-----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, NhtKw4QCTJjPSymB08g1JEs2TSpXTOWjqTyBuYgNszxtwRztG8qDpm7OWvFGcHxg qivKQw2HyUYLTC0NmXM9ew== 0000891020-98-001809.txt : 19990108 0000891020-98-001809.hdr.sgml : 19990108 ACCESSION NUMBER: 0000891020-98-001809 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARBUCKS CORP CENTRAL INDEX KEY: 0000829224 STANDARD INDUSTRIAL CLASSIFICATION: 5810 IRS NUMBER: 911325671 STATE OF INCORPORATION: WA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20322 FILM NUMBER: 98776425 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-K 1 FORM 10-K FOR THE YEAR ENDED SEPTEMBER 27, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 1998 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 Number) 2401 UTAH AVENUE SOUTH, SEATTLE, WASHINGTON 98134 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (206) 447-1575 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form l0-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Registrants Common Stock on December 1, 1998, as reported on the National Market tier of The Nasdaq Stock Market, Inc. was $4,368,196,902. As of December l, 1998, there were 89,655,557 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants Annual Report to Shareholders for the fiscal year ended September 27, 1998 have been incorporated by reference into Parts II and IV of this Annual Report on Form 10-K. Portions of the definitive Proxy Statement for the Registrant's Annual Meeting of Shareholders to be held on February 23, 1999 have been incorporated by reference into Part III of this Annual Report on Form 10-K. 2 Cautionary Statement pursuant to the Private Securities Litigation Reform Act of 1995 Certain statements set forth in or incorporated by reference into this Annual Report on Form 10-K, including anticipated store openings, planned capital expenditures and trends in or expectations regarding the Company's operations, specifically including the effect of problems associated with the Year 2000, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to 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. PART I ITEM 1. BUSINESS General. Starbucks Corporation and its subsidiaries (collectively "Starbucks" or the "Company") purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, a variety of pastries and confections and coffee-related accessories and equipment, primarily through its Company-operated retail stores. In addition to sales through its Company-operated retail stores, Starbucks sells primarily whole bean coffees through its specialty sales operations. Starbucks, through its joint venture partnerships, also produces and sells bottled Frappuccino(TM) coffee drink and a line of premium ice creams. The Company's objective is to establish Starbucks as the most recognized and respected brand of coffee in the world. To achieve this goal, the Company plans to continue to rapidly expand its retail operations, grow its specialty sales businesses, and selectively pursue other opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels. Starbucks is committed to selling only the finest whole bean coffees and coffee beverages. To ensure compliance with its rigorous coffee standards, Starbucks controls its coffee purchasing, roasting and packaging, and the distribution of coffee to its retail stores. The Company purchases green coffee beans for its many blends and single origin coffees from coffee-producing regions around the world and custom roasts them to its exacting standards. Company-Operated Retail Stores. The Company's retail goal is to become the leading retailer and brand of coffee in each of its target markets by selling the finest quality coffee and related products and by providing superior customer service, thereby building a high degree of customer loyalty. Starbucks strategy for expanding its retail business is to increase its market share in existing markets and to open stores in new markets where the opportunity exists to become the leading specialty coffee retailer. In furtherance of this strategy, the Company acquired London-based Seattle Coffee Holdings Limited ("Seattle Coffee Company") in exchange for approximately 1.8 million shares of Starbucks common stock in May 1998. The acquisition gave the Company an immediate presence in the United Kingdom with 61 Starbucks-style retail stores, and provides a logical point of entry for future expansion into the European market. As of September 27, 1998, Starbucks had 1,688 Company-operated stores in 32 states, the District of Columbia, four Canadian provinces and the United Kingdom. Company-operated retail stores accounted for approximately 84% of net revenues during the fiscal year ended September 27, 1998 ("fiscal 1998"). The Company intends to finance additional growth in the number of Company-operated retail stores with cash flow from operations, supplemented by debt financing, if necessary. Starbucks retail stores are typically clustered in high-traffic, high-visibility locations. Because the Company can vary the size and format of its stores, Starbucks stores are located in a variety of settings, including downtown and suburban retail centers, office buildings, supermarket foyers and on university campuses. While the Company selectively locates stores in suburban malls, it focuses on stores that are convenient for pedestrian street traffic. All Starbucks stores offer a choice of regular or decaffeinated coffee beverages, including at least one "coffee of the day," a broad selection of Italian-style espresso beverages and distinctively packaged, roasted whole 3 bean coffees. Starbucks stores also offer a selection of fresh pastries and other food items, sodas, juices, tea, and coffee-making equipment and accessories. Each Starbucks store varies its product mix depending upon the size of the store and its location. Larger stores carry a broad selection of the Company's whole bean coffees in various sizes and types of packaging, as well as an assortment of coffee and espresso-making equipment and accessories such as coffee grinders, drip coffee makers, espresso machines, coffee filters, storage containers, travel tumblers and mugs. Smaller Starbucks stores and kiosks typically sell a full line of coffee beverages, a more limited selection of whole bean coffees and a few accessories such as travel tumblers and logo mugs. During fiscal 1998, the Company's retail sales mix by product type was approximately 66% coffee beverages, 14% food items, 12% whole bean coffees, and 8% coffee-making equipment and accessories. Specialty Sales. Starbucks specialty sales operations strive to develop the Starbucks brand outside the Company-operated retail store environment. Starbucks strategy for expanding its specialty sales operations is to reach customers as they shop, travel, work and dine by establishing relationships with prominent third parties who share Starbucks values and commitment to quality. These relationships take various forms, including domestic wholesale accounts, domestic retail store and grocery channel licensing agreements, international licensing arrangements and a direct response business. In some situations, the licensee is a joint venture in which Starbucks has an equity ownership interest. During fiscal 1998, specialty sales revenues (which include royalties and fees from licensees as well as product sales) accounted for approximately 16% of the Company's net revenues. Domestic Retail Licensing. Although the Company does not generally relinquish operational control of its retail stores in North America, in situations in which a master concessionaire or another company controls or can provide improved access to desirable retail space, the Company may consider licensing its operations. As part of these arrangements, Starbucks receives license fees and royalties and sells coffee and related products for resale in the licensed locations. Employees working in the licensed locations must follow Starbucks detailed store-operating procedures and attend the same core training classes given to Starbucks store managers and employees. As of September 27, 1998, the Company had 133 licensee-operated stores in continental North America. Domestic Grocery Licensing. Following supermarket tests in Portland, Oregon and Chicago, Illinois during fiscal 1997 and early fiscal 1998, the Company evaluated several strategic alternatives for accessing the market for whole bean and ground specialty coffee in supermarkets. During the second half of fiscal 1998, the Company expanded the distribution of its coffee to 10 West Coast grocery markets. By fiscal year-end, Starbucks whole bean and ground coffee was available in approximately 4,000 supermarkets. Late in fiscal 1998, Starbucks entered into a long-term licensing agreement with Kraft Foods, Inc. ("Kraft") to accelerate the growth of the Starbucks brand into the grocery channel in the United States. Pursuant to the arrangements with Kraft, Kraft will handle all distribution, marketing, advertising and promotions for Starbucks whole bean and ground coffee in grocery, warehouse club and mass merchandise stores. Domestic Joint Ventures. The Company has entered into 50-50 joint ventures with the Pepsi-Cola Company, a division of PepsiCo, Inc. ("Pepsi"), and Dreyer's Grand Ice Cream, Inc. ("Dreyer's"). The joint venture with Pepsi, The North American Coffee Partnership, was formed in fiscal 1994 to develop and distribute ready-to-drink coffee-based products. In May 1996, The North American Coffee Partnership introduced bottled Frappuccino coffee drink in selected supermarkets and other retail points of distribution throughout the west coast of the United States. In mid-1997, the joint venture began to distribute Frappuccino to additional supermarkets, convenience and drug stores on the west coast as well as key cities in the midwest and northeast United States. By the end of fiscal 1998, the joint venture was distributing Frappuccino to approximately 200,000 supermarkets, convenience and drug stores and other locations throughout the United States. The Company's joint venture with Dreyer's was formed in early fiscal 1996 to develop and distribute Starbucks premium coffee ice creams. During fiscal 1997, the Company expanded the product line produced and distributed through the joint venture from six flavors of ice cream to eight flavors of ice cream and two novelty products, including two low-fat ice creams and a low-fat blended coffee bar. In early 1998, the Company introduced its first non-coffee ice cream in limited markets. (See Note 6 to the Company's consolidated financial statements, "Joint Ventures and Other Investments," incorporated by reference to the Company's 1998 Annual Report to Shareholders in Item 8 of this Form 10-K.) International Licensing. Starbucks retail stores located outside of continental North America and the United Kingdom are operated through a number of joint venture and licensing arrangements with prominent retailers. During fiscal 1998, the Company expanded its international presence by opening 45 new stores in the 2 4 Pacific Rim and entering into agreements with Restaurant Brands, the Berjaya Group and Beijing Mei-Da Coffee Company Ltd. to develop Starbucks stores in New Zealand, Malaysia and Beijing, China, respectively. At fiscal year end the Company had 26 stores in Japan, 13 in Hawaii, 11 in Singapore, six in Taiwan, five in the Philippines and one in Thailand. The Company also has two licensed locations in South Africa and one in Kuwait obtained in the acquisition of Seattle Coffee Company. Direct Response. The Company's direct response operations ensure that fresh Starbucks coffee and products are conveniently available via mail order and on-line. Starbucks publishes and distributes a mail order catalog that offers its coffees, certain food items and select coffee-making equipment and accessories. In early October 1998, the Company launched its web site at www.Starbucks.com with an on-line store that allows customers to browse for and purchase coffee, gifts and other items via the internet. Starbucks ships products to customers located in all 50 states and in many foreign countries. Management believes that the Company's direct response operations support its retail store expansion into new markets and reinforce brand recognition in existing markets. Product Supply. Coffee is the world's second largest traded commodity and its supply and price 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 depends upon its relationships with outside trading companies and exporters for its supply of green coffee. To secure an adequate supply and to fix costs for future periods, the Company routinely enters into fixed price purchase commitments for future deliveries of coffee. As of September 27, 1998, the Company had approximately $96 million in fixed price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee well into fiscal 1999. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is remote. In addition, the Company from time to time purchases and sells coffee futures contracts as a hedging mechanism to minimize cost risk due to market fluctuations. There can be no assurance that these activities will successfully protect the Company against the risks of higher coffee prices or that such activities will not result in the Company having to pay substantially more for its coffee supply than it would have been required to pay absent such activities. Products other than whole bean coffees and coffee beverages sold in Starbucks retail stores are obtained through a number of different channels. Specialty foods, such as fresh pastries and lunch items, are generally purchased from local sources based on quality and price. Coffee-making equipment, such as drip and french press coffee makers, espresso machines and coffee grinders, are generally purchased directly from their manufacturers for resale. Coffee-related accessories, including items bearing the Company's logos and trademarks, are produced and distributed through contracts with a number of different vendors. Competition. The Company's primary competitors for coffee beverage sales are restaurants, shops, and street carts. In almost all markets in which the Company does business there has been a significant increase in competition in the specialty coffee beverage business and management expects this trend to continue. Although competition in the beverage market is currently fragmented, a major competitor with substantially greater financial, marketing and operating resources than the Company could enter this market at any time and compete directly against the Company. The Company's whole bean coffees compete directly against specialty coffees sold at retail through supermarkets, specialty retailers, and a growing number of specialty coffee stores. The Company's coffee beverages compete directly against all restaurant and beverage outlets that serve coffee and a growing number of espresso stands, carts, and stores. Both the Company's whole bean coffees and its coffee beverages compete indirectly against all other coffees on the market. The Company believes that its customers choose among retailers primarily on the basis of product quality, service and convenience, and, to a lesser extent, on price. 