<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 June 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
Commission File Number 0-20322
-----------------------------
STARBUCKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1325671
(State or other Jurisdiction of (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 August 1, 1999, there were 182,188,895 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. . . . . . . . . . . . . . . . . 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . 16
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
(unaudited) (unaudited)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $423,792 $334,429 $1,205,252 $950,997
Cost of sales and related
occupancy costs 185,020 145,081 541,276 424,817
Store operating expenses 137,625 111,734 382,074 304,859
Other operating expenses 13,040 12,221 37,491 30,527
Depreciation and
amortization 25,214 18,928 70,848 52,416
General and administrative
expenses 24,679 20,588 67,405 57,678
Merger expenses 0 8,930 0 8,930
- -------------------------------------------------------------------------------
Operating income 38,214 16,947 106,158 71,770
Interest and other
income 1,954 2,176 6,509 6,662
Interest and other expense (434) (114) (851) (1,193)
- -------------------------------------------------------------------------------
Earnings before income
taxes 39,734 19,009 111,816 77,239
Income taxes 15,099 11,110 42,490 34,421
- -------------------------------------------------------------------------------
Net earnings $24,635 $ 7,899 $69,326 $42,818
===============================================================================
Net earnings per common share
- basic $ 0.13 $ 0.04 $ 0.38 $ 0.24
Net earnings per common share
- diluted $ 0.13 $ 0.04 $ 0.37 $ 0.24
Weighted average shares
outstanding:
Basic 182,781 178,137 181,397 175,095
Diluted 191,336 185,149 188,614 183,418
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 27, September 27,
1999 1998
(unaudited)
- -------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 90,946 $ 101,663
Short-term investments 58,461 21,874
Accounts receivable 41,468 50,972
Inventories 166,579 143,118
Prepaid expenses and other
current assets 19,967 11,205
Deferred income taxes, net 9,059 8,448
- ------------------------------------------------------------------------
Total current assets 386,480 337,280
Joint ventures and other investments 55,078 38,917
Property, plant and equipment, net 691,732 600,794
Deposits and other assets 21,688 15,685
Goodwill, net 13,560 79
- ------------------------------------------------------------------------
Total $ 1,168,538 $ 992,755
========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,790 $ 54,446
Checks drawn in excess of bank balances 39,364 33,634
Accrued compensation and related costs 45,573 35,941
Accrued occupancy costs 21,399 17,526
Accrued taxes 24,579 18,323
Other accrued expenses 27,689 19,605
- ------------------------------------------------------------------------
Total current liabilities 224,394 179,475
Deferred income taxes, net 22,250 18,983
Shareholders' equity:
Common stock - Authorized, 300,000,000;
issued and outstanding, 182,901,602 and
179,266,956 shares, respectively,(includes
848,550 common stock units in both periods) 644,427 589,214
Retained earnings 281,572 212,246
Accumulated other comprehensive income (4,105) (7,163)
- ------------------------------------------------------------------------
Total shareholders' equity 921,894 794,297
- ------------------------------------------------------------------------
Total $ 1,168,538 $ 992,755
========================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
<TABLE>
<CAPTION>
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
- ----------------------------------------------------------------------
June 27, June 28,
1999 1998
(39 Weeks) (39 Weeks)
(unaudited)
- ----------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 69,326 $ 42,818
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 78,339 58,312
Provision for store remodels and
other charges 0 7,153
Deferred income taxes, net 3,121 (1,814)
Equity in losses of investees 987 1,002
Cash provided/(used) by changes in
operating assets and liabilities:
Accounts receivable 9,564 (2,828)
Inventories (24,519) (32,143)
Prepaid expenses and other
current assets (8,891) (1,523)
Accounts payable 12,653 11,919
Accrued compensation and
related costs 9,688 8,953
Accrued occupancy costs 3,909 3,899
Accrued taxes 6,156 1,759
Other accrued expenses 8,181 2,570
- -----------------------------------------------------------------------
Net cash provided by operating activities 168,514 100,077
Investing activities:
Purchase of investments (111,447) (51,410)
Maturity of investments 78,553 98,925
Sale of investments 0 6,736
Purchases of businesses, net of cash acquired (16,216) 0
Investments in joint ventures and other
investments (16,301) (10,424)
Distributions from joint ventures 2,983 1,547
Additions to property, plant
and equipment (174,871) (143,904)
