-----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, NnfCnV3SdZLVl8q7tu6BGcoelE2fR9WusA5QTnhvtMik7/fXPUpow4T8UwlMRju9 LsBh/w7Tq9WFh5HbVJ8TYg== 0000891020-00-001104.txt : 20000518 0000891020-00-001104.hdr.sgml : 20000518 ACCESSION NUMBER: 0000891020-00-001104 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000402 FILED AS OF DATE: 20000517 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: 638790 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 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended April 2, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ___ to ___ Commission File Number 0-20322 --------------- STARBUCKS CORPORATION (Exact Name of Registrant as Specified in its Charter) Washington 91-1325671 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2401 Utah Avenue South, Seattle, Washington 98134 (Address of Principal Executive Office, including Zip Code) (206) 447-1575 (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 15, 2000, there were 185,528,869 shares of the Registrant's Common Stock outstanding. ================================================================================ 2 STARBUCKS CORPORATION INDEX PART I. FINANCIAL INFORMATION
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................................... 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings..................................... 13 Item 4. Submission of Matters to a Vote of Security Holders... 13 Item 5. Other Information..................................... 14 Item 6. Exhibits and Reports on Form 8-K...................... 14 Signature...................................................... 14
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 Six Months Ended April 2, March 28, April 2, March 28, 2000 1999 2000 1999 (13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks) (unaudited) (unaudited) - ---------------------------------------------------------------------------------------------------- Net revenues $504,698 $375,822 $1,031,680 $781,460 Cost of sales and related occupancy costs 223,249 169,957 461,651 356,256 - ---------------------------------------------------------------------------------------------------- Gross margin 281,449 205,865 570,029 425,204 Store operating expenses 169,257 121,845 333,457 244,449 Other operating expenses 16,412 11,142 30,724 24,450 Depreciation and amortization 31,951 23,740 61,241 45,634 General and administrative expenses 28,622 22,371 54,767 42,726 - ---------------------------------------------------------------------------------------------------- Operating income 35,207 26,767 89,840 67,945 Interest and other income, net 2,242 2,197 3,656 4,137 - ---------------------------------------------------------------------------------------------------- Earnings before income taxes 37,449 28,964 93,496 72,082 Income taxes 14,043 11,007 35,341 27,391 - ---------------------------------------------------------------------------------------------------- Net earnings $ 23,406 $ 17,957 $ 58,155 $ 44,691 ==================================================================================================== Net earnings per common share - basic $ 0.13 $ 0.10 $ 0.32 $ 0.25 Net earnings per common share - diluted $ 0.12 $ 0.10 $ 0.30 $ 0.24 Weighted average shares outstanding: Basic 184,785 181,370 184,106 180,706 Diluted 192,417 188,349 191,041 186,917
See notes to consolidated financial statements 3 4 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
April 2, October 3, 2000 1999 (unaudited) - --------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 85,258 $ 66,419 Short-term investments 42,926 51,367 Accounts receivable 58,599 47,646 Inventories 151,948 180,886 Prepaid expenses and other current assets 26,866 19,049 Deferred income taxes, net 26,369 21,133 - --------------------------------------------------------------------------------- Total current assets 391,966 386,500 Joint ventures and other investments 104,988 68,060 Property, plant and equipment, net 840,944 760,289 Other assets 27,367 23,474 Goodwill, net 18,686 14,191 - --------------------------------------------------------------------------------- Total $ 1,383,951 $ 1,252,514 ================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 65,130 $ 56,108 Checks drawn in excess of bank balances 50,463 64,211 Accrued compensation and related costs 62,185 43,872 Accrued occupancy costs 26,005 23,017 Accrued taxes 18,838 30,752 Other accrued expenses 50,552 33,637 - --------------------------------------------------------------------------------- Total current liabilities 273,173 251,597 Deferred income taxes, net 35,921 32,886 Long-term debt 6,677 7,018 Shareholders' equity: Common stock - Authorized, 300,000,000; issued and outstanding, 186,282,959 and 183,282,095 shares, respectively, (includes 848,550 common stock units in both periods) 702,169 651,020 Retained earnings 372,094 313,939 Accumulated other comprehensive loss (6,083) (3,946) - --------------------------------------------------------------------------------- Total shareholders' equity 1,068,180 961,013 - --------------------------------------------------------------------------------- Total $ 1,383,951 $ 1,252,514 =================================================================================
See notes to consolidated financial statements 4 5 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended - ------------------------------------------------------------------------------ April 2, March 28, 2000 1999 (26 Weeks) (26 Weeks) (unaudited) - ------------------------------------------------------------------------------ Operating activities: Net earnings $ 58,155 $ 44,691 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 67,594 50,630 Provision for store remodels and losses on asset disposals 1,307 -- Deferred income taxes, net 84 2,479 Equity in (income)/losses of investees (5,055) 731 Cash provided/(used) by changes in operating assets and liabilities: Accounts receivable (10,814) 13,984 Inventories 29,882 11,485 Prepaid expenses and other current assets (638) (4,473) Accounts payable 8,140 1,523 Accrued compensation and related costs 18,301 4,750 Accrued occupancy costs 2,984 2,342 Accrued taxes (18,954) (10,030) Other accrued expenses 17,474 3,474 - ------------------------------------------------------------------------------ Net cash provided by operating activities 168,460 121,586 Investing activities: Purchase of investments (55,314) (80,502) Maturity of investments 28,000 59,053 Sale of investments 35,524 -- Purchases of businesses, net of cash acquired (8,242) (16,216) Investments in joint ventures and other investments (38,187) (10,002) Distributions from joint ventures 4,556 5,500 Additions to property, plant and equipment (148,005) (99,277) Additions to deposits and other assets (3,986) (4,769) - ------------------------------------------------------------------------------ Net cash used by investing activities (185,654) (146,213) Financing activities: Decrease in cash provided by checks drawn in excess of bank balances (13,748) (114) Proceeds from sale of common stock under employee stock purchase plan 5,020 3,329 Exercise of stock options 32,853 29,789 Tax benefit from exercise of non-qualified stock options 13,276 16,184 Payments on long-term debt (1,344) -- - ------------------------------------------------------------------------------ Net cash provided by financing activities 36,057 49,188 - ------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents (24) 1,250 - ------------------------------------------------------------------------------ Net increase in cash and cash equivalents 18,839 25,811 Cash and cash equivalents: Beginning of the period 66,419 101,663 - ------------------------------------------------------------------------------ End of the period $ 85,258 $ 127,474 ============================================================================== Supplemental cash flow information: Cash paid during the period for: Interest $ 191 $ 90 Income taxes 32,710 18,789 Net unrealized holding(loss)/gain (1,409) 21 on investments
See notes to consolidated financial statements 5 6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks and 26 Weeks Ended April 2, 2000 and March 28, 1999 NOTE 1: FINANCIAL STATEMENT PREPARATION The consolidated financial statements as of April 2, 2000 and October 3, 1999 and for the 13-week and 26-week periods ended April 2, 2000 and March 28, 1999 have been prepared by Starbucks Corporation ("Starbucks" or the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The financial information for the 13-week and 26-week periods ended April 2, 2000 and March 28, 1999 is unaudited, but, in the opinion of management, reflects all adjustments (consisting only of normal recurring adjustments and accruals) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of October 3, 1999, is derived from the Company's audited consolidated financial statements and notes thereto for the year ended October 3, 1999, and should be read in conjunction with such financial statements. Certain reclassifications of prior year's balances have been made to conform to the current format. The results of operations for the 13-week and 26-week periods ended April 2, 2000 are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending October 1, 2000. NOTE 2: OTHER ITEMS On February 12, 2000, Starbucks entered into a strategic agreement with Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment and convenience items. Under the agreement, Starbucks will receive $150 million over a five-year period for in-store exposure and co-marketing opportunities. Kozmo.com will locate drop boxes within Starbucks stores for return of videos, DVDs, video games and other items delivered by Kozmo.com and will deliver Starbucks coffee by the pound, Tazo teas and other Starbucks products. In accordance with this agreement, Starbucks received $15 million which will be recognized as revenue over 12 months, beginning in March 2000. On March 16, 2000, Starbucks made a minority investment of $25 million in Kozmo.com. NOTE 3: EARNINGS PER SHARE The computation of basic earnings per share is based on the weighted average number of shares and common stock units outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of certain shares subject to stock options. NOTE 4: INVENTORIES Inventories consist of the following (in thousands):
