-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TaaTdUUB/RcaUK/mmwZyiKWIkmr9ch0+sQ4dz6hE5jBmPR8cxo98xA2baZ4G0CLo 9exr/Tj3gaBxX5biQ0D+Pw== 0000829224-99-000008.txt : 19990812 0000829224-99-000008.hdr.sgml : 19990812 ACCESSION NUMBER: 0000829224-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990627 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARBUCKS CORP CENTRAL INDEX KEY: 0000829224 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING & DRINKING PLACES [5810] IRS NUMBER: 911325671 STATE OF INCORPORATION: WA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20322 FILM NUMBER: 99683646 BUSINESS ADDRESS: STREET 1: P O BOX 34067 CITY: SEATTLE STATE: WA ZIP: 98124-1067 BUSINESS PHONE: 2064471575 MAIL ADDRESS: STREET 1: 2401 UTAH AVENUE SOUTH CITY: SEATTLE STATE: WA ZIP: 98134 10-Q 1 1999 3RD QUARTER 10Q - ----------------------------------------------------------------------- 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 June 27, 1999 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 August 1, 1999, there were 182,188,895 shares of the Registrant's Common Stock outstanding. - ----------------------------------------------------------------------- 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. . . 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . . . . 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 16 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 16 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except earnings per share) Three Months Ended Nine Months Ended June 27, June 28, June 27, June 28, 1999 1998 1999 1998 (13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks) (unaudited) (unaudited) - ------------------------------------------------------------------------------ Net revenues $423,792 $334,429 $1,205,252 $950,997 Cost of sales and related occupancy costs 185,020 145,081 541,276 424,817 Store operating expenses 137,625 111,734 382,074 304,859 Other operating expenses 13,040 12,221 37,491 30,527 Depreciation and amortization 25,214 18,928 70,848 52,416 General and administrative expenses 24,679 20,588 67,405 57,678 Merger expenses 0 8,930 0 8,930 - ------------------------------------------------------------------------------- Operating income 38,214 16,947 106,158 71,770 Interest and other income 1,954 2,176 6,509 6,662 Interest and other expense (434) (114) (851) (1,193) - ------------------------------------------------------------------------------- Earnings before income taxes 39,734 19,009 111,816 77,239 Income taxes 15,099 11,110 42,490 34,421 - ------------------------------------------------------------------------------- Net earnings $24,635 $ 7,899 $69,326 $42,818 =============================================================================== Net earnings per common share - basic $ 0.13 $ 0.04 $ 0.38 $ 0.24 Net earnings per common share - diluted $ 0.13 $ 0.04 $ 0.37 $ 0.24 Weighted average shares outstanding: Basic 182,781 178,137 181,397 175,095 Diluted 191,336 185,149 188,614 183,418 See notes to consolidated financial statements
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STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data) June 27, September 27, 1999 1998 (unaudited) - ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 90,946 $ 101,663 Short-term investments 58,461 21,874 Accounts receivable 41,468 50,972 Inventories 166,579 143,118 Prepaid expenses and other current assets 19,967 11,205 Deferred income taxes, net 9,059 8,448 - ------------------------------------------------------------------------ Total current assets 386,480 337,280 Joint ventures and other investments 55,078 38,917 Property, plant and equipment, net 691,732 600,794 Deposits and other assets 21,688 15,685 Goodwill, net 13,560 79 - ------------------------------------------------------------------------ Total $ 1,168,538 $ 992,755 ======================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 65,790 $ 54,446 Checks drawn in excess of bank balances 39,364 33,634 Accrued compensation and related costs 45,573 35,941 Accrued occupancy costs 21,399 17,526 Accrued taxes 24,579 18,323 Other accrued expenses 27,689 19,605 - ------------------------------------------------------------------------ Total current liabilities 224,394 179,475 Deferred income taxes, net 22,250 18,983 Shareholders' equity: Common stock - Authorized, 300,000,000; issued and outstanding, 182,901,602 and 179,266,956 shares, respectively,(includes 848,550 common stock units in both periods) 644,427 589,214 Retained earnings 281,572 212,246 Accumulated other comprehensive income (4,105) (7,163) - ------------------------------------------------------------------------ Total shareholders' equity 921,894 794,297 - ------------------------------------------------------------------------ Total $ 1,168,538 $ 992,755 ========================================================================
See notes to consolidated financial statements 4
STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended - ---------------------------------------------------------------------- June 27, June 28, 1999 1998 (39 Weeks) (39 Weeks) (unaudited) - ---------------------------------------------------------------------- Operating activities: Net earnings $ 69,326 $ 42,818 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 78,339 58,312 Provision for store remodels and other charges 0 7,153 Deferred income taxes, net 3,121 (1,814) Equity in losses of investees 987 1,002 Cash provided/(used) by changes in operating assets and liabilities: Accounts receivable 9,564 (2,828) Inventories (24,519) (32,143) Prepaid expenses and other current assets (8,891) (1,523) Accounts payable 12,653 11,919 Accrued compensation and related costs 9,688 8,953 Accrued occupancy costs 3,909 3,899 Accrued taxes 6,156 1,759 Other accrued expenses 8,181 2,570 - ----------------------------------------------------------------------- Net cash provided by operating activities 168,514 100,077 Investing activities: Purchase of investments (111,447) (51,410) Maturity of investments 78,553 98,925 Sale of investments 0 6,736 Purchases of businesses, net of cash acquired (16,216) 0 Investments in joint ventures and other investments (16,301) (10,424) Distributions from joint ventures 2,983 1,547 Additions to property, plant and equipment (174,871) (143,904) Proceeds from sale of assets 3,380 0 Additions to deposits and other assets (6,950) (2,511) - ---------------------------------------------------------------------- Net cash used by investing activities (240,869) (101,041) Financing activities: Increase/(decrease) in cash provided by checks drawn in excess of bank balances 5,939 (6,604) Proceeds from sale of common stock 4,994 8,101 Exercise of stock options 32,039 13,339 Tax benefit from exercise of non-qualified stock options 18,180 7,539 - ---------------------------------------------------------------------- Net cash provided by financing activities 61,152 22,375 - ---------------------------------------------------------------------- Balance, carried forward (11,203) 21,411
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Balance, brought forward (11,203) 21,411 Effect of exchange rate changes on cash and cash equivalents 486 (186) - ----------------------------------------------------------------------- Net (decrease)/increase in cash and cash equivalents (10,717) 21,225 Cash and cash equivalents: Beginning of the period 101,663 70,126 - ----------------------------------------------------------------------- End of the period $ 90,946 $ 91,351 ======================================================================= Supplemental cash flow information: Cash paid during the period for: Interest $ 135 $4,100 Income taxes 20,870 29,607 Net unrealized holding gain/(loss) 30 (410) on investments Conversion of convertible debt into common stock, net of unamortized issue costs and accrued interest 0 162,036 Common stock tendered in settlement of stock options exercised 0 4,859
See notes to consolidated financial statements 6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks and 39 Weeks Ended June 27, 1999 and June 28, 1998 NOTE 1: FINANCIAL STATEMENT PREPARATION The consolidated financial statements as of June 27, 1999 and September 27, 1998 and for the 13-week and 39-week periods ended June 27, 1999 and June 28, 1998 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 39-week periods ended June 27, 1999 and June 28, 1998 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 September 27, 1998, is derived from the Company's audited consolidated financial statements and notes thereto for the year ended September 27, 1998, 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 39-week periods ended June 27, 1999 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 3, 1999. NOTE 2: OTHER EVENTS On January 20, 1999, Starbucks acquired the net assets of Tazo, L.L.C. ("Tazo"), a Portland, Oregon-based tea company that produces premium tea products. On March 1, 1999, Starbucks acquired the stock of Pasqua Inc. ("Pasqua"), a San Francisco, California-based roaster and retailer of specialty coffee. The total purchase price for these two acquisitions was $17.1 million and both were recorded under the purchase method of accounting. The purchase price has been allocated to the underlying assets acquired and liabilities assumed based on preliminary estimates of their fair values at the dates of acquisition. Estimates may be revised at a later date. The residual of approximately $13.8 million was recorded to "Goodwill" and is being amortized on a straight-line basis over 10 years. Contingent consideration of $2.8 million is currently held in escrow pending resolution of certain potential claims by Starbucks under the purchase agreements. The contingent consideration amount is not included in the purchase price above. Once the contingencies are resolved and the escrow period ends, the Company will record the fair value of any additional net assets acquired and will record any excess consideration as additional goodwill. The results of operations of Tazo and Pasqua are included in the accompanying financial statements from the dates of acquisition. Pro forma financial information showing the results of operations as if the acquisitions had occurred at the beginning of the year is not presented as the acquisitions would not have had a material impact on previously reported results. NOTE 3: EARNINGS PER SHARE The computation of basic earnings per share is based on the weighted average number of common shares and common stock units outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common 7 stock equivalents consisting of certain shares subject to stock options. The computation of diluted earnings per share also assumes conversion of the Company's convertible subordinated debentures using the "if converted" method, when such securities are dilutive, with net income adjusted for the after-tax interest expense and amortization of issuance costs applicable to these debentures. The Company's convertible subordinated debentures were converted to equity during the first quarter of fiscal 1998. On March 19, 1999, the Company recorded a 2-for-1 stock split for holders of record on March 5, 1999. Accordingly, outstanding shares, stock options, and per share data presented herein have been retroactively restated for all periods. NOTE 4: INVENTORIES Inventories consist of the following (in thousands):