Proceeds from sale of assets 3,380 0
Additions to deposits and other assets (6,950) (2,511)
- ----------------------------------------------------------------------
Net cash used by investing activities (240,869) (101,041)
Financing activities:
Increase/(decrease) in cash provided by checks
drawn in excess of bank balances 5,939 (6,604)
Proceeds from sale of common stock 4,994 8,101
Exercise of stock options 32,039 13,339
Tax benefit from exercise of non-qualified
stock options 18,180 7,539
- ----------------------------------------------------------------------
Net cash provided by financing activities 61,152 22,375
- ----------------------------------------------------------------------
Balance, carried forward (11,203) 21,411
</TABLE>
(Continued on next page)
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Balance, brought forward (11,203) 21,411
Effect of exchange rate changes
on cash and cash equivalents 486 (186)
- -----------------------------------------------------------------------
Net (decrease)/increase in cash and
cash equivalents (10,717) 21,225
Cash and cash equivalents:
Beginning of the period 101,663 70,126
- -----------------------------------------------------------------------
End of the period $ 90,946 $ 91,351
=======================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 135 $4,100
Income taxes 20,870 29,607
Net unrealized holding gain/(loss) 30 (410)
on investments
Conversion of convertible debt into common
stock, net of unamortized issue costs and
accrued interest 0 162,036
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 and 39 Weeks Ended June 27, 1999 and
June 28, 1998
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of June 27, 1999 and September 27,
1998 and for the 13-week and 39-week periods ended June 27, 1999 and June 28,
1998 have been prepared by Starbucks Corporation ("Starbucks" or the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). The financial information for the 13-week
and 39-week periods ended June 27, 1999 and June 28, 1998 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 and 39-week periods ended June 27,
1999 are not necessarily indicative of the results of operations that may be
achieved for the entire fiscal year ending October 3, 1999.
NOTE 2: OTHER EVENTS
On January 20, 1999, Starbucks acquired the net assets of Tazo, L.L.C.
("Tazo"), a Portland, Oregon-based tea company that produces premium tea
products. On March 1, 1999, Starbucks acquired the stock of Pasqua Inc.
("Pasqua"), a San Francisco, California-based roaster and retailer of
specialty coffee. The total purchase price for these two acquisitions was
$17.1 million and both were recorded under the purchase method of accounting.
The purchase price has been allocated to the underlying assets acquired and
liabilities assumed based on preliminary estimates of their fair values at
the dates of acquisition. Estimates may be revised at a later date. The
residual of approximately $13.8 million was recorded to "Goodwill" and is being
amortized on a straight-line basis over 10 years. Contingent consideration of
$2.8 million is currently held in escrow pending resolution of certain
potential claims by Starbucks under the purchase agreements. The contingent
consideration amount is not included in the purchase price above. Once the
contingencies are resolved and the escrow period ends, the Company will
record the fair value of any additional net assets acquired and will record
any excess consideration as additional goodwill. The results of operations
of Tazo and Pasqua are included in the accompanying financial statements from
the dates of acquisition.
Pro forma financial information showing the results of operations as if the
acquisitions had occurred at the beginning of the year is not presented as
the acquisitions would not have had a material impact on previously reported
results.
NOTE 3: 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
7
<PAGE>
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.
On March 19, 1999, the Company recorded a 2-for-1 stock split for holders of
record on March 5, 1999. Accordingly, outstanding shares, stock options, and
per share data presented herein have been retroactively restated for all
periods.
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 27, September 27,
1999 1998
- -------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 95,523 $ 77,400
Roasted 22,949 18,996
Other merchandise held for sale 38,828 36,850
Packaging and other supplies 9,279 9,872
- -------------------------------------------------------------------
$ 166,579 $ 143,118
===================================================================
</TABLE>
As of June 27, 1999, the Company had fixed-price purchase commitments for
green coffee totaling approximately $101 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 5: NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company will adopt SFAS 131 at the end of fiscal year 1999.
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, 2000.