April 2, October 3, 2000 1999 - ------------------------------------------------------------------- Coffee: Unroasted $ 59,112 $ 95,001 Roasted 26,683 28,065 Other merchandise held for sale 53,062 46,655 Packaging and other supplies 13,091 11,165 - ------------------------------------------------------------------- $ 151,948 $ 180,886 ===================================================================
6 7 As of April 2, 2000, the Company had fixed-price purchase commitments for green coffee totaling approximately $112 million. NOTE 5: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are recorded at cost and consist of the following (in thousands):
April 2, October 3, 2000 1999 - ------------------------------------------------------------------------------- Land $ 5,084 $ 5,084 Building 19,795 19,795 Leasehold improvements 668,877 591,640 Roasting and store equipment 309,571 273,612 Furniture, fixtures and other 140,967 130,223 - ------------------------------------------------------------------------------- 1,144,294 1,020,354 Less accumulated depreciation and amortization (386,372) (320,982) - ------------------------------------------------------------------------------- 757,922 699,372 Work in progress 83,022 60,917 - ------------------------------------------------------------------------------- $ 840,944 $ 760,289 ===============================================================================
NOTE 6: COMPREHENSIVE INCOME Comprehensive income includes all changes in equity during the period, except those resulting from transactions with shareholders of the Company. It has two components: net income and other comprehensive income. Accumulated other comprehensive income (loss) reported on the Company's consolidated balance sheets consists of foreign currency translation adjustments and the unrealized gains and losses, net of applicable taxes, on available-for-sale securities. Comprehensive income, net of related tax effects, is as follows (in thousands):
Three months ended Six months ended April 2, March 28, April 2, March 28, 2000 1999 2000 1999 - ------------------------------------------------------------------------------------ Net income $ 23,406 $17,957 $ 58,155 $44,691 Translation adjustment (4,270) 237 (577) 964 Unrealized holding gains/ (losses), net (12,547) 28 (1,409) 21 Reclassification adjustment for net (gains)/losses realized in net income (151) 62 (151) 62 -------- ------- -------- ------- Total comprehensive income $ 6,438 $18,284 $ 56,018 $45,738 ====================================================================================
7 8 NOTE 7: SEGMENT REPORTING The Company is organized into a number of business units. The Company's North American retail business sells primarily coffee beverages, whole bean coffees, and related merchandise through Company-operated retail stores in the United States and Canada. The Company also owns and operates retail stores in the United Kingdom. These two retail segments are managed by different presidents within the Company and are measured and evaluated separately by senior management. The Company operates through several other business units, each of which is managed and evaluated independently. These other business units include domestic wholesale, domestic retail store licensing, grocery channel licensing, international retail store licensing and a direct-to-consumer business. The tables below present information by operating segment (in thousands):
Three months ended Six months ended April 2, March 28, April 2, March 28, 2000 1999 2000 1999 - --------------------------------------------------------------------------------------- REVENUES North American retail $ 408,525 $ 307,908 $ 830,589 $ 640,434 All other business units 102,319 70,582 211,373 145,362 Intersegment revenues (6,146) (2,668) (10,282) (4,336) --------- --------- ----------- --------- Total revenues $ 504,698 $ 375,822 $ 1,031,680 $ 781,460 ======================================================================================= - --------------------------------------------------------------------------------------- OPERATING INCOME North American retail $ 54,307 $ 41,514 $ 118,060 $ 94,282 All other business units 16,607 12,084 39,260 24,728 Unallocated corporate expenses (35,803) (26,696) (67,295) (50,932) Intersegment eliminations 96 (135) (185) (133) Interest, net 2,242 2,197 3,656 4,137 --------- --------- ----------- --------- Earnings before income taxes $ 37,449 $ 28,964 $ 93,496 $ 72,082 =======================================================================================
NOTE 8: NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will require the Company to recognize derivatives on its balance sheet at fair value. Changes in the fair values of derivatives that qualify as cash flow hedges will be recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. The Company is in the process of evaluating the impact of this new accounting standard and does not expect that it will have a significant effect on its results of operations. The FASB subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB No. 133", which postpones initial application until fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 in fiscal 2001. 8 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements herein, including anticipated store openings, planned capital expenditures and trends in or expectations regarding the Company's operations, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information, and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the impact of competition, the effect of legal proceedings, and other risks detailed herein and in the Company's annual and quarterly filings with the Securities and Exchange Commission. GENERAL During the 26-week period ending April 2, 2000, Starbucks Corporation ("Starbucks" or the "Company") derived approximately 85% of net revenues from its Company-operated retail stores. The remaining 15% of net revenues is derived from the Company's specialty operations, which include sales to wholesale accounts and licensees, royalty and license fee income, and sales through its direct-to-consumer business including its on-line store at www.starbucks.com. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal year 1999 had 53 weeks. The fiscal year ending on October 1, 2000 will include 52 weeks. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED APRIL 2, 2000, COMPARED TO THE 13 WEEKS ENDED MARCH 28, 1999 REVENUES Net revenues for the 13 weeks ended April 2, 2000 increased 34% to $505 million from $376 million for the corresponding period in fiscal 1999. Retail revenues increased 35% to $429 million from $319 million primarily due to the opening of new retail stores plus an increase in comparable store sales of 10% for the period. The increase in comparable store sales (stores open for at least 13 months) resulted from a 5% increase in the number of transactions combined with a 5% increase in the average dollar value per transaction. During the 13 weeks ended April 2, 2000, the Company opened 98 stores in continental North America and 17 in the United Kingdom. The Company ended the period with 2,233 Company-operated stores in continental North America and 127 Company-operated stores in the United Kingdom. Specialty revenues increased 33% to $76 million for the 13 weeks ended April 2, 2000, compared to $57 million for the corresponding period in fiscal 1999. The increase in specialty revenues was driven primarily by higher revenues from foodservice accounts, the national expansion of whole bean and ground coffee in supermarkets through a licensing agreement with Kraft, and increased revenues from licensees. Licensees (including those in which the Company is a joint venture partner) opened 58 stores in continental North America and 42 stores in international markets. The Company ended the period with 265 licensed stores in continental North America and 260 licensed stores in international markets. GROSS MARGIN Gross margin increased to 55.8% for the 13 weeks ended April 2, 2000 from 54.8% for the corresponding period in fiscal 1999. The improvement in gross margin was primarily due to lower green coffee costs and the impact of a beverage sales price increase in the third quarter of 1999, partially offset by higher occupancy costs. EXPENSES Store operating expenses as a percentage of retail revenues increased to 39.5% for the 13 weeks ended April 2, 2000, from 38.2% for the corresponding period in fiscal 1999. The increase was primarily due to higher payroll-related expenditures as a percent of retail revenues, resulting from both an increase in average hourly wage rates and the continuing shift in sales to more labor-intensive handcrafted beverages. 