<PAGE>
- ------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 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 No.)
2401 Utah Avenue South, Seattle, Washington 98134
(Address of Principal Executive Office, including Zip Code)
(206) 447-1575
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
As of February 1, 1999, there were 90,048,024 shares of the Registrant's
Common Stock outstanding.
- ------------------------------------------------------------------------
<PAGE>
STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements. . . . . . . . . . . . . . . . . 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . 15
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
<CAPTION>
Three Months Ended
December 27, December 28,
1998 1997
(13 Weeks) (13 Weeks)
(unaudited)
- --------------------------------------------------------------------------
<S> <C> <C>
Net revenues $405,638 $321,325
Cost of sales and related
occupancy costs 186,300 146,235
Store operating expenses 122,601 98,101
Other operating expenses 13,308 9,674
Depreciation and amortization 21,893 16,051
General and administrative
expenses 20,359 17,783
- ------------------------------------------------------------------------
Operating income 41,177 33,481
Interest and other income 2,124 2,157
Interest and other expense (183) (845)
- -------------------------------------------------------------------------
Earnings before income taxes 43,118 34,793
Income taxes 16,385 13,838
- -------------------------------------------------------------------------
Net earnings $26,733 $20,955
=========================================================================
Net earnings per common share - basic $ 0.30 $ 0.25
Net earnings per common share - diluted $ 0.29 $ 0.23
Weighted average shares outstanding:
Basic 90,021 84,978
Diluted 92,733 90,962
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 27, September 27,
1998 1998
(unaudited)
- ----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 128,385 $101,663
Short-term investments 56,079 21,874
Accounts receivable 45,029 50,972
Inventories 117,957 143,118
Prepaid expenses and other
current assets 11,643 11,205
Deferred income taxes, net 9,023 8,448
- ----------------------------------------------------------------------
Total current assets 368,116 337,280
Joint ventures and other investments 43,559 38,917
Property, plant and equipment, net 628,201 600,794
Deposits and other assets 16,594 15,764
- ----------------------------------------------------------------------
Total $ 1,056,470 $992,755
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53,016 $54,446
Checks drawn in excess of bank balances 36,840 33,634
Accrued compensation and related costs 36,177 35,941
Accrued occupancy costs 19,356 17,526
Other accrued expenses 50,873 37,928
- ----------------------------------------------------------------------
Total current liabilities 196,262 179,475
Deferred income taxes, net 20,164 18,983
Shareholders' equity:
Common stock - Authorized, 150,000,000;
issued and outstanding, 90,408,232 and
88,316,635 shares, respectively,(includes
424,275 common stock units in both periods) 607,508 589,214
Retained earnings 238,979 212,246
Accumulated other comprehensive income (6,443) (7,163)
- ----------------------------------------------------------------------
Total shareholders' equity 840,044 794,297
- ----------------------------------------------------------------------
Total $ 1,056,470 $992,755
======================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
- ----------------------------------------------------------------------
December 27, December 28,
1998 1997
(13 Weeks) (13 Weeks)
(unaudited)
- ----------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 26,733 $20,955
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 24,638 17,764
Deferred income taxes, net 604 (134)
Equity in losses of investees 353 45
Cash provided/(used) by changes in
operating assets and liabilities:
Accounts receivable 5,920 (4,557)
Inventories 26,435 3,714
Prepaid expenses and other
current assets (419) (640)
Accounts payable (1,602) 13,740
Accrued compensation and
related costs 252 1,292
Accrued occupancy costs 1,830 1,838
Other accrued expenses 12,596 12,034
- -----------------------------------------------------------------------
Net cash provided by operating activities 97,340 66,051
Investing activities:
Purchase of investments (52,998) (22,698)
Maturity of investments 11,000 28,740
Sale of investments 0 4,150
Investments in joint ventures (1,963) (6,131)
Distributions from joint ventures 5,000 1,000
Additions to property, plant
and equipment (51,817) (49,979)
Additions to deposits and other assets (1,018) (443)
- ----------------------------------------------------------------------