8
<PAGE>
NOTE 6: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the
following (in thousands):
<TABLE>
<CAPTION>
June 27, September 27,
1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 550,864 460,020
Roasting and store equipment 263,685 218,744
Furniture, fixtures and other 95,329 79,953
- ------------------------------------------------------------------
921,818 770,657
Less accumulated depreciation
and amortization (302,076) (218,455)
- ------------------------------------------------------------------
619,742 552,202
Work in progress 71,990 48,592
- ------------------------------------------------------------------
$ 691,732 $ 600,794
==================================================================
</TABLE>
NOTE 7: 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
shareholders 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 Nine months ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 24,635 $ 7,899 $ 69,326 $ 42,818
Translation adjustment 1,847 (1,462) 2,811 (2,560)
Unrealized holding gains/
(losses) 9 (4) 30 (410)
Reclassification adjustment
for losses realized in net
income 155 0 217 0
-------- -------- -------- --------
Total comprehensive
income $ 26,646 $ 6,433 $ 72,384 $ 39,848
=======================================================================
</TABLE>
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,
implementation of our Internet strategy, the impact of competition, the
effect of legal proceedings, and other risks detailed herein and in the
Company's annual and quarterly filings with the Securities and Exchange
Commission.
GENERAL
During the 39-week period ending June 27, 1999, Starbucks Corporation
("Starbucks" or the "Company") derived approximately 84% of net revenues from
its Company-operated retail stores. The remaining 16% of net revenues were
derived from the Company's specialty sales operations, which include product
sales to wholesale customers, product sales to and royalties and fees from
licensees, and 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.
During the second quarter of fiscal 1999, Starbucks completed the purchases
of Tazo, L.L.C. ("Tazo"), a Portland, Oregon-based tea company that produces
premium tea products and Pasqua Inc. ("Pasqua"), a San Francisco, California-
based roaster and retailer of specialty coffee. The results of operations for
Tazo and Pasqua are included in the accompanying financial statements from
the dates of acquisition.
During the third quarter of fiscal 1998, Starbucks acquired the United
Kingdom-based Seattle Coffee Company in a pooling-of-interests transaction (the
"Transaction"). In conjunction with that transaction, Starbucks recorded
pre-tax charges of $8.9 million in direct merger costs and $6.6 million in
other charges associated with the integration of Seattle Coffee Company.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JUNE 27, 1999, COMPARED TO
THE 13 WEEKS ENDED JUNE 28, 1998
Revenues. Net revenues for the 13 weeks ended June 27, 1999, increased 27%
to $424 million from $334 million for the corresponding period in fiscal
1998. Retail sales increased 26% to $356 million from $284 million due
primarily to the opening of new retail stores plus an increase in comparable
store sales (sales from stores open 13 months or longer) of 6% for the
period. The increase in comparable store sales resulted from a 4% increase
in the number of transactions combined with an approximate 2% increase in the
average dollar value per transaction. During the 13 weeks ended June 27,
1999, the Company opened 81 stores in continental North America and 6 in the
United Kingdom. The Company ended the period with 1,909 Company-operated
stores in continental North America and 86 Company-operated stores in the
United Kingdom.
Specialty sales revenues increased 33% to $68 million for the 13 weeks ended
June 27, 1999, compared to $51 million for the corresponding period in fiscal
1998. Specialty sales growth was driven primarily by higher sales to
warehouse clubs and higher revenues from licensees and joint venture
activities. 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
10
<PAGE>
Starbucks whole bean and ground coffee in grocery, warehouse club and mass
merchandise stores. The transition to Kraft began in the first quarter of
fiscal 1999. Licensees (including those in which the Company is a joint
venture partner) opened 5 stores in continental North America and 28 stores
in international markets. The Company ended the period with 169 licensed
stores in continental North America and 148 licensed stores in international
markets.
Costs and Expenses. Cost of sales and related occupancy costs as a
percentage of net revenues was 43.7% for the 13 weeks ended June 27, 1999 and
42.9% for the corresponding period in fiscal 1998 excluding the costs
associated with the Seattle Coffee Company transaction. The increase as a
percentage of revenues was due to higher retail occupancy costs combined with
lower gross margins in the specialty sales category, primarily due to a
change in the grocery distribution strategy.
Store operating expenses as a percentage of retail sales increased to 38.7%
for the 13 weeks ended June 27, 1999, from 37.7% for the corresponding period
in fiscal 1998 excluding costs associated with the Transaction. The increase
was primarily due to higher payroll-related expenditures resulting from the
continuing shift in sales mix to the more labor-intensive hand-crafted
beverages, as well as an increase in average hourly wage rates.
