1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ COMMISSION FILE NUMBER: 0-20322 STARBUCKS CORPORATION (Exact Name of Registrant as Specified in its Charter) WASHINGTON 91-1325671 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 2401 UTAH AVENUE SOUTH, SEATTLE, WASHINGTON 98134 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (206) 447-1575 Securities Registered Pursuant to Section 12(b) of the Act: NONE Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation of S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form l0-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Registrants Common Stock on December 1, 1998, as reported on the National Market tier of The Nasdaq Stock Market, Inc. was $4,368,196,902. As of December l, 1998, there were 89,655,557 shares of the Registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrants Annual Report to Shareholders for the fiscal year ended September 27, 1998 have been incorporated by reference into Parts II and IV of this Annual Report on Form 10-K. Portions of the definitive Proxy Statement for the Registrant's Annual Meeting of Shareholders to be held on February 23, 1999 have been incorporated by reference into Part III of this Annual Report on Form 10-K.
2 Cautionary Statement pursuant to the Private Securities Litigation Reform Act of 1995 Certain statements set forth in or incorporated by reference into this Annual Report on Form 10-K, including anticipated store openings, planned capital expenditures and trends in or expectations regarding the Company's operations, specifically including the effect of problems associated with the Year 2000, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to 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. PART I ITEM 1. BUSINESS General. 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, a variety of pastries and confections and coffee-related accessories and equipment, primarily through its Company-operated retail stores. In addition to sales through its Company-operated retail stores, Starbucks sells primarily whole bean coffees through its specialty sales operations. Starbucks, through its joint venture partnerships, also produces and sells bottled Frappuccino(TM) coffee drink and a line of premium ice creams. The Company's objective is to establish Starbucks as the most recognized and respected brand of coffee in the world. To achieve this goal, the Company plans to continue to rapidly expand its retail operations, grow its specialty sales businesses, and selectively pursue other opportunities to leverage the Starbucks brand through the introduction of new products and the development of new distribution channels. Starbucks is committed to selling only the finest whole bean coffees and coffee beverages. To ensure compliance with its rigorous coffee standards, Starbucks controls its coffee purchasing, roasting and packaging, and the distribution of coffee to its retail stores. The Company purchases green coffee beans for its many blends and single origin coffees from coffee-producing regions around the world and custom roasts them to its exacting standards. Company-Operated Retail Stores. The Company's retail goal is to become the leading retailer and brand of coffee in each of its target markets by selling the finest quality coffee and related products and by providing superior customer service, thereby building a high degree of customer loyalty. Starbucks strategy for expanding its retail business is to increase its market share in existing markets and to open stores in new markets where the opportunity exists to become the leading specialty coffee retailer. In furtherance of this strategy, the Company acquired London-based Seattle Coffee Holdings Limited ("Seattle Coffee Company") in exchange for approximately 1.8 million shares of Starbucks common stock in May 1998. The acquisition gave the Company an immediate presence in the United Kingdom with 61 Starbucks-style retail stores, and provides a logical point of entry for future expansion into the European market. As of September 27, 1998, Starbucks had 1,688 Company-operated stores in 32 states, the District of Columbia, four Canadian provinces and the United Kingdom. Company-operated retail stores accounted for approximately 84% of net revenues during the fiscal year ended September 27, 1998 ("fiscal 1998"). The Company intends to finance additional growth in the number of Company-operated retail stores with cash flow from operations, supplemented by debt financing, if necessary. Starbucks retail stores are typically clustered in high-traffic, high-visibility locations. Because the Company can vary the size and format of its stores, Starbucks stores are located in a variety of settings, including downtown and suburban retail centers, office buildings, supermarket foyers and on university campuses. While the Company selectively locates stores in suburban malls, it focuses on stores that are convenient for pedestrian street traffic. All Starbucks stores offer a choice of regular or decaffeinated coffee beverages, including at least one "coffee of the day," a broad selection of Italian-style espresso beverages and distinctively packaged, roasted whole
