<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
In thousands, except earnings per share and store operating data
The following selected financial data have been derived from the consolidated
financial statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto.
<TABLE>
<CAPTION>
As of and for the Oct 1, 2000 Oct 3, 1999 Sept 27, 1998 Sept 28, 1997 Sept 29, 1996
fiscal year ended(1) (52 Wks) (53 Wks) (52 Wks) (52 Wks) (52 Wks)
-------------------- ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA
Net revenues:
Retail $1,823,607 $1,423,389 $1,102,574 $836,291 $601,458
Specialty 345,611 256,756 206,128 139,098 96,414
---------- ---------- ---------- -------- --------
Total net revenues 2,169,218 1,680,145 1,308,702 975,389 697,872
Merger expenses(2) -- -- 8,930 -- --
Operating income 212,252 156,711 109,216 86,199 56,575
Internet-related investment losses(3) 58,792 -- -- -- --
Gain on sale of investment(4) -- -- -- -- 9,218
Net earnings $ 94,564 $ 101,693 $ 68,372 $ 55,211 $ 41,710
Net earnings per common share-diluted(5) $ 0.49 $ 0.54 $ 0.37 $ 0.33 $ 0.27
Cash dividends per share -- -- -- -- --
---------- ---------- ---------- -------- --------
BALANCE SHEET DATA
Working capital $ 146,568 $ 135,303 $ 157,805 $172,079 $239,365
Total assets 1,493,131 1,252,514 992,755 857,152 729,227
Long-term debt (including current portion) 7,168 7,691 1,803 168,832 167,980
Shareholders' equity 1,148,399 961,013 794,297 533,710 454,050
---------- ---------- ---------- -------- --------
STORE OPERATING DATA
Comparable store sales(6) 9% 6% 5% 5% 7%
Stores open at year-end:
Continental North America:
Company-operated stores 2,446 2,038 1,622 1,270 929
Licensed stores 530 179 133 94 75
International:
Company-operated stores 173 97 66 31 9
Licensed stores 352 184 65 17 2
---------- ---------- ---------- -------- --------
Total stores 3,501 2,498 1,886 1,412 1,015
---------- ---------- ---------- -------- --------
</TABLE>
(1) The Company's fiscal year ends on the Sunday closest to September 30.
All fiscal years presented include 52 weeks, except fiscal 1999 which
includes 53 weeks.
(2) Merger expenses relate to the business combination with Seattle Coffee
Holdings Limited in fiscal 1998.
(3) Internet-related investment losses consist of write-downs of investments
in Kozmo.com, Inc., living.com Inc., Cooking.com, Inc. and Talk City,
Inc.
(4) Gain on sale of investment relates to the sale of Noah's New York
Bagels, Inc. stock in fiscal 1996.
(5) Diluted earnings per share is based on the weighted average number of
shares and common stock units outstanding during the period. In
addition, the presentation of diluted earnings per share includes the
dilutive effect of common stock equivalents consisting of certain shares
subject to stock options and assumes conversion of the Company's
formerly outstanding convertible subordinated debentures using the "if
converted" method when such securities were dilutive, with net income
adjusted for the after-tax interest expense and amortization applicable
to these debentures. Earnings per share data for fiscal years 1996
through 1998 have been restated to reflect the two-for-one stock split
in fiscal 1999.
(6) Percentage change includes only Company-operated stores open 13 months
or longer.
<PAGE> 2
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements set forth in this Annual Report, including anticipated store
and market 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Starbucks presently derives approximately 84% of net revenues from its
Company-operated retail stores. The 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. The Company's fiscal year ends on the Sunday
closest to September 30. Fiscal year 2000 had 52 weeks, fiscal 1999 had 53
weeks, and fiscal year 1998 had 52 weeks. The fiscal year ending on September
30, 2001, will include 52 weeks.
The Company's consolidated net revenues increased 29% from $1.7 billion in
fiscal 1999 (53 weeks) to $2.2 billion in fiscal 2000 (52 weeks), primarily due
to the Company's store expansion program and comparable store sales increases.
Comparable store sales increased by 9%, 6% and 5% in fiscal 2000, 1999 and 1998,
respectively. As part of its expansion strategy of clustering stores in existing
markets, Starbucks has experienced a certain level of cannibalization of
existing stores by new stores as store concentration has increased. However,
management believes such cannibalization has been justified by the incremental
sales and return on new store investments. This cannibalization, as well as
increased competition and other factors, may put downward pressure on the
Company's comparable store sales growth in future periods.
The following table sets forth the percentage relationship to total net
revenues, unless otherwise indicated, of certain items included in the Company's
consolidated statements of earnings:
<TABLE>
<CAPTION>
Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
Fiscal year ended (52 Wks) (53 Wks) (52 Wks)
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
STATEMENTS OF EARNINGS DATA
Net revenues:
Retail 84.1% 84.7% 84.2%
Specialty 15.9 15.3 15.8
----- ----- -----
Total net revenues 100.0 100.0 100.0
Cost of sales and related occupancy costs 44.0 44.1 44.2
----- ----- -----
Gross margin 56.0 55.9 55.8
Joint venture income 0.9 0.2 0.1
Store operating expenses(1) 38.7 38.2 38.0
Other operating expenses(2) 22.7 21.3 21.6
Depreciation and amortization 6.0 5.8 5.5
General and administrative expenses 5.1 5.3 5.9
Merger expenses -- -- 0.7
----- ----- -----
Operating income 9.8 9.3 8.3
Interest and other income, net 0.3 0.5 0.6
Internet-related investment losses 2.7 -- --
----- ----- -----
Earnings before income taxes 7.4 9.8 8.9
Income taxes 3.0 3.7 3.7
----- ----- -----
Net earnings 4.4% 6.1% 5.2%
----- ----- -----
</TABLE>
(1) Shown as a percentage of retail revenues.
(2) Shown as a percentage of specialty revenues.
<PAGE> 3
BUSINESS COMBINATIONS
During fiscal 2000, Starbucks acquired the outstanding stock of Tympanum, Inc.
(d/b/a "Hear Music"), a music retailer, and of Coffee Partners Co. Ltd., the
company licensed to operate Starbucks stores in Thailand ("Thailand
operations"). The combined purchase price for these two acquisitions was $14.1
million. During fiscal 1999, Starbucks acquired the net assets of Tazo, L.L.C.,
a Portland, Oregon-based tea company that produces premium tea products, and the
stock of Pasqua Inc., a San Francisco, California-based roaster and retailer of
specialty coffee. The combined purchase price for these two acquisitions was
$16.5 million. All of the above acquisitions were accounted for under the
purchase method of accounting. Results of operations of the acquired companies
are included on the accompanying consolidated financial statements from the
dates of acquisition. During fiscal 1998, Starbucks acquired the United
Kingdom-based Seattle Coffee Holdings Limited ("Seattle Coffee Company") in a
pooling-of-interests transaction (the "Transaction"). In conjunction with the
Transaction, Starbucks recorded pre-tax charges of $8.9 million in direct merger
costs and $6.6 million in other charges associated with the integration of
Seattle Coffee Company. The historical financial statements for the periods
prior to the Transaction were restated as though the companies had always been
combined.
RESULTS OF OPERATIONS -- FISCAL 2000 COMPARED TO FISCAL 1999
SYSTEMWIDE RETAIL STORE SALES
Systemwide retail store sales, which include net sales for both Company-operated
and licensed retail stores, were $2.3 billion for fiscal 2000 (52 weeks) an
increase of 38% from $1.6 billion in fiscal 1999 (53 weeks), primarily due to
the opening of an additional 1,035 stores. Systemwide retail store sales
provides a broader perspective of global brand sales; however, it excludes net
revenues from non-retail channels.
REVENUES
Consolidated net revenues increased 29% to $2.2 billion for fiscal 2000,
compared to $1.7 billion for fiscal 1999. Retail revenues increased 28% to $1.8
billion from $1.4 billion. The increase in retail revenues was due to the
addition of new Company-operated stores and comparable store sales growth of 9%.
The increase in comparable store sales resulted from a 5% increase in the number
of transactions and a 4% increase in the average dollar value per transaction.
During fiscal 2000, the Company opened 417 stores in continental North America,
63 stores in the United Kingdom, eight in Thailand and two in Australia. As of
fiscal year-end, there were 2,446 Company-operated stores in continental North
America, 156 in the United Kingdom, 15 in Thailand and two in Australia. During
fiscal 2001, the Company expects to open at least 450 Company-operated stores in
North America and 75 in international markets.
Specialty revenues increased 35% to $346 million for fiscal 2000 from $257
million for fiscal 1999. The increase was driven primarily by higher sales to
licensees, grocery channel and food service accounts. Licensees (including those
in which the Company is a joint venture partner) opened 361 stores in
continental North America, of which over 280 stores related to the Company's
expansion into grocery stores, and 184 stores in international markets. The
Company ended the year with 530 licensed stores in continental North America and
352 licensed stores in international markets. During fiscal 2001, the Company
expects to open at least 575 licensed stores.
GROSS MARGIN
Gross margin increased to 56.0% of net revenues for fiscal 2000 from 55.9% in
fiscal 1999. The positive impact on gross margin of lower green coffee costs and
retail beverage sales price increases was partially offset by higher retail
occupancy costs. Occupancy costs, which are primarily fixed costs, were higher
as a percentage of revenue due, in part, to one less week of sales in fiscal
2000. Also, occupancy costs have increased as a result of higher average rent
expense per square foot as well as the expansion of Company-operated stores into
international markets that have higher occupancy costs as a percentage of
revenue than North American retail operations.
