-----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, OKRTj7O3Es0DrmS45Sa6uLM++GNk2PP51DKnZ5ddOMR2pVi7WBJOmcgB0ImEl33K fO2kzSRbYjJYfgGkWH/HGQ== 0000891020-99-002151.txt : 19991224 0000891020-99-002151.hdr.sgml : 19991224 ACCESSION NUMBER: 0000891020-99-002151 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991003 FILED AS OF DATE: 19991223 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARBUCKS CORP CENTRAL INDEX KEY: 0000829224 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING & DRINKING PLACES [5810] IRS NUMBER: 911325671 STATE OF INCORPORATION: WA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20322 FILM NUMBER: 99779540 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 OCTOBER 2, 1999 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 OCTOBER 3, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER: 0-20322 STARBUCKS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 91-1325671 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER) OR ORGANIZATION) 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Registrant's Common Stock on December 1, 1999, as reported on the National Market tier of The Nasdaq Stock Market, Inc. was $4,732,328,104. As of December 20, 1999, there were 182,699,160 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the fiscal year ended October 3, 1999 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 14, 2000 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, coffee-related accessories and equipment, and a line of premium teas, primarily through its Company-operated retail stores. In addition to sales through its Company-operated retail stores, Starbucks sells coffee and tea products through other channels of distribution (collectively, "specialty operations"). Starbucks, through its joint venture partnerships, also produces and sells bottled Frappuccino(R) coffee drink and a line of premium ice creams. The Company's objective is to establish Starbucks as the most recognized and respected brand in the world. To achieve this goal, the Company plans to continue to rapidly expand its retail operations, grow its specialty operations and selectively pursue other opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels. 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 opened 460 new stores, converted 56 stores acquired in May 1998 from Seattle Coffee Holdings Limited ("Seattle Coffee Company") to Starbucks stores and converted 26 stores acquired in March 1999 from Pasqua Inc. ("Pasqua"), a San Francisco based coffee retailer, to Starbucks stores. As of October 3, 1999, Starbucks had 2,135 Company-operated stores in 34 states, the District of Columbia, five Canadian provinces and the United Kingdom. Company-operated retail stores accounted for approximately 85% of net revenues during the fiscal year ended October 3, 1999 ("fiscal 1999"). 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 and decaffeinated coffee beverages, including at least one "coffee of the day," a broad selection of Italian-style espresso beverages, a selection of teas and distinctively packaged, roasted whole bean coffees. Starbucks stores also offer a selection of fresh pastries and other food items, sodas, juices, 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, 2 3 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 1999, the Company's retail sales mix by product type was approximately 69% handcrafted beverages, 15% food items, 10% whole bean coffees, and 6% coffee-making equipment and accessories. Specialty Operations. Starbucks specialty operations strive to develop the Starbucks brand outside the Company-operated retail store environment through a number of channels. Starbucks strategy for expanding its specialty operations is to reach customers where they work, travel, shop 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 licensing agreements, grocery channel licensing agreements, domestic joint ventures and international licensing agreements. Starbucks specialty operations also include direct-to-consumer marketing channels. In certain licensing situations, the licensee is a joint venture in which Starbucks has an equity ownership interest. During fiscal 1999, specialty revenues (which include royalties and fees from licensees as well as product sales) accounted for approximately 15% of the Company's net revenues. Domestic Wholesale Accounts. Starbucks sells whole bean and ground coffees to several types of domestic wholesale accounts, including (i) foodservice accounts, which include office coffee distributors and institutional foodservice management companies that service business, industry, education and healthcare accounts, and hotels, airlines and restaurants; and (ii) warehouse club stores. During fiscal 1999, sales to domestic wholesale accounts comprised 8% of the Company's net revenues. Domestic Retail Store 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 training classes similar to those given to Starbucks store managers and employees. As of October 3, 1999, the Company had 179 licensed stores in continental North America. Domestic Grocery Licensing. 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 such agreement, Kraft manages all distribution, marketing, advertising and promotions for Starbucks whole bean and ground coffee in grocery, warehouse club and mass merchandise stores. By the end of fiscal 1999, the Company's whole bean and ground coffees were available in 15 states and approximately 8,500 supermarkets. The Company expects to achieve national distribution by the middle of fiscal 2000. Domestic Joint Ventures. The Company has two non-retail domestic 50-50 joint ventures. The North American Coffee Partnership, a joint venture with the Pepsi-Cola Company, a division of PepsiCo, Inc., 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. By the end of fiscal 1999, the joint venture was distributing Frappuccino to approximately 200,000 supermarkets, convenience and drug stores and other locations throughout the United States and Canada. The Company formed a joint venture with Dreyer's Grand Ice Cream, Inc. in fiscal 1996 to develop and distribute Starbucks premium coffee ice creams. By the end of fiscal 1999, the joint venture was distributing 17 ice cream and novelty products to over 21,000 supermarkets throughout the United States. (See Note 6 to the Company's consolidated financial statements, "Joint Ventures and Other Investments," incorporated by reference to the Company's 1999 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 1999, the Company expanded its international presence by opening 121 new stores 3 4 outside of North America and the United Kingdom, including the first stores in China, Malaysia, South Korea, New Zealand and Kuwait. At fiscal year end, the Company had 82 stores in Japan, 23 in Taiwan, 21 in Singapore, 17 in Hawaii, 14 in the Philippines, 9 in China, 7 in Thailand, 6 in New Zealand, 2 in Malaysia, 2 in Kuwait and 1 in South Korea. Direct-to-Consumer Marketing. The Company makes fresh Starbucks coffee and products 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 and the Company maintains a 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. Management believes that the Company's direct-to-consumer operations support its retail store expansion into new markets and reinforce brand recognition in existing markets. Product Supply. 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. The supply and price of coffee are subject to significant volatility. Although most coffee trades in the commodity market, coffee of the quality sought by the Company tends to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. The Company 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 October 3, 1999, the Company had approximately $84 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee for the majority of fiscal 2000. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is remote. In addition, the Company may from time to time purchase and sell 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. In addition to coffee, the Company also purchases significant amounts of dairy products to support the needs of its retail stores. Fluid milk requirements are purchased from local processors and distributors to ensure quality and reliable service. Dairy prices vary throughout the year as supply and demand fluctuate and are subject to additional changes due to government regulations. The Company obtains competitive prices through a combination of competitive bidding and negotiations with its suppliers. The Company also purchases a broad range of paper and plastic products, such as paper cups, plastic cold cups, hot cup lids, napkins, straws, shopping bags and corrugated paper boxes from several companies to support the needs of its retail stores as well as its manufacturing and distribution operations. The cost of these materials are somewhat dependent upon commodity paper and plastic resin costs, but the Company believes it mitigates the effect of short-term raw material price increases through strategic relationships with key suppliers. 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 4 5 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. 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. 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, Copyrights and Domain Names. The Company owns and/or has applied to register numerous trademarks and service marks in the United States, Canada and in more than 125 additional countries throughout the world. Rights to the trademarks and service marks in the United States are generally 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 systems and designs. In addition, the Company has registered and maintains numerous Internet domain names, including "Starbucks.com" and "Starbucks.net." While valuable, individual copyrights, patents and domain names 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 food scientists, engineers, chemists and technicians responsible for the formulation and technical development of new equipment, food and beverage products, and manufacturing processes. The department has played a major role in the expansion of the bottled Frappuccino category and coffee ice cream offerings. Development of novel coffee ingredients and a new dairy base have improved the Company's ability to deliver blended Frappuccino worldwide, while technical support of the tea and juice beverage development has resulted in new 5 6 formulations and line extensions in the Company's blended fruit and tea beverage line, Tiazzi(R). The Company spent approximately $5.0 million during fiscal 1999 on technical research and development activities, in addition to customary product testing and product and process improvements 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 October 3, 1999, the Company employed approximately 37,000 individuals, approximately 34,000 in retail stores and regional offices and the remainder in the Company's administrative, specialty, real estate, roasting, and warehousing operations. At fiscal year end, employees at 12 of the Company's stores were represented by unions. Starbucks has entered into a labor agreement governing such stores that extends until July 2001. The Company believes that its current relations with its employees are good. 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 owns a 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 also leases approximately 92,000 square feet in a building in Seattle, Washington pursuant to a lease extendable through 2001 (the "Seattle Plant"). On September 1, 1999, the Company purchased a 365,000 square foot roasting and distribution facility that it previously had leased in York County, Pennsylvania (the "York Plant"). The Company has an option to purchase an additional parcel of land adjacent to the York Plant until August 2001. In connection with the purchase of the York Plant, the Company assumed loans totaling approximately $7.7 million 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 leases approximately 456,000 square feet of a building located in Seattle, Washington for administrative offices and has options to lease approximately 100,000 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 used for parking. As of October 3, 1999, Starbucks operated a total of 2,135 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 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 1999. 6 7 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 1999 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 1999 Annual Report to Shareholders. 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 1999 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 1999 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 1999 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. 7 8 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 14, 2000 (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................... 46 chairman of the board and chief 1985 executive officer Orin Smith....................... 57 director, president and chief 1990 operating officer Paul D. Davis.................... 42 president, Retail North America 1999 Peter Maslen..................... 47 president, Starbucks Coffee 1999 International, Inc. John B. Richards................. 51 president, North American 1997 Operations Michael Casey.................... 54 executive vice president, chief 1995 financial officer and chief administrative officer E. R. (Ted) Garcia............... 52 executive vice president, Supply 1995 Chain and Coffee Operations Deidra Wager..................... 44 executive vice president and 1993 consultant to Starbucks Coffee International, Inc. James Alling..................... 38 senior vice president, Business 1997 Alliances Bruce Craig...................... 57 senior vice president, Retail 1997 Field Operations Sharon E. Elliott................ 48 senior vice president, Human 1994 Resources David W. Frost................... 49 senior vice president, Business 1999 Development Deborah Gillotti................. 42 senior vice president and general 1997 manager, Starbucks X Wanda Herndon.................... 47 senior vice president, 1996 Communications and Public Affairs Shelley B. Lanza................. 43 senior vice president, Law and 1995 Corporate Affairs and general counsel Pedro Y. K. Man.................. 45 senior vice president and 1999 president, Starbucks Coffee Asia Pacific Ltd. David M. Olsen................... 53 senior vice president 1991 Arthur I. Rubinfeld.............. 46 senior vice president, Store 1992 Development Engle Saez....................... 49 senior vice president, Retail 1999 Marketing and Product Management Michael T. Sweeney............... 41 senior vice president, and 1998 president, Starbucks Coffee Company (U.K.) Limited
8 9
NAME AGE POSITION EXECUTIVE OFFICER SINCE ---- --- -------- ----------------------- Mark Wesley...................... 45 senior vice president, Store 1999 Development and Asset Management Mary Williams.................... 50 senior vice president, Coffee 1997 Howard Wollner................... 46 senior vice president, 1998 Administration and Strategic Alliance Management