Other operating expenses (expenses associated with all operations other than
Company-owned retail, including the Company's share of joint venture profits
and losses) were 19.2% of specialty sales revenue for the 13 weeks ended June
27, 1999, compared to 24.0% for the corresponding period in fiscal 1998. The
decrease was primarily due to lower operating expenses associated with the
transition of the grocery business to Kraft.
Depreciation and amortization was 5.9% of net revenues, up from 5.7% of net
revenues in the third quarter of fiscal 1998 primarily due to depreciation on
new information systems put into service in the last year.
General and administrative expenses as a percentage of net revenues were 5.8%
for the 13 weeks ended June 27, 1999, compared to 6.2% for the same period in
fiscal 1998. This decrease was primarily due to proportionately lower payroll-
related expenses.
Income Taxes. The Company's effective tax rate for the 13 weeks ended June
27, 1999 was 38.0% compared to 58.4% for the corresponding period in fiscal
1998. Fiscal year 1998 included non-deductible losses incurred by Seattle
Coffee Company prior to the Transaction.
RESULTS OF OPERATIONS -- FOR THE 39 WEEKS ENDED JUNE 27, 1999, COMPARED TO
THE 39 WEEKS ENDED JUNE 28, 1998
Revenues. Net revenues for the 39 weeks ended June 27, 1999, increased 27%
to $1.2 billion from $951 million for the corresponding period in fiscal
1998. Retail sales increased 25% to $1.0 billion from $812 million primarily
due to the opening of new retail stores combined with an increase in
comparable store sales (sales from stores open 13 months or longer) of 5% for
the period. The increase in comparable store sales resulted from a 5%
increase in the number of transactions while the average dollar value
per transaction was flat year over year. During the 39 weeks ended June 27,
1999, the Company opened 293 stores in continental North America and 20 in
the United Kingdom.
Specialty sales revenues increased 35% to $188 million for the 39 weeks ended
June 27, 1999, compared to $139 million for the corresponding period in
fiscal 1998. Specialty sales growth was driven primarily by higher revenues
from license and joint venture activities, warehouse clubs, business dining
and grocery. Licensees (including those in which the Company is a joint
venture partner) opened 32 stores in continental North America and 84 stores
in international markets.
11
<PAGE>
Costs and Expenses. Cost of sales and related occupancy costs as a
percentage of net revenues was 44.9% for the 39 weeks ended June 27, 1999
compared to 44.5% for the corresponding period in fiscal 1998 excluding costs
associated with the Transaction. Cost of sales was negatively impacted by an
overall mix shift from retail to specialty sales, partially offset by
improved retail margins. Retail margins improved as lower green coffee
costs more than offset higher packaging, occupancy, and dairy costs.
Store operating expenses as a percentage of retail sales increased to 37.6%
for the 39 weeks ended June 27, 1999, from 37.0% for the corresponding period
in fiscal 1998, excluding costs associated with the Transaction. The
increase as a percentage of retail sales was primarily due to increased labor
costs partially offset by decreased advertising and marketing expenses.
Other operating expenses were 20.0% of specialty sales revenue for the 39
weeks ended June 27, 1999, compared to 21.9% for the corresponding period in
fiscal 1998. The decrease was due to lower operating expenses resulting from
the transition of the grocery business to Kraft in the first quarter of fiscal
1999, partially offset by higher payroll and other expenses associated with
supervising licensed operations and the Tazo tea business.
Depreciation and amortization was 5.9% of net revenues, up from 5.5% of net
revenues in the corresponding period of fiscal 1998 primarily due 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 5.6%
for the 39 weeks ended June 27, 1999, compared to 6.1% for the same period in
fiscal 1998. This decrease was due to slower growth in payroll-related and all
other administrative expenses relative to net revenue growth.
Interest and other expense for the 39 weeks ended June 27, 1999 was $851,000
compared to $1.2 million for the corresponding period in 1998. The decrease
is 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 39 weeks ended June
27, 1999 was 38.0% compared to 44.6% for the corresponding period in fiscal
1998. Fiscal year 1998 included non-deductible losses incurred by Seattle
Coffee Company prior to the transaction.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with $149 million in total cash and short-term
investments and working capital of $162 million. Cash and cash equivalents
decreased by $11 million for the 39 weeks ended June 27, 1999 to $91 million.