Net cash used by investing activities (91,796) (45,361)
Financing activities:
Increase in cash provided by checks
drawn in excess of bank balances 3,216 4,631
Proceeds from sale of common stock 1,499 5,791
Exercise of stock options 10,181 2,950
Tax benefit from exercise of non-qualified
stock options 6,614 1,565
- ----------------------------------------------------------------------
Net cash provided by financing activities 21,510 14,937
- ----------------------------------------------------------------------
Balance, carried forward 27,054 35,627
</TABLE>
(Continued on next page)
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Balance, brought forward 27,054 35,627
Effect of exchange rate changes
on cash and cash equivalents (332) (107)
- -----------------------------------------------------------------------
Net increase in cash and
cash equivalents 26,722 35,520
Cash and cash equivalents:
Beginning of the period 101,663 70,126
- ----------------------------------------------------------------------
End of the period $128,385 $105,646
======================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 54 $3,679
Income taxes 7,487 2,569
Net unrealized holding loss (4) (348)
on investments
Conversion of convertible debt into common
stock, net of unamortized issue costs and
accrued interest 0 162,056
Common stock tendered in settlement of stock
options exercised 0 4,859
</TABLE>
See notes to consolidated financial statements
6
<PAGE>
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended December 27, 1998 and
December 28, 1997
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of December 27, 1998 and
September 27, 1998 and for the 13-week periods ended December 27, 1998 and
December 28, 1997 have been prepared by Starbucks Corporation ("Starbucks"
or the "Company") pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). The financial information for the
13-week periods ended December 27, 1998 and December 28, 1997 is unaudited,
but, in the opinion of management, reflects all adjustments (consisting only
of normal recurring adjustments and accruals) necessary for a fair
presentation of the financial position, results of operations and cash flows
for the interim periods.
The financial information as of September 27, 1998, is derived from the
Company's audited consolidated financial statements and notes thereto for
the year ended September 27, 1998, and should be read in conjunction with
such financial statements.
Certain reclassifications of prior year's balances have been made to conform
to the current format.
The results of operations for the 13-week period ended December 27, 1998 are
not necessarily indicative of the results of operations that may be achieved
for the entire fiscal year ending October 3, 1999.
NOTE 2: EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of common shares and common stock units outstanding during the period.
The computation of diluted earnings per share includes the dilutive effect of
common stock equivalents consisting of certain shares subject to stock
options. 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 of issuance
costs applicable to these debentures. The Company's convertible subordinated
debentures were converted to equity during the first quarter of fiscal 1998.
7
<PAGE>
NOTE 3: INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following (in thousands):
December 27, September 27,
1998 1998
- -------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 50,915 $ 77,400
Roasted 21,452 18,996
Other merchandise held for sale 38,113 36,850
Packaging and other supplies 7,477 9,872
- ------------------------------------------------------------------
$ 117,957 $ 143,118
==================================================================
As of December 27, 1998, the Company had fixed price purchase commitments
for green coffee totaling approximately $92 million.
The Company may, from time to time, enter into futures contracts to hedge
price-to-be-established coffee purchase commitments with the objective of
minimizing cost risk due to market fluctuations. The Company does not hold
or issue derivative instruments for trading purposes. In accordance with
Statement of Financial Accounting Standards ("SFAS") 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 in results of operations as coffee products are sold. Gains and
losses are calculated based on the difference between the cost basis and the
market value of the coffee contracts. The market risk related to coffee
futures is substantially offset by changes in the cost of coffee purchased.
NOTE 4: NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This
pronouncement will require the Company to recognize certain 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.