9 10 Other operating expenses (expenses associated with all operations other than Company-owned retail, as well as the Company's share of joint venture profits and losses) were 21.7% of specialty revenues for the 13 weeks ended April 2, 2000, compared to 19.5% for the corresponding period in fiscal 1999. Higher payroll-related expenses and higher marketing expenditures as a percent of specialty revenues were partially offset by improved profitability from both international and domestic joint venture activities. General and administrative expenses as a percentage of net revenues were 5.7% for the 13 weeks ended April 2, 2000, compared to 6.0% for the corresponding period in fiscal 1999. The decrease was primarily due to leverage from the acceleration of revenue growth. INCOME TAXES The Company's effective tax rate for the 13 weeks ended April 2, 2000 was 37.5% compared to 38.0% for the corresponding period in fiscal 1999. The decrease was due to overall tax planning efforts and the reduction of losses by the Company's joint venture in Japan, which are not deductible for U.S. tax purposes. RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED APRIL 2, 2000, COMPARED TO THE 26 WEEKS ENDED MARCH 28, 1999 REVENUES Net revenues for the 26 weeks ended April 2, 2000, increased 32% to $1.0 billion from $781 million for the corresponding period in fiscal 1999. Retail revenues increased 31% to $870 million from $662 million primarily due to the opening of new retail stores plus an increase in comparable store sales of 8% for the period. The increase in comparable store sales resulted from a 4% increase in the number of transactions combined with a 4% increase in the average dollar value per transaction. During the 26 weeks ended April 2, 2000, the Company opened 202 stores in continental North America and 32 in the United Kingdom. Specialty revenues increased 35% to $162 million for the 26 weeks ended April 2, 2000, compared to $120 million for the corresponding period in fiscal 1999. The increase in specialty revenues was driven primarily by higher revenues from foodservice accounts, licensees, and the grocery channel. Licensees (including those in which the Company is a joint venture partner) opened 89 stores in continental North America and 76 stores in international markets. GROSS MARGIN Gross margin increased to 55.3% for the 26 weeks ended April 2, 2000 from 54.4% for the corresponding period in fiscal 1999. The improvement in gross margin was primarily due to lower green coffee costs and, to a lesser extent, the impact of a beverage sales price increase implemented in the third quarter of fiscal 1999. EXPENSES Store operating expenses as a percentage of retail revenues increased to 38.3% for the 26 weeks ended April 2, 2000, from 37.0% for the corresponding period in fiscal 1999. The increase was due almost entirely to higher payroll-related expenditures as a percent of retail revenues resulting from an increase in average hourly wage rates and a continuing shift in sales to more labor-intensive handcrafted beverages. 10 11 Other operating expenses were 19.0% of specialty revenues for the 26 weeks ended April 2, 2000, compared to 20.4% for the corresponding period in fiscal 1999. The decrease was primarily due to continued improvements in profitability from joint venture activities, which were partially offset by increases in operating expenses relating to accelerating the growth of the specialty businesses. General and administrative expenses as a percentage of net revenues were 5.3% for the 26 weeks ended April 2, 2000 compared to 5.5% for the corresponding period in fiscal 1999. The decrease was primarily due to leverage from the acceleration of revenue growth. INCOME TAXES The Company's effective tax rate for the 26 weeks ended April 2, 2000 was 37.8% compared to 38.0% for the corresponding period in fiscal 1999. The decrease was due to overall tax planning efforts and the reduction of losses by the Company's joint venture in Japan, which are not deductible for U.S. tax purposes. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with total cash and cash equivalents and short-term investments of $128 million and working capital of $119 million. Cash and cash equivalents increased by $19 million for the 26 weeks ended April 2, 2000 to $85 million. Cash provided by operating activities totaled $168 million for the first 26 weeks of fiscal 2000, resulting primarily from net earnings before non-cash charges of $122 million and a decrease in inventories of $30 million. In addition, $15 million was received in accordance with the strategic agreement with Kozmo.com, Inc. Cash used by investing activities for the first 26 weeks of fiscal 2000 totaled $186 million. This included capital additions to property, plant and equipment of $148 million related to opening 234 new Company-operated retail stores, enhancing information systems, purchasing roasting and packaging equipment for the Company's roasting and distribution facilities, and remodeling certain existing stores. The Company used $25 million to make a minority investment in Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment and convenience items and $10 million to make a minority investment in Cooking.com, a leading web-based retailer of cookware, accessories, and specialty foods and provider of information about cooking. The purchase of Tympanum, Inc. (d/b/a Hear Music) used $8 million. During the 26-week period ending April 2, 2000, the Company made equity investments of $3 million in its international joint ventures and received $4.5 million in distributions from its domestic joint ventures. The Company invested excess cash primarily in short-term, investment-grade marketable debt securities. The net activity in the Company's marketable securities portfolio during the 26-week period provided $8 million. Cash provided by financing activities for the first 26 weeks of fiscal 2000 totaled $36 million. This included $51 million generated from the exercise of employee stock options, the related income tax benefit available to the Company upon exercise of such options, and cash generated from the Company's employee stock purchase plan. As options granted under the Company's stock option plans vest and are exercised, the Company will continue to receive proceeds and a tax deduction; however, neither the amounts nor timing can be predicted. This was offset by a $14 million decrease in checks outstanding. Cash requirements for the remainder of fiscal 2000, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores. The Company plans to open at least 400 Company-operated stores during fiscal 2000. The Company also anticipates incurring additional expenditures for enhancing its production capacity and information systems and remodeling certain existing stores. While there can be no assurance that current expectations will be realized, management expects capital expenditures for the remainder of fiscal 2000 to be approximately $157 million. Management believes that existing cash and investments plus cash generated from operations should be sufficient to finance capital requirements for its core businesses through fiscal 2000. New joint ventures, other new business opportunities or store expansion rates substantially in excess of that presently planned may require outside funding. 11 12 COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS The supply and price of green (unroasted) coffee are subject to significant volatility. Although most coffee trades in the commodity market, coffee of the quality sought by the Company tends to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. The Company's ability to raise sales prices in response to rising coffee prices may be limited and the Company's profitability could be adversely affected if coffee prices were to rise substantially. The Company enters into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee and bring greater certainty to the cost of sales in future periods. As of April 2, 2000, the Company had approximately $112 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee for the remainder of fiscal 2000. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is remote. To further reduce its exposure to rising coffee costs, the Company may, from time to time, enter into futures contracts to hedge price-to-be-established coffee purchase commitments. The specific risks associated with these activities are described below in Item 3 "Quantitative and Qualitative Disclosures about Market Risk." In addition to fluctuating green coffee prices, management believes that the Company's future results of operations and earnings could be significantly impacted by other factors such as increased competition within the specialty coffee industry, the Company's ability to find optimal store locations at favorable lease rates, increased costs associated with opening and operating retail stores in new markets, increases in the cost of dairy products and the Company's continued ability to hire, train and retain qualified personnel. SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal fluctuations. Significant portions of the Company's net revenues and profits are realized during the first quarter of the Company's fiscal year, which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of seasonal influences. Because of the seasonality of the Company's business and its overall growth, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. 