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. 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. PAUL D. DAVIS joined Starbucks in March 1999 as president of Consumer Products and was appointed to president, Retail North America in November 1999. Prior to joining Starbucks, Mr. Davis worked with Frito-Lay, a division of PepsiCo, Inc. for 14 years where he held several sales, marketing and general management positions. Most recently, he served as president of Frito-Lay's Canadian division. Prior to joining Frito-Lay, Mr. Davis held various positions with Procter & Gamble. PETER MASLEN joined Starbucks in August 1999 as president, Starbucks Coffee International, Inc. Prior to joining Starbucks, Mr. Maslen served in various executive positions with Mars Inc., PepsiCo, Inc. and most recently Tricon Global Restaurants from 1992 to 1999, including most recently serving as the Senior Vice President and General Manager of its Central Europe Operations. JOHN B. RICHARDS joined the Company in September 1997 as president, Retail North America and was appointed to president, North American Operations in November 1999. 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. In March 1999, Ms. Wager moved to Tokyo, Japan to serve as a consultant to Starbucks Coffee International, Inc. and work with Starbucks Coffee Japan Limited. Prior to joining Starbucks, Ms. Wager held several operations positions with Taco Bell(R), Inc. from 1988 to 1992. 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. 9 10 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. DAVID W. FROST joined Starbucks in July 1999 as senior vice president, Business Development. Prior to joining Starbucks, Mr. Frost served as a managing director of Chapman Partners and New Millenium Partners, investment and merchant banking partnerships, from January 1998 to 1999. From December 1995 to November 1997, Mr. Frost was a managing director for KPMG. Prior to that Mr. Frost served as vice president, Business Development for the Pillsbury Company and the Food Sector of Grand Metropolitan PLC. DEBORAH GILLOTTI joined Starbucks in February 1997 as senior vice president and chief information officer. In August, 1999 she was named as senior vice president and general manager, Starbucks X. 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 a variety of management positions for KPMG Peat Marwick Management Consulting from 1989 to 1993 and with GTE Corporation from 1982 to 1989. WANDA HERNDON joined Starbucks in July 1995 as vice president, Communications and Public Affairs and was promoted to senior vice president, Communications and Public Affairs in November 1996. From February 1990 to June 1995, Ms. Herndon held several communications management positions at DuPont Company. From November 1978 to February 1990, Ms. Herndon held several public affairs and marketing communications positions at 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. PEDRO Y. K. MAN joined Starbucks in April 1999 as senior vice president and president of Starbucks Coffee Asia Pacific Ltd. Prior to joining Starbucks, Mr. Man spent over eight years with the Pillsbury Company developing and managing the Haagen Dazs business in Asia. During that time, Mr. Man served in a number of positions with Haagen Dazs Far East Limited, most recently serving as vice president, Haagen Dazs, Asia Pacific. 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. ENGLE SAEZ joined the Company in October 1999 as senior vice president of Marketing and Product Management. Prior to joining the Company, Mr. Saez spent five years as president and CEO of The AtlanticRancher Company, Inc., a direct mail and Internet marketer of upscale, premium quality apparel, footwear and accessories. Prior to that time, Mr. Saez held senior management positions with Stride Rite Corporation, Phillips Van Heusen and The Timberland Company. MICHAEL T. SWEENEY joined the Company in November 1998 as senior vice president, International. In August 1999, Mr. Sweeney also was named as the president of Starbucks Coffee Company (UK) Limited. Prior to joining Starbucks, Mr. Sweeney served from September 1995 to November 1998 as the President of 10 11 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. MARK WESLEY joined Starbucks in September 1993 as the real estate manager for the Southwest Zone and was promoted in September 1994 to director of Development for the Southwest Zone. In October 1997, Mr. Wesley was promoted to vice president, Store Development and Asset Management -- Western Region and in November 1999 he was promoted to his current position, senior vice president, Store Development and Asset Management. 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 Carroon & Black Corporation where he was president of the Seattle office of C&B Consulting Group, an employee benefits consulting firm. 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. 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. 11 12 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 in Part II, Item 8 of this Annual Report on Form 10-K: Consolidated Balance Sheets as of October 3, 1999 and September 27, 1998; Consolidated Statements of Earnings for the fiscal years ending October 3, 1999, September 27, 1998 and September 28, 1997; Consolidated Statements of Cash Flows for the fiscal years ending October 3, 1999, September 27, 1998 and September 28, 1997; Consolidated Statements of Shareholders' Equity for the fiscal years ending October 3, 1999, September 27, 1998 and September 28, 1997; Notes to Consolidated Financial Statements; and Independent Auditors' Report. 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) 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) 3.1.3 Amendment dated March 4, 1999 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3(i) to the Company's Form 10-Q for the quarterly period ended March 28, 1999, filed with the SEC on May 12, 1990) 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)*
12 13
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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 Amended and Restated 1989 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Appendix A to the Company's Proxy Statement filed with the SEC on January 13, 1999)* 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) 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)
13 14
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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) 10.15 Starbucks Corporation Executive Management Bonus Plan* 10.16 Starbucks Corporation Management Deferred Compensation Plan (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the SEC on January 1, 1998)* 10.17 Starbucks Corporation 1997 Deferred Stock Plan* 11 Computation of Per Share Earnings 13 Portions of the 1999 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 did not file any Current Reports on Form 8-K during the fourth quarter of the fiscal year ended October 3, 1999. 14 15 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 13, 1999 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 December 13, 1999 - ----------------------------------------------------- Directors and chief Howard Schultz executive officer /s/ ORIN C. SMITH director, president and December 10, 1999 - ----------------------------------------------------- chief operating Officer Orin C. Smith /s/ MICHAEL CASEY executive vice president, December 13, 1999 - ----------------------------------------------------- chief financial officer and Michael Casey chief administrative officer (principal financial officer and principal accounting officer) /s/ BARBARA BASS director December 13, 1999 - ----------------------------------------------------- Barbara Bass /s/ HOWARD BEHAR director December 10, 1999 - ----------------------------------------------------- Howard Behar /s/ CRAIG J. FOLEY director December 13, 1999 - ----------------------------------------------------- Craig J. Foley /s/ GREGORY B. MAFFEI director December 13, 1999 - ----------------------------------------------------- Gregory B. Maffei /s/ ARLEN I. PRENTICE director December 13, 1999 - ----------------------------------------------------- Arlen I. Prentice /s/ JAMES G. SHENNAN, JR. director December 10, 1999 - ----------------------------------------------------- James G. Shennan, Jr. /s/ CRAIG E. WEATHERUP director December 14, 1999 - ----------------------------------------------------- Craig E. Weatherup
15 16 INDEX TO EXHIBITS
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) 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) 3.1.3 Amendment dated March 4, 1999 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3(i) to the Company's Form 10-Q for the quarterly period ended March 28, 1999, filed with the SEC on May 12, 1990) 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 Amended and Restated 1989 Stock Option Plan for Non-Employee Directors (incorporated herein by reference to Appendix A to the Company's Proxy Statement filed with the SEC on January 13, 1999)* 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) 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) 10.14 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) 10.15 Starbucks Corporation Executive Management Bonus Plan* 10.16 Starbucks Corporation Management Deferred Compensation Plan (incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 filed with the SEC on January 1, 1998)* 10.17 Starbucks Corporation 1997 Deferred Stock Plan* 11 Computation of Per Share Earnings 13 Portions of the 1999 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule
- --------------- * Management contract or compensatory plan or arrangement. EX-10.15 2 STARBUCKS CORPORATION EXEC. MANAGEMENT BONUS PLAN 1 EXHIBIT 10.15 EXECUTIVE MANAGEMENT BONUS PLAN (AS AMENDED THROUGH NOVEMBER 15, 1999) PLAN EFFECTIVE DATE September 30, 1996 PURPOSE The purpose of the Plan is to provide an incentive for the achievement of Goals that support Starbucks Strategic Plan. TERMS AND DEFINITIONS - - PLAN NAME The Executive Management Bonus Plan. - - PARTICIPANTS Employees serving in positions of executive vice president and above, as well as certain other senior officers of the Corporation specified by the Compensation Committee ("Participants"). - - PLAN PERIOD The Starbucks fiscal year. - - BASE PAY The monthly pay (annual pay divided by 12) established for the participant by Starbucks and in effect on the last day of the Plan Period or, in the case of a deceased or disabled Participant, on the last day of participation in the Plan. Starbucks, in conjunction with the Compensation Committee of the Board of Directors ("Compensation Committee"), may at any time, in its sole discretion, prospectively revise the Participant's Base Pay. - - BONUS PAYOUT The actual award (expressed in dollars) to the Participant based on the terms of the Plan. - - TARGET BONUS A percentage of each Participant's Base Pay as established each year by the Compensation Committee. - - PERFORMANCE In accordance with Section 162(m) of the Internal MEASURES AND Revenue Code, at the beginning of each Plan Period, the GOALS Compensation Committee selects specific measures among Earnings Per Share, Return on Capital, Sales Growth and Volume, and/or Return on Assets as the Objective Performance Measure or Measures for such Plan Period. Single or multiple Performance Measures may be selected. Objective Performance Measures are the basis for 70% of the total Bonus Payout. The remaining 30% of the total Bonus Payout is based on individual Goals with corresponding percentage weights designed to measure a Participant's achievements. Each Participant will develop individual Goals for approval by the Compensation Committee against which performance under the Plan will be measured. ELIGIBILITY The senior vice president, Human Resources has the authority to recommend Participants. The Compensation Committee has the sole authority to approve Participants who: 1) remain a Starbucks partner through the end of the Plan Period, unless employment is terminated prior to the end of the Plan Period due to death or disability, and, 2) refrain from engaging during the Plan Period, directly or indirectly, in any activity which is competitive with any Starbucks activity. Participation will conclude upon termination of the Participant's employment, withdrawal of selection by the Compensation Committee, transfer to a position compensated otherwise than as provided in the Plan, or termination of the Plan by Starbucks. Starbucks may terminate the Plan or a Participant at any time and for any reason. 2 BONUS PAYOUT At the end of the Plan Period, the Compensation DETERMINATION Committee will oversee the determination of the Participant's Bonus Payout, as follows: - - COMPENSATION - Determine extent to which the selected Objective COMMITTEE MEMBERS Performance Measure or Measures and individual Goals were achieved. - Determine the Bonus Payout for each Participant. The Compensation Committee may exercise its discretion to determine that the Bonus Payout for any Participant will be less than (but not greater than) the amount earned by such Participant under the Plan. The maximum Bonus Payout pursuant to the achievement of the Objective Performance Measure or Measures shall be $1,000,000. - Prorate the Bonus Payout for any partner who becomes a Participant after the start of the Plan Period, is on a leave of absence for a portion of the Plan Period, or whose employment with Starbucks is terminated prior to the end of the Plan Period because of disability or death. A prorated Bonus Payout will be calculated by multiplying the number of full months during which the Participant participated in the Plan during the Plan Period. Credit will be given for a full month if the Participant is eligible for 15 or more calendar days during that month. - - SENIOR VICE - Review the Bonus Payout against the Plan. PRESIDENT, HUMAN RESOURCES - - PAYROLL - Prepare bonus checks for distribution. BONUS PAYOUT - The Bonus Payout will be made as soon as administratively feasible and is expected to be approximately 45 to 60 days after the end of the Plan Period. - No amount is due and owing before the Bonus Payout has been determined. - The Bonus Payout will be granted to Participants in cash separate from, and not added to, Base Pay. - The Bonus Payout will be taxed at the flat IRS rate plus applicable state and local rates for bonus payments. ADMINISTRATION The Plan is administered by the senior vice president Human Resources in conjunction with the Compensation Committee. In the event of a dispute regarding the Plan, the Participant may seek resolution through the senior vice president Human Resources and the Compensation Committee. TERMINATION OF The Plan is not a contract of employment for any period EMPLOYMENT of time. The Participant may resign or be terminated at any time for any or no reason. Employment and termination of employment are governed by Starbucks policy and not by the Plan. REVISIONS TO THE PLAN The Plan will be reviewed by the senior vice president Human Resources and the Compensation Committee on a periodic basis for revisions. Starbucks reserves the right at its discretion with or without notice, to review, change amend or cancel the Plan, at any time. EX-10.17 3 STARBUCKS CORPORATION 1997 DEFERRED STOCK PLAN 1 EXHIBIT 10.17 STARBUCKS CORPORATION 1997 DEFERRED STOCK PLAN 1. The Plan. The purpose of this Starbucks Corporation 1997 Deferred Stock Plan (the "Deferred Stock Plan") is to assist a select group of key employees in maintaining their level of ownership of the common stock, no par value per share (the "Common Stock"), of Starbucks Corporation (the "Company") by providing a way to defer the proceeds from exercises of stock options granted under the Company's Amended and Restated 1985 Stock Option Plan, the Company's Key Employee Stock Option Plan - 1994 and such other stock option plan or plans as may be in effect from time to time (the "Stock Option Plans"). The Deferred Stock Plan is an unfunded liability of the Company for federal income tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Participants in the Deferred Stock Plan are general unsecured creditors of the Company with respect to assets held by the Company pursuant to this Deferred Stock Plan. 2. Definitions. Capitalized terms used but not otherwise defined in the Deferred Stock Plan shall have the meanings set forth below: "Board" shall mean the Board of Directors of Starbucks Corporation. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Common Stock Unit" shall mean a derivative security of the Company entitling the holder thereof to receive (i) at the time of the payment of any cash or stock dividend by the Company on its Common Stock (other than a stock dividend effectuating a stock split), that amount of cash or that number of shares distributed to the holder of a share of Common Stock and (ii) at the time of payment of Proceeds pursuant to the terms hereof and any Election Form, one share of Common Stock. "Compensation Committee" shall mean the Compensation Committee of the Board of Directors of the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exercise Price" shall mean the exercise price of Options granted under the Stock Option Plans as set forth in the stock option grant agreement relating to such Options. "Fair Market Value" shall mean the closing bid price of the Company's Common Stock on the national exchange, over-the-counter or other stock market on which the Company is listed on the specified day and, if such day is not a trading day on such exchange or stock market, the closing price on the prior trading day. If the Company's Common Stock ceases to be publicly traded on a national exchange or stock market, the Fair Market Value shall be determined by the Board. "Mature Shares" shall mean shares of the Company's Common Stock owned by a Participant for six months or more at the time of the exercise of Options. "Options" shall mean all of the non-qualified stock options granted pursuant to a specific grant under one of the Company's Stock Option Plans. Such Options must be fully exercisable pursuant to the terms of the applicable Stock Option Plan and the stock option grant agreement pertaining to such Options. "Participants" shall mean those persons designated by the Compensation Committee of the Board as participants in this Deferred Stock Plan. "Proceeds" shall mean the proceeds of an exercise of Options. In the event of an exercise with the payment of the Exercise Price in cash, such proceeds shall be the number of shares of Common Stock subject to Options being exercised. In the event of an exercise pursuant to the tender of or attestation to previously acquired shares of Common Stock, the proceeds shall be the number of shares of Common Stock subject to such Options, less the number of shares of Common Stock with a value equal to the aggregate Exercise Price payable to the Company 2 upon exercise of the Options. For purposes of determining the Proceeds, the number of shares of Common Stock with a value equal to the aggregate Exercise Price shall be determined by dividing the aggregate Exercise Price of the Options by the Fair Market Value of a share of Common Stock on the date of exercise, and rounding down to the next lowest whole number. "Securities Act" shall mean the Securities Act of 1933, as amended. 3. Administration of the Plan. The Deferred Stock Plan shall be administered by the Compensation Committee which shall, in its sole discretion, determine the persons who may participate in and the terms and conditions of deferrals under the Deferred Stock Plan. The Compensation Committee shall have the authority to interpret the Deferred Stock Plan and to adopt from time to time such guidelines, rules, agreements and documents for the administration of the Deferred Stock Plan as it deems necessary or appropriate. 4. Deferral of Proceeds of Stock Option Exercises. A Participant may elect to defer the receipt of Proceeds of the exercise of Options by executing and delivering a deferral election form, substantially in the form attached hereto as Exhibit A and subject to the conditions hereinafter set forth (an "Election Form"), to the chairman of the Compensation Committee and delivering a copy thereof to the general counsel of the Company. Such election to defer receipt of the Proceeds pursuant to this Deferred Stock Plan shall be irrevocable. The Election Form must be received by the Chairman of the Compensation Committee and a copy must be received by the general counsel at least six months prior to the date that the Options will be exercised (or such shorter period as may be approved in advance by the Compensation Committee). 5. Duration of Deferral. The Election Form must specify the time period during which receipt of the Proceeds is deferred. Such period must be at least five years from the date of exercise of the Options, but may be longer at the discretion of the Participant. A Participant may extend the deferral period relating to Options previously deferred by executing and delivering an addition Election Form with respect to such Options to the chairman of the Compensation Committee and the general counsel of the Company at any time up to one year before the previous deferral expires. 6. Exercise of Options. Participants shall exercise Options by delivering a Notice of Exercise to Human Resources - Stock Administration prior to the date of exercise of the Options. Such notice shall either (i) be accompanied by a check in payment of the aggregate Exercise Price of the Options or (ii) shall request an exercise of such Options pursuant to the tender of or attestation to the ownership of previously acquired shares of Common Stock and contain an attestation by the Participant that he or she owns Mature Shares with a value equal to or greater than the aggregate Exercise Price of the Options. 7. Payment of Proceeds. Unless otherwise specified in the Election Form pertaining to the Options and their Proceeds, upon the expiration of the deferral period, the Company shall pay the Proceeds to the Participant in one payment by issuing shares of Common Stock. Participants may elect to receive the Proceeds in several payments over a number of years or may elect to receive that portion of the Proceeds having a specified value in several payments over a number of years by specifying the desired payment terms in the Election Form. Notwithstanding any election by the Participant, in the event of the Participant's death, the Committee shall promptly determine, in its sole discretion after consideration of the tax and other consequences of such decision, whether to pay the Proceeds into the Participant's estate immediately or to defer payment in accordance with the terms specified in the Election Form. A Participant may specify in his or her Election Form that payment of the Proceeds shall be made to a designated beneficiary or beneficiaries upon his or her death. 8. Payment of Proceeds in Special Circumstances. Notwithstanding any election made by a Participant and the terms thereof, upon (i) any occurrence causing a Participant to become substantially or completely disabled or (ii) the occurrence of an unforeseeable emergency beyond the reasonable control of a Participant that causes or threatens to cause severe financial hardship to a Participant or his or her family if early withdrawal of Proceeds is not permitted, then, at the request of such Participant the Committee may, in its sole discretion, approve the payment of the Proceeds prior to the expiration of the deferral period specified in the Election Form pertaining to specified Options and the Proceeds thereof. Any early payment of Proceeds shall be limited to the amount reasonably necessary to meet the emergency. 3 9. Deferred Compensation Account. Upon the exercise by a Participant pursuant to Section 6 hereof of Options subject to an Election Form, the Company shall establish a deferred compensation account for such Participant. The Company shall issue and credit to such account the number of Common Stock Units equal to the number of shares of Common Stock constituting the Proceeds. If the Company declares and pays cash or stock dividends on its Common Stock (other than a stock dividend effectuating a stock split) the Company shall pay such dividends to the Participant directly. In the event of a stock split or reverse stock split, the number of Common Stock Units in each Participant's account shall be adjusted appropriately. In the event of a merger or other corporate event effecting a payment for or exchange of the Company's outstanding securities, Common Stock Units shall be treated as if they were shares of Common Stock owned by the Participant, except that the Compensation Committee shall determine, in its sole discretion and on an individual Participant basis, whether such payments or shares received in exchange for the Company's Common Stock shall be subject to the terms of the Election Form pertaining to the Options and Proceeds thereof reflected as Common Stock Units in each Participant's deferred compensation account. Upon the expiration of a deferral period specified by a Participant in an Election Form, or upon the date specified for a partial payment of the Proceeds by a Participant in an Election Form, the number of Common Stock Units in a Participant's account shall be reduced by the number of shares of Common Stock issued to the Participant in payment of the Proceeds. 10. Tax Withholding upon Payment. Prior to the date of any payment of Proceeds, a Participant shall arrange for the payment of required tax withholdings for federal, state and local income taxes and any other applicable taxes by either delivering such tax withholding amounts to the Company or by authorizing the Company to withhold shares of Common Stock with a value equal to such tax withholdings from the payment of the Proceeds. 11. Assignment of Deferred Compensation Account. A Participant may not sell, transfer, assign, pledge or otherwise encumber the balance in his or her deferred compensation account. A Participant may, however, specify in his or her Election Form a beneficiary or beneficiaries to receive the Proceeds upon his or her death. 12. Amendment or Termination of the Plan. The Compensation Committee may modify or amend this Deferred Stock Plan at any time; provided, however, that no modification or amendment may adversely affect deferrals made prior to the date thereof without the written consent of the affected Participant. The Compensation Committee may also terminate the Deferred Stock Plan, but such termination shall not affect the Company's obligations to pay Proceeds to Participants pursuant to any deferral made prior to the effective date of such termination. 13. Governing Law. This Deferred Stock Plan shall be governed by federal laws and the laws of the State of Washington. EX-11 4 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS (in thousands, except earnings per share)
October 3, September 27, September 28, 1999 1998 1997 - ---------------------------------------------------------------------------------------------- CALCULATION OF NET EARNINGS PER COMMON SHARE - BASIC Net earnings $101,693 $ 68,372 $ 55,211 - ---------------------------------------------------------------------------------------------- Weighted average common shares and common stock units outstanding 181,842 176,110 159,289 - ---------------------------------------------------------------------------------------------- Net earnings per common share - basic $ 0.56 $ 0.39 $ 0.35 - ---------------------------------------------------------------------------------------------- CALCULATION OF NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE - DILUTED: (1) Net earnings calculation: Net earnings $101,693 $ 68,372 $ 55,211 Add after-tax interest expense on debentures -- 348 4,300 Add after-tax amortization of issuance costs related to the debentures -- 30 354 - ---------------------------------------------------------------------------------------------- Adjusted net earnings $101,693 $ 68,750 $ 59,865 - ---------------------------------------------------------------------------------------------- Weighted average shares outstanding calculation: Weighted average common shares and common stock units outstanding 181,842 176,110 159,289 Dilutive effect of outstanding common stock options 6,689 6,257 6,833 Assuming conversion of convertible subordinated debentures -- 1,404 14,195 - ---------------------------------------------------------------------------------------------- Weighted average common and common equivalent shares outstanding 188,531 183,771 180,317 - ---------------------------------------------------------------------------------------------- Net earnings per common and common equivalent share - diluted $ 0.54 $ 0.37 $ 0.33 - ----------------------------------------------------------------------------------------------
(1) Diluted earnings per share assumes conversion of the Company's formerly outstanding convertible subordinated debentures using the "if converted" method when such securities were dilutive, with income adjusted for the after-tax interest expense and amortization applicable to these debentures. EX-13 5 PORTIONS OF THE 1999 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 SELECTED FINANCIAL DATA In thousands, except earnings per share and store operating data 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 OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 SEPT 29, 1996 OCT 1, 1995 fiscal year ended(1) (53 Wks) (52 Wks) (52 Wks) (52 Wks) (52 Wks) - ---------------------------------------------------------------------------------------------------------------------------- RESULTS OF OPERATIONS DATA Net Revenues Retail $1,423,389 $1,102,574 $836,291 $601,458 $402,655 Specialty(2) 256,756 206,128 139,098 96,414 62,558 - ---------------------------------------------------------------------------------------------------------------------------- Total net revenues 1,680,145 1,308,702 975,389 697,872 465,213 Merger expenses(3) -- 8,930 -- -- -- Operating income 156,711 109,216 86,199 56,575 40,116 Gain on sale of investment(4) -- -- -- 9,218 -- Net earnings $ 101,693 $ 68,372 $ 55,211 $ 41,710 $ 26,102 Net earnings per common share -- diluted(5) $ 0.54 $ 0.37 $ 0.33 $ 0.27 $ 0.18 Cash dividends per share -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA Working capital $ 134,903 $ 157,805 $172,079 $239,365 $134,304 Total assets 1,252,514 992,755 857,152 729,227 468,178 Long-term debt (including current portion) 9,057 1,803 168,832 167,980 81,773 Shareholders' equity 961,013 794,297 533,710 454,050 312,231 - ---------------------------------------------------------------------------------------------------------------------------- STORE OPERATING DATA Percentage change in comparable store sales(6) 6% 5% 5% 7% 9% Stores open at year-end Continental North America Company-operated stores 2,038 1,622 1,270 929 627 Licensed stores 179 133 94 75 49 International Company-operated stores -- United Kingdom 97 66 31 9 1 Licensed stores 184 65 17 2 -- - ---------------------------------------------------------------------------------------------------------------------------- Total stores 2,498 1,886 1,412 1,015 677 - ----------------------------------------------------------------------------------------------------------------------------
