<PAGE> 1
--------------------------------------------------------------------------------
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 July 2, 2000
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 14, 2000, there were 187,076,501 shares of the Registrant's Common
Stock outstanding.
----------------------------------------------------------------------------
<PAGE> 2
STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
<S> <C>
Item 1. Financial Statements .......................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ........................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 13
Item 6. Exhibits and Reports on Form 8-K .............................. 13
Signature .............................................................. 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
(unaudited) (unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 555,546 $ 423,792 $1,587,226 $1,205,252
Cost of sales and related
occupancy costs 241,126 185,020 702,777 541,276
-------------------------------------------------------------------------------------------------------
Gross margin 314,420 238,772 884,449 663,976
Joint venture income 4,339 360 11,555 25
Store operating expenses 185,515 137,625 518,971 382,074
Other operating expenses 17,629 13,400 55,569 37,516
Depreciation and amortization 33,260 25,214 94,501 70,848
General and administrative
expenses 28,049 24,679 82,817 67,405
-------------------------------------------------------------------------------------------------------
Operating income 54,306 38,214 144,146 106,158
Interest and other income, net 1,555 1,520 5,211 5,658
-------------------------------------------------------------------------------------------------------
Earnings before income taxes 55,861 39,734 149,357 111,816
Income taxes 20,948 15,099 56,289 42,490
-------------------------------------------------------------------------------------------------------
Net earnings $ 34,913 $ 24,635 $ 93,068 $ 69,326
=======================================================================================================
Net earnings per common share - basic $ 0.19 $ 0.13 $ 0.50 $ 0.38
Net earnings per common share - diluted $ 0.18 $ 0.13 $ 0.48 $ 0.37
Weighted average shares outstanding:
Basic 186,520 182,781 184,911 181,397
Diluted 193,881 191,336 192,099 188,614
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
July 2, October 3,
2000 1999
(unaudited)
---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 67,436 $ 66,419
Short-term investments 56,127 51,367
Accounts receivable 63,149 47,646
Inventories 181,986 180,886
Prepaid expenses and other
current assets 21,248 19,049
Deferred income taxes, net 26,146 21,133
---------------------------------------------------------------------------------
Total current assets 416,092 386,500
Joint ventures and other investments 108,794 68,060
Property, plant and equipment, net 882,475 760,289
Other assets 27,141 23,474
Goodwill, net 20,528 14,191
---------------------------------------------------------------------------------
Total $ 1,455,030 $ 1,252,514
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 75,225 $ 56,108
Checks drawn in excess of bank balances 52,481 63,811
Accrued compensation and related costs 71,295 43,872
Accrued occupancy costs 27,470 23,017
Accrued taxes 21,846 30,752
Other accrued expenses 40,340 33,153
Deferred revenue 11,280 484
---------------------------------------------------------------------------------
Total current liabilities 299,937 251,197
Deferred income taxes, net 35,627 32,886
Long-term debt 6,505 7,018
Minority interest 2,525 400
Shareholders' equity:
Common stock - Authorized, 300,000,000;
issued and outstanding, 186,787,690 and
183,282,095 shares, respectively, (includes
848,550 common stock units in both periods) 715,896 651,020
Retained earnings 407,007 313,939
Accumulated other comprehensive loss (12,467) (3,946)
---------------------------------------------------------------------------------
Total shareholders' equity 1,110,436 961,013
---------------------------------------------------------------------------------
Total $ 1,455,030 $ 1,252,514
=================================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------------------------------------------------------------
July 2, June 27,
2000 1999
(39 Weeks) (39 Weeks)
(unaudited)
---------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 93,068 $ 69,326
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 101,252 78,339
Provision for losses on asset disposals 2,462 --
Deferred income taxes, net 1,708 3,121
Equity in (income)/losses of investees (8,199) 987
Cash provided/(used) by changes in
operating assets and liabilities:
Net purchases of trading securities (1,107) --
Accounts receivable (15,073) 9,564
Inventories (218) (24,519)
Prepaid expenses and other current assets (1,625) (8,891)