JOINT VENTURE INCOME
The Company has two joint ventures to produce and distribute Starbucks branded
products. The North American Coffee Partnership is a 50/50 joint venture
partnership with the Pepsi-Cola Company to develop and distribute bottled
Frappuccino(R) coffee drink. The Starbucks Ice Cream Partnership is a 50/50
joint venture partnership with Dreyer's Grand Ice Cream, Inc. to develop and
distribute premium ice creams.
The Company is a partner in several other joint ventures that operate licensed
Starbucks retail stores, including Starbucks Coffee Japan Limited, a 50/50 joint
venture partnership with Japanese retailer and restauranteur SAZABY Inc., to
develop Starbucks retail stores in Japan.
<PAGE> 4
Joint venture income was $20.3 million for fiscal 2000, compared to $3.2 million
for fiscal 1999. The increase was primarily due to the crossover from losses to
profitability of Starbucks Coffee Japan Limited as a result of an increase in
scale, and due to the improved profitability of the North American Coffee
Partnership.
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 38.7%
for fiscal 2000 from 38.2% for fiscal 1999. The increase was due to a number of
factors. Higher average wage rates combined with a continuing shift in retail
sales to more labor-intensive handcrafted beverages resulted in higher
payroll-related expenditures. This shift in retail sales mix also resulted in
increased maintenance on store equipment. Provision for losses on asset
disposals increased due to store remodel costs associated with the expansion of
lunch programs and computer system upgrades. These increases were partially
offset by leverage gained from retail beverage sales price increases and
reductions in advertising expenses.
Other operating expenses (expenses associated with all operations other than
Company-operated retail stores) were 22.7% of specialty revenues during fiscal
2000, compared to 21.3% for fiscal 1999. This increase was primarily due to
higher payroll-related expenditures for accelerating the growth of the Company's
specialty businesses.
Depreciation and amortization was 6.0% of net revenues, compared to 5.8% of net
revenues for fiscal 1999. Excluding the extra week of sales in fiscal 1999,
depreciation and amortization would have been 5.9% of net revenues in fiscal
1999.
General and administrative expenses were 5.1% of net revenues during fiscal
2000, compared to 5.3% for fiscal 1999, primarily due to lower payroll-related
expenses as a percentage of net revenues.
INTERNET-RELATED INVESTMENT LOSSES
During fiscal 2000 and 1999, the Company made several minority investments in
companies that derive the majority of their revenue from Internet-related
activities.
In fiscal 1999, the Company invested $8 million in Talk City, Inc. ("Talk
City"), a publicly traded interactive online chat site. The Company also
invested $20 million in living.com Inc. ("living.com"), an online furniture
retailer. Also in fiscal 1999, the Company established an alliance with
Cooking.com, Inc. ("Cooking.com"), a privately held web-based retailer of
cookware, accessories and specialty foods and provider of information about
cooking. As part of this alliance, the Company made a $10 million investment in
Cooking.com.
In the second quarter of fiscal 2000, the Company invested $25 million in
Kozmo.com, Inc. ("Kozmo.com"), an Internet-to-door delivery service for food,
entertainment and convenience items. Starbucks and Kozmo.com also entered into a
commercial agreement to provide in-store return boxes in Starbucks stores in
exchange for cash, a channel for selling the Company's products and other
marketing opportunities. In connection with this agreement, Starbucks received a
$15 million payment that is being recognized as revenue on a straight-line basis
over twelve months. The Company does not expect to continue recording revenue
from the current Kozmo.com relationship after February 2001.
During the fourth quarter of fiscal 2000, the Company determined that its
investments in Internet-related companies had experienced declines in value that
were other than temporary. As a result, the Company recognized losses totaling
$59 million to reduce its investments in living.com, Talk City, Cooking.com and
Kozmo.com to their aggregate fair value of $5 million as of October 1, 2000.
INCOME TAXES
The Company's effective tax rate for fiscal 2000 was 41.1% compared to 38.0% for
fiscal 1999. The increase was due to the establishment of a valuation allowance
against a portion of the Internet-related investment losses which management
determined may ultimately not be realizable for tax purposes. Excluding the
effect of these losses, the effective tax rate for fiscal 2000 was 37.6%.
Management expects tax planning efforts to lower the effective tax rate to
approximately 37.0% in fiscal 2001.
<PAGE> 5
RESULTS OF OPERATIONS -- FISCAL 1999 COMPARED TO FISCAL 1998
SYSTEMWIDE RETAIL STORE SALES
Systemwide retail store sales, which include net sales for both company-operated
and licensed retail stores, were $1.6 billion for fiscal 1999 (53 weeks), up 37%
from $1.2 billion in fiscal 1998 (52 weeks) primarily due to the opening of an
additional 625 stores.
REVENUES
Consolidated net revenues increased 28% to $1.7 billion for fiscal 1999,
compared to $1.3 billion for fiscal 1998. Retail revenues increased 29% to $1.4
billion from $1.1 billion. The increase in retail revenues was due to the
addition of new Company-operated stores, comparable store sales growth of 6% and
sales for the 53rd week of the fiscal year. The increase in comparable store
sales resulted from a 5% increase in the number of transactions and a 1%
increase in the average dollar value per transaction. During fiscal 1999, the
Company opened 424 stores in continental North America and 36 stores in the
United Kingdom. As of fiscal year-end, there were 2,038 Company-operated stores
in continental North America and 97 in the United Kingdom.
Specialty revenues increased 25% to $257 million for fiscal 1999 from $206
million for fiscal 1998. The increase was driven primarily by higher sales to
licensees and joint ventures and business dining customers. Licensees (including
those in which the Company is a joint venture partner) opened 44 stores in
continental North America and 121 stores in international markets. The Company
ended the year with 179 licensed stores in continental North America and 184
licensed stores in international markets.
GROSS MARGIN
Gross margin increased to 55.9% for fiscal 1999 from 55.8% in fiscal 1998. The
positive impact on gross margin of lower green coffee costs was partially offset
by lower gross margins associated with a change in the Company's strategy for
the grocery channel. In late fiscal 1998, the Company signed a long-term
licensing agreement with Kraft Foods, Inc. ("Kraft") to handle the U.S.
distribution, marketing and advertising for Starbucks whole bean and ground
coffee in grocery, warehouse club and mass merchandise stores. The transition to
Kraft occurred in the first quarter of fiscal 1999.
JOINT VENTURE INCOME
Joint venture income was $3.2 million for fiscal 1999, compared to $1.0 million
for fiscal 1998. The increase was primarily due to the improved profitability
from the North American Coffee Partnership and from Starbucks Coffee Japan
Limited.
EXPENSES
Store operating expenses as a percentage of retail sales increased to 38.2% for
fiscal 1999 from 37.5% for fiscal 1998, excluding costs associated with the
Transaction. This was due primarily to higher payroll-related expenditures
resulting from both an increase in average hourly wage rates and a continuing
shift in sales to handcrafted beverages, which are more labor intensive.
Including the Transaction costs, store operating expenses for fiscal 1998 were
38.0% of retail sales.
Other operating expenses were 21.3% of specialty revenues during fiscal 1999,
compared to 21.6% for fiscal 1998. This decrease was attributable to lower
operating expenses associated with the grocery channel after the transition to
Kraft, partially offset by higher payroll-related expense supporting other
channels.
Depreciation and amortization was 5.8% of net revenues, compared to 5.5% of net
revenues for fiscal 1998, primarily due to depreciation on new information
systems put into service in late fiscal 1998 and during fiscal 1999. General and
administrative expenses were 5.3% of net revenues during fiscal 1999 compared to
5.9% for fiscal 1998, primarily due to proportionately lower payroll-related
expenses.
INCOME TAXES
The Company's effective tax rate for fiscal 1999 was 38.0% compared to 41.2% for
fiscal 1998. The effective tax rate in fiscal 1998 was impacted by
non-deductible losses of Seattle Coffee Company prior to the Transaction. Fiscal
1998's rate was also affected by Transaction-related costs.
<PAGE> 6
LIQUIDITY AND CAPITAL RESOURCES
The Company ended fiscal 2000 with $132.2 million in total cash and short-term
investments. Working capital as of October 1, 2000, totaled $146.6 million
compared to $135.3 million as of October 3, 1999. Cash and cash equivalents
increased by $4.4 million during fiscal 2000 to $70.8 million at October 1,
2000. This increase was in addition to an increase in short-term investments of
$10.0 million during the same period.
Cash provided by operating activities for fiscal 2000 totaled $318.6 million and
resulted primarily from net earnings of $299.0 million before non-cash charges.
Accrued compensation and related costs contributed $31.0 million, primarily due
to accrued bonus increases resulting from the financial performance of the
Company's core businesses. In addition, deferred revenue increased mainly from
the commercial agreement with Kozmo.com. Higher international accounts
receivable, which are generally outstanding for longer periods of time than
domestic receivables, and higher receivables from licensees resulted in an
increased use of cash.
Cash used by investing activities for fiscal 2000 totaled $373.2 million. This
included capital additions to property, plant and equipment of $316.5 million
related to opening 490 new Company-operated retail stores, remodeling certain
existing stores, enhancing information systems, purchasing roasting and
packaging equipment for the Company's roasting and distribution facilities and
expanding existing office space. The Company also used $35.5 million primarily
to make minority investments in Kozmo.com and Cooking.com. The purchases of Hear
Music and the Thailand operations used $13.5 million. The Company invested
excess cash primarily in short-term, investment-grade marketable debt
securities. The net activity in the Company's marketable securities portfolio
during fiscal 2000 used $10.5 million. During fiscal 2000, the Company made
equity investments of $8.5 million in its international joint ventures. The
Company received $13.7 million in distributions from the North American Coffee
Partnership, $0.5 million in distributions from the Starbucks Ice Cream
Partnership and $0.1 million from its international joint ventures.
