-----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, Ikl3uQAWCKc0q5LSz7WF4y7V/b81uvzzUTsiwkKHCrX8egYHG2SxuSAeGCwPgkYi J4B/5NuWaBUoZ6jouWhBaQ== 0000891020-00-000326.txt : 20000217 0000891020-00-000326.hdr.sgml : 20000217 ACCESSION NUMBER: 0000891020-00-000326 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000102 FILED AS OF DATE: 20000216 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: 547528 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 FORM 10-Q FOR THE QUARTER ENDED JANUARY 2, 2000 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 January 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 February 14, 2000, there were 183,546,902 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 ..... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings ................................... 12 Item 6. Exhibits and Reports on Form 8-K .................... 12 Signature .................................................... 12
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except earnings per share)
Three Months Ended January 2, December 27, 2000 1998 (13 Weeks) (13 Weeks) (unaudited) - --------------------------------------------------------------------------- Net revenues $526,982 $405,638 Cost of sales and related occupancy costs 238,402 186,300 - --------------------------------------------------------------------------- Gross Margin 288,580 219,338 Store operating expenses 164,200 122,601 Other operating expenses 14,312 13,308 Depreciation and amortization 29,290 21,893 General and administrative expenses 26,145 20,359 - --------------------------------------------------------------------------- Operating income 54,633 41,177 Interest and other income, net 1,414 1,941 - --------------------------------------------------------------------------- Earnings before income taxes 56,047 43,118 Income taxes 21,298 16,385 - --------------------------------------------------------------------------- Net earnings $ 34,749 $ 26,733 =========================================================================== Net earnings per common share - basic $ 0.19 $ 0.15 Net earnings per common share - diluted $ 0.18 $ 0.14 Weighted average shares outstanding: Basic 183,427 180,042 Diluted 189,340 185,466
See notes to consolidated financial statements 3 4 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
January 2, October 3, 2000 1999 (unaudited) - ---------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 77,368 $ 66,419 Short-term investments 72,808 51,367 Accounts receivable 48,567 47,646 Inventories 157,232 180,886 Prepaid expenses and other current assets 17,549 19,049 Deferred income taxes, net 25,093 21,133 - ---------------------------------------------------------------------- Total current assets 398,617 386,500 Joint ventures and other investments 82,424 68,060 Property, plant and equipment, net 796,550 760,289 Deposits and other assets 27,582 23,474 Goodwill, net 19,384 14,191 - ---------------------------------------------------------------------- Total $ 1,324,557 $ 1,252,514 ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 63,803 $ 56,108 Checks drawn in excess of bank balances 47,122 64,211 Accrued compensation and related costs 51,193 43,872 Accrued occupancy costs 25,608 23,017 Accrued taxes 40,366 30,752 Other accrued expenses 31,103 33,637 - ---------------------------------------------------------------------- Total current liabilities 259,195 251,597 Deferred income taxes, net 40,152 32,886 Long-term debt 6,848 7,018 Shareholders' equity: Common stock - Authorized, 300,000,000; issued and outstanding, 183,730,150 and 183,282,095 shares, respectively, (includes 848,550 common stock units in both periods) 658,789 651,020 Retained earnings 348,688 313,939 Accumulated other comprehensive income (loss) 10,885 (3,946) - ---------------------------------------------------------------------- Total shareholders' equity 1,018,362 961,013 - ---------------------------------------------------------------------- Total $ 1,324,557 $ 1,252,514 ======================================================================
See notes to consolidated financial statements 4 5 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended - ------------------------------------------------------------------------------------------------ January 2, December 27, 2000 1998 (13 Weeks) (13 Weeks) (unaudited) - ------------------------------------------------------------------------------------------------ Operating activities: Net earnings $ 34,749 $ 26,733 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 31,976 24,396 Provision for store remodels and losses on asset disposals 613 242 Deferred income taxes, net (2,240) 604 Equity in (income)/losses of investees (2,798) 353 Cash provided/(used) by changes in operating assets and liabilities: Accounts receivable (765) 5,920 Inventories 24,692 26,435 Prepaid expenses and other current assets 1,656 (419) Accounts payable 7,007 (1,602) Accrued compensation and related costs 7,381 252 Accrued occupancy costs 2,625 1,830 Accrued taxes 9,625 3,753 Other accrued expenses (852) 8,843 - ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 113,669 97,340 Investing activities: Purchase of investments (18,775) (52,998) Maturity of investments 10,000 11,000 Sale of investments 5,282 0 Purchases of businesses, net of cash acquired (8,242) 0 Investments in joint ventures and other investments (11,792) (1,963) Distributions from joint ventures 500 5,000 Additions to property, plant and equipment (65,988) (51,817) Additions to deposits and other assets (3,682) (1,018) - ------------------------------------------------------------------------------------------------ Net cash used by investing activities (92,697) (91,796) Financing activities: (Decrease)/increase in cash provided by checks drawn in excess of bank balances (17,038) 3,216 Proceeds from sale of common stock 2,544 1,499 Exercise of stock options 4,144 10,181 Tax benefit from exercise of non-qualified stock options 1,081 6,614 Payments on long-term debt (923) 0 - ------------------------------------------------------------------------------------------------ Net cash (used) provided by financing activities (10,192) 21,510 - ------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents 169 (332) - ------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 10,949 26,722 Cash and cash equivalents: Beginning of the period 66,419 101,663 - ------------------------------------------------------------------------------------------------ End of the period $ 77,368 $ 128,385 ================================================================================================ Supplemental cash flow information: Cash paid during the period for: Interest $ 131 $ 54 Income taxes 12,689 7,487 Net unrealized holding gain/(loss) 11,138 (4) on investments
See notes to consolidated financial statements 5 6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks Ended January 2, 2000 and December 27, 1998 NOTE 1: FINANCIAL STATEMENT PREPARATION The consolidated financial statements as of January 2, 2000 and October 3, 1999 and for the 13-week periods ended January 2, 2000 and December 27, 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 periods ended January 2, 2000 and December 27, 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 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 period ended January 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 EVENTS On October 18, 1999, Starbucks acquired all of the outstanding stock of Tympanum, Inc. ("Hear Music"), a music retailer with five company stores and 12 licensed locations, in a transaction accounted for as a purchase. The total purchase price was $8 million and the excess purchase price over the net assets acquired was allocated to goodwill and is being amortized over a period of 10 years. Hear Music's results of operations are included in these financial statements from the date of acquisition. Pro forma financial information is not presented, as Hear Music's operations are not material. 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. On March 19, 1999, the Company effected a two-for-one stock split for its holders of record on March 5, 1999. All applicable share and per-share data in these consolidated financial statements have been restated to give effect to this stock split. NOTE 4: INVENTORIES Inventories consist of the following (in thousands):
January 2, October 3, 2000 1999 - ------------------------------------------------------------------- Coffee: Unroasted $ 67,870 $ 95,001 Roasted 24,107 28,065 Other merchandise held for sale 50,732 46,655 Packaging and other supplies 14,523 11,165 - ------------------------------------------------------------------- $ 157,232 $ 180,886 ===================================================================
6 7 As of January 2, 2000, the Company had fixed-price purchase commitments for green coffee totaling approximately $110 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") No. 80 "Accounting for Futures Contracts," these futures contracts meet the hedge criteria and are accounted for as hedges. Accordingly, gains and losses are deferred and recognized as adjustments to the carrying value of coffee inventory when purchased and recognized in results of operations as coffee products are sold. Gains and losses are calculated based on the difference between the cost basis and the market value of the coffee contracts. The market risk related to coffee futures is substantially offset by changes in the cost of coffee purchased. NOTE 5: 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. NOTE 6: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost and consist of the following (in thousands):
January 2, October 3, 2000 1999 - ------------------------------------------------------------------ Land $ 5,084 $ 5,084 Building 19,795 19,795 Leasehold improvements 615,313 591,640 Roasting and store equipment 296,167 273,612 Furniture, fixtures and other 134,723 130,223 - ------------------------------------------------------------------ 1,071,082 1,020,354 Less accumulated depreciation and amortization (352,299) (320,982) - ------------------------------------------------------------------ 718,783 699,372 Work in progress 77,767 60,917 - ------------------------------------------------------------------ $ 796,550 $ 760,289 ==================================================================
