<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ___ to ___
Commission File Number 0-20322
---------------
STARBUCKS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Washington 91-1325671
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2401 Utah Avenue South, Seattle, Washington 98134
(Address of Principal Executive Office, including Zip Code)
(206) 447-1575
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of May 15, 2000, there were 185,528,869 shares of the Registrant's Common
Stock outstanding.
================================================================================
<PAGE> 2
STARBUCKS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Item 1. Financial Statements................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................... 13
Item 4. Submission of Matters to a Vote of Security Holders... 13
Item 5. Other Information..................................... 14
Item 6. Exhibits and Reports on Form 8-K...................... 14
Signature...................................................... 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 2, March 28, April 2, March 28,
2000 1999 2000 1999
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
(unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $504,698 $375,822 $1,031,680 $781,460
Cost of sales and related
occupancy costs 223,249 169,957 461,651 356,256
- ----------------------------------------------------------------------------------------------------
Gross margin 281,449 205,865 570,029 425,204
Store operating expenses 169,257 121,845 333,457 244,449
Other operating expenses 16,412 11,142 30,724 24,450
Depreciation and amortization 31,951 23,740 61,241 45,634
General and administrative
expenses 28,622 22,371 54,767 42,726
- ----------------------------------------------------------------------------------------------------
Operating income 35,207 26,767 89,840 67,945
Interest and other income, net 2,242 2,197 3,656 4,137
- ----------------------------------------------------------------------------------------------------
Earnings before income taxes 37,449 28,964 93,496 72,082
Income taxes 14,043 11,007 35,341 27,391
- ----------------------------------------------------------------------------------------------------
Net earnings $ 23,406 $ 17,957 $ 58,155 $ 44,691
====================================================================================================
Net earnings per common share - basic $ 0.13 $ 0.10 $ 0.32 $ 0.25
Net earnings per common share - diluted $ 0.12 $ 0.10 $ 0.30 $ 0.24
Weighted average shares outstanding:
Basic 184,785 181,370 184,106 180,706
Diluted 192,417 188,349 191,041 186,917
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
April 2, October 3,
2000 1999
(unaudited)
- ---------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 85,258 $ 66,419
Short-term investments 42,926 51,367
Accounts receivable 58,599 47,646
Inventories 151,948 180,886
Prepaid expenses and other
current assets 26,866 19,049
Deferred income taxes, net 26,369 21,133
- ---------------------------------------------------------------------------------
Total current assets 391,966 386,500
Joint ventures and other investments 104,988 68,060
Property, plant and equipment, net 840,944 760,289
Other assets 27,367 23,474
Goodwill, net 18,686 14,191
- ---------------------------------------------------------------------------------
Total $ 1,383,951 $ 1,252,514
=================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,130 $ 56,108
Checks drawn in excess of bank balances 50,463 64,211
Accrued compensation and related costs 62,185 43,872
Accrued occupancy costs 26,005 23,017
Accrued taxes 18,838 30,752
Other accrued expenses 50,552 33,637
- ---------------------------------------------------------------------------------
Total current liabilities 273,173 251,597
Deferred income taxes, net 35,921 32,886
Long-term debt 6,677 7,018
Shareholders' equity:
Common stock - Authorized, 300,000,000;
issued and outstanding, 186,282,959 and
183,282,095 shares, respectively, (includes
848,550 common stock units in both periods) 702,169 651,020
Retained earnings 372,094 313,939
Accumulated other comprehensive loss (6,083) (3,946)
- ---------------------------------------------------------------------------------
Total shareholders' equity 1,068,180 961,013
- ---------------------------------------------------------------------------------
Total $ 1,383,951 $ 1,252,514
=================================================================================
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
- ------------------------------------------------------------------------------
April 2, March 28,
2000 1999
(26 Weeks) (26 Weeks)
(unaudited)
- ------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 58,155 $ 44,691
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 67,594 50,630
Provision for store remodels
and losses on asset disposals 1,307 --
Deferred income taxes, net 84 2,479
Equity in (income)/losses of investees (5,055) 731
Cash provided/(used) by changes in
operating assets and liabilities:
Accounts receivable (10,814) 13,984
Inventories 29,882 11,485
Prepaid expenses and other
current assets (638) (4,473)
Accounts payable 8,140 1,523
Accrued compensation and
related costs 18,301 4,750
Accrued occupancy costs 2,984 2,342
Accrued taxes (18,954) (10,030)
Other accrued expenses 17,474 3,474
- ------------------------------------------------------------------------------
Net cash provided by operating activities 168,460 121,586
Investing activities:
Purchase of investments (55,314) (80,502)
Maturity of investments 28,000 59,053
Sale of investments 35,524 --
Purchases of businesses, net of cash acquired (8,242) (16,216)
Investments in joint ventures and other
investments (38,187) (10,002)
Distributions from joint ventures 4,556 5,500
Additions to property, plant
and equipment (148,005) (99,277)
Additions to deposits and other assets (3,986) (4,769)
- ------------------------------------------------------------------------------
Net cash used by investing activities (185,654) (146,213)
Financing activities:
Decrease in cash provided by checks
drawn in excess of bank balances (13,748) (114)
Proceeds from sale of common stock under
employee stock purchase plan 5,020 3,329
Exercise of stock options 32,853 29,789
Tax benefit from exercise of non-qualified
stock options 13,276 16,184
Payments on long-term debt (1,344) --
- ------------------------------------------------------------------------------
Net cash provided by financing activities 36,057 49,188
- ------------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents (24) 1,250
- ------------------------------------------------------------------------------
Net increase in cash and cash equivalents 18,839 25,811
Cash and cash equivalents:
Beginning of the period 66,419 101,663
- ------------------------------------------------------------------------------
End of the period $ 85,258 $ 127,474
==============================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 191 $ 90
Income taxes 32,710 18,789
Net unrealized holding(loss)/gain (1,409) 21
on investments
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 26 Weeks Ended April 2, 2000 and
March 28, 1999
NOTE 1: FINANCIAL STATEMENT PREPARATION
The consolidated financial statements as of April 2, 2000 and October 3, 1999
and for the 13-week and 26-week periods ended April 2, 2000 and March 28, 1999
have been prepared by Starbucks Corporation ("Starbucks" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). The financial information for the 13-week and 26-week periods ended
April 2, 2000 and March 28, 1999 is unaudited, but, in the opinion of
management, reflects all adjustments (consisting only of normal recurring
adjustments and accruals) necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods.
The financial information as of October 3, 1999, is derived from the Company's
audited consolidated financial statements and notes thereto for the year ended
October 3, 1999, and should be read in conjunction with such financial
statements.
Certain reclassifications of prior year's balances have been made to conform to
the current format.
The results of operations for the 13-week and 26-week periods ended April 2,
2000 are not necessarily indicative of the results of operations that may be
achieved for the entire fiscal year ending October 1, 2000.
NOTE 2: OTHER ITEMS
On February 12, 2000, Starbucks entered into a strategic agreement with
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items. Under the agreement, Starbucks will receive $150 million
over a five-year period for in-store exposure and co-marketing opportunities.
Kozmo.com will locate drop boxes within Starbucks stores for return of videos,
DVDs, video games and other items delivered by Kozmo.com and will deliver
Starbucks coffee by the pound, Tazo teas and other Starbucks products. In
accordance with this agreement, Starbucks received $15 million which will be
recognized as revenue over 12 months, beginning in March 2000. On March 16,
2000, Starbucks made a minority investment of $25 million in Kozmo.com.
NOTE 3: EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted average
number of shares and common stock units outstanding during the period. The
computation of diluted earnings per share includes the dilutive effect of common
stock equivalents consisting of certain shares subject to stock options.
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
April 2, October 3,
2000 1999
- -------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 59,112 $ 95,001
Roasted 26,683 28,065
Other merchandise held for sale 53,062 46,655
Packaging and other supplies 13,091 11,165
- -------------------------------------------------------------------
$ 151,948 $ 180,886
===================================================================
</TABLE>
6
<PAGE> 7
As of April 2, 2000, the Company had fixed-price purchase commitments for green
coffee totaling approximately $112 million.