(1) The Company's fiscal year ends on the Sunday closest to September 30. Fiscal year 1999 included 53 weeks and fiscal years 1995 to 1998 each included 52 weeks. (2) Specialty revenues include product sales to and royalties and fees from the Company's licensees. (3) Merger expenses relate to the business combination with Seattle Coffee Holdings Limited in fiscal 1998. (4) Gain on sale of investment relates to the sale of Noah's New York Bagels, Inc. stock in fiscal 1996. (5) Earnings per share is based on the weighted average number of 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 formerly outstanding convertible subordinated debentures using the "if converted" method when such securities were dilutive, with net income adjusted for the after-tax interest expense and amortization applicable to these debentures. Earnings per share data for fiscal years 1995 through 1998 have been restated to reflect the two-for-one stock splits in fiscal 1999 and 1996. (6) Includes only Company-operated stores open 13 months or longer. 2 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 various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the impact of competition, the effect of legal proceedings and other risks detailed herein and in the Company's annual and quarterly filings with the Securities and Exchange Commission. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Starbucks presently derives approximately 85% of net revenues from its Company-operated retail stores. The remaining 15% of net revenues is derived from the Company's specialty operations, which include sales to wholesale accounts and licensees, royalty and license fee income and sales through its direct-to-consumer business and its on-line store at www.starbucks.com. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal year 1999 had 53 weeks, and fiscal years 1998 and 1997 each had 52 weeks. The fiscal year ending on October 1, 2000, will include 52 weeks. The Company's net revenues increased from $1.3 billion in fiscal 1998 to $1.7 billion in fiscal 1999, due primarily to the Company's store expansion program and comparable store sales increases. Comparable store sales increased by 6%, 5% and 5% in fiscal 1999, 1998 and 1997, 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 store concentration has increased. However, management believes such cannibalization has been justified by the incremental sales and return on new store investments. 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 OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 (53 Wks) (52 Wks) (52 Wks) - ---------------------------------------------------------------------------------------------------------- STATEMENTS OF EARNINGS DATA Net revenues Retail 84.7% 84.2% 85.7% Specialty 15.3 15.8 14.3 - ---------------------------------------------------------------------------------------------------------- Total net revenues 100.0 100.0 100.0 Cost of sales and related occupancy costs 44.1 44.2 44.8 - ---------------------------------------------------------------------------------------------------------- Gross margin 55.9 55.8 55.2 Store operating expenses(1) 38.2 38.0 37.6 Other operating expenses(2) 20.0 21.1 20.3 Depreciation and amortization 5.8 5.5 5.4 General and administrative expenses 5.3 5.9 5.9 Merger expenses 0.0 0.7 0.0 Operating income 9.3 8.3 8.8 Interest and other income 0.5 0.7 1.3 Interest and other expense (0.0) (0.1) (0.7) - ---------------------------------------------------------------------------------------------------------- Earnings before income taxes 9.8 8.9 9.4 Income taxes 3.7 3.7 3.7 - ---------------------------------------------------------------------------------------------------------- Net earnings 6.1 % 5.2% 5.7 % - ----------------------------------------------------------------------------------------------------------
(1) Shown as a percentage of retail revenues. (2) Shown as a percentage of specialty revenues. 3 BUSINESS COMBINATIONS During the second quarter of fiscal 1999, Starbucks acquired the net assets of Tazo, L.L.C. ("Tazo"), a Portland, Oregon-based tea company that produces premium tea products, and Pasqua Inc. ("Pasqua"), a San Francisco, California-based roaster and retailer of specialty coffee. Both of these acquisitions were accounted for under the purchase method of accounting. The results of operations for Tazo and Pasqua are included in the accompanying consolidated financial statements from the dates of acquisition. During the third quarter of fiscal 1998, Starbucks acquired the United Kingdom-based Seattle Coffee Holdings Limited ("Seattle Coffee Company") in a pooling-of-interests transaction (the "Transaction"). In conjunction with the Transaction, Starbucks recorded pre-tax charges of $8.9 million in direct merger costs and $6.6 million in other charges associated with the integration of Seattle Coffee Company. The historical financial statements for the periods prior to the Transaction were restated as though the companies had always been combined. RESULTS OF OPERATIONS -- FISCAL 1999 COMPARED TO FISCAL 1998 REVENUES Net revenues increased 28% to $1.7 billion for fiscal 1999, compared to $1.3 billion for fiscal 1998. Retail sales increased 29% to $1.4 billion from $1.1 billion. The increase in retail sales was due to the addition of new Company-operated stores, comparable store sales growth of 6% and sales for the 53rd week of the fiscal year. Comparable store sales percentages have been calculated excluding the 53rd week of fiscal 1999. The increase in comparable store sales resulted from a 5% increase in the number of transactions and a 1% increase in the average dollar value per transaction. During fiscal 1999, the Company opened 424 stores in continental North America and 36 stores in the United Kingdom. As of fiscal year-end, there were 2,038 Company-operated stores in continental North America and 97 in the United Kingdom. During fiscal 2000, the Company expects to open at least 350 Company-operated stores in North America and 50 in the United Kingdom. Specialty revenues increased 25% to $257 million for fiscal 1999 from $206 million for fiscal 1998. The increase was driven primarily by higher sales to licensees and joint ventures and business dining customers. Licensees (including those in which the Company is a joint venture partner) opened 44 stores in continental North America and 121 stores in international markets. The Company ended the year with 179 licensed stores in continental North America and 184 licensed stores in international markets. During fiscal 2000, the Company expects to open at least 200 licensed stores. GROSS MARGIN Gross margin increased to 55.9% for fiscal 1999 from 55.8% in fiscal 1998. The positive impact on gross margin of lower green coffee costs was partially offset by lower gross margins associated with a change in the Company's strategy for the grocery channel. In late fiscal 1998, the Company signed a long-term licensing agreement with Kraft Foods, Inc. ("Kraft") to handle the U.S. distribution, marketing and advertising for Starbucks whole bean and ground coffee in grocery, warehouse club and mass merchandise stores. The transition to Kraft occurred in the first quarter of fiscal 1999. 4 EXPENSES Store operating expenses as a percentage of retail sales increased to 38.2% for fiscal 1999 from 37.5% for fiscal 1998, excluding costs associated with the Transaction. This was due primarily to higher payroll-related expenditures resulting from both an increase in average hourly wage rates and a continuing shift in sales to handcrafted beverages, which are more labor intensive. Including the Transaction costs, store operating expenses for fiscal 1998 were 38.0% of retail sales. Other operating expenses (expenses associated with all operations other than Company-owned retail stores, including the Company's share of joint venture profits and losses) were 20.0% of specialty revenues during fiscal 1999, compared to 21.1% for fiscal 1998. This decrease was attributable to lower operating expenses associated with the grocery channel after the transition to Kraft, partially offset by higher payroll expense supporting other channels. Depreciation and amortization was 5.8% of net revenues, up from 5.5% of net revenues for fiscal 1998, primarily due to depreciation on new information systems put into service in late fiscal 1998 and during fiscal 1999. General and administrative expenses were 5.3% of net revenues during fiscal 1999 compared to 5.9% for fiscal 1998, primarily due to proportionately lower payroll-related expenses. INCOME TAXES The Company's effective tax rate for fiscal 1999 was 38.0% compared to 41.2% for fiscal 1998. The effective tax rate in fiscal 1998 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. Management expects the effective tax rate to be approximately 38% during fiscal 2000. RESULTS OF OPERATIONS -- FISCAL 1998 COMPARED TO FISCAL 1997 REVENUES Net revenues increased 34% to $1.3 billion for fiscal 1998, compared to $975 million for fiscal 1997. Retail sales increased 32% to $1.1 billion from $836 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 revenues increased 48% to $206 million for fiscal 1998 from $139 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(R) coffee drink. The Company also sells coffee extract to Dreyer's Grand Ice Cream, Inc. ("Dreyer's") for use in the manufacture of Starbucks branded ice creams 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. 5 GROSS MARGIN Gross margin increased to 55.8% for fiscal 1998 compared to 55.2% for fiscal 1997. This increase 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 operations, as well as the Company's share of joint venture profits and losses) increased to 21.1% of specialty revenues for fiscal 1998 from 20.3% 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. 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. 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 for fiscal 1998 would have been 38.3%. LIQUIDITY AND CAPITAL RESOURCES The Company ended fiscal 1999 with $117.8 million in total cash and short-term investments. Working capital as of October 3, 1999, totaled $134.9 million compared to $157.8 million at September 27, 1998. Cash and cash equivalents decreased by $35.2 million during fiscal 1999 to $66.4 million at October 3, 1999. This decrease was offset by an increase in short-term investments of $29.5 million during the same period. Cash provided by operating activities for fiscal 1999 totaled $210.6 million and resulted primarily from net earnings before non-cash charges of $210.1 million. Cash used by investing activities for fiscal 1999 totaled $336.3 million. This included capital additions to property, plant and equipment of $261.8 million related to opening 460 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 purchases of Pasqua and Tazo used $15.7 million. During fiscal 1999, the Company made equity investments of $10.5 million in its international joint ventures. The Company received $5.7 million in distributions from the North American Coffee Partnership and $3.3 million in distributions from the Ice Cream Joint Venture. The Company also used $28.3 million to make minority investments in Living.com, Inc. and Talk City, Inc. The Company invested excess cash primarily in short-term, investment-grade marketable debt securities. The net activity in the Company's marketable securities portfolio during fiscal 1999 provided $34.1 million. 6 Cash provided by financing activities for fiscal 1999 totaled $90.5 million. This included $29.9 million of checks issued but not presented for payment, $52.4 million generated from the exercise of employee stock options and the related income tax benefit available to the Company upon exercise of such options and $9.4 million generated from the Company's employee stock purchase plan. As options granted under the Company's stock option plans are exercised, the Company will continue to receive proceeds and a tax deduction; however, neither the amounts nor the timing thereof can be predicted. Cash requirements for fiscal 2000, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores. The Company plans to open at least 400 Company-operated stores during fiscal 2000. The Company also anticipates incurring additional expenditures for enhancing its production capacity and information systems and remodeling certain existing stores. While there can be no assurance that current expectations will be realized, management expects capital expenditures for fiscal 2000 to be approximately $300 million. Management believes that existing cash and investments plus cash generated from operations should be sufficient to finance capital requirements for its core businesses through fiscal 2000. New joint ventures, other new business opportunities or store expansion rates substantially in excess of that presently planned may require outside funding. YEAR 2000 COMPLIANCE The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year. Computer programs with time-sensitive software, at the Company and elsewhere, may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to produce and distribute products, process transactions or engage in similar normal business activities. To address the Year 2000 issue and its risks, the Company formed a cross-functional Task Force, headed by senior management, to evaluate the risks and implement appropriate remediation and contingency plans. The Company's preparations for the Year 2000 have been divided into two categories, MIS-supported systems and other systems and issues. "MIS-supported" systems are those telephone and computer systems that are acquired, installed and maintained by the Company's Management Information Systems ("MIS") department. These systems include all of the software applications generally available on the Company's computer network, as well as many applications used by particular departments or in connection with specific functions (for example, payroll and general accounting software). Single-user applications and a few specialized systems maintained by certain departments within the Company are not considered MIS-supported systems. The Company's MIS department is primarily responsible for addressing Year 2000 compliance issues arising from all MIS-supported systems, while the Year 2000 Task Force is primarily responsible for Year 2000 compliance issues arising from non-MIS-supported systems and from relationships with critical product and service providers. The majority of computer and telephony applications at Starbucks are relatively recent purchases that are not expected to be affected by the Year 2000 problem. All of the MIS-supported systems used at Starbucks have been identified and evaluated. Where necessary, the Company has remediated such systems by installing system upgrades or rewriting code. As the suppliers of telephone and computer systems or software to the Company have worked to address Year 2000 issues with their own products, several have uncovered new or additional problems relating to their systems or software and have so notified the Company. In some cases, these new or additional issues have necessitated additional remediation or testing of the Company's systems. As part of the remediation process, the Company's MIS department has tested each critical system and networked application. 