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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 0-20322
STARBUCKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
WASHINGTON 91-1325671
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2401 UTAH AVENUE SOUTH, SEATTLE, WASHINGTON 98134
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (206) 447-1575
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation of S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form l0-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Registrants Common Stock on
December 1, 1998, as reported on the National Market tier of The Nasdaq Stock
Market, Inc. was $4,368,196,902.
As of December l, 1998, there were 89,655,557 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Annual Report to Shareholders for the fiscal year
ended September 27, 1998 have been incorporated by reference into Parts II and
IV of this Annual Report on Form 10-K. Portions of the definitive Proxy
Statement for the Registrant's Annual Meeting of Shareholders to be held on
February 23, 1999 have been incorporated by reference into Part III of this
Annual Report on Form 10-K.
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Cautionary Statement pursuant to the Private Securities
Litigation Reform Act of 1995
Certain statements set forth in or incorporated by reference into this
Annual Report on Form 10-K, including anticipated store openings, planned
capital expenditures and trends in or expectations regarding the Company's
operations, specifically including the effect of problems associated with the
Year 2000, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based on
currently available operating, financial and competitive information and are
subject to various risks and uncertainties. Actual future results and trends may
differ materially depending on a variety of factors, including, but not limited
to, coffee and other raw materials prices and availability, successful execution
of internal performance and expansion plans, the impact of competition, the
effect of legal proceedings and other risks detailed herein.
PART I
ITEM 1. BUSINESS
General. Starbucks Corporation and its subsidiaries (collectively
"Starbucks" or the "Company") purchases and roasts high-quality whole bean
coffees and sells them, along with fresh, rich-brewed coffees, Italian-style
espresso beverages, a variety of pastries and confections and coffee-related
accessories and equipment, primarily through its Company-operated retail stores.
In addition to sales through its Company-operated retail stores, Starbucks sells
primarily whole bean coffees through its specialty sales operations. Starbucks,
through its joint venture partnerships, also produces and sells bottled
Frappuccino(TM) coffee drink and a line of premium ice creams. The Company's
objective is to establish Starbucks as the most recognized and respected brand
of coffee in the world. To achieve this goal, the Company plans to continue to
rapidly expand its retail operations, grow its specialty sales businesses, and
selectively pursue other opportunities to leverage the Starbucks brand through
the introduction of new products and the development of new distribution
channels.
Starbucks is committed to selling only the finest whole bean coffees
and coffee beverages. To ensure compliance with its rigorous coffee standards,
Starbucks controls its coffee purchasing, roasting and packaging, and the
distribution of coffee to its retail stores. The Company purchases green coffee
beans for its many blends and single origin coffees from coffee-producing
regions around the world and custom roasts them to its exacting standards.
Company-Operated Retail Stores. The Company's retail goal is to become
the leading retailer and brand of coffee in each of its target markets by
selling the finest quality coffee and related products and by providing superior
customer service, thereby building a high degree of customer loyalty. Starbucks
strategy for expanding its retail business is to increase its market share in
existing markets and to open stores in new markets where the opportunity exists
to become the leading specialty coffee retailer. In furtherance of this
strategy, the Company acquired London-based Seattle Coffee Holdings Limited
("Seattle Coffee Company") in exchange for approximately 1.8 million shares of
Starbucks common stock in May 1998. The acquisition gave the Company an
immediate presence in the United Kingdom with 61 Starbucks-style retail stores,
and provides a logical point of entry for future expansion into the European
market. As of September 27, 1998, Starbucks had 1,688 Company-operated stores in
32 states, the District of Columbia, four Canadian provinces and the United
Kingdom. Company-operated retail stores accounted for approximately 84% of net
revenues during the fiscal year ended September 27, 1998 ("fiscal 1998"). The
Company intends to finance additional growth in the number of Company-operated
retail stores with cash flow from operations, supplemented by debt financing, if
necessary.
Starbucks retail stores are typically clustered in high-traffic,
high-visibility locations. Because the Company can vary the size and format of
its stores, Starbucks stores are located in a variety of settings, including
downtown and suburban retail centers, office buildings, supermarket foyers and
on university campuses. While the Company selectively locates stores in suburban
malls, it focuses on stores that are convenient for pedestrian street traffic.
All Starbucks stores offer a choice of regular or decaffeinated coffee
beverages, including at least one "coffee of the day," a broad selection of
Italian-style espresso beverages and distinctively packaged, roasted whole
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bean coffees. Starbucks stores also offer a selection of fresh pastries and
other food items, sodas, juices, tea, and coffee-making equipment and
accessories. Each Starbucks store varies its product mix depending upon the size
of the store and its location. Larger stores carry a broad selection of the
Company's whole bean coffees in various sizes and types of packaging, as well as
an assortment of coffee and espresso-making equipment and accessories such as
coffee grinders, drip coffee makers, espresso machines, coffee filters, storage
containers, travel tumblers and mugs. Smaller Starbucks stores and kiosks
typically sell a full line of coffee beverages, a more limited selection of
whole bean coffees and a few accessories such as travel tumblers and logo mugs.
During fiscal 1998, the Company's retail sales mix by product type was
approximately 66% coffee beverages, 14% food items, 12% whole bean coffees, and
8% coffee-making equipment and accessories.
Specialty Sales. Starbucks specialty sales operations strive to
develop the Starbucks brand outside the Company-operated retail store
environment. Starbucks strategy for expanding its specialty sales operations is
to reach customers as they shop, travel, work and dine by establishing
relationships with prominent third parties who share Starbucks values and
commitment to quality. These relationships take various forms, including
domestic wholesale accounts, domestic retail store and grocery channel licensing
agreements, international licensing arrangements and a direct response business.
In some situations, the licensee is a joint venture in which Starbucks has an
equity ownership interest. During fiscal 1998, specialty sales revenues (which
include royalties and fees from licensees as well as product sales) accounted
for approximately 16% of the Company's net revenues.
Domestic Retail Licensing. Although the Company does not generally
relinquish operational control of its retail stores in North America, in
situations in which a master concessionaire or another company controls or can
provide improved access to desirable retail space, the Company may consider
licensing its operations. As part of these arrangements, Starbucks receives
license fees and royalties and sells coffee and related products for resale in
the licensed locations. Employees working in the licensed locations must follow
Starbucks detailed store-operating procedures and attend the same core training
classes given to Starbucks store managers and employees. As of September 27,
1998, the Company had 133 licensee-operated stores in continental North America.
Domestic Grocery Licensing. Following supermarket tests in Portland,
Oregon and Chicago, Illinois during fiscal 1997 and early fiscal 1998, the
Company evaluated several strategic alternatives for accessing the market for
whole bean and ground specialty coffee in supermarkets. During the second half
of fiscal 1998, the Company expanded the distribution of its coffee to 10 West
Coast grocery markets. By fiscal year-end, Starbucks whole bean and ground
coffee was available in approximately 4,000 supermarkets. Late in fiscal 1998,
Starbucks entered into a long-term licensing agreement with Kraft Foods, Inc.
("Kraft") to accelerate the growth of the Starbucks brand into the grocery
channel in the United States. Pursuant to the arrangements with Kraft, Kraft
will handle all distribution, marketing, advertising and promotions for
Starbucks whole bean and ground coffee in grocery, warehouse club and mass
merchandise stores.
Domestic Joint Ventures. The Company has entered into 50-50 joint
ventures with the Pepsi-Cola Company, a division of PepsiCo, Inc. ("Pepsi"), and
Dreyer's Grand Ice Cream, Inc. ("Dreyer's"). The joint venture with Pepsi, The
North American Coffee Partnership, was formed in fiscal 1994 to develop and
distribute ready-to-drink coffee-based products. In May 1996, The North American
Coffee Partnership introduced bottled Frappuccino coffee drink in selected
supermarkets and other retail points of distribution throughout the west coast
of the United States. In mid-1997, the joint venture began to distribute
Frappuccino to additional supermarkets, convenience and drug stores on the west
coast as well as key cities in the midwest and northeast United States. By the
end of fiscal 1998, the joint venture was distributing Frappuccino to
approximately 200,000 supermarkets, convenience and drug stores and other
locations throughout the United States. The Company's joint venture with
Dreyer's was formed in early fiscal 1996 to develop and distribute Starbucks
premium coffee ice creams. During fiscal 1997, the Company expanded the product
line produced and distributed through the joint venture from six flavors of ice
cream to eight flavors of ice cream and two novelty products, including two
low-fat ice creams and a low-fat blended coffee bar. In early 1998, the Company
introduced its first non-coffee ice cream in limited markets. (See Note 6 to the
Company's consolidated financial statements, "Joint Ventures and Other
Investments," incorporated by reference to the Company's 1998 Annual Report to
Shareholders in Item 8 of this Form 10-K.)
International Licensing. Starbucks retail stores located outside of
continental North America and the United Kingdom are operated through a number
of joint venture and licensing arrangements with prominent retailers. During
fiscal 1998, the Company expanded its international presence by opening 45 new
stores in the
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Pacific Rim and entering into agreements with Restaurant Brands, the Berjaya
Group and Beijing Mei-Da Coffee Company Ltd. to develop Starbucks stores in New
Zealand, Malaysia and Beijing, China, respectively. At fiscal year end the
Company had 26 stores in Japan, 13 in Hawaii, 11 in Singapore, six in Taiwan,
five in the Philippines and one in Thailand. The Company also has two licensed
locations in South Africa and one in Kuwait obtained in the acquisition of
Seattle Coffee Company.
Direct Response. The Company's direct response operations ensure that
fresh Starbucks coffee and products are conveniently available via mail order
and on-line. Starbucks publishes and distributes a mail order catalog that
offers its coffees, certain food items and select coffee-making equipment and
accessories. In early October 1998, the Company launched its web site at
www.Starbucks.com with an on-line store that allows customers to browse for and
purchase coffee, gifts and other items via the internet. Starbucks ships
products to customers located in all 50 states and in many foreign countries.
Management believes that the Company's direct response operations support its
retail store expansion into new markets and reinforce brand recognition in
existing markets.
Product Supply. Coffee is the world's second largest traded commodity
and its supply and price are subject to significant volatility. Although most
coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of
purchase. Supply and price can be affected by multiple factors in the producing
countries, including weather, political and economic conditions. In addition,
green coffee prices have been affected in the past, and may be affected in the
future, by the actions of certain organizations and associations that have
historically attempted to influence commodity prices of green coffee through
agreements establishing export quotas or restricting coffee supplies worldwide.
The Company depends upon its relationships with outside trading
companies and exporters for its supply of green coffee. To secure an adequate
supply and to fix costs for future periods, the Company routinely enters into
fixed price purchase commitments for future deliveries of coffee. As of
September 27, 1998, the Company had approximately $96 million in fixed price
purchase commitments which, together with existing inventory, is expected to
provide an adequate supply of green coffee well into fiscal 1999. The Company
believes, based on relationships established with its suppliers in the past,
that the risk of non-delivery on such purchase commitments is remote. In
addition, the Company from time to time purchases and sells coffee futures
contracts as a hedging mechanism to minimize cost risk due to market
fluctuations. There can be no assurance that these activities will successfully
protect the Company against the risks of higher coffee prices or that such
activities will not result in the Company having to pay substantially more for
its coffee supply than it would have been required to pay absent such
activities.
Products other than whole bean coffees and coffee beverages sold in
Starbucks retail stores are obtained through a number of different channels.
Specialty foods, such as fresh pastries and lunch items, are generally purchased
from local sources based on quality and price. Coffee-making equipment, such as
drip and french press coffee makers, espresso machines and coffee grinders, are
generally purchased directly from their manufacturers for resale. Coffee-related
accessories, including items bearing the Company's logos and trademarks, are
produced and distributed through contracts with a number of different vendors.
Competition. The Company's primary competitors for coffee beverage
sales are restaurants, shops, and street carts. In almost all markets in which
the Company does business there has been a significant increase in competition
in the specialty coffee beverage business and management expects this trend to
continue. Although competition in the beverage market is currently fragmented, a
major competitor with substantially greater financial, marketing and operating
resources than the Company could enter this market at any time and compete
directly against the Company.
The Company's whole bean coffees compete directly against specialty
coffees sold at retail through supermarkets, specialty retailers, and a growing
number of specialty coffee stores. The Company's coffee beverages compete
directly against all restaurant and beverage outlets that serve coffee and a
growing number of espresso stands, carts, and stores. Both the Company's whole
bean coffees and its coffee beverages compete indirectly against all other
coffees on the market. The Company believes that its customers choose among
retailers primarily on the basis of product quality, service and convenience,
and, to a lesser extent, on price.
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Management believes that supermarkets are the most competitive
distribution channel for specialty whole bean coffee, in part because
supermarkets offer customers a variety of choices without having to make a
separate trip to a specialty coffee store. A number of nationwide coffee
manufacturers are distributing premium coffee products in supermarkets that may
serve as substitutes for the Company's coffees. Regional specialty coffee
companies also sell whole bean coffees in supermarkets.
In addition to the competition generated by supermarket sales of
coffee, Starbucks competes for whole bean coffee sales with franchise operators
and independent specialty coffee stores. In virtually every major metropolitan
area where Starbucks operates and expects to expand, there are local or regional
competitors with substantial market presence in the specialty coffee business.