8
<PAGE>
NOTE 5: PROPERTY, PLANT, AND EQUIPMENT
</TABLE>
<TABLE>
<CAPTION>
Property, plant, and equipment are recorded at cost and consist of the
following
(in thousands):
December 27, September 27,
1998 1998
- --------------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 498,626 460,020
Roasting and store equipment 230,510 218,744
Furniture, fixtures and other 84,176 79,953
- ------------------------------------------------------------------
825,252 770,657
Less accumulated depreciation
and amortization (241,825) (218,455)
- ------------------------------------------------------------------
583,427 552,202
Work in progress 44,774 48,592
- ------------------------------------------------------------------
$ 628,201 $ 600,794
==================================================================
</TABLE>
NOTE 6: COMPREHENSIVE INCOME
The Company has adopted SFAS 130, "Reporting Comprehensive Income," as of the
first quarter of fiscal 1999. Comprehensive income includes all changes in
equity during the period except those resulting from transactions with owners
of the Company; it has two components: net income and other comprehensive
income. Accumulated other comprehensive income reported on the Company's
Consolidated Balance Sheets consists of foreign currency translation
adjustments and the unrealized gains and losses, net of applicable taxes, on
available-for-sale securities. Comprehensive income, net of related tax effects,
is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
December 27, December 28,
1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Net income $ 26,733 $ 20,955
Translation adjustment 724 (1,266)
Unrealized holding losses, net (4) (348)
-------- --------
Total comprehensive income $ 27,453 $ 19,341
======================================================================
</TABLE>
NOTE 7: SUBSEQUENT AND OTHER EVENTS
On December 15, 1998, the Company announced its intention to acquire all of
the stock of Pasqua Inc., a San Francisco, California-based roaster and
retailer of specialty coffee. The transaction is scheduled to close in the
second fiscal quarter of 1999 and will be accounted for as a purchase.
On January 20, 1999, Starbucks acquired the net assets of Tazo, L.L.C., a
Portland, Oregon-based tea company that produces premium tea products. The
transaction will be accounted for as a purchase.
9
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Certain statements herein, including anticipated store openings, planned
capital expenditures, and trends in or expectations regarding the Company's
operations, 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.
GENERAL
During the 13-week period ending December 27, 1998, Starbucks Corporation
("Starbucks" or the "Company") derived approximately 85% of net revenues from
its Company-operated retail stores. The remaining 15% of net revenues are
accounted for by the Company's specialty sales operations, which include
product sales to and royalties and fees from licensees, product sales to
wholesale customers, as well as direct response sales.
The Company's fiscal year ends on the Sunday closest to September 30. Fiscal
year 1998 had 52 weeks. The fiscal year ending on October 3, 1999 will
include 53 weeks.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED DECEMBER 27, 1998,
COMPARED TO THE 13 WEEKS ENDED DECEMBER 28, 1997
Revenues. Net revenues for the 13 weeks ended December 27, 1998, increased
26% to $406 million from $321 million for the corresponding period in fiscal
1998. Retail sales increased 25% to $343 million from $275 million due
primarily to the opening of new retail stores combined with an increase in
comparable store sales (sales from stores open 13 months or longer) of 3% for
the period. The increase in comparable store sales resulted from an increase
in the number of transactions partially offset by a decrease in the average
dollar value per transaction. During the 13 weeks ended December 27, 1998,
the Company opened 97 stores in continental North America and 8 in the United
Kingdom. The Company ended the period with 1,713 Company-operated stores in
continental North America and 74 Company-operated stores in the United Kingdom.
Specialty sales revenues increased 36% to $63 million for the 13 weeks ended
December 27, 1998, compared to $46 million for the corresponding period in
fiscal 1998. Specialty sales growth was driven primarily by higher revenues
in the grocery category and higher sales to licensees and joint ventures.
During late fiscal 1998, the Company signed a long-term licensing agreement
with Kraft Foods, Inc. ("Kraft") to handle the U.S. distribution, marketing,
and advertising for Starbucks whole bean and ground coffee in grocery,
warehouse club and mass merchandise stores. The transition to Kraft began in
December 1998. The Company sells roasted coffee to its joint venture with
Pepsi-Cola Company, a division of PepsiCo, Inc., (the "North American Coffee
Partnership") for use in the manufacture of its bottled Frappuccino(R) coffee
drink. The Company also sells coffee extract to Dreyer's Grand Ice Cream,
Inc. ("Dreyer's") for use in the manufacture of Starbucks branded ice 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 9 stores in continental North America and 32 stores in
international markets. The Company ended the period with 146 licensed stores
in continental North America and 97 licensed stores in international markets.