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 7 Company has identified the critical product and service suppliers for each of its business units and departments. The Company has solicited information from these critical suppliers and others about their remediation and contingency plans and their ability to meet the Company's needs in the Year 2000. By the end of fiscal 1999, the Company had received responses from approximately 93% of these product and service suppliers, virtually all of which indicate that they are actively addressing the Year 2000 issue. The Company has worked with these suppliers to complete additional remediation steps and is working with all of its critical product and service suppliers to develop appropriate contingency plans. The contingency plans include, among other actions, purchasing additional inventory prior to the end of 1999, identifying alternate sources of products and services and establishing alternate ways to accomplish critical business functions. The Company has prepared contingency plans for each of its critical business units or departments and conducted tests of certain critical non-MIS-supported systems. Despite these efforts, there can be no guarantee that the other companies on which the Company relies will be prepared for the Year 2000 and that their Year 2000 problems will not have an adverse effect on the Company. The Company presently believes that the most reasonably likely worst case scenario concerning the Year 2000 is that certain critical product and service providers will not be Year 2000 compliant and will be unable to deliver products and services in a timely manner. The Company believes that its geographically dispersed retail stores and large supplier base will significantly mitigate any adverse impact from suppliers' delays or failures, but that the Company remains vulnerable to (i) delays in deliveries by a few suppliers who are the sole source of certain products and services; (ii) disruption of the components of its distribution operations, including ports, trucking and air freight services; and (iii) local or regional retail store shutdowns as a result of problems with infrastructure such as power, water and sewer service. To support the Company's business, particularly the retail stores, in the event that any problems occur, the Company has prepared a Year 2000 event room with backup generator power to monitor the rollover of the Company's systems to the new year and address any other Year 2000 issues. The Company has spent approximately $1.4 million in direct costs for the Year 2000 compliance project through the end of fiscal 1999 and expects to spend approximately $2.0 million for the project. The total cost of all remediation efforts is management's best estimate, which is 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 The supply and price of coffee are subject to significant volatility. Although most coffee trades in the commodity market, coffee of the quality sought by the Company tends to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. The Company's ability to raise sales prices in response to rising coffee prices may be limited, and the Company's profitability could be adversely affected if coffee prices were to rise substantially. The Company enters into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee and bring greater certainty to the cost of sales in future periods. As of October 3, 1999, the Company had approximately $84 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee for the majority of fiscal 2000. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is remote. 8 To further reduce its exposure to rising coffee costs, the Company may, from time to time, enter into futures contracts to hedge price-to-be-established coffee purchase commitments. The specific risks associated with these activities are described below in "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 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 accumulated other comprehensive income. As of October 3, 1999, approximately 76% of the total portfolio was invested in short-term marketable debt securities with maturities of less than one year. An additional 15% was invested in long-term U.S. Government obligations with maturities of 12 to 18 months and the remaining 9% was invested in marketable equity securities. The Company does not hedge its interest rate exposure. 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 do so in the future. The Company may, from time to time, enter into futures contracts to hedge price-to-be-fixed coffee purchase commitments with the objective of minimizing cost risk due to market fluctuations. The Company does not hold or issue derivative instruments for trading purposes. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 80, "Accounting for Futures Contracts," these futures contracts meet the hedge criteria and are accounted for as hedges. Accordingly, gains and losses are deferred and recognized as adjustments to the carrying value of coffee inventory when purchased and recognized in results of operations as coffee products are sold. Gains and losses are calculated based on the difference between the cost basis and the market value of the coffee contracts. The market risk related to coffee futures is substantially offset by changes in the costs of coffee purchased. 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 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This pronouncement will require the Company to recognize derivatives on its balance sheet at fair value. Changes in the fair values of derivatives that qualify as cash-flow hedges will be recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. The Company is in the process of evaluating the impact of this new accounting standard and does not expect that it will have a significant effect on its results of operations. The FASB subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", which postpones initial application until fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 in fiscal 2001. 9 CONSOLIDATED BALANCE SHEETS In thousands, except share data
- ------------------------------------------------------------------------------------------------------------------------------------ OCT 3, 1999 SEPT 27, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets Cash and cash equivalents $ 66,419 $ 101,663 Short-term investments 51,367 21,874 Accounts receivable 47,646 50,972 Inventories 180,886 143,118 Prepaid expenses and other current assets 19,049 11,205 Deferred income taxes, net 21,133 8,448 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 386,500 337,280 Joint ventures and other investments 68,060 38,917 Property, plant and equipment, net 760,289 600,794 Deposits and other assets 23,474 15,685 Goodwill, net 14,191 79 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,252,514 $ 992,755 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 56,108 $ 49,861 Checks drawn in excess of bank balances 64,211 33,634 Accrued compensation and related costs 43,872 35,941 Accrued occupancy costs 23,017 17,526 Accrued taxes 30,752 18,323 Other accrued expenses 33,637 24,190 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 251,597 179,475 Deferred income taxes, net 32,886 18,983 Long-term debt 7,018 -- Commitments and contingencies (notes 5, 9 and 13) SHAREHOLDERS' EQUITY Common stock -- Authorized, 300,000,000 shares; issued and outstanding, 183,282,095 and 179,266,956 shares, respectively (includes 848,550 common stock units in both years) 651,020 589,214 Retained earnings 313,939 212,246 Accumulated other comprehensive loss (3,946) (7,163) - ------------------------------------------------------------------------------------------------------------------------------------ Total shareholders' equity 961,013 794,297 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,252,514 $ 992,755 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 10 CONSOLIDATED STATEMENTS OF EARNINGS In thousands, except earnings per share
- ------------------------------------------------------------------------------------------------------------------------------------ Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Net revenues $ 1,680,145 $ 1,308,702 $ 975,389 Cost of sales and related occupancy costs 741,010 578,483 436,942 - ------------------------------------------------------------------------------------------------------------------------------------ Gross margin 939,135 730,219 538,447 Store operating expenses 543,572 418,476 314,064 Other operating expenses 51,374 43,479 28,239 Depreciation and amortization 97,797 72,543 52,801 General and administrative expenses 89,681 77,575 57,144 Merger expenses -- 8,930 -- - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 156,711 109,216 86,199 Interest and other income 8,678 8,515 12,393 Interest and other expense (1,363) (1,381) (7,282) - ------------------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes 164,026 116,350 91,310 Income taxes 62,333 47,978 36,099 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings $ 101,693 $ 68,372 $ 55,211 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings per common share -- basic $ 0.56 $ 0.39 $ 0.35 Net earnings per common share -- diluted $ 0.54 $ 0.37 $ 0.33 Weighted average shares outstanding Basic 181,842 176,110 159,289 Diluted 188,531 183,771 180,317 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 11 CONSOLIDATED STATEMENTS OF CASH FLOWS In thousands
- ------------------------------------------------------------------------------------------------------------------------------------ Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net earnings $ 101,693 $ 68,372 $ 55,211 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation and amortization 107,512 80,901 58,864 Provision for store remodels and losses on asset disposals 2,456 7,234 1,049 Conversion of compensatory options into common stock -- 1,158 -- Deferred income taxes, net 794 2,125 5,490 Equity in (income) losses of investees (2,318) 14 2,760 Cash (used) provided by changes in operating assets and liabilities Accounts receivable 3,838 (19,790) (13,475) Inventories (36,405) (23,496) (36,382) Prepaid expenses and other current assets (7,552) (2,497) (2,236) Accounts payable 4,711 4,601 9,559 Accrued compensation and related costs 7,586 9,943 10,871 Accrued occupancy costs 5,517 5,342 4,208 Accrued taxes 12,429 7,173 3,850 Other accrued expenses 10,313 1,799 525 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 210,574 142,879 100,294 INVESTING ACTIVITIES Purchase of investments (122,800) (51,354) (171,631) Sale of investments 3,633 5,138 9,257 Maturity of investments 85,053 112,080 173,665 Purchase of businesses, net of cash acquired (15,662) -- -- Investments in joint ventures and other investments (30,780) (12,418) (27,624) Distributions from joint ventures 8,983 2,750 -- Additions to property, plant and equipment (261,781) (201,855) (174,363) Proceeds from sales of property, plant and equipment 3,927 -- -- Additions to deposits and other assets (6,866) (3,184) (4,604) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (336,293) (148,843) (195,300) FINANCING ACTIVITIES Increase in cash provided by checks drawn in excess of bank balances 29,912 4,846 12,287 Proceeds from sale of common stock under employee stock purchase plan 9,386 4,649 4,009 Exercise of stock options 33,799 20,755 13,629 Tax benefit from exercise of nonqualified stock options 18,621 9,332 9,626 Payments on long-term debt (1,189) (1,993) (1,566) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 90,529 37,589 37,985 Effect of exchange rate changes on cash and cash equivalents (54) (88) (18) - ------------------------------------------------------------------------------------------------------------------------------------ (Decrease) increase in cash and cash equivalents (35,244) 31,537 (57,039) CASH AND CASH EQUIVALENTS Beginning of year 101,663 70,126 127,165 - ------------------------------------------------------------------------------------------------------------------------------------ End of year $ 66,419 $ 101,663 $ 70,126 - ------------------------------------------------------------------------------------------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for Interest $ 442 $ 4,130 $ 7,179 Income taxes 35,366 32,643 19,679 NONCASH FINANCING AND INVESTING TRANSACTIONS Liabilities assumed in conjunction with the acquisition of land and building 7,746 -- -- Net unrealized holding gains (losses) on investments 683 (595) (1,983) Conversion of convertible debt into common stock, net of unamortized issue costs and accrued interest -- 162,036 -- Common stock tendered in settlement of stock options exercised -- 4,859 -- Equipment acquired under capital lease -- -- 2,434 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 12 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY In thousands, except share data
ACCUMULATED OTHER COMMON STOCK RETAINED COMPREHENSIVE SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 30, 1996 157,422,976 $364,020 $ 88,663 $ 1,367 $ 454,050 Net earnings -- -- 55,211 -- 55,211 Unrealized holding losses, net -- -- -- (1,983) (1,983) Translation adjustment -- -- -- (832) (832) --------- Comprehensive income 52,396 --------- Exercise of stock options, including tax benefit of $9,626 2,763,830 23,255 -- -- 23,255 Sale of common stock 931,240 4,009 -- -- 4,009 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 28, 1997 161,118,046 391,284 143,874 (1,448) 533,710 Net earnings -- -- 68,372 -- 68,372 Unrealized holding losses, net -- -- -- (595) (595) Translation adjustment -- -- -- (5,120) (5,120) --------- Comprehensive income 62,657 --------- Conversion of convertible debt into common stock 14,194,054 162,036 -- -- 162,036 Common stock units issued under deferred stock plan, net of shares tendered 848,550 -- -- -- -- Exercise of stock options, including tax benefit of $9,332 2,834,528 31,245 -- -- 31,245 Sale of common stock 271,778 4,649 -- -- 4,649 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, September 27, 1998 179,266,956 589,214 212,246 (7,163) 794,297 Net earnings -- -- 101,693 -- 101,693 Unrealized holding gains, net -- -- -- 683 683 Translation adjustment -- -- -- 2,534 2,534 --------- Comprehensive income 104,910 --------- Exercise of stock options, including tax benefit of $18,621 3,522,908 52,420 -- -- 52,420 Sale of common stock 492,231 9,386 -- -- 9,386 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, October 3, 1999 183,282,095 $651,020 $313,939 $(3,946) $ 961,013 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years ended October 3, 1999, September 27, 1998 and September 28, 1997 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, coffee-related accessories and equipment and a line of premium teas, primarily through its Company-operated retail stores. In addition to sales through its Company-operated retail stores, Starbucks sells coffee and tea products through other channels of distribution (collectively, "specialty operations"). Starbucks, through its joint venture partnerships, also produces and sells bottled Frappuccino(R) coffee drink and a line of premium ice creams. The Company's objective is to establish Starbucks as the most recognized and respected brand in the world. To achieve this goal, the Company plans to continue to rapidly expand its retail operations, grow its specialty operations and selectively pursue other opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels. PRINCIPLES OF CONSOLIDATION The consolidated financial statements reflect the financial position and operating results of Starbucks and its subsidiaries. Material intercompany transactions have been eliminated. Investments in unconsolidated joint ventures are accounted for under the equity method, as the Company does not exercise control over the operating and financial policies of such joint ventures. FISCAL YEAR-END The Company's fiscal year ends on the Sunday closest to September 30. The fiscal year ended October 3, 1999, included 53 weeks. Fiscal years 1998 and 1997 each included 52 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 consolidated financial statements. INVESTMENTS The Company's investments consist primarily of investment-grade marketable debt and equity securities, all of which are classified as available-for-sale and recorded at fair value. Unrealized holding gains and losses are recorded, net of any tax effect, as a separate component of accumulated other comprehensive income. 