In addition to the competition for coffee beverage retail sales and
whole bean coffee, the Company faces intense competition from both restaurants
and other specialty retailers for suitable sites for new stores and qualified
personnel to operate both new and existing stores. There can be no assurance
that Starbucks will be able to continue to secure adequate sites at acceptable
rent levels or that the Company will be able to attract a sufficient number of
qualified workers. Starbucks specialty sales operations also face significant
competition from established wholesale and mail order suppliers, some of whom
have greater financial and marketing resources than the Company.
Patents, Trademarks and Copyrights. The Company owns and/or has
applied to register numerous trademarks and service marks in the United States,
Canada and in more than 100 additional countries throughout the world. Rights to
the trademarks and service marks in the United States are held by Starbucks U.S.
Brands Corporation, a wholly-owned subsidiary of the Company, and are used by
the Company under license. Some of the Company's trademarks, including
"Starbucks," the Starbucks logo and "Frappuccino," are of material importance to
the Company. Trademarks are generally valid as long as they are in use and/or
their registrations are properly maintained, and they have not been found to
have become generic. Trademark registrations can generally be renewed
indefinitely so long as the marks are in use.
The Company also owns numerous copyrights for its product packaging,
promotional materials, in-store graphics and training materials, among other
things. The Company also holds patents on certain products and systems. While
valuable, individual copyrights and patents currently held by the Company are
not viewed as material to the Company's business.
Research and Development. The Company's Research and Development
department is comprised of chemists, engineers, food scientists and technicians
responsible for the formulation and technical development of new food, beverage
and equipment products. The department has played a major role in the
development of bottled Frappuccino, coffee ice cream products, a portafilter
system for espresso machines that accommodates both ground coffee and espresso
filter packs ("pods"), and the Company's blended fruit and tea beverage,
Tiazzi(TM). The Company spent approximately $4.0 million during fiscal 1998 on
technical research and development activities, in addition to customary product
testing and development in all areas of the Company's business.
Seasonality and Quarterly Results. The Company's business is subject
to seasonal fluctuations. Significant portions of the Company's net revenues and
profits are realized during the first quarter of the Company's fiscal year that
includes the December holiday season. In addition, quarterly results are
affected by the timing of the opening of new stores, and the Company's rapid
growth may conceal the impact of other seasonal influences. Because of the
seasonality of the Company's business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full fiscal
year.
Employees. As of September 27, 1998, the Company employed approximately
26,000 individuals, approximately 24,000 in retail stores and regional offices
and the remainder in the Company's administrative, specialty sales, real estate,
roasting, and warehousing operations. At fiscal year end, 11 of the Company's
stores (out of a total of 1,688 Company-operated stores in continental North
America and the United Kingdom) were unionized. Starbucks has entered into a
labor agreement governing such stores that extends until July 1999. The Company
believes that its current relations with its employees are excellent.
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ITEM 2. PROPERTIES
Starbucks currently operates four roasting and distribution facilities
- - - two in the Seattle, Washington area, one in East Manchester Township, York
County, Pennsylvania and one in London, England. In the Seattle area, the
Company leases approximately 92,000 square feet in one building pursuant to a
lease extendable through 2001 (the "Seattle Plant"), and owns an additional
roasting plant and distribution facility of approximately 305,000 square feet
and leases a warehouse facility of approximately 156,000 square feet in Kent,
Washington (the "Kent Plant"). The Company has a lease agreement executed in
August 1994 with York County Industrial Development Corporation for a roasting
and distribution facility (the "York Plant"), providing for approximately
365,000 square feet initially. The lease has a 15-year term and the Company has
an option to purchase the land and building within five years of the date of
occupancy. Such option to purchase also provides that the Company may purchase,
within seven years of occupancy, additional land adjacent to the York Plant that
would expand it to 1,000,000 square feet. The Company is party to a letter of
intent and a commitment letter which provide that in the event that the Company
exercises its option to purchase the York Plant, the Company will have the right
to assume loans incurred in connection with its development. The Company also
leases a small roasting and storage facility in London, England that supports
its operations in the United Kingdom. The lease for this facility expires in
2007 unless extended by the parties.
The Company also leases approximately 400,000 square feet of a
building located in Seattle, Washington for administrative offices and has
options to lease approximately 150,000 additional square feet in such building.
The Company owns 2.36 acres (102,800 square feet) of undeveloped land near its
administrative offices and adjacent to the Seattle Plant, which is currently
used for parking.
As of September 27, 1998, Starbucks operated a total of 1,688 retail
stores. All Starbucks stores are located in leased premises. The Company also
leases space in approximately 50 additional locations for regional, district and
other administrative offices, training facilities and storage, not including
spaces within retail stores used for such purposes and certain seasonal retail
storage locations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the
ordinary course of its business, but is not currently a party to any legal
proceeding which the Company believes will have a material adverse effect on the
financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated herein by
reference to the section entitled "Shareholder Information" in the Company's
1998 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by
reference to the section entitled "Selected Financial Data" in the Company's
1998 Annual Report to Shareholders.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by
reference to the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1998 Annual
Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Risk Management" in
the Company's 1998 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by
reference to the Consolidated Financial Statements and the notes thereto in the
Company's 1998 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company and compliance
with Section 16(a) of the Securities Exchange Act of 1934, as amended, is
incorporated herein by reference to the sections entitled " Proposal 1 Election
of Directors" and "Executive Compensation - Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on February 23, 1999 (the "Proxy Statement").
The Company intends to file the Proxy Statement within 120 days after the end of
its fiscal year.
The executive officers of the Company, each of whom serves a one-year
term and until his or her successor is elected and qualified, are as follows:
<TABLE>
<CAPTION>
Name Age Position Executive Officer Since
---- --- -------- -----------------------
<S> <C> <C> <C>
Howard Schultz 45 chairman of the board and chief executive 1985
officer
Orin Smith 56 director, president and chief operating officer 1990
Howard Behar 54 director and president, Starbucks Coffee 1989
International, Inc.
John B. Richards 50 president, Retail North America 1997
Michael Casey 53 executive vice president, chief financial 1995
officer and chief administrative officer
</TABLE>
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<TABLE>
<CAPTION>
Name Age Position Executive Officer Since
---- --- -------- -----------------------
<S> <C> <C> <C>
E. R. (Ted) Garcia 51 executive vice president, Supply Chain and 1995
Coffee Operations
Deidra Wager 43 executive vice president, Retail Marketing and 1993
Operations
James Alling 37 senior vice president, Specialty Sales and 1997
Marketing
Bruce Craig 56 senior vice president, Retail Field Operations 1997
Sharon E. Elliott 47 senior vice president, Human Resources 1994
Deborah Gillotti 41 senior vice president and chief information 1997
officer
Wanda Herndon 46 senior vice president, Communications and 1996
Public Affairs
Shelley B. Lanza 42 senior vice president, Law and Corporate 1995
Affairs and general counsel
Judy Meleliat 41 senior vice president, Marketing 1997
David M. Olsen 52 senior vice president 1991
Arthur I. Rubinfeld 45 senior vice president, Store Development 1992
Michael Sweeney 40 senior vice president, International 1998
Don Valencia 46 senior vice president, Research and Development 1997
Mary Williams 49 senior vice president, Coffee 1997
Howard Wollner 45 senior vice president, Administration and 1998
Strategic Alliance Management
Scott T. Svenson 32 chief executive officer, Starbucks Coffee (UK) 1998
Holdings Limited
</TABLE>
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.
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ORIN SMITH joined the Company in 1990 and has served as president and
chief operating officer of the Company since June 1994. Prior to June 1994, Mr.
Smith served as the Company's vice president and chief financial officer and
later, as its executive vice president and chief financial officer.
HOWARD BEHAR joined the Company in 1989 and has served as president of
Starbucks Coffee International, Inc. since June 1994. From February 1993 to June
1994, Mr. Behar served as the Company's executive vice president, Sales and
Operations. From February 1991 to February 1993, Mr. Behar served as senior vice
president, Retail Operations of the Company and from August 1989 to January
1991, he served as the Company's vice president, Retail Stores.
JOHN B. RICHARDS joined the Company in September 1997 as president,
Retail North America. Prior to joining the Company, Mr. Richards served as the
Executive Vice President of Four Seasons Hotels and Resorts for 10 years. Prior
to that time Mr. Richards held various positions with McKinsey & Company and
Procter & Gamble.
MICHAEL CASEY joined Starbucks in August 1995 as senior vice president
and chief financial officer and was promoted to executive vice president, chief
financial officer and chief administrative officer in September 1997. Prior to
joining Starbucks, Mr. Casey served as executive vice president and chief
financial officer of Family Restaurants, Inc. from its inception in 1986. During
his tenure there, he also served as a director from 1986 to 1993, and as
president and chief executive officer of its El Torito Restaurants, Inc.
subsidiary from 1988 to 1993.
E. R. (TED) GARCIA joined Starbucks in April 1995 as senior vice
president, Supply Chain Operations and was promoted to executive vice president,
Supply Chain and Coffee Operations in September 1997. From May 1993 to April
1995, Mr. Garcia was an executive for Gemini Consulting. From January 1990 until
May 1993, he was the vice president of Operations Strategy for Grand
Metropolitan PLC, Food Sector.
DEIDRA WAGER joined Starbucks in 1992 and served as the Company's
senior vice president, Retail Operations from August 1993 to September 1997 when
she was promoted to executive vice president, Retail Marketing and Operations.
From September 1992 to August 1993, Ms. Wager served as the Company's vice
president, Operation Services. From March 1992 to September 1992, she was the
Company's California regional manager. From September 1988 to March 1992, Ms.
Wager held several operations positions with Taco Bell(R), Inc., including
having served as its director of operations systems development.
JAMES ALLING joined Starbucks in September 1997 as senior vice
president, Grocery and became senior vice president, Specialty Sales and
Marketing in December 1998. From 1985 to 1997, Mr. Alling held several marketing
and general management positions for Nestle, U.S.A., including serving as the
vice president and general manager of the ground coffee division.
BRUCE CRAIG joined Starbucks in October 1992 and served as regional
and then zone vice president for the Southwest. In September 1997, Mr. Craig was
promoted to the position of senior vice president, Retail Field Operations.
Prior to joining Starbucks, Mr. Craig served for 21 years with Burger King Corp.
in various positions, including executive vice president/division manager and as
an owner/operator.
SHARON E. ELLIOTT joined Starbucks in 1994 as senior vice president,
Human Resources. From September 1993 to June 1994, Ms. Elliott served as the
corporate director, staffing and development of Allied Signal Corporation. From
July 1987 to August 1993, she held several human resources management positions
with Bristol-Myers Squibb, including serving as the director of human
resources--corporate staff.
DEBORAH GILLOTTI joined Starbucks in February 1997 as senior vice
president and chief information officer. Prior to joining Starbucks, Ms.
Gillotti served as vice president, Corporate MIS for Duracell International,
Inc. (now a division of the Gillette Company). She also held several management
positions for KPMG Peat Marwick Management Consulting from 1989 to 1993.
WANDA HERNDON joined Starbucks in July 1995 as vice president,
Communications and Public Affairs and was promoted to senior vice president,
Communication and Public Affairs in November 1996. From February 1990 to June
1995, Ms. Herndon held several communications management positions at DuPont.
From November 1978 to
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February 1990, Ms. Herndon held several public affairs and marketing
communications positions for Dow Chemical Company.
SHELLEY B. LANZA joined Starbucks in June 1995 as senior vice
president, Law and Corporate Affairs and general counsel. From 1986 to 1995, Ms.
Lanza served as vice president and general counsel of Honda of America
Manufacturing, Inc. From 1982 to 1986, Ms. Lanza practiced law at the law firm
of Vorys, Sater, Seymour and Pease in Columbus, Ohio.
JUDY MELELIAT joined Starbucks in October 1997 as vice president,
Marketing Operations and was promoted to senior vice president, Marketing in
November 1997. Prior to joining Starbucks, Ms. Meleliat was vice president of
Marketing for InfoAccess. From September 1995 to June 1996, she served at Edmark
Corporation as the vice president of Sales for the Education Channel. From
September 1987 to September 1995, Ms. Meleliat held several executive management
positions at Egghead Software.
DAVID M. OLSEN joined Starbucks in 1986 and served as the Company's
senior vice president, Coffee from September 1991 to October 1997. From November
1987 to September 1991, Mr. Olsen served as vice president, Coffee, and from
February 1986 to November 1987, he served as the Company's director of training.
ARTHUR I. RUBINFELD joined the Company in 1992 as senior vice
president, Real Estate. From April 1986 to May 1992, Mr. Rubinfeld served as a
managing partner of Epsteen & Associates, a commercial real estate company.
MICHAEL SWEENEY joined the Company in November 1998 as senior vice
president, International. Prior to joining Starbucks, Mr. Sweeney served from
September 1995 to November 1998 as the President of Minnesota Pizza Company, a
franchise of Papa Johns, International, which operated 37 locations. From May
1992 to July 1995, Mr. Sweeney served as the President of Blockbuster
Mid-America, a franchisee of Blockbuster Entertainment, Inc. that operated 35
locations.
DON VALENCIA joined Starbucks in November 1993 as vice president,
Research and Development and was promoted to senior vice president, Research and
Development in October 1997. From 1980 to 1993, Mr. Valencia was president of
Immuno Concepts, Incorporated, a biomedical company.
MARY WILLIAMS joined Starbucks in March 1993 as vice president, Green
Coffee and was promoted to senior vice president, Coffee in October 1997. From
May 1988 to March 1993, Ms. Williams served as president of Klein Bros.
International, Coffee Division.