NOTE 5: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the following
(in thousands):
<TABLE>
<CAPTION>
April 2, October 3,
2000 1999
- -------------------------------------------------------------------------------
<S> <C> <C>
Land $ 5,084 $ 5,084
Building 19,795 19,795
Leasehold improvements 668,877 591,640
Roasting and store equipment 309,571 273,612
Furniture, fixtures and other 140,967 130,223
- -------------------------------------------------------------------------------
1,144,294 1,020,354
Less accumulated depreciation
and amortization (386,372) (320,982)
- -------------------------------------------------------------------------------
757,922 699,372
Work in progress 83,022 60,917
- -------------------------------------------------------------------------------
$ 840,944 $ 760,289
===============================================================================
</TABLE>
NOTE 6: COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during the period, except
those resulting from transactions with shareholders of the Company. It has two
components: net income and other comprehensive income. Accumulated other
comprehensive income (loss) reported on the Company's consolidated balance
sheets consists of foreign currency translation adjustments and the unrealized
gains and losses, net of applicable taxes, on available-for-sale securities.
Comprehensive income, net of related tax effects, is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
April 2, March 28, April 2, March 28,
2000 1999 2000 1999
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 23,406 $17,957 $ 58,155 $44,691
Translation adjustment (4,270) 237 (577) 964
Unrealized holding gains/
(losses), net (12,547) 28 (1,409) 21
Reclassification adjustment
for net (gains)/losses
realized in net income (151) 62 (151) 62
-------- ------- -------- -------
Total comprehensive income $ 6,438 $18,284 $ 56,018 $45,738
====================================================================================
</TABLE>
7
<PAGE> 8
NOTE 7: SEGMENT REPORTING
The Company is organized into a number of business units. The Company's North
American retail business sells primarily coffee beverages, whole bean coffees,
and related merchandise through Company-operated retail stores in the United
States and Canada. The Company also owns and operates retail stores in the
United Kingdom. These two retail segments are managed by different presidents
within the Company and are measured and evaluated separately by senior
management.
The Company operates through several other business units, each of which is
managed and evaluated independently. These other business units include domestic
wholesale, domestic retail store licensing, grocery channel licensing,
international retail store licensing and a direct-to-consumer business.
The tables below present information by operating segment (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
April 2, March 28, April 2, March 28,
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
North American retail $ 408,525 $ 307,908 $ 830,589 $ 640,434
All other business units 102,319 70,582 211,373 145,362
Intersegment revenues (6,146) (2,668) (10,282) (4,336)
--------- --------- ----------- ---------
Total revenues $ 504,698 $ 375,822 $ 1,031,680 $ 781,460
=======================================================================================
- ---------------------------------------------------------------------------------------
OPERATING INCOME
North American retail $ 54,307 $ 41,514 $ 118,060 $ 94,282
All other business units 16,607 12,084 39,260 24,728
Unallocated corporate expenses (35,803) (26,696) (67,295) (50,932)
Intersegment eliminations 96 (135) (185) (133)
Interest, net 2,242 2,197 3,656 4,137
--------- --------- ----------- ---------
Earnings before income taxes $ 37,449 $ 28,964 $ 93,496 $ 72,082
=======================================================================================
</TABLE>
NOTE 8: NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
pronouncement will require the Company to recognize derivatives on its balance
sheet at fair value. Changes in the fair values of derivatives that qualify as
cash flow hedges will be recognized in accumulated other comprehensive income
until the hedged item is recognized in earnings. The Company is in the process
of evaluating the impact of this new accounting standard and does not expect
that it will have a significant effect on its results of operations. The FASB
subsequently issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB No. 133", which
postpones initial application until fiscal years beginning after June 15, 2000.
The Company expects to adopt SFAS No. 133 in fiscal 2001.
8
<PAGE> 9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements herein, including anticipated store openings, planned capital
expenditures and trends in or expectations regarding the Company's operations,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based on currently
available operating, financial and competitive information, and are subject to
various risks and uncertainties. Actual future results and trends may differ
materially depending on a variety of factors, including, but not limited to,
coffee and other raw materials prices and availability, successful execution of
internal performance and expansion plans, the impact of competition, the effect
of legal proceedings, and other risks detailed herein and in the Company's
annual and quarterly filings with the Securities and Exchange Commission.
GENERAL
During the 26-week period ending April 2, 2000, Starbucks Corporation
("Starbucks" or the "Company") derived approximately 85% of net revenues from
its Company-operated retail stores. The remaining 15% of net revenues is derived
from the Company's specialty operations, which include sales to wholesale
accounts and licensees, royalty and license fee income, and sales through its
direct-to-consumer business including its on-line store at www.starbucks.com.
The Company's fiscal year ends on the Sunday closest to September 30. Fiscal
year 1999 had 53 weeks. The fiscal year ending on October 1, 2000 will include
52 weeks.
RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED APRIL 2, 2000,
COMPARED TO THE 13 WEEKS ENDED MARCH 28, 1999
REVENUES
Net revenues for the 13 weeks ended April 2, 2000 increased 34% to $505 million
from $376 million for the corresponding period in fiscal 1999. Retail revenues
increased 35% to $429 million from $319 million primarily due to the opening of
new retail stores plus an increase in comparable store sales of 10% for the
period. The increase in comparable store sales (stores open for at least 13
months) resulted from a 5% increase in the number of transactions combined with
a 5% increase in the average dollar value per transaction. During the 13 weeks
ended April 2, 2000, the Company opened 98 stores in continental North America
and 17 in the United Kingdom. The Company ended the period with 2,233
Company-operated stores in continental North America and 127 Company-operated
stores in the United Kingdom.
Specialty revenues increased 33% to $76 million for the 13 weeks ended April 2,
2000, compared to $57 million for the corresponding period in fiscal 1999. The
increase in specialty revenues was driven primarily by higher revenues from
foodservice accounts, the national expansion of whole bean and ground coffee in
supermarkets through a licensing agreement with Kraft, and increased revenues
from licensees. Licensees (including those in which the Company is a joint
venture partner) opened 58 stores in continental North America and 42 stores in
international markets. The Company ended the period with 265 licensed stores in
continental North America and 260 licensed stores in international markets.
GROSS MARGIN
Gross margin increased to 55.8% for the 13 weeks ended April 2, 2000 from 54.8%
for the corresponding period in fiscal 1999. The improvement in gross margin was
primarily due to lower green coffee costs and the impact of a beverage sales
price increase in the third quarter of 1999, partially offset by higher
occupancy costs.
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 39.5%
for the 13 weeks ended April 2, 2000, from 38.2% for the corresponding period in
fiscal 1999. The increase was primarily due to higher payroll-related
expenditures as a percent of retail revenues, resulting from both an increase in
average hourly wage rates and the continuing shift in sales to more
labor-intensive handcrafted beverages.
9
<PAGE> 10
Other operating expenses (expenses associated with all operations other than
Company-owned retail, as well as the Company's share of joint venture profits
and losses) were 21.7% of specialty revenues for the 13 weeks ended April 2,
2000, compared to 19.5% for the corresponding period in fiscal 1999. Higher
payroll-related expenses and higher marketing expenditures as a percent of
specialty revenues were partially offset by improved profitability from both
international and domestic joint venture activities.
General and administrative expenses as a percentage of net revenues were 5.7%
for the 13 weeks ended April 2, 2000, compared to 6.0% for the corresponding
period in fiscal 1999. The decrease was primarily due to leverage from the
acceleration of revenue growth.
INCOME TAXES
The Company's effective tax rate for the 13 weeks ended April 2, 2000 was 37.5%
compared to 38.0% for the corresponding period in fiscal 1999. The decrease was
due to overall tax planning efforts and the reduction of losses by the Company's
joint venture in Japan, which are not deductible for U.S. tax purposes.
RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED APRIL 2, 2000,
COMPARED TO THE 26 WEEKS ENDED MARCH 28, 1999
REVENUES
Net revenues for the 26 weeks ended April 2, 2000, increased 32% to $1.0 billion
from $781 million for the corresponding period in fiscal 1999. Retail revenues
increased 31% to $870 million from $662 million primarily due to the opening of
new retail stores plus an increase in comparable store sales of 8% for the
period. The increase in comparable store sales resulted from a 4% increase in
the number of transactions combined with a 4% increase in the average dollar
value per transaction. During the 26 weeks ended April 2, 2000, the Company
opened 202 stores in continental North America and 32 in the United Kingdom.
Specialty revenues increased 35% to $162 million for the 26 weeks ended April 2,
2000, compared to $120 million for the corresponding period in fiscal 1999. The
increase in specialty revenues was driven primarily by higher revenues from
foodservice accounts, licensees, and the grocery channel. Licensees (including
those in which the Company is a joint venture partner) opened 89 stores in
continental North America and 76 stores in international markets.