14 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 (short- and long-term) at October 3, 1999, were $56.4 million and $56.2 million, respectively. The fair value and amortized cost of the Company's investments at September 27, 1998, were $21.9 million and $22.7 million, respectively. For further information on investments, see Note 4. The carrying value of long-term debt approximates fair value. 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 two 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" in the accompanying consolidated statements of earnings. GOODWILL The excess purchase price paid over net assets of businesses acquired is amortized on a straight-line basis over the period of expected benefit, which ranges from ten to twenty years. LONG-LIVED ASSETS 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 assets 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") No. 80 "Accounting for Futures Contracts," these futures contracts meet the hedge criteria and are accounted for as hedges. Accordingly, gains and losses are deferred and recognized as adjustments to the carrying value of coffee inventory when purchased and recognized in results of operations as coffee products are sold. Gains and losses are calculated based on the difference between the cost basis and the market value of the coffee contracts. The market risk related to coffee futures is substantially offset by changes in the costs of coffee purchased. The Company had no open futures contracts as of October 3, 1999, or September 27, 1998. 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 twelve months. STORE PREOPENING EXPENSES Costs incurred in connection with the start-up and promotion of new store openings are expensed as incurred. 15 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. Minimum rental expenses are recognized on a straight-line basis over the terms of the leases. FOREIGN CURRENCY TRANSLATION The Company's international operations use their local currency as their functional currency. 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 separate component of accumulated other comprehensive income. 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. STOCK SPLIT On March 19, 1999, the Company effected a two-for-one stock split for its holders of record on March 5, 1999. All applicable share and per-share data in these consolidated financial statements have been restated to give effect to this stock split. 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 1999, 1998 and 1997 were 181.8 million, 176.1 million and 159.3 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 formerly outstanding convertible subordinated debentures using the "if converted" method when such securities were 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 1999, 1998 and 1997 were 188.5 million, 183.8 million and 180.3 million, respectively. Options with exercise prices greater than the average market price were not included in the computation of diluted earnings per share. These options totaled 0.6 million, 0.3 million and 0.6 million for fiscal 1999, 1998 and 1997, respectively. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will require the Company to recognize derivatives on its balance sheet at fair value. Changes in the fair values of derivatives that qualify as cash-flow hedges will be recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. The Company is in the process of evaluating the impact of this new accounting standard and does not expect that it will have a significant effect on its results of operations. The FASB subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", which postpones initial application until fiscal years beginning after June 15, 2000. The Company expects to adopt SFAS No. 133 in fiscal 2001. RECLASSIFICATIONS Certain reclassifications of prior years' balances have been made to conform to the fiscal 1999 presentation. 16 NOTE 2: BUSINESS COMBINATIONS During the second quarter of fiscal 1999, Starbucks acquired the net assets of Tazo, L.L.C. ("Tazo"), a Portland, Oregon-based tea company that produces premium tea products, and the stock of Pasqua Inc. ("Pasqua"), a San Francisco, California-based roaster and retailer of specialty coffee. The combined purchase price for these two acquisitions was $16.5 million. The excess purchase price over the net assets acquired was recorded to goodwill and is being amortized over a period of ten to twenty years. Both of these acquisitions were accounted for under the purchase method of accounting. The results of operations of Tazo and Pasqua have been included in the consolidated financial statements of the Company from the dates of acquisition. Pro forma results of operations have not been presented because the effects of these acquisitions were not material on either an individual or aggregate basis. On May 28, 1998, the Company acquired all of the equity interests of Seattle Coffee Holdings Limited ("Seattle Coffee Company"), a United Kingdom-based roaster and retailer of specialty coffee, in exchange for 3.6 million shares of Starbucks common stock. This business combination (the "Transaction") was accounted for as a pooling-of-interests for accounting and financial reporting purposes. Accordingly, the historical financial statements for the periods prior to the business combination were restated as though the companies had always been combined. The restated financial statements were adjusted to conform the accounting policies and fiscal reporting periods of Seattle Coffee Company 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. 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 0.25 (0.02) 0.23 - -------------------------------------------------------------------------------------------------------------------- 18 Weeks after the Transaction Net revenues $487,876 Net earnings 25,873 Net earnings per share -- diluted 0.15 - -------------------------------------------------------------------------------------------------------------------- 1997 Net revenues $966,946 $ 8,443 $975,389 Net earnings 57,412 (2,201) 55,211 Net earnings per share -- diluted 0.35 (0.02) 0.33 - --------------------------------------------------------------------------------------------------------------------
17 NOTE 3: CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of the following (in thousands):
OCT 3, 1999 SEPT 27, 1998 - ---------------------------------------------------------------------------------------- Operating funds and interest-bearing deposits $ 39,926 $ 26,564 Commercial paper 7,980 67,024 Money market funds 18,513 8,075 - ---------------------------------------------------------------------------------------- $ 66,419 $101,663 - ----------------------------------------------------------------------------------------
NOTE 4: INVESTMENTS The Company's investments consist of the following (in thousands):
- ------------------------------------------------------------------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED FAIR AMORTIZED HOLDING HOLDING October 3,1999 VALUE COST GAINS LOSSES - ------------------------------------------------------------------------------------------------------------ Current investments Corporate debt securities $17,233 $17,123 $ 155 $ (45) U.S. Government obligations 4,988 4,976 13 (1) Commercial paper 18,706 18,751 -- (45) Mutual funds 2,056 2,002 73 (19) Marketable equity securities 8,384 8,258 313 (187) - ------------------------------------------------------------------------------------------------------------ $51,367 $51,110 $ 554 $ (297) - ------------------------------------------------------------------------------------------------------------ Non-current investments U.S. Government obligations $ 5,028 $ 5,044 $ -- $ (16) - ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------ 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 -- Marketable equity securities 108 958 -- (850) - ------------------------------------------------------------------------------------------------------------ $21,874 $22,740 $ 21 $ (887) - ------------------------------------------------------------------------------------------------------------
All investments are classified as available-for-sale as of October 3,1999 and September 27, 1998. 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 consolidated balance sheets. The specific identification method is used to determine a cost basis for computing realized gains and losses. In fiscal 1999, 1998 and 1997, proceeds from the sale of investment securities were $3.6 million, $5.1 million and $9.3 million, respectively. Gross realized gains and losses were not material in 1999, 1998 and 1997. 18 NOTE 5: INVENTORIES Inventories consist of the following (in thousands):
- ---------------------------------------------------------------------------------- OCT 3, 1999 SEPT 27, 1998 - ---------------------------------------------------------------------------------- Coffee Unroasted $ 95,001 $ 77,400 Roasted 28,065 18,996 Other merchandise held for sale 46,655 36,850 Packaging and other supplies 11,165 9,872 - ---------------------------------------------------------------------------------- $180,886 $143,118 - ----------------------------------------------------------------------------------
As of October 3, 1999, the Company had fixed-price inventory purchase commitments for green coffee totaling approximately $84 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 several joint ventures that are accounted for using the equity method. The Company's share of joint venture income or losses is included in "Other operating expenses" in the accompanying consolidated statements of earnings. The Company has two joint ventures to produce and distribute Starbucks branded products: a 50/50 joint venture and partnership agreement with Pepsi-Cola Company ("Pepsi") to develop ready-to-drink coffee-based beverages and 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 several other joint ventures that operate licensed Starbucks retail stores. The Company has a 50/50 joint venture partnership with SAZABY Inc., a Japanese retailer and restauranteur, to develop Starbucks retail stores in Japan. The Company also has a 5% interest in a joint venture to develop Starbucks retail stores in Hawaii and a 5% interest in a joint venture to develop Starbucks retail stores in Taiwan. The Company's investments in these joint ventures are as follows (in thousands):
- -------------------------------------------------------------------------------------------------- PEPSI ALL OTHER JOINT JOINT VENTURE VENTURES TOTAL - -------------------------------------------------------------------------------------------------- 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 Allocated share of (losses) income 3,046 (728) 2,318 Distributions from joint ventures (5,733) (3,250) (8,983) Capital contributions -- 10,466 10,466 - -------------------------------------------------------------------------------------------------- Balance, October 3, 1999 $ 32,392 $ 10,326 $ 42,718 - --------------------------------------------------------------------------------------------------
In addition, the Company has a consolidated 50/50 joint venture with Johnson Development Corporation to develop retail stores in under-served urban communities. As of October 3,1999, the Company had a $20.3 million investment in convertible securities of Living.com, Inc. Subsequent to year-end, the investment was converted into shares of Living.com, Inc. Series B Preferred Stock. 19 NOTE 7: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and consist of the following (in thousands):
OCT 3, 1999 SEPT 27, 1998 - ---------------------------------------------------------------------------------------------- Land $ 5,084 $ 3,602 Building 19,795 8,338 Leasehold improvements 591,640 460,020 Roasting and store equipment 273,612 218,744 Furniture, fixtures and other 130,223 79,953 - ---------------------------------------------------------------------------------------------- 1,020,354 770,657 Less accumulated depreciation and amortization (320,982) (218,455) - ---------------------------------------------------------------------------------------------- 699,372 552,202 Work in progress 60,917 48,592 - ---------------------------------------------------------------------------------------------- $ 760,289 $ 600,794 - ----------------------------------------------------------------------------------------------
NOTE 8: LONG-TERM DEBT In September 1999, the Company purchased the land and building comprising its York County, Pennsylvania roasting plant and distribution facility. The total purchase price was $12.9 million. In connection with this purchase, the Company assumed loans totaling $7.7 million from the York County Industrial Development Corporation. Maturities of these loans range from 9.5 to 10.5 years, with interest rates from 0.0% to 2.0%. Scheduled principal payments on long-term debt are as follows (in thousands):
- -------------------------------------------------------------------------------- Fiscal year ending - -------------------------------------------------------------------------------- 2000 $ 673 2001 685 2002 697 2003 710 2004 722 Thereafter 4,204 - -------------------------------------------------------------------------------- Total principal payments $7,691 - --------------------------------------------------------------------------------
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. 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 OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 - ----------------------------------------------------------------------------------- Minimum rentals $95,613 $75,912 $54,093 Contingent rentals 1,581 1,406 1,193 - ----------------------------------------------------------------------------------- $97,194 $77,318 $55,286 - -----------------------------------------------------------------------------------
20 Minimum future rental payments under non-cancelable lease obligations as of October 3, 1999, are as follows (in thousands):