HOWARD WOLLNER joined Starbucks in January 1992 as vice president,
Administration and was promoted to senior vice president, Administration and
Strategic Alliance Management in October 1998. Prior to joining Starbucks, Mr.
Wollner was executive vice president of Watts Silverstein Associates from July
1990 to July 1991. From 1977 to 1990, Mr. Wollner was associated with Canoon &
Black Corporation where he was president of C&B Consulting Group, an employee
benefits consulting firm.
SCOTT T. SVENSON joined Starbucks in June 1998 as chief executive
officer of Starbucks Coffee (UK) Holdings Limited following the acquisition of
Seattle Coffee Company. Mr. Svenson co-founded Seattle Coffee Company in January
1995 and served as its chief executive officer until June 1998. From September
1993 to May 1996 Mr. Svenson was a director of Crestacare plc, assuming the role
of deputy chief executive for 1995 and 1996.
There are no family relationships between any directors or executive
officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section entitled "Executive Compensation" in the Company's Proxy Statement.
9
<PAGE> 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the section entitled "Beneficial Ownership of Common Stock" in the Company's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the section entitled "Executive Compensation - Certain Transactions" in the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on
Form l0-K:
1.Financial Statements.
The following financial statements are incorporated by
reference to Part II, Item 8 of the Company's 1998 Annual Report
to Shareholders:
Consolidated Balance Sheets as of September 27, 1998 and September
28, 1997;
Consolidated Statements of Earnings for the fiscal years ending
September 27, 1998, September 28, 1997 and September 29, 1996;
Consolidated Statements of Cash Flows for the fiscal years ending
September 27, 1998, September 28, 1997 and September 29, 1996;
Consolidated Statements of Shareholders' Equity for the fiscal
years ending September 27, 1998, September 28, 1997 and
September 29, 1996;
Notes to Consolidated Financial Statements.
2.Financial Statement Schedules.
Financial statement schedules are omitted because they are not
required or are not applicable, or the required information is
provided in the consolidated financial statements or notes thereto
described in Item 14(a)(1) above.
3.Exhibits.
The Exhibits listed below and on the accompanying Index to
Exhibits immediately following the signature page hereto are filed
as part of, or incorporated by reference into, this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
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)
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C>
3.1.2 Amendment dated March 18, 1996 to the Restated Articles of
Incorporation of Starbucks Corporation (incorporated herein
by reference to Exhibit 3.1.2 to the Company's Form 10-Q for
the quarterly period ended March 31, 1996, filed with the
SEC on May 15, 1996)
3.2 Amended and Restated Bylaws of Starbucks Corporation
(incorporated herein by reference to Exhibit 3.2 to the
Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed with the SEC on May 15, 1996)
10.1 Starbucks Corporation Key Employee Stock Option Plan - 1994
(incorporated herein by reference to Appendix A to the
Company's 1994 Proxy Statement filed with the SEC on
December 23, 1994)*
10.1.1 Starbucks Corporation Key Employee Stock Option Plan - 1994,
as amended (incorporated herein by reference to Exhibit
10.1.1 to the Company's Form 10-K for the fiscal year ended
September 29, 1996, filed with the SEC on December 26,
1996)*
10.2 Starbucks Corporation 1989 Stock Option Plan for
Non-Employee Directors, as amended (incorporated herein by
reference to Appendix B to the Company's 1994 Proxy
Statement filed with the SEC on December 23, 1994)*
10.2.1 Starbucks Corporation 1989 Stock Option Plan for
Non-Employee Directors, as amended (incorporated herein by
reference to Exhibit 10.2.1 to the Company's Form 10-K for
the fiscal year ended on September 29, 1996, filed with the
SEC on December 26, 1996)*
10.3 Starbucks Corporation 1991 Company-Wide Stock Option Plan,
as amended (incorporated herein by reference to the
Company's Registration Statement No. 33-52528 on Form S-8,
filed with the SEC on September 28, 1992)*
10.3.1 Starbucks Corporation 1991 Company-Wide Stock Option Plan,
as amended (incorporated by reference to Exhibit 10.3.1 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 29, 1996, filed with the SEC on December 26,
1996)*
10.4 Starbucks Corporation Employee Stock Purchase Plan - 1995
(incorporated herein by reference to Appendix C to the
Company's 1994 Proxy Statement filed with the SEC on
December 23, 1994)*
10.5 Industrial Lease, dated March 31, 1989, between Starbucks
Corporation and the City of Seattle (successor in interest
to David A. Sabey and Sandra L. Sabey) (incorporated herein
by reference to Exhibit 10.4 to the Company's Registration
Statement No. 33-47951 on Form S-1, filed with the SEC on
May 15, 1992)
10.6 Office Lease, dated as of July 15, 1993, between First and
Utah Street Associates, L.P. and Starbucks Corporation
(incorporated herein by reference to Exhibit 10.17 to the
Company's Form 10-K for the Fiscal Year ended October 3,
1993, filed with the SEC on December 30, 1993)
10.6.1 Second Amendment to Office Lease, dated as of January 1,
1995, between First & Utah Street Associates, L.P. and
Starbucks Corporation (incorporated herein by reference to
the Company's Registration Statement No. 33-93974 on Form
S-3, filed with the SEC on June 27, 1995)
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C>
10.6.2 Third Amendment to Office Lease, dated as of September 30,
1995, between First and Utah Street Associates, L.P. and
Starbucks Corporation (incorporated herein by reference to
Exhibit 10.19 to the Company's Form 10-K for the fiscal year
ended October l, 1995, filed with the SEC on December 28,
1995)
10.7 Development Agreement, dated as of February 11, 1994,
between Starbucks Corporation and Host International, Inc.
(incorporated herein by reference to Exhibit 10.18 to the
Company's Form 10-K for the Fiscal Year ended October 2,
1994, filed with the SEC on December 23, 1994)
10.8 Special Warranty Deed, dated March 7, 1994, between Kent
North Corporate Park, as grantor and Starbucks Corporation,
as grantee (incorporated herein by reference to Exhibit
10.14 to the Company's Form 10-K for the Fiscal Year ended
October 2, 1994, filed with the SEC on December 23, 1994)
10.9 Joint Venture and Partnership Agreement, dated August 10,
1994, between Pepsi-Cola Company, a division of PepsiCo,
Inc., and Starbucks New Venture Company (incorporated herein
by reference to Exhibit 10 to the Company's Form 10-Q for
the Quarterly Period ended July 3, 1994, filed with the SEC
on August 16, 1994)
10.10 Lease, dated August 22, 1994, between York County Industrial
Development Corporation and Starbucks Corporation
(incorporated herein by reference to Exhibit l0 to the
Company's Form 10-Q for the Quarterly Period Ended July 2,
1995, filed with the SEC on August 15, 1995)
10.11 Starbucks Corporation Amended and Restated
Consulting/Employment Agreement with Jeffrey H. Brotman,
dated as of January 14, 1995 (incorporated herein by
reference to Exhibit 10.14 to the Company's Form 10-K for
the Fiscal Year ended October l, 1995, filed with the SEC on
December 28, 1995)*
10.14 Master Licensing Agreement between the Company and ARAMARK
Food and Services Group, Inc. dated as of January 30, 1996,
as amended and restated May 7, 1996 (incorporated herein by
reference to Exhibit 10.23 to the Company's Form l0-Q for
the Quarterly Period Ended March 31, 1996, filed with the
SEC on May 15, 1996)
11 Computation of Per Share Earnings
13 Portions of the 1998 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
</TABLE>
- - -------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated as of and filed
on July 9, 1998 reporting in Item 5 the completion of the acquisition
of all of the equity interests of Seattle Coffee Company. The Current
Report contained the audited supplemental consolidated financial
statements listed below as of September 28, 1997 and September 29,
1996, and for each of the three years ended September 28, 1997, which
had been restated as if Starbucks and Seattle Coffee Company had been
combined for all periods presented. The Current Report also contained
the unaudited supplemental consolidated financial statements listed
below for the first and second quarters of fiscal 1998 (the periods
ending December 28, 1997 and March 29, 1998, respectively), which had
also been restated as if Starbucks and Seattle Coffee Company had been
combined for such periods.
<TABLE>
<S> <C>
Financial Statements for Fiscal Year 1997
- - -----------------------------------------
Independent Auditors' Report
Supplemental Consolidated Balance Sheets at September 28, 1997 and
September 29, 1996
Supplemental Consolidated Statements of Earnings for the Years Ended September
28, 1997, September 29, 1996 and October 1, 1995
Supplemental Consolidated Statements of Cash Flows for the Years Ended September
28, 1997, September 29, 1996 and October 1, 1995
Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended
September 28, 1997, September 29, 1996 and October 1, 1995
Notes to Supplemental Consolidated Financial Statements for the Years Ended
September 28, 1997, September 29, 1996 and October 1, 1995
Financial Statements for the First Fiscal Quarter of 1998
- - ---------------------------------------------------------
Supplemental Consolidated Statements of Earnings for the 13 weeks Ended
December 28, 1997 and December 29, 1996
Supplemental Consolidated Balance Sheets at December 28, 1997 and
September 28, 1997
Supplemental Consolidated Statements of Cash Flows for the 13 weeks Ended
December 28, 1997 and December 29, 1996
Notes to Supplemental Quarterly Consolidated Financial Statements for the 13 Weeks
Ended December 28, 1997 and December 29, 1996
Financial Statements for the Second Fiscal Quarter of 1998 Supplemental
- - -----------------------------------------------------------------------
Consolidated Statements of Earnings for the 13 and 26 weeks Ended
March 29, 1998 and March 30, 1997
Supplemental Consolidated Balance Sheets at March 29, 1998 and
September 28, 1997
Supplemental Consolidated Statements of Cash Flows for the 26 weeks Ended March
29, 1998 and March 30, 1997
Notes to Supplemental Quarterly Consolidated Financial Statements for the 13 and
26 Weeks Ended March 29, 1998 and March 30, 1997
</TABLE>
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
STARBUCKS CORPORATION
By: /s/ Howard Schultz
--------------------------------------
Howard Schultz
chairman of the Board of Directors and
chief executive officer
December 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ Howard Schultz chairman of the Board of Directors December 17, 1998
- - ------------------------
Howard Schultz and chief executive officer
/s/ Orin C. Smith director, president and chief operating December 15, 1998
- - ------------------------
Orin C. Smith officer
/s/ Howard Behar director, president of Starbucks Coffee December 15, 1998
- - ------------------------
Howard Behar International, Inc.
/s/ Michael Casey executive vice president, chief December 15, 1998
- - ------------------------
Michael Casey financial officer and chief administrative officer
(principal financial officer and principal
accounting officer)
/s/ Barbara Bass director December 15, 1998
- - ------------------------
Barbara Bass
/s/ Jeffrey H. Brotman director December 12, 1998
- - ------------------------
Jeffrey H. Brotman
/s/ Craig J. Foley director December 18, 1998
- - ------------------------
Craig J. Foley
/s/ Arlen I. Prentice director December 15, 1998
- - ------------------------
Arlen I. Prentice
/s/ James G. Shennan, Jr. director December 15, 1998
- - ------------------------
James G. Shennan, Jr.
</TABLE>
13
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
3.1 Restated Articles of Incorporation of Starbucks Corporation
(incorporated herein by reference to Exhibit 3.1 to the
Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed with the SEC on May 15, 1996)
3.1.1 Amendment dated November 22, 1995 to the Restated
Articles of Incorporation of Starbucks Corporation
(incorporated herein by reference to Exhibit 3.1.1 to
the Company's Form 10-Q for the fiscal quarter ended
March 31, 1996, filed with the SEC on May 15, 1996)
3.1.2 Amendment dated March 18, 1996 to the Restated
Articles of Incorporation of Starbucks Corporation
(incorporated herein by reference to Exhibit 3.1.2 to
the Company's Form 10-Q for the quarterly period
ended March 31, 1996, filed with the SEC on May 15,
1996)
3.2 Amended and Restated Bylaws of Starbucks Corporation
(incorporated herein by reference to Exhibit 3.2 to the
Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed with the SEC on May 15, 1996)
10.1 Starbucks Corporation Key Employee Stock Option Plan
- 1994 (incorporated herein by reference to Appendix
A to the Company's 1994 Proxy Statement filed with
the SEC on December 23, 1994)*
10.1.1 Starbucks Corporation Key Employee Stock Option Plan
- 1994, as amended (incorporated herein by reference
to Exhibit 10.1.1 to the Company's Form 10-K for the
fiscal year ended September 29, 1996, filed with the
SEC on December 26, 1996)*
10.2 Starbucks Corporation 1989 Stock Option Plan for
Non-Employee Directors, as amended (incorporated
herein by reference to Appendix B to the Company's
1994 Proxy Statement filed with the SEC on December
23, 1994)*
10.2.1 Starbucks Corporation 1989 Stock Option Plan for
Non-Employee Directors, as amended (incorporated
herein by reference to Exhibit 10.2.1 to the
Company's Form 10-K for the fiscal year ended on
September 29, 1996, filed with the SEC on December
26, 1996)*
10.3 Starbucks Corporation 1991 Company-Wide Stock Option
Plan, as amended (incorporated herein by reference to
the Company's Registration Statement No. 33-52528 on
Form S-8, filed with the SEC on September 28, 1992)*
10.3.1 Starbucks Corporation 1991 Company-Wide Stock Option
Plan, as amended (incorporated by reference to
Exhibit 10.3.1 to the Company's Annual Report on Form
10-K for the fiscal year ended September 29, 1996,
filed with the SEC on December 26, 1996)*
</TABLE>
E-1
<PAGE> 16
<TABLE>
<S> <C> <C>
10.4 Starbucks Corporation Employee Stock Purchase Plan - 1995 (incorporated
herein by reference to Appendix C to the Company's 1994 Proxy
Statement filed with the SEC on December 23, 1994)*
10.5 Industrial Lease, dated March 31, 1989, between
Starbucks Corporation and the City of Seattle
(successor in interest to David A. Sabey and Sandra
L. Sabey) (incorporated herein by reference to
Exhibit 10.4 to the Company's Registration Statement
No. 33-47951 on Form S-1, filed with the SEC on May
15, 1992)
10.6 Office Lease, dated as of July 15, 1993, between First and Utah Street
Associates, L.P. and Starbucks Corporation (incorporated
herein by reference to Exhibit 10.17 to the Company's Form
10-K for the Fiscal Year ended October 3, 1993, filed with the
SEC on December 30, 1993)
10.6.1 Second Amendment to Office Lease, dated as of January
1, 1995, between First & Utah Street Associates, L.P.
and Starbucks Corporation (incorporated herein by
reference to the Company's Registration Statement No.