GROSS MARGIN
Gross margin increased to 55.3% for the 26 weeks ended April 2, 2000 from 54.4%
for the corresponding period in fiscal 1999. The improvement in gross margin was
primarily due to lower green coffee costs and, to a lesser extent, the impact of
a beverage sales price increase implemented in the third quarter of fiscal 1999.
EXPENSES
Store operating expenses as a percentage of retail revenues increased to 38.3%
for the 26 weeks ended April 2, 2000, from 37.0% for the corresponding period in
fiscal 1999. The increase was due almost entirely to higher payroll-related
expenditures as a percent of retail revenues resulting from an increase in
average hourly wage rates and a continuing shift in sales to more
labor-intensive handcrafted beverages.
10
<PAGE> 11
Other operating expenses were 19.0% of specialty revenues for the 26 weeks ended
April 2, 2000, compared to 20.4% for the corresponding period in fiscal 1999.
The decrease was primarily due to continued improvements in profitability from
joint venture activities, which were partially offset by increases in operating
expenses relating to accelerating the growth of the specialty businesses.
General and administrative expenses as a percentage of net revenues were 5.3%
for the 26 weeks ended April 2, 2000 compared to 5.5% for the corresponding
period in fiscal 1999. The decrease was primarily due to leverage from the
acceleration of revenue growth.
INCOME TAXES
The Company's effective tax rate for the 26 weeks ended April 2, 2000 was 37.8%
compared to 38.0% for the corresponding period in fiscal 1999. The decrease was
due to overall tax planning efforts and the reduction of losses by the Company's
joint venture in Japan, which are not deductible for U.S. tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended the period with total cash and cash equivalents and short-term
investments of $128 million and working capital of $119 million. Cash and cash
equivalents increased by $19 million for the 26 weeks ended April 2, 2000 to $85
million. Cash provided by operating activities totaled $168 million for the
first 26 weeks of fiscal 2000, resulting primarily from net earnings before
non-cash charges of $122 million and a decrease in inventories of $30 million.
In addition, $15 million was received in accordance with the strategic agreement
with Kozmo.com, Inc.
Cash used by investing activities for the first 26 weeks of fiscal 2000 totaled
$186 million. This included capital additions to property, plant and equipment
of $148 million related to opening 234 new Company-operated retail stores,
enhancing information systems, purchasing roasting and packaging equipment for
the Company's roasting and distribution facilities, and remodeling certain
existing stores. The Company used $25 million to make a minority investment in
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items and $10 million to make a minority investment in
Cooking.com, a leading web-based retailer of cookware, accessories, and
specialty foods and provider of information about cooking. The purchase of
Tympanum, Inc. (d/b/a Hear Music) used $8 million. During the 26-week period
ending April 2, 2000, the Company made equity investments of $3 million in its
international joint ventures and received $4.5 million in distributions from its
domestic joint ventures. The Company invested excess cash primarily in
short-term, investment-grade marketable debt securities. The net activity in the
Company's marketable securities portfolio during the 26-week period provided $8
million.
Cash provided by financing activities for the first 26 weeks of fiscal 2000
totaled $36 million. This included $51 million generated from the exercise of
employee stock options, the related income tax benefit available to the Company
upon exercise of such options, and cash generated from the Company's employee
stock purchase plan. As options granted under the Company's stock option plans
vest and are exercised, the Company will continue to receive proceeds and a tax
deduction; however, neither the amounts nor timing can be predicted. This was
offset by a $14 million decrease in checks outstanding.
Cash requirements for the remainder of fiscal 2000, other than normal operating
expenses, are expected to consist primarily of capital expenditures related to
the addition of new Company-operated retail stores. The Company plans to open at
least 400 Company-operated stores during fiscal 2000. The Company also
anticipates incurring additional expenditures for enhancing its production
capacity and information systems and remodeling certain existing stores. While
there can be no assurance that current expectations will be realized, management
expects capital expenditures for the remainder of fiscal 2000 to be
approximately $157 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 2000. New joint ventures, other new business
opportunities or store expansion rates substantially in excess of that presently
planned may require outside funding.
11
<PAGE> 12
COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS
The supply and price of green (unroasted) coffee are subject to significant
volatility. Although most coffee trades in the commodity market, coffee of the
quality sought by the Company tends to trade on a negotiated basis at a
substantial premium above commodity coffee prices, depending upon the supply and
demand at the time of purchase. Supply and price can be affected by multiple
factors in the producing countries, including weather, political and economic
conditions. In addition, green coffee prices have been affected in the past, and
may be affected in the future, by the actions of certain organizations and
associations that have historically attempted to influence commodity prices of
green coffee through agreements establishing export quotas or restricting coffee
supplies worldwide. The Company's ability to raise sales prices in response to
rising coffee prices may be limited and the Company's profitability could be
adversely affected if coffee prices were to rise substantially.
The Company enters into fixed-price purchase commitments in order to secure an
adequate supply of quality green coffee and bring greater certainty to the cost
of sales in future periods. As of April 2, 2000, the Company had approximately
$112 million in fixed-price purchase commitments which, together with existing
inventory, is expected to provide an adequate supply of green coffee for the
remainder of fiscal 2000. The Company believes, based on relationships
established with its suppliers in the past, that the risk of non-delivery on
such purchase commitments is remote.
To further reduce its exposure to rising coffee costs, the Company may, from
time to time, enter into futures contracts to hedge price-to-be-established
coffee purchase commitments. The specific risks associated with these activities
are described below in Item 3 "Quantitative and Qualitative Disclosures about
Market Risk."
In addition to fluctuating green coffee prices, management believes that the
Company's future results of operations and earnings could be significantly
impacted by other factors such as increased competition within the specialty
coffee industry, the Company's ability to find optimal store locations at
favorable lease rates, increased costs associated with opening and operating
retail stores in new markets, increases in the cost of dairy products and the
Company's continued ability to hire, train and retain qualified personnel.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Significant portions
of the Company's net revenues and profits are realized during the first quarter
of the Company's fiscal year, which includes the December holiday season. In
addition, quarterly results are affected by the timing of the opening of new
stores, and the Company's rapid growth may conceal the impact of seasonal
influences. Because of the seasonality of the Company's business and its overall
growth, results for any quarter are not necessarily indicative of the results
that may be achieved for the full fiscal year.
12
<PAGE> 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company maintains investment portfolio holdings of various issuers, types
and maturities. These securities are classified as either trading or
available-for-sale. Trading securities are recorded on the balance sheet at fair
value, with unrealized gains and losses included in earnings. Available-for-sale
securities are recorded on the balance sheet at fair value, with unrealized
gains or losses reported as a separate component of accumulated other
comprehensive income. The Company does not hedge its interest rate exposure.
The Company is subject to foreign currency exchange rate exposure, primarily
related to its retail operations in Canada and the United Kingdom. Historically,
this exposure has had a minimal impact on the Company. At the present time, the
Company does not hedge foreign currency risk, but may do so in the future.
The Company may, from time to time, enter into futures contracts to hedge
price-to-be-fixed coffee purchase commitments with the objective of minimizing
cost risk due to market fluctuations. The Company does not hold or issue
derivative instruments for trading purposes. In accordance with SFAS No. 80
"Accounting for Futures Contracts," these futures contracts meet the hedge
criteria and are accounted for as hedges. Accordingly, gains and losses are
deferred and recognized as adjustments to the carrying value of the coffee
inventory when purchased and recognized in results of operations as coffee
products are sold. Gains and losses are calculated based on the difference
between the cost basis and the market value of the coffee contracts. The market
risk related to coffee futures is substantially offset by changes in the costs
of coffee purchased.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the ordinary
course of its business, but is not currently a party to any legal proceeding
that management believes would have a material adverse effect on the financial
position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders of the Company was held on February 14, 2000
for the purposes of (i) electing three Class 1 directors to serve until the
Annual Meeting of Shareholders to be held in early 2003; (ii) approving the
amendment and restatement of the Starbucks Corporation Key Employee Stock Option
Plan to increase by 9,000,000 the number of shares of the Company's Common Stock
reserved for issuance under the plan, add provisions prohibiting the granting of
stock options with an exercise price below the fair market value of a share of
the Company's Common Stock on the date of grant or the repricing of stock
options below such fair market value without shareholder approval, and update
the plan to permit more effective administrative practices; and (iii) ratifying
the selection of the independent auditors for fiscal 2000. All proposals were
approved. The table below shows the results of the shareholders' voting:
<TABLE>
<CAPTION>
Votes in Votes Votes Withheld
Favor Against Abstentions
----------- ---------- --------------
<S> <C> <C> <C>
Election of Directors
Class 1 Directors:
Howard P. Behar 165,069,643 0 1,562,104
James G. Shennan, Jr. 165,085,210 0 1,546,537
Craig E. Weatherup 165,036,842 0 1,594,905
Approve the amendment and
restatement of the Company's
Key Employee Stock Option
Plan - 1994 147,167,794 18,498,175 965,778
Ratification of
independent auditors 165,812,940 361,880 456,927
</TABLE>
Because all proposals were routine, there were no broker non-votes.