7 8 NOTE 7: COMPREHENSIVE INCOME Comprehensive income includes all changes in equity during the period, except those resulting from transactions with shareholders of the Company. It has two components: net income and other comprehensive income. Accumulated other comprehensive income (loss) reported on the Company's consolidated balance sheets consists of foreign currency translation adjustments and the unrealized gains and losses, net of applicable taxes, on available-for-sale securities. Comprehensive income, net of related tax effects, is as follows (in thousands):
Three months ended January 2, December 27, 2000 1998 - ---------------------------------------------------------------- Net income $ 34,749 $ 26,733 Unrealized holding gains/(losses), net 11,138 (4) Translation adjustment 3,693 724 - ---------------------------------------------------------------- Total comprehensive income $ 49,580 $ 27,453 ================================================================
NOTE 8: 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. 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 and grocery channel licensing, international licensing and a direct-to-consumer business. The tables below present information by operating segment (in thousands):
Three months ended January 2, December 27, 2000 1998 - ---------------------------------------------------------------- REVENUES North American retail $422,064 $332,526 All other business units 108,331 74,781 Intersegment revenues (3,413) (1,669) - ---------------------------------------------------------------- Total revenues $526,982 $405,638 ================================================================ - ---------------------------------------------------------------- OPERATING INCOME North American retail $ 63,747 $ 52,767 All other business units 22,659 12,647 Unallocated corporate expenses (31,490) (24,240) Intersegment eliminations (283) 3 Interest, net 1,414 1,941 - ---------------------------------------------------------------- Earnings before income taxes $ 56,047 $ 43,118 ================================================================
NOTE 9: SUBSEQUENT EVENT 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. 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 13-week period ending January 2, 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 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. On October 18, 1999, Starbucks acquired all of the outstanding stock of Tympanum, Inc. ("Hear Music"), a music retailer with five company stores and 12 licensed locations, in a transaction accounted for as a purchase. The total purchase price was $8 million and the excess purchase price over the net assets acquired was allocated to goodwill and is being amortized over a period of 10 years. Hear Music's results of operations are included in these financial statements from the date of acquisition. Pro forma financial information is not presented, as Hear Music's operations are not material. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JANUARY 2, 2000, COMPARED TO THE 13 WEEKS ENDED DECEMBER 27, 1998 Revenues. Net revenues for the 13 weeks ended January 2, 2000, increased 30% to $527 million from $406 million for the corresponding period in fiscal 1999. Retail revenues increased 29% to $441 million from $343 million primarily due to the opening of new retail stores plus an increase in comparable store sales of 7% for the period. The increase in comparable store sales resulted from a 4% increase in the number of transactions combined with a 3% increase in the average dollar value per transaction. During the 13 weeks ended January 2, 2000, the Company opened 104 stores in continental North America and 15 in the United Kingdom. The Company ended the period with 2,139 Company-operated stores in continental North America and 110 Company-operated stores in the United Kingdom. Specialty revenues increased 37% to $86 million for the 13 weeks ended January 2, 2000, compared to $63 million for the corresponding period in fiscal 1999. The increase in specialty revenues was driven primarily by higher revenues from licensees, foodservice accounts, and the wholesale channel. Licensees (including those in which the Company is a joint venture partner) opened 31 stores in continental North America and 34 stores in international markets. The Company ended the period with 207 licensed stores in continental North America and 218 licensed stores in international markets. Gross margin. Gross margin increased to 54.8% for the 13 weeks ended January 2, 2000 from 54.1% 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 implemented in May 1999. Store operating expenses as a percentage of retail sales increased to 37.3% for the 13 weeks ended January 2, 2000, from 35.8% for the corresponding period in fiscal 1999. The increase was primarily due to higher payroll-related expenditures resulting from an increase in average hourly wage rates and a 