33-93974 on Form 5-3, filed with the SEC on June 27,
1995)
10.6.2 Third Amendment to Office Lease, dated as of
September 30, 1995, between First and Utah Street
Associates, L.P. and Starbucks Corporation
(incorporated herein by reference to Exhibit 10.19 to
the Company's Form 10-K for the Fiscal Year ended
October l, 1995, filed with the SEC on December 28,
1995)
10.7 Development Agreement, dated as of February 11, 1994,
between Starbucks Corporation and Host International,
Inc. (incorporated herein by reference to Exhibit
10.18 to the Company's Form 10-K for the Fiscal Year
ended October 2, 1994, filed with the SEC on December
23, 1994)
10.8 Special Warranty Deed, dated March 7, 1994, between
Kent North Corporate Park, as grantor and Starbucks
Corporation, as grantee (incorporated herein by
reference to Exhibit 10.14 to the Company's Form 10-K
for the Fiscal Year ended October 2, 1994, filed with
the SEC on December 23, 1994)
10.9 Joint Venture and Partnership Agreement, dated August
10, 1994, between Pepsi-Cola Company, a division of
PepsiCo, Inc., and Starbucks New Venture Company
(incorporated herein by reference to Exhibit 10 to
the Company's Form 10-Q for the Quarterly Period
ended July 3, 1994, filed with the SEC on August 16,
1994)
10.10 Lease, dated August 22, 1994, between York County
Industrial Development Corporation and Starbucks
Corporation (incorporated herein by reference to
Exhibit l0 to the Company's Form 10-Q for the
Quarterly Period Ended July 2, 1995, filed with the
SEC on August 15, 1995)
</TABLE>
E-2
<PAGE> 17
<TABLE>
<S> <C> <C>
10.11 Starbucks Corporation Amended and Restated
Consulting/Employment Agreement with Jeffrey H.
Brotman, dated as of January 14, 1995 (incorporated
herein by reference to Exhibit 10.14 to the Company's
Form 10-K for the Fiscal Year ended October l, 1995,
filed with the SEC on December 28, 1995)*
10.14 Master Licensing Agreement between the Company and
ARAMARK Food and Services Group, Inc. dated as of
January 30, 1996, as amended and restated May 7, 1996
(incorporated herein by reference to Exhibit 10.23 to
the Company's Form l0-Q for the Quarterly Period
Ended March 31, 1996, filed with the SEC on May 15,
1996)
11 Computation of Per Share Earnings E-4
13 Portions of the 1998 Annual Report to Shareholders E-5
21 Subsidiaries of the Registrant E-31
23 Independent Auditors' Consent E-32
27 Financial Data Schedule E-33
</TABLE>
- - -------------
* Management contract or compensatory plan or arrangement.
E-3
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
September 27, September 28, September 29,
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CALCULATION OF NET EARNINGS
PER COMMON SHARE-BASIC
Net earnings $68,372 $55,211 $41,710
------- ------- -------
Weighted average common shares and
common stock units outstanding -- basic 88,055 79,645 74,667
------- ------- -------
Net earnings per common share $ 0.78 $ 0.69 $ 0.56
------- ------- -------
CALCULATION OF NET EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE- DILUTED:(1)
Net earnings calculation:
Net earnings $68,372 $55,211 $41,710
Add after-tax interest
expense on debentures 348 4,300 1,248
Add after-tax amortization of issuance
costs related to the debentures 30 354 93
------- ------- -------
Adjusted net earnings $68,750 $59,865 $43,051
------- ------- -------
Weighted average shares outstanding calculation:
Weighted average common shares
and common stock units outstanding 88,055 79,645 74,667
Dilutive effect of outstanding common
stock options 3,128 3,416 3,223
Assuming conversion of convertible
subordinated debentures 702 7,098 3,026
------- ------- -------
Weighted average common and common equivalent
shares outstanding 91,885 90,159 80,916
------- ------- -------
Net earnings per common and common
equivalent share -diluted $ 0.75 $ 0.66 $ 0.53
------- ------- -------
</TABLE>
(1) Diluted earnings per share assumes conversion of the Company's convertible
subordinated debentures using the "if converted" method, when such
securities are dilutive, with income adjusted for the after-tax interest
expense and amortization applicable to these debentures.
E-4
<PAGE> 1
EXHIBIT 13
PORTIONS OF THE 1998 ANNUAL REPORT TO SHAREHOLDERS
SHAREHOLDER INFORMATION
STARBUCKS CORPORATION
MARKET INFORMATION AND DIVIDEND POLICY. The Company's Common Stock is traded on
the National Market tier of The Nasdaq Stock Market, Inc. ("Nasdaq") under the
symbol "SBUX". The following table sets forth the quarterly high and low sale
prices per share of the Common Stock as reported by Nasdaq for each quarter
during the last two fiscal years.
<TABLE>
<CAPTION>
Fiscal year ended High Low
- - ----------------- ---- ---
<S> <C> <C>
September 27, 1998
First Quarter $ 41 13/16 $31 7/16
Second Quarter 43 1/16 33 5/8
Third Quarter 54 1/8 43 1/8
Fourth Quarter 58 1/6 29 3/16
September 28, 1997
First Quarter $ 40 1/4 $28 7/8
Second Quarter 37 1/4 27 3/8
Third Quarter 39 1/2 26 1/8
Fourth Quarter 44 3/4 34 1/8
</TABLE>
As of December 1, 1998, the Company had 7,757 shareholders of record. The
Company has never paid any dividends on its Common Stock. The Company presently
intends to retain earnings for use in its business and therefore does not
anticipate paying a cash dividend in the near future.
Company Filings and Information. The Company's Annual Report on Form 10-K for
the fiscal year ended September 27, 1998 may be obtained without charge by
accessing the Company's filings at www.sec.gov or by sending a written request
to Investor Relations at the address below.
Quarterly information is available to all shareholders immediately upon its
release, free of charge, via fax, by calling (800) 239-0317 or through access on
the Internet at www.businesswire.com/cnn/sbux.htm. To receive a copy by mail,
please send your written request to:
Investor Relations - M/S S-FP1
Starbucks Corporation
P.O. Box 34067
Seattle, WA 98124-1067
E-5
<PAGE> 2
SELECTED FINANCIAL DATA
(in thousands, except earnings per share)
The following selected financial data have been derived from the consolidated
financial statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto.
<TABLE>
<CAPTION>
As of and for the fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 Oct 2, 1994
(52 Wks) (52 Wks) (52 Wks) (52 Wks) (52 Wks)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Results of Operations Data:
Net revenues
Retail $1,102,574 $ 836,291 $ 601,458 $ 402,655 $ 248,495
Specialty Sales 206,128 139,098 96,414 62,558 36,428
---------- ---------- ---------- ---------- ----------
Total net revenues 1,308,702 975,389 697,872 465,213 284,923
Merger expenses(1) 8,930 -- -- -- 3,867
Operating income 109,216 86,199 56,575 40,116 23,298
Gain on sale of investment (2) -- -- 9,218 -- --
Net earnings $ 68,372 $ 55,211 $ 41,710 $ 26,102 $ 10,206
Net earnings per common share - diluted(3) $ 0.75 $ 0.66 $ 0.53 $ 0.37 $ 0.17
Cash dividends per share -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Working capital $ 157,805 $ 172,079 $ 239,365 $ 134,304 $ 44,162
Total assets 992,755 857,152 729,227 468,178 231,421
Long-term debt (including current portion) 1,803 168,832 167,980 81,773 80,500
Shareholders' equity $ 794,297 $ 533,710 $ 454,050 $ 312,231 $ 109,898
---------- ---------- ---------- ---------- ----------
Store Operating Data:
Percentage change in comparable store sales(4) 5% 5% 7% 9% 9%
Stores open at year end:
Continental North America:
Company-operated stores 1,622 1,270 929 627 399
Licensed stores (5) 133 94 75 49 26
International stores:
Company-operated - United Kingdom 66 31 9 1 0
Licensed stores (5) 65 17 2 0 0
---------- ---------- ---------- ---------- ----------
Total stores 1,886 1,412 1,015 677 425
</TABLE>
(1) Merger expenses relate to the transactions with Seattle Coffee Company in
fiscal 1998 and the Coffee Connection, Inc. in fiscal 1994.
(2) Gain on sale of investment in Noah's New York Bagel, Inc. stock in fiscal
1996.
(3) Earnings per share is based on the weighted average shares outstanding
during the period plus common stock equivalents consisting of certain
shares subject to stock options. In addition, the presentation of diluted
earnings per share assumes conversion of the Company's convertible
subordinated debentures using the "if converted" method, when such
securities are dilutive, with net income adjusted for the after-tax
interest expense and amortization applicable to these debentures.
(4) Includes only Company-operated stores open 13 months or longer.
(5) Product sales to and royalties and fees from the Company's licensees are
included in the Company's specialty sales revenues. Joint ventures are
accounted for on the equity method and therefore their results of
operations are not consolidated into the Company's operations.
E-6
<PAGE> 3
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
Certain statements set forth in this Annual Report, including anticipated store
openings, planned capital expenditures, and trends in or expectations regarding
the Company's operations, specifically including the effect of problems
associated with the Year 2000, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are based on currently available operating, financial and competitive
information and are subject to risks and uncertainties. Actual future results
and trends may differ materially depending on a variety of factors, including,
but not limited to, coffee and other raw materials prices and availability,
successful execution of internal performance and expansion plans, the impact of
competition, the effect of legal proceedings, and other risks detailed herein
and in the Company's Securities and Exchange Commission filings, including the
Company's Annual Report on Form 10-K for the fiscal year ended September 27,
1998.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL. Starbucks presently derives approximately 84% of net revenues from its
Company-operated retail stores. The Company's specialty sales operations, which
include product sales to and royalties and fees from wholesale customers, retail
store and grocery licensees, and international licensees, as well as direct
response sales, accounted for the remaining 16% of net revenues in fiscal 1998.
The Company's fiscal year ends on the Sunday closest to September 30. Fiscal
years 1998, 1997, and 1996 each had 52 weeks. The fiscal year ending on October
3, 1999 will include 53 weeks.
The Company's net revenues increased from $975.4 million in fiscal 1997 to $1.3
billion in fiscal 1998, due primarily to the Company's store expansion program
and comparable store sales increases. Comparable store sales increased by 5%,
5%, and 7% in fiscal 1998, 1997, and 1996, respectively. As part of its
expansion strategy of clustering stores in existing markets, Starbucks has
experienced a certain level of cannibalization of existing stores by new stores
as the store concentration has increased. However, management believes such
cannibalization has been justified by the incremental sales and return on new
store investment. This cannibalization, as well as increased competition and
other factors, may continue to put downward pressure on the Company's comparable
store sales growth in future periods.
The following table sets forth the percentage relationship to total net
revenues, unless otherwise indicated, of certain items included in the Company's
consolidated statements of earnings:
<TABLE>
<CAPTION>
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996
(52 Wks) (52 Wks) (52 Wks)
----- ----- -----
<S> <C> <C> <C>
Statements of Earnings Data:
Net revenues
Retail 84.2% 85.7% 86.2%
Specialty Sales 15.8 14.3 13.8
----- ----- -----
Total net revenues 100.0 100.0 100.0
Cost of sales and related occupancy costs 44.2 44.8 48.2
Store operating expenses(1) 38.0 37.6 35.2
Other operating expenses 3.3 2.9 2.8
Depreciation and amortization 5.5 5.4 5.2
General and administrative expenses 5.9 5.9 5.3
Merger expenses 0.7 0.0 0.0
Operating income 8.3 8.8 8.1
Interest and other income 0.7 1.3 1.7
Interest and other expense (0.1) (0.7) (1.3)
Gain on sale of investment 0.0 0.0 1.3
----- ----- -----
Earnings before income taxes 8.9 9.4 9.8
Income taxes 3.7 3.7 3.8
----- ----- -----
Net earnings 5.2% 5.7% 6.0%
----- ----- -----
</TABLE>
(1) Shown as a percentage of retail sales
E-7
<PAGE> 4
SEATTLE COFFEE COMPANY
On May 28, 1998, the Company acquired all of the equity interests of Seattle
Coffee Holdings Limited ("Seattle Coffee Company"), a United Kingdom roaster and
retailer of specialty coffee, in exchange for 1,817,894 shares of Starbucks
common stock. This business combination (the "Transaction") has been accounted
for as a pooling of interests for accounting and financial reporting purposes.
