purchases of trading securities (2,592) - Accounts receivable (1,959) (765) Inventories 33,220 24,692 Prepaid expenses and other current assets (1,810) 1,656 Accounts payable 10,611 7,007 Accrued compensation and related costs 6,785 7,381 Accrued occupancy costs 1,899 2,625 Accrued taxes 10,903 9,625 Minority interest 442 - Deferred revenue (3,851) 289 Other accrued expenses 2,589 (1,141) - ---------------------------------------------------------------------- Net cash provided by operating activities 162,767 114,750 Investing activities: Purchase of available-for-sale investments (26,016) (18,775) Maturity of available-for-sale investments 36,000 10,000 Sale of available-for-sale investments 2,000 5,282 Purchases of businesses, net of cash acquired - (8,242) Net investments in joint ventures (9,025) (1,103) Purchase of other investments - (10,189) Additions to property, plant and equipment (78,972) (65,988) Additions to other assets (164) (3,682) - ---------------------------------------------------------------------- Net cash used by investing activities (76,177) (92,697) Financing activities: Increase/(decrease) in cash provided by checks drawn in excess of bank balances 1,969 (17,038) Proceeds from sale of common stock under employee stock purchase plan 2,773 2,544 Proceeds from exercise of stock options 15,494 4,144 Principal payments on long-term debt (170) (923) - ---------------------------------------------------------------------- Net cash provided (used) by financing activities 20,066 (11,273) - ---------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (32) 169 - ---------------------------------------------------------------------- Net increase in cash and cash equivalents 106,624 10,949 Cash and cash equivalents: Beginning of the period 70,817 66,419 - ---------------------------------------------------------------------- End of the period $ 177,441 $ 77,368 ====================================================================== Supplemental cash flow information: Cash paid during the period for: Interest $ 98 $ 131 Income taxes 8,325 12,689 </TABLE> See notes to consolidated financial statements 5
6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks Ended December 31, 2000 and January 2, 2000 NOTE 1: FINANCIAL STATEMENT PREPARATION The consolidated financial statements as of December 31, 2000 and January 2, 2000 and for the 13-week periods ended December 31, 2000 and January 2, 2000 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 periods ended December 31, 2000 and January 2, 2000 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 1, 2000, is derived from the Company's audited consolidated financial statements and notes thereto for the year ended October 1, 2000, 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 period ended December 31, 2000 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 30, 2001. NOTE 2: OTHER EVENTS On December 4, 2000, the Company entered into a 50/50 joint venture agreement with Shinsegae Department Store Co. Ltd. to develop and operate licensed Starbucks retail stores in Korea. The joint venture will be accounted for using the equity method as the Company does not exercise control over the operating and financial policies of the joint venture. The Company paid $8.4 million to obtain its ownership share in the joint venture during the first quarter of fiscal 2001. NOTE 3: NEW ACCOUNTING STANDARDS In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires any shipping and handling costs billed to customers in a sale transaction to be classified as revenue. The Company adopted Issue 00-10 on October 2, 2000. Issue 00-10 did not have a material impact on the Company's consolidated financial statements. NOTE 4: INVENTORIES Inventories consist of the following (in thousands): <TABLE> <CAPTION> December 31, October 1, 2000 2000 - ------------------------------------------------------------------- <S> <C> <C> Coffee: Unroasted $ 62,932 $ 90,807 Roasted 25,854 27,880 Other merchandise held for sale 55,140 59,420 Packaging and other supplies 24,512 23,549 - ------------------------------------------------------------------- Total $ 168,438 $ 201,656 =================================================================== </TABLE> As of December 31, 2000, the Company had fixed-price purchase commitments for green coffee totaling approximately $108 million. 6
7 NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS On October 2, 2000, the Company adopted SFAS 133, as amended by SFAS 138, which requires that all derivatives be recorded on the balance sheet at fair value. The accounting for changes in the fair value of derivative instruments depends on the intended use and resulting designation. The Company designates its derivatives based upon the criteria established by SFAS 133. For derivatives designated as a fair value hedge, the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative designated as a cash flow hedge, the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income ("OCI") and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized immediately into earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. The Company classifies the cash flows from hedging