3 5 Management believes that supermarkets are the most competitive distribution channel for specialty whole bean coffee, in part because supermarkets offer customers a variety of choices without having to make a separate trip to a specialty coffee store. A number of nationwide coffee manufacturers are distributing premium coffee products in supermarkets that may serve as substitutes for the Company's coffees. Regional specialty coffee companies also sell whole bean coffees in supermarkets. In addition to the competition generated by supermarket sales of coffee, Starbucks competes for whole bean coffee sales with franchise operators and independent specialty coffee stores. In virtually every major metropolitan area where Starbucks operates and expects to expand, there are local or regional competitors with substantial market presence in the specialty coffee business. In addition to the competition for coffee beverage retail sales and whole bean coffee, the Company faces intense competition from both restaurants and other specialty retailers for suitable sites for new stores and qualified personnel to operate both new and existing stores. There can be no assurance that Starbucks will be able to continue to secure adequate sites at acceptable rent levels or that the Company will be able to attract a sufficient number of qualified workers. Starbucks specialty sales operations also face significant competition from established wholesale and mail order suppliers, some of whom have greater financial and marketing resources than the Company. Patents, Trademarks and Copyrights. The Company owns and/or has applied to register numerous trademarks and service marks in the United States, Canada and in more than 100 additional countries throughout the world. Rights to the trademarks and service marks in the United States are held by Starbucks U.S. Brands Corporation, a wholly-owned subsidiary of the Company, and are used by the Company under license. Some of the Company's trademarks, including "Starbucks," the Starbucks logo and "Frappuccino," are of material importance to the Company. Trademarks are generally valid as long as they are in use and/or their registrations are properly maintained, and they have not been found to have become generic. Trademark registrations can generally be renewed indefinitely so long as the marks are in use. The Company also owns numerous copyrights for its product packaging, promotional materials, in-store graphics and training materials, among other things. The Company also holds patents on certain products and systems. While valuable, individual copyrights and patents currently held by the Company are not viewed as material to the Company's business. Research and Development. The Company's Research and Development department is comprised of chemists, engineers, food scientists and technicians responsible for the formulation and technical development of new food, beverage and equipment products. The department has played a major role in the development of bottled Frappuccino, coffee ice cream products, a portafilter system for espresso machines that accommodates both ground coffee and espresso filter packs ("pods"), and the Company's blended fruit and tea beverage, Tiazzi(TM). The Company spent approximately $4.0 million during fiscal 1998 on technical research and development activities, in addition to customary product testing and development in all areas of the Company's business. 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 that includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of other seasonal influences. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. Employees. As of September 27, 1998, the Company employed approximately 26,000 individuals, approximately 24,000 in retail stores and regional offices and the remainder in the Company's administrative, specialty sales, real estate, roasting, and warehousing operations. At fiscal year end, 11 of the Company's stores (out of a total of 1,688 Company-operated stores in continental North America and the United Kingdom) were unionized. Starbucks has entered into a labor agreement governing such stores that extends until July 1999. The Company believes that its current relations with its employees are excellent. 4 6 ITEM 2. PROPERTIES Starbucks currently operates four roasting and distribution facilities - - - two in the Seattle, Washington area, one in East Manchester Township, York County, Pennsylvania and one in London, England. In the Seattle area, the Company leases approximately 92,000 square feet in one building pursuant to a lease extendable through 2001 (the "Seattle Plant"), and owns an additional roasting plant and distribution facility of approximately 305,000 square feet and leases a warehouse facility of approximately 156,000 square feet in Kent, Washington (the "Kent Plant"). The Company has a lease agreement executed in August 1994 with York County Industrial Development Corporation for a roasting and distribution facility (the "York Plant"), providing for approximately 365,000 square feet initially. The lease has a 15-year term and the Company has an option to purchase the land and building within five years of the date of occupancy. Such option to purchase also provides that the Company may purchase, within seven years of occupancy, additional land adjacent to the York Plant that would expand it to 1,000,000 square feet. The Company is party to a letter of intent and a commitment letter which provide that in the event that the Company exercises its option to purchase the York Plant, the Company will have the right to assume loans incurred in connection with its development. The Company also leases a small roasting and storage facility in London, England that supports its operations in the United Kingdom. The lease for this facility expires in 2007 unless extended by the parties. The Company also leases approximately 400,000 square feet of a building located in Seattle, Washington for administrative offices and has options to lease approximately 150,000 additional square feet in such building. The Company owns 2.36 acres (102,800 square feet) of undeveloped land near its administrative offices and adjacent to the Seattle Plant, which is currently used for parking. As of September 27, 1998, Starbucks operated a total of 1,688 retail stores. All Starbucks stores are located in leased premises. The Company also leases space in approximately 50 additional locations for regional, district and other administrative offices, training facilities and storage, not including spaces within retail stores used for such purposes and certain seasonal retail storage locations. ITEM 3. 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 which the Company believes will 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. No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to the section entitled "Shareholder Information" in the Company's 1998 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to the section entitled "Selected Financial Data" in the Company's 1998 Annual Report to Shareholders. 5 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1998 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Risk Management" in the Company's 1998 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto in the Company's 1998 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference to the sections entitled " Proposal 1 Election of Directors" and "Executive Compensation - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 23, 1999 (the "Proxy Statement"). The Company intends to file the Proxy Statement within 120 days after the end of its fiscal year. The executive officers of the Company, each of whom serves a one-year term and until his or her successor is elected and qualified, are as follows:
Name Age Position Executive Officer Since ---- --- -------- ----------------------- Howard Schultz 45 chairman of the board and chief executive 1985 officer Orin Smith 56 director, president and chief operating officer 1990 Howard Behar 54 director and president, Starbucks Coffee 1989 International, Inc. John B. Richards 50 president, Retail North America 1997 Michael Casey 53 executive vice president, chief financial 1995 officer and chief administrative officer
6 8
Name Age Position Executive Officer Since ---- --- -------- ----------------------- E. R. (Ted) Garcia 51 executive vice president, Supply Chain and 1995 Coffee Operations Deidra Wager 43 executive vice president, Retail Marketing and 1993 Operations James Alling 37 senior vice president, Specialty Sales and 1997 Marketing Bruce Craig 56 senior vice president, Retail Field Operations 1997 Sharon E. Elliott 47 senior vice president, Human Resources 1994 Deborah Gillotti 41 senior vice president and chief information 1997 officer Wanda Herndon 46 senior vice president, Communications and 1996 Public Affairs Shelley B. Lanza 42 senior vice president, Law and Corporate 1995 Affairs and general counsel Judy Meleliat 41 senior vice president, Marketing 1997 David M. Olsen 52 senior vice president 1991 Arthur I. Rubinfeld 45 senior vice president, Store Development 1992 Michael Sweeney 40 senior vice president, International 1998 Don Valencia 46 senior vice president, Research and Development 1997 Mary Williams 49 senior vice president, Coffee 1997 Howard Wollner 45 senior vice president, Administration and 1998 Strategic Alliance Management Scott T. Svenson 32 chief executive officer, Starbucks Coffee (UK) 1998 Holdings Limited
HOWARD SCHULTZ is the founder of the Company and has been chairman of the board and chief executive officer since its inception in 1985. From 1985 to June 1994, Mr. Schultz was also the Company's president. From September 1982 to December 1985, Mr. Schultz was the director of Retail Operations and Marketing for Starbucks Coffee Company, a predecessor to the Company; and from January 1986 to July 1987, he was the chairman of the board, chief executive officer and president of Il Giornale Coffee Company, a predecessor to the Company. 7 9 ORIN SMITH joined the Company in 1990 and has served as president and chief operating officer of the Company since June 1994. Prior to June 1994, Mr. Smith served as the Company's vice president and chief financial officer and later, as its executive vice president and chief financial officer. HOWARD BEHAR joined the Company in 1989 and has served as president of Starbucks Coffee International, Inc. since June 1994. From February 1993 to June 1994, Mr. Behar served as the Company's executive vice president, Sales and Operations. From February 1991 to February 1993, Mr. Behar served as senior vice president, Retail Operations of the Company and from August 1989 to January 1991, he served as the Company's vice president, Retail Stores. JOHN B. RICHARDS joined the Company in September 1997 as president, Retail North America. Prior to joining the Company, Mr. Richards served as the Executive Vice President of Four Seasons Hotels and Resorts for 10 years. Prior to that time Mr. Richards held various positions with McKinsey & Company and Procter & Gamble. MICHAEL CASEY joined Starbucks in August 1995 as senior vice president and chief financial officer and was promoted to executive vice president, chief financial officer and chief administrative officer in September 1997. Prior to joining Starbucks, Mr. Casey served as executive vice president and chief financial officer of Family Restaurants, Inc. from its inception in 1986. During his tenure there, he also served as a director from 1986 to 1993, and as president and chief executive officer of its El Torito Restaurants, Inc. subsidiary from 1988 to 1993. E. R. (TED) GARCIA joined Starbucks in April 1995 as senior vice president, Supply Chain Operations and was promoted to executive vice president, Supply Chain and Coffee Operations in September 1997. From May 1993 to April 1995, Mr. Garcia was an executive for Gemini Consulting. From January 1990 until May 1993, he was the vice president of Operations Strategy for Grand Metropolitan PLC, Food Sector. DEIDRA WAGER joined Starbucks in 1992 and served as the Company's senior vice president, Retail Operations from August 1993 to September 1997 when she was promoted to executive vice president, Retail Marketing and Operations. From September 1992 to August 1993, Ms. Wager served as the Company's vice president, Operation Services. From March 1992 to September 1992, she was the Company's California regional manager. From September 1988 to March 1992, Ms. Wager held several operations positions with Taco Bell(R), Inc., including having served as its director of operations systems development. JAMES ALLING joined Starbucks in September 1997 as senior vice president, Grocery and became senior vice president, Specialty Sales and Marketing in December 1998. From 1985 to 1997, Mr. Alling held several marketing and general management positions for Nestle, U.S.A., including serving as the vice president and general manager of the ground coffee division. BRUCE CRAIG joined Starbucks in October 1992 and served as regional and then zone vice president for the Southwest. In September 1997, Mr. Craig was promoted to the position of senior vice president, Retail Field Operations. Prior to joining Starbucks, Mr. Craig served for 21 years with Burger King Corp. in various positions, including executive vice president/division manager and as an owner/operator. SHARON E. ELLIOTT joined Starbucks in 1994 as senior vice president, Human Resources. From September 1993 to June 1994, Ms. Elliott served as the corporate director, staffing and development of Allied Signal Corporation. From July 1987 to August 1993, she held several human resources management positions with Bristol-Myers Squibb, including serving as the director