The pooling-of-interests method of accounting is intended to present as a single
interest, two or more common shareholders' interests which were previously
independent; accordingly, the historical financial statements for the periods
prior to the business combination are restated as though the companies had
always been combined. The restated financial statements are adjusted to conform
the accounting policies and fiscal reporting periods to Starbucks accounting
policies and fiscal reporting periods. The Transaction resulted in pre-tax
charges of $8.9 million in direct merger costs and $6.6 million in other costs
associated with the integration of Seattle Coffee Company. Merger costs
consisted mainly of investment banking, legal and accounting fees. Other
one-time integration costs were primarily related to asset write-offs due to the
planned conversion of Seattle Coffee Company stores to Starbucks. The
Transaction resulted in transaction and other related after-tax charges of $0.14
per share in the third quarter of fiscal 1998.
RESULTS OF OPERATIONS -- FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Net revenues increased 34% to $1.3 billion for fiscal 1998, compared
to $975.4 million for fiscal 1997. Retail sales increased 32% to $1.1 billion
from $836.3 million. The increase in retail sales was due primarily to the
addition of new Company-operated stores. In addition, comparable store sales
increased 5% for the 52 weeks ended September 27, 1998 compared to the same
52-week period in fiscal 1997. Comparable store sales increases resulted from an
increase in the number of transactions combined with an increase in the average
dollar value per transaction. The increase in average dollar value per
transaction was primarily due to the sales price increases effected during
fiscal 1997. During fiscal 1998, the Company opened 357 stores in continental
North America and 37 stores in the United Kingdom. By fiscal year end, there
were 1,622 Company-operated stores in continental North America and 66 in the
United Kingdom.
Specialty Sales revenues increased 48% to $206.1 million for fiscal 1998 from
$139.1 million for fiscal 1997. The increase was due primarily to increased
sales and license fees in the grocery category, increased sales to the Company's
joint ventures and licensees, and higher wholesale club sales. The Company sells
roasted coffee to its joint venture with Pepsi-Cola Company, a division of
PepsiCo, Inc., (the "North American Coffee Partnership") for use in the
manufacture of its bottled Frappuccino(TM) beverage. The Company also sells
coffee extract to Dreyer's Grand Ice Cream, Inc. ("Dreyer's") for use in the
manufacture of Starbucks branded ice cream sold by the Company's joint venture
with Dreyer's (the "Ice Cream Joint Venture"). Licensees (including those in
which the Company is a joint venture partner) opened 45 stores in continental
North America and 48 stores in international markets. The Company ended the year
with 133 licensed stores in continental North America and 65 licensed stores in
international markets.
Costs and Expenses. Cost of sales and related occupancy costs as a percentage of
net revenues decreased to 44.2% for fiscal 1998 compared to 44.8% for fiscal
1997. This decrease was primarily the result of prior year sales price increases
partially offset by higher green coffee costs.
Store operating expenses as a percentage of retail sales increased to 38.0% for
fiscal 1998 from 37.6% for fiscal 1997. This was due to integration costs
associated with the Transaction. Excluding these costs, store operating expenses
for fiscal 1998 would have been 37.5% of retail sales.
Other operating expenses (expenses associated with the Company's specialty sales
operations, as well as the Company's share of joint venture profits and losses)
increased to 3.3% of net revenues for fiscal 1998 from 2.9% for fiscal 1997. The
increase was attributable to higher advertising expenses and higher
payroll-related costs for the Company's international and grocery businesses
partially offset by improved results of both the North American Coffee
Partnership and the Ice Cream Joint Venture. Management anticipates that the
joint ventures with Pepsi and Dreyer's will contribute positively to earnings in
fiscal 1999 and that the international operations will remain dilutive to
earnings in fiscal 1999.
MERGER EXPENSES. Merger expenses of $8.9 million consisted mainly of investment
banking, legal and accounting fees.
Interest and Other Income. Interest and other income for fiscal 1998 was $8.5
million, compared to $12.4 million for fiscal 1997. The decrease was primarily
due to lower average investment balances.
E-8
<PAGE> 5
Interest and Other Expense. Interest and other expense for fiscal 1998 was $1.4
million compared to $7.3 million for fiscal 1997. The decrease was due to the
conversion of the Company's $165.0 million 4 1/4% Convertible Subordinated
Debentures to common stock during the first quarter of fiscal 1998.
Income Taxes. The Company's effective tax rate for fiscal 1998 was 41.2%
compared to 39.5% in fiscal 1997. The effective tax rate in both years was
impacted by non-deductible losses of Seattle Coffee Company prior to the
Transaction; fiscal 1998's rate was also affected by Transaction-related costs.
Excluding the impact of Transaction-related costs, the effective tax rate would
have been 38.3%. Management expects the effective tax rate to be 38.0% during
fiscal 1999.
RESULTS OF OPERATIONS -- FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Net revenues increased 40% to $975.4 million for fiscal 1997, compared
to $697.9 million for fiscal 1996. Retail sales increased 39% to $836.3 million
from $601.5 million. The increase in retail sales was due primarily to the
addition of new Company-operated stores. In addition, comparable store sales
increased 5% for the 52 weeks ended September 28, 1997 compared to the same
52-week period in fiscal 1996. Comparable store sales increases resulted from an
increase in the number of transactions combined with an increase in the average
dollar value per transaction. During fiscal 1997, the Company opened 363
Starbucks stores. The Company opened 341 stores in continental North America and
22 stores in the United Kingdom. By fiscal year end, the Company had 1,270
stores in continental North America and 31 in the United Kingdom.
Specialty Sales revenues increased 44% to $139.1 million for fiscal 1997 from
$96.4 million for fiscal 1996. The increase was due primarily to increased
revenues from sales to the Company's joint ventures and licensees, a chain of
wholesale clubs, and business dining accounts. Licensees opened 20 stores in
continental North America and opened 15 stores in the Pacific Rim. The Company
ended the year with 94 licensed stores in continental North America and 17 in
the Pacific Rim.
Costs and Expenses. Cost of sales and related occupancy costs as a percentage of
net revenues decreased to 44.8% for fiscal 1997 compared to 48.2% for fiscal
1996. This decrease was primarily the result of lower green coffee costs as a
percentage of net revenues and, to a much lesser extent, the impact of sales
price increases.
Store operating expenses as a percentage of retail sales increased to 37.6% for
fiscal 1997 from 35.2% for fiscal 1996. This was due to higher advertising
expenses and higher payroll-related costs.
Other operating expenses (expenses associated with the Company's specialty sales
operations, as well as the Company's share of joint venture profits and losses)
increased to 2.9% of net revenues for fiscal 1997 from 2.8% for fiscal 1996. The
increase was attributable to higher payroll-related costs offset by lower
business taxes and improved contribution from joint ventures. Depreciation and
amortization as a percentage of net revenues increased to 5.4% for fiscal 1997
from 5.2% for fiscal 1996.
General and administrative expenses were 5.9% of net revenues for fiscal 1997
compared to 5.3% for fiscal 1996. This increase was due primarily to higher
payroll-related costs which were tightly constrained in 1996.
Interest and Other Income. Interest and other income for fiscal 1997 was $12.4
million, compared to $11.0 million for fiscal 1996. The increase was due to
gains on sales of investments and higher average interest rates earned on
investments, partially offset by lower average investment balances during fiscal
1997.
Interest and Other Expense. Interest and other expense for fiscal 1997 was $7.3
million compared to $8.7 million for fiscal 1996. The decrease in interest
expense is due to the conversion of the Company's $80.5 million of 4 1/2%
Convertible Subordinated Debentures during the third quarter of fiscal 1996.
Income Taxes. The Company's effective tax rate for fiscal 1997 was 39.5% which
increased from 38.7% in fiscal 1996 due to the non-deductible losses incurred by
Seattle Coffee Company prior to the Transaction.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended fiscal 1998 with $123.5 million in total cash and short-term
investments. Working capital as of September 27, 1998 totaled $157.8 million
compared to $172.1 million at September 28, 1997. Cash and cash equivalents
increased by $31.5 million during fiscal 1998 to $101.7 million at September 27,
1998.
E-9
<PAGE> 6
Cash provided by operating activities for fiscal 1998 totaled $142.9 million and
resulted primarily from net income before non-cash charges of $159.8 million,
partially offset by a $23.5 million increase in inventories and a $19.8 million
increase in accounts receivable.
Cash used by investing activities for fiscal 1998 totaled $148.8 million. This
included capital additions to property, plant, and equipment of $201.9 million
related to opening 394 new Company-operated retail stores and remodeling certain
existing stores, purchasing roasting and packaging equipment for the Company's
roasting and distribution facilities, enhancing information systems, and
expanding existing office space. The net activity in the Company's marketable
securities portfolio during fiscal 1998 provided $65.9 million. During fiscal
1998, the Company made equity investments of $7.6 million in the North American
Coffee Partnership and $4.8 million in its international joint ventures. The
Company received $2.8 million in distributions from the Ice Cream Joint Venture.
The Company invested excess cash primarily in short-term investment-grade
marketable debt securities.
Cash provided by financing activities for fiscal 1998 totaled $37.6 million and
included cash generated from the exercise of employee stock options and the
related income tax benefit available to the Company upon exercise of such
options and cash generated from the Company's employee stock purchase plan. As
options granted under the Company's stock option plans vest, the Company will
continue to receive proceeds and a tax deduction as a result of option
exercises; however, neither the amounts nor the timing thereof can be predicted.
Cash requirements for fiscal 1999, other than normal operating expenses, are
expected to consist primarily of capital expenditures related to the addition of
new Company-operated retail stores. The Company and its licensees plan to open
at least 400 new stores in continental North America and 100 in international
markets during fiscal 1999. The Company also anticipates incurring additional
expenditures for enhancing its production capacity and information systems and
remodeling certain existing stores. While there can be no assurance that current
expectations will be realized, management expects capital expenditures for
fiscal 1999 to be approximately $250 million and additional cash requirements
for its international expansion during fiscal 1999 to be approximately $5
million.
Management believes that existing cash and investments plus cash generated from
operations should be sufficient to finance capital requirements for its core
businesses through fiscal 1999. Any new joint ventures, other new business
opportunities, or store expansion rates substantially in excess of that
presently planned may require outside funding. The Company expects to reach its
goal of 2,500 stores in continental North America by the end of the year 2000
and at least 500 stores in the Pacific Rim and 500 stores in Europe by the end
of the year 2003 using cash flow generated from operations, supplemented by debt
financing, if necessary.
YEAR 2000 COMPLIANCE
The Year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Computer programs, at the
Company and elsewhere, with time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to produce and distribute products, process
transactions or engage in similar normal business activities. To address the
Year 2000 issue and its risks, the Company has formed a cross-functional Task
Force, headed by senior management, to evaluate the risks and implement
appropriate remediation and contingency plans.
The Company's preparations for the Year 2000 have been divided into two
categories: MIS supported systems and other systems and issues. All of the MIS
supported systems used at Starbucks have been identified and evaluated and
Starbucks is in the process of developing remediation plans for bringing
non-compliant applications into compliance. The majority of computer and
telephony applications at Starbucks are relatively recent purchases that are not
expected to be affected by the Year 2000 problem. The Company expects to have
completed its remediation efforts and contingency planning for MIS supported
systems by mid-1999. To address issues arising from non-MIS supported systems or
embedded chips and to evaluate the Company's exposure to third parties' failures
to remediate their Year 2000 problems, the Company has identified the critical
product and service suppliers for each of its business units and departments.
The Company has solicited information from these critical suppliers about their
remediation and contingency plans and their ability to meet the Company's needs
in the Year 2000. The Company is tracking responses to such inquiries and plans
to work with its suppliers to develop appropriate contingency plans.
E-10
<PAGE> 7
There can be no guarantee, however, that the other companies on which the
Company relies will be prepared for the Year 2000 and that their Year 2000
problems will not have an adverse effect on the Company.
The Company has spent approximately $0.5 million in direct costs for the Year
2000 compliance project through fiscal 1998 and expects to spend an additional
$1.2 million to complete its remediation efforts. These costs and the date on
which the Company plans to complete the Year 2000 modification and testing
processes are management's best estimates, which are based on numerous
assumptions about future events, including the continued availability of certain
resources, third party modification plans and other factors. There can be no
guarantee that these estimates will prove true and actual results could differ
significantly from those projected.
COFFEE PRICES, AVAILABILITY, AND GENERAL RISK CONDITIONS
Green coffee commodity prices are subject to substantial price fluctuations,
generally caused by multiple factors including weather, political and economic
conditions in certain coffee-producing countries and other supply-related
concerns. In addition, green coffee prices have been affected in the past, and
may be affected in the future, by the actions of certain organizations and
associations that have historically attempted to influence commodity prices of
green coffee through agreements establishing export quotas or restricting coffee
supplies worldwide. The Company's ability to raise sales prices in response to
rising coffee prices may be limited and the Company's profitability could be
adversely affected if coffee prices were to rise substantially.