13
<PAGE> 14
The following members of the Board of Directors, who were not up for re-election
during the current year, have terms that expire at the annual meeting of
shareholders to be held in early 2001 and 2002:
<TABLE>
<CAPTION>
Director Term expires at the
annual meeting held in:
- ------------------------------- ------------------------------
<S> <C>
Gregory B. Maffei 2001
Arlen I. Prentice 2001
Orin C. Smith 2001
Barbara Bass 2002
Craig J. Foley 2002
Howard Schultz 2002
</TABLE>
ITEM 5. OTHER INFORMATION
On February 12, 2000, Starbucks entered into a strategic agreement with
Kozmo.com, Inc., an internet-to-door delivery service for food, entertainment
and convenience items. Under the agreement, Starbucks will receive $150 million
over a five-year period for in-store exposure and co-marketing opportunities.
Kozmo.com will locate drop boxes within Starbucks stores for return of videos,
DVDs, video games and other items delivered by Kozmo.com and will deliver
Starbucks coffee by the pound, Tazo teas and other Starbucks products. In
accordance with this agreement, Starbucks received $15 million which will be
recognized as revenue over 12 months, beginning in March 2000. On March 16,
2000, Starbucks made a minority investment of $25 million in Kozmo.com.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
10.18* Strategic Agreement dated February 12, 2000 between
Starbucks Corporation and Kozmo.com, Inc.
11 Statement re: computation of per share earnings
27 Financial Data Schedule
</TABLE>
(b) Current Reports on Forms 8-K filed during the 26 weeks ended April 2,
2000:
None
*Confidential treatment requested
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STARBUCKS CORPORATION
Dated: May 17, 2000 By: /s/ Michael Casey
----------------------
Michael Casey
executive vice president and
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
14
<PAGE> 1
EXHIBIT 10.18
Pages containing information for which confidential treatment has been
requested are marked "Confidential Treatment Requested - Redacted Material Filed
Separately with the Commission." The location of information for which
confidential treatment has been requested has been marked with an asterisk (*).
STRATEGIC AGREEMENT
BETWEEN
STARBUCKS CORPORATION AND
KOZMO.COM, INC.
This Strategic Agreement ("Agreement") is made and entered into on February 12,
2000 by and between Starbucks Corporation, a Washington corporation
("Starbucks") and Kozmo.com, Inc., a Delaware corporation ("Kozmo").
BACKGROUND
A. Kozmo currently provides same-day delivery of videos, DVDs, video games,
convenience foods and other items which are ordered by its customers over the
internet and delivered by Kozmo to customers at their homes or places of
business. Kozmo intends to expand its internet-based, same-day delivery business
to sell additional items including without limitation, books, compact discs,
magazines and electronics. Kozmo desires to provide convenient locations for its
customers to return to Kozmo videos, DVDs and video games (collectively, "Video
Products") and to possibly return to Kozmo certain other items purchased from
Kozmo.
B. Kozmo currently intends to expand its same-day delivery service business into
the Expansion Cities in the manner and in accordance with the timeline set forth
in Schedule A attached hereto, which may be revised by Kozmo at any time upon
notice to Starbucks.
C. Starbucks operates retail coffee stores throughout the United States and
Canada. In addition, Starbucks sells, both in its stores and through other means
of distribution, coffee, tea and other related products, including but not
limited to compact discs and other music items sold by Starbucks through its
Hear Music division ("Starbucks' Retail Products").
D. Starbucks has a valuable network of stores, a substantial customer base, and
certain other intangibles to which Kozmo desires access.
E. Starbucks has considerable expertise in a variety of areas, including without
limitation, branding, marketing, customer relations, real estate and employee
training ("Starbucks' Expertise").
F. Starbucks wishes to lease from Kozmo Drop-boxes to place in its stores to
permit the collection of the Video Products and certain other items purchased
from Kozmo. Kozmo further wishes to distribute to its customers certain
Starbucks' Retail Products.
<PAGE> 2
G. Kozmo wishes to obtain assistance from Starbucks in the areas of Starbucks'
Expertise on terms mutually agreeable to the parties hereto; provided, however,
Starbucks will not charge Kozmo for its time.
H. Starbucks and Kozmo desire to enter into a strategic relationship to
undertake certain joint marketing efforts in-store, online and through
traditional marketing media.
AGREEMENT
The parties agree as follows:
1. DROP-BOX.
1.1 STARBUCKS' RESPONSIBILITIES.
1.1.1 Within ten (10) days following the execution of this Agreement,
Starbucks will deliver to Kozmo a list showing the location of each of its
retail coffee stores wholly-owned and operated by Starbucks ("Starbucks Stores")
located in each city in the United States and Canada in which Kozmo operates its
internet-based, same-day delivery business. As Kozmo expands its business into
additional U.S. or Canadian cities ("Expansion Cities"), Starbucks will provide
a list showing the location of each of its Starbucks Stores located in the
Expansion Cities within thirty (30) days following written notification from
Kozmo of its intention to commence operations in such cities. On a quarterly
basis throughout the Term of this Agreement, Starbucks will provide Kozmo with a
list for each of the cities in which Kozmo operates that sets forth (a) new
Starbucks Stores that have opened since the date of the last quarterly report,
and (b) new Starbucks Stores that Starbucks expects to be opened during the next
calendar quarter.
1.1.2 Starbucks will locate a Drop-box (as defined below) to be used by
customers of Kozmo for the return to Kozmo of the Video Products and, subject to
the provisions of Section 1.4, the Kozmo Items (as defined below) in those
Starbucks Stores(*)
1.1.3 Starbucks will allow Kozmo's employees who comply with the
requirement of Section 1.2.4 below, to enter each Starbucks Store containing a
Drop-box to collect the Video Products and Kozmo Items during such store's
normal business hours, as may be modified by Starbucks from time to time in its
sole discretion, at such times as may be mutually agreed upon by Starbucks and
Kozmo.
1.1.4 Starbucks will not have any responsibility or liability for the
condition of Video Products or Kozmo Items returned to the Drop-boxes, nor will
Starbucks be responsible to accept or hold for collection by Kozmo any Video
Product or Kozmo Item which will not fit in
- ------------
* CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH
THE COMMISSION
2
<PAGE> 3
the Drop-box for any reason. Kozmo will bear all risk of loss relating to the
Video Products and the Kozmo Items.
1.1.5 Starbucks will notify Kozmo by telephone of any problems with or
damage to a Drop-box in a Starbucks Store of which Starbucks becomes aware;
provided, however, that Starbucks will not have any duty or obligation to
inspect or monitor the Drop-boxes.
1.1.6 Starbucks reserves the right to require by written notice to Kozmo
that Kozmo remove a Drop-box from any Starbucks Store if, at any time, the
criteria set forth in Sections 1.1.2 (c), (d) and (e) are not being met. Upon
the removal of a Drop-box from a Starbucks Store, Kozmo will, at its sole cost
and expense, use commercially reasonable efforts to notify its customers that
they will no longer be able to return Video Products or Kozmo Items to the
applicable Starbucks Store.
1.2 KOZMO RESPONSIBILITIES.
1.2.1 Kozmo will collect all Video Products and Kozmo Items from the
Drop-boxes located at each Starbucks Store in such a manner so as to assure that
such Drop-boxes do not overflow, or more frequently as mutually agreed upon by
Starbucks and Kozmo. Kozmo will collect items from the Drop-boxes at such times
as is agreed to by the parties so as to not interfere with Starbucks' normal
business operations.
1.2.2 Kozmo will use commercially reasonable efforts to maintain the
Drop-boxes in good condition and appearance at all times during this Agreement.