12 13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company maintains investment portfolio holdings of various issuers, types and maturities. These securities are classified as either trading or available-for-sale. Trading securities are recorded on the balance sheet at fair value, with unrealized gains and losses included in earnings. Available-for-sale securities are recorded on the balance sheet at fair value, with unrealized gains or losses reported as a separate component of accumulated other comprehensive income. The Company does not hedge its interest rate exposure. The Company is subject to foreign currency exchange rate exposure, primarily related to its retail operations in Canada and the United Kingdom. Historically, this exposure has had a minimal impact on the Company. At the present time, the Company does not hedge foreign currency risk, but may do so in the future. The Company may, from time to time, enter into futures contracts to hedge price-to-be-fixed coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. The Company does not hold or issue derivative instruments for trading purposes. In accordance with SFAS No. 80 "Accounting for Futures Contracts," these futures contracts meet the hedge criteria and are accounted for as hedges. Accordingly, gains and losses are deferred and recognized as adjustments to the carrying value of the coffee inventory when purchased and recognized in results of operations as coffee products are sold. Gains and losses are calculated based on the difference between the cost basis and the market value of the coffee contracts. The market risk related to coffee futures is substantially offset by changes in the costs of coffee purchased. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to various legal proceedings arising in the ordinary course of its business, but is not currently a party to any legal proceeding that management believes would have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders of the Company was held on February 14, 2000 for the purposes of (i) electing three Class 1 directors to serve until the Annual Meeting of Shareholders to be held in early 2003; (ii) approving the amendment and restatement of the Starbucks Corporation Key Employee Stock Option Plan to increase by 9,000,000 the number of shares of the Company's Common Stock reserved for issuance under the plan, add provisions prohibiting the granting of stock options with an exercise price below the fair market value of a share of the Company's Common Stock on the date of grant or the repricing of stock options below such fair market value without shareholder approval, and update the plan to permit more effective administrative practices; and (iii) ratifying the selection of the independent auditors for fiscal 2000. All proposals were approved. The table below shows the results of the shareholders' voting:
Votes in Votes Votes Withheld Favor Against Abstentions ----------- ---------- -------------- Election of Directors Class 1 Directors: Howard P. Behar 165,069,643 0 1,562,104 James G. Shennan, Jr. 165,085,210 0 1,546,537 Craig E. Weatherup 165,036,842 0 1,594,905 Approve the amendment and restatement of the Company's Key Employee Stock Option Plan - 1994 147,167,794 18,498,175 965,778 Ratification of independent auditors 165,812,940 361,880 456,927
Because all proposals were routine, there were no broker non-votes. 13 14 The following members of the Board of Directors, who were not up for re-election during the current year, have terms that expire at the annual meeting of shareholders to be held in early 2001 and 2002:
Director Term expires at the annual meeting held in: - ------------------------------- ------------------------------ Gregory B. Maffei 2001 Arlen I. Prentice 2001 Orin C. Smith 2001 Barbara Bass 2002 Craig J. Foley 2002 Howard Schultz 2002
ITEM 5. OTHER INFORMATION On February 12, 2000, Starbucks entered into a strategic agreement with Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment and convenience items. Under the agreement, Starbucks will receive $150 million over a five-year period for in-store exposure and co-marketing opportunities. Kozmo.com will locate drop boxes within Starbucks stores for return of videos, DVDs, video games and other items delivered by Kozmo.com and will deliver Starbucks coffee by the pound, Tazo teas and other Starbucks products. In accordance with this agreement, Starbucks received $15 million which will be recognized as revenue over 12 months, beginning in March 2000. On March 16, 2000, Starbucks made a minority investment of $25 million in Kozmo.com. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit No. Description 10.18* Strategic Agreement dated February 12, 2000 between Starbucks Corporation and Kozmo.com, Inc. 11 Statement re: computation of per share earnings 27 Financial Data Schedule
(b) Current Reports on Forms 8-K filed during the 26 weeks ended April 2, 2000: None *Confidential treatment requested SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STARBUCKS CORPORATION Dated: May 17, 2000 By: /s/ Michael Casey ---------------------- Michael Casey executive vice president and chief financial officer Signing on behalf of the registrant and as principal financial officer 14 EX-10.18 2 STRATEGIC AGREEMENT WITH KOZMO.COM, INC. 1 EXHIBIT 10.18 Pages containing information for which confidential treatment has been requested are marked "Confidential Treatment Requested - Redacted Material Filed Separately with the Commission." The location of information for which confidential treatment has been requested has been marked with an asterisk (*). STRATEGIC AGREEMENT BETWEEN STARBUCKS CORPORATION AND KOZMO.COM, INC. This Strategic Agreement ("Agreement") is made and entered into on February 12, 2000 by and between Starbucks Corporation, a Washington corporation ("Starbucks") and Kozmo.com, Inc., a Delaware corporation ("Kozmo"). BACKGROUND A. Kozmo currently provides same-day delivery of videos, DVDs, video games, convenience foods and other items which are ordered by its customers over the internet and delivered by Kozmo to customers at their homes or places of business. Kozmo intends to expand its internet-based, same-day delivery business to sell additional items including without limitation, books, compact discs, magazines and electronics. Kozmo desires to provide convenient locations for its customers to return to Kozmo videos, DVDs and video games (collectively, "Video Products") and to possibly return to Kozmo certain other items purchased from Kozmo. B. Kozmo currently intends to expand its same-day delivery service business into the Expansion Cities in the manner and in accordance with the timeline set forth in Schedule A attached hereto, which may be revised by Kozmo at any time upon notice to Starbucks. C. Starbucks operates retail coffee stores throughout the United States and Canada. In addition, Starbucks sells, both in its stores and through other means of distribution, coffee, tea and other related products, including but not limited to compact discs and other music items sold by Starbucks through its Hear Music division ("Starbucks' Retail Products"). D. Starbucks has a valuable network of stores, a substantial customer base, and certain other intangibles to which Kozmo desires access. E. Starbucks has considerable expertise in a variety of areas, including without limitation, branding, marketing, customer relations, real estate and employee training ("Starbucks' Expertise"). F. Starbucks wishes to lease from Kozmo Drop-boxes to place in its stores to permit the collection of the Video Products and certain other items purchased from Kozmo. Kozmo further wishes to distribute to its customers certain Starbucks' Retail Products. 2 G. Kozmo wishes to obtain assistance from Starbucks in the areas of Starbucks' Expertise on terms mutually agreeable to the parties hereto; provided, however, Starbucks will not charge Kozmo for its time. H. Starbucks and Kozmo desire to enter into a strategic relationship to undertake certain joint marketing efforts in-store, online and through traditional marketing media. AGREEMENT The parties agree as follows: 1. DROP-BOX. 1.1 STARBUCKS' RESPONSIBILITIES. 1.1.1 Within ten (10) days following the execution of this Agreement, Starbucks will deliver to Kozmo a list showing the location of each of its retail coffee stores wholly-owned and operated by Starbucks ("Starbucks Stores") located in each city in the United States and Canada in which Kozmo operates its internet-based, same-day delivery business. As Kozmo expands its business into additional U.S. or Canadian cities ("Expansion Cities"), Starbucks will provide a list showing the location of each of its Starbucks Stores located in the Expansion Cities within thirty (30) days following written notification from Kozmo of its intention to commence operations in such cities. On a quarterly basis throughout the Term of this Agreement, Starbucks will provide Kozmo with a list for each of the cities in which Kozmo operates that sets forth (a) new Starbucks Stores that have opened since the date of the last quarterly report, and (b) new Starbucks Stores that Starbucks expects to be opened during the next calendar quarter. 1.1.2 Starbucks will locate a Drop-box (as defined below) to be used by customers of Kozmo for the return to Kozmo of the Video Products and, subject to the provisions of Section 1.4, the Kozmo Items (as defined below) in those Starbucks Stores(*) 1.1.3 Starbucks will allow Kozmo's employees who comply with the requirement of Section 1.2.4 below, to enter each Starbucks Store containing a Drop-box to collect the Video Products and Kozmo Items during such store's normal business hours, as may be modified by Starbucks from time to time in its sole discretion, at such times as may be mutually agreed upon by Starbucks and Kozmo. 1.1.4 Starbucks will not have any responsibility or liability for the condition of Video Products or Kozmo Items returned to the Drop-boxes, nor will Starbucks be responsible to accept or hold for collection by Kozmo any Video Product or Kozmo Item which will not fit in - ------------ * CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH THE COMMISSION 2 3 the Drop-box for any reason. Kozmo will bear all risk of loss relating to the Video Products and the Kozmo Items. 1.1.5 Starbucks will notify Kozmo by telephone of any problems with or damage to a Drop-box in a Starbucks Store of which Starbucks becomes aware; provided, however, that Starbucks will not have any duty or obligation to inspect or monitor the Drop-boxes. 