During fiscal 1997, worldwide green coffee commodity prices increased
significantly and remained high relative to historical levels through the second
quarter of 1998. In response, the Company effected sales price increases during
fiscal 1997 on its whole bean coffees and its coffee beverages to mitigate the
effects of increases in its costs of supply. Because the Company had existing
inventories and fixed-price purchase commitments for some of its green coffee
requirements at the time of these sales price increases, the Company's gross
margins during the first two quarters of fiscal 1998 were favorably impacted by
these sales price increases relative to the corresponding periods of fiscal
1997. During the last two quarters of fiscal 1998, the Company's gross margins
were unfavorably impacted relative to the corresponding periods of fiscal 1997
as the Company passed the anniversaries of the sales price increases while cost
of sales continued to reflect the higher cost of coffee.
The Company enters into fixed price purchase commitments in order to secure an
adequate supply of quality green coffee and bring greater certainty to the cost
of sales in future periods. As of September 27, 1998 the Company had
approximately $96 million in fixed price purchase commitments which, together
with existing inventory, is expected to provide an adequate supply of green
coffee well into fiscal 1999. The Company believes, based on relationships
established with its suppliers in the past, that the risk of non-delivery on
such purchase commitments is remote.
To further reduce its exposure to rising coffee costs, the Company, from time to
time, enters into futures contracts to hedge price-to-be-established coffee
purchase commitments. The specific risks associated with these activities are
described below in "Financial Risk Management."
In addition to fluctuating coffee prices, management believes that the Company's
future results of operations and earnings could be significantly impacted by
other factors such as increased competition within the specialty coffee
industry, the Company's ability to find optimal store locations at favorable
lease rates, increased costs associated with opening and operating retail stores
in new markets and the Company's continued ability to hire, train, and retain
qualified personnel.
FINANCIAL RISK MANAGEMENT
The Company maintains investment portfolio holdings of various issuers, types,
and maturities. These securities are classified as available-for-sale, and are
recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of retained earnings. As of September 27, 1998,
approximately 99% of the total portfolio was invested in short-term marketable
debt securities with maturities less than one year, and the remaining 1% was
invested in marketable equity securities. The Company does not hedge its
interest rate exposures.
E-11
<PAGE> 8
The Company is subject to foreign currency exchange rate exposure, primarily
related to its foreign retail operations in Canada and the United Kingdom.
Historically, this exposure has had a minimal impact on the Company. At the
present time, the Company does not hedge foreign currency risk, but may hedge
known transaction exposure in the future.
The Company may, from time to time, enter into futures contracts to hedge
price-to-be-fixed coffee purchase commitments with the objective of minimizing
cost risk due to market fluctuations. The Company does not hold or issue
derivative instruments for trading purposes. In accordance with Statement of
Financial Accounting Standards ("SFAS") 80 "Accounting for Futures Contracts,"
these futures contracts meet the hedge criteria and are accounted for as hedges.
Accordingly, gains and losses are deferred and recognized as adjustments to the
carrying amount of coffee inventory when purchased and recognized in results of
operations as coffee products are sold. Gains and losses are calculated based on
the difference between the cost basis and the market value of the coffee
contracts. The market risk related to coffee futures is substantially offset by
changes in the costs of coffee purchased. The deferred losses from hedging
activities were not significant as of September 27, 1998 and will be offset by
lower costs of coffee purchased during fiscal 1999. The Company had no open
futures contracts as of September 27, 1998.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Significant portions
of the Company's net revenues and profits are realized during the first quarter
of the Company's fiscal year, which includes the December holiday season. In
addition, quarterly results are affected by the timing of the opening of new
stores, and the Company's rapid growth may conceal the impact of other seasonal
influences. Because of the seasonality of the Company's business, results for
any quarter are not necessarily indicative of the results that may be achieved
for the full fiscal year.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS 130
"Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company will adopt SFAS 130 and SFAS
131 in fiscal 1999. In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities." This pronouncement will require
the Company to recognize derivatives on its balance sheet at fair value. Changes
in the fair values of derivatives that qualify as cash flow hedges will be
recognized in comprehensive income until the hedged item is recognized in
earnings. The Company expects that this new standard will not have a significant
effect on its results of operations. SFAS 133 is effective for fiscal years
beginning after June 15, 1999.
E-12
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Sept 27, 1998 Sept 28, 1997
------------- -------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $101,663 $ 70,126
Short-term investments 21,874 83,504
Accounts receivable 50,972 31,231
Inventories 143,118 119,767
Prepaid expenses and other current assets 11,205 8,763
Deferred income taxes, net 8,448 4,164
-------- --------
Total current assets 337,280 317,555
Joint ventures and other investments 38,917 34,464
Property, plant, and equipment, net 600,794 488,791
Deposits and other assets 15,764 16,342
-------- --------
Total $992,755 $857,152
======== ========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 54,446 $ 47,987
Checks drawn in excess of bank balances 33,634 28,582
Accrued compensation and related costs 35,941 25,894
Accrued occupancy costs 17,526 12,184
Other accrued expenses 37,928 30,829
-------- --------
Total current liabilities 179,475 145,476
Deferred income taxes, net 18,983 12,946
Convertible subordinated debentures -- 165,020
Commitments and contingencies (notes 5, 9, and 13)
Shareholders' Equity:
Common stock--Authorized, 150,000,000 shares;
issued and outstanding, 89,633,478 (includes 424,275 common stock units) and
80,559,023 shares, respectively 589,214 391,284
Retained earnings, including cumulative translation adjustment of $(6,631)
and $(1,511) respectively, and net unrealized holding (loss)/gain on investments
of $(532) and $63, respectively 205,083 142,426
-------- --------
Total shareholders' equity 794,297 533,710
-------- --------
Total $992,755 $857,152
======== ========
</TABLE>
E-13
<PAGE> 10
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues $ 1,308,702 $ 975,389 $ 697,872
Cost of sales and related occupancy costs 578,483 436,942 336,658
Store operating expenses 418,476 314,064 211,575
Other operating expenses 43,479 28,239 19,787
Depreciation and amortization 72,543 52,801 36,019
General and administrative expenses 77,575 57,144 37,258
Merger expenses 8,930 -- --
----------- ----------- -----------
Operating income 109,216 86,199 56,575
Interest and other income 8,515 12,393 11,029
Interest and other expense (1,381) (7,282) (8,739)
Gain on sale of investment -- -- 9,218
----------- ----------- -----------
Earnings before income taxes 116,350 91,310 68,083
Income taxes 47,978 36,099 26,373
----------- ----------- -----------
Net earnings $ 68,372 $ 55,211 $ 41,710
----------- ----------- -----------
Net earnings per common share - basic $ 0.78 $ 0.69 $ 0.56
Net earnings per common share - diluted $ 0.75 $ 0.66 $ 0.53
Weighted average shares outstanding:
Basic 88,055 79,645 74,667
Diluted 91,885 90,159 80,916
----------- ----------- -----------
</TABLE>
E-14
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 68,372 $ 55,211 $ 41,710
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 80,901 58,864 39,438
Provision for store remodels and asset disposals 7,234 1,049 412
Conversion of compensatory options into common stock 1,158 -- --
Deferred income taxes, net 2,125 5,490 4,407
Equity in losses of investees 14 2,760 1,935
Gain on sale of investment -- -- (9,218)
Cash (used) provided by changes in operating assets and liabilities:
Accounts receivable (19,790) (13,475) (7,918)
Inventories (23,496) (36,382) 40,237
Prepaid expenses and other current assets (2,497) (2,236) (1,769)
Accounts payable 4,601 9,559 9,527
Accrued compensation and related costs 9,943 10,871 2,208
Accrued occupancy costs 5,342 4,208 3,345
Other accrued expenses 8,972 4,375 12,067
--------- --------- ---------
Net cash provided by operating activities 142,879 100,294 136,381
Investing Activities:
Purchase of investments (51,354) (171,631) (178,643)
Sale of investments 5,138 9,257 17,144
Maturity of investments 112,080 173,665 103,056
Investments in joint ventures and other investments (12,418) (27,624) (6,040)
Distributions from joint venture 2,750 -- --
Proceeds from sale of equity investments -- -- 20,550
Additions to property, plant, and equipment (201,855) (174,363) (163,284)
Additions to deposits and other assets (3,184) (4,604) (5,432)
--------- --------- ---------
Net cash used by investing activities (148,843) (195,300) (212,649)
Financing Activities:
Increase in cash provided by checks drawn in excess of bank balances 4,846 12,287 3,096
Proceeds from sale of convertible debentures, net -- -- 160,685
Proceeds from sale of common stock 4,649 4,009 4,446
Exercise of stock options 20,755 13,629 8,032
Tax benefit from exercise of nonqualified stock options 9,332 9,626 6,808
Payments on capital lease obligations (1,993) (1,566) (575)
--------- --------- ---------
Net cash provided by financing activities 37,589 37,985 182,492
Effect of exchange rate changes on cash and cash equivalents (88) (18) (3)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 31,537 (57,039) 106,221
Cash and Cash Equivalents:
Beginning of year 70,126 127,165 20,944
--------- --------- ---------
End of year $ 101,663 $ 70,126 $ 127,165
--------- --------- ---------
</TABLE>
E-15
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 4,130 $ 7,179 $ 5,630
Income taxes 32,643 19,679 12,127
Noncash Financing and Investing Transactions:
Equipment acquired under capital lease $ -- $ 2,434 $ 2,089
Net unrealized holding gains (losses) on investments (595) (1,983) 2,012
Conversion of convertible debt into common stock,
net of unamortized issue costs and accrued interest 162,036 -- 79,345
Common stock tendered in settlement of stock
options exercised 4,859 -- --
</TABLE>
E-16
<PAGE> 13
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common stock Retained
Shares Amount earnings Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, October 1, 1995 70,956,990 $ 265,679 $ 46,552 $ 312,231
Exercise of stock options including
tax benefit of $6,808 1,177,736 14,840 -- 14,840
Sale of common stock 1,216,993 4,446 -- 4,446
Conversion of convertible debt into
common stock 5,359,769 79,055 -- 79,055
Net earnings -- -- 41,710 41,710
Unrealized holding gains, net -- -- 2,012 2,012
Translation adjustment -- -- (244) (244)
---------- ---------- ---------- ----------
Balance, September 29, 1996 78,711,488 364,020 90,030 454,050
Exercise of stock options including
tax benefit of $9,626 1,381,915 23,255 -- 23,255
Sale of common stock 465,620 4,009 -- 4,009
Net earnings -- -- 55,211 55,211
Unrealized holding losses, net -- -- (1,983) (1,983)
Translation adjustment -- -- (832) (832)
---------- ---------- ---------- ----------
Balance, September 28, 1997 80,559,023 391,284 142,426 533,710
Exercise of stock options including
tax benefit of $9,332 1,417,264 31,245 -- 31,245
Common stock units issued under deferred stock
plan, net of shares tendered 424,275 -- -- --
Sale of common stock 135,889 4,649 -- 4,649
Conversion of convertible debt into
common stock 7,097,027 162,036 -- 162,036
Net earnings -- -- 68,372 68,372
Unrealized holding losses, net -- -- (595) (595)
Translation adjustment -- -- (5,120) (5,120)
---------- ---------- ---------- ----------
Balance, September 27, 1998 89,633,478 $ 589,214 $ 205,083 $ 794,297
---------- ---------- ---------- ----------
</TABLE>
E-17
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 28, 1997,
AND SEPTEMBER 29, 1996)
Note 1: Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS. Starbucks Corporation and its subsidiaries
(collectively "Starbucks" or the "Company") purchases and roasts high-quality
whole bean coffees and sells them, along with fresh, rich-brewed coffees,
Italian-style espresso beverages, a variety of pastries and confections, and
coffee-related accessories and equipment, primarily through its Company-operated
retail stores. In addition to sales through its Company-operated retail stores,
Starbucks sells primarily whole bean coffees through its specialty sales
operations. Starbucks, through its joint venture partnerships, also produces and
sells bottled Frappuccino(TM) coffee drink and a line of premium ice creams.
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of Starbucks Corporation and its wholly owned subsidiaries. As
described in Note 2, on May 28, 1998, the Company acquired all of the equity
interests of Seattle Coffee Holdings Limited ("Seattle Coffee Company"), in a
business combination accounted for as a pooling of interests. The consolidated
financial statements reflect the combined financial position and operating
results of Starbucks and its wholly owned subsidiaries, including Seattle Coffee
Company, for all periods presented. Investments in unconsolidated joint ventures
are accounted for under the equity method. Material intercompany transactions
during the periods covered by these consolidated financial statements have been
eliminated.
FISCAL YEAR END. The Company's fiscal year ends on the Sunday closest to
September 30. Fiscal years 1998, 1997, and 1996 each included 52 weeks. The
fiscal year ending on October 3, 1999 will include 53 weeks.
ESTIMATES AND ASSUMPTIONS. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results may differ from these
estimates.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid instruments
with a maturity of three months or less at the time of purchase to be cash
equivalents.
CASH MANAGEMENT. The Company's cash management system provides for the
reimbursement of all major bank disbursement accounts on a daily basis. Checks
issued but not presented for payment to the bank are reflected as "Checks drawn
in excess of bank balances" in the accompanying financial statements.