Cash provided by financing activities for fiscal 2000 totaled $59.4 million.
This included $58.5 million generated from the exercise of employee stock
options and $10.3 million generated from the Company's employee stock purchase
plan. As options granted under the Company's stock option plans are exercised,
the Company will continue to receive proceeds and a tax deduction; however,
neither the amounts nor the timing thereof can be predicted. Checks issued but
not presented for payment used $7.5 million.
Cash requirements for fiscal 2001, 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 525
Company-operated stores during fiscal 2001. The Company also anticipates
incurring additional expenditures for remodeling certain existing stores and
enhancing its production capacity and information systems. While there can be no
assurance that current expectations will be realized, management expects capital
expenditures for fiscal 2001 to be approximately $390 million.
Management believes that existing cash and investments plus cash generated from
operations should be sufficient to finance capital requirements for its core
businesses through fiscal 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, AVAILABILITY AND GENERAL RISK CONDITIONS
The supply and price of coffee are subject to significant volatility. Although
most coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of
purchase. Supply and price can be affected by multiple factors in the producing
countries, including weather, political and economic conditions. In addition,
green coffee prices have been affected in the past, and may be affected in the
future, by the actions of certain organizations and associations that have
historically attempted to influence commodity prices of green coffee through
agreements establishing export quotas or restricting coffee supplies worldwide.
The Company's ability to raise sales prices in response to rising coffee prices
may be limited, and the Company's profitability could be adversely affected if
coffee prices were to rise substantially.
The Company enters into fixed-price purchase commitments in order to secure an
adequate supply of quality green coffee and bring greater certainty to the cost
of sales in future periods. As of October 1, 2000, the Company had approximately
$84 million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee for the
majority of fiscal 2001. The Company believes, based on relationships
established with its suppliers in the past, that the risk of non-delivery on
such purchase commitments is remote.
In addition to fluctuating coffee prices, management believes that the Company's
future results of operations and earnings could be significantly impacted by
other factors such as increased competition within the specialty coffee
industry, the Company's ability to find optimal store locations at favorable
lease rates, increased costs associated with opening and operating retail stores
and the Company's continued ability to hire, train and retain qualified
personnel.
<PAGE> 7
FINANCIAL RISK MANAGEMENT
The Company is exposed to market risk related to changes in interest rates,
equity security prices and foreign currency exchange rates.
INTEREST RATE RISK
The Company's available-for-sale portfolio consists mainly of diversified fixed
income instruments with average maturities of three months. The primary
objectives of these investments are to preserve capital and liquidity without
significantly increasing risk to the Company. Available-for-sale securities are
of investment grade and are recorded on the balance sheet at fair value with
unrealized gains and losses reported as a separate component of accumulated
other comprehensive income. As of October 1, 2000, this portfolio comprised 98%
of "Short-term investments" on the accompanying consolidated balance sheet. The
Company does not hedge its interest rate exposure.
EQUITY SECURITY PRICE RISK
The Company has minimal exposure to price fluctuations on equity mutual funds
within the trading portfolio, which comprised the remaining 2% of "Short-term
investments" on the accompanying consolidated balance sheet as of October 1,
2000. The trading securities are designated to approximate the Company's
liability under the Management Deferred Compensation Plan ("MDCP"). A
corresponding liability is included in "Accrued compensation and related costs"
on the accompanying consolidated balance sheets. These investments are recorded
at fair value with unrealized gains and losses recognized in "Interest and other
income, net." The offsetting changes in the MDCP liability are recorded in
"General and administrative expenses" on the accompanying consolidated
statements of earnings.
The Company also has equity investments in privately held Internet-related
companies. These investments are inherently risky as the products and services
supplied by these companies could be considered in the start-up or development
stages and may never materialize. The Company could lose its entire investment
in these companies. During fiscal 2000, the Company recorded
other-than-temporary write-downs of $59 million. These investments are recorded
on the accompanying consolidated balance sheet at a fair value of $5 million as
of October 1, 2000.
FOREIGN CURRENCY EXCHANGE RISK
The majority of the Company's revenue, expense and capital purchasing activities
are transacted in United States dollars. However, because a portion of the
Company's operations consists of activities outside of the United States, the
Company has transactions in other currencies, primarily the Canadian dollar,
British pound and Japanese yen. Historically, this exposure has had a minimal
impact on the Company.
The Company did not hedge foreign currency risk or engage in any other hedging
transactions during fiscal 2000, 1999 or 1998. The Company has entered into
forward foreign exchange contracts to hedge foreign currency risk in fiscal
2001.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Significant portions
of the Company's net revenues and profits are realized during the first quarter
of the Company's fiscal year, which includes the December holiday season. In
addition, quarterly results are affected by the timing of the opening of new
stores, and the Company's rapid growth may conceal the impact of other seasonal
influences. Because of the seasonality of the Company's business, results for
any quarter are not necessarily indicative of the results that may be achieved
for the full fiscal year.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138,
which amends certain provisions of SFAS 133 to clarify four areas causing
difficulties in implementation. The amendment included expanding the normal
purchase and sale exemption for supply contracts, permitting the offsetting of
certain intercompany foreign currency derivatives, thereby reducing the number
of third party derivatives, permitting hedge accounting for foreign-currency
assets and liabilities and redefining interest rate risk to reduce sources of
ineffectiveness. The Company has adopted the provisions of SFAS 133/138 as of
October 2, 2000, the first day of fiscal 2001. Adoption of SFAS 133/138 will not
have a material impact on the Company's consolidated results of operations,
financial position or cash flows.
In December 1999, the staff of the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," to provide
guidance on the recognition, presentation and disclosure of revenues in
financial statements. The Company believes that its revenue recognition
practices are in conformity with the guidelines in SAB 101, as revised, and that
this pronouncement will have no material impact on its financial statements.
<PAGE> 8
In March 2000, the FASB released Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation: an interpretation of APB Opinion No.
25." Interpretation No. 44 provides clarification of certain issues, such as the
determination of who is an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. The Company believes that its practices are in conformity with this
guidance, and therefore Interpretation No. 44 has no impact on its financial
statements.
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs,"
which requires any shipping and handling costs billed to customers in a sale
transaction to be classified as revenue. The Company will adopt Issue 00-10 as
of October 2, 2000, and does not expect it to have a material impact on the
Company's consolidated results of operations.
EITF Issue 00-15, "Classification in the Statement of Cash Flows of the Income
Tax Benefit Realized by a Company upon Employee Exercise of a Nonqualified Stock
Option," was adopted by the Company in fiscal 2000. Issue 00-15 requires the
income tax benefit resulting from the exercise of nonqualified stock options to
be classified as cash provided by operating activities in the consolidated
statements of cash flows.