June 27, September 27, 1999 1998 - ------------------------------------------------------------------- Coffee: Unroasted $ 95,523 $ 77,400 Roasted 22,949 18,996 Other merchandise held for sale 38,828 36,850 Packaging and other supplies 9,279 9,872 - ------------------------------------------------------------------- $ 166,579 $ 143,118 ===================================================================
As of June 27, 1999, the Company had fixed-price purchase commitments for green coffee totaling approximately $101 million. The Company may, from time to time, enter into futures contracts to hedge price-to-be-established 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") 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 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 cost of coffee purchased. NOTE 5: NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Company will adopt SFAS 131 at the end of fiscal year 1999. In June 1998, the Financial Accounting Standards Board issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will require the Company to recognize certain 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 comprehensive income until the hedged item is recognized in earnings. The Company expects that this new standard will not have a significant effect on its results of operations. SFAS 133 is effective for fiscal years beginning after June 15, 2000. 8 NOTE 6: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost and consist of the following (in thousands):
June 27, September 27, 1999 1998 - -------------------------------------------------------------------- Land $ 3,602 $ 3,602 Building 8,338 8,338 Leasehold improvements 550,864 460,020 Roasting and store equipment 263,685 218,744 Furniture, fixtures and other 95,329 79,953 - ------------------------------------------------------------------ 921,818 770,657 Less accumulated depreciation and amortization (302,076) (218,455) - ------------------------------------------------------------------ 619,742 552,202 Work in progress 71,990 48,592 - ------------------------------------------------------------------ $ 691,732 $ 600,794 ==================================================================
NOTE 7: COMPREHENSIVE INCOME The Company has adopted SFAS 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 reported on the Company's Consolidated Balance Sheets consists of foreign currency translation adjustments and the unrealized gains and losses, net of applicable taxes, on available-for-sale securities. Comprehensive income, net of related tax effects, is as follows (in thousands):
Three months ended Nine months ended June 27, June 28, June 27, June 28, 1999 1998 1999 1998 - ----------------------------------------------------------------------- Net income $ 24,635 $ 7,899 $ 69,326 $ 42,818 Translation adjustment 1,847 (1,462) 2,811 (2,560) Unrealized holding gains/ (losses) 9 (4) 30 (410) Reclassification adjustment for losses realized in net income 155 0 217 0 -------- -------- -------- -------- Total comprehensive income $ 26,646 $ 6,433 $ 72,384 $ 39,848 =======================================================================
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, 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 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, implementation of our Internet strategy, 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 39-week period ending June 27, 1999, Starbucks Corporation ("Starbucks" or the "Company") derived approximately 84% of net revenues from its Company-operated retail stores. The remaining 16% of net revenues were derived from the Company's specialty sales operations, which include product sales to wholesale customers, product sales to and royalties and fees from licensees, and direct response sales. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal year 1998 had 52 weeks. The fiscal year ending on October 3, 1999 will include 53 weeks. During the second quarter of fiscal 1999, Starbucks completed the purchases 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. The results of operations for Tazo and Pasqua are included in the accompanying financial statements from the dates of acquisition. During the third quarter of fiscal 1998, Starbucks acquired the United Kingdom-based Seattle Coffee Company in a pooling-of-interests transaction (the "Transaction"). In conjunction with that 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. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JUNE 27, 1999, COMPARED TO THE 13 WEEKS ENDED JUNE 28, 1998 Revenues. Net revenues for the 13 weeks ended June 27, 1999, increased 27% to $424 million from $334 million for the corresponding period in fiscal 1998. Retail sales increased 26% to $356 million from $284 million due primarily to the opening of new retail stores plus an increase in comparable store sales (sales from stores open 13 months or longer) of 6% for the period. The increase in comparable store sales resulted from a 4% increase in the number of transactions combined with an approximate 2% increase in the average dollar value per transaction. During the 13 weeks ended June 27, 1999, the Company opened 81 stores in continental North America and 6 in the United Kingdom. The Company ended the period with 1,909 Company-operated stores in continental North America and 86 Company-operated stores in the United Kingdom. Specialty