Accounts payable 17,400 12,653
Accrued compensation and related costs 27,329 9,688
Accrued occupancy costs 4,421 3,909
Accrued taxes (8,950) 6,156
Minority interest 2,125 400
Deferred revenue 10,796 228
Other accrued expenses 6,552 7,553
---------------------------------------------------------------------------------
Net cash provided by operating activities 231,941 168,514
Investing activities:
Purchase of investments (101,489) (111,447)
Maturity of investments 44,750 78,553
Sale of investments 48,238 --
Purchases of businesses, net of cash acquired (12,889) (16,216)
Investments in joint ventures and other
investments (39,136) (16,301)
Distributions from joint ventures 4,569 2,983
Additions to property, plant and equipment (223,766) (171,491)
Additions to other assets (2,878) (6,950)
---------------------------------------------------------------------------------
Net cash used by investing activities (282,601) (240,869)
Financing activities:
(Decrease)/increase in cash provided by
checks drawn in excess of bank balances (11,331) 5,939
Proceeds from sale of common stock under
employee stock purchase plan 7,470 4,994
Exercise of stock options 38,211 32,039
Tax benefit from exercise of non-qualified
stock options 19,195 18,180
Payments on long-term debt (1,660) --
---------------------------------------------------------------------------------
Net cash provided by financing activities 51,885 61,152
---------------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents (208) 486
---------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,017 (10,717)
Cash and cash equivalents:
Beginning of the period 66,419 101,663
---------------------------------------------------------------------------------
End of the period $ 67,436 $ 90,946
=================================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 284 $ 135
Income taxes 1,858 20,870
Net unrealized holding(loss)/gain on investments (4,237) 30
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 39 Weeks Ended July 2, 2000 and
June 27, 1999
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of July 2, 2000 and October 3, 1999 and
for the 13-week and 39-week periods ended July 2, 2000 and June 27, 1999 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 July
2, 2000 and June 27, 1999 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 October 3, 1999, is derived from the Company's
audited consolidated financial statements and notes thereto for the year ended
October 3, 1999, 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 July 2, 2000
are not necessarily indicative of the results of operations that may be achieved
for the entire fiscal year ending October 1, 2000.
NOTE 2: OTHER ITEMS
On June 23, 2000, Starbucks purchased a 97% interest in its Thailand operations,
which included 12 licensed stores, for approximately $5 million.
NOTE 3: 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
computation of diluted earnings per share includes the dilutive effect of common
stock equivalents consisting of certain shares subject to stock options.
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
July 2, October 3,
2000 1999
-----------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 79,914 $ 95,001
Roasted 27,896 28,065
Other merchandise held for sale 61,972 46,655
Packaging and other supplies 12,204 11,165
-----------------------------------------------------------------
$ 181,986 $ 180,886
=================================================================
</TABLE>
6
<PAGE> 7
As of July 2, 2000, the Company had fixed-price purchase commitments for green
coffee totaling approximately $107 million.
NOTE 5: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the following
(in thousands):
<TABLE>
<CAPTION>
July 2, October 3,
2000 1999
----------------------------------------------------------------
<S> <C> <C>
Land $ 5,084 $ 5,084
Building 19,795 19,795
Leasehold improvements 700,236 591,640
Roasting and store equipment 343,389 273,612
Furniture, fixtures and other 152,397 130,223
----------------------------------------------------------------
1,220,901 1,020,354
Less accumulated depreciation
and amortization (418,207) (320,982)
----------------------------------------------------------------
802,694 699,372
Work in progress 79,781 60,917
----------------------------------------------------------------
$ 882,475 $ 760,289
================================================================
</TABLE>
NOTE 6: COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during the period, except
those resulting from transactions with shareholders of the Company. It has two
components: net income and other comprehensive income. Accumulated other
comprehensive income/(loss) reported on the Company's consolidated balance
sheets consists of foreign currency translation adjustments and the unrealized
gains and losses, net of applicable taxes, on available-for-sale securities.