- -------------------------------------------------------------------------------- Fiscal year ending - -------------------------------------------------------------------------------- 2000 $ 98,515 2001 99,459 2002 99,133 2003 95,827 2004 90,405 Thereafter 321,941 - -------------------------------------------------------------------------------- Total minimum lease payments $805,280 - --------------------------------------------------------------------------------
NOTE 10: SHAREHOLDERS' EQUITY The Company has authorized 7,500,000 shares of its preferred stock, none of which was outstanding at October 3, 1999. COMPREHENSIVE INCOME The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of the first quarter of fiscal 1999. Comprehensive income includes all changes in equity during the period, except those resulting from transactions with shareholders of the Company. It has two components: net income and other comprehensive income. Accumulated other comprehensive income (loss) reported on the Company's consolidated balance sheets consists of foreign currency translation adjustments and the unrealized gains and losses, net of applicable taxes, on available-for-sale securities. Comprehensive income, net of related tax effects, is as follows (in thousands):
- --------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 - --------------------------------------------------------------------------------------------------------------------- Net earnings $101,693 $ 68,372 $ 55,211 Unrealized holding gains (losses) on investments, net of tax (provision) benefit of ($155), $373 and $1,242 in 1999, 1998 and 1997, respectively 252 (595) (1,983) Reclassification adjustment for losses realized in net income, net of tax benefit of $270 431 -- -- - --------------------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) 683 (595) (1,983) - --------------------------------------------------------------------------------------------------------------------- Translation adjustment 2,534 (5,120) (832) - --------------------------------------------------------------------------------------------------------------------- Total comprehensive income $104,910 $ 62,657 $ 52,396 - ---------------------------------------------------------------------------------------------------------------------
21 NOTE 11: EMPLOYEE STOCK AND BENEFIT PLANS STOCK OPTION PLANS The Company maintains several stock option plans under which the Company may grant incentive stock options and non-qualified stock options to employees, consultants 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 September 30, 1996, through October 3, 1999.
- --------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED AVERAGE SHARES AVERAGE SHARES EXERCISE SUBJECT TO EXERCISE SUBJECT TO PRICE EXERCISABLE PRICE OPTIONS PER SHARE OPTIONS PER SHARE - --------------------------------------------------------------------------------------------------------------------- Outstanding, September 30, 1996 15,572,456 $ 6.35 6,633,934 $ 4.22 Granted 5,859,592 16.62 Exercised (2,763,830) 4.96 Cancelled (760,896) 10.65 - --------------------------------------------------------------------------------------------------------------------- Outstanding, September 28, 1997 17,907,322 9.66 7,427,352 5.43 Granted 6,508,632 18.52 Exercised (3,683,078) 6.13 Cancelled (1,229,478) 11.79 - --------------------------------------------------------------------------------------------------------------------- Outstanding, September 27, 1998 19,503,398 13.10 7,560,806 8.49 Granted 8,051,998 22.97 Exercised (3,522,908) 9.53 Cancelled (1,461,937) 18.99 - --------------------------------------------------------------------------------------------------------------------- Outstanding, October 3, 1999 22,570,551 $ 16.84 12,080,825 $ 13.55 - ---------------------------------------------------------------------------------------------------------------------
At October 3, 1999, there were 10,620,149 shares of common stock available for issuance pursuant to future stock option grants. Additional information regarding options outstanding as of October 3, 1999, 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 - --------------------------------------------------------------------------------------------------------------------------- $ 0.37 $ 6.28 2,483,329 3.71 $ 4.58 2,469,329 $ 4.57 6.31 9.41 2,480,518 5.68 8.57 2,191,796 8.51 9.69 18.41 9,148,398 7.51 16.93 5,281,766 16.43 19.42 26.25 7,948,806 9.09 21.96 2,137,934 21.98 35.31 35.31 509,500 9.68 35.31 -- -- - --------------------------------------------------------------------------------------------------------------------------- $ 0.37 $ 35.31 22,570,551 7.50 $ 16.84 12,080,825 $ 13.55 - ---------------------------------------------------------------------------------------------------------------------------
22 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 connection with the plan. The total number of shares issuable under the plan is 8,000,000. There were 492,231 shares issued under the plan during fiscal 1999 at prices ranging from $14.05 to $25.18. There were 271,778 shares issued under the plan during fiscal 1998 at prices ranging from $15.99 to $19.58. There were 185,492 shares issued under the plan during fiscal 1997 at prices ranging from $11.79 to $12.86. Of the 18,555 employees eligible to participate, 4,972 were participants in the plan as of October 3, 1999. DEFERRED STOCK PLAN The Company has 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 October 3, 1999, receipt of 848,550 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. 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 No. 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. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income and net income per share as if the Company adopted the fair-value method of accounting for stock-based awards 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 1999 1998 1997 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- Expected life (years) 1.5 - 6 1.5 - 6 1.5 - 6 .25 .25 .25 Expected volatility 50% 45% 40% 44 - 66% 37 - 45% 45 - 47% Risk-free interest rate 4.60 - 6.21% 5.28 - 6.05% 5.41 - 6.54% 4.26 - 5.63% 5.26 - 5.74% 5.27 - 5.53% 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. 23 As required by SFAS No. 123, the Company has determined that the weighted average estimated fair values of options granted during fiscal 1999, 1998 and 1997 were $8.86, $7.20 and $5.42 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 No. 123, the Company's net earnings and earnings per share would have been as follows (in thousands, except earnings per share):
- -------------------------------------------------------------------------------- PRO FORMA UNDER SFAS Fiscal year ended AS REPORTED NO. 123 - -------------------------------------------------------------------------------- October 3, 1999 Net earnings $ 101,693 $ 75,326 Net earnings per common share Basic $ 0.56 $ 0.41 Diluted $ 0.54 $ 0.40 September 27, 1998 Net earnings $ 68,372 $ 51,595 Net earnings per common share Basic $ 0.39 $ 0.30 Diluted $ 0.37 $ 0.28 September 28, 1997 Net earnings $ 55,211 $ 45,808 Net earnings per common share Basic $ 0.35 $ 0.29 Diluted $ 0.33 $ 0.28 - --------------------------------------------------------------------------------
In applying SFAS No. 123, the impact of outstanding stock options granted prior to 1996 has been excluded from the pro forma calculations; accordingly, the 1999, 1998 and 1997 pro forma adjustments are not necessarily 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. For certain plans, the Company matches 25% of each employee's eligible contribution up to a maximum of the first 4% of each employee's compensation. The Company's matching contributions to the plans were approximately $0.9 million, $0.8 million and $0.6 million for fiscal 1999, 1998 and 1997, respectively. 24 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 OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 - ------------------------------------------------------------------------------------------------------- Statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal income tax benefit 3.7 3.8 3.6 Non deductible losses and merger costs -- 2.6 1.0 Other, net (0.7) (0.2) (0.1) - ------------------------------------------------------------------------------------------------------- Effective tax rate 38.0% 41.2% 39.5% - -------------------------------------------------------------------------------------------------------
The provision for income taxes consists of the following (in thousands):
- -------------------------------------------------------------------------------------- Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 - -------------------------------------------------------------------------------------- Currently payable Federal $52,207 $39,267 $25,884 State 9,332 6,586 4,725 Deferred liability 794 2,125 5,490 - -------------------------------------------------------------------------------------- $62,333 $47,978 $36,099 - --------------------------------------------------------------------------------------
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):
- --------------------------------------------------------------------------------------- Oct 3, 1999 Sept 27, 1998 - --------------------------------------------------------------------------------------- Depreciation $ 29,826 $ 24,240 Accrued rent (8,234) (6,252) Investments in joint ventures 3,990 2,400 Accrued compensation and related costs (5,622) (4,096) Other, net (8,207) (5,757) - --------------------------------------------------------------------------------------- $ 11,753 $ 10,535 - ---------------------------------------------------------------------------------------
Taxes payable of $16.3 million and $8.7 million are included in "Accrued taxes" in the accompanying consolidated balance sheets as of October 3, 1999, and September 27, 1998, respectively. NOTE 13: COMMITMENTS AND CONTINGENCIES 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 October 3, 1999. NOTE 14: SEGMENT REPORTING In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes reporting and disclosure standards for an enterprise's operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available and regularly reviewed by the Company's senior management. The Company is organized into a number of business units. The Company's North American retail business sells coffee beverages, whole bean coffees and related hardware and equipment through Company-operated retail stores in the United States and Canada. The Company also has a subsidiary that owns and operates retail stores in the United Kingdom. These two retail segments are managed by different presidents within the Company and are measured and evaluated separately by senior management. The Company operates through several other business units, each of which is managed and evaluated independently. These other business units are organized around the strategic relationships that govern the distribution of products to the customer. These relationships include domestic 25 wholesale accounts, domestic retail store and grocery channel licensing agreements, international licensing agreements and direct-to-consumer business. Revenues from these segments include both sales to unaffiliated customers and intersegment sales, which are accounted for on a basis consistent with sales to unaffiliated customers. Intersegment sales and other intersegment transactions have been eliminated in the accompanying consolidated financial statements. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in Note 1. Operating income represents earnings before interest and other income/expense and income taxes. No allocations of overhead, interest or income taxes are made to the segments. Identifiable assets by segment are those assets used in the Company's operations in each segment. General corporate assets include cash and investments, unallocated assets of the corporate headquarters and deferred tax assets. Management evaluates performance of the segments based upon direct product sales and operating costs. The tables below present information by operating segment (in thousands):
- ------------------------------------------------------------------------------------------------------------------------ Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 - ------------------------------------------------------------------------------------------------------------------------ REVENUES North American retail $ 1,375,018 $ 1,076,731 $ 828,074 All other business units 320,604 238,798 152,564 Intersegment revenues (15,477) (6,827) (5,249) - ------------------------------------------------------------------------------------------------------------------------ Total revenues $ 1,680,145 $ 1,308,702 $ 975,389 - ------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME North American retail $ 209,338 $ 161,334 $ 121,673 All other business units 55,998 45,943 29,566 Unallocated corporate expenses (107,460) (89,069) (65,040) Merger expenses -- (8,930) -- Intersegment eliminations (1,165) (62) -- Interest, net 7,315 7,134 5,111 - ------------------------------------------------------------------------------------------------------------------------ Earnings before income taxes $ 164,026 $ 116,350 $ 91,310 - ------------------------------------------------------------------------------------------------------------------------ DEPRECIATION AND AMORTIZATION North American retail $ 72,252 $ 56,328 $ 42,526 All other business units 7,766 4,721 2,379 Unallocated corporate expenses 17,779 11,494 7,896 - ------------------------------------------------------------------------------------------------------------------------ Total depreciation and amortization $ 97,797 $ 72,543 $ 52,801 - ------------------------------------------------------------------------------------------------------------------------ INCOME (LOSSES) FROM EQUITY METHOD INVESTEES All other business units $ 2,318 $ (14) $ (2,760) Intersegment eliminations 874 1,048 718 - ------------------------------------------------------------------------------------------------------------------------ Total income (losses) from equity method investees $ 3,192 $ 1,034 $ (2,042) - ------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------- OCT 3, 1999 SEPT 27, 1998 - ----------------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS North American retail $ 587,823 $ 465,626 All other business units 97,544 107,115 General corporate assets 567,147 420,014 - ----------------------------------------------------------------------------------------------- Total assets $1,252,514 $ 992,755 - -----------------------------------------------------------------------------------------------
26 The tables below present information by geographic area (in thousands):
- ------------------------------------------------------------------------------------------------------ Fiscal year ended OCT 3, 1999 SEPT 27, 1998 SEPT 28, 1997 - ------------------------------------------------------------------------------------------------------ REVENUES FROM EXTERNAL CUSTOMERS United States $1,490,133 $1,173,982 $ 884,314 Foreign countries 190,012 134,720 91,075 - ------------------------------------------------------------------------------------------------------ Total $1,680,145 $1,308,702 $ 975,389 - ------------------------------------------------------------------------------------------------------
Revenues from foreign countries are based on the location of the customers and consist primarily of revenues from Canada and the United Kingdom. No customer accounts for 10% or more of the Company's revenues.