of human resources--corporate staff. DEBORAH GILLOTTI joined Starbucks in February 1997 as senior vice president and chief information officer. Prior to joining Starbucks, Ms. Gillotti served as vice president, Corporate MIS for Duracell International, Inc. (now a division of the Gillette Company). She also held several management positions for KPMG Peat Marwick Management Consulting from 1989 to 1993. WANDA HERNDON joined Starbucks in July 1995 as vice president, Communications and Public Affairs and was promoted to senior vice president, Communication and Public Affairs in November 1996. From February 1990 to June 1995, Ms. Herndon held several communications management positions at DuPont. From November 1978 to 8 10 February 1990, Ms. Herndon held several public affairs and marketing communications positions for Dow Chemical Company. SHELLEY B. LANZA joined Starbucks in June 1995 as senior vice president, Law and Corporate Affairs and general counsel. From 1986 to 1995, Ms. Lanza served as vice president and general counsel of Honda of America Manufacturing, Inc. From 1982 to 1986, Ms. Lanza practiced law at the law firm of Vorys, Sater, Seymour and Pease in Columbus, Ohio. JUDY MELELIAT joined Starbucks in October 1997 as vice president, Marketing Operations and was promoted to senior vice president, Marketing in November 1997. Prior to joining Starbucks, Ms. Meleliat was vice president of Marketing for InfoAccess. From September 1995 to June 1996, she served at Edmark Corporation as the vice president of Sales for the Education Channel. From September 1987 to September 1995, Ms. Meleliat held several executive management positions at Egghead Software. DAVID M. OLSEN joined Starbucks in 1986 and served as the Company's senior vice president, Coffee from September 1991 to October 1997. From November 1987 to September 1991, Mr. Olsen served as vice president, Coffee, and from February 1986 to November 1987, he served as the Company's director of training. ARTHUR I. RUBINFELD joined the Company in 1992 as senior vice president, Real Estate. From April 1986 to May 1992, Mr. Rubinfeld served as a managing partner of Epsteen & Associates, a commercial real estate company. MICHAEL SWEENEY joined the Company in November 1998 as senior vice president, International. Prior to joining Starbucks, Mr. Sweeney served from September 1995 to November 1998 as the President of Minnesota Pizza Company, a franchise of Papa Johns, International, which operated 37 locations. From May 1992 to July 1995, Mr. Sweeney served as the President of Blockbuster Mid-America, a franchisee of Blockbuster Entertainment, Inc. that operated 35 locations. DON VALENCIA joined Starbucks in November 1993 as vice president, Research and Development and was promoted to senior vice president, Research and Development in October 1997. From 1980 to 1993, Mr. Valencia was president of Immuno Concepts, Incorporated, a biomedical company. MARY WILLIAMS joined Starbucks in March 1993 as vice president, Green Coffee and was promoted to senior vice president, Coffee in October 1997. From May 1988 to March 1993, Ms. Williams served as president of Klein Bros. International, Coffee Division. HOWARD WOLLNER joined Starbucks in January 1992 as vice president, Administration and was promoted to senior vice president, Administration and Strategic Alliance Management in October 1998. Prior to joining Starbucks, Mr. Wollner was executive vice president of Watts Silverstein Associates from July 1990 to July 1991. From 1977 to 1990, Mr. Wollner was associated with Canoon & Black Corporation where he was president of C&B Consulting Group, an employee benefits consulting firm. SCOTT T. SVENSON joined Starbucks in June 1998 as chief executive officer of Starbucks Coffee (UK) Holdings Limited following the acquisition of Seattle Coffee Company. Mr. Svenson co-founded Seattle Coffee Company in January 1995 and served as its chief executive officer until June 1998. From September 1993 to May 1996 Mr. Svenson was a director of Crestacare plc, assuming the role of deputy chief executive for 1995 and 1996. There are no family relationships between any directors or executive officers of the Company. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the section entitled "Executive Compensation" in the Company's Proxy Statement. 9 11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the section entitled "Beneficial Ownership of Common Stock" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the section entitled "Executive Compensation - Certain Transactions" in the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Annual Report on Form l0-K: 1.Financial Statements. The following financial statements are incorporated by reference to Part II, Item 8 of the Company's 1998 Annual Report to Shareholders: Consolidated Balance Sheets as of September 27, 1998 and September 28, 1997; Consolidated Statements of Earnings for the fiscal years ending September 27, 1998, September 28, 1997 and September 29, 1996; Consolidated Statements of Cash Flows for the fiscal years ending September 27, 1998, September 28, 1997 and September 29, 1996; Consolidated Statements of Shareholders' Equity for the fiscal years ending September 27, 1998, September 28, 1997 and September 29, 1996; Notes to Consolidated Financial Statements. 2.Financial Statement Schedules. Financial statement schedules are omitted because they are not required or are not applicable, or the required information is provided in the consolidated financial statements or notes thereto described in Item 14(a)(1) above. 3.Exhibits. The Exhibits listed below and on the accompanying Index to Exhibits immediately following the signature page hereto are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
Exhibit No. Description ----------- ----------- 3.1 Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3. 1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 3.1.1 Amendment dated November 22, 1995 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1.1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996)
10 12 3.1.2 Amendment dated March 18, 1996 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1.2 to the Company's Form 10-Q for the quarterly period ended March 31, 1996, filed with the SEC on May 15, 1996) 3.2 Amended and Restated Bylaws of Starbucks Corporation (incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 10.1 Starbucks Corporation Key Employee Stock Option Plan - 1994 (incorporated herein by reference to Appendix A to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.1.1 Starbucks Corporation Key Employee Stock Option Plan - 1994, as amended (incorporated herein by reference to Exhibit 10.1.1 to the Company's Form 10-K for the fiscal year ended September 29, 1996, filed with the SEC on December 26, 1996)* 10.2 Starbucks Corporation 1989 Stock Option Plan for Non-Employee Directors, as amended (incorporated herein by reference to Appendix B to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.2.1 Starbucks Corporation 1989 Stock Option Plan for Non-Employee Directors, as amended (incorporated herein by reference to Exhibit 10.2.1 to the Company's Form 10-K for the fiscal year ended on September 29, 1996, filed with the SEC on December 26, 1996)* 10.3 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as amended (incorporated herein by reference to the Company's Registration Statement No. 33-52528 on Form S-8, filed with the SEC on September 28, 1992)* 10.3.1 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1996, filed with the SEC on December 26, 1996)* 10.4 Starbucks Corporation Employee Stock Purchase Plan - 1995 (incorporated herein by reference to Appendix C to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.5 Industrial Lease, dated March 31, 1989, between Starbucks Corporation and the City of Seattle (successor in interest to David A. Sabey and Sandra L. Sabey) (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement No. 33-47951 on Form S-1, filed with the SEC on May 15, 1992) 10.6 Office Lease, dated as of July 15, 1993, between First and Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to Exhibit 10.17 to the Company's Form 10-K for the Fiscal Year ended October 3, 1993, filed with the SEC on December 30, 1993) 10.6.1 Second Amendment to Office Lease, dated as of January 1, 1995, between First & Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to the Company's Registration Statement No. 33-93974 on Form S-3, filed with the SEC on June 27, 1995)
11 13 10.6.2 Third Amendment to Office Lease, dated as of September 30, 1995, between First and Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to Exhibit 10.19 to the Company's Form 10-K for the fiscal year ended October l, 1995, filed with the SEC on December 28, 1995) 10.7 Development Agreement, dated as of February 11, 1994, between Starbucks Corporation and Host International, Inc. (incorporated herein by reference to Exhibit 10.18 to the Company's Form 10-K for the Fiscal Year ended October 2, 1994, filed with the SEC on December 23, 1994) 10.8 Special Warranty Deed, dated March 7, 1994, between Kent North Corporate Park, as grantor and Starbucks Corporation, as grantee (incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year ended October 2, 1994, filed with the SEC on December 23, 1994) 10.9 Joint Venture and Partnership Agreement, dated August 10, 1994, between Pepsi-Cola Company, a division of PepsiCo, Inc., and Starbucks New Venture Company (incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the Quarterly Period ended July 3, 1994, filed with the SEC on August 16, 1994) 10.10 Lease, dated August 22, 1994, between York County Industrial Development Corporation and Starbucks Corporation (incorporated herein by reference to Exhibit l0 to the Company's Form 10-Q for the Quarterly Period Ended July 2, 1995, filed with the SEC on August 15, 1995) 10.11 Starbucks Corporation Amended and Restated Consulting/Employment Agreement with Jeffrey H. Brotman, dated as of January 14, 1995 (incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year ended October l, 1995, filed with the SEC on December 28, 1995)* 10.14 Master Licensing Agreement between the Company and ARAMARK Food and Services Group, Inc. dated as of January 30, 1996, as amended and restated May 7, 1996 (incorporated herein by reference to Exhibit 10.23 to the Company's Form l0-Q for the Quarterly Period Ended March 31, 1996, filed with the SEC on May 15, 1996) 11 Computation of Per Share Earnings 13 Portions of the 1998 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule
- - ------------- * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K dated as of and filed on July 9, 1998 reporting in Item 5 the completion of the acquisition of all of the equity interests of Seattle Coffee Company. The Current Report contained the audited supplemental consolidated financial statements listed below as of September 28, 1997 and September 29, 1996, and for each of the three years ended September 28, 1997, which had been restated as if Starbucks and Seattle Coffee Company had been combined for all periods presented. The Current Report also contained the unaudited supplemental consolidated financial statements listed below for the first and second quarters of fiscal 1998 (the periods ending December 28, 1997 and March 29, 1998, respectively), which had also been restated as if Starbucks and Seattle Coffee Company had been combined for such periods. Financial Statements for Fiscal Year 1997 - - ----------------------------------------- Independent Auditors' Report Supplemental Consolidated Balance Sheets at September 28, 1997 and September 29, 1996 Supplemental Consolidated Statements of Earnings for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 Supplemental Consolidated Statements of Cash Flows for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 Notes to Supplemental Consolidated Financial Statements for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 Financial Statements for the First Fiscal Quarter of 1998 - - --------------------------------------------------------- Supplemental Consolidated Statements of Earnings for the 13 weeks Ended December 28, 1997 and December 29, 1996 Supplemental Consolidated Balance Sheets at December 28, 1997 and September 28, 1997 Supplemental Consolidated Statements of Cash Flows for the 13 weeks Ended December 28, 1997 and December 29, 1996 Notes to Supplemental Quarterly Consolidated Financial Statements for the 13 Weeks Ended December 28, 1997 and December 29, 1996 Financial Statements for the Second Fiscal Quarter of 1998 Supplemental - - ----------------------------------------------------------------------- Consolidated Statements of Earnings for the 13 and 26 weeks Ended March 29, 1998 and March 30, 1997 Supplemental Consolidated Balance Sheets at March 29, 1998 and September 28, 1997 Supplemental Consolidated Statements of Cash Flows for the 26 weeks Ended March 29, 1998 and March 30, 1997 Notes to Supplemental Quarterly Consolidated Financial Statements for the 13 and 26 Weeks Ended March 29, 1998 and March 30, 1997
12 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STARBUCKS CORPORATION By: /s/ Howard Schultz -------------------------------------- Howard Schultz chairman of the Board of Directors and chief executive officer December 17, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - - --------- ----- ---- /s/ Howard Schultz chairman of the Board of Directors December 17, 1998 - - ------------------------ Howard Schultz and chief executive officer /s/ Orin C. Smith director, president and chief operating December 15, 1998 - - ------------------------ Orin C. Smith officer /s/ Howard Behar director, president of Starbucks Coffee December 15, 1998 - - ------------------------ Howard Behar International, Inc. /s/ Michael Casey executive vice president, chief December 15, 1998 - - ------------------------ Michael Casey financial officer and chief administrative officer (principal financial officer and principal accounting officer) /s/ Barbara Bass director December 15, 1998 - - ------------------------ Barbara Bass /s/ Jeffrey H. Brotman director December 12, 1998 - - ------------------------ Jeffrey H. Brotman /s/ Craig J. Foley director December 18, 1998 - - ------------------------ Craig J. Foley /s/ Arlen I. Prentice director December 15, 1998 - - ------------------------ Arlen I. Prentice /s/ James G. Shennan, Jr. director December 15, 1998 - - ------------------------ James G. Shennan, Jr.