3 bean coffees. Starbucks stores also offer a selection of fresh pastries and other food items, sodas, juices, tea, and coffee-making equipment and accessories. Each Starbucks store varies its product mix depending upon the size of the store and its location. Larger stores carry a broad selection of the Company's whole bean coffees in various sizes and types of packaging, as well as an assortment of coffee and espresso-making equipment and accessories such as coffee grinders, drip coffee makers, espresso machines, coffee filters, storage containers, travel tumblers and mugs. Smaller Starbucks stores and kiosks typically sell a full line of coffee beverages, a more limited selection of whole bean coffees and a few accessories such as travel tumblers and logo mugs. During fiscal 1998, the Company's retail sales mix by product type was approximately 66% coffee beverages, 14% food items, 12% whole bean coffees, and 8% coffee-making equipment and accessories. Specialty Sales. Starbucks specialty sales operations strive to develop the Starbucks brand outside the Company-operated retail store environment. Starbucks strategy for expanding its specialty sales operations is to reach customers as they shop, travel, work and dine by establishing relationships with prominent third parties who share Starbucks values and commitment to quality. These relationships take various forms, including domestic wholesale accounts, domestic retail store and grocery channel licensing agreements, international licensing arrangements and a direct response business. In some situations, the licensee is a joint venture in which Starbucks has an equity ownership interest. During fiscal 1998, specialty sales revenues (which include royalties and fees from licensees as well as product sales) accounted for approximately 16% of the Company's net revenues. Domestic Retail Licensing. Although the Company does not generally relinquish operational control of its retail stores in North America, in situations in which a master concessionaire or another company controls or can provide improved access to desirable retail space, the Company may consider licensing its operations. As part of these arrangements, Starbucks receives license fees and royalties and sells coffee and related products for resale in the licensed locations. Employees working in the licensed locations must follow Starbucks detailed store-operating procedures and attend the same core training classes given to Starbucks store managers and employees. As of September 27, 1998, the Company had 133 licensee-operated stores in continental North America. Domestic Grocery Licensing. Following supermarket tests in Portland, Oregon and Chicago, Illinois during fiscal 1997 and early fiscal 1998, the Company evaluated several strategic alternatives for accessing the market for whole bean and ground specialty coffee in supermarkets. During the second half of fiscal 1998, the Company expanded the distribution of its coffee to 10 West Coast grocery markets. By fiscal year-end, Starbucks whole bean and ground coffee was available in approximately 4,000 supermarkets. Late in fiscal 1998, Starbucks entered into a long-term licensing agreement with Kraft Foods, Inc. ("Kraft") to accelerate the growth of the Starbucks brand into the grocery channel in the United States. Pursuant to the arrangements with Kraft, Kraft will handle all distribution, marketing, advertising and promotions for Starbucks whole bean and ground coffee in grocery, warehouse club and mass merchandise stores. Domestic Joint Ventures. The Company has entered into 50-50 joint ventures with the Pepsi-Cola Company, a division of PepsiCo, Inc. ("Pepsi"), and Dreyer's Grand Ice Cream, Inc. ("Dreyer's"). The joint venture with Pepsi, The North American Coffee Partnership, was formed in fiscal 1994 to develop and distribute ready-to-drink coffee-based products. In May 1996, The North American Coffee Partnership introduced bottled Frappuccino coffee drink in selected supermarkets and other retail points of distribution throughout the west coast of the United States. In mid-1997, the joint venture began to distribute Frappuccino to additional supermarkets, convenience and drug stores on the west coast as well as key cities in the midwest and northeast United States. By the end of fiscal 1998, the joint venture was distributing Frappuccino to approximately 200,000 supermarkets, convenience and drug stores and other locations throughout the United States. The Company's joint venture with Dreyer's was formed in early fiscal 1996 to develop and distribute Starbucks premium coffee ice creams. During fiscal 1997, the Company expanded the product line produced and distributed through the joint venture from six flavors of ice cream to eight flavors of ice cream and two novelty products, including two low-fat ice creams and a low-fat blended coffee bar. In early 1998, the Company introduced its first non-coffee ice cream in limited markets. (See Note 6 to the Company's consolidated financial statements, "Joint Ventures and Other Investments," incorporated by reference to the Company's 1998 Annual Report to Shareholders in Item 8 of this Form 10-K.) International Licensing. Starbucks retail stores located outside of continental North America and the United Kingdom are operated through a number of joint venture and licensing arrangements with prominent retailers. During fiscal 1998, the Company expanded its international presence by opening 45 new stores in the 2