INVESTMENTS. The Company's investments consist primarily of investment-grade
marketable debt securities, all of which are classified as available-for-sale
and recorded at fair value as defined below. Unrealized holding gains and losses
are recorded, net of any tax effect, as a component of retained earnings.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying value of cash and cash
equivalents approximates fair value because of the short-term maturity of those
instruments. The fair value of the Company's investments in marketable debt and
equity securities is based upon the quoted market price on the last business day
of the fiscal year plus accrued interest, if any. The fair value and amortized
cost of the Company's investments at September 27, 1998, were $21.9 million and
$22.7 million, respectively. The fair value and amortized cost of the Company's
investments (short- and long-term) at September 28, 1997, were $88.7 million and
$88.6 million, respectively. For further detail on investments, see Note 4. The
fair value of the Company's 4 1/4% Convertible Subordinated Debentures due 2002
(see Note 8) was based on the quoted market price on
E-18
<PAGE> 15
the last business day of the fiscal year. As of September 28, 1997, the fair
value and principal amount of the debentures were $294.6 million and $165.0
million, respectively. These debentures were converted to common stock during
the first quarter of fiscal 1998.
INVENTORIES. Inventories are stated at the lower of cost (primarily moving
average cost) or market.
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment are carried at
cost less accumulated depreciation and amortization. Depreciation of property,
plant, and equipment, which includes amortization of assets under capital
leases, is provided on the straight-line method over estimated useful lives,
generally ranging from three to seven years for equipment and 40 years for
buildings. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the related lease life, generally ten years. The
portion of depreciation expense related to production and distribution
facilities is included in "Cost of sales and related occupancy costs." When
facts and circumstances indicate that the cost of long-lived assets may be
impaired, an evaluation of recoverability is performed by comparing the carrying
value of the asset to projected future cash flows. Upon indication that the
carrying value of such assets may not be recoverable, the Company recognizes an
impairment loss by a charge against current operations.
HEDGING AND FUTURES CONTRACTS. The Company may, from time to time, enter into
futures contracts to hedge price-to-be-fixed coffee purchase commitments with
the objective of minimizing cost risk due to market fluctuations. The Company
does not hold or issue derivative instruments for trading purposes. In
accordance with Statement of Financial Accounting Standards ("SFAS") 80
"Accounting for Futures Contracts," these futures contracts meet the hedge
criteria and are accounted for as hedges. Accordingly, gains and losses are
deferred and recognized as adjustments to the carrying amount of coffee
inventory when purchased and recognized in results of operations as coffee
products are sold. Gains and losses are calculated based on the difference
between the cost basis and the market value of the coffee contracts. The market
risk related to coffee futures is substantially offset by changes in the costs
of coffee purchased. The deferred losses from hedging activities were not
significant as of September 27, 1998 and will be offset by lower costs of coffee
purchased during fiscal 1999. The Company had no open futures contracts as of
September 27, 1998 and did not engage in hedging activities in fiscal 1997 or
1996.
ADVERTISING. The Company expenses costs of advertising the first time the
advertising campaign takes place, except for direct response advertising, which
is capitalized and amortized over its expected period of future benefit,
generally three to six months.
STORE PREOPENING EXPENSES. Costs incurred in connection with start-up and
promotion of new store openings are expensed as incurred.
RENT EXPENSE. Certain of the Company's lease agreements provide for scheduled
rent increases during the lease terms, or for rental payments commencing at a
date other than the date of initial occupancy. Rent expenses are recognized on a
straight-line basis over the terms of the leases.
FOREIGN CURRENCY TRANSLATION. The accumulated foreign currency translation
adjustment relates to the Company's operations in Canada and the United Kingdom.
Assets and liabilities are translated at exchange rates in effect at the balance
sheet date and income and expense accounts at the average exchange rates during
the year. Resulting translation adjustments are recorded as a component of
retained earnings.
INCOME TAXES. The Company computes income taxes using the asset and liability
method, under which deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities.
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<PAGE> 16
EARNINGS PER SHARE. The computation of basic earnings per share is based on the
weighted average number of shares and common stock units outstanding during the
period. The numbers of shares resulting from this computation for fiscal 1998,
1997, and 1996 were 88.1 million, 79.6 million, and 74.7 million, respectively.
The computation of diluted earnings per share includes the dilutive effect of
common stock equivalents consisting of certain shares subject to stock options.
The computation of diluted earnings per share also assumes conversion of the
Company's convertible subordinated debentures using the "if converted" method,
when such securities are dilutive, with net income adjusted for the after-tax
interest expense and amortization applicable to these debentures. The numbers of
shares resulting from this computation for fiscal 1998, 1997, and 1996 were 91.9
million, 90.2 million, and 80.9 million, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS 130 "Reporting Comprehensive Income," and
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information."
The Company will adopt SFAS 130 and SFAS 131 in fiscal 1999. In June 1998, the
FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." This pronouncement will require the Company to recognize
derivatives on its balance sheet at fair value. Changes in the fair values of
derivatives that qualify as cash flow hedges will be recognized in comprehensive
income until the hedged item is recognized in earnings. The Company expects that
this new standard will not have a significant effect on its results of
operations. SFAS 133 is effective for fiscal years beginning after June 15,
1999.
RECLASSIFICATIONS. Certain reclassifications of prior years' balances have been
made to conform to the fiscal 1998 presentation.
E-20
<PAGE> 17
Note 2: Seattle Coffee Company
On May 28, 1998, the Company acquired all of the equity interests of Seattle
Coffee Company, a United Kingdom roaster and retailer of specialty coffee, in
exchange for 1,817,894 shares of Starbucks common stock. This business
combination (the "Transaction") has been accounted for as a pooling of interests
for accounting and financial reporting purposes. The pooling-of-interests method
of accounting is intended to present as a single interest, two or more common
shareholders' interests which were previously independent; accordingly, the
historical financial statements for the periods prior to the business
combination are restated as though the companies had always been combined. The
restated financial statements are adjusted to conform the accounting policies
and fiscal reporting periods to Starbucks accounting policies and fiscal
reporting periods. The Transaction resulted in pre-tax charges of $8.9 million
in direct merger costs and $6.6 million in other costs associated with the
integration of Seattle Coffee Company. Merger costs consisted mainly of
investment banking, legal and accounting fees. Other integration costs were
primarily related to asset write-offs due to the planned conversion of Seattle
Coffee Company stores to Starbucks. The Transaction resulted in transaction and
other related after-tax charges of $0.14 per share in the third quarter of
fiscal 1998.
The following summarizes the Company's net revenues, net earnings, and earnings
per share for the periods prior to and following the Transaction (in thousands,
except earnings per share):
<TABLE>
<CAPTION>
Seattle Coffee
Starbucks Company Combined
----------- --------------- ---------
<S> <C> <C> <C>
1998
34 Weeks prior to the Transaction
Net revenues $ 805,151 $ 15,675 $ 820,826
Net earnings 45,811 (3,312) 42,499
Net earnings per share-diluted 0.50 (0.04) 0.46
18 Weeks after the Transaction
Net revenues 487,876
Net earnings 25,873
Net earnings per share-diluted 0.29
1997
Net revenues 966,946 8,443 975,389
Net earnings 57,412 (2,201) 55,211
Net earnings per share-diluted 0.70 (0.04) 0.66
1996
Net revenues 696,481 1,391 697,872
Net earnings 42,128 (418) 41,710
Net earnings per share-diluted $ 0.54 $ (0.01) $ 0.53
</TABLE>
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<PAGE> 18
Note 3: Cash and Cash Equivalents
Cash and cash equivalents consist of the following (in thousands):
<TABLE>
<CAPTION>
Sept 27, 1998 Sept 28, 1997
------------- -------------
<S> <C> <C>
Operating funds and interest-bearing deposits $ 26,564 $ 14,482
Commercial paper 67,024 39,649
Money market funds 8,075 8,152
Local government obligations -- 4,022
Corporate debt securities -- 3,821
-------- --------
$101,663 $ 70,126
-------- --------
</TABLE>
Note 4: Investments
The Company's investments consist of the following (in thousands):
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Fair Amortized holding holding
September 27, 1998 value cost gains losses
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current investments:
Corporate debt securities $11,356 $11,373 $ 20 $ (37)
U.S. Government obligations 10,410 10,409 1 --
Commercial paper -- -- -- --
Marketable equity securities 108 958 -- (850)
------- ------- ------- -------
$21,874 $22,740 $ 21 $ (887)
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Fair Amortized holding holding
September 28, 1997 value cost gains losses
------- ------- ------- -------
<S> <C> <C> <C> <C>
Current investments:
Corporate debt securities $25,948 $25,944 $ 10 $ (6)
U.S. Government obligations 30,532 30,540 8 (16)
Commercial paper 25,720 25,721 -- (1)
Marketable equity securities 1,304 1,198 106 --
------- ------- ------- -------
$83,504 $83,403 $ 124 $ (23)
------- ------- ------- -------
Non-current investments:
Corporate debt securities $ 4,196 $ 4,194 $ 2 $ --
US. Government obligations 1,005 1,006 -- (1)
------- ------- ------- -------
$ 5,201 $ 5,200 $ 2 $ (1)
------- ------- ------- -------
</TABLE>
All investments are classified as available-for-sale as of September 27, 1998
and September 28, 1997. Securities with remaining maturities of one year or less
are classified as short-term investments. Securities with remaining maturities
longer than one year are classified as long-term and are included in the line
item "Joint ventures and other investments" in the accompanying balance sheets.
The specific identification method is used to determine a cost basis for
computing realized gains and losses.
E-22
<PAGE> 19
During fiscal 1995, the Company purchased shares of Noah's New York Bagel, Inc.
("Noah's") Series B Preferred Stock. On February 1, 1996, Noah's merged with
Einstein Brothers Bagels, Inc. In exchange for its investment in Noah's, the
Company received $20.6 million in cash and recognized a $9.2 million pre-tax
gain ($5.7 million net of tax) on the transaction.
In fiscal 1998, 1997, and 1996, proceeds from the sale of investment securities
were $5.1 million, $9.3 million, and $17.1 million, respectively. Gross realized
gains and losses were not material in 1998, 1997, and 1996 except for the sale
of Noah's stock, which occurred in fiscal 1996.
Note 5: Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Sept 27, 1998 Sept 28, 1997
------------- -------------
<S> <C> <C>
Coffee
Unroasted $ 77,400 $ 65,296
Roasted 18,996 13,954
Other merchandise held for sale 36,850 33,253
Packaging and other supplies 9,872 7,264
-------- --------
$143,118 $119,767
-------- --------
</TABLE>
As of September 27, 1998, the Company had fixed price inventory purchase
commitments for green coffee totaling approximately $96 million. The Company
believes, based on relationships established with its suppliers in the past,
that the risk of non-delivery on such purchase commitments is remote.
Note 6: Joint Ventures and Other Investments
Starbucks has entered into several joint ventures, most of which are accounted
for using the equity method. The Company's share of joint venture income or
losses is included in "Other operating expenses."
The Company has domestic joint ventures with two companies to produce and
distribute Starbucks branded products. The Company has a 50/50 joint venture and
partnership agreement with Pepsi-Cola Company ("Pepsi") to develop
ready-to-drink coffee-based beverages. The Company also has a 50/50 joint
venture agreement with Dreyer's Grand Ice Cream, Inc. to develop and distribute
premium ice creams.
The Company is a partner in four other joint ventures. During fiscal 1996, the
Company signed an agreement with SAZABY Inc., a Japanese retailer and
restauranteur, to form a joint venture partnership (50/50) to develop Starbucks
retail stores in Japan. On August 3, 1996, the Company entered into a joint
venture partnership as a 5% partner with Cafe Hawaii Partners to develop
Starbucks retail stores in Hawaii. During fiscal 1998, the Company entered into
a joint venture partnership as a 5% partner with President Chain Store
Corporation to develop Starbucks retail stores in Taiwan. During fiscal 1998,
the Company entered into a joint venture partnership (50/50) with Johnson
Development Corporation to develop retail stores in under-served urban
communities.
E-23
<PAGE> 20
The Company's investments in these joint ventures are as follows (in thousands):
<TABLE>
<CAPTION>
Pepsi All other
joint venture joint ventures Total
------------- -------------- -----
<S> <C> <C> <C>
Balance, October 1, 1995 $ 294 $ -- $ 294
Allocated share of losses (401) (1,534) (1,935)
Capital contributions 2,725 3,315 6,040
-------- -------- --------
Balance, September 29, 1996 2,618 1,781 4,399
Allocated share of losses (2,384) (376) (2,760)
Capital contributions 27,259 365 27,624
-------- -------- --------
Balance, September 28, 1997 27,493 1,770 29,263
Allocated share of (losses) income (30) 16 (14)
Distributions from joint ventures -- (2,750) (2,750)
Capital contributions 7,616 4,802 12,418
-------- -------- --------
Balance, September 27, 1998 $ 35,079 $ 3,838 $ 38,917
-------- -------- --------
</TABLE>
Note 7: Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost and consist of the following
(in thousands):
<TABLE>
<CAPTION>
Sept 27, 1998 Sept 28, 1997
------------- -------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 460,020 352,640
Roasting and store equipment 218,744 168,929
Furniture, fixtures, and other 79,953 49,790
--------- ---------
770,657 583,299
Less accumulated depreciation
and amortization (218,455) (144,068)
--------- ---------
552,202 439,231
Work in progress 48,592 49,560
--------- ---------
$ 600,794 $ 488,791
--------- ---------
</TABLE>
Note 8: Convertible Subordinated Debentures
During fiscal 1993, the Company issued $80.5 million in principal amount of 4
1/2% Convertible Subordinated Debentures due 2003. On April 12, 1996, the
Company called these debentures for redemption. The total principal amount
converted, net of unamortized issue costs, accrued but unpaid interest, and
costs of conversion was credited to common stock.