- ---------------------------------------------------------------------------------- OCT 3, 1999 SEPT 27, 1998 - ---------------------------------------------------------------------------------- LONG-LIVED ASSETS United States $680,344 $549,730 Foreign countries 79,945 51,064 - ---------------------------------------------------------------------------------- Total $760,289 $600,794 - ----------------------------------------------------------------------------------
Assets attributed to foreign countries are based on the country in which those assets are located. NOTE 15: QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for fiscal years 1999 and 1998 is as follows (in thousands, except earnings per share):
- ---------------------------------------------------------------------------------------------------------------------- FIRST SECOND THIRD FOURTH - ---------------------------------------------------------------------------------------------------------------------- 1999 quarter Net revenues $405,638 $375,822 $423,792 $474,893 Gross margin 219,338 205,865 238,772 275,160 Net earnings 26,733 17,957 24,635 32,368 Net earnings per common share -- diluted $ 0.14 $ 0.10 $ 0.13 $ 0.17 - ---------------------------------------------------------------------------------------------------------------------- 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 $ 0.12 $ 0.08 $ 0.04 $ 0.14 - ----------------------------------------------------------------------------------------------------------------------
27 STARBUCKS CORPORATION (Seattle, Washington) We have audited the accompanying consolidated balance sheets of Starbucks Corporation and subsidiaries (the Company) as of October 3, 1999, and September 27, 1998, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended October 3, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Starbucks Corporation and subsidiaries as of October 3, 1999, and September 27, 1998, and the results of their operations and their cash flows for each of the three years in the period ended October 3, 1999, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Seattle, Washington December 10, 1999 28 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The management of Starbucks Corporation is responsible for the preparation and integrity of the financial statements included in this Annual Report to Shareholders. The financial statements have been prepared in conformity with generally accepted accounting principles and include amounts based on management's best judgment where necessary. Financial information included elsewhere in this Annual Report is consistent with these financial statements. Management maintains a system of internal controls and procedures designed to provide reasonable assurance that transactions are executed in accordance with proper authorization, that transactions are properly recorded in the Company's records, that assets are safeguarded and that accountability for assets is maintained. The concept of reasonable assurance is based on the recognition that the cost of maintaining our system of internal accounting controls should not exceed benefits expected to be derived from the system. Internal controls and procedures are periodically reviewed and revised, when appropriate, due to changing circumstances and requirements. Independent auditors are appointed by the Company's Board of Directors and ratified by the Company's shareholders to audit the financial statements in accordance with generally accepted auditing standards and to independently assess the fair presentation of the Company's financial position, results of operations and cash flows. Their report appears in this Annual Report. The Audit Committee, all of whose members are outside directors, is responsible for monitoring the Company's accounting and reporting practices. The Audit Committee meets periodically with management and the independent auditors to ensure that each is properly discharging its responsibilities. The independent auditors have full and free access to the Committee without the presence of management to discuss the results of their audits, the adequacy of internal accounting controls and the quality of financial reporting. /s/ HOWARD SCHULTZ /s/ ORIN SMITH /s/ MICHAEL CASEY HOWARD SCHULTZ ORIN SMITH MICHAEL CASEY chairman and president and executive vice president, chief executive officer chief operating officer chief financial officer and chief administrative officer 29 SHAREHOLDER INFORMATION 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 closing sale prices per share of the Common Stock as reported by Nasdaq for each quarter during the last two fiscal years. All prices shown reflect the two-for-one stock split effected March 19, 1999.
- -------------------------------------------------------------------------------- HIGH LOW - -------------------------------------------------------------------------------- October 3, 1999 First Quarter $26 11/16 $16 9/16 Second Quarter 30 11/16 23 9/32 Third Quarter 39 3/4 28 1/16 Fourth Quarter 37 9/16 20 1/16 September 27, 1998 First Quarter $20 29/32 $15 23/32 Second Quarter 21 17/32 16 13/16 Third Quarter 27 1/16 21 9/16 Fourth Quarter 29 9/32 14 19/32 - --------------------------------------------------------------------------------
As of December 1, 1999, the Company had 8,904 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. THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 3, 1999, WITHOUT THE EXHIBITS THERETO, MAY BE OBTAINED WITHOUT CHARGE BY ACCESSING THE COMPANY'S FILINGS AT WWW.SEC.GOV OR BY SENDING A REQUEST TO INVESTOR RELATIONS AT THE ADDRESS OR PHONE NUMBER 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 request to: INVESTOR RELATIONS Investor Relations -- M/S S-FP1 Starbucks Corporation P.O. Box 34067 Seattle, WA 98124-1067 (206) 447-1575, ext. 87118 30 BOARD OF DIRECTORS AND EXECUTIVE OFFICERS BOARD OF DIRECTORS Howard Schultz Starbucks Corporation, chairman of the board and chief executive officer Orin C. Smith Starbucks Corporation, president and chief operating officer Arlen I. Prentice Kibble & Prentice, co-chairman and chief executive officer Barbara Bass Gerson Bakar Foundation, president Craig J. Foley Wickham Capital Corp., president Craig E. Weatherup The Pepsi Bottling Group, chairman and chief executive officer Gregory B. Maffei Microsoft Corporation, senior vice president and chief financial officer Howard P. Behar director James G. Shennan, Jr. Trinity Ventures, general partner EXECUTIVE OFFICERS PRESIDENTS John B. Richards president, North American Operations Paul D. Davis president, Retail North America Peter Maslen president, Starbucks Coffee International, Inc. EXECUTIVE VICE PRESIDENTS Deidra Wager executive vice president, Retail Eduardo R. Garcia executive vice president, Supply Chain and Coffee Operations Michael Casey executive vice president, chief financial officer and chief administrative officer SENIOR VICE PRESIDENTS Arthur Rubinfeld senior vice president, Store Development Bruce Craig senior vice president, Retail Field Operations David W. Frost senior vice president, New Business Development David Olsen senior vice president Deborah Gillotti senior vice president and general manager, Starbucks X Engle Saez senior vice president, Retail Marketing and Product Management Howard Wollner senior vice president, Administration and Strategic Alliance Management James Alling senior vice president, Business Alliances Mark Wesley senior vice president, Store Development and Asset Management Mary Williams senior vice president, Coffee Michael T. Sweeney senior vice president and president, Starbucks Coffee Company (UK) Limited Pedro Y.K. Man senior vice president and president, Starbucks Coffee Asia Pacific Ltd. Sharon Elliott senior vice president, Human Resources Shelley B. Lanza senior vice president, Law and Corporate Affairs, and general counsel Wanda Herndon senior vice president, Communications and Public Affairs SECRETARY OF CORPORATION G. Scott Greenburg secretary EX-21 6 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 Holdings (UK) Limited Starbucks Coffee Company (UK) Limited (a wholly-owned subsidiary of Starbucks Coffee Holdings (UK) Limited) Seattle Coffee Company International (a wholly-owned subsidiary of Starbucks Coffee Holdings (UK) Limited) Torz & Macatonia Limited (a wholly-owned subsidiary of Starbucks Coffee Holdings (UK) Limited) Tazo Tea Company Pasqua Inc. Starbucks Coffee France, EURL (a wholly-owned subsidiary of Starbucks Coffee International, Inc.) Starbucks Coffee Asia Pacific Ltd. (a wholly-owned subsidiary of Starbucks Coffee International, Inc.) Starbucks Coffee Company (Australia) Pty Ltd (a 90% owned subsidiary of the Registrant) Tympanum, Inc. EX-23 7 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 Forms S-8 of our report dated December 10, 1999, incorporated by reference in the Annual Report on Form 10-K of Starbucks Corporation for year ended October 3, 1999. DELOITTE & TOUCHE LLP Seattle, Washington December 22, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STARBUCKS CORPORATION FISCAL YEAR ENDED 10/3/99 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR OCT-03-1999 SEP-28-1998 OCT-03-1999 66,419 56,395 48,873 1,227 180,886 386,500 1,081,271 320,982 1,252,514 251,597 7,018 0 0 651,020 309,933 1,252,514 1,680,145 1,680,145 741,010 741,010 782,424 0 1,363 164,026 62,333 101,693 0 0 0 101,693 .56 .54
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