transactions in the same category as the cash flows from the respective hedged items. The adoption of SFAS 133 did not have a material impact on the Company's consolidated results of operations, financial position or cash flows. The Company implemented a hedging policy to manage exposure to foreign currency risk within the consolidated financial statements. As part of that policy, the Company may engage in transactions involving various derivative instruments, with maturities not longer than five years, to hedge assets, liabilities, revenues and purchases denominated in foreign currencies. During the first quarter of fiscal 2001, the Company entered into forward foreign exchange contracts that qualify as cash flow hedges under SFAS 133 to hedge a portion of anticipated international revenue. These contracts expire within 12 months and are intended to minimize certain foreign currency exposures that can be confidently identified and quantified. In accordance with SFAS 133, cash flow hedges related to anticipated transactions are designated and documented at the inception of each hedge by matching the terms of the contract to the underlying transaction. Once established, cash flow hedges are generally not removed until maturity. Forward contract effectiveness is calculated by comparing the fair value of the contract to the change in value of the anticipated transaction using forward rates on a monthly basis. Any ineffectiveness is recognized immediately in "Interest and other income, net" on the accompanying consolidated statement of earnings. No ineffectiveness was recognized in the first quarter of fiscal 2001. The Company had accumulated derivative gains of $0.5 million, net of taxes, in OCI as of December 31, 2000, which are expected to be reclassified into earnings within 12 months. 7
8 NOTE 6: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost and consist of the following (in thousands): <TABLE> <CAPTION> December 31, October 1, 2000 2000 - ------------------------------------------------------------------ <S> <C> <C> Land $ 5,084 $ 5,084 Building 19,795 19,795 Leasehold improvements 772,187 736,471 Roasting and store equipment 380,686 369,587 Furniture, fixtures and other 179,395 182,528 - ------------------------------------------------------------------ 1,357,147 1,313,465 Less accumulated depreciation and amortization (484,991) (446,403) - ------------------------------------------------------------------ 872,156 867,062 Work in progress 88,227 63,697 - ------------------------------------------------------------------ Property, plant and equipment, net $ 960,383 $ 930,759 ================================================================== </TABLE> NOTE 7: CAPITAL TRANSACTIONS On December 15, 2000, the Articles of Incorporation of the Company were amended and restated to, among other things, change the par value of the Company's common stock and preferred stock from no par value per share to $0.001 par value per share. After the amendment and restatement, the Company had authorized 300,000,000 shares of common stock, $0.001 par value per share, and 7,500,000 shares of preferred stock, $0.001 par value per share. As a result of this amendment and restatement, the dollar value of issued and outstanding shares of common stock was $0.2 million as of December 31, 2000 and October 1, 2000. Additional paid-in capital was $779.1 million and $750.7 million as of December 31, 2000 and October 1, 2000, respectively. NOTE 8: 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 earnings and other comprehensive income. Accumulated other comprehensive 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 and on derivative instruments designated and qualifying as cash flow hedges. Comprehensive income, net of related tax effects, is as follows (in thousands): <TABLE> <CAPTION> Three months ended December, 31 January 2, 2000 2000 - ---------------------------------------------------------------- <S> <C> <C> Net earnings $ 48,995 $ 34,749 Unrealized holding gains (losses) on available-for-sale investments, net of tax benefit (provision) of $100 and ($6,824), respectively (170) 11,133 Unrealized holding gains on cash flow hedging instruments, net of tax provision of $284 and $0, respectively 483 - Reclassification adjustment for gains realized in net earnings, net of tax provision of $9 and $3, respectively 14 5 - ---------------------------------------------------------------- Net unrealized gain 327 11,138 Translation adjustment 1,513 3,693 - ---------------------------------------------------------------- Total comprehensive income $ 50,835 $ 49,580 ================================================================ </TABLE> 8