1.1.6 Starbucks reserves the right to require by written notice to Kozmo that Kozmo remove a Drop-box from any Starbucks Store if, at any time, the criteria set forth in Sections 1.1.2 (c), (d) and (e) are not being met. Upon the removal of a Drop-box from a Starbucks Store, Kozmo will, at its sole cost and expense, use commercially reasonable efforts to notify its customers that they will no longer be able to return Video Products or Kozmo Items to the applicable Starbucks Store. 1.2 KOZMO RESPONSIBILITIES. 1.2.1 Kozmo will collect all Video Products and Kozmo Items from the Drop-boxes located at each Starbucks Store in such a manner so as to assure that such Drop-boxes do not overflow, or more frequently as mutually agreed upon by Starbucks and Kozmo. Kozmo will collect items from the Drop-boxes at such times as is agreed to by the parties so as to not interfere with Starbucks' normal business operations. 1.2.2 Kozmo will use commercially reasonable efforts to maintain the Drop-boxes in good condition and appearance at all times during this Agreement. 1.2.3 Kozmo will provide each Starbucks Store with a toll free customer service number staffed by one or more Kozmo customer service representatives during normal business hours for Starbucks' employees to contact Kozmo, or to provide to Kozmo's customers, for questions regarding returns, problems with or damage to the Drop-boxes, and to request additional pick-up from the Drop-boxes. 1.2.4 Kozmo employees collecting the Video Products and Kozmo Items from the Starbucks Stores' Drop-boxes will at all times be professional in appearance and manner, be appropriately identified as a Kozmo employee, not interfere with the normal operations of any such Starbucks Store and comply with all procedures, requirements and protocol as Starbucks may reasonably impose from time to time. 1.3 DROP-BOX DEVELOPMENT. Kozmo will, with input and approval from Starbucks, design, develop, manufacture and pay for drop-boxes for the return of Video Products and Kozmo Items by Kozmo's customers ("Drop-boxes") for placement in the Starbucks Stores. Kozmo's current Drop-box will be used until a new design is agreed upon by the parties. The dimensions of the current Drop-boxes are 12" x 16" x 32" and the current Drop-box includes a slanted cover with a slot the size of a VHS video tape for the return of items and a combination lock on the front of the box. Any modification to the size or design of the Drop-box must be approved in advance by Starbucks, in its reasonable discretion, prior to being placed in any Starbucks Store. Kozmo will own the design and all proprietary rights relating to the Drop-boxes and will own each of the Drop-boxes located in the Starbucks Stores. Kozmo will lease the Drop-boxes to be located in 3 4 Starbucks Stores to Starbucks, for the Term of this Agreement, for the rental payment of $1.00 per Drop-box per year, pursuant to the terms of an equipment lease to be agreed upon by the parties (the "Equipment Lease"). 1.4 KOZMO ITEMS. The Drop-boxes will be used for the purpose of returning Kozmo Items, only if the return of such items does not interfere with Starbucks normal business operations and does not materially interrupt or interfere with the regular duties of Starbucks' employees in the Starbucks Stores. Starbucks will not be responsible or liable for paying any amounts to any Kozmo customer for the return of a Kozmo Item. "Kozmo Items" shall mean non-perishable items sold and delivered by Kozmo which are of a size that will easily fit into the Drop-box and which are of the type of items listed on the attached SCHEDULE B as may be amended from time to time upon the mutual written consent of the parties. 1.5 EXCLUSIVITY OF KOZMO. Kozmo agrees that, during the Term, it will not allow its Video Products or Kozmo Items to be collected in Drop-boxes or similar receptacles located in any store of a Retail Chain, other than Starbucks, whose primary business is the sale of coffee or tea products; provided, however that Kozmo will not be required to remove any drop boxes currently located in a Retail Chain whose primary business is the sale of coffee or tea products. For the purposes of this Agreement, a "Retail Chain" shall mean any entity which owns or operates five (5) or more retail operations in the United States and/or Canada under the same or substantially the same tradename or any five (5) or more stores operating in the United States and/or Canada under the same or substantially the same tradename pursuant to a franchise, license, partnership or joint venture arrangement. 1.6 (*) 2. SALE OF STARBUCKS' RETAIL PRODUCTS. Distribution of Retail Products. Kozmo will distribute to its customers those Starbucks Retail Products identified by Starbucks and agreed to by Kozmo from time to time, including but not limited to compact discs and other music items sold by Starbucks through its Hear Music division, pursuant to a supply agreement to be agreed upon by the parties (the "Supply Agreement"). Kozmo also agrees to enter into additional supply agreements on commercially reasonable terms reasonably acceptable to Kozmo with suppliers of Frappuccino(R) bottled beverages and Starbucks(R) ice cream. Products Exclusivity. Kozmo agrees that during the Term of this Agreement, it will not (a) promote, sell, offer for sale or deliver to its customers any non-Starbucks brand of coffee or tea products, or any other products if the primary purpose of such product is to promote non-Starbucks brands of coffee or tea products; or (b) promote a Retail Chain whose primary business is the sale of coffee or tea products. - ------------ * CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH THE COMMISSION 4 5 3. JOINT MARKETING AND WEBSITE DEVELOPMENT. 3.1 JOINT MARKETING. 3.1.1 Starbucks and Kozmo, together with the Marketing Managers (as defined below) will develop an annual joint marketing strategy ("Annual Strategy") which more clearly defines the opportunities and roles of the parties, and includes a jointly-developed business plan and budget covering cost, general and administrative expenses and other financial arrangements. Such Annual Strategy will be reviewed, updated and approved by each party on a quarterly basis. Examples of possible joint marketing activities will include developing joint messaging for in-store materials, collateral and signage and other programs as set forth on the attached SCHEDULE C. 3.1.2 (*) 3.1.3 Any and all such joint marketing materials, campaigns and other joint promotions of Starbucks and Kozmo must be approved in writing by representatives of both Starbucks and Kozmo, in each party's reasonable discretion and it is recognized and agreed that such items shall not include exterior signage at the Starbucks Stores. Interior signage at the Starbucks Stores must conform to the requirements of the applicable lease and applicable laws, rules and regulations, ordinances and permits. In addition, Starbucks must consent, in its reasonable discretion consistent with Starbucks standards in its stores, to the use and content of any Kozmo-only marketing materials to be displayed or distributed in the Starbucks Stores. 3.1.4 Starbucks will pay for and be solely responsible for Starbucks-only marketing expenses and costs and Kozmo will pay for and be solely responsible for Kozmo-only marketing expenses and costs. The payment obligations with respect to marketing expenses of each party are listed as current understandings on SCHEDULE C. 3.2 WEB SITE DEVELOPMENT. 3.2.1 Each party will establish and maintain internet hypertext links ("Links") on its web site to facilitate click through to the other party's web site by such party's customers and end-users. Each party will cooperate with the other to identify appropriate areas within such party's web site to place the Links and to identify the most appropriate pages within such party's web site with which to Link; provided, however that each such party will maintain full control over its own web site and as to the location of such Links. 3.2.2 Each party retains the right, in its sole discretion, to immediately cease linking to the other party's web site, if such party has reasonable grounds to believe in good faith, that the other party' web site infringes on the proprietary rights of any third party, violates any applicable law or regulation or is defamatory, obscene or patently offensive. - ------------ * CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH THE COMMISSION 5 6 Notwithstanding any exercise of, or failure to exercise, such right, each party will have the sole and exclusive responsibility for its respective web sites. 3.2.3 Each party will bear its own costs for development, hosting and maintenance of its own web sites. Either party may change the URL's of its web site for which it is responsible hereunder upon ten (10) days' advance written notice. Each party will retain sole editorial control of and responsibility for information presented on its web site and will not interfere with the other party's editorial control of such content, except as expressly stated otherwise herein. 3.2.4 Each party will promptly inform the other of (a) any information related to its web site that could reasonably lead to a claim, demand or liability of or against the other party by any third party, and (b) any changes to its web site that would substantially change the content in any area to which the other party has linked. 3.2.5 Starbucks may collect data on end users' access and use of its web site. All data collected by Starbucks shall be owned exclusively by Starbucks. Kozmo may collect data on end users' access and use of its web site. All data collected by Kozmo shall be owned exclusively by Kozmo. 