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, including the Company's share of joint venture profits and losses) were 16.6% of specialty revenues for the 13 weeks ended January 2, 2000, compared to 21.2% for the corresponding period in fiscal 1999. The decrease was primarily due to improved profit contribution from joint venture activities. General and administrative expenses as a percentage of net revenues were 5.0% for the 13 weeks ended January 2, 2000 and December 27, 1998. Higher professional fees were primarily offset by lower payroll-related expenses as a percent of revenues. Income Taxes. The Company's effective tax rate for the 13 weeks ended January 2, 2000 and December 27, 1998 was 38.0%. Management expects the tax rate to decrease to 37.5% for the remainder of fiscal 2000 due to tax planning and a reduction of losses by the Company's joint venture in Japan. Such losses are not deductible for U.S. tax purposes. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $150 million in total cash and short-term investments and working capital of $139 million. Cash and cash equivalents increased by $11 million for the 13 weeks ended January 2, 2000 to $77 million. Cash provided by operating activities totaled $114 million for the first 13 weeks of fiscal 2000, resulting primarily from net earnings before non-cash charges of $62 million and a decrease in inventories of $25 million. Cash used by investing activities for the first 13 weeks of fiscal 2000 totaled $93 million. This included capital additions to property, plant and equipment of $66 million related to opening 119 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 purchase of Hear Music used $8 million. The Company also used $10 million to make a minority investment in Cooking.com, a leading web-based retailer of cookware, accessories, specialty foods and cooking content such as menus and recipes. During the 13-week period ending January 2, 2000, the Company made equity investments of $2 million in its international joint ventures. The Company received $.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 13-week period used $3 million. Cash used by financing activities for the first 13 weeks of fiscal 2000 totaled $10 million. This included a $17 million decrease of checks outstanding, offset by $8 million generated from the exercise of employee stock options and the related income tax benefit available to the Company upon exercise of such options and 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 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 $235 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. 10 11 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 January 2, 2000, the Company had approximately $110 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 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. NEW ACCOUNTING STANDARDS 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 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. 11 12 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 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 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. 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 January 2, 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 16, 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 12 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 STARBUCKS CORPORATION --------------------- EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended January 2, December 27, 2000 1998 (13 Weeks) - -------------------------------------------------------------- CALCULATION OF EARNINGS PER COMMON SHARE-BASIC: Net earnings $ 34,749 $ 26,733 ============================================================== Weighted average common shares and common stock units outstanding 183,427 180,042 ============================================================== Net earnings per common share-basic $ 0.19 $ 0.15 ============================================================== CALCULATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE-DILUTED: Net earnings $ 34,749 $ 26,733 ============================================================== Weighted average shares outstanding calculation: Weighted average common shares and common stock units outstanding 183,427 180,042 Dilutive effect of outstanding common stock options 5,913 5,424 - -------------------------------------------------------------- Weighted average common and common equivalent shares outstanding 189,340 185,466 ============================================================== Net earnings per common and common equivalent share-diluted $ 0.18 $ 0.14 ==============================================================
EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STARBUCKS CORPORATION FIRST QUARTER FISCAL 2000 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS OCT-01-2000 OCT-04-1999 JAN-02-2000 77,368 77,924 50,297 1,730 157,232 398,617 1,148,849 352,299 1,324,557 259,195 6,848 0 0 658,789 359,573 1,324,557 526,982 526,982 238,402 238,402 233,947 0 383 56,047 21,298 34,749 0 0 0 34,749 .19 .18
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