Comprehensive income, net of related tax effects, is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 34,913 $ 24,635 $ 93,068 $ 69,326
Translation adjustment (3,556) 1,847 (4,133) 2,811
Unrealized holding gains/
(losses), net (2,828) 9 (4,237) 30
Reclassification adjustment
for net (gains)/losses
realized in net income -- 155 (151) 217
-------- -------- -------- --------
Total comprehensive income $ 28,529 $ 26,646 $ 84,547 $ 72,384
=====================================================================================
</TABLE>
7
<PAGE> 8
NOTE 7: SEGMENT REPORTING
The Company is organized into a number of business units. The Company's North
American retail business sells primarily coffee beverages, whole bean coffees,
and related merchandise through Company-operated retail stores in the United
States and Canada. The Company also owns and operates retail stores in the
United Kingdom and Thailand. The North American and International retail
segments are managed by different presidents within the Company and are measured
and evaluated separately by senior management.
The Company also operates through several other business units, each of which is
managed and evaluated independently. These other business units include domestic
wholesale, domestic retail store licensing, grocery channel licensing,
international retail store licensing and a direct-to-consumer business.
The tables below present information by operating segment (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
July 2, June 27, July 2, June 27,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
North American retail $ 443,334 $ 344,027 $ 1,273,923 $ 984,462
All other business units 117,832 84,962 329,208 230,326
Intersegment revenues (5,620) (5,197) (15,905) (9,536)
----------- ----------- ----------- -----------
Total revenues $ 555,546 $ 423,792 $ 1,587,226 $ 1,205,252
===============================================================================================
</TABLE>
<TABLE>
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING INCOME
North American retail $ 60,698 $ 52,724 $ 178,728 $ 146,999
All other business units 27,370 15,164 66,568 39,900
Unallocated corporate expenses (33,519) (29,260) (100,815) (80,186)
Intersegment eliminations (243) (414) (335) (555)
Interest, net 1,555 1,520 5,211 5,658
--------- --------- --------- ---------
Earnings before income taxes $ 55,861 $ 39,734 $ 149,357 $ 111,816
======================================================================================================
</TABLE>
NOTE 8: NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
standard, as amended, will require the Company to recognize derivatives on its
balance sheet at fair value. Changes in the fair values of derivatives that
qualify as cash flow hedges will be recognized in accumulated other
comprehensive income until the hedged item is recognized in earnings. The
Company will adopt this standard in fiscal 2001. Given the Company's current
operations, management does not expect that adoption of this standard will have
a material impact on its financial statements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB
101 summarizes the SEC Staff's views on applying generally accepted accounting
principles to revenue recognition. The Company has reviewed the requirements of
the bulletin and believes its current revenue recognition policies are in
compliance with SAB 101.
8
<PAGE> 9
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,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based on currently
available operating, financial and competitive information, and are subject to
various risks and uncertainties. Actual future results and trends may differ
materially depending on a variety of factors, including, but not limited to,
coffee and other raw materials prices and availability, successful execution of
internal performance and expansion plans, the impact of competition, the effect
of legal proceedings, and other risks detailed herein and in the Company's
annual and quarterly filings with the Securities and Exchange Commission.
GENERAL
During the 39-week period ending July 2, 2000, Starbucks Corporation
("Starbucks" or the "Company") derived approximately 84% of net revenues from
its Company-operated retail stores. The remaining 16% of net revenues is derived
from the Company's specialty operations, which include sales to wholesale
accounts and licensees, royalty and license fee income, and sales through its
direct-to-consumer business including its on-line store at www.starbucks.com.