10
<PAGE>
Costs and Expenses. Cost of sales and related occupancy costs as a
percentage of net revenues increased to 45.9% for the 13 weeks ended
December 27, 1998, from 45.5% for the corresponding period in fiscal 1998.
Cost of sales as a percentage of revenues increased due to an overall sales
mix shift from retail to specialty sales as well as higher occupancy costs.
Retail product margins were unchanged overall; dairy costs were higher in the
first quarter of fiscal 1999 than the same period in fiscal 1998 but these
higher costs were offset by lower green coffee costs and favorable product
mix shifts within the retail stores.
Store operating expenses as a percentage of retail sales increased to 35.8%
for the 13 weeks ended December 27, 1998, from 35.7% for the corresponding
period in fiscal 1998. The increase was due to the greater significance of
the United Kingdom retail stores, which have higher store operating expenses
relative to their sales than the Company's North American stores. For the
quarter, store operating expenses for both the North American and United
Kingdom retail businesses decreased slightly as a percentage of their
respective retail sales. The decrease in North America was due to lower
regional overhead, supplies and pre-opening expenses partially offset by
higher payroll-related expenditures.
Other operating expenses (expenses associated with all operations other than
Company-owned retail, as well as the Company's share of joint venture profits
and losses) were 3.3% of total Company net revenues for the 13 weeks ended
December 27, 1998, compared to 3.0% for the corresponding period in fiscal
1998. The increase was due primarily to payroll and other expenses
associated with building infrastructure in the Specialty Sales business unit.
These expenses were partially offset by decreased overhead due to the
transition of grocery distribution, marketing, and advertising to Kraft.
Depreciation and amortization was 5.4% of net revenues, up from 5.0% of net
revenues in the first quarter of fiscal 1998 due primarily to depreciation
on new information systems projects put into service in the last year.
General and administrative expenses as a percentage of net revenues were 5.0%
for the 13 weeks ended December 27, 1998, compared to 5.5% for the same
period in fiscal 1998. This decrease was primarily due to lower professional
fees and lower relocation and recruitment expenses.
Interest and other expense for the 13 weeks ended December 27, 1998 was $0.2
million compared to $0.8 million for the corresponding period in fiscal 1998
due to the conversion of the Company's convertible subordinated debentures to
common stock during the first quarter of fiscal 1998.
Income Taxes. The Company's effective tax rate for the 13 weeks ended
December 27, 1998 was 38.0% compared to 39.8% for the corresponding period
in fiscal 1998 due to non-deductible losses incurred by Seattle Coffee
Company prior to the business combination which occurred in fiscal 1998. The
Company expects the effective tax rate to be 38.0% for the remainder of
fiscal 1999.
SUBSEQUENT AND OTHER EVENTS
On December 15, 1998, the Company announced its intention to acquire all of
the stock of Pasqua Inc., a San Francisco, California-based roaster and
retailer of specialty coffee. The transaction is scheduled to close in the
second fiscal quarter of 1999 and will be accounted for as a purchase.
On January 20, 1999, Starbucks acquired the net assets of Tazo, L.L.C., a
Portland, Oregon-based tea company that produces premium tea products. The
transaction will be accounted for as a purchase.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $184.5 million in total cash and short-term
investments and working capital of $171.9 million. Cash and cash equivalents
increased by $26.7 million for the 13 weeks ended December 27, 1998 to $128.4
million.
11
<PAGE>
Cash provided by operating activities totaled $97.3 million for the first 13
weeks of fiscal 1999 resulting primarily from net earnings before non-cash
charges of $52.3 million and a $26.4 million decrease in inventories.