9 NOTE 9: 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. The following table represents the calculation of net earnings per common share - - basic (in thousands, except earnings per share data): <TABLE> <CAPTION> Three Months Ended December 31, January 2, 2000 2000 - -------------------------------------------------------------- <S> <C> <C> Net earnings $ 48,995 $ 34,749 Weighted average common shares and common stock units outstanding 188,645 183,427 ============================================================== Net earnings per common share-basic $ 0.26 $ 0.19 ============================================================== </TABLE> The following table represents the calculation of net earnings per common and common equivalent share - diluted (in thousands, except per share data): <TABLE> <CAPTION> Three Months Ended December 31, January 2, 2000 2000 - -------------------------------------------------------------- <S> <C> <C> Net earnings $ 48,995 $ 34,749 Weighted average shares outstanding calculation: Weighted average common shares and common stock units outstanding 188,645 183,427 Dilutive effect of outstanding common stock options 8,185 5,913 - -------------------------------------------------------------- Weighted average common and common equivalent shares outstanding 196,830 189,340 ============================================================== Net earnings per common and common equivalent share-diluted $ 0.25 $ 0.18 ============================================================== </TABLE> NOTE 10: SEGMENT REPORTING 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 owns and operates retail stores in the United Kingdom, Thailand and Australia. These two retail segments are managed by different presidents within the Company and are measured and evaluated separately by senior management. At the beginning of fiscal 2001, the Company combined its foodservice and domestic retail store licensing operations to form Business Alliances. As a result of this internal reorganization and the manner in which the operations of foodservice and domestic retail store licensing are measured and evaluated as one combined business unit, the Company's management has determined that separate segment reporting of Business Alliances is appropriate under SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." All prior period disclosures will be restated as if Business Alliances had always been a separately reported segment. The Company operates through several other business units, each of which is managed and evaluated independently. These other business units include domestic wholesale, grocery channel licensing, international licensing and a direct-to-consumer business. 9
10 The tables below present information by operating segment (in thousands): <TABLE> <CAPTION> Three months ended December 31, January 2, 2000 2000 - ---------------------------------------------------------------- <S> <C> <C> REVENUES: North American retail $531,078 $422,064 Business Alliances 48,589 40,509 All other business units 96,111 70,172 Intersegment revenues (8,391) (3,413) - ---------------------------------------------------------------- Total revenues $667,387 $529,332 ================================================================ - ---------------------------------------------------------------- OPERATING INCOME: North American retail $ 92,409 $ 63,747 Business Alliances 12,329 12,565 All other business units 13,085 10,094 Unallocated corporate expenses (41,596) (31,490) Intersegment eliminations (170) (283) Interest, net 1,713 1,414 - ---------------------------------------------------------------- Earnings before income taxes $ 77,770 $ 56,047 ================================================================ </TABLE> The table below represents information by geographic area (in thousands): <TABLE> <CAPTION> Three months ended December 31, January 2, 2000 2000 - ---------------------------------------------------------------- <S> <C> <C> REVENUES FROM EXTERNAL CUSTOMERS: United States $598,568 $472,877 Foreign countries 68,819 56,455 - ---------------------------------------------------------------- Total revenues $667,387 $529,332 ================================================================ </TABLE> Revenues from foreign countries are based on the location of the customers and consist primarily of revenues from Canada and the United Kingdom. 10
11 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 and market 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 13-week period ending December 31, 2000, Starbucks Corporation ("Starbucks" or the "Company") derived approximately 84% of net revenues from its Company-operated retail stores. The remaining 16% 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. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal year 2000 had 52 weeks. The fiscal year ending on September 30, 2001 will also include 52 weeks. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED DECEMBER 31, 2000, COMPARED TO THE 13 WEEKS ENDED JANUARY 2, 2000 SYSTEMWIDE RETAIL STORE SALES Systemwide retail store sales, which include net sales for both Company-operated and licensed retail stores, were $722 million for the first quarter of fiscal 2001, an increase of 39% from $520 million in the first quarter of fiscal 2000 primarily due to the opening of 1,133 stores in the last 12 months. Systemwide retail store sales provides a broader perspective of global brand sales; however, it excludes net revenues from non-retail channels. REVENUES Net revenues for the 13 weeks ended December 31, 2000, increased 26% to $667 million from $529 million for the corresponding period in fiscal 2000. Retail revenues increased 28% to $562 