sales revenues increased 33% to $68 million for the 13 weeks ended June 27, 1999, compared to $51 million for the corresponding period in fiscal 1998. Specialty sales growth was driven primarily by higher sales to warehouse clubs and higher revenues from licensees and joint venture activities. During 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 10 Starbucks whole bean and ground coffee in grocery, warehouse club and mass merchandise stores. The transition to Kraft began in the first quarter of fiscal 1999. Licensees (including those in which the Company is a joint venture partner) opened 5 stores in continental North America and 28 stores in international markets. The Company ended the period with 169 licensed stores in continental North America and 148 licensed stores in international markets. Costs and Expenses. Cost of sales and related occupancy costs as a percentage of net revenues was 43.7% for the 13 weeks ended June 27, 1999 and 42.9% for the corresponding period in fiscal 1998 excluding the costs associated with the Seattle Coffee Company transaction. The increase as a percentage of revenues was due to higher retail occupancy costs combined with lower gross margins in the specialty sales category, primarily due to a change in the grocery distribution strategy. Store operating expenses as a percentage of retail sales increased to 38.7% for the 13 weeks ended June 27, 1999, from 37.7% for the corresponding period in fiscal 1998 excluding costs associated with the Transaction. The increase was primarily due to higher payroll-related expenditures resulting from the continuing shift in sales mix to the more labor-intensive hand-crafted beverages, as well as an increase in average hourly wage rates. Other operating expenses (expenses associated with all operations other than Company-owned retail, including the Company's share of joint venture profits and losses) were 19.2% of specialty sales revenue for the 13 weeks ended June 27, 1999, compared to 24.0% for the corresponding period in fiscal 1998. The decrease was primarily due to lower operating expenses associated with the transition of the grocery business to Kraft. Depreciation and amortization was 5.9% of net revenues, up from 5.7% of net revenues in the third quarter of fiscal 1998 primarily due to depreciation on new information systems put into service in the last year. General and administrative expenses as a percentage of net revenues were 5.8% for the 13 weeks ended June 27, 1999, compared to 6.2% for the same period in fiscal 1998. This decrease was primarily due to proportionately lower payroll- related expenses. Income Taxes. The Company's effective tax rate for the 13 weeks ended June 27, 1999 was 38.0% compared to 58.4% for the corresponding period in fiscal 1998. Fiscal year 1998 included non-deductible losses incurred by Seattle Coffee Company prior to the Transaction. RESULTS OF OPERATIONS -- FOR THE 39 WEEKS ENDED JUNE 27, 1999, COMPARED TO THE 39 WEEKS ENDED JUNE 28, 1998 Revenues. Net revenues for the 39 weeks ended June 27, 1999, increased 27% to $1.2 billion from $951 million for the corresponding period in fiscal 1998. Retail sales increased 25% to $1.0 billion from $812 million primarily due to the opening of new retail stores combined with an increase in comparable store sales (sales from stores open 13 months or longer) of 5% for the period. The increase in comparable store sales resulted from a 5% increase in the number of transactions while the average dollar value per transaction was flat year over year. During the 39 weeks ended June 27, 1999, the Company opened 293 stores in continental North America and 20 in the United Kingdom. Specialty sales revenues increased 35% to $188 million for the 39 weeks ended June 27, 1999, compared to $139 million for the corresponding period in fiscal 1998. Specialty sales growth was driven primarily by higher revenues from license and joint venture activities, warehouse clubs, business dining and grocery. Licensees (including those in which the Company is a joint venture partner) opened 32 stores in continental North America and 84 stores in international markets. 11 Costs and Expenses. Cost of sales and related occupancy costs as a percentage of net revenues was 44.9% for the 39 weeks ended June 27, 1999 compared to 44.5% for the corresponding period in fiscal 1998 excluding costs associated with the Transaction. Cost of sales was negatively impacted by an overall mix shift from retail to specialty sales, partially offset by improved retail margins. Retail margins improved as lower green coffee costs more than offset higher packaging, occupancy, and dairy costs. Store operating expenses as a percentage of retail sales increased to 37.6% for the 39 weeks ended June 27, 1999, from 37.0% for the corresponding period in fiscal 1998, excluding costs associated with the Transaction. The increase as a percentage of retail sales was primarily due to increased labor costs partially offset by decreased advertising and marketing expenses. Other operating expenses were 20.0% of specialty sales revenue for the 39 weeks ended June 27, 1999, compared to 21.9% for the corresponding period in fiscal 1998. The decrease was due to lower operating expenses resulting from the transition of the grocery business to Kraft in the first quarter of fiscal 1999, partially offset by higher payroll and other expenses associated with supervising licensed operations and the Tazo tea business. Depreciation and amortization was 5.9% of net revenues, up from 5.5% of net revenues in the corresponding period of fiscal 1998 primarily due