<PAGE> 9
CONSOLIDATED BALANCE SHEETS
In thousands, except share data
<TABLE>
<CAPTION>
Oct 1, 2000 Oct 3, 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 70,817 $ 66,419
Short-term investments 61,336 51,367
Accounts receivable, net of allowances of $2,941 and $1,227, respectively 76,385 47,646
Inventories 201,656 180,886
Prepaid expenses and other current assets 20,321 19,049
Deferred income taxes, net 29,304 21,133
----------- -----------
Total current assets 459,819 386,500
Joint ventures 52,051 42,718
Other investments 3,788 25,342
Property, plant and equipment, net 930,759 760,289
Other assets 25,403 23,474
Goodwill, net 21,311 14,191
----------- -----------
TOTAL ASSETS $ 1,493,131 $ 1,252,514
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 73,653 $ 56,108
Checks drawn in excess of bank balances 56,332 63,811
Accrued compensation and related costs 75,250 43,872
Accrued occupancy costs 29,117 23,017
Accrued taxes 35,841 30,752
Other accrued expenses 35,053 32,480
Deferred revenue 7,320 484
Current portion of long-term debt 685 673
----------- -----------
Total current liabilities 313,251 251,197
Deferred income taxes, net 21,410 32,886
Long-term debt 6,483 7,018
Minority interest 3,588 400
Shareholders' equity:
Common stock -- Authorized, 300,000,000 shares; issued and
outstanding, 188,157,651 and 183,282,095 shares, respectively
(includes 848,550 common stock units in both years) 750,872 651,020
Retained earnings 408,503 313,939
Accumulated other comprehensive loss (10,976) (3,946)
----------- -----------
Total shareholders' equity 1,148,399 961,013
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,493,131 $ 1,252,514
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 10
CONSOLIDATED STATEMENTS OF EARNINGS
In thousands, except earnings per share
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
Net revenues:
Retail $1,823,607 $1,423,389 $1,102,574
Specialty 345,611 256,756 206,128
---------- ---------- ----------
Total net revenues 2,169,218 1,680,145 1,308,702
Cost of sales and related occupancy costs 953,560 741,010 578,483
---------- ---------- ----------
Gross margin 1,215,658 939,135 730,219
Joint venture income 20,300 3,192 1,034
Store operating expenses 704,898 543,572 418,476
Other operating expenses 78,374 54,566 44,513
Depreciation and amortization 130,232 97,797 72,543
General and administrative expenses 110,202 89,681 77,575
Merger expenses -- -- 8,930
---------- ---------- ----------
Operating income 212,252 156,711 109,216
Interest and other income, net 7,110 7,315 7,134
Internet-related investment losses 58,792 -- --
---------- ---------- ----------
Earnings before income taxes 160,570 164,026 116,350
Income taxes 66,006 62,333 47,978
---------- ---------- ----------
Net earnings $ 94,564 $ 101,693 $ 68,372
---------- ---------- ----------
Net earnings per common share -- basic $ 0.51 $ 0.56 $ 0.39
Net earnings per common share -- diluted $ 0.49 $ 0.54 $ 0.37
Weighted average shares outstanding:
Basic 185,595 181,842 176,110
Diluted 192,999 188,531 183,771
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
In thousands
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings $ 94,564 $ 101,693 $ 68,372
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 142,171 107,512 80,901
Internet-related investment losses 58,792 -- --
Provision for losses on asset disposals 5,753 2,456 7,234
Conversion of compensatory options into common stock -- -- 1,158
Deferred income taxes, net (18,252) 794 2,125
Equity in (income) losses of investees (15,139) (2,318) 14
Tax benefit from exercise of nonqualified stock options 31,131 18,621 9,332
Cash provided (used) by changes in operating assets and liabilities:
Net purchases of trading securities (1,414) -- --
Accounts receivable (28,235) 3,838 (19,790)
Inventories (19,495) (36,405) (23,496)
Prepaid expenses and other current assets (700) (7,552) (2,497)
Accounts payable 15,561 4,711 4,601
Accrued compensation and related costs 30,962 7,586 9,943
Accrued occupancy costs 6,007 5,517 5,342
Accrued taxes 5,026 12,429 7,173
Minority interest 3,188 400 --
Deferred revenue 6,836 (53) 209
Other accrued expenses 1,818 10,366 1,590
--------- --------- ---------
Net cash provided by operating activities 318,574 229,595 152,211
INVESTING ACTIVITIES:
Purchase of available-for-sale investments (118,501) (122,800) (51,354)
Maturity of available-for-sale investments 58,750 85,053 112,080
Sale of available-for-sale investments 49,238 3,633 5,138
Purchase of businesses, net of cash acquired (13,522) (15,662) --
Investments in joint ventures (8,473) (10,466) (12,418)
Purchases of other investments (35,457) (20,314) --
Distributions from joint ventures 14,279 8,983 2,750
Additions to property, plant and equipment (316,450) (257,854) (201,855)
Additions to other assets (3,096) (6,866) (3,184)
--------- --------- ---------
Net cash used by investing activities (373,232) (336,293) (148,843)
FINANCING ACTIVITIES:
Increase/(decrease) in cash provided by checks drawn in excess of bank balances (7,479) 29,512 4,846
Proceeds from sale of common stock under employee stock purchase plan 10,258 9,386 4,649
Exercise of stock options 58,463 33,799 20,755
Payments on long-term debt (1,889) (1,189) (1,993)
--------- --------- ---------
Net cash provided by financing activities 59,353 71,508 28,257
Effect of exchange rate changes on cash and cash equivalents (297) (54) (88)
--------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 4,398 (35,244) 31,537
CASH AND CASH EQUIVALENTS:
Beginning of year 66,419 101,663 70,126
--------- --------- ---------
End of year $ 70,817 $ 66,419 $ 101,663
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 411 $ 442 $ 4,130
Income taxes 51,856 35,366 32,643
NONCASH FINANCING AND INVESTING TRANSACTIONS:
Liabilities assumed in conjunction with the acquisition of land and building -- 7,746 --
Net unrealized holding gains (losses) on investments (163) 683 (595)
Conversion of convertible debt into common stock,
net of unamortized issue costs and accrued interest -- -- 162,036
Common stock tendered in settlement of stock options exercised -- -- 4,859
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In thousands, except share data
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
--------------------------- RETAINED COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
----------- -------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, September 28, 1997 161,118,046 $391,284 $143,874 $ (1,448) $ 533,710
Net earnings -- -- 68,372 -- 68,372
Unrealized holding losses, net -- -- -- (595) (595)
Translation adjustment -- -- -- (5,120) (5,120)
-----------
Comprehensive income 62,657
-----------
Conversion of convertible debt
into common stock 14,194,054 162,036 -- -- 162,036
Common stock units issued
under deferred stock plan,
net of shares tendered 848,550 -- -- -- --
Exercise of stock options,
including tax benefit of $9,332 2,834,528 31,245 -- -- 31,245
Sale of common stock 271,778 4,649 -- -- 4,649
----------- -------- -------- -------- -----------
Balance, September 27, 1998 179,266,956 589,214 212,246 (7,163) 794,297
Net earnings -- -- 101,693 -- 101,693
Unrealized holding gains, net -- -- -- 683 683
Translation adjustment -- -- -- 2,534 2,534
-----------
Comprehensive income 104,910
-----------
Exercise of stock options,
including tax benefit of $18,621 3,522,908 52,420 -- -- 52,420
Sale of common stock 492,231 9,386 -- -- 9,386
----------- -------- -------- -------- -----------
Balance, October 3, 1999 183,282,095 651,020 313,939 (3,946) 961,013
Net earnings -- -- 94,564 -- 94,564
Unrealized holding losses, net -- -- -- (163) (163)
Translation adjustment -- -- -- (6,867) (6,867)
-----------
Comprehensive income 87,534
-----------
Exercise of stock options,
including tax benefit of $31,131 4,471,785 89,594 -- -- 89,594
Sale of common stock 403,771 10,258 -- -- 10,258
----------- -------- -------- -------- -----------
Balance, October 1, 2000 188,157,651 $750,872 $408,503 $(10,976) $ 1,148,399
----------- -------- -------- -------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended October 1, 2000, October 3, 1999 and September 27, 1998
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Starbucks Corporation and its subsidiaries (collectively "Starbucks" or the
"Company") purchases and roasts high quality whole bean coffees and sells them,
along with fresh, rich-brewed coffees, Italian-style espresso beverages, cold
blended beverages, a variety of pastries and confections, coffee-related
accessories and equipment and a line of premium teas, primarily through its
Company-operated retail stores. In addition to sales through its
Company-operated retail stores, Starbucks sells coffee and tea products through
other channels of distribution (collectively, "specialty operations").
Starbucks, through its joint venture partnerships, also produces and sells
bottled Frappuccino(R) coffee drink and a line of premium ice creams. The
Company's objective is to establish Starbucks as the most recognized and
respected brand in the world. To achieve this goal, the Company plans to
continue to rapidly expand its retail operations, grow its specialty operations
and selectively pursue other opportunities to leverage the Starbucks brand
through the introduction of new products and the development of new distribution
channels.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements reflect the financial position and
operating results of Starbucks, its subsidiaries and investments in joint
ventures in which the Company has significant control. All significant
intercompany transactions have been eliminated.
The Company has investments in unconsolidated joint ventures that are accounted
for under the equity method, as the Company does not exercise control over the
operating and financial policies of such joint ventures. The Company also has
other investments that are accounted for under the cost method.
FISCAL YEAR-END
The Company's fiscal year ends on the Sunday closest to September 30. The fiscal
years ended October 1, 2000 and September 27, 1998 each included 52 weeks. The
fiscal year ended October 3, 1999, included 53 weeks.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of three
months or less at the time of purchase to be cash equivalents.
CASH MANAGEMENT
The Company's cash management system provides for the reimbursement of all major
bank disbursement accounts on a daily basis. Checks issued but not presented for
payment to the bank are reflected as "Checks drawn in excess of bank balances"
on the accompanying consolidated financial statements.
SHORT-TERM INVESTMENTS
The Company's investments consist primarily of investment-grade marketable debt
and equity securities, all of which are classified as trading or
available-for-sale. Trading securities are recorded at fair value with
unrealized holding gains and losses included in earnings. Available-for-sale
securities are recorded at fair value, and unrealized holding gains and losses
are recorded, net of tax, as a separate component of accumulated other
comprehensive income. Unrealized losses are charged against net earnings when a
decline in fair value is determined to be other than temporary. Realized gains
and losses are accounted for on the specific identification method. Purchases
and sales are recorded on a trade date basis.
OTHER INVESTMENTS
The Company has investments in privately held equity securities that are
recorded at their estimated fair values.
<PAGE> 14
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents approximates fair value because
of the short-term maturity of those instruments. The fair value of the Company's
investments in marketable debt and equity securities is based upon the quoted
market price on the last business day of the fiscal year. The fair value and
amortized cost of the Company's investments (short- and long-term) at October 1,
2000, were $61.3 million and $61.0 million, respectively. The fair value and
amortized cost of the Company's investments at October 3, 1999, were $56.4
million and $56.2 million, respectively.
For equity securities of companies that are privately held, or where an
observable quoted market price does not exist, the Company estimates fair value
using a variety of valuation methodologies. Such methodologies include comparing
the security with securities of publicly traded companies in similar lines of
business, applying revenue multiples to estimated future operating results for
the private company and estimating discounted cash flows for that company. For
further information on investments, see Notes 4 and 7. The carrying value of
long-term debt approximates fair value.
INVENTORIES
Inventories are stated at the lower of cost (primarily moving average cost) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation of property, plant and equipment, which includes
amortization of assets under capital leases, is provided on the straight-line
method over estimated useful lives, generally ranging from two to seven years
for equipment and 30 to 40 years for buildings. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the related lease
life, generally ten years. The portion of depreciation expense related to
production and distribution facilities is included in "Cost of sales and related
occupancy costs" on the accompanying consolidated statements of earnings.