The Company's fiscal year ends on the Sunday closest to September 30. Fiscal
year 1999 had 53 weeks. The fiscal year ending on October 1, 2000 will include
52 weeks.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED JULY 2, 2000, COMPARED TO THE 13
WEEKS ENDED JUNE 27, 1999
REVENUES
Net revenues for the 13 weeks ended July 2, 2000 increased 31% to $556 million
from $424 million for the corresponding period in fiscal 1999. Retail revenues
increased 31% to $467 million from $356 million primarily due to the opening of
new retail stores plus an increase in comparable store sales of 10% for the
period. The increase in comparable store sales (stores open for at least 13
months) resulted from a 5% increase in the number of transactions combined with
a 5% increase in the average dollar value per transaction. During the 13 weeks
ended July 2, 2000, the Company opened 109 stores in continental North America
and 12 internationally. The Company ended the period with 2,341 Company-operated
stores in continental North America and 148 Company-operated stores
internationally.
Specialty revenues increased 31% to $89 million for the 13 weeks ended July 2,
2000, compared to $68 million for the corresponding period in fiscal 1999. The
increase in specialty revenues was primarily due to higher revenues from
foodservice accounts, the national expansion of whole bean and ground coffee in
supermarkets through a licensing agreement with Kraft, and increased revenues
from retail store licensees. Licensees (including those in which the Company is
a joint venture partner) opened 176 stores in continental North America and 42
stores in international markets. The Company ended the period with 438 licensed
stores in continental North America and 288 licensed stores in international
markets.
SYSTEMWIDE RETAIL STORE REVENUES
Systemwide retail store revenues, which include net revenues for both
Company-operated and licensed retail stores, were $584 million for the third
quarter of fiscal 2000, up 43% from $410 million in the third quarter of fiscal
1999 primarily due to the opening of 904 stores in the last 12 months.
Systemwide retail store revenues provides a broader perspective of global brand
sales; however, it excludes net revenues from non-retail channels.
GROSS MARGIN
Gross margin increased to 56.6% for the 13 weeks ended July 2, 2000 from 56.3%
for the corresponding period in fiscal 1999. The improvement in gross margin was
primarily due to lower green coffee costs and the impact of sales price
increases on beverages sold at Company-operated retail stores, partially offset
by higher occupancy costs at Company-operated retail stores.
JOINT VENTURE INCOME
Joint venture income was $4.3 million for the quarter just ended, up from
$360,000 in the third quarter of fiscal 1999. The increase was primarily due to
improved profitability from the Japanese retail store joint venture and the
Company's Bottled Frappuccino(R) joint venture.
9
<PAGE> 10
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 39.7%
for the 13 weeks ended July 2, 2000, from 38.7% for the corresponding period in
fiscal 1999. The increase was primarily due to higher regional overhead costs,
higher advertising expenses and higher store labor costs, as a percentage of
retail revenues.
Other operating expenses (expenses associated with all operations other than
Company-owned retail) were 19.8% of specialty revenues for the 13 weeks ended
July 2, 2000, unchanged from the corresponding period in fiscal 1999. Higher
payroll-related expenses required to accelerate the growth of the specialty
businesses were offset by lower marketing expenses for the wholesale business.
In the third quarter of fiscal 1999, the wholesale business had a special
marketing promotion that was not repeated in fiscal 2000.
General and administrative expenses as a percentage of net revenues were 5.0%
for the 13 weeks ended July 2, 2000, compared to 5.8% for the corresponding
period in fiscal 1999. The decrease was primarily due to leverage from the
acceleration of revenue growth.
INCOME TAXES
The Company's effective tax rate for the 13 weeks ended July 2, 2000 was 37.5%
compared to 38.0% for the corresponding period in fiscal 1999. The decrease was
due to overall tax planning efforts and the reduction of losses by the Company's
joint venture in Japan, which are not deductible for U.S. tax purposes.
RESULTS OF OPERATIONS -- FOR THE 39 WEEKS ENDED JULY 2, 2000, COMPARED TO THE 39
WEEKS ENDED JUNE 27, 1999
REVENUES
Net revenues for the 39 weeks ended July 2, 2000, increased 32% to $1.6 billion
from $1.2 billion for the corresponding period in fiscal 1999. Retail revenues
increased 31% to $1.3 billion from $1.0 billion primarily due to the opening of
new retail stores plus an increase in comparable store sales of 9% for the
period. The increase in comparable store sales resulted from a 5% increase in
the number of transactions combined with a 4% increase in the average dollar
value per transaction. During the 39 weeks ended July 2, 2000, the Company
opened 311 stores in continental North America and 47 internationally.