3.3 LICENSES. 3.3.1 Each party ("Licensor") grants to the other party ("Licensee") during the Term of this Agreement a non-exclusive, non-transferable, revocable upon termination of this Agreement subject to the terms hereof license to use the Marks (as defined below) provided by Licensee to Licensor in compliance with this Agreement and with any reasonable guidelines which may be provided by Licensor from time to time. The parties may only use the Marks in connection with the joint marketing materials, for the purposes contemplated herein. The parties each agree to cooperate with the other in facilitating the monitoring and control of the other party's Marks. Licensor may terminate the Agreement and the Licensee's license to use the Marks upon five (5) days' written notice if Licensor reasonably believes that such use dilutes or tarnishes the value of the Marks; provided, however, such notice will include specific reasons of Licensor for its belief and provided further that if Licensee takes such action which reasonably satisfies Licensor that the Marks are no longer being diluted or tarnished within such five (5) day period or if it is not commercially reasonable to fully remedy the dilution or tarnishment within the five (5) day period then if Licensee uses commercially reasonable efforts, and cures such dilution or tarnishment no later than fifteen (15) days after such notice, then Licensor will not terminate this Agreement and the Licensee's license to use the Marks at such time. Licensee agrees not to take any action inconsistent with the Licensor's ownership of the Marks (including a claim of any interest in the other party's Marks) and agrees that any benefits accruing from use of such Marks will automatically vest in the Licensor. Licensee will place a "(R)" or a "TM" (as appropriate) with the Marks as requested by Licensor. Nothing in this Agreement will be deemed to grant to Licensee any ownership interest in the Licensor's Marks. For the purposes of this Agreement, "Marks" will mean the trade names, trademarks, service names and service marks of a party (including, without limitation, the party's name, domain name and logos) which are designated by such party for use in connection with this Agreement. 6 7 3.3.2 Licensee acknowledges that Licensor, or a subsidiary of Licensor, is the owner of the Marks. Licensee will not at any time do or suffer to be done any act or thing which will in any way impair the rights of Licensor or its subsidiary in and to the Marks or the goodwill inherent in such Marks. Licensee agrees not to challenge the validity of the Marks or to set up any claim adverse to Licensor or its subsidiary with respect to such challenge. 3.3.3 Licensee will comply with the conditions set forth in this Agreement and with any reasonable guidelines provided to Licensee by Licensor, as amended from time to time, or as reasonably directed by Licensor with respect to the style, color, appearance and manner of use of the Marks. Prior to producing, distributing or displaying any advertising or other material containing the Marks, Licensee will obtain prior written approval from Licensor, which may be held in Licensor's sole discretion. Licensee is solely responsible for ensuring that any uses of the Marks in any advertising or promotional materials or otherwise is approved by Licensor. Licensor will use commercially reasonable efforts to provide either approval or rejection of Licensee's materials within two (2) weeks of Licensee's written request for approval; provided, however, the failure of Licensor to make such approval or rejection within the two week period shall not be deemed, in any way, to be an approval of such materials. 3.4 MARKETING AND OPERATIONS MANAGER. 3.4.1 Within thirty (30) days of this Agreement, or at such other time as is agreed by the parties hereto, each party will commence activities and will use commercially reasonable efforts to hire a management level employee (each a "Marketing Manager") to manage the design of Drop-boxes, the placement of Drop-boxes in the Starbucks Stores, to develop, manage and coordinate the joint marketing efforts of the parties, to develop web site enhancements and modifications, to manage the operations of the Drop-box pick-up, to develop an approval process for marketing materials and proposals for the use of the Marks and to perform such other tasks and duties related to the relationship between Starbucks and Kozmo as may be assigned to him or her by his or her respective employer. 3.4.2 Each party will be solely responsible for the costs and expenses related to the hiring and payment of the Marketing Manager hired by such party. 3.4.3 Such employee will, at all times, be under the complete control and supervision of the party employing such employee, and such party will have the ability to reprimand or dismiss such employee. 3.5 FUTURE OPPORTUNITIES. The parties agree to explore and evaluate, in each party's sole discretion, the feasibility and desirability of certain future joint business opportunities which may include but are not limited to the opportunities described on the attached SCHEDULE D; provided, however, that neither party shall have any obligation to proceed with or expend any funds in relation to such future opportunities. In the event the parties agree to proceed with one or more future business opportunities, the parties will enter into a written agreement relating to such business endeavor, on terms reasonably acceptable to each party. Nothing in this provision precludes either party from exploring such future opportunities alone or with other entities provided that each party shall comply with its all of its obligations under this Agreement. 7 8 Consideration. Kozmo will pay to Starbucks up to an aggregate of One Hundred Fifty Million Dollars ($150,000,000) ("Royalty") payable over the Term of this Agreement as follows: ------------------------------------------------------ Year 1 $15,000,000 ------------------------------------------------------ Year 2 $25,000,000 ------------------------------------------------------ Year 3 $35,000,000 ------------------------------------------------------ Year 4 $35,000,000 ------------------------------------------------------ Year 5 $40,000,000 ----------------------------- ------------------------
Each annual Royalty will be payable, in advance, in four quarterly equal installments with the first such payment to be made on March 1, 2000 ("Initial Payment Date") and subsequent payments to be made on the first day of June, September, December and March thereafter; provided, however, that the first four quarterly Royalty payments will be paid by Kozmo in advance on March 1, 2000 and thereafter, regular payments of the quarterly Royalty will be made beginning on March 1, 2001. Term. The Term of this Agreement will commence on the date of this Agreement and continue in full force and effect until the earlier of (a) the fifth anniversary of Initial Payment Date (the "Term"); or (b) a termination pursuant to Section 6 of this Agreement. 4. TERMINATION. 4.1 TERMINATION BY STARBUCKS. 4.1.1 In the event Kozmo fails to make any payment when due under this Agreement, Starbucks may, but is not obligated to terminate this Agreement upon five (5) days written notice to Kozmo, provided however that such termination shall not be effective if Kozmo cures such breach within such five (5) day period. 4.1.2 In the event Kozmo breaches any other material term or covenant of this Agreement, Starbucks may terminate this Agreement upon thirty (30) days written notice to Kozmo, provided however that such termination shall not be effective if Kozmo cures such breach within such thirty (30) day period. 4.1.3 Starbucks may terminate this Agreement upon thirty (30) days written notice in the event Kozmo promotes, sells, offers for sale or rent or delivers to its customers any items or materials which violate any applicable law or regulation, firearms or other weapons ("Prohibited Items"), or actively promotes pornographic materials; provided however that Starbucks shall not terminate this Agreement if within such thirty (30) day period, Kozmo ceases to promote, sell, rent, offer for sale or rent, or deliver such Prohibited Items or ceases to actively promote pornographic materials. 8 9 4.1.4 Starbucks may terminate this Agreement upon thirty (30) days written notice in the event Kozmo places its Drop-boxes or otherwise allows Video Products or Kozmo Items to be collected in pawn shops, adult book stores, adult movie stores, gun shops or adult theme exotic entertainment facilities ("Prohibited Establishments"); provided, however that Starbucks shall not terminate this Agreement if, within such thirty (30) day period, Kozmo removes the Drop-boxes from such Prohibited Establishments and ceases to collect Video Products or Kozmo Items from such Prohibited Establishments. 4.1.5 Starbucks may terminate this Agreement upon thirty (30) days written notice to Kozmo, if any assignment for the benefit of its creditors is made by Kozmo, or if a voluntary or involuntary petition in bankruptcy or for reorganization, or if an arrangement is filed by or against Kozmo (which petition is not discharged within thirty (30) days), or if Kozmo is adjudicated bankrupt or insolvent, or if a receiver is appointed for Kozmo or for all or a substantial part of its assets and/or operations. 4.2 TERMINATION BY KOZMO. 4.2.1 In the event Starbucks breaches any material term or covenant of this Agreement, Kozmo may terminate this Agreement upon thirty (30) days written notice to Starbucks, provided however that such termination shall not be effective if Starbucks cures such breach within such thirty (30) day period. 