GOODWILL
Goodwill resulting from business acquisitions represents the excess purchase
price paid over net assets of businesses acquired and is amortized on a
straight-line basis over the period of expected benefit, which ranges from ten
to twenty years.
LONG-LIVED ASSETS
When facts and circumstances indicate that the carrying values of long-lived
assets, including intangibles, may be impaired, an evaluation of recoverability
is performed by comparing the carrying value of the assets to projected future
cash flows in addition to other quantitative and qualitative analyses. Upon
indication that the carrying value of such assets may not be recoverable, the
Company recognizes an impairment loss by a charge against current operations.
REVENUE RECOGNITION
Retail store revenues are recognized when payment is tendered at the point of
sale. Specialty revenues, consisting mainly of product sales, are generally
recognized upon shipment to customers. Initial non-refundable fees required
under licensing agreements are earned upon substantial performance of services.
Royalty revenues based upon a percentage of sales and other continuing fees are
recognized when earned. All revenues are recognized net of any discounts.
ADVERTISING
The Company expenses costs of advertising the first time the advertising
campaign takes place, except for direct-to-consumer advertising, which is
capitalized and amortized over its expected period of future benefit, generally
six to twelve months. Net capitalized direct-to-consumer advertising costs were
$0.2 million and $2.5 million as of October 1, 2000 and October 3, 1999,
respectively, and are included in "Prepaid expenses and other current assets" on
the accompanying consolidated balance sheets. Total advertising expenses,
recorded in "Store operating expenses" and "Other operating expenses" on the
accompanying consolidated statements of earnings, were $32.6 million, $38.4
million and $31.4 million in 2000, 1999, and 1998, respectively.
STORE PREOPENING EXPENSES
Costs incurred in connection with the start-up and promotion of new store
openings are expensed as incurred.
<PAGE> 15
RENT EXPENSE
Certain of the Company's lease agreements provide for scheduled rent increases
during the lease terms or for rental payments commencing at a date other than
the date of initial occupancy. Minimum rental expenses are recognized on a
straight-line basis over the terms of the leases.
FOREIGN CURRENCY TRANSLATION
The Company's international operations use their local currency as their
functional currency. Assets and liabilities are translated at exchange rates in
effect at the balance sheet date. Income and expense accounts are translated at
the average monthly exchange rates during the year. Resulting translation
adjustments are recorded as a separate component of accumulated other
comprehensive income.
INCOME TAXES
The Company computes income taxes using the asset and liability method, under
which deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities.
STOCK SPLIT
On March 19, 1999, the Company effected a two-for-one stock split for its
holders of record on March 5, 1999. All applicable share and per-share data in
these consolidated financial statements have been restated to give effect to
this stock split.
EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of shares and common stock units outstanding during the period. The
computation of diluted earnings per share includes the dilutive effect of common
stock equivalents consisting of certain shares subject to stock options. The
computation of diluted earnings per share also assumes conversion of the
Company's formerly outstanding convertible subordinated debentures using the "if
converted" method when such securities were dilutive, with net income adjusted
for the after-tax interest expense and amortization applicable to these
debentures.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138,
which amends certain provisions of SFAS 133 to clarify four areas causing
difficulties in implementation. The amendment included expanding the normal
purchase and sale exemption for supply contracts, permitting the offsetting of
certain intercompany foreign currency derivatives, thereby reducing the number
of third party derivatives, permitting hedge accounting for foreign-currency
assets and liabilities and redefining interest rate risk to reduce sources of
ineffectiveness. The Company has adopted the provisions of SFAS 133/138 as of
October 2, 2000, the first day of fiscal 2001. Adoption of SFAS 133/138 will not
have a material impact on the Company's consolidated results of operations,
financial position or cash flows.
In December 1999, the staff of the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," to provide
guidance on the recognition, presentation and disclosure of revenues in
financial statements. The Company believes that its revenue recognition
practices are in conformity with the guidelines in SAB 101, as revised, and that
this pronouncement will have no material impact on its financial statements.
In March 2000, the FASB released Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation: an interpretation of APB Opinion No.
25." Interpretation No. 44 provides clarification of certain issues, such as the
determination of who is an employee, the criteria for determining whether a plan
qualifies as a non-compensatory plan, the accounting consequence of various
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. The Company believes that its practices are in conformity with this
guidance, and therefore Interpretation No. 44 has no impact on its financial
statements.
In September 2000, the Emerging Issues Task Force ("EITF") reached a consensus
regarding Issue 00-10, "Accounting for Shipping and Handling Fees and Costs,"
which requires any shipping and handling costs billed to customers in a sale
transaction to be classified as revenue. The Company will adopt Issue 00-10 as
of October 2, 2000, and does not expect it to have a material impact on the
Company's consolidated results of operations.
EITF Issue 00-15, "Classification in the Statement of Cash Flows of the Income
Tax Benefit Realized by a Company upon Employee Exercise of a Nonqualified Stock
Option," was adopted by the Company in fiscal 2000. Issue 00-15 requires the
income tax benefit resulting from the exercise of nonqualified stock options to
be classified as cash provided by operating activities in the consolidated
statements of cash flows.
<PAGE> 16
RECLASSIFICATIONS
Certain reclassifications of prior years' balances have been made to conform to
the fiscal 2000 presentation.
NOTE 2: BUSINESS COMBINATIONS
During fiscal 2000, Starbucks acquired the outstanding stock of Tympanum, Inc.
(d/b/a "Hear Music"), a music retailer, and of Coffee Partners Co. Ltd., the
company licensed to operate Starbucks stores in Thailand ("Thailand
operations"). The combined purchase price for these two acquisitions was $14.1
million. During fiscal 1999, Starbucks acquired the net assets of Tazo, L.L.C.,
a Portland, Oregon-based tea company that produces premium tea products, and the
stock of Pasqua Inc., a San Francisco, California-based roaster and retailer of
specialty coffee. The combined purchase price for these two acquisitions was
$16.5 million. All of the above acquisitions were accounted for under the
purchase method of accounting. Results of operations of the acquired companies
are included on the accompanying consolidated financial statements from the
dates of acquisition. During fiscal 1998, Starbucks acquired the United
Kingdom-based Seattle Coffee Holdings Limited ("Seattle Coffee Company") in a
pooling-of-interests transaction (the "Transaction"). In conjunction with the
Transaction, Starbucks recorded pre-tax charges of $8.9 million in direct merger
costs and $6.6 million in other charges associated with the integration of
Seattle Coffee Company. The historical financial statements for the periods
prior to the Transaction were restated as though the companies had always been
combined.
The following summarizes the Company's net revenues, net earnings and earnings
per share for the periods in fiscal 1998 prior to and following the Transaction
(in thousands, except earnings per share):
<TABLE>
<CAPTION>
SEATTLE
COFFEE
STARBUCKS COMPANY COMBINED
--------- -------- --------
<S> <C> <C> <C>
34 Weeks prior to the Transaction:
Net revenues $805,151 $ 15,675 $820,826
Net earnings 45,811 (3,312) 42,499
Net earnings per share -- diluted 0.25 (0.02) 0.23
-------- -------- --------
18 Weeks after the Transaction:
Net revenues $487,876
Net earnings 25,873
Net earnings per share -- diluted 0.15
--------
</TABLE>
NOTE 3: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (in thousands):
<TABLE>
<CAPTION>
Oct 1, 2000 Oct 3, 1999
----------- -----------
<S> <C> <C>
Operating funds and interest-bearing deposits $48,821 $39,926
Commercial paper 998 7,980
Money market funds 20,998 18,513
------- -------
Total $70,817 $66,419
------- -------
</TABLE>
<PAGE> 17
NOTE 4: SHORT-TERM INVESTMENTS
The Company's investments consist of the following (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
FAIR AMORTIZED HOLDING HOLDING
October 3, 2000: VALUE COST GAINS LOSSES
--------------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments - available-for-sale:
U.S. Government obligations $10,990 $10,996 $3 $ (9)
Commercial paper 45,356 45,373 1 (18)
Marketable equity securities 1,227 1,227 - --
------- ------- -- ----
Total 57,573 $57,596 $4 $(27)
------- ------- -- ----
Short-term investments - trading 3,763
-------
Total short-term investments $61,336
-------
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
FAIR AMORTIZED HOLDING HOLDING
October 3, 1999: VALUE COST GAINS LOSSES
--------------- ------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments - available-for-sale:
Corporate debt securities $17,233 $17,123 $155 $ (45)
U.S. Government obligations 4,988 4,976 13 (1)
Commercial paper 18,706 18,751 -- (45)
Mutual funds 2,056 2,002 73 (19)
Marketable equity securities 8,384 8,258 313 (187)
------- ------- ---- -----
Total $51,367 $51,110 $554 $(297)
------- ------- ---- -----
Long-term investments:
U.S. Government obligations $ 5,028 $ 5,044 $ -- $ (16)
------- ------- ---- -----
</TABLE>
Available-for-sale securities with remaining maturities of one year or less are
classified as short-term investments. Securities with remaining maturities
longer than one year are classified as long-term and are included in the line
item "Other investments" on the accompanying consolidated balance sheets. The
specific identification method is used to determine a cost basis for computing
realized gains and losses.
In fiscal 2000, 1999 and 1998, proceeds from the sale of investment securities
were $49.2 million, $3.6 million and $5.1 million, respectively. Gross realized
gains and losses from the sale of securities were not material in 2000, 1999 and
1998.