Cash provided by operating activities totaled $169 million for the first 39
weeks of fiscal 1999, resulting primarily from net earnings before non-cash
charges of $152 million.
Cash used by investing activities for the first 39 weeks of fiscal 1999
totaled $241 million. This included capital additions to property, plant and
equipment of $175 million related to opening 313 new Company-operated stores,
enhancing information systems, purchasing roasting and packaging equipment,
and remodeling certain existing stores. The acquisitions of Tazo and Pasqua
used $16 million. During the 39-week period ending June 27, 1999, the Company
made equity investments of $16 million.The Company also received $3 million
in distributions from its domestic joint ventures. The Company invested
excess cash primarily in short-term, investment-grade marketable debt
securities. The net activity in the Company's marketable securities portfolio
during the 39-week period used $33 million.
Cash provided from financing activities for the first 39 weeks of fiscal 1999
totaled $61 million and included cash generated from the exercise of employee
stock options and the related income tax benefit available to the Company
upon exercise
12
<PAGE>
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 130 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 $90 million,
excluding any major new initiatives.
Management has announced its intention to pursue business opportunities on
the Internet. In order to do so, the Company may invest in related
businesses. The strategy for developing this business is still being
formulated and related capital requirements are not yet known.
Management believes that existing cash and investments plus cash generated
from operations should be sufficient to finance capital requirements through
fiscal 2000, 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
with time-sensitive software, at the Company and elsewhere, may recognize a
date using "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculation causing disruptions of
operations, including, among other things, a temporary inability to produce
and distribute products, process transactions or engage in similar normal
business activities. To address the Year 2000 issue and its risks, the
Company 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. "MIS
supported" systems are those telephone and computer systems that are
acquired, installed and maintained by the Company's Management Information
Systems ("MIS") department. These systems include all of the software
applications generally available on the Company's computer network, as well
as many applications used by particular departments or in connection with
specific functions (for example, payroll and general accounting software).
Single user applications and a few specialized systems maintained by certain
departments within the Company are not considered "MIS supported" systems. The
Company's MIS department is primarily responsible for addressing Year 2000
compliance issues arising from all MIS supported systems, while the Year 2000
Task Force is primarily responsible for Year 2000 compliance issues arising
from non-MIS supported systems and from relationships with critical product and
service providers.
The majority of computer and telephony applications at Starbucks are
relatively recent purchases that are not expected to be affected by the Year
2000 problem. All of the MIS supported systems used at Starbucks have been
identified and evaluated. Where necessary, the Company has remediated such
systems by installing system upgrades or rewriting code. As the suppliers of
telephone and computer systems to the Company have worked to address Year 2000
issues with their own products, several have uncovered new or additional
problems relating to their systems or software and have so notified the
Company. In some cases, these new or
13
<PAGE>
additional issues have necessitated additional remediation or testing of the
Company's systems, slightly slowing the completion of the overall remediation
process. In early October 1999, the Company expects to complete its
remediation efforts by installing routine software system upgrades on two
production control systems. As part of the remediation process, the
Company's MIS department has tested each critical system and networked
application. The Company currently expects to continue to test the
integration of its systems and applications for Year 2000 compliance through
the end of October 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 and
others about their remediation and contingency plans and their ability to
meet the Company's needs in the Year 2000. By the end of the third quarter
of fiscal 1999, the Company had received responses from approximately 94% of
these product and service suppliers, virtually all of which indicate that
they are actively addressing the Year 2000 issue. The Company is working with
these suppliers to complete additional remediation steps and is working with
all of its critical product and service suppliers to develop appropriate
contingency plans. The contingency plans may include, among other actions,
purchasing additional inventory prior to the end of 1999, identifying
alternate sources of products and services and establishing alternate ways to
accomplish critical business functions.
The Company is preparing contingency plans for each of its critical business
units or departments and plans to conduct tests of certain critical non-MIS
supported systems (even if the Company has received assurances of compliance)
through the end of October 1999. Despite these efforts, there can be no
guarantee that the other companies on which the Company relies will be
prepared for the Year 2000 and that their Year 2000 problems will not have an
adverse effect on the Company.