13 15 EXHIBIT INDEX
Exhibit No. Description Page No. ----------- ----------- -------- 3.1 Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 3.1.1 Amendment dated November 22, 1995 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1.1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 3.1.2 Amendment dated March 18, 1996 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1.2 to the Company's Form 10-Q for the quarterly period ended March 31, 1996, filed with the SEC on May 15, 1996) 3.2 Amended and Restated Bylaws of Starbucks Corporation (incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 10.1 Starbucks Corporation Key Employee Stock Option Plan - 1994 (incorporated herein by reference to Appendix A to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.1.1 Starbucks Corporation Key Employee Stock Option Plan - 1994, as amended (incorporated herein by reference to Exhibit 10.1.1 to the Company's Form 10-K for the fiscal year ended September 29, 1996, filed with the SEC on December 26, 1996)* 10.2 Starbucks Corporation 1989 Stock Option Plan for Non-Employee Directors, as amended (incorporated herein by reference to Appendix B to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.2.1 Starbucks Corporation 1989 Stock Option Plan for Non-Employee Directors, as amended (incorporated herein by reference to Exhibit 10.2.1 to the Company's Form 10-K for the fiscal year ended on September 29, 1996, filed with the SEC on December 26, 1996)* 10.3 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as amended (incorporated herein by reference to the Company's Registration Statement No. 33-52528 on Form S-8, filed with the SEC on September 28, 1992)* 10.3.1 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1996, filed with the SEC on December 26, 1996)*
E-1 16 10.4 Starbucks Corporation Employee Stock Purchase Plan - 1995 (incorporated herein by reference to Appendix C to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.5 Industrial Lease, dated March 31, 1989, between Starbucks Corporation and the City of Seattle (successor in interest to David A. Sabey and Sandra L. Sabey) (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement No. 33-47951 on Form S-1, filed with the SEC on May 15, 1992) 10.6 Office Lease, dated as of July 15, 1993, between First and Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to Exhibit 10.17 to the Company's Form 10-K for the Fiscal Year ended October 3, 1993, filed with the SEC on December 30, 1993) 10.6.1 Second Amendment to Office Lease, dated as of January 1, 1995, between First & Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to the Company's Registration Statement No. 33-93974 on Form 5-3, filed with the SEC on June 27, 1995) 10.6.2 Third Amendment to Office Lease, dated as of September 30, 1995, between First and Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to Exhibit 10.19 to the Company's Form 10-K for the Fiscal Year ended October l, 1995, filed with the SEC on December 28, 1995) 10.7 Development Agreement, dated as of February 11, 1994, between Starbucks Corporation and Host International, Inc. (incorporated herein by reference to Exhibit 10.18 to the Company's Form 10-K for the Fiscal Year ended October 2, 1994, filed with the SEC on December 23, 1994) 10.8 Special Warranty Deed, dated March 7, 1994, between Kent North Corporate Park, as grantor and Starbucks Corporation, as grantee (incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year ended October 2, 1994, filed with the SEC on December 23, 1994) 10.9 Joint Venture and Partnership Agreement, dated August 10, 1994, between Pepsi-Cola Company, a division of PepsiCo, Inc., and Starbucks New Venture Company (incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the Quarterly Period ended July 3, 1994, filed with the SEC on August 16, 1994) 10.10 Lease, dated August 22, 1994, between York County Industrial Development Corporation and Starbucks Corporation (incorporated herein by reference to Exhibit l0 to the Company's Form 10-Q for the Quarterly Period Ended July 2, 1995, filed with the SEC on August 15, 1995)
E-2 17 10.11 Starbucks Corporation Amended and Restated Consulting/Employment Agreement with Jeffrey H. Brotman, dated as of January 14, 1995 (incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year ended October l, 1995, filed with the SEC on December 28, 1995)* 10.14 Master Licensing Agreement between the Company and ARAMARK Food and Services Group, Inc. dated as of January 30, 1996, as amended and restated May 7, 1996 (incorporated herein by reference to Exhibit 10.23 to the Company's Form l0-Q for the Quarterly Period Ended March 31, 1996, filed with the SEC on May 15, 1996) 11 Computation of Per Share Earnings E-4 13 Portions of the 1998 Annual Report to Shareholders E-5 21 Subsidiaries of the Registrant E-31 23 Independent Auditors' Consent E-32 27 Financial Data Schedule E-33
- - ------------- * Management contract or compensatory plan or arrangement. E-3 EX-11 2 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS (in thousands, except earnings per share)
September 27, September 28, September 29, 1998 1997 1996 ------- ------- ------- CALCULATION OF NET EARNINGS PER COMMON SHARE-BASIC Net earnings $68,372 $55,211 $41,710 ------- ------- ------- Weighted average common shares and common stock units outstanding -- basic 88,055 79,645 74,667 ------- ------- ------- Net earnings per common share $ 0.78 $ 0.69 $ 0.56 ------- ------- ------- CALCULATION OF NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE- DILUTED:(1) Net earnings calculation: Net earnings $68,372 $55,211 $41,710 Add after-tax interest expense on debentures 348 4,300 1,248 Add after-tax amortization of issuance costs related to the debentures 30 354 93 ------- ------- ------- Adjusted net earnings $68,750 $59,865 $43,051 ------- ------- ------- Weighted average shares outstanding calculation: Weighted average common shares and common stock units outstanding 88,055 79,645 74,667 Dilutive effect of outstanding common stock options 3,128 3,416 3,223 Assuming conversion of convertible subordinated debentures 702 7,098 3,026 ------- ------- ------- Weighted average common and common equivalent shares outstanding 91,885 90,159 80,916 ------- ------- ------- Net earnings per common and common equivalent share -diluted $ 0.75 $ 0.66 $ 0.53 ------- ------- -------
(1) Diluted earnings per share assumes conversion of the Company's convertible subordinated debentures using the "if converted" method, when such securities are dilutive, with income adjusted for the after-tax interest expense and amortization applicable to these debentures. E-4 EX-13 3 PORTIONS OF THE 1998 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 PORTIONS OF THE 1998 ANNUAL REPORT TO SHAREHOLDERS SHAREHOLDER INFORMATION STARBUCKS CORPORATION MARKET INFORMATION AND DIVIDEND POLICY. The Company's Common Stock is traded on the National Market tier of The Nasdaq Stock Market, Inc. ("Nasdaq") under the symbol "SBUX". The following table sets forth the quarterly high and low sale prices per share of the Common Stock as reported by Nasdaq for each quarter during the last two fiscal years.
Fiscal year ended High Low - - ----------------- ---- --- September 27, 1998 First Quarter $ 41 13/16 $31 7/16 Second Quarter 43 1/16 33 5/8 Third Quarter 54 1/8 43 1/8 Fourth Quarter 58 1/6 29 3/16 September 28, 1997 First Quarter $ 40 1/4 $28 7/8 Second Quarter 37 1/4 27 3/8 Third Quarter 39 1/2 26 1/8 Fourth Quarter 44 3/4 34 1/8
As of December 1, 1998, the Company had 7,757 shareholders of record. The Company has never paid any dividends on its Common Stock. The Company presently intends to retain earnings for use in its business and therefore does not anticipate paying a cash dividend in the near future. Company Filings and Information. The Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1998 may be obtained without charge by accessing the Company's filings at www.sec.gov or by sending a written request to Investor Relations at the address below. Quarterly information is available to all shareholders immediately upon its release, free of charge, via fax, by calling (800) 239-0317 or through access on the Internet at www.businesswire.com/cnn/sbux.htm. To receive a copy by mail, please send your written request to: Investor Relations - M/S S-FP1 Starbucks Corporation P.O. Box 34067 Seattle, WA 98124-1067 E-5 2 SELECTED FINANCIAL DATA (in thousands, except earnings per share) The following selected financial data have been derived from the consolidated financial statements of the Company. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto.
As of and for the fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 Oct 2, 1994 (52 Wks) (52 Wks) (52 Wks) (52 Wks) (52 Wks) ---------- ---------- ---------- ---------- ---------- Results of Operations Data: Net revenues Retail $1,102,574 $ 836,291 $ 601,458 $ 402,655 $ 248,495 Specialty Sales 206,128 139,098 96,414 62,558 36,428 ---------- ---------- ---------- ---------- ---------- Total net revenues 1,308,702 975,389 697,872 465,213 284,923 Merger expenses(1) 8,930 -- -- -- 3,867 Operating income 109,216 86,199 56,575 40,116 23,298 Gain on sale of investment (2) -- -- 9,218 -- -- Net earnings $ 68,372 $ 55,211 $ 41,710 $ 26,102 $ 10,206 Net earnings per common share - diluted(3) $ 0.75 $ 0.66 $ 0.53 $ 0.37 $ 0.17 Cash dividends per share -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- Balance Sheet Data: Working capital $ 157,805 $ 172,079 $ 239,365 $ 134,304 $ 44,162 Total assets 992,755 857,152 729,227 468,178 231,421 Long-term debt (including current portion) 1,803 168,832 167,980 81,773 80,500 Shareholders' equity $ 794,297 $ 533,710 $ 454,050 $ 312,231 $ 109,898 ---------- ---------- ---------- ---------- ---------- Store Operating Data: Percentage change in comparable store sales(4) 5% 5% 7% 9% 9% Stores open at year end: Continental North America: Company-operated stores 1,622 1,270 929 627 399 Licensed stores (5) 133 94 75 49 26 International stores: Company-operated - United Kingdom 66 31 9 1 0 Licensed stores (5) 65 17 2 0 0 ---------- ---------- ---------- ---------- ---------- Total stores 1,886 1,412 1,015 677 425
(1) Merger expenses relate to the transactions with Seattle Coffee Company in fiscal 1998 and the Coffee Connection, Inc. in fiscal 1994. (2) Gain on sale of investment in Noah's New York Bagel, Inc. stock in fiscal 1996. (3) Earnings per share is based on the weighted average shares outstanding during the period plus common stock equivalents consisting of certain shares subject to stock options. In addition, the presentation of diluted earnings per share assumes conversion of the Company's convertible subordinated debentures using the "if converted" method, when such securities are dilutive, with net income adjusted for the after-tax interest expense and amortization applicable to these debentures. (4) Includes only Company-operated stores open 13 months or longer. (5) Product sales to and royalties and fees from the Company's licensees are included in the Company's specialty sales revenues. Joint ventures are accounted for on the equity method and therefore their results of operations are not consolidated into the Company's operations. E-6 3 CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements set forth in this Annual Report, including anticipated store openings, planned capital expenditures, and trends in or expectations regarding the Company's operations, specifically including the effect of problems associated with the Year 2000, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the impact of competition, the effect of legal proceedings, and other risks detailed herein and in the Company's Securities and Exchange Commission filings, including the Company's Annual Report on Form 10-K for the fiscal year ended September 27, 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL. Starbucks presently derives approximately 84% of net revenues from its Company-operated retail stores. The Company's specialty sales operations, which include product sales to and royalties and fees from wholesale customers, retail store and grocery licensees, and international licensees, as well as direct response sales, accounted for the remaining 16% of net revenues in fiscal 1998. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal years 1998, 1997, and 1996 each had 52 weeks. The fiscal year ending on October 3, 1999 will include 53 weeks. The Company's net revenues increased from $975.4 million in fiscal 1997 to $1.3 billion in fiscal 1998, due primarily to the Company's store expansion program and comparable store sales increases. Comparable store sales increased by 5%, 5%, and 7% in fiscal 1998, 1997, and 1996, respectively. As part of its expansion strategy of clustering stores in existing markets, Starbucks has experienced a certain level of cannibalization of existing stores by new stores as the store concentration has increased. However, management believes such cannibalization has been justified by the incremental sales and return on new store investment. This cannibalization, as well as increased competition and other factors, may continue to put downward pressure on the Company's comparable store sales growth in future periods. The following table sets forth the percentage relationship to total net revenues, unless otherwise indicated, of certain items included in the Company's consolidated statements of earnings:
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996 (52 Wks) (52 Wks) (52 Wks) ----- ----- ----- Statements of Earnings Data: Net revenues Retail 84.2% 85.7% 86.2% Specialty Sales 15.8 14.3 13.8 ----- ----- ----- Total net revenues 100.0 100.0 100.0 Cost of sales and related occupancy costs 44.2 44.8 48.2 Store operating expenses(1) 38.0 37.6 35.2 Other operating expenses 3.3 2.9 2.8 Depreciation and amortization 5.5 5.4 5.2 General and administrative expenses 5.9 5.9 5.3 Merger expenses 0.7 0.0 0.0 Operating income 8.3 8.8 8.1 Interest and other income 0.7 1.3 1.7 Interest and other expense (0.1) (0.7) (1.3) Gain on sale of investment 0.0 0.0 1.3 ----- ----- ----- Earnings before income taxes 8.9 9.4 9.8 Income taxes 3.7 3.7 3.8 ----- ----- ----- Net earnings 5.2% 5.7% 6.0% ----- ----- -----