Cash used by investing activities for the first 13 weeks of fiscal 1999
totaled $91.8 million. This included capital additions to property, plant and
equipment of $51.8 million related to opening 105 new Company-operated
stores, enhancing information systems, purchasing roasting and packaging
equipment, and remodeling certain existing stores. The Company invested
excess cash primarily in short-term, investment-grade marketable debt
securities. The net activity in the Company's marketable securities
portfolio during the 13-week period used $42.0 million. During the 13-week
period ending December 27, 1998, the Company made equity investments of $2.0
million in its international joint ventures and received $5.0 million in
distributions from its domestic joint ventures.
Cash provided from financing activities for the first 13 weeks of fiscal 1999
totaled $21.5 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 and are exercised, the Company will continue to receive proceeds
and a tax deduction; however, neither the amounts nor timing can be predicted.
Cash requirements for the remainder of fiscal 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 a total of at least 400 new stores in
continental North America and 100 in international markets during fiscal 1999.
The Company also anticipates making additional expenditures for enhancing its
production capacity and information systems and remodeling certain existing
stores. While there can be no assurance that amounts and timing of the
expenditures will occur as planned, management expects capital expenditures
for the remainder of fiscal 1999 to be approximately $220 million, which
includes expenditures related to the acquisition of Tazo, L.L.C., and the
planned acquisition of Pasqua Inc.
Management believes that existing cash and investments plus cash generated
from operations should be sufficient to finance capital requirements for the
remainder of fiscal 1999, barring any major new initiatives. Longer term,
the Company expects to reach its goal of at least 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 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. The majority
of computer and telephony applications at Starbucks are relatively recent
purchases that are not expected to be affected by the Year 2000 problem. All
of the MIS supported systems used at Starbucks have been identified,
evaluated and remediation plans have been implemented. During the first
quarter of fiscal 1999, all of the computer code previously identified as
non-compliant was corrected and unit tested. The Company leased
additional hardware that will be used over the next six months for extensive
testing of the accounting, payroll, inventory, and other administrative
12
<PAGE>
systems. The Company also acquired a software package that will be used to
inventory the Company's network-connected PC hardware and software. The
software package will allow the Company to more accurately identify and
remediate non-compliant PC-based hardware and software.
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 and others
about their remediation and contingency plans and their ability to meet the
Company's needs in the Year 2000. By quarter end, the Company had received
responses from approximately 50% of these product and service suppliers, most
of which indicate that they are actively addressing the Year 2000 issue. The
Company is continuing to solicit and track responses to its inquiries and
plans to work with its suppliers to develop appropriate contingency plans.
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 spent approximately $0.7 million in direct costs for the Year
2000 compliance project through the first quarter of fiscal 1999 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 AND 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.
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 December 27, 1998, the Company had
approximately $92 million in fixed price purchase commitments which, together
with existing inventory, is expected to provide an adequate supply of green
coffee through the end of 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. The Company does not
expect the recent natural disasters in Nicaragua or Colombia to have any
material impact on the availability or cost of its coffee supplies.
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 Item 3 "Quantitative and Qualitative Disclosures about
Market Risk."
In addition to fluctuating coffee prices, management believes that the
Company's future results of operations and earnings could be significantly
impacted by factors such as increased competition within the specialty coffee
industry, the Company's ability to find optimal store locations at favorable
lease rates, the increased costs associated with opening and operating retail
stores in new markets, and the Company's ability to hire, train and retain
qualified personnel.
13
<PAGE>
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Significant
portions of the Company's net revenues and profits are realized during the
first quarter of the Company's fiscal year, which includes the December
holiday season. In addition, quarterly results are affected by the timing of
the opening of new stores, and the Company's rapid growth may conceal the
impact of seasonal influences. Because of the seasonality of the Company's
business and its overall growth, results for any quarter are not necessarily
indicative of the results that may be achieved for the full fiscal year.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." This pronouncement will require the
Company to recognize certain 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains investment portfolio holdings of various issuers, types
and maturities. These securities are classified as available-for-sale, and
are recorded on the balance sheet at fair value, with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income.