to depreciation on new information systems projects put into service in the last year. General and administrative expenses as a percentage of net revenues were 5.6% for the 39 weeks ended June 27, 1999, compared to 6.1% for the same period in fiscal 1998. This decrease was due to slower growth in payroll-related and all other administrative expenses relative to net revenue growth. Interest and other expense for the 39 weeks ended June 27, 1999 was $851,000 compared to $1.2 million for the corresponding period in 1998. The decrease is due to the conversion of the Company's convertible subordinated debentures to common stock during the first quarter of fiscal 1998. Income Taxes. The Company's effective tax rate for the 39 weeks ended June 27, 1999 was 38.0% compared to 44.6% for the corresponding period in fiscal 1998. Fiscal year 1998 included non-deductible losses incurred by Seattle Coffee Company prior to the transaction. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $149 million in total cash and short-term investments and working capital of $162 million. Cash and cash equivalents decreased by $11 million for the 39 weeks ended June 27, 1999 to $91 million. Cash provided by operating activities totaled $169 million for the first 39 weeks of fiscal 1999, resulting primarily from net earnings before non-cash charges of $152 million. Cash used by investing activities for the first 39 weeks of fiscal 1999 totaled $241 million. This included capital additions to property, plant and equipment of $175 million related to opening 313 new Company-operated stores, enhancing information systems, purchasing roasting and packaging equipment, and remodeling certain existing stores. The acquisitions of Tazo and Pasqua used $16 million. During the 39-week period ending June 27, 1999, the Company made equity investments of $16 million.The Company also received $3 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 39-week period used $33 million. Cash provided from financing activities for the first 39 weeks of fiscal 1999 totaled $61 million and included cash generated from the exercise of employee stock options and the related income tax benefit available to the Company upon exercise 12 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. Cash requirements for the remainder of fiscal 1999, 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 and its licensees plan to open a total of at least 400 new stores in continental North America and 130 in international markets during fiscal 1999. The Company also anticipates making additional expenditures for enhancing its production capacity and information systems and remodeling certain existing stores. While there can be no assurance that amounts and timing of the expenditures will occur as planned, management expects capital expenditures for the remainder of fiscal 1999 to be approximately $90 million, excluding any major new initiatives. Management has announced its intention to pursue business opportunities on the Internet. In order to do so, the Company may invest in related businesses. The strategy for developing this business is still being formulated and related capital requirements are not yet known. Management believes that existing cash and investments plus cash generated from operations should be sufficient to finance capital requirements through fiscal 2000, barring any major new initiatives. Longer term, the Company expects to reach its goal of at least 2,500 stores in continental North America by the end of the year 2000 and at least 500 stores in the Pacific Rim and 500 stores in Europe by the end of 2003, using cash flow generated from operations supplemented by debt financing, if necessary. 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 has 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 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 13 additional issues have necessitated additional remediation or testing of the Company's systems, slightly slowing the completion of the overall remediation process. In early October 1999, the Company expects to complete its remediation efforts by installing routine software system upgrades on two production control systems. As part of the remediation process, the Company's MIS department has tested each critical system and networked application. The Company currently expects to continue to test the integration of its systems and applications for Year 2000 compliance through the end of October 1999. 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 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 the third quarter of fiscal 1999, the Company had received responses from approximately 94% of these product and service suppliers, virtually all of which indicate that they are actively addressing the Year 2000 issue. The Company is working 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 may 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 is preparing contingency plans for each of its critical business units or departments and plans to conduct tests of certain critical non-MIS supported systems (even if the Company has received assurances of compliance) through the end of October 1999. 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. The Company has spent approximately $1.3 million in direct costs for the Year 2000 compliance project through the third quarter of fiscal 1999 and expects to spend up to an additional $0.9 million to complete its remediation and testing efforts. The total cost to complete remediation efforts and the dates by which the Company expects to complete its Year 2000 remediation and testing processes are management's best estimates, which are 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 AND AVAILABILITY AND GENERAL RISK CONDITIONS Green coffee commodity prices are subject to substantial price fluctuations, caused by various factors including weather, political and economic conditions in certain coffee-producing countries and other supply-related oncerns. 