(1) Shown as a percentage of retail sales E-7 4 SEATTLE COFFEE COMPANY On May 28, 1998, the Company acquired all of the equity interests of Seattle Coffee Holdings Limited ("Seattle Coffee Company"), a United Kingdom roaster and retailer of specialty coffee, in exchange for 1,817,894 shares of Starbucks common stock. This business combination (the "Transaction") has been accounted for as a pooling of interests for accounting and financial reporting purposes. The pooling-of-interests method of accounting is intended to present as a single interest, two or more common shareholders' interests which were previously independent; accordingly, the historical financial statements for the periods prior to the business combination are restated as though the companies had always been combined. The restated financial statements are adjusted to conform the accounting policies and fiscal reporting periods to Starbucks accounting policies and fiscal reporting periods. The Transaction resulted in pre-tax charges of $8.9 million in direct merger costs and $6.6 million in other costs associated with the integration of Seattle Coffee Company. Merger costs consisted mainly of investment banking, legal and accounting fees. Other one-time integration costs were primarily related to asset write-offs due to the planned conversion of Seattle Coffee Company stores to Starbucks. The Transaction resulted in transaction and other related after-tax charges of $0.14 per share in the third quarter of fiscal 1998. RESULTS OF OPERATIONS -- FISCAL 1998 COMPARED TO FISCAL 1997 Revenues. Net revenues increased 34% to $1.3 billion for fiscal 1998, compared to $975.4 million for fiscal 1997. Retail sales increased 32% to $1.1 billion from $836.3 million. The increase in retail sales was due primarily to the addition of new Company-operated stores. In addition, comparable store sales increased 5% for the 52 weeks ended September 27, 1998 compared to the same 52-week period in fiscal 1997. Comparable store sales increases resulted from an increase in the number of transactions combined with an increase in the average dollar value per transaction. The increase in average dollar value per transaction was primarily due to the sales price increases effected during fiscal 1997. During fiscal 1998, the Company opened 357 stores in continental North America and 37 stores in the United Kingdom. By fiscal year end, there were 1,622 Company-operated stores in continental North America and 66 in the United Kingdom. Specialty Sales revenues increased 48% to $206.1 million for fiscal 1998 from $139.1 million for fiscal 1997. The increase was due primarily to increased sales and license fees in the grocery category, increased sales to the Company's joint ventures and licensees, and higher wholesale club sales. The Company sells roasted coffee to its joint venture with Pepsi-Cola Company, a division of PepsiCo, Inc., (the "North American Coffee Partnership") for use in the manufacture of its bottled Frappuccino(TM) beverage. The Company also sells coffee extract to Dreyer's Grand Ice Cream, Inc. ("Dreyer's") for use in the manufacture of Starbucks branded ice cream sold by the Company's joint venture with Dreyer's (the "Ice Cream Joint Venture"). Licensees (including those in which the Company is a joint venture partner) opened 45 stores in continental North America and 48 stores in international markets. The Company ended the year with 133 licensed stores in continental North America and 65 licensed stores in international markets. Costs and Expenses. Cost of sales and related occupancy costs as a percentage of net revenues decreased to 44.2% for fiscal 1998 compared to 44.8% for fiscal 1997. This decrease was primarily the result of prior year sales price increases partially offset by higher green coffee costs. Store operating expenses as a percentage of retail sales increased to 38.0% for fiscal 1998 from 37.6% for fiscal 1997. This was due to integration costs associated with the Transaction. Excluding these costs, store operating expenses for fiscal 1998 would have been 37.5% of retail sales. Other operating expenses (expenses associated with the Company's specialty sales operations, as well as the Company's share of joint venture profits and losses) increased to 3.3% of net revenues for fiscal 1998 from 2.9% for fiscal 1997. The increase was attributable to higher advertising expenses and higher payroll-related costs for the Company's international and grocery businesses partially offset by improved results of both the North American Coffee Partnership and the Ice Cream Joint Venture. Management anticipates that the joint ventures with Pepsi and Dreyer's will contribute positively to earnings in fiscal 1999 and that the international operations will remain dilutive to earnings in fiscal 1999. MERGER EXPENSES. Merger expenses of $8.9 million consisted mainly of investment banking, legal and accounting fees. Interest and Other Income. Interest and other income for fiscal 1998 was $8.5 million, compared to $12.4 million for fiscal 1997. The decrease was primarily due to lower average investment balances. E-8 5 Interest and Other Expense. Interest and other expense for fiscal 1998 was $1.4 million compared to $7.3 million for fiscal 1997. The decrease was due to the conversion of the Company's $165.0 million 4 1/4% Convertible Subordinated Debentures to common stock during the first quarter of fiscal 1998. Income Taxes. The Company's effective tax rate for fiscal 1998 was 41.2% compared to 39.5% in fiscal 1997. The effective tax rate in both years was impacted by non-deductible losses of Seattle Coffee Company prior to the Transaction; fiscal 1998's rate was also affected by Transaction-related costs. Excluding the impact of Transaction-related costs, the effective tax rate would have been 38.3%. Management expects the effective tax rate to be 38.0% during fiscal 1999. RESULTS OF OPERATIONS -- FISCAL 1997 COMPARED TO FISCAL 1996 Revenues. Net revenues increased 40% to $975.4 million for fiscal 1997, compared to $697.9 million for fiscal 1996. Retail sales increased 39% to $836.3 million from $601.5 million. The increase in retail sales was due primarily to the addition of new Company-operated stores. In addition, comparable store sales increased 5% for the 52 weeks ended September 28, 1997 compared to the same 52-week period in fiscal 1996. Comparable store sales increases resulted from an increase in the number of transactions combined with an increase in the average dollar value per transaction. During fiscal 1997, the Company opened 363 Starbucks stores. The Company opened 341 stores in continental North America and 22 stores in the United Kingdom. By fiscal year end, the Company had 1,270 stores in continental North America and 31 in the United Kingdom. Specialty Sales revenues increased 44% to $139.1 million for fiscal 1997 from $96.4 million for fiscal 1996. The increase was due primarily to increased revenues from sales to the Company's joint ventures and licensees, a chain of wholesale clubs, and business dining accounts. Licensees opened 20 stores in continental North America and opened 15 stores in the Pacific Rim. The Company ended the year with 94 licensed stores in continental North America and 17 in the Pacific Rim. Costs and Expenses. Cost of sales and related occupancy costs as a percentage of net revenues decreased to 44.8% for fiscal 1997 compared to 48.2% for fiscal 1996. This decrease was primarily the result of lower green coffee costs as a percentage of net revenues and, to a much lesser extent, the impact of sales price increases. Store operating expenses as a percentage of retail sales increased to 37.6% for fiscal 1997 from 35.2% for fiscal 1996. This was due to higher advertising expenses and higher payroll-related costs. Other operating expenses (expenses associated with the Company's specialty sales operations, as well as the Company's share of joint venture profits and losses) increased to 2.9% of net revenues for fiscal 1997 from 2.8% for fiscal 1996. The increase was attributable to higher payroll-related costs offset by lower business taxes and improved contribution from joint ventures. Depreciation and amortization as a percentage of net revenues increased to 5.4% for fiscal 1997 from 5.2% for fiscal 1996. General and administrative expenses were 5.9% of net revenues for fiscal 1997 compared to 5.3% for fiscal 1996. This increase was due primarily to higher payroll-related costs which were tightly constrained in 1996. Interest and Other Income. Interest and other income for fiscal 1997 was $12.4 million, compared to $11.0 million for fiscal 1996. The increase was due to gains on sales of investments and higher average interest rates earned on investments, partially offset by lower average investment balances during fiscal 1997. Interest and Other Expense. Interest and other expense for fiscal 1997 was $7.3 million compared to $8.7 million for fiscal 1996. The decrease in interest expense is due to the conversion of the Company's $80.5 million of 4 1/2% Convertible Subordinated Debentures during the third quarter of fiscal 1996. Income Taxes. The Company's effective tax rate for fiscal 1997 was 39.5% which increased from 38.7% in fiscal 1996 due to the non-deductible losses incurred by Seattle Coffee Company prior to the Transaction. LIQUIDITY AND CAPITAL RESOURCES The Company ended fiscal 1998 with $123.5 million in total cash and short-term investments. Working capital as of September 27, 1998 totaled $157.8 million compared to $172.1 million at September 28, 1997. Cash and cash equivalents increased by $31.5 million during fiscal 1998 to $101.7 million at September 27, 1998. E-9 6 Cash provided by operating activities for fiscal 1998 totaled $142.9 million and resulted primarily from net income before non-cash charges of $159.8 million, partially offset by a $23.5 million increase in inventories and a $19.8 million increase in accounts receivable. Cash used by investing activities for fiscal 1998 totaled $148.8 million. This included capital additions to property, plant, and equipment of $201.9 million related to opening 394 new Company-operated retail stores and remodeling certain existing stores, purchasing roasting and packaging equipment for the Company's roasting and distribution facilities, enhancing information systems, and expanding existing office space. The net activity in the Company's marketable securities portfolio during fiscal 1998 provided $65.9 million. During fiscal 1998, the Company made equity investments of $7.6 million in the North American Coffee Partnership and $4.8 million in its international joint ventures. The Company received $2.8 million in distributions from the Ice Cream Joint Venture. The Company invested excess cash primarily in short-term investment-grade marketable debt securities. Cash provided by financing activities for fiscal 1998 totaled $37.6 million and included cash 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, the Company will continue to receive proceeds and a tax deduction as a result of option exercises; however, neither the amounts nor the timing thereof can be predicted. Cash requirements for fiscal 1999, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores. The Company and its licensees plan to open at least 400 new stores in continental North America and 100 in international markets during fiscal 1999. 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 fiscal 1999 to be approximately $250 million and additional cash requirements for its international expansion during fiscal 1999 to be approximately $5 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 1999. Any new joint ventures, other new business opportunities, or store expansion rates substantially in excess of that presently planned may require outside funding. The Company expects to reach its goal of 2,500 stores in continental North America by the end of the year 2000 and at least 500 stores in the Pacific Rim and 500 stores in Europe by the end of the year 2003 using cash flow generated from operations, supplemented by debt financing, if necessary. YEAR 2000 COMPLIANCE The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. Computer programs, at the Company and elsewhere, with time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to produce and distribute products, process transactions or engage in similar normal business activities. To address the Year 2000 issue and its risks, the Company has formed a cross-functional Task Force, headed by senior management, to evaluate the risks and implement appropriate remediation and contingency plans. The Company's preparations for the Year 2000 have been divided into two categories: MIS supported systems and other systems and issues. All of the MIS supported systems used at Starbucks have been identified and evaluated and Starbucks is in the process of developing remediation plans for bringing non-compliant applications into compliance. The majority of computer and telephony applications at Starbucks are relatively recent purchases that are not expected to be affected by the Year 2000 problem. The Company expects to have completed its remediation efforts and contingency planning for MIS supported systems by mid-1999. To address issues arising from non-MIS supported systems or embedded chips and to evaluate the Company's exposure to third parties' failures to remediate their Year 2000 problems, the Company has identified the critical product and service suppliers for each of its business units and departments. The Company has solicited information from these critical suppliers about their remediation and contingency plans and their ability to meet the Company's needs in the Year 2000. The Company is tracking responses to such inquiries and plans to work with its suppliers to develop appropriate contingency plans. E-10 7 There can be no guarantee, however, that the other companies on which the Company relies will be prepared for the Year 2000 and that their Year 2000 problems will not have an adverse effect on the Company. The Company has spent approximately $0.5 million in direct costs for the Year 2000 compliance project through fiscal 1998 and expects to spend an additional $1.2 million to complete its remediation efforts. These costs and the date on which the Company plans to complete the Year 2000 modification and testing processes are management's best estimates, which are based on numerous assumptions about future events, including the continued availability of certain resources, third party modification plans and other factors. There can be no guarantee that these estimates will prove true and actual results could differ significantly from those projected. COFFEE PRICES, AVAILABILITY, AND GENERAL RISK CONDITIONS Green coffee commodity prices are subject to substantial price fluctuations, generally caused by multiple factors including weather, political and economic conditions in certain coffee-producing countries and other supply-related concerns. 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. During fiscal 1997, worldwide green coffee commodity prices increased significantly and remained high relative to historical levels through the second quarter of 1998. In response, the Company effected sales price increases during fiscal 1997 on its whole bean coffees and its coffee beverages to mitigate the effects of increases in its costs of supply. Because the Company had existing inventories and fixed-price purchase commitments for some of its green coffee requirements at the time of these sales price increases, the Company's gross margins during the first two quarters of fiscal 1998 were favorably impacted by these sales price increases relative to the corresponding periods of fiscal 1997. During the last two quarters of fiscal 1998, the Company's gross margins were unfavorably impacted relative to the corresponding periods of fiscal 1997 as the Company passed the anniversaries of the sales price increases while cost of sales continued to reflect the higher cost of coffee. 