During fiscal 1996, the Company issued $165.0 million in principal amount of 4
1/4% Convertible Subordinated Debentures due 2002. On October 21, 1997, the
Company called these debentures for redemption. The total principal amount
converted, net of unamortized issue costs, accrued but unpaid interest, and
costs of conversion was credited to common stock.
E-24
<PAGE> 21
Note 9: Leases
The Company leases retail stores, roasting and distribution facilities, and
office space under operating leases expiring through 2023. Most lease agreements
contain renewal options and rent escalation clauses. Certain leases provide for
contingent rentals based upon gross sales.
Rental expense under these lease agreements was as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Minimum rentals $75,912 $54,093 $37,675
Contingent rentals 1,406 1,193 1,190
------- ------- -------
$77,318 $55,286 $38,865
------- ------- -------
</TABLE>
Minimum future rental payments under non-cancelable lease obligations as of
September 27, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending:
- - -------------------
<S> <C>
1999 $ 79,935
2000 79,906
2001 80,044
2002 79,712
2003 77,203
Thereafter 289,218
---------
Total minimum lease payments $ 686,018
---------
</TABLE>
The Company opened a roasting and distribution facility in York County,
Pennsylvania (the "York Plant") in September 1995. Under the terms of this lease
agreement, the Company has an option to purchase the land and building
comprising the York Plant for approximately $14 million within five years of the
date of occupancy. Such option to purchase also provides that the Company may
purchase, within seven years of occupancy, additional land adjacent to the York
Plant.
Note 10: Shareholders' Equity
The Company has authorized 7,500,000 shares of its preferred stock, none of
which is outstanding at September 27, 1998.
Share amounts outstanding are based on the historical outstanding shares of both
Starbucks and Seattle Coffee Company adjusted for the exchange of 1,817,894
shares of Starbucks stock for all of the equity interests of Seattle Coffee
Company.
E-25
<PAGE> 22
Note 11: Employee Benefit Plans
The Company maintains several stock option plans under which the Company may
grant incentive stock options and nonqualified stock options to employees and
non-employee directors. Stock options have been granted at prices at or above
the fair market value on the date of grant. Options vest and expire according to
terms established at the grant date.
The following summarizes all stock option transactions from October 1, 1995,
through September 27, 1998.
<TABLE>
<CAPTION>
Weighted average Weighted average
Shares subject price Shares subject to price
to options per share exercisable options per share
---------- --------- ------------------- ---------
<S> <C> <C> <C> <C>
Outstanding, October 1, 1995 6,874,656 $ 9.52 3,108,578 $ 6.36
Granted 2,538,466 18.64
Exercised (1,177,736) 6.78
Cancelled (449,158) 13.99
---------- ------ ---------- ------
Outstanding, September 29, 1996 7,786,228 12.69 3,316,967 8.43
Granted 2,929,796 33.24
Exercised (1,381,915) 9.92
Cancelled (380,448) 21.30
---------- ------ ---------- ------
Outstanding, September 28, 1997 8,953,661 19.32 3,713,676 10.86
Granted 3,254,316 37.04
Exercised (1,841,539) 12.26
Cancelled (614,739) 23.58
---------- ------ ---------- ------
Outstanding, September 27, 1998 9,751,699 $26.20 3,780,403 $16.98
</TABLE>
At September 27, 1998, there were 7,890,615 shares of common stock reserved for
issuance pursuant to future stock option grants.
Additional information regarding options outstanding as of September 27, 1998 is
as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
- - ---------------------- --------- ------------ -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
$ 0.75 $12.56 1,982,632 4.71 $ 8.96 1,709,452 $ 8.53
12.63 23.50 2,316,004 6.80 18.61 1,299,989 18.21
26.94 34.00 2,029,049 8.20 32.66 630,215 32.52
34.50 36.06 554,138 8.71 35.41 79,189 35.39
36.81 50.31 2,869,876 9.06 38.16 61,558 43.02
- - ------ ------ --------- ------ ------ --------- ------
$ 0.75 $50.31 9,751,699 7.44 $26.20 3,780,403 $16.98
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN. The Company has an employee stock purchase plan
which provides that eligible employees may contribute up to 10% of their base
earnings, up to $25,000 annually, toward the quarterly purchase of the Company's
common stock. The employee's purchase price is 85% of the lesser of the fair
market value of the stock on the first business day or the last business day of
the quarterly offering period. No compensation expense is recorded in
E-26
<PAGE> 23
connection with the plan. The total number of shares issuable under the plan is
4,000,000. There were 135,889 shares issued under the plan during fiscal 1998 at
prices ranging from $31.98 to $39.15. During fiscal 1997, 92,971 shares were
issued under the plan at prices ranging from $23.59 to $25.71. There were 89,373
shares issued under the plan during fiscal 1996 at prices ranging from $15.99 to
$24.65. Of the 17,342 employees eligible to participate, 3,548 were participants
in the plan as of September 27, 1998.
ACCOUNTING FOR STOCK-BASED COMPENSATION. The Company accounts for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" and its related interpretations. Accordingly, no compensation expense
has been recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") requires the disclosure of pro forma net income
(loss) and net income (loss) per share as if the Company adopted the fair value
method as of the beginning of fiscal 1996. The fair value of stock-based awards
to employees is calculated using the Black-Scholes option pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
Employee Stock Options Employee Stock Purchase Plan
---------------------------------------- -----------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) 1.5-6 1.5-6 1.5-6 .25 .25 .25
Expected volatility 45% 40% 40% 37-75% 45-47% 39-61%
Risk-free interest rate 5.28-6.05% 5.41-6.54% 5.01-6.74% 5.26-5.74% 5.27-5.53% 5.27-5.49%
Expected dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
</TABLE>
The Company's valuations are based upon a multiple option valuation approach and
forfeitures are recognized as they occur. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options and changes in the subjective input assumptions can materially affect
the fair value estimate.
As required by SFAS 123, the Company has determined that the weighted average
estimated fair values of options granted during fiscal 1998, 1997 and 1996 were
$14.40, $10.85 and $5.64 per share, respectively. Had compensation costs for the
Company's stock-based compensation plans been accounted for using the fair value
method of accounting described by SFAS 123, the Company's net earnings and
earnings per share would have been as follows (in thousands, except earnings per
share):
E-27
<PAGE> 24
<TABLE>
<CAPTION>
Pro Forma
Fiscal Year Ended: As Reported Under SFAS 123
- - ------------------ ----------- --------------
<S> <C> <C>
September 27, 1998
Net earnings $ 68,372 $ 51,595
Net earnings per common share:
Basic $ 0.78 $ 0.59
Diluted $ 0.75 $ 0.57
September 28, 1997
Net earnings $ 55,211 $ 45,808
Net earnings per common share:
Basic $ 0.69 $ 0.58
Diluted $ 0.66 $ 0.56
September 29, 1996
Net earnings $ 41,710 $ 37,801
Net earnings per common share:
Basic $ 0.56 $ 0.51
Diluted $ 0.53 $ 0.49
</TABLE>
In applying SFAS 123, the impact of outstanding non-vested stock options granted
prior to 1996 has been excluded from the pro forma calculations; accordingly,
the 1998, 1997 and 1996 pro forma adjustments are not indicative of future
period pro forma adjustments.
DEFINED CONTRIBUTION PLANS. Starbucks maintains voluntary defined contribution
plans covering eligible employees as defined in the plan documents.
Participating employees may elect to defer and contribute a percentage of their
compensation to the plan, not to exceed the dollar amount set by law. The
Company matches 25% of each employee's contribution up to a maximum of the first
4% of each employee's compensation.
The Company's matching contributions to the plans were approximately $0.8
million, $0.6 million, and $0.3 million for fiscal 1998, 1997, and 1996,
respectively.
DEFERRED STOCK PLAN. During fiscal 1998, the Company adopted a Deferred Stock
Plan for certain key employees that enables participants in the plan to defer
receipt of ownership of common shares from the exercise of non-qualified stock
options. The minimum deferral period is five years. As of September 27, 1998,
receipt of 424,275 shares was deferred under the terms of this plan. The rights
to receive these shares, represented by common stock units, are included in the
calculation of basic and diluted earnings per share as common stock equivalents.
E-28
<PAGE> 25
Note 12: Income Taxes
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996
- - ------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.8 3.6 3.1
Non deductible losses
and merger costs 2.6 1.0 0.2
Other (0.2) (0.1) 0.4
---- ---- ----
Effective tax rate 41.2% 39.5% 38.7%
---- ---- ----
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended: Sept 27, 1998 Sept 28, 1997 Sept 29, 1996
- - ------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Currently payable:
Federal $39,267 $25,884 $19,568
State 6,586 4,725 2,398
Deferred liability 2,125 5,490 4,407
------- ------- -------
$47,978 $36,099 $26,373
------- ------- -------
</TABLE>
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):
<TABLE>
<CAPTION>
Sept 27, 1998 Sept 28, 1997
------------- -------------
<S> <C> <C>
Depreciation $ 24,240 $ 17,136
Accrued rent (6,252) (4,356)
Accrued compensation and related costs (2,338) (1,786)
Inventory (1,906) (1,474)
Other, net (3,209) (738)
-------- --------
$ 10,535 $ 8,782
-------- --------
</TABLE>
Taxes payable of $8.7 million and $4.5 million are included in "Other accrued
expenses" as of September 27, 1998 and September 28, 1997, respectively.
E-29
<PAGE> 26
Note 13: Commitments and Contingencies
Under the amended terms of the Company's corporate office lease, the Company
provides financing to the building owner to be used exclusively for facilities
and leasehold development costs to accommodate the Company. Any funds advanced
by the Company will be repaid with interest at 9.5% over a term not to exceed 20
years. The maximum amount available under the agreement is $17.0 million. As of
September 27, 1998 and September 28, 1997, the amounts outstanding under the
agreement totaled $9.8 million and $8.2 million, respectively, and are included
in "Deposits and other assets" on the balance sheet.
In the normal course of business, the Company has various legal claims and other
contingent matters outstanding. Management believes that any ultimate liability
arising from these actions would not have a material adverse effect on the
Company's results of operations or financial condition as of and for the fiscal
year ended September 27, 1998.
Note 14: Related Party Transactions
A director of the Company serves as chairman of a wholesale customer of the
Company. Sales to this customer were $36.3 million, $31.0 million, and $22.7
million for fiscal 1998, 1997, and 1996, respectively. Amounts receivable from
this customer totaled $3.8 million and $4.6 million as of September 27, 1998 and
September 28, 1997, respectively.
Note: 15 Quarterly Financial Information (Unaudited)
Summarized quarterly financial information for fiscal years 1998 and 1997 is as
follows (in thousands, except earnings per share):
<TABLE>
<CAPTION>
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1998 quarter:
Net revenues $321,325 $295,243 $334,429 $357,705
Gross margin 175,090 161,742 189,348 204,039
Net earnings 20,955 13,962 7,899 25,556
Net earnings per
common share -
diluted $ 0.23 $ 0.15 $ 0.09 $ 0.28
1997 quarter:
Net revenues $240,154 $216,269 $244,241 $274,725
Gross margin 124,053 116,297 140,406 157,691
Net earnings 13,886 9,241 14,199 17,885
Net earnings per
common share -
diluted $ 0.17 $ 0.12 $ 0.17 $ 0.21
</TABLE>
E-30
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Coffee Connection, Inc.
Starbucks New Venture Company
Starbucks Coffee International, Inc.
Starbucks Holding Company
Starbucks Manufacturing Corporation
SBI Nevada, Inc.
(a wholly-owned subsidiary of
Starbucks Coffee International, Inc.)
Circadia Corporation
Starbucks U.S. Brands Corporation
Starbucks Asset Management Corporation
(a wholly-owned subsidiary of
Starbucks U.S. Brands Corporation)
Starbucks Foreign Sales Corporation
Starbucks Coffee (UK) Holdings Limited
Starbucks Coffee Company (UK) Limited
(a wholly-owned subsidiary of
Starbucks Coffee (UK) Holdings Limited)
Seattle Coffee Company International
(a wholly-owned subsidiary of
Starbucks Coffee (UK) Holdings Limited)
Torz & Macatonia Limited
(a wholly-owned subsidiary of
Starbucks Coffee (UK) Holdings Limited)
E-31
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-52524, 33-52526, 33-52528, 33-92208, 33-92184 and 333-65181 of Starbucks
Corporation on Form S-8 and Registration Statement No. 333-58725 on Form S-3 of
our report dated November 20, 1998, incorporated by reference in the Annual
Report on Form 10-K of Starbucks Corporation for the year ended September 27,
1998.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
December 28, 1998
E-32
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 101,663
<SECURITIES> 21,874
<RECEIVABLES> 51,387
<ALLOWANCES> 415
<INVENTORY> 143,118
<CURRENT-ASSETS> 337,280
<PP&E> 819,249
<DEPRECIATION> 218,455
<TOTAL-ASSETS> 992,755
<CURRENT-LIABILITIES> 179,475
<BONDS> 0
0
0
<COMMON> 589,214
<OTHER-SE> 205,083
<TOTAL-LIABILITY-AND-EQUITY> 992,755
<SALES> 1,308,702
<TOTAL-REVENUES> 1,308,702
<CGS> 578,483
<TOTAL-COSTS> 578,483
<OTHER-EXPENSES> 621,003
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,381
<INCOME-PRETAX> 116,350
<INCOME-TAX> 47,978
<INCOME-CONTINUING> 68,372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,372
<EPS-PRIMARY> 0.78
<EPS-DILUTED> 0.75
</TABLE>