During fiscal 2000, the Company recorded a loss of $6.8 million on its
investment in the common stock of Talk City, Inc., due to an impairment that was
determined by management to be other than temporary. The remaining fair value of
the investment was $1.2 million as of October 1, 2000.
Trading securities are classified as short-term investments. The trading
securities are marketable equity funds designated to approximate the Company's
liability under the Management Deferred Compensation Plan ("MDCP"). The
corresponding deferred compensation liability of $3.8 million is included in
"Accrued compensation and related costs" on the accompanying consolidated
balance sheets. The change in net unrealized holding gains in the
trading portfolio included in earnings during the year was $0.3 million. There
were no trading securities as of October 3, 1999.
<PAGE> 18
NOTE 5: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Oct 1, 2000 Oct 3, 1999
----------- -----------
<S> <C> <C>
Coffee:
Unroasted $ 90,807 $ 95,001
Roasted 27,880 28,065
Other merchandise held for sale 59,420 37,564
Packaging and other supplies 23,549 20,256
-------- --------
Total $201,656 $180,886
-------- --------
</TABLE>
As of October 1, 2000, the Company had fixed-price inventory purchase
commitments for green coffee totaling approximately $84 million. The Company
believes, based on relationships established with its suppliers in the past,
that the risk of non-delivery on such purchase commitments is remote.
NOTE 6: JOINT VENTURES
The Company has two joint ventures to produce and distribute Starbucks branded
products. The North American Coffee Partnership is a 50/50 joint venture
partnership with the Pepsi-Cola Company to develop and distribute bottled
Frappuccino coffee drink. The Starbucks Ice Cream Partnership is a 50/50 joint
venture partnership with Dreyer's Grand Ice Cream, Inc. to develop and
distribute premium ice creams.
The Company is a partner in several other joint ventures that operate licensed
Starbucks retail stores, including Starbucks Coffee Japan Limited, a 50/50 joint
venture partnership with Japanese retailer and restauranteur SAZABY Inc., to
develop Starbucks retail stores in Japan. The Company also has interests in
joint ventures to develop Starbucks retail stores in Hawaii, Taiwan, Shanghai,
Hong Kong and Switzerland.
The Company accounts for these investments using the equity method when
Starbucks is deemed to have significant influence over the investee but is not
the controlling or managing partner; otherwise, the investment is accounted for
using the cost method. The Company's share of income and losses for equity
method joint ventures is included in "Joint venture income" on the accompanying
consolidated statements of earnings. This line also includes the Company's
proportionate share of gross margin resulting from the sale of coffee and other
products to the joint ventures and the Company's proportionate share of royalty
and license fee revenues received from the joint ventures.
The Company's investments in these joint ventures are as follows (in thousands):
<TABLE>
<CAPTION>
EQUITY COST
JOINT JOINT
VENTURES VENTURES TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balance, September 28, 1997 $ 29,263 $ -- $ 29,263
Allocated share of losses (14) -- (14)
Distributions from joint ventures (2,750) -- (2,750)
Capital contributions 12,059 359 12,418
-------- ---- --------
Balance, September 27, 1998 $ 38,558 $359 $ 38,917
Allocated share of income 2,318 -- 2,318
Distributions from joint ventures (8,983) -- (8,983)
Capital contributions 10,466 -- 10,466
-------- ---- --------
Balance, October 3, 1999 $ 42,359 $359 $ 42,718
Allocated share of income 15,139 -- 15,139
Distributions from joint ventures (14,279) -- (14,279)
Capital contributions 8,049 424 8,473
-------- ---- --------
Balance, October 1, 2000 $ 51,268 $783 $ 52,051
-------- ---- --------
</TABLE>
The Company has a consolidated 90/10 joint venture with Starbucks Coffee Company
(Australia) Pty Ltd. to develop retail stores in Australia. In addition, the
Company has a consolidated 50/50 joint venture, Urban Coffee Opportunities, LLC,
with Johnson Development Corporation to develop retail stores in under-served
urban communities.
<PAGE> 19
NOTE 7: OTHER INVESTMENTS
In fiscal 1999, the Company invested $20.3 million in living.com Inc.
("living.com"), an online furniture retailer. Also in 1999, the Company
established an alliance with Cooking.com, Inc. ("Cooking.com"), a privately held
web-based retailer of cookware, accessories and specialty foods and provider of
information about cooking. As part of this alliance, the Company made a $10.0
million investment in Cooking.com.
During fiscal 2000, the Company invested $25.0 million in Kozmo.com, an
Internet-to-door delivery service for food, entertainment and convenience items.
Starbucks and Kozmo.com also entered into a commercial agreement to provide
in-store return boxes in Starbucks stores in exchange for cash, a channel for
selling the Company's products and other marketing opportunities. In connection
with this agreement, Starbucks received a $15.0 million payment that is being
recognized as revenue on a straight-line basis over twelve months. The Company
does not expect to continue recording revenue from the current Kozmo.com
relationship after February 2001.
During fiscal 2000, the Company determined that its investments in
Internet-related companies had suffered declines in value that were other than
temporary. As a result, the Company recognized losses totaling $52.0 million to
reduce its investments in living.com, Cooking.com and Kozmo.com to their
aggregate fair value of $3.6 million as of October 1, 2000.
The Company also had various other investments recorded at their estimated
aggregate fair value of $0.2 million as of October 1, 2000.
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and consist of the following
(in thousands):
<TABLE>
<CAPTION>
Oct 1, 2000 Oct 3, 1999
----------- -----------
<S> <C> <C>
Land $ 5,084 $ 5,084
Building 19,795 19,795
Leasehold improvements 736,471 591,640
Roasting and store equipment 369,587 273,612
Furniture, fixtures and other 182,528 130,223
----------- -----------
1,313,465 1,020,354
Less accumulated depreciation and amortization (446,403) (320,982)
----------- -----------
867,062 699,372
Work in progress 63,697 60,917
----------- -----------
Property, plant and equipment, net $ 930,759 $ 760,289
----------- -----------
</TABLE>
NOTE 9: LONG-TERM DEBT
In September 1999, the Company purchased the land and building comprising its
York County, Pennsylvania roasting plant and distribution facility. The total
purchase price was $12.9 million. In connection with this purchase, the Company
assumed loans totaling $7.7 million from the York County Industrial Development
Corporation. The remaining maturities of these loans range from 9 to 10 years,
with interest rates from 0.0% to 2.0%.
Scheduled principal payments on long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending
------------------
<S> <C>
2001 $ 685
2002 697
2003 710
2004 722
2005 735
Thereafter 3,619
------
Total principal payments $7,168
------
</TABLE>
<PAGE> 20
NOTE 10: LEASES
The Company leases retail stores, roasting and distribution facilities and
office space under operating leases expiring through 2023. Most lease agreements
contain renewal options and rent escalation clauses. Certain leases provide for
contingent rentals based upon gross sales.
Rental expense under these lease agreements was as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------- ----------- -------------
<S> <C> <C> <C>
Minimum rentals $127,149 $95,613 $75,912
Contingent rentals 3,743 1,581 1,406
-------- ------- -------
Total $130,892 $97,194 $77,318
-------- ------- -------
</TABLE>
Minimum future rental payments under non-cancelable lease obligations as of
October 1, 2000, are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending
------------------
<S> <C>
2001 $ 129,407
2002 129,018
2003 127,604
2004 122,404
2005 112,988
Thereafter 417,874
----------
Total minimum lease payments $1,039,295
----------
</TABLE>
NOTE 11: SHAREHOLDERS' EQUITY
The Company has authorized 7,500,000 shares of its preferred stock, none of
which was outstanding at October 1, 2000.
COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of the
first quarter of fiscal 1999. Comprehensive income includes all changes in
equity during the period, except those resulting from transactions with
shareholders of the Company. It has two components: net income and other
comprehensive income. Accumulated other comprehensive income (loss) reported on
the Company's consolidated balance sheets consists of foreign currency
translation adjustments and the unrealized gains and losses, net of applicable
taxes, on available-for-sale securities. Comprehensive income, net of related
tax effects, is as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
Net earnings $ 94,564 $101,693 $ 68,372
Unrealized holding gains (losses) on
investments, net of tax (provision)
benefit of $52, ($155) and $373
in 2000, 1999 and 1998, respectively (85) 252 (595)
Reclassification adjustment for (gains) losses
realized in net income, net of tax provision
(benefit) of ($48) and $270, respectively (78) 431 --
-------- -------- --------
Net unrealized gain (loss) (163) 683 (595)
-------- -------- --------
Translation adjustment (6,867) 2,534 (5,120)
-------- -------- --------
Total comprehensive income $ 87,534 $104,910 $ 62,657
-------- -------- --------
</TABLE>
<PAGE> 21
NOTE 12: EMPLOYEE STOCK AND BENEFIT PLANS
STOCK OPTION PLANS
The Company maintains several stock option plans under which the Company may
grant incentive stock options and non-qualified stock options to employees,
consultants and non-employee directors. Stock options have been granted at
prices at or above the fair market value on the date of grant. Options vest and
expire according to terms established at the grant date.
The following summarizes all stock option transactions from September 28, 1997,
through October 1, 2000.