Specialty revenues increased 34% to $251 million for the 39 weeks ended July 2,
2000, compared to $188 million for the corresponding period in fiscal 1999. The
increase in specialty revenues was primarily due to higher revenues from
foodservice accounts, retail store licensees, and the grocery channel. Licensees
(including those in which the Company is a joint venture partner) opened 265
stores in continental North America and 115 stores in international markets.
SYSTEMWIDE RETAIL STORE REVENUES
Systemwide retail store revenues were $1.6 billion for the nine months ended
July 2, 2000, up 41% from $2.1 billion in the corresponding period in fiscal
1999 primarily due to the opening of 904 stores in the last 12
months.
GROSS MARGIN
Gross margin increased to 55.7% for the 39 weeks ended July 2, 2000 from 55.1%
for the corresponding period in fiscal 1999. The improvement in gross margin was
primarily due to lower green coffee costs and the impact of sales price
increases on beverages sold at Company-operated retail stores, partially offset
by higher occupancy costs at Company-operated retail stores.
JOINT VENTURE INCOME
Joint venture income was $11.6 million or 0.7% of net revenue during the 39
weeks ended July 2, 2000, up from less than 0.1% for the corresponding period in
fiscal 1999. The increase was primarily due to the improved profitability from
both the Starbucks Japanese retail store joint venture and the Company's Bottled
Frappuccino(R) joint venture.
10
<PAGE> 11
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 38.8%
for the 39 weeks ended July 2, 2000, from 37.6% for the corresponding period in
fiscal 1999. The increase was due to higher payroll-related expenditures as a
percent of retail revenues resulting from an increase in average hourly wage
rates and a continuing shift in sales to more labor-intensive handcrafted
beverages.
Other operating expenses were 22.2% of specialty revenues for the 39 weeks ended
July 2, 2000, compared to 20.0% for the corresponding period in fiscal 1999. The
increase was primarily due to higher payroll-related expenditures to accelerate
the growth of the specialty businesses.
General and administrative expenses as a percentage of net revenues were 5.2%
for the 39 weeks ended July 2, 2000 compared to 5.6% for the corresponding
period in fiscal 1999. The decrease was primarily due to leverage from the
acceleration of revenue growth.
INCOME TAXES
The Company's effective tax rate for the 39 weeks ended July 2, 2000 was 37.7%
compared to 38.0% for the corresponding period in fiscal 1999. The decrease was
due to overall tax planning efforts and the reduction of losses by the Company's
joint venture in Japan, which are not deductible for U.S. tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with total cash and cash equivalents and short-term
investments of $124 million and working capital of $116 million. Cash and cash
equivalents increased by $1 million for the 39 weeks ended July 2, 2000 to $67
million. Cash provided by operating activities totaled $232 million for the
first 39 weeks of fiscal 2000, resulting primarily from net earnings before
non-cash charges of $190 million and a $45 million increase in accrued
compensation and accounts payable.
Cash used by investing activities for the first 39 weeks of fiscal 2000 totaled
$283 million. This included capital additions to property, plant and equipment
of $224 million related to opening 358 new Company-operated retail stores,
remodeling certain existing stores, enhancing information systems and purchasing
roasting and packaging equipment for the Company's roasting and distribution
facilities. The Company used $25 million to make a minority investment in
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items and $10 million to make a minority investment in
Cooking.com, a leading web-based retailer of cookware, accessories, and
specialty foods and provider of information about cooking. The purchase of
Tympanum, Inc. (d/b/a Hear Music) used $8 million and the purchase of Starbucks
Thailand operations used $5 million. During the 39-week period ending July 2,
2000, the Company made equity investments of $4 million in its international
joint ventures and received $5 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 $9 million.