1.2.3 Kozmo will provide each Starbucks Store with a toll free customer
service number staffed by one or more Kozmo customer service representatives
during normal business hours for Starbucks' employees to contact Kozmo, or to
provide to Kozmo's customers, for questions regarding returns, problems with or
damage to the Drop-boxes, and to request additional pick-up from the Drop-boxes.
1.2.4 Kozmo employees collecting the Video Products and Kozmo Items from
the Starbucks Stores' Drop-boxes will at all times be professional in appearance
and manner, be appropriately identified as a Kozmo employee, not interfere with
the normal operations of any such Starbucks Store and comply with all
procedures, requirements and protocol as Starbucks may reasonably impose from
time to time.
1.3 DROP-BOX DEVELOPMENT. Kozmo will, with input and approval from
Starbucks, design, develop, manufacture and pay for drop-boxes for the return of
Video Products and Kozmo Items by Kozmo's customers ("Drop-boxes") for placement
in the Starbucks Stores. Kozmo's current Drop-box will be used until a new
design is agreed upon by the parties. The dimensions of the current Drop-boxes
are 12" x 16" x 32" and the current Drop-box includes a slanted cover with a
slot the size of a VHS video tape for the return of items and a combination lock
on the front of the box. Any modification to the size or design of the Drop-box
must be approved in advance by Starbucks, in its reasonable discretion, prior to
being placed in any Starbucks Store. Kozmo will own the design and all
proprietary rights relating to the Drop-boxes and will own each of the
Drop-boxes located in the Starbucks Stores. Kozmo will lease the Drop-boxes to
be located in
3
<PAGE> 4
Starbucks Stores to Starbucks, for the Term of this Agreement, for the rental
payment of $1.00 per Drop-box per year, pursuant to the terms of an equipment
lease to be agreed upon by the parties (the "Equipment Lease").
1.4 KOZMO ITEMS. The Drop-boxes will be used for the purpose of returning
Kozmo Items, only if the return of such items does not interfere with Starbucks
normal business operations and does not materially interrupt or interfere with
the regular duties of Starbucks' employees in the Starbucks Stores. Starbucks
will not be responsible or liable for paying any amounts to any Kozmo customer
for the return of a Kozmo Item. "Kozmo Items" shall mean non-perishable items
sold and delivered by Kozmo which are of a size that will easily fit into the
Drop-box and which are of the type of items listed on the attached SCHEDULE B as
may be amended from time to time upon the mutual written consent of the parties.
1.5 EXCLUSIVITY OF KOZMO. Kozmo agrees that, during the Term, it will not
allow its Video Products or Kozmo Items to be collected in Drop-boxes or similar
receptacles located in any store of a Retail Chain, other than Starbucks, whose
primary business is the sale of coffee or tea products; provided, however that
Kozmo will not be required to remove any drop boxes currently located in a
Retail Chain whose primary business is the sale of coffee or tea products. For
the purposes of this Agreement, a "Retail Chain" shall mean any entity which
owns or operates five (5) or more retail operations in the United States and/or
Canada under the same or substantially the same tradename or any five (5) or
more stores operating in the United States and/or Canada under the same or
substantially the same tradename pursuant to a franchise, license, partnership
or joint venture arrangement.
1.6 (*)
2. SALE OF STARBUCKS' RETAIL PRODUCTS.
Distribution of Retail Products. Kozmo will distribute to its customers
those Starbucks Retail Products identified by Starbucks and agreed to by Kozmo
from time to time, including but not limited to compact discs and other music
items sold by Starbucks through its Hear Music division, pursuant to a supply
agreement to be agreed upon by the parties (the "Supply Agreement"). Kozmo also
agrees to enter into additional supply agreements on commercially reasonable
terms reasonably acceptable to Kozmo with suppliers of Frappuccino(R) bottled
beverages and Starbucks(R) ice cream.
Products Exclusivity. Kozmo agrees that during the Term of this
Agreement, it will not (a) promote, sell, offer for sale or deliver to its
customers any non-Starbucks brand of coffee or tea products, or any other
products if the primary purpose of such product is to promote non-Starbucks
brands of coffee or tea products; or (b) promote a Retail Chain whose primary
business is the sale of coffee or tea products.
- ------------
* CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH
THE COMMISSION
4
<PAGE> 5
3. JOINT MARKETING AND WEBSITE DEVELOPMENT.
3.1 JOINT MARKETING.
3.1.1 Starbucks and Kozmo, together with the Marketing Managers (as
defined below) will develop an annual joint marketing strategy ("Annual
Strategy") which more clearly defines the opportunities and roles of the
parties, and includes a jointly-developed business plan and budget covering
cost, general and administrative expenses and other financial arrangements. Such
Annual Strategy will be reviewed, updated and approved by each party on a
quarterly basis. Examples of possible joint marketing activities will include
developing joint messaging for in-store materials, collateral and signage and
other programs as set forth on the attached SCHEDULE C.
3.1.2 (*)
3.1.3 Any and all such joint marketing materials, campaigns and other
joint promotions of Starbucks and Kozmo must be approved in writing by
representatives of both Starbucks and Kozmo, in each party's reasonable
discretion and it is recognized and agreed that such items shall not include
exterior signage at the Starbucks Stores. Interior signage at the Starbucks
Stores must conform to the requirements of the applicable lease and applicable
laws, rules and regulations, ordinances and permits. In addition, Starbucks must
consent, in its reasonable discretion consistent with Starbucks standards in its
stores, to the use and content of any Kozmo-only marketing materials to be
displayed or distributed in the Starbucks Stores.
3.1.4 Starbucks will pay for and be solely responsible for
Starbucks-only marketing expenses and costs and Kozmo will pay for and be solely
responsible for Kozmo-only marketing expenses and costs. The payment obligations
with respect to marketing expenses of each party are listed as current
understandings on SCHEDULE C.
3.2 WEB SITE DEVELOPMENT.
3.2.1 Each party will establish and maintain internet hypertext links
("Links") on its web site to facilitate click through to the other party's web
site by such party's customers and end-users. Each party will cooperate with the
other to identify appropriate areas within such party's web site to place the
Links and to identify the most appropriate pages within such party's web site
with which to Link; provided, however that each such party will maintain full
control over its own web site and as to the location of such Links.
3.2.2 Each party retains the right, in its sole discretion, to
immediately cease linking to the other party's web site, if such party has
reasonable grounds to believe in good faith, that the other party' web site
infringes on the proprietary rights of any third party, violates any applicable
law or regulation or is defamatory, obscene or patently offensive.
- ------------
* CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH
THE COMMISSION
5
<PAGE> 6
Notwithstanding any exercise of, or failure to exercise, such right, each party
will have the sole and exclusive responsibility for its respective web sites.
3.2.3 Each party will bear its own costs for development, hosting and
maintenance of its own web sites. Either party may change the URL's of its web
site for which it is responsible hereunder upon ten (10) days' advance written
notice. Each party will retain sole editorial control of and responsibility for
information presented on its web site and will not interfere with the other
party's editorial control of such content, except as expressly stated otherwise
herein.
3.2.4 Each party will promptly inform the other of (a) any information
related to its web site that could reasonably lead to a claim, demand or
liability of or against the other party by any third party, and (b) any changes
to its web site that would substantially change the content in any area to which
the other party has linked.
3.2.5 Starbucks may collect data on end users' access and use of its web
site. All data collected by Starbucks shall be owned exclusively by Starbucks.
Kozmo may collect data on end users' access and use of its web site. All data
collected by Kozmo shall be owned exclusively by Kozmo.