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE SHARES AVERAGE
SHARES EXERCISE SUBJECT TO EXERCISE
SUBJECT TO PRICE EXERCISABLE PRICE
OPTIONS PER SHARE OPTIONS PER SHARE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding, September 28, 1997 17,907,322 $ 9.66 7,427,352 $ 5.43
Granted 6,508,632 18.52
Exercised (3,683,078) 6.13
Cancelled (1,229,478) 11.79
----------- -----------
Outstanding, September 27, 1998 19,503,398 13.10 7,560,806 8.49
Granted 8,051,998 22.97
Exercised (3,522,908) 9.53
Cancelled (1,461,937) 18.99
----------- -----------
Outstanding, October 3, 1999 22,570,551 16.84 12,080,825 13.55
Granted 4,705,165 24.84
Exercised (4,471,785) 13.07
Cancelled (1,859,068) 21.41
----------- -----------
Outstanding, October 1, 2000 20,944,863 $ 19.10 10,165,370 $ 15.65
----------- ----------- ----------- -----------
</TABLE>
As of October 1, 2000, there were 16,762,482 shares of common stock available
for issuance pursuant to future stock option grants.
Additional information regarding options outstanding as of October 1, 2000, is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
-------------------------- --------- ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 0.75 $ 9.41 3,046,798 4.04 $ 7.14 2,872,310 $ 7.01
9.69 18.41 6,942,673 6.54 16.92 4,007,553 16.15
19.42 22.69 5,530,507 8.17 21.52 2,681,621 21.48
23.25 35.31 5,197,385 8.93 25.60 603,886 27.49
36.06 40.75 227,500 9.75 38.13 -- --
---------- ---------- ---------- ------- ---------- ---------- ----------
$ 0.75 $ 40.75 20,944,863 7.23 $ 19.10 10,165,370 $ 15.65
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
The Company has an employee stock purchase plan which provides that eligible
employees may contribute up to 10% of their base earnings, up to $25,000
annually, toward the quarterly purchase of the Company's common stock. The
employee's purchase price is 85% of the lesser of the fair market value of the
stock on the first business day or the last business day of the quarterly
offering period. No compensation expense is recorded in connection with the
plan. The total number of shares issuable under the plan is 8,000,000. There
were 403,771 shares issued under the plan during fiscal 2000 at prices ranging
from $20.37 to $32.73. There were 492,231 shares issued under the plan during
fiscal 1999 at prices ranging from $14.05 to $25.18. There were 271,778 shares
issued under the plan during fiscal 1998 at prices ranging from $15.99 to
$19.58. Of the 24,465 employees eligible to participate, 6,708 were participants
in the plan as of October 1, 2000.
<PAGE> 22
DEFERRED STOCK PLAN
The Company has a Deferred Stock Plan for certain key employees that enables
participants in the plan to defer receipt of ownership of common shares from the
exercise of non-qualified stock options. The minimum deferral period is five
years. As of October 1, 2000, receipt of 848,550 shares was deferred under the
terms of this plan. The rights to receive these shares, represented by common
stock units, are included in the calculation of basic and diluted earnings per
share as common stock equivalents.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its stock-based awards using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure
of pro forma net income and net income per share as if the Company adopted the
fair-value method of accounting for stock-based awards as of the beginning of
fiscal 1996. The fair value of stock-based awards to employees is calculated
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTIONS EMPLOYEE STOCK PURCHASE PLAN
-------------------------------------------------- --------------------------------------------------
2000 1999 1998 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Expected life (years) 2 - 6 1.5 - 6 1.5 - 6 0.25 0.25 0.25
Expected volatility 55% 50% 45% 42 - 82% 44 - 66% 37 - 45%
Risk-free interest rate 5.65 - 6.87% 4.60 - 6.21% 5.28 - 6.05% 5.97 - 6.40% 4.26 - 5.63% 5.26 - 5.74%
Expected dividend yield 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
The Company's valuations are based upon a multiple option valuation approach and
forfeitures are recognized as they occur. The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options,
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock-price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
the fair value estimate.
As required by SFAS No. 123, the Company has determined that the weighted
average estimated fair values of options granted during fiscal 2000, 1999 and
1998 were $10.74, $8.86 and $7.20 per share, respectively. Had compensation
costs for the Company's stock-based compensation plans been accounted for using
the fair value method of accounting described by SFAS No. 123, the Company's net
earnings and earnings per share would have been as follows (in thousands, except
earnings per share):
<TABLE>
<CAPTION>
PRO FORMA
UNDER SFAS
Fiscal year ended AS REPORTED NO. 123
----------------- ----------- -----------
<S> <C> <C>
October 1, 2000:
Net earnings $ 94,564 $ 66,241
Net earnings per common share:
Basic $ 0.51 $ 0.36
Diluted $ 0.49 $ 0.35
October 3, 1999:
Net earnings $ 101,693 $ 75,326
Net earnings per common share:
Basic $ 0.56 $ 0.41
Diluted $ 0.54 $ 0.40
September 27, 1998:
Net earnings $ 68,372 $ 51,595
Net earnings per common share:
Basic $ 0.39 $ 0.30
Diluted $ 0.37 $ 0.28
</TABLE>
In applying SFAS No. 123, the impact of outstanding stock options granted prior
to 1996 has been excluded from the pro forma calculations; accordingly, the
2000, 1999 and 1998 pro forma adjustments are not necessarily indicative of
future period pro forma adjustments.
<PAGE> 23
DEFINED CONTRIBUTION PLANS
Starbucks maintains voluntary defined contribution plans covering eligible
employees as defined in the plan documents. Participating employees may elect to
defer and contribute a percentage of their compensation to the plan, not to
exceed the dollar amount set by law. For certain plans, the Company matches 25%
of each employee's eligible contribution up to a maximum of the first 4% of each
employee's compensation.
The Company's matching contributions to the plans were approximately $1.1
million, $0.9 million and $0.8 million for fiscal 2000, 1999 and 1998,
respectively.
NOTE 13: INCOME TAXES
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.7 3.7 3.8
Non-deductible losses and merger costs -- -- 2.6
Valuation allowance change from prior year 3.5 -- --
Other, net (1.1) (0.7) (0.2)
---- ---- ----
Effective tax rate 41.1% 38.0% 41.2%
---- ---- ----
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
Currently payable:
Federal $ 71,758 $52,207 $39,267
State 12,500 9,332 6,586
Deferred (asset) liability, net (18,252) 794 2,125
-------- ------- -------
Total $ 66,006 $62,333 $47,978
-------- ------- -------
</TABLE>
Deferred income taxes (benefits) reflect the tax effect of temporary differences
between the amounts of assets and liabilities for financial reporting purposes
and amounts as measured for tax purposes. The Company will establish a valuation
allowance if it is more likely than not these items will either expire before
the Company is able to realize their benefits, or that future deductibility is
uncertain. At October 1, 2000, the Company established a valuation allowance of
$5.7 million as a result of the losses incurred on Internet-related investments.
The tax effect of temporary differences and carryforwards that cause significant
portions of deferred tax assets and liabilities is as follows (in thousands):
<TABLE>
<CAPTION>
Oct 1, 2000 Oct 3, 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Loss on investments $ 22,635 $ --
Accrued rent 10,321 8,234
Accrued compensation and related costs 6,710 5,622
Inventory related costs 3,550 2,067
Other 15,222 9,900
-------- --------
Total 58,438 25,823
Valuation allowance (5,659) --
-------- --------
Total deferred tax asset, net of valuation allowance 52,779 25,823
Deferred tax liabilities:
Depreciation (36,249) (29,826)
Investments in joint ventures (4,616) (3,990)
Other (4,020) (3,760)
-------- --------
Total (44,885) (37,576)
-------- --------
Net deferred tax asset (liability) $ 7,894 $(11,753)
-------- --------
</TABLE>
<PAGE> 24
Taxes currently payable of $17.9 million and $16.3 million are included in
"Accrued taxes" on the accompanying consolidated balance sheets as of October 1,
2000 and October 3, 1999, respectively.
NOTE 14: EARNINGS PER SHARE
The following table represents the calculation of net earnings per common share
-- basic (in thousands, except earnings per share):
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
Net earnings $ 94,564 $101,693 $ 68,372
Weighted average common shares and
common stock units outstanding 185,595 181,842 176,110
-------- -------- --------
Net earnings per common share - basic $ 0.51 $ 0.56 $ 0.39
-------- -------- --------
</TABLE>
The following table represents the calculation of net earnings per common and
common equivalent share - diluted (in thousands, except earnings per share):
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
Net earnings calculation:
Net earnings $ 94,564 $101,693 $ 68,372
Add after-tax interest expense on
debentures -- -- 348
Add after-tax amortization of issuance
costs related to the debentures -- -- 30
-------- -------- --------
Adjusted net earnings $ 94,564 $101,693 $ 68,750
-------- -------- --------
Weighted average common shares and
common stock units outstanding 185,595 181,842 176,110
Dilutive effect of outstanding common
stock options 7,404 6,689 6,257
Assuming conversion of convertible
subordinated debentures -- -- 1,404
-------- -------- --------
Weighted average common and common
equivalent shares outstanding 192,999 188,531 183,771
-------- -------- --------
Net earnings per common and common
equivalent share - diluted $ 0.49 $ 0.54 $ 0.37
-------- -------- --------
</TABLE>
The Internet-related investment losses of $58.8 million during fiscal 2000
negatively impacted the diluted earnings per share calculation by $0.22.
Excluding these losses, diluted net earnings per common and common equivalent
share was $0.71. See Notes 4 and 7.
Options with exercise prices greater than the average market price were not
included in the computation of diluted earnings per share. These options totaled
0.3 million, 0.6 million and 0.3 million for fiscal 2000, 1999 and 1998,
respectively.
NOTE 15: COMMITMENTS AND CONTINGENCIES
In connection with various bank loans entered into by Starbucks Coffee Japan
Limited, the Company has guaranteed $25.4 million of the outstanding debt in the
event of default by Starbucks Coffee Japan Limited.