Cash provided by financing activities for the first 39 weeks of fiscal 2000
totaled $52 million. This included $65 million generated from the exercise of
employee stock options, 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. This was
offset by an $11 million decrease in checks outstanding.
Cash requirements for the remainder of fiscal 2000, other than normal operating
expenses, are expected to consist primarily of capital expenditures related to
the addition of new Company-operated retail stores. The Company plans to open at
least 450 Company-operated stores during fiscal 2000. The Company also
anticipates incurring additional expenditures for enhancing its production
capacity and information systems and remodeling certain existing stores. While
there can be no assurance that current expectations will be realized, management
expects capital expenditures for the remainder of fiscal 2000 to be
approximately $90 million.
11
<PAGE> 12
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 2001. New joint ventures, other new business
opportunities or store expansion rates substantially in excess of that presently
planned may require outside funding.
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
The supply and price of green (unroasted) coffee are subject to significant
volatility. Although most coffee trades in the commodity market, coffee of the
quality sought by the Company tends to trade on a negotiated basis at a
substantial premium above commodity coffee prices, depending upon the supply and
demand at the time of purchase. Supply and price can be affected by multiple
factors in the producing countries, including weather, political and economic
conditions. In addition, green coffee prices have been affected in the past, and
may be affected in the future, by the actions of certain organizations and
associations that have historically attempted to influence commodity prices of
green coffee through agreements establishing export quotas or restricting coffee
supplies worldwide. The Company's ability to raise sales prices in response to
rising coffee prices may be limited and the Company's profitability could be
adversely affected if coffee prices were to rise substantially.
The Company enters into fixed-price purchase commitments in order to secure an
adequate supply of quality green coffee and bring greater certainty to the cost
of sales in future periods. As of July 2, 2000, the Company had approximately
$107 million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee for the
remainder 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 may, from
time to time, enter into futures contracts to hedge price-to-be-established
coffee purchase commitments. The specific risks associated with these activities
are described below in Item 3 "Quantitative and Qualitative Disclosures about
Market Risk."
In addition to fluctuating green 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, increases in the cost of dairy products and the
Company's continued 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.
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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 either trading or
available-for-sale. Trading securities are recorded on the balance sheet at fair
value, with unrealized gains and losses included in earnings. Available-for-sale
securities 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 exposure.
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 do so 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 SFAS No.
80 "Accounting for Futures Contracts," these futures contracts meet the hedge
criteria and are accounted for as hedges. Accordingly, gains and losses are
deferred and recognized as adjustments to the carrying value of the coffee
inventory when purchased and recognized in results of operations as coffee
products are sold. Gains and losses are calculated based on the difference
between the cost basis and the market value of the coffee contracts. The market
risk related to coffee futures is substantially offset by changes in the costs
of coffee purchased.
The Company has investments of $64 million (at cost) in equity instruments of
public and private Internet and e-commerce companies. These investments are
accounted for under the cost method since ownership is less than 20% and the
Company does not exert significant influence over the operations of these
companies. The Company regularly monitors and evaluates the carrying value of
these investments. If the events and circumstances indicate that these assets
might be permanently impaired, the Company would reduce the carrying value of
the asset and record a non-cash impairment loss. To date, no such impairment has
been recorded; however in recent months, companies in the Internet and
e-commerce industries have experienced difficulties, including difficulties in
raising proceeds to fund expansion or to continue operations. Because the
companies in which Starbucks has invested are part of the Internet and
e-commerce industries, the Company may conclude in future quarters that some of
these investments have experienced other-than-temporary impairment.
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
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Statement re: computation of per share earnings
27 Financial Data Schedule
</TABLE>
(b) Current Reports on Forms 8-K filed during the 39 weeks ended July 2,
2000:
None
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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 15, 2000 By:/S/ Michael Casey
----------------------------------
Michael Casey
executive vice president and
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
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