The Company presently believes that the most reasonably likely worst case
scenario concerning the Year 2000 is that certain critical product and
service providers will not be Year 2000 compliant and will be unable to
deliver products and services in a timely manner. The Company believes that
its geographically dispersed retail stores and large supplier base will
significantly mitigate any adverse impact from suppliers' delays or failures,
but that the Company remains vulnerable to (i) delays in deliveries by a few
suppliers who are the sole source of certain products and services; (ii)
disruption of the components of its distribution operations, including ports,
trucking, and air freight services, and (iii) local or regional retail store
shutdowns as a result of problems with infrastructure such as power, water
and sewer service.
The Company has spent approximately $1.3 million in direct costs for the Year
2000 compliance project through the third quarter of fiscal 1999 and expects
to spend up to an additional $0.9 million to complete its remediation and
testing efforts. The total cost to complete remediation efforts and the
dates by which the Company expects to complete its Year 2000 remediation 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,
caused by various factors including weather, political and economic
conditions in certain coffee-producing countries and other supply-related
oncerns. 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
14
<PAGE>
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 June 27, 1999, the Company had
approximately $101 million in fixed-price purchase commitments which,
together with existing inventory, is expected to provide an adequate supply
of green coffee for most of fiscal 2000. The Company believes, based on
relationships established with its suppliers in the past, that the risk of non-
delivery on such purchase commitments is remote.
To further reduce its exposure to rising coffee costs, the Company, 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.
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 STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company will adopt SFAS 131 at the end of fiscal year 1999.
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, 2000.
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.
15
<PAGE>
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.
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 June 27,
1999:
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: August 11, 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
16
<PAGE>
<TABLE>
<CAPTION>
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
(13 Weeks) (39 Weeks)
- -------------------------------------------------------------------------------
CALCULATION OF EARNINGS PER COMMON SHARE-BASIC:
<S> <C> <C> <C> <C>
Net earnings $ 24,635 $ 7,899 $ 69,326 $42,818
===============================================================================
Weighted average common shares and
common stock units outstanding 182,781 178,137 181,397 175,095
===============================================================================
Net earnings per common share-basic $ 0.13 $ 0.04 $ 0.38 $0.24
===============================================================================
CALCULATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE-DILUTED(1):
Net earnings calculation:
Net earnings $ 24,635 $ 7,899 $ 69,326 $ 42,818
Add after-tax interest
expense on debentures 0 0 0 348
Add after-tax amortization of issuance
costs related to the debentures 0 0 0 30
- ------------------------------------------------------------------------------
Adjusted net earnings $ 24,635 $ 7,899 $ 69,326 $ 43,196
==============================================================================
Weighted average shares outstanding
calculation:
Weighted average common shares
and common stock units outstanding 182,781 178,137 181,397 175,095
Dilutive effect of outstanding common
stock options 8,555 7,012 7,217 6,452
Assuming conversion of convertible
subordinated debentures 0 0 0 1,871
- ------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 191,336 185,149 188,614 183,418
==============================================================================
Net earnings per common and
common equivalent share-diluted $ 0.13 $ 0.04 $0.37 $0.24
==============================================================================
</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. The Company's
convertible subordinated debentures were converted to equity during the first
quarter of fiscal 1998.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Starbucks Corporation third 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> 9-MOS
<FISCAL-YEAR-END> OCT-3-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> JUN-27-1999
<CASH> 90,946
<SECURITIES> 58,461
<RECEIVABLES> 42,186
<ALLOWANCES> 718
<INVENTORY> 166,579
<CURRENT-ASSETS> 386,480
<PP&E> 993,808
<DEPRECIATION> 302,076
<TOTAL-ASSETS> 1,168,538
<CURRENT-LIABILITIES> 224,394
<BONDS> 0
0
0
<COMMON> 644,427
<OTHER-SE> 277,467
<TOTAL-LIABILITY-AND-EQUITY> 1,168,538
<SALES> 1,205,252
<TOTAL-REVENUES> 1,205,252
<CGS> 541,276
<TOTAL-COSTS> 541,276
<OTHER-EXPENSES> 557,818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 851
<INCOME-PRETAX> 111,816
<INCOME-TAX> 42,490
<INCOME-CONTINUING> 69,326
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,326
<EPS-BASIC> .38
<EPS-DILUTED> .37
</TABLE>