3.3 LICENSES.
3.3.1 Each party ("Licensor") grants to the other party ("Licensee")
during the Term of this Agreement a non-exclusive, non-transferable, revocable
upon termination of this Agreement subject to the terms hereof license to use
the Marks (as defined below) provided by Licensee to Licensor in compliance with
this Agreement and with any reasonable guidelines which may be provided by
Licensor from time to time. The parties may only use the Marks in connection
with the joint marketing materials, for the purposes contemplated herein. The
parties each agree to cooperate with the other in facilitating the monitoring
and control of the other party's Marks. Licensor may terminate the Agreement and
the Licensee's license to use the Marks upon five (5) days' written notice if
Licensor reasonably believes that such use dilutes or tarnishes the value of the
Marks; provided, however, such notice will include specific reasons of Licensor
for its belief and provided further that if Licensee takes such action which
reasonably satisfies Licensor that the Marks are no longer being diluted or
tarnished within such five (5) day period or if it is not commercially
reasonable to fully remedy the dilution or tarnishment within the five (5) day
period then if Licensee uses commercially reasonable efforts, and cures such
dilution or tarnishment no later than fifteen (15) days after such notice, then
Licensor will not terminate this Agreement and the Licensee's license to use the
Marks at such time. Licensee agrees not to take any action inconsistent with the
Licensor's ownership of the Marks (including a claim of any interest in the
other party's Marks) and agrees that any benefits accruing from use of such
Marks will automatically vest in the Licensor. Licensee will place a "(R)" or a
"TM" (as appropriate) with the Marks as requested by Licensor. Nothing in this
Agreement will be deemed to grant to Licensee any ownership interest in the
Licensor's Marks. For the purposes of this Agreement, "Marks" will mean the
trade names, trademarks, service names and service marks of a party (including,
without limitation, the party's name, domain name and logos) which are
designated by such party for use in connection with this Agreement.
6
<PAGE> 7
3.3.2 Licensee acknowledges that Licensor, or a subsidiary of Licensor,
is the owner of the Marks. Licensee will not at any time do or suffer to be done
any act or thing which will in any way impair the rights of Licensor or its
subsidiary in and to the Marks or the goodwill inherent in such Marks. Licensee
agrees not to challenge the validity of the Marks or to set up any claim adverse
to Licensor or its subsidiary with respect to such challenge.
3.3.3 Licensee will comply with the conditions set forth in this
Agreement and with any reasonable guidelines provided to Licensee by Licensor,
as amended from time to time, or as reasonably directed by Licensor with respect
to the style, color, appearance and manner of use of the Marks. Prior to
producing, distributing or displaying any advertising or other material
containing the Marks, Licensee will obtain prior written approval from Licensor,
which may be held in Licensor's sole discretion. Licensee is solely responsible
for ensuring that any uses of the Marks in any advertising or promotional
materials or otherwise is approved by Licensor. Licensor will use commercially
reasonable efforts to provide either approval or rejection of Licensee's
materials within two (2) weeks of Licensee's written request for approval;
provided, however, the failure of Licensor to make such approval or rejection
within the two week period shall not be deemed, in any way, to be an approval of
such materials.
3.4 MARKETING AND OPERATIONS MANAGER.
3.4.1 Within thirty (30) days of this Agreement, or at such other time
as is agreed by the parties hereto, each party will commence activities and will
use commercially reasonable efforts to hire a management level employee (each a
"Marketing Manager") to manage the design of Drop-boxes, the placement of
Drop-boxes in the Starbucks Stores, to develop, manage and coordinate the joint
marketing efforts of the parties, to develop web site enhancements and
modifications, to manage the operations of the Drop-box pick-up, to develop an
approval process for marketing materials and proposals for the use of the Marks
and to perform such other tasks and duties related to the relationship between
Starbucks and Kozmo as may be assigned to him or her by his or her respective
employer.
3.4.2 Each party will be solely responsible for the costs and expenses
related to the hiring and payment of the Marketing Manager hired by such party.
3.4.3 Such employee will, at all times, be under the complete control
and supervision of the party employing such employee, and such party will have
the ability to reprimand or dismiss such employee.
3.5 FUTURE OPPORTUNITIES. The parties agree to explore and evaluate, in each
party's sole discretion, the feasibility and desirability of certain future
joint business opportunities which may include but are not limited to the
opportunities described on the attached SCHEDULE D; provided, however, that
neither party shall have any obligation to proceed with or expend any funds in
relation to such future opportunities. In the event the parties agree to proceed
with one or more future business opportunities, the parties will enter into a
written agreement relating to such business endeavor, on terms reasonably
acceptable to each party. Nothing in this provision precludes either party from
exploring such future opportunities alone or with other entities provided that
each party shall comply with its all of its obligations under this Agreement.
7
<PAGE> 8
Consideration. Kozmo will pay to Starbucks up to an aggregate of One
Hundred Fifty Million Dollars ($150,000,000) ("Royalty") payable over the Term
of this Agreement as follows:
<TABLE>
------------------------------------------------------
<S> <C>
Year 1 $15,000,000
------------------------------------------------------
Year 2 $25,000,000
------------------------------------------------------
Year 3 $35,000,000
------------------------------------------------------
Year 4 $35,000,000
------------------------------------------------------
Year 5 $40,000,000
----------------------------- ------------------------
</TABLE>
Each annual Royalty will be payable, in advance, in four quarterly equal
installments with the first such payment to be made on March 1, 2000 ("Initial
Payment Date") and subsequent payments to be made on the first day of June,
September, December and March thereafter; provided, however, that the first four
quarterly Royalty payments will be paid by Kozmo in advance on March 1, 2000 and
thereafter, regular payments of the quarterly Royalty will be made beginning on
March 1, 2001.
Term. The Term of this Agreement will commence on the date of this
Agreement and continue in full force and effect until the earlier of (a) the
fifth anniversary of Initial Payment Date (the "Term"); or (b) a termination
pursuant to Section 6 of this Agreement.
4. TERMINATION.
4.1 TERMINATION BY STARBUCKS.
4.1.1 In the event Kozmo fails to make any payment when due under this
Agreement, Starbucks may, but is not obligated to terminate this Agreement upon
five (5) days written notice to Kozmo, provided however that such termination
shall not be effective if Kozmo cures such breach within such five (5) day
period.
4.1.2 In the event Kozmo breaches any other material term or covenant of
this Agreement, Starbucks may terminate this Agreement upon thirty (30) days
written notice to Kozmo, provided however that such termination shall not be
effective if Kozmo cures such breach within such thirty (30) day period.
4.1.3 Starbucks may terminate this Agreement upon thirty (30) days
written notice in the event Kozmo promotes, sells, offers for sale or rent or
delivers to its customers any items or materials which violate any applicable
law or regulation, firearms or other weapons ("Prohibited Items"), or actively
promotes pornographic materials; provided however that Starbucks shall not
terminate this Agreement if within such thirty (30) day period, Kozmo ceases to
promote, sell, rent, offer for sale or rent, or deliver such Prohibited Items or
ceases to actively promote pornographic materials.
8
<PAGE> 9
4.1.4 Starbucks may terminate this Agreement upon thirty (30) days
written notice in the event Kozmo places its Drop-boxes or otherwise allows
Video Products or Kozmo Items to be collected in pawn shops, adult book stores,
adult movie stores, gun shops or adult theme exotic entertainment facilities
("Prohibited Establishments"); provided, however that Starbucks shall not
terminate this Agreement if, within such thirty (30) day period, Kozmo removes
the Drop-boxes from such Prohibited Establishments and ceases to collect Video
Products or Kozmo Items from such Prohibited Establishments.
4.1.5 Starbucks may terminate this Agreement upon thirty (30) days
written notice to Kozmo, if any assignment for the benefit of its creditors is
made by Kozmo, or if a voluntary or involuntary petition in bankruptcy or for
reorganization, or if an arrangement is filed by or against Kozmo (which
petition is not discharged within thirty (30) days), or if Kozmo is adjudicated
bankrupt or insolvent, or if a receiver is appointed for Kozmo or for all or a
substantial part of its assets and/or operations.
4.2 TERMINATION BY KOZMO.
4.2.1 In the event Starbucks breaches any material term or covenant of
this Agreement, Kozmo may terminate this Agreement upon thirty (30) days written
notice to Starbucks, provided however that such termination shall not be
effective if Starbucks cures such breach within such thirty (30) day period.
4.2.2 Kozmo may terminate this Agreement upon thirty (30) days written
notice to Starbucks, if any assignment for the benefit of its creditors is be
made by Starbucks, or if a voluntary or involuntary petition in bankruptcy or
for reorganization, or if an arrangement is filed by or against Starbucks (which
petition is not discharged within thirty (30) days), or if Starbucks is
adjudicated bankrupt or insolvent, or if a receiver is appointed for Starbucks
or for all or a substantial part of its assets and/or operations.
Survival Upon Termination. Sections 6.4, 7, and 10 through 14 inclusive
will survive the termination or expiration of this Agreement.