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 14 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 June 27, 1999, the Company had approximately $101 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee for most 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, from time to time, enters 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 coffee prices, management believes that the Company's future results of operations and earnings could be significantly impacted by factors such as increased competition within the specialty coffee industry, the Company's ability to find optimal store locations at favorable lease rates, the increased costs associated with opening and operating retail stores in new markets, and the Company's 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. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Company will adopt SFAS 131 at the end of fiscal year 1999. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will require the Company to recognize certain 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 comprehensive income until the hedged item is recognized in earnings. The Company expects that this new standard will not have a significant effect on its results of operations. SFAS 133 is effective for fiscal years beginning after June 15, 2000. 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 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. The Company does not hedge its interest rate exposures. 15 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 hedge known transaction exposure in the future. The Company may, from time to time, enter into futures contracts to hedge price-to-be-established 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 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 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 cost 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 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 11 Statement re: computation of per share earnings 27 Financial Data Schedule (b) Current Reports on Forms 8-K filed during the 13 weeks ended June 27, 1999: 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: August 11, 1999 By: /s/ Michael Casey ---------------------- Michael Casey executive vice president and chief financial officer Signing on behalf of the registrant and as principal financial officer 16
STARBUCKS CORPORATION --------------------- EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Three Months Ended Nine Months Ended June 27, June 28, June 27, June 28, 1999 1998 1999 1998 (13 Weeks) (39 Weeks) - ------------------------------------------------------------------------------- CALCULATION OF EARNINGS PER COMMON SHARE-BASIC: Net earnings $ 24,635 $ 7,899 $ 69,326 $42,818 =============================================================================== Weighted average common shares and common stock units outstanding 182,781 178,137 181,397 175,095 =============================================================================== Net earnings per common share-basic $ 0.13 $ 0.04 $ 0.38 $0.24 =============================================================================== CALCULATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE-DILUTED(1): Net earnings calculation: Net earnings $ 24,635 $ 7,899 $ 69,326 $ 42,818 Add after-tax interest expense on debentures 0 0 0 348 Add after-tax amortization of issuance costs related to the debentures 0 0 0 30 - ------------------------------------------------------------------------------ Adjusted net earnings $ 24,635 $ 7,899 $ 69,326 $ 43,196 ============================================================================== Weighted average shares outstanding calculation: Weighted average common shares and common stock units outstanding 182,781 178,137 181,397 175,095 Dilutive effect of outstanding common stock options 8,555 7,012 7,217 6,452 Assuming conversion of convertible subordinated debentures 0 0 0 1,871 - ------------------------------------------------------------------------------ Weighted average common and common equivalent shares outstanding 191,336 185,149 188,614 183,418 ============================================================================== Net earnings per common and common equivalent share-diluted $ 0.13 $ 0.04 $0.37 $0.24 ==============================================================================
(1) Diluted earnings per share assumes conversion of the Company's convertible subordinated debentures using the "if converted" method, when such securities are dilutive, with income adjusted for the after-tax interest expense and amortization applicable to these debentures. The Company's convertible subordinated debentures were converted to equity during the first quarter of fiscal 1998. 17 EX-27 2
5 This schedule contains summary financial information extracted from the Starbucks Corporation third quarter fiscal 1999 consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS OCT-3-1999 SEP-28-1998 JUN-27-1999 90,946 58,461 42,186 718 166,579 386,480 993,808 302,076 1,168,538 224,394 0 0 0 644,427 277,467 1,168,538 1,205,252 1,205,252 541,276 541,276 557,818 0 851 111,816 42,490 69,326 0 0 0 69,326 .38 .37
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