million from $441 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 resulted from a 4% increase in the number of transactions combined with a 6% increase in the average dollar value per transaction. During the 13 weeks ended December 31, 2000, the Company opened 118 stores in continental North America and 14 in the United Kingdom, 3 in Thailand, and 2 in Australia. The Company ended the period with 2,564 Company-operated stores in continental North America and 192 Company-operated stores in international markets. During fiscal 2001, the Company expects to open at least 450 Company-operated stores in North America and 75 in international markets. Specialty revenues increased 19% to $105 million for the 13 weeks ended December 31, 2000, compared to $89 million for the corresponding period in fiscal 2000. The increase in specialty revenues was driven primarily by higher sales to licensees and the grocery channel, and from the Company's commercial agreement with Kozmo.com. Licensees (including those in which the Company is a joint venture partner) opened 96 stores in continental North America and 83 stores in international markets. The Company ended the period with 626 licensed stores in continental North America and 435 licensed stores in international markets. During fiscal 2001, the Company expects to open at least 575 licensed stores globally. GROSS MARGIN Gross margin increased to 56.2% for the 13 weeks ended December 31, 2000 from 54.5% for the corresponding period in fiscal 2000. The positive impact on gross margin of retail beverage sales price increases, lower green coffee costs and lower dairy costs, was partially offset by higher international retail occupancy costs. 11
12 JOINT VENTURE INCOME Joint venture income was $4.8 million for the first quarter of fiscal 2001, compared to $3.4 million in the first quarter of fiscal 2000. The increase was primarily due to improved operating income from Starbucks Coffee Japan Limited, partially offset by a higher provision for Japanese income tax. Starbucks Coffee Japan Limited fully utilized its net operating loss carryforwards during the first quarter of fiscal 2001. EXPENSES Store operating expenses as a percentage of retail sales remained flat at 37.3% for the 13 weeks ended December 31, 2000, compared to the first quarter of fiscal 2000. Lower advertising and regional overhead expenses as a percentage of retail revenues were offset by increased provisions for store remodels and relocations and higher business taxes. Other operating expenses (expenses associated with all operations other than Company-owned retail) were 20.8% of specialty revenues for the 13 weeks ended December 31, 2000, compared to 20.0% for the corresponding period in fiscal 2000. The increase is attributed to the growth of licensee channels, both domestic and international, as the Company expands these businesses geographically and develops its internal resources to support them. These increases were partially offset by lower advertising expenses for the direct response business and leverage gained from the revenue generated by the Company's commercial agreement with Kozmo.com. The Company does not expect to continue recording revenue from the current Kozmo.com relationship after February 2001. General and administrative expenses as a percentage of net revenues were 5.2% for the 13 weeks ended December 31, 2000 compared to 4.9% for the same period in fiscal 2000. Higher payroll-related expenditures and provisions for obsolete computer software as a percentage of revenues were partially offset by a one-time telephone refund. INCOME TAXES The Company's effective tax rate for the 13 weeks ended December 31, 2000 was 37.0% compared to 38.0% for the 13 weeks ended January 2, 2000. Management expects the tax rate to remain at 37.0% for the remainder of fiscal 2001 due to tax planning efforts. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $228 million in total cash and short-term investments and working capital of $186 million. Cash and cash equivalents increased by $107 million for the 13 weeks ended December 31, 2000 to $177 million. Cash provided by operating activities totaled $163 million for the first 13 weeks of fiscal 2001, resulting primarily from net earnings before non-cash charges of $107 million and a decrease in inventories of $33 million. Cash used by investing activities for the first 13 weeks of fiscal 2001 totaled $76 million. This included capital additions to property, plant and equipment of $79 million related to opening 137 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. During the 13-week period ended December 31, 2000, the Company made equity investments of $9 million in its international joint ventures. The Company invested excess cash primarily in short-term, investment-grade marketable debt securities. The net activity in the Company's available-for-sale portfolio during the 13-week period provided $12 million. Cash provided by financing activities for the first 13 weeks of fiscal 2001 totaled $20 million. This included $15 million generated from the exercise of employee stock options and $3 million 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. 12