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 September 27, 1998 the Company had approximately $96 million in fixed price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee well into fiscal 1999. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is remote. To further reduce its exposure to rising coffee costs, the Company, from time to time, enters into futures contracts to hedge price-to-be-established coffee purchase commitments. The specific risks associated with these activities are described below in "Financial Risk Management." 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 and the Company's continued ability to hire, train, and retain qualified personnel. FINANCIAL RISK MANAGEMENT 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 retained earnings. As of September 27, 1998, approximately 99% of the total portfolio was invested in short-term marketable debt securities with maturities less than one year, and the remaining 1% was invested in marketable equity securities. The Company does not hedge its interest rate exposures. E-11 8 The Company is subject to foreign currency exchange rate exposure, primarily related to its foreign retail operations in Canada and the United Kingdom. Historically, this exposure has had a minimal impact on the Company. At the present time, the Company does not hedge foreign currency risk, but may hedge known transaction exposure in the future. The Company may, from time to time, enter into futures contracts to hedge price-to-be-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 Statement of Financial Accounting Standards ("SFAS") 80 "Accounting for Futures Contracts," these futures contracts meet the hedge criteria and are accounted for as hedges. Accordingly, gains and losses are deferred and recognized as adjustments to the carrying amount 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 costs of coffee purchased. The deferred losses from hedging activities were not significant as of September 27, 1998 and will be offset by lower costs of coffee purchased during fiscal 1999. The Company had no open futures contracts as of September 27, 1998. SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal fluctuations. Significant portions of the Company's net revenues and profits are realized during the first quarter of the Company's fiscal year, which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of other seasonal influences. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130 "Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Company will adopt SFAS 130 and SFAS 131 in fiscal 1999. In June 1998, the FASB issued 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 comprehensive income until the hedged item is recognized in earnings. The Company expects that this new standard will not have a significant effect on its results of operations. SFAS 133 is effective for fiscal years beginning after June 15, 1999. E-12 9 CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
Sept 27, 1998 Sept 28, 1997 ------------- ------------- Assets Current Assets: Cash and cash equivalents $101,663 $ 70,126 Short-term investments 21,874 83,504 Accounts receivable 50,972 31,231 Inventories 143,118 119,767 Prepaid expenses and other current assets 11,205 8,763 Deferred income taxes, net 8,448 4,164 -------- -------- Total current assets 337,280 317,555 Joint ventures and other investments 38,917 34,464 Property, plant, and equipment, net 600,794 488,791 Deposits and other assets 15,764 16,342 -------- -------- Total $992,755 $857,152 ======== ======== Liabilities and Shareholders' Equity Current Liabilities: Accounts payable $ 54,446 $ 47,987 Checks drawn in excess of bank balances 33,634 28,582 Accrued compensation and related costs 35,941 25,894 Accrued occupancy costs 17,526 12,184 Other accrued expenses 37,928 30,829 -------- -------- Total current liabilities 179,475 145,476 Deferred income taxes, net 18,983 12,946 Convertible subordinated debentures -- 165,020 Commitments and contingencies (notes 5, 9, and 13) Shareholders' Equity: Common stock--Authorized, 150,000,000 shares; issued and outstanding, 89,633,478 (includes 424,275 common stock units) and 80,559,023 shares, respectively 589,214 391,284 Retained earnings, including cumulative translation adjustment of $(6,631) and $(1,511) respectively, and net unrealized holding (loss)/gain on investments of $(532) and $63, respectively 205,083 142,426 -------- -------- Total shareholders' equity 794,297 533,710 -------- -------- Total $992,755 $857,152 ======== ========
E-13 10 CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except earnings per share)
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996 ------------- ------------- ------------- Net revenues $ 1,308,702 $ 975,389 $ 697,872 Cost of sales and related occupancy costs 578,483 436,942 336,658 Store operating expenses 418,476 314,064 211,575 Other operating expenses 43,479 28,239 19,787 Depreciation and amortization 72,543 52,801 36,019 General and administrative expenses 77,575 57,144 37,258 Merger expenses 8,930 -- -- ----------- ----------- ----------- Operating income 109,216 86,199 56,575 Interest and other income 8,515 12,393 11,029 Interest and other expense (1,381) (7,282) (8,739) Gain on sale of investment -- -- 9,218 ----------- ----------- ----------- Earnings before income taxes 116,350 91,310 68,083 Income taxes 47,978 36,099 26,373 ----------- ----------- ----------- Net earnings $ 68,372 $ 55,211 $ 41,710 ----------- ----------- ----------- Net earnings per common share - basic $ 0.78 $ 0.69 $ 0.56 Net earnings per common share - diluted $ 0.75 $ 0.66 $ 0.53 Weighted average shares outstanding: Basic 88,055 79,645 74,667 Diluted 91,885 90,159 80,916 ----------- ----------- -----------
E-14 11 CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996 ------------- ------------- ------------- Operating Activities: Net earnings $ 68,372 $ 55,211 $ 41,710 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 80,901 58,864 39,438 Provision for store remodels and asset disposals 7,234 1,049 412 Conversion of compensatory options into common stock 1,158 -- -- Deferred income taxes, net 2,125 5,490 4,407 Equity in losses of investees 14 2,760 1,935 Gain on sale of investment -- -- (9,218) Cash (used) provided by changes in operating assets and liabilities: Accounts receivable (19,790) (13,475) (7,918) Inventories (23,496) (36,382) 40,237 Prepaid expenses and other current assets (2,497) (2,236) (1,769) Accounts payable 4,601 9,559 9,527 Accrued compensation and related costs 9,943 10,871 2,208 Accrued occupancy costs 5,342 4,208 3,345 Other accrued expenses 8,972 4,375 12,067 --------- --------- --------- Net cash provided by operating activities 142,879 100,294 136,381 Investing Activities: Purchase of investments (51,354) (171,631) (178,643) Sale of investments 5,138 9,257 17,144 Maturity of investments 112,080 173,665 103,056 Investments in joint ventures and other investments (12,418) (27,624) (6,040) Distributions from joint venture 2,750 -- -- Proceeds from sale of equity investments -- -- 20,550 Additions to property, plant, and equipment (201,855) (174,363) (163,284) Additions to deposits and other assets (3,184) (4,604) (5,432) --------- --------- --------- Net cash used by investing activities (148,843) (195,300) (212,649) Financing Activities: Increase in cash provided by checks drawn in excess of bank balances 4,846 12,287 3,096 Proceeds from sale of convertible debentures, net -- -- 160,685 Proceeds from sale of common stock 4,649 4,009 4,446 Exercise of stock options 20,755 13,629 8,032 Tax benefit from exercise of nonqualified stock options 9,332 9,626 6,808 Payments on capital lease obligations (1,993) (1,566) (575) --------- --------- --------- Net cash provided by financing activities 37,589 37,985 182,492 Effect of exchange rate changes on cash and cash equivalents (88) (18) (3) --------- --------- --------- Increase (decrease) in cash and cash equivalents 31,537 (57,039) 106,221 Cash and Cash Equivalents: Beginning of year 70,126 127,165 20,944 --------- --------- --------- End of year $ 101,663 $ 70,126 $ 127,165 --------- --------- ---------
E-15 12 Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest $ 4,130 $ 7,179 $ 5,630 Income taxes 32,643 19,679 12,127 Noncash Financing and Investing Transactions: Equipment acquired under capital lease $ -- $ 2,434 $ 2,089 Net unrealized holding gains (losses) on investments (595) (1,983) 2,012 Conversion of convertible debt into common stock, net of unamortized issue costs and accrued interest 162,036 -- 79,345 Common stock tendered in settlement of stock options exercised 4,859 -- --
E-16 13 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data)
Common stock Retained Shares Amount earnings Total ---------- ---------- ---------- ---------- Balance, October 1, 1995 70,956,990 $ 265,679 $ 46,552 $ 312,231 Exercise of stock options including tax benefit of $6,808 1,177,736 14,840 -- 14,840 Sale of common stock 1,216,993 4,446 -- 4,446 Conversion of convertible debt into common stock 5,359,769 79,055 -- 79,055 Net earnings -- -- 41,710 41,710 Unrealized holding gains, net -- -- 2,012 2,012 Translation adjustment -- -- (244) (244) ---------- ---------- ---------- ---------- Balance, September 29, 1996 78,711,488 364,020 90,030 454,050 Exercise of stock options including tax benefit of $9,626 1,381,915 23,255 -- 23,255 Sale of common stock 465,620 4,009 -- 4,009 Net earnings -- -- 55,211 55,211 Unrealized holding losses, net -- -- (1,983) (1,983) Translation adjustment -- -- (832) (832) ---------- ---------- ---------- ---------- Balance, September 28, 1997 80,559,023 391,284 142,426 533,710 Exercise of stock options including tax benefit of $9,332 1,417,264 31,245 -- 31,245 Common stock units issued under deferred stock plan, net of shares tendered 424,275 -- -- -- Sale of common stock 135,889 4,649 -- 4,649 Conversion of convertible debt into common stock 7,097,027 162,036 -- 162,036 Net earnings -- -- 68,372 68,372 Unrealized holding losses, net -- -- (595) (595) Translation adjustment -- -- (5,120) (5,120) ---------- ---------- ---------- ---------- Balance, September 27, 1998 89,633,478 $ 589,214 $ 205,083 $ 794,297 ---------- ---------- ---------- ----------
E-17 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 28, 1997, AND SEPTEMBER 29, 1996) Note 1: Summary of Significant Accounting Policies DESCRIPTION OF BUSINESS. Starbucks Corporation and its subsidiaries (collectively "Starbucks" or the "Company") purchases and roasts high-quality whole bean coffees and sells them, along with fresh, rich-brewed coffees, Italian-style espresso beverages, a variety of pastries and confections, and coffee-related accessories and equipment, primarily through its Company-operated retail stores. In addition to sales through its Company-operated retail stores, Starbucks sells primarily whole bean coffees through its specialty sales operations. Starbucks, through its joint venture partnerships, also produces and sells bottled Frappuccino(TM) coffee drink and a line of premium ice creams. BASIS OF PRESENTATION. The consolidated financial statements include the accounts of Starbucks Corporation and its wholly owned subsidiaries. As described in Note 2, on May 28, 1998, the Company acquired all of the equity interests of Seattle Coffee Holdings Limited ("Seattle Coffee Company"), in a business combination accounted for as a pooling of interests. The consolidated financial statements reflect the combined financial position and operating results of Starbucks and its wholly owned subsidiaries, including Seattle Coffee Company, for all periods presented. Investments in unconsolidated joint ventures are accounted for under the equity method. Material intercompany transactions during the periods covered by these consolidated financial statements have been eliminated. FISCAL YEAR END. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal years 1998, 1997, and 1996 each included 52 weeks. The fiscal year ending on October 3, 1999 will include 53 weeks. ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results may differ from these estimates. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid instruments with a maturity of three months or less at the time of purchase to be cash equivalents. CASH MANAGEMENT. The Company's cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Checks issued but not presented for payment to the bank are reflected as "Checks drawn in excess of bank balances" in the accompanying financial statements. INVESTMENTS. The Company's investments consist primarily of investment-grade marketable debt securities, all of which are classified as available-for-sale and recorded at fair value as defined below. Unrealized holding gains and losses are recorded, net of any tax effect, as a component of retained earnings. FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of those instruments. The fair value of the Company's investments in marketable debt and equity securities is based upon the quoted market price on the last business day of the fiscal year plus accrued interest, if any. The fair value and amortized cost of the Company's investments at September 27, 1998, were $21.9 million and $22.7 million, respectively. The fair value and amortized cost of the Company's investments (short- and long-term) at September 28, 1997, were $88.7 million and $88.6 million, respectively. For further detail on investments, see Note 4. The fair value of the Company's 4 1/4% Convertible Subordinated Debentures due 2002 (see Note 8) was based on the quoted market price on E-18 15 the last business day of the fiscal year. As of September 28, 1997, the fair value and principal amount of the debentures were $294.6 million and $165.0 million, respectively. These debentures were converted to common stock during the first quarter of fiscal 1998. INVENTORIES. Inventories are stated at the lower of cost (primarily moving average cost) or market. PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment are carried at cost less accumulated depreciation and amortization. Depreciation of property, plant, and equipment, which includes amortization of assets under capital leases, is provided on the straight-line method over estimated useful lives, generally ranging from three to seven years for equipment and 40 years for buildings. Leasehold improvements are amortized over the shorter of their estimated useful lives or the related lease life, generally ten years. The portion of depreciation expense related to production and distribution facilities is included in "Cost of sales and related occupancy costs." When facts and circumstances indicate that the cost of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the asset to projected future cash flows. Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss by a charge against current operations. HEDGING AND FUTURES CONTRACTS. 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 Statement of Financial Accounting Standards ("SFAS") 80 "Accounting for Futures Contracts," these futures contracts meet the hedge criteria and are accounted for as hedges. Accordingly, gains and losses are deferred and recognized as adjustments to the carrying amount 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 costs of coffee purchased. The deferred losses from hedging activities were not significant as of September 27, 1998 and will be offset by lower costs of coffee purchased during fiscal 1999. The Company had no open futures contracts as of September 27, 1998 and did not engage in hedging activities in fiscal 1997 or 1996. ADVERTISING. The Company expenses costs of advertising the first time the advertising campaign takes place, except for direct response advertising, which is capitalized and amortized over its expected period of future benefit, generally three to six months. STORE PREOPENING EXPENSES. Costs incurred in connection with start-up and promotion of new store openings are expensed as incurred. RENT EXPENSE. Certain of the Company's lease agreements provide for scheduled rent increases during the lease terms, or for rental payments commencing at a date other than the date of initial occupancy. Rent expenses are recognized on a straight-line basis over the terms of the leases. FOREIGN CURRENCY TRANSLATION. The accumulated foreign currency translation adjustment relates to the Company's operations in Canada and the United Kingdom. Assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expense accounts at the average exchange rates during the year. Resulting translation adjustments are recorded as a component of retained earnings. INCOME TAXES. The Company computes income taxes using the asset and liability method, under which deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. E-19 16 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 numbers of shares resulting from this computation for fiscal 1998, 1997, and 1996 were 88.1 million, 79.6 million, and 74.7 million, respectively. The computation of diluted earnings per share includes the dilutive effect of common stock equivalents consisting of certain shares subject to stock options. The computation of diluted earnings per share also assumes conversion of the Company's convertible subordinated debentures using the "if converted" method, when such securities are dilutive, with net income adjusted for the after-tax interest expense and amortization applicable to these debentures. The numbers of shares resulting from this computation for fiscal 1998, 1997, and 1996 were 91.9 million, 90.2 million, and 80.9 million, respectively. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130 "Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Company will adopt SFAS 130 and SFAS 131 in fiscal 1999. In June 1998, the FASB issued 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 comprehensive income until the hedged item is recognized in earnings. The Company expects that this new standard will not have a significant effect on its results of operations. SFAS 133 is effective for fiscal years beginning after June 15, 1999. RECLASSIFICATIONS. Certain reclassifications of prior years' balances have been made to conform to the fiscal 1998 presentation. E-20 17 Note 2: Seattle Coffee Company On May 28, 1998, the Company acquired all of the equity interests of Seattle Coffee Company, a United Kingdom roaster and retailer of specialty coffee, in exchange for 1,817,894 shares of Starbucks common stock. This business combination (the "Transaction") has been accounted for as a pooling of interests for accounting and financial reporting purposes. The pooling-of-interests method of accounting is intended to present as a single interest, two or more common shareholders' interests which were previously independent; accordingly, the historical financial statements for the periods prior to the business combination are restated as though the companies had always been combined. The restated financial statements are adjusted to conform the accounting policies and fiscal reporting periods to Starbucks accounting policies and fiscal reporting periods. The Transaction resulted in pre-tax charges of $8.9 million in direct merger costs and $6.6 million in other costs associated with the integration of Seattle Coffee Company. Merger costs consisted mainly of investment banking, legal and accounting fees. Other integration costs were primarily related to asset write-offs due to the planned conversion of Seattle Coffee Company stores to Starbucks. The Transaction resulted in transaction and other related after-tax charges of $0.14 per share in the third quarter of fiscal 1998. The following summarizes the Company's net revenues, net earnings, and earnings per share for the periods prior to and following the Transaction (in thousands, except earnings per share):
Seattle Coffee Starbucks Company Combined ----------- --------------- --------- 1998 34 Weeks prior to the Transaction Net revenues $ 805,151 $ 15,675 $ 820,826 Net earnings 45,811 (3,312) 42,499 Net earnings per share-diluted 0.50 (0.04) 0.46 18 Weeks after the Transaction Net revenues 487,876 Net earnings 25,873 Net earnings per share-diluted 0.29 1997 Net revenues 966,946 8,443 975,389 Net earnings 57,412 (2,201) 55,211 Net earnings per share-diluted 0.70 (0.04) 0.66 1996 Net revenues 696,481 1,391 697,872 Net earnings 42,128 (418) 41,710 Net earnings per share-diluted $ 0.54 $ (0.01) $ 0.53
E-21 18 Note 3: Cash and Cash Equivalents Cash and cash equivalents consist of the following (in thousands):
Sept 27, 1998 Sept 28, 1997 ------------- ------------- Operating funds and interest-bearing deposits $ 26,564 $ 14,482 Commercial paper 67,024 39,649 Money market funds 8,075 8,152 Local government obligations -- 4,022 Corporate debt securities -- 3,821 -------- -------- $101,663 $ 70,126 -------- --------
Note 4: Investments The Company's investments consist of the following (in thousands):
Gross Gross unrealized unrealized Fair Amortized holding holding September 27, 1998 value cost gains losses ------- ------- ------- ------- Current investments: Corporate debt securities $11,356 $11,373 $ 20 $ (37) U.S. Government obligations 10,410 10,409 1 -- Commercial paper -- -- -- -- Marketable equity securities 108 958 -- (850) ------- ------- ------- ------- $21,874 $22,740 $ 21 $ (887) ------- ------- ------- -------
Gross Gross unrealized unrealized Fair Amortized holding holding September 28, 1997 value cost gains losses ------- ------- ------- ------- Current investments: Corporate debt securities $25,948 $25,944 $ 10 $ (6) U.S. Government obligations 30,532 30,540 8 (16) Commercial paper 25,720 25,721 -- (1) Marketable equity securities 1,304 1,198 106 -- ------- ------- ------- ------- $83,504 $83,403 $ 124 $ (23) ------- ------- ------- ------- Non-current investments: Corporate debt securities $ 4,196 $ 4,194 $ 2 $ -- US. Government obligations 1,005 1,006 -- (1) ------- ------- ------- ------- $ 5,201 $ 5,200 $ 2 $ (1) ------- ------- ------- -------
All investments are classified as available-for-sale as of September 27, 1998 and September 28, 1997. Securities with remaining maturities of one year or less are classified as short-term investments. Securities with remaining maturities longer than one year are classified as long-term and are included in the line item "Joint ventures and other investments" in the accompanying balance sheets. The specific identification method is used to determine a cost basis for computing realized gains and losses. E-22 19 During fiscal 1995, the Company purchased shares of Noah's New York Bagel, Inc. ("Noah's") Series B Preferred Stock. On February 1, 1996, Noah's merged with Einstein Brothers Bagels, Inc. In exchange for its investment in Noah's, the Company received $20.6 million in cash and recognized a $9.2 million pre-tax gain ($5.7 million net of tax) on the transaction. In fiscal 1998, 1997, and 1996, proceeds from the sale of investment securities were $5.1 million, $9.3 million, and $17.1 million, respectively. Gross realized gains and losses were not material in 1998, 1997, and 1996 except for the sale of Noah's stock, which occurred in fiscal 1996. Note 5: Inventories Inventories consist of the following (in thousands):
Sept 27, 1998 Sept 28, 1997 ------------- ------------- Coffee Unroasted $ 77,400 $ 65,296 Roasted 18,996 13,954 Other merchandise held for sale 36,850 33,253 Packaging and other supplies 9,872 7,264 -------- -------- $143,118 $119,767 -------- --------
As of September 27, 1998, the Company had fixed price inventory purchase commitments for green coffee totaling approximately $96 million. 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. Note 6: Joint Ventures and Other Investments Starbucks has entered into several joint ventures, most of which are accounted for using the equity method. The Company's share of joint venture income or losses is included in "Other operating expenses." The Company has domestic joint ventures with two companies to produce and distribute Starbucks branded products. The Company has a 50/50 joint venture and partnership agreement with Pepsi-Cola Company ("Pepsi") to develop ready-to-drink coffee-based beverages. The Company also has a 50/50 joint venture agreement with Dreyer's Grand Ice Cream, Inc. to develop and distribute premium ice creams. The Company is a partner in four other joint ventures. During fiscal 1996, the Company signed an agreement with SAZABY Inc., a Japanese retailer and restauranteur, to form a joint venture partnership (50/50) to develop Starbucks retail stores in Japan. On August 3, 1996, the Company entered into a joint venture partnership as a 5% partner with Cafe Hawaii Partners to develop Starbucks retail stores in Hawaii. During fiscal 1998, the Company entered into a joint venture partnership as a 5% partner with President Chain Store Corporation to develop Starbucks retail stores in Taiwan. During fiscal 1998, the Company entered into a joint venture partnership (50/50) with Johnson Development Corporation to develop retail stores in under-served urban communities. E-23 20 The Company's investments in these joint ventures are as follows (in thousands):
Pepsi All other joint venture joint ventures Total ------------- -------------- ----- Balance, October 1, 1995 $ 294 $ -- $ 294 Allocated share of losses (401) (1,534) (1,935) Capital contributions 2,725 3,315 6,040 -------- -------- -------- Balance, September 29, 1996 2,618 1,781 4,399 Allocated share of losses (2,384) (376) (2,760) Capital contributions 27,259 365 27,624 -------- -------- -------- Balance, September 28, 1997 27,493 1,770 29,263 Allocated share of (losses) income (30) 16 (14) Distributions from joint ventures -- (2,750) (2,750) Capital contributions 7,616 4,802 12,418 -------- -------- -------- Balance, September 27, 1998 $ 35,079 $ 3,838 $ 38,917 -------- -------- --------
Note 7: Property, Plant, and Equipment Property, plant, and equipment are recorded at cost and consist of the following (in thousands):
Sept 27, 1998 Sept 28, 1997 ------------- ------------- Land $ 3,602 $ 3,602 Building 8,338 8,338 Leasehold improvements 460,020 352,640 Roasting and store equipment 218,744 168,929 Furniture, fixtures, and other 79,953 49,790 --------- --------- 770,657 583,299 Less accumulated depreciation and amortization (218,455) (144,068) --------- --------- 552,202 439,231 Work in progress 48,592 49,560 --------- --------- $ 600,794 $ 488,791 --------- ---------
Note 8: Convertible Subordinated Debentures During fiscal 1993, the Company issued $80.5 million in principal amount of 4 1/2% Convertible Subordinated Debentures due 2003. On April 12, 1996, the Company called these debentures for redemption. The total principal amount converted, net of unamortized issue costs, accrued but unpaid interest, and costs of conversion was credited to common stock. During fiscal 1996, the Company issued $165.0 million in principal amount of 4 1/4% Convertible Subordinated Debentures due 2002. On October 21, 1997, the Company called these debentures for redemption. The total principal amount converted, net of unamortized issue costs, accrued but unpaid interest, and costs of conversion was credited to common stock. E-24 21 Note 9: Leases The Company leases retail stores, roasting and distribution facilities, and office space under operating leases expiring through 2023. Most lease agreements contain renewal options and rent escalation clauses. Certain leases provide for contingent rentals based upon gross sales. Rental expense under these lease agreements was as follows (in thousands):
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996 ------------- ------------- ------------- Minimum rentals $75,912 $54,093 $37,675 Contingent rentals 1,406 1,193 1,190 ------- ------- ------- $77,318 $55,286 $38,865 ------- ------- -------
Minimum future rental payments under non-cancelable lease obligations as of September 27, 1998 are as follows (in thousands):
Fiscal year ending: - - ------------------- 1999 $ 79,935 2000 79,906 2001 80,044 2002 79,712 2003 77,203 Thereafter 289,218 --------- Total minimum lease payments $ 686,018 ---------
The Company opened a roasting and distribution facility in York County, Pennsylvania (the "York Plant") in September 1995. Under the terms of this lease agreement, the Company has an option to purchase the land and building comprising the York Plant for approximately $14 million within five years of the date of occupancy. Such option to purchase also provides that the Company may purchase, within seven years of occupancy, additional land adjacent to the York Plant. Note 10: Shareholders' Equity The Company has authorized 7,500,000 shares of its preferred stock, none of which is outstanding at September 27, 1998. Share amounts outstanding are based on the historical outstanding shares of both Starbucks and Seattle Coffee Company adjusted for the exchange of 1,817,894 shares of Starbucks stock for all of the equity interests of Seattle Coffee Company. E-25 22 Note 11: Employee Benefit Plans The Company maintains several stock option plans under which the Company may grant incentive stock options and nonqualified stock options to employees and non-employee directors. Stock options have been granted at prices at or above the fair market value on the date of grant. Options vest and expire according to terms established at the grant date. The following summarizes all stock option transactions from October 1, 1995, through September 27, 1998.