The Company does not hedge its interest rate exposures.
The Company is subject to foreign currency exchange rate exposure, primarily
related to its retail operations in Canada and the United Kingdom.
Historically, this exposure has had a minimal impact on the Company. At the
present time, the Company does not hedge foreign currency risk, but may hedge
known transaction exposure in the future.
The Company may, from time to time, enter into futures contracts to hedge
price-to-be-established coffee purchase commitments with the objective of
minimizing cost risk due to market fluctuations. The Company does not hold
or issue derivative instruments for trading purposes. In accordance with
Statement of Financial Accounting Standards No. 80 "Accounting for Futures
Contracts," these futures contracts meet the hedge criteria and are accounted
for as hedges. Accordingly, gains and losses are deferred and recognized in
results of operations as coffee products are sold. Gains and losses are
calculated based on the difference between the cost basis and the market
value of the coffee contracts. The market risk related to coffee futures is
substantially offset by changes in the cost of coffee purchased.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various legal proceedings arising in the ordinary
course of its business, but is not currently a party to any legal proceeding
that management believes would have a material adverse effect on the
financial position or results of operations of the Company.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) Current Reports on Forms 8-K filed during the 13 weeks ended
December 27, 1998:
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARBUCKS CORPORATION
Dated: February 10, 1999 By: /s/ Michael Casey
----------------------
Michael Casey
executive vice president and
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
15
<PAGE>
STARBUCKS CORPORATION
---------------------
<TABLE>
<CAPTION>
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended
December 27, December 28,
1998 1997
(13 Weeks) (13 Weeks)
- --------------------------------------------------------------------------
CALCULATION OF EARNINGS PER COMMON SHARE-BASIC:
<S> <C> <C>
Net earnings $ 26,733 $ 20,955
=========================================================================
Weighted average common shares and
common stock units outstanding 90,021 84,978
=========================================================================
Net earnings per common share-basic $ 0.30 $ 0.25
=========================================================================
CALCULATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE-DILUTED(1):
Net earnings calculation:
Net earnings $26,733 $ 20,955
Add after-tax interest
expense on debentures 0 348
Add after-tax amortization of issuance
costs related to the debentures 0 30
- -------------------------------------------------------------------------
Adjusted net earnings $26,733 $ 21,333
=========================================================================
Weighted average shares outstanding
calculation:
Weighted average common shares
and common stock units outstanding 90,021 84,978
Dilutive effect of outstanding common
stock options 2,712 3,176
Assuming conversion of convertible
subordinated debentures 0 2,808
- -------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 92,733 90,962
=========================================================================
Net earnings per common and
common equivalent share-diluted $ 0.29 $ 0.23
=========================================================================
(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. The Company's
convertible subordinated debentures were converted to equity during the first
quarter of fiscal 1998.
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Starbucks Corporation first quarter fiscal 1999 consolidated financial
statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-03-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> DEC-27-1998
<CASH> 128,385
<SECURITIES> 56,079
<RECEIVABLES> 45,690
<ALLOWANCES> 661
<INVENTORY> 117,957
<CURRENT-ASSETS> 368,116
<PP&E> 870,026
<DEPRECIATION> 241,825
<TOTAL-ASSETS> 1,056,470
<CURRENT-LIABILITIES> 196,262
<BONDS> 0
0
0
<COMMON> 607,508
<OTHER-SE> 232,536
<TOTAL-LIABILITY-AND-EQUITY> 1,056,470
<SALES> 405,638
<TOTAL-REVENUES> 405,638
<CGS> 186,300
<TOTAL-COSTS> 186,300
<OTHER-EXPENSES> 178,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183
<INCOME-PRETAX> 43,118
<INCOME-TAX> 16,385
<INCOME-CONTINUING> 26,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,733
<EPS-PRIMARY> .30
<EPS-DILUTED> .29
</TABLE>