Effect of Termination. Upon the termination or expiration of this
Agreement, (a) each party will promptly return all confidential and proprietary
information and other information, documents, equipment and other materials
belonging to the other party; (b) each party will (i) upon the expiration of
this Agreement immediately cease using all Marks of the other Party, in any form
or (ii) upon the termination of this Agreement, cease using all Marks of the
other Party, in any form as soon as reasonably practicable, but in any event no
later than forty-five (45) days after the termination of this Agreement; (c)
each Party will immediately terminate all web site Links established pursuant to
this Agreement; (d) subject to Section 6.4(b)(ii), all licenses granted herein
and the Equipment Lease and Supply Agreement will terminate; (e) as soon as
commercially practical upon the termination of this Agreement, but in any event
no later than forty-five (45) days after termination or immediately upon the
expiration of this Agreement, Kozmo will, at its sole cost and expense, remove
all Drop-boxes from the Starbucks Stores; provided that if Kozmo fails to remove
the Drop-boxes from the Starbucks Stores within such time period, Starbucks may
remove such Drop-boxes and Kozmo will reimburse Starbucks for any costs or
expenses incurred by Starbucks for such removal; and (f) Kozmo will, at its sole
9
<PAGE> 10
cost and expense, use commercially reasonable efforts to promptly notify its
customers that they can no longer return Video Products to Drop-boxes in
Starbucks Stores. Upon termination, each party shall have no further financial
obligation to the other; provided that nothing herein shall relieve either party
from its obligation to pay any amount which accrued prior to the effective date
of termination. Notwithstanding the foregoing, nothing herein shall restrict the
rights or remedies of either Party to pursue its rights or remedies at law or in
equity.
Confidential Information. Confidential Information (as defined in the
Confidentiality Agreement) disclosed pursuant to this Agreement and the
activities contemplated herein, shall be governed by the Mutual Confidentiality
Agreement ("Confidentiality Agreement") entered into between the parties
effective as of February 10, 2000 and incorporated herein by reference.
5. REPRESENTATIONS AND WARRANTIES.
5.1 STARBUCKS' REPRESENTATIONS AND WARRANTIES.
5.1.1 Starbucks' agreement to perform the obligations and duties
required of it under this Agreement does not violate any agreement or obligation
between Starbucks and a third party, subject to the provisions of the lease
agreements for each Starbucks Store and Starbucks' right to require the removal
of Drop-boxes pursuant to Section 1.1.6;
5.1.2 Starbucks has the right to grant the license contained in Section
3.3.
5.1.3 Starbucks will not make any warranty, guaranty or representation,
whether written or oral, on Kozmo's behalf.
5.2 KOZMO'S REPRESENTATIONS AND WARRANTIES.
5.2.1 Kozmo's agreement to perform the obligations and duties required
of it under this Agreement does not violate any agreement or obligation between
Kozmo and a third party;
5.2.2 Kozmo will not make any warranty, guaranty or representation,
whether written or oral, on Starbucks' behalf; and
5.2.3 Kozmo will operate its delivery service and perform its
obligations hereunder in a safe and professional manner and in accordance with
the service standards established by Kozmo and subject to Starbucks' approval
within sixty (60) days of the date of this Agreement.
INSURANCE. Kozmo agrees to maintain during the Term of this Agreement
(a) commercial general liability insurance, including product liability
coverage, in minimum amounts of $2,000,000 per occurrence for damage, injury
and/or death to persons and $1,000,000 per occurrence for damage and/or injury
to property and (b) product recall insurance in a minimum amount of $2,000,000
per occurrence and with a deductible of not more than $10,000. Kozmo further
agrees to require all of its delivery personnel to be licensed to drive, whether
they are employees or independent contractors. All policies of liability
insurance required to be effected by Kozmo shall cover Kozmo's employees,
agents, and independent
10
<PAGE> 11
contractors and shall include Starbucks as an additional insured, and in
addition shall contain cross liability and severability clauses protecting
Starbucks with respect to claims by Kozmo or other persons as if Starbucks were
separately insured. The insurance coverage required herein shall be provided by
an insurance company or companies acceptable to Starbucks in its reasonable
business judgment. Upon execution of this Agreement, and annually thereafter,
Kozmo shall promptly provide Starbucks with certificates of insurance evidencing
such coverage and each certificate shall indicate that the coverage represented
thereby shall not be canceled nor modified until at least thirty (30) days prior
written notice has been given to Starbucks. Upon Starbucks request, Kozmo will
provide Starbucks with copies of its insurance policies.
6. INDEMNITY.
Mutual Indemnification. Each party will indemnify the other party, the other
party's affiliates, directors, officers and employees and will hold them
harmless from any and all liability, loss damages, claims or causes of action,
including reasonable legal fees and expenses that may be incurred by the other
party, arising out of or related to the indemnifying party's breach of any of
the foregoing representations or warranties or otherwise arising out of such
party's performance under this Agreement.
Kozmo's Indemnification. Kozmo will indemnify Starbucks and Starbucks'
affiliates, directors, officers and employees, and will hold them harmless, from
any and all liability, loss, damages, claims or causes of action, including
reasonable legal fees and expenses that may be incurred by Starbucks arising out
of or related to Kozmo's delivery of its services or other actions or omissions
relating thereto provided that Kozmo shall have no obligation to indemnify
Starbucks for Claims that would not have occurred except for Starbucks
negligence or willful misconduct.
Starbucks Indemnification. Starbucks will indemnify Kozmo and Kozmo's
affiliates, directors, officers and employees, and will hold them harmless, from
any and all liability, loss, damages, claims or causes of action ("Claims"),
including reasonable legal fees and expenses that may be incurred by Kozmo
arising out of or related to (a) Starbucks operation of its retail stores or (b)
the sale or use of Starbucks products or other actions or omissions relating
thereto; provided that Starbucks shall have no obligation to indemnify Kozmo for
Claims that would not have occurred except for Kozmo's negligence or willful
misconduct.
Intellectual Property Indemnification. Each party will indemnify the other
party, and the other party's affiliates, directors, officers and employees and
will hold them harmless from any and all liability, loss damages, claims or
causes of action, including reasonable legal fees and expenses that may be
incurred by the other party (a) arising out of any claims or causes of action
brought against the indemnified party to the extent such claim or cause of
action is based on the infringement by the indemnifying party's patents,
copyrights, or Marks, of a third party's patents, copyrights, marks or other
proprietary rights, and (b) arising out of the unaltered content or marketing
materials provided by the indemnifying party for use in the joint marketing
efforts of the parties.
11
<PAGE> 12
7. LIMITATION OF LIABILITY.
Liability. Neither party will be liable to the other party for any indirect,
incidental, consequential, special or exemplary damages (even if that party has
been advised of the possibility of such damages) arising from this Agreement,
such as, but not limited to, loss of revenue or anticipated profits or lost
business.
NO ADDITIONAL WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT,
NEITHER PARTY MAKES, AND EACH PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING ANY MATTER SUBJECT
TO THIS AGREEMENT, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR IMPLIED WARRANTIES ARISING FROM COURSE OF DEALING OR
COURSE OF PERFORMANCE.
Dispute Resolution. The parties desire to attempt to resolve disputes
arising out of this Agreement without litigation. Accordingly, except for action
seeking a temporary restraining order or injunction related to the purposes of
this Agreement, or suit to compel compliance with this dispute resolution
process, the parties agree to follow the dispute resolution procedures set forth
in this Section 12 with respect to any controversy or claim arising out of or
relating to this Agreement or its breach.
7.1 At the written request of either party, Starbucks and Kozmo will appoint
knowledgeable, responsible representatives to meet and negotiate in good faith
to resolve any dispute arising under this Agreement. The parties intend that
these negotiations be conducted by non-lawyer, business representatives. The
location, format, frequency, duration and conclusion of these discussions will
be left to the discretion of the representatives. Discussion and correspondence
among the representatives for the purposes of these negotiations will be treated
as confidential information developed for the purposes of settlement, exempt
from discovery and production, which will not be admissible in any litigation
described below. Documents identified in or provided with such communications,
which are not prepared for purposes of the negotiations, are not so exempted and
may, if otherwise admissible, be admitted in evidence in any such litigation.
7.2 If the negotiations set forth in Section 12.1 do not resolve the dispute
within sixty (60) days of the initial written request, then either party may
pursue to litigate the claim or dispute.
7.3 If such dispute is commenced by Kozmo, then such dispute will be
resolved in a court of appropriate jurisdiction located in King County,
Washington. If such dispute is commenced by Starbucks, then such dispute will be
resolved in a court of appropriate jurisdiction located in New York City, New
York. Each of Starbucks and Kozmo hereby consents and submits to the personal
jurisdiction of the state and federal courts located in King County, Washington
and New York City, New York.