In the normal course of business, the Company has various legal claims and other
contingent matters outstanding. Management believes that any ultimate liability
arising from these actions would not have a material adverse effect on the
Company's results of operations or financial condition as of and for the fiscal
year ended October 1, 2000.
NOTE 16: SEGMENT REPORTING
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes reporting and
disclosure standards for an enterprise's operating segments. Operating segments
are defined as components of an enterprise for which separate financial
information is available and regularly reviewed by the Company's senior
management.
The Company is organized into a number of business units. The Company's North
American retail business sells coffee beverages, whole bean coffees and related
hardware and equipment through Company-operated retail stores in the United
States and Canada. The Company's international retail business consists of
entities that own and operate retail stores in the United Kingdom, Thailand and
Australia. These two retail segments are managed by different presidents within
the Company and are measured and evaluated separately by senior management.
<PAGE> 25
The Company operates through several other business units, each of which is
managed and evaluated independently. These other business units are organized
around the strategic relationships that govern the distribution of products to
the customer. These relationships include retail store licensing agreements,
wholesale accounts, grocery channel licensing agreements, joint ventures and
direct-to-consumer marketing channels. Revenues from these segments include both
sales to unaffiliated customers and intersegment sales, which are accounted for
on a basis consistent with sales to unaffiliated customers. Intersegment sales
and other intersegment transactions have been eliminated on the accompanying
consolidated financial statements.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in Note 1. Operating
income represents earnings before interest and other income/expense and income
taxes. No allocations of overhead, interest or income taxes are made to the
segments. Identifiable assets by segment are those assets used in the Company's
operations in each segment. General corporate assets include cash and
investments, unallocated assets of the corporate headquarters and roasting
facilities, deferred taxes and certain intangibles. Management evaluates
performance of the segments based on direct product sales and operating costs.
The tables below present information by operating segment (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
REVENUES:
North American retail $ 1,734,929 $ 1,375,018 $ 1,076,731
All other business units 457,496 320,604 238,798
Intersegment revenues (23,207) (15,477) (6,827)
----------- ----------- -----------
Total revenues $ 2,169,218 $ 1,680,145 $ 1,308,702
----------- ----------- -----------
OPERATING INCOME:
North American retail $ 249,924 $ 209,338 $ 161,334
All other business units 97,100 55,998 45,943
Unallocated corporate expenses (134,902) (107,460) (89,069)
Merger expenses -- -- (8,930)
Intersegment eliminations 130 (1,165) (62)
Interest and other income, net 7,110 7,315 7,134
Internet-related investment losses (58,792) -- --
----------- ----------- -----------
Total earnings before income taxes $ 160,570 $ 164,026 $ 116,350
----------- ----------- -----------
DEPRECIATION AND AMORTIZATION:
North American retail $ 94,312 $ 72,252 $ 56,328
All other business units 13,664 7,766 4,721
Unallocated corporate expenses 22,256 17,779 11,494
----------- ----------- -----------
Total depreciation and amortization $ 130,232 $ 97,797 $ 72,543
----------- ----------- -----------
INCOME (LOSSES) FROM EQUITY METHOD INVESTEES:
All other business units $ 15,139 $ 2,318 $ (14)
Intersegment eliminations 5,161 874 1,048
----------- ----------- -----------
Total income from equity method investees $ 20,300 $ 3,192 $ 1,034
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Oct 1, 2000 Oct 3, 1999
----------- -----------
<S> <C> <C>
IDENTIFIABLE ASSETS:
North American retail $ 664,773 $ 587,823
All other business units 165,702 97,544
General corporate assets 662,656 567,147
---------- ----------
Total assets $1,493,131 $1,252,514
---------- ----------
</TABLE>
<PAGE> 26
The tables below represent information by geographic area (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended Oct 1, 2000 Oct 3, 1999 Sept 27, 1998
----------------- ----------- ----------- -------------
<S> <C> <C> <C>
REVENUES FROM EXTERNAL CUSTOMERS:
United States $1,940,723 $1,490,133 $1,173,982
Foreign countries 228,495 190,012 134,720
---------- ---------- ----------
Total $2,169,218 $1,680,145 $1,308,702
---------- ---------- ----------
</TABLE>
Revenues from foreign countries are based on the location of the customers and
consist primarily of revenues from Canada and the United Kingdom. No customer
accounts for 10% or more of the Company's revenues.
<TABLE>
<CAPTION>
Oct 1, 2000 Oct 3, 1999
----------- -----------
<S> <C> <C>
LONG-LIVED ASSETS:
United States $819,200 $680,344
Foreign countries 111,559 79,945
-------- --------
Total $930,759 $760,289
-------- --------
</TABLE>
Assets attributed to foreign countries are based on the country in which those
assets are located.
NOTE 17: QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal years 2000 and 1999 is as
follows (in thousands, except earnings per share):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
<S> <C> <C> <C> <C>
2000 quarter:
Net revenues $526,982 $504,698 $555,546 $581,992
Gross margin 288,580 281,449 314,420 331,209
Net earnings 34,749 23,406 34,913 1,496
Net earnings per common share -- diluted $ 0.18 $ 0.12 $ 0.18 $ 0.01
1999 quarter:
Net revenues $405,638 $375,822 $423,792 $474,893
Gross margin 219,338 205,865 238,772 275,160
Net earnings 26,733 17,957 24,635 32,368
Net earnings per common share -- diluted $ 0.14 $ 0.10 $ 0.13 $ 0.17
</TABLE>
<PAGE> 27
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Starbucks Corporation is responsible for the preparation and
integrity of the financial statements included in this Annual Report to
Shareholders. The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America and
include amounts based on management's best judgment where necessary. Financial
information included elsewhere in this Annual Report is consistent with these
financial statements.
Management maintains a system of internal controls and procedures designed to
provide reasonable assurance that transactions are executed in accordance with
proper authorization, that transactions are properly recorded in the Company's
records, that assets are safeguarded and that accountability for assets is
maintained. The concept of reasonable assurance is based on the recognition that
the cost of maintaining our system of internal accounting controls should not
exceed benefits expected to be derived from the system. Internal controls and
procedures are periodically reviewed and revised, when appropriate, due to
changing circumstances and requirements.
Independent auditors are appointed by the Company's Board of Directors and
ratified by the Company's shareholders to audit the financial statements in
accordance with auditing standards generally accepted in the United States of
America and to independently assess the fair presentation of the Company's
financial position, results of operations and cash flows. Their report appears
in this Annual Report.
The Audit Committee, all of whose members are outside directors, is responsible
for monitoring the Company's accounting and reporting practices. The Audit
Committee meets periodically with management and the independent auditors to
ensure that each is properly discharging its responsibilities. The independent
auditors have full and free access to the Committee without the presence of
management to discuss the results of their audits, the adequacy of internal
accounting controls and the quality of financial reporting.
/s/ ORIN C. SMITH /s/ MICHAEL CASEY
-------------------------------- ------------------------------------
ORIN C. SMITH MICHAEL CASEY
president and executive vice president,
chief executive officer chief financial officer and
chief administrative officer
<PAGE> 28
STARBUCKS CORPORATION
(Seattle, Washington)
We have audited the accompanying consolidated balance sheets of Starbucks
Corporation and subsidiaries (the Company) as of October 1, 2000, and October 3,
1999, and the related consolidated statements of earnings, shareholders' equity
and cash flows for each of the three years in the period ended October 1, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Starbucks Corporation and
subsidiaries as of October 1, 2000, and October 3, 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended October 1, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
---------------------------------
DELOITTE & TOUCHE LLP
Seattle, Washington
December 8, 2000
<PAGE> 29
SHAREHOLDER INFORMATION
MARKET INFORMATION AND DIVIDEND POLICY
The Company's Common Stock is traded on the National Market tier of The Nasdaq
Stock Market, Inc. ("Nasdaq"), under the symbol "SBUX". The following table sets
forth the quarterly high and low closing sale prices per share of the Common
Stock as reported by Nasdaq for each quarter during the last two fiscal years.
All prices shown reflect the two-for-one stock split effected March 19, 1999.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
October 1, 2000:
First Quarter $30.13 $21.56
Second Quarter 44.81 23.88
Third Quarter 43.44 28.31
Fourth Quarter 43.56 35.13
October 3, 1999:
First Quarter $26.69 $16.56
Second Quarter 30.69 23.28
Third Quarter 39.75 28.06
Fourth Quarter 37.56 20.06
</TABLE>
As of December 11, 2000, the Company had 8,814 shareholders of record. The
Company has never paid any dividends on its Common Stock. The Company presently
intends to retain earnings for use in its business and, therefore, does not
anticipate paying a cash dividend in the near future.
THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 1,
2000, WITHOUT THE EXHIBITS THERETO, MAY BE OBTAINED WITHOUT CHARGE BY ACCESSING
THE COMPANY'S FILINGS AT WWW.SEC.GOV OR BY SENDING A REQUEST TO INVESTOR
RELATIONS AT THE ADDRESS OR PHONE NUMBER BELOW.
Quarterly information is available to all shareholders immediately upon its
release, free of charge, via fax, by calling (800) 239-0317 or through access on
the Internet at www.businesswire.com/cnn/sbux.htm. To receive a copy by mail,
please send your request to:
INVESTOR RELATIONS
Investor Relations -- M/S S-FP1
Starbucks Corporation
P.O. Box 34067
Seattle, WA 98124-1067
(206) 447-1575, ext. 87118