13 Cash requirements for the remainder of fiscal 2001, 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 450 Company-operated stores during fiscal 2001. The Company also anticipates incurring additional expenditures for remodeling certain existing stores and enhancing its production capacity and information systems. While there can be no assurance that current expectations will be realized, management expects capital expenditures for the remainder of fiscal 2001 to be approximately $321 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 2001. New joint ventures, other new business opportunities or store expansion rates substantially in excess of that presently planned may require outside funding. COFFEE PRICES AND 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 December 31, 2000, the Company had approximately $108 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 2001. 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. 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 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 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. 13
14 NEW ACCOUNTING STANDARDS In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires any shipping and handling costs billed to customers in a sale transaction to be classified as revenue. The Company adopted Issue 00-10 on October 2, 2000. Issue 00-10 did not have a material impact on the Company's consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to changes in interest rates, equity security prices and foreign currency exchange rates. INTEREST RATE RISK The Company's available-for-sale portfolio consists mainly of diversified fixed income instruments. The primary objectives of these investments are to preserve capital and liquidity without significantly increasing risk to the Company. Available-for-sale securities are of investment grade and are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income. The Company generally does not hedge its interest rate exposure. EQUITY SECURITY PRICE RISK The Company has minimal exposure to price fluctuations on equity mutual funds within the trading portfolio. The trading securities are designated to approximate the Company's liability under the Management Deferred Compensation Plan ("MDCP"). A corresponding liability is included in "Accrued compensation and related costs" on the accompanying consolidated balance sheets. These investments are recorded at fair value with unrealized gains and losses recognized in "Interest and other income, net." The offsetting changes in the MDCP liability are recorded in "General and administrative expenses" on the accompanying consolidated statements of earnings. The Company also has equity investments in privately held Internet-related companies. These investments are inherently risky as the products and services supplied by these companies could be considered in the start-up or development stages. The Company could lose its entire investment in these companies. These investments are recorded on the accompanying consolidated balance sheet at a fair value of $4 million as of December 31, 2000. FOREIGN CURRENCY EXCHANGE RISK The majority of the Company's revenue, expense and capital purchasing activities are transacted in United States dollars. However, because a portion of the Company's operations consists of activities outside of the United States, the Company has transactions in other currencies, primarily the Canadian dollar, British pound and Japanese yen. As part of its risk management strategy, the Company frequently evaluates its foreign currency exchange risk by monitoring market data and external factors that may influence exchange rate fluctuations. As a result, the Company may engage in transactions involving various derivative instruments, with maturities not to exceed five years, to hedge assets, liabilities, revenues and purchases denominated in foreign currencies. During the first quarter of fiscal 2001, the Company entered into forward foreign exchange contracts that qualify as cash flow hedges under SFAS 133 to hedge a portion of anticipated international revenue. These contracts expire within 12 months. The Company anticipates entering into derivative instruments designated to hedge foreign currency exposure from net investments in foreign operations. 14
15 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On December 15, 2000, the Articles of Incorporation of the Company were amended and restated to, among other things, change the par value of the Company's common stock and preferred stock from no par value per share to $0.001 par value per share. After the amendment and restatement, the Company had authorized 300,000,000 shares of common stock, $0.001 par value per share, and 7,500,000 shares of preferred stock, $0.001 par value per share. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Current Reports on Forms 8-K filed during the 13 weeks ended December 31, 2000: None 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: February 14, 2001 By: /s/ Michael Casey ---------------------- Michael Casey executive vice president and chief financial officer Signing on behalf of the registrant and as principal financial officer 15