4.2.2 Kozmo may terminate this Agreement upon thirty (30) days written notice to Starbucks, if any assignment for the benefit of its creditors is be made by Starbucks, or if a voluntary or involuntary petition in bankruptcy or for reorganization, or if an arrangement is filed by or against Starbucks (which petition is not discharged within thirty (30) days), or if Starbucks is adjudicated bankrupt or insolvent, or if a receiver is appointed for Starbucks or for all or a substantial part of its assets and/or operations. Survival Upon Termination. Sections 6.4, 7, and 10 through 14 inclusive will survive the termination or expiration of this Agreement. Effect of Termination. Upon the termination or expiration of this Agreement, (a) each party will promptly return all confidential and proprietary information and other information, documents, equipment and other materials belonging to the other party; (b) each party will (i) upon the expiration of this Agreement immediately cease using all Marks of the other Party, in any form or (ii) upon the termination of this Agreement, cease using all Marks of the other Party, in any form as soon as reasonably practicable, but in any event no later than forty-five (45) days after the termination of this Agreement; (c) each Party will immediately terminate all web site Links established pursuant to this Agreement; (d) subject to Section 6.4(b)(ii), all licenses granted herein and the Equipment Lease and Supply Agreement will terminate; (e) as soon as commercially practical upon the termination of this Agreement, but in any event no later than forty-five (45) days after termination or immediately upon the expiration of this Agreement, Kozmo will, at its sole cost and expense, remove all Drop-boxes from the Starbucks Stores; provided that if Kozmo fails to remove the Drop-boxes from the Starbucks Stores within such time period, Starbucks may remove such Drop-boxes and Kozmo will reimburse Starbucks for any costs or expenses incurred by Starbucks for such removal; and (f) Kozmo will, at its sole 9 10 cost and expense, use commercially reasonable efforts to promptly notify its customers that they can no longer return Video Products to Drop-boxes in Starbucks Stores. Upon termination, each party shall have no further financial obligation to the other; provided that nothing herein shall relieve either party from its obligation to pay any amount which accrued prior to the effective date of termination. Notwithstanding the foregoing, nothing herein shall restrict the rights or remedies of either Party to pursue its rights or remedies at law or in equity. Confidential Information. Confidential Information (as defined in the Confidentiality Agreement) disclosed pursuant to this Agreement and the activities contemplated herein, shall be governed by the Mutual Confidentiality Agreement ("Confidentiality Agreement") entered into between the parties effective as of February 10, 2000 and incorporated herein by reference. 5. REPRESENTATIONS AND WARRANTIES. 5.1 STARBUCKS' REPRESENTATIONS AND WARRANTIES. 5.1.1 Starbucks' agreement to perform the obligations and duties required of it under this Agreement does not violate any agreement or obligation between Starbucks and a third party, subject to the provisions of the lease agreements for each Starbucks Store and Starbucks' right to require the removal of Drop-boxes pursuant to Section 1.1.6; 5.1.2 Starbucks has the right to grant the license contained in Section 3.3. 5.1.3 Starbucks will not make any warranty, guaranty or representation, whether written or oral, on Kozmo's behalf. 5.2 KOZMO'S REPRESENTATIONS AND WARRANTIES. 5.2.1 Kozmo's agreement to perform the obligations and duties required of it under this Agreement does not violate any agreement or obligation between Kozmo and a third party; 5.2.2 Kozmo will not make any warranty, guaranty or representation, whether written or oral, on Starbucks' behalf; and 5.2.3 Kozmo will operate its delivery service and perform its obligations hereunder in a safe and professional manner and in accordance with the service standards established by Kozmo and subject to Starbucks' approval within sixty (60) days of the date of this Agreement. INSURANCE. Kozmo agrees to maintain during the Term of this Agreement (a) commercial general liability insurance, including product liability coverage, in minimum amounts of $2,000,000 per occurrence for damage, injury and/or death to persons and $1,000,000 per occurrence for damage and/or injury to property and (b) product recall insurance in a minimum amount of $2,000,000 per occurrence and with a deductible of not more than $10,000. Kozmo further agrees to require all of its delivery personnel to be licensed to drive, whether they are employees or independent contractors. All policies of liability insurance required to be effected by Kozmo shall cover Kozmo's employees, agents, and independent 10 11 contractors and shall include Starbucks as an additional insured, and in addition shall contain cross liability and severability clauses protecting Starbucks with respect to claims by Kozmo or other persons as if Starbucks were separately insured. The insurance coverage required herein shall be provided by an insurance company or companies acceptable to Starbucks in its reasonable business judgment. Upon execution of this Agreement, and annually thereafter, Kozmo shall promptly provide Starbucks with certificates of insurance evidencing such coverage and each certificate shall indicate that the coverage represented thereby shall not be canceled nor modified until at least thirty (30) days prior written notice has been given to Starbucks. Upon Starbucks request, Kozmo will provide Starbucks with copies of its insurance policies. 6. INDEMNITY. Mutual Indemnification. Each party will indemnify the other party, the other party's affiliates, directors, officers and employees and will hold them harmless from any and all liability, loss damages, claims or causes of action, including reasonable legal fees and expenses that may be incurred by the other party, arising out of or related to the indemnifying party's breach of any of the foregoing representations or warranties or otherwise arising out of such party's performance under this Agreement. Kozmo's Indemnification. Kozmo will indemnify Starbucks and Starbucks' affiliates, directors, officers and employees, and will hold them harmless, from any and all liability, loss, damages, claims or causes of action, including reasonable legal fees and expenses that may be incurred by Starbucks arising out of or related to Kozmo's delivery of its services or other actions or omissions relating thereto provided that Kozmo shall have no obligation to indemnify Starbucks for Claims that would not have occurred except for Starbucks negligence or willful misconduct. Starbucks Indemnification. Starbucks will indemnify Kozmo and Kozmo's affiliates, directors, officers and employees, and will hold them harmless, from any and all liability, loss, damages, claims or causes of action ("Claims"), including reasonable legal fees and expenses that may be incurred by Kozmo arising out of or related to (a) Starbucks operation of its retail stores or (b) the sale or use of Starbucks products or other actions or omissions relating thereto; provided that Starbucks shall have no obligation to indemnify Kozmo for Claims that would not have occurred except for Kozmo's negligence or willful misconduct. Intellectual Property Indemnification. Each party will indemnify the other party, and the other party's affiliates, directors, officers and employees and will hold them harmless from any and all liability, loss damages, claims or causes of action, including reasonable legal fees and expenses that may be incurred by the other party (a) arising out of any claims or causes of action brought against the indemnified party to the extent such claim or cause of action is based on the infringement by the indemnifying party's patents, copyrights, or Marks, of a third party's patents, copyrights, marks or other proprietary rights, and (b) arising out of the unaltered content or marketing materials provided by the indemnifying party for use in the joint marketing efforts of the parties. 11 12 7. LIMITATION OF LIABILITY. Liability. Neither party will be liable to the other party for any indirect, incidental, consequential, special or exemplary damages (even if that party has been advised of the possibility of such damages) arising from this Agreement, such as, but not limited to, loss of revenue or anticipated profits or lost business. NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING ANY MATTER SUBJECT TO THIS AGREEMENT, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE. Dispute Resolution. The parties desire to attempt to resolve disputes arising out of this Agreement without litigation. Accordingly, except for action seeking a temporary restraining order or injunction related to the purposes of this Agreement, or suit to compel compliance with this dispute resolution process, the parties agree to follow the dispute resolution procedures set forth in this Section 12 with respect to any controversy or claim arising out of or relating to this Agreement or its breach. 7.1 At the written request of either party, Starbucks and Kozmo will appoint knowledgeable, responsible representatives to meet and negotiate in good faith to resolve any dispute arising under this Agreement. The parties intend that these negotiations be conducted by non-lawyer, business representatives. The location, format, frequency, duration and conclusion of these discussions will be left to the discretion of the representatives. Discussion and correspondence among the representatives for the purposes of these negotiations will be treated as confidential information developed for the purposes of settlement, exempt from discovery and production, which will not be admissible in any litigation described below. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in evidence in any such litigation. 7.2 If the negotiations set forth in Section 12.1 do not resolve the dispute within sixty (60) days of the initial written request, then either party may pursue to litigate the claim or dispute. 7.3 If such dispute is commenced by Kozmo, then such dispute will be resolved in a court of appropriate jurisdiction located in King County, Washington. If such dispute is commenced by Starbucks, then such dispute will be resolved in a court of appropriate jurisdiction located in New York City, New York. Each of Starbucks and Kozmo hereby consents and submits to the personal jurisdiction of the state and federal courts located in King County, Washington and New York City, New York. Late Fees and Interest. If any portion of the Royalties remains unpaid for five (5) or more calendar days after the date on which such amount is due, Kozmo shall pay to Starbucks 12 13 interest on such delinquent amount equal to eighteen percent (18%) per annum from the date such delinquent amount is due until paid; provided, however, that in no event shall such interest charged be greater than that permitted by applicable state law. This Section 13 shall not relieve Kozmo of its obligation to pay the Royalty when due and in the manner herein specified. Acceptance by Starbucks of the interest on such delinquent amount shall not constitute a waiver of Kozmo's default with respect to said delinquent payments, nor prevent Starbucks from exercising any other rights or remedies available to Starbucks under this Agreement or at law or in equity. 8. MISCELLANEOUS. Entire Agreement; Amendment. This Agreement and other agreements expressly referenced herein, including but not limited to the Supply Agreement, the Equipment Lease for the Drop-boxes and the Confidentiality Agreement, constitute the entire agreement between the parties concerning the subject matter hereof and supersede any prior agreements, representations, statements, negotiations, understandings, proposals or undertakings, oral or written, with respect to the subject matter expressly set forth herein. Any amendment or supplement to this Agreement must be in writing and duly executed by the party against whom enforcement is sought. If any provision of this Agreement is held to be illegal, invalid or unenforceable, each party agrees that such provision will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the validity, legality and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby. Expenses. Each party will pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement and the other agreements described herein. Choice of Law. This Agreement is to be construed in accordance with and governed by the internal laws of the State of New York, without giving effect to choice of law. Notices. Any notice or other communication under this Agreement will be given in writing and will be deemed to have been delivered and given (a) on the delivery date if delivered by electronic mail with an electronically generated return receipt or if delivered personally to the intended recipient; (b) one (1) business day after deposit with a commercial overnight carrier with written verification of receipt; or (c) three (3) business days after the mailing date if sent by U.S. mail, return receipt requested, postage and charges prepaid, or any other means of repaid mail delivery for which acknowledgement of receipt is required. Any notices or other communications to be given under this Agreement will be sent to the following persons: For Starbucks: Starbucks Corporation 2401 Utah Ave. S. Seattle, WA 98134-1431 Attn: President, North American Operations With a copy to: Vice President and Assistant General Counsel With a Copy to: Davis Wright Tremaine, LLP 13 14 1300 SW 5th Avenue, Suite 2300 Portland, OR 97201 Attn: Benjamin G. Wolff For Kozmo: Kozmo.com, Inc. 80 Broad Street New York, New York 10004 Attn: President and Chief Executive Officer With a Copy to: Greenberg Traurig Met Life Building 200 Park Avenue New York, NY 10166 Attn.: Alan N. Sutin, Esq. Assignment. Except as otherwise provided in Section 4, neither party may assign or transfer all or any part of its rights or obligations under this Agreement without the prior written consent of the other party, which consent may be given or withheld for any reason. For the purposes of this Agreement, a change of control, merger, sale of substantially all of the assets or any other similar corporate reorganization of Kozmo ("Change of Control Event") will constitute an assignment that is subject to consent pursuant to this Section 14.5. Starbucks will not unreasonably withhold consent upon a Change of Control Event, provided, that it shall not be unreasonable to withhold consent if a Change of Control Event results in a transfer to a direct competitor of Starbucks, circumstances in which the Starbucks brand would be adversely affected, such as transfer to a tobacco company or pornography company or circumstances where Starbucks would then be in material breach of a material agreement. 8.1 ATTORNEYS' FEES. If any suit or action arising out of or related to this Agreement is brought by any party, the prevailing party or parties shall be entitled to recover its costs and fees including without limitation reasonable attorneys' fees, the fees and costs of experts and consultants, copying, courier and telecommunication costs, and deposition costs and all other costs of discovery incurred by such party or parties in such suit or action, including without limitation any post-trial or appellate proceeding, or in the collection or enforcement of any judgment or award entered or made in such suit or action. 8.2 PUBLICITY. Without the prior approval of the other party, none of the parties hereto will disclose to the public or to any third party any information concerning the transactions contemplated hereby, other than disclosures to their financial, legal and other advisors and to governmental authorities or the public as may, in the opinion of counsel, be required by law. Notwithstanding the foregoing, Starbucks and Kozmo will be permitted to disclose such details of the transaction contemplated herein as may be required by law; provided that Starbucks and Kozmo will each have the right to review and comment thereon prior to any such disclosure, which review and comment will be given in a timely manner. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement on the date first written above. 14 15 STARBUCKS CORPORATION KOZMO.COM, INC. By: /s/ HOWARD SCHULTZ By: /s/ JOSEPH PARK --------------------------------------- -------------------------- Howard Schultz Joseph Park chairman and chief executive officer Chief Executive Officer 15 16 SCHEDULE A LAUNCH SCHEDULE(*) - ------------ * CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH THE COMMISSION 16 17 SCHEDULE B KOZMO ITEMS - - VHS video tapes - - DVD cartridges/tapes - - Video game cartridges - - CD's - - Books - - Small electronics 17 18 SCHEDULE C JOINT MARKETING STRATEGY(*) - ------------ * CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH THE COMMISSION 18 19 SCHEDULE D FUTURE BUSINESS OPPORTUNITIES(*) - ------------ * CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH THE COMMISSION 19 EX-11 3 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 STARBUCKS CORPORATION --------------------- EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended Six Months Ended April 2, March 28, April 2, March 28, 2000 1999 2000 1999 (13 Weeks) (26 Weeks) - ---------------------------------------------------------------------------------------------- CALCULATION OF EARNINGS PER COMMON SHARE-BASIC: Net earnings $ 23,406 $ 17,957 $ 58,155 $ 44,691 ============================================================================================== Weighted average common shares and common stock units outstanding 184,785 181,370 184,106 180,706 ============================================================================================== Net earnings per common share-basic $ 0.13 $ 0.10 $ 0.32 $ 0.25 ============================================================================================== CALCULATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE-DILUTED: Net earnings $ 23,406 $ 17,957 $ 58,155 $ 44,691 ============================================================================================== Weighted average shares outstanding calculation: Weighted average common shares and common stock units outstanding 184,785 181,370 184,106 180,706 Dilutive effect of outstanding common stock options 7,632 6,979 6,935 6,211 - ---------------------------------------------------------------------------------------------- Weighted average common and common equivalent shares outstanding 192,417 188,349 191,041 186,917 ============================================================================================== Net earnings per common and common equivalent share-diluted $ 0.12 $ 0.10 $ 0.30 $ 0.24 ==============================================================================================
EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STARBUCKS CORPORATION's SECOND QUARTER FISCAL 2000 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS OCT-01-2000 OCT-04-1999 APR-02-2000 85,258 45,921 60,257 1,658 151,948 391,966 1,227,316 386,372 1,383,951 273,173 6,677 0 0 702,169 366,011 1,383,951 1,031,680 1,031,680 461,651 461,651 480,189 0 250 93,496 35,341 58,155 0 0 0 58,155 .32 .32
-----END PRIVACY-ENHANCED MESSAGE-----