Weighted average Weighted average Shares subject price Shares subject to price to options per share exercisable options per share ---------- --------- ------------------- --------- Outstanding, October 1, 1995 6,874,656 $ 9.52 3,108,578 $ 6.36 Granted 2,538,466 18.64 Exercised (1,177,736) 6.78 Cancelled (449,158) 13.99 ---------- ------ ---------- ------ Outstanding, September 29, 1996 7,786,228 12.69 3,316,967 8.43 Granted 2,929,796 33.24 Exercised (1,381,915) 9.92 Cancelled (380,448) 21.30 ---------- ------ ---------- ------ Outstanding, September 28, 1997 8,953,661 19.32 3,713,676 10.86 Granted 3,254,316 37.04 Exercised (1,841,539) 12.26 Cancelled (614,739) 23.58 ---------- ------ ---------- ------ Outstanding, September 27, 1998 9,751,699 $26.20 3,780,403 $16.98
At September 27, 1998, there were 7,890,615 shares of common stock reserved for issuance pursuant to future stock option grants. Additional information regarding options outstanding as of September 27, 1998 is as follows:
Options Outstanding Options Exercisable ---------------------------------------- --------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life (Years) Price Shares Price - - ---------------------- --------- ------------ -------- --------- ----- $ 0.75 $12.56 1,982,632 4.71 $ 8.96 1,709,452 $ 8.53 12.63 23.50 2,316,004 6.80 18.61 1,299,989 18.21 26.94 34.00 2,029,049 8.20 32.66 630,215 32.52 34.50 36.06 554,138 8.71 35.41 79,189 35.39 36.81 50.31 2,869,876 9.06 38.16 61,558 43.02 - - ------ ------ --------- ------ ------ --------- ------ $ 0.75 $50.31 9,751,699 7.44 $26.20 3,780,403 $16.98
EMPLOYEE STOCK PURCHASE PLAN. The Company has an employee stock purchase plan which provides that eligible employees may contribute up to 10% of their base earnings, up to $25,000 annually, toward the quarterly purchase of the Company's common stock. The employee's purchase price is 85% of the lesser of the fair market value of the stock on the first business day or the last business day of the quarterly offering period. No compensation expense is recorded in E-26 23 connection with the plan. The total number of shares issuable under the plan is 4,000,000. There were 135,889 shares issued under the plan during fiscal 1998 at prices ranging from $31.98 to $39.15. During fiscal 1997, 92,971 shares were issued under the plan at prices ranging from $23.59 to $25.71. There were 89,373 shares issued under the plan during fiscal 1996 at prices ranging from $15.99 to $24.65. Of the 17,342 employees eligible to participate, 3,548 were participants in the plan as of September 27, 1998. ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company accounts for its stock-based awards using the intrinsic value method in accordance with Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" and its related interpretations. Accordingly, no compensation expense has been recognized in the financial statements for employee stock arrangements. Statement of Financial Accounting Standards 123, "Accounting for Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net income (loss) and net income (loss) per share as if the Company adopted the fair value method as of the beginning of fiscal 1996. The fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model with the following weighted average assumptions:
Employee Stock Options Employee Stock Purchase Plan ---------------------------------------- ----------------------------------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Expected life (years) 1.5-6 1.5-6 1.5-6 .25 .25 .25 Expected volatility 45% 40% 40% 37-75% 45-47% 39-61% Risk-free interest rate 5.28-6.05% 5.41-6.54% 5.01-6.74% 5.26-5.74% 5.27-5.53% 5.27-5.49% Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
The Company's valuations are based upon a multiple option valuation approach and forfeitures are recognized as they occur. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. The Company's employee stock options have characteristics significantly different from those of traded options and changes in the subjective input assumptions can materially affect the fair value estimate. As required by SFAS 123, the Company has determined that the weighted average estimated fair values of options granted during fiscal 1998, 1997 and 1996 were $14.40, $10.85 and $5.64 per share, respectively. Had compensation costs for the Company's stock-based compensation plans been accounted for using the fair value method of accounting described by SFAS 123, the Company's net earnings and earnings per share would have been as follows (in thousands, except earnings per share): E-27 24
Pro Forma Fiscal Year Ended: As Reported Under SFAS 123 - - ------------------ ----------- -------------- September 27, 1998 Net earnings $ 68,372 $ 51,595 Net earnings per common share: Basic $ 0.78 $ 0.59 Diluted $ 0.75 $ 0.57 September 28, 1997 Net earnings $ 55,211 $ 45,808 Net earnings per common share: Basic $ 0.69 $ 0.58 Diluted $ 0.66 $ 0.56 September 29, 1996 Net earnings $ 41,710 $ 37,801 Net earnings per common share: Basic $ 0.56 $ 0.51 Diluted $ 0.53 $ 0.49
In applying SFAS 123, the impact of outstanding non-vested stock options granted prior to 1996 has been excluded from the pro forma calculations; accordingly, the 1998, 1997 and 1996 pro forma adjustments are not indicative of future period pro forma adjustments. DEFINED CONTRIBUTION PLANS. Starbucks maintains voluntary defined contribution plans covering eligible employees as defined in the plan documents. Participating employees may elect to defer and contribute a percentage of their compensation to the plan, not to exceed the dollar amount set by law. The Company matches 25% of each employee's contribution up to a maximum of the first 4% of each employee's compensation. The Company's matching contributions to the plans were approximately $0.8 million, $0.6 million, and $0.3 million for fiscal 1998, 1997, and 1996, respectively. DEFERRED STOCK PLAN. During fiscal 1998, the Company adopted a Deferred Stock Plan for certain key employees that enables participants in the plan to defer receipt of ownership of common shares from the exercise of non-qualified stock options. The minimum deferral period is five years. As of September 27, 1998, receipt of 424,275 shares was deferred under the terms of this plan. The rights to receive these shares, represented by common stock units, are included in the calculation of basic and diluted earnings per share as common stock equivalents. E-28 25 Note 12: Income Taxes A reconciliation of the statutory federal income tax rate with the Company's effective income tax rate is as follows:
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996 - - ------------------ ------------- ------------- ------------- Statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 3.8 3.6 3.1 Non deductible losses and merger costs 2.6 1.0 0.2 Other (0.2) (0.1) 0.4 ---- ---- ---- Effective tax rate 41.2% 39.5% 38.7% ---- ---- ----
The provision for income taxes consists of the following (in thousands):
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996 - - ------------------ ------------- ------------- ------------- Currently payable: Federal $39,267 $25,884 $19,568 State 6,586 4,725 2,398 Deferred liability 2,125 5,490 4,407 ------- ------- ------- $47,978 $36,099 $26,373 ------- ------- -------
Deferred income taxes (benefits) reflect the tax effect of temporary differences between the amounts of assets and liabilities for financial reporting purposes and amounts as measured for tax purposes. The tax effect of temporary differences and carryforwards that cause significant portions of deferred tax assets and liabilities are as follows (in thousands):
Sept 27, 1998 Sept 28, 1997 ------------- ------------- Depreciation $ 24,240 $ 17,136 Accrued rent (6,252) (4,356) Accrued compensation and related costs (2,338) (1,786) Inventory (1,906) (1,474) Other, net (3,209) (738) -------- -------- $ 10,535 $ 8,782 -------- --------
Taxes payable of $8.7 million and $4.5 million are included in "Other accrued expenses" as of September 27, 1998 and September 28, 1997, respectively. E-29 26 Note 13: Commitments and Contingencies Under the amended terms of the Company's corporate office lease, the Company provides financing to the building owner to be used exclusively for facilities and leasehold development costs to accommodate the Company. Any funds advanced by the Company will be repaid with interest at 9.5% over a term not to exceed 20 years. The maximum amount available under the agreement is $17.0 million. As of September 27, 1998 and September 28, 1997, the amounts outstanding under the agreement totaled $9.8 million and $8.2 million, respectively, and are included in "Deposits and other assets" on the balance sheet. In the normal course of business, the Company has various legal claims and other contingent matters outstanding. Management believes that any ultimate liability arising from these actions would not have a material adverse effect on the Company's results of operations or financial condition as of and for the fiscal year ended September 27, 1998. Note 14: Related Party Transactions A director of the Company serves as chairman of a wholesale customer of the Company. Sales to this customer were $36.3 million, $31.0 million, and $22.7 million for fiscal 1998, 1997, and 1996, respectively. Amounts receivable from this customer totaled $3.8 million and $4.6 million as of September 27, 1998 and September 28, 1997, respectively. Note: 15 Quarterly Financial Information (Unaudited) Summarized quarterly financial information for fiscal years 1998 and 1997 is as follows (in thousands, except earnings per share):
First Second Third Fourth -------- -------- -------- -------- 1998 quarter: Net revenues $321,325 $295,243 $334,429 $357,705 Gross margin 175,090 161,742 189,348 204,039 Net earnings 20,955 13,962 7,899 25,556 Net earnings per common share - diluted $ 0.23 $ 0.15 $ 0.09 $ 0.28 1997 quarter: Net revenues $240,154 $216,269 $244,241 $274,725 Gross margin 124,053 116,297 140,406 157,691 Net earnings 13,886 9,241 14,199 17,885 Net earnings per common share - diluted $ 0.17 $ 0.12 $ 0.17 $ 0.21
E-30 EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The Coffee Connection, Inc. Starbucks New Venture Company Starbucks Coffee International, Inc. Starbucks Holding Company Starbucks Manufacturing Corporation SBI Nevada, Inc. (a wholly-owned subsidiary of Starbucks Coffee International, Inc.) Circadia Corporation Starbucks U.S. Brands Corporation Starbucks Asset Management Corporation (a wholly-owned subsidiary of Starbucks U.S. Brands Corporation) Starbucks Foreign Sales Corporation Starbucks Coffee (UK) Holdings Limited Starbucks Coffee Company (UK) Limited (a wholly-owned subsidiary of Starbucks Coffee (UK) Holdings Limited) Seattle Coffee Company International (a wholly-owned subsidiary of Starbucks Coffee (UK) Holdings Limited) Torz & Macatonia Limited (a wholly-owned subsidiary of Starbucks Coffee (UK) Holdings Limited) E-31 EX-23 5 INDEPENDENT AUDITORS' CONSENT 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-52524, 33-52526, 33-52528, 33-92208, 33-92184 and 333-65181 of Starbucks Corporation on Form S-8 and Registration Statement No. 333-58725 on Form S-3 of our report dated November 20, 1998, incorporated by reference in the Annual Report on Form 10-K of Starbucks Corporation for the year ended September 27, 1998. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Seattle, Washington December 28, 1998 E-32 EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-27-1998 SEP-29-1997 SEP-27-1998 101,663 21,874 51,387 415 143,118 337,280 819,249 218,455 992,755 179,475 0 0 0 589,214 205,083 992,755 1,308,702 1,308,702 578,483 578,483 621,003 0 1,381 116,350 47,978 68,372 0 0 0 68,372 0.78 0.75
-----END PRIVACY-ENHANCED MESSAGE-----