Late Fees and Interest. If any portion of the Royalties remains unpaid for
five (5) or more calendar days after the date on which such amount is due, Kozmo
shall pay to Starbucks
12
<PAGE> 13
interest on such delinquent amount equal to eighteen percent (18%) per annum
from the date such delinquent amount is due until paid; provided, however, that
in no event shall such interest charged be greater than that permitted by
applicable state law. This Section 13 shall not relieve Kozmo of its obligation
to pay the Royalty when due and in the manner herein specified. Acceptance by
Starbucks of the interest on such delinquent amount shall not constitute a
waiver of Kozmo's default with respect to said delinquent payments, nor prevent
Starbucks from exercising any other rights or remedies available to Starbucks
under this Agreement or at law or in equity.
8. MISCELLANEOUS.
Entire Agreement; Amendment. This Agreement and other agreements expressly
referenced herein, including but not limited to the Supply Agreement, the
Equipment Lease for the Drop-boxes and the Confidentiality Agreement, constitute
the entire agreement between the parties concerning the subject matter hereof
and supersede any prior agreements, representations, statements, negotiations,
understandings, proposals or undertakings, oral or written, with respect to the
subject matter expressly set forth herein. Any amendment or supplement to this
Agreement must be in writing and duly executed by the party against whom
enforcement is sought. If any provision of this Agreement is held to be illegal,
invalid or unenforceable, each party agrees that such provision will be enforced
to the maximum extent permissible so as to effect the intent of the parties, and
the validity, legality and enforceability of the remaining provisions of this
Agreement will not in any way be affected or impaired thereby.
Expenses. Each party will pay all costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement and the other agreements described herein.
Choice of Law. This Agreement is to be construed in accordance with and
governed by the internal laws of the State of New York, without giving effect to
choice of law.
Notices. Any notice or other communication under this Agreement will be
given in writing and will be deemed to have been delivered and given (a) on the
delivery date if delivered by electronic mail with an electronically generated
return receipt or if delivered personally to the intended recipient; (b) one (1)
business day after deposit with a commercial overnight carrier with written
verification of receipt; or (c) three (3) business days after the mailing date
if sent by U.S. mail, return receipt requested, postage and charges prepaid, or
any other means of repaid mail delivery for which acknowledgement of receipt is
required. Any notices or other communications to be given under this Agreement
will be sent to the following persons:
For Starbucks: Starbucks Corporation
2401 Utah Ave. S.
Seattle, WA 98134-1431
Attn: President, North American Operations
With a copy to:
Vice President and Assistant General Counsel
With a Copy to: Davis Wright Tremaine, LLP
13
<PAGE> 14
1300 SW 5th Avenue, Suite 2300
Portland, OR 97201
Attn: Benjamin G. Wolff
For Kozmo: Kozmo.com, Inc.
80 Broad Street
New York, New York 10004
Attn: President and Chief Executive Officer
With a Copy to: Greenberg Traurig
Met Life Building
200 Park Avenue
New York, NY 10166
Attn.: Alan N. Sutin, Esq.
Assignment. Except as otherwise provided in Section 4, neither party may
assign or transfer all or any part of its rights or obligations under this
Agreement without the prior written consent of the other party, which consent
may be given or withheld for any reason. For the purposes of this Agreement, a
change of control, merger, sale of substantially all of the assets or any other
similar corporate reorganization of Kozmo ("Change of Control Event") will
constitute an assignment that is subject to consent pursuant to this Section
14.5. Starbucks will not unreasonably withhold consent upon a Change of Control
Event, provided, that it shall not be unreasonable to withhold consent if a
Change of Control Event results in a transfer to a direct competitor of
Starbucks, circumstances in which the Starbucks brand would be adversely
affected, such as transfer to a tobacco company or pornography company or
circumstances where Starbucks would then be in material breach of a material
agreement.
8.1 ATTORNEYS' FEES. If any suit or action arising out of or related to this
Agreement is brought by any party, the prevailing party or parties shall be
entitled to recover its costs and fees including without limitation reasonable
attorneys' fees, the fees and costs of experts and consultants, copying, courier
and telecommunication costs, and deposition costs and all other costs of
discovery incurred by such party or parties in such suit or action, including
without limitation any post-trial or appellate proceeding, or in the collection
or enforcement of any judgment or award entered or made in such suit or action.
8.2 PUBLICITY. Without the prior approval of the other party, none of the
parties hereto will disclose to the public or to any third party any information
concerning the transactions contemplated hereby, other than disclosures to their
financial, legal and other advisors and to governmental authorities or the
public as may, in the opinion of counsel, be required by law. Notwithstanding
the foregoing, Starbucks and Kozmo will be permitted to disclose such details of
the transaction contemplated herein as may be required by law; provided that
Starbucks and Kozmo will each have the right to review and comment thereon prior
to any such disclosure, which review and comment will be given in a timely
manner.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement on the
date first written above.
14
<PAGE> 15
STARBUCKS CORPORATION KOZMO.COM, INC.
By: /s/ HOWARD SCHULTZ By: /s/ JOSEPH PARK
--------------------------------------- --------------------------
Howard Schultz Joseph Park
chairman and chief executive officer Chief Executive Officer
15
<PAGE> 16
SCHEDULE A
LAUNCH SCHEDULE(*)
- ------------
* CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH
THE COMMISSION
16
<PAGE> 17
SCHEDULE B
KOZMO ITEMS
- - VHS video tapes
- - DVD cartridges/tapes
- - Video game cartridges
- - CD's
- - Books
- - Small electronics
17
<PAGE> 18
SCHEDULE C
JOINT MARKETING STRATEGY(*)
- ------------
* CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH
THE COMMISSION
18
<PAGE> 19
SCHEDULE D
FUTURE BUSINESS OPPORTUNITIES(*)
- ------------
* CONFIDENTIAL TREATMENT REQUESTED - REDACTED MATERIAL FILED SEPARATELY WITH
THE COMMISSION
19
<PAGE> 1
STARBUCKS CORPORATION
---------------------
EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 2, March 28, April 2, March 28,
2000 1999 2000 1999
(13 Weeks) (26 Weeks)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALCULATION OF EARNINGS PER COMMON SHARE-BASIC:
Net earnings $ 23,406 $ 17,957 $ 58,155 $ 44,691
==============================================================================================
Weighted average common shares and
common stock units outstanding 184,785 181,370 184,106 180,706
==============================================================================================
Net earnings per common share-basic $ 0.13 $ 0.10 $ 0.32 $ 0.25
==============================================================================================
CALCULATION OF EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE-DILUTED:
Net earnings $ 23,406 $ 17,957 $ 58,155 $ 44,691
==============================================================================================
Weighted average shares outstanding
calculation:
Weighted average common shares
and common stock units outstanding 184,785 181,370 184,106 180,706
Dilutive effect of outstanding common
stock options 7,632 6,979 6,935 6,211
- ----------------------------------------------------------------------------------------------
Weighted average common and common
equivalent shares outstanding 192,417 188,349 191,041 186,917
==============================================================================================
Net earnings per common and
common equivalent share-diluted $ 0.12 $ 0.10 $ 0.30 $ 0.24
==============================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STARBUCKS
CORPORATION's SECOND QUARTER FISCAL 2000 CONSOLIDATED FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-01-2000
<PERIOD-START> OCT-04-1999
<PERIOD-END> APR-02-2000
<CASH> 85,258
<SECURITIES> 45,921
<RECEIVABLES> 60,257
<ALLOWANCES> 1,658
<INVENTORY> 151,948
<CURRENT-ASSETS> 391,966
<PP&E> 1,227,316
<DEPRECIATION> 386,372
<TOTAL-ASSETS> 1,383,951
<CURRENT-LIABILITIES> 273,173
<BONDS> 6,677
0
0
<COMMON> 702,169
<OTHER-SE> 366,011
<TOTAL-LIABILITY-AND-EQUITY> 1,383,951
<SALES> 1,031,680
<TOTAL-REVENUES> 1,031,680
<CGS> 461,651
<TOTAL-COSTS> 461,651
<OTHER-EXPENSES> 480,189
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250
<INCOME-PRETAX> 93,496
<INCOME-TAX> 35,341
<INCOME-CONTINUING> 58,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,155
<EPS-BASIC> .32
<EPS-DILUTED> .32
</TABLE>