4 Pacific Rim and entering into agreements with Restaurant Brands, the Berjaya Group and Beijing Mei-Da Coffee Company Ltd. to develop Starbucks stores in New Zealand, Malaysia and Beijing, China, respectively. At fiscal year end the Company had 26 stores in Japan, 13 in Hawaii, 11 in Singapore, six in Taiwan, five in the Philippines and one in Thailand. The Company also has two licensed locations in South Africa and one in Kuwait obtained in the acquisition of Seattle Coffee Company. Direct Response. The Company's direct response operations ensure that fresh Starbucks coffee and products are conveniently available via mail order and on-line. Starbucks publishes and distributes a mail order catalog that offers its coffees, certain food items and select coffee-making equipment and accessories. In early October 1998, the Company launched its web site at www.Starbucks.com with an on-line store that allows customers to browse for and purchase coffee, gifts and other items via the internet. Starbucks ships products to customers located in all 50 states and in many foreign countries. Management believes that the Company's direct response operations support its retail store expansion into new markets and reinforce brand recognition in existing markets. Product Supply. Coffee is the world's second largest traded commodity and its supply and price 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 depends upon its relationships with outside trading companies and exporters for its supply of green coffee. To secure an adequate supply and to fix costs for future periods, the Company routinely enters into fixed price purchase commitments for future deliveries of coffee. As of September 27, 1998, the Company had approximately $96 million in fixed price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee well into fiscal 1999. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is remote. In addition, the Company from time to time purchases and sells coffee futures contracts as a hedging mechanism to minimize cost risk due to market fluctuations. There can be no assurance that these activities will successfully protect the Company against the risks of higher coffee prices or that such activities will not result in the Company having to pay substantially more for its coffee supply than it would have been required to pay absent such activities. Products other than whole bean coffees and coffee beverages sold in Starbucks retail stores are obtained through a number of different channels. Specialty foods, such as fresh pastries and lunch items, are generally purchased from local sources based on quality and price. Coffee-making equipment, such as drip and french press coffee makers, espresso machines and coffee grinders, are generally purchased directly from their manufacturers for resale. Coffee-related accessories, including items bearing the Company's logos and trademarks, are produced and distributed through contracts with a number of different vendors. Competition. The Company's primary competitors for coffee beverage sales are restaurants, shops, and street carts. In almost all markets in which the Company does business there has been a significant increase in competition in the specialty coffee beverage business and management expects this trend to continue. Although competition in the beverage market is currently fragmented, a major competitor with substantially greater financial, marketing and operating resources than the Company could enter this market at any time and compete directly against the Company. The Company's whole bean coffees compete directly against specialty coffees sold at retail through supermarkets, specialty retailers, and a growing number of specialty coffee stores. The Company's coffee beverages compete directly against all restaurant and beverage outlets that serve coffee and a growing number of espresso stands, carts, and stores. Both the Company's whole bean coffees and its coffee beverages compete indirectly against all other coffees on the market. The Company believes that its customers choose among retailers primarily on the basis of product quality, service and convenience, and, to a lesser extent, on price. 3
5 Management believes that supermarkets are the most competitive distribution channel for specialty whole bean coffee, in part because supermarkets offer customers a variety of choices without having to make a separate trip to a specialty coffee store. A number of nationwide coffee manufacturers are distributing premium coffee products in supermarkets that may serve as substitutes for the Company's coffees. Regional specialty coffee companies also sell whole bean coffees in supermarkets. In addition to the competition generated by supermarket sales of coffee, Starbucks competes for whole bean coffee sales with franchise operators and independent specialty coffee stores. In virtually every major metropolitan area where Starbucks operates and expects to expand, there are local or regional competitors with substantial market presence in the specialty coffee business. In addition to the competition for coffee beverage retail sales and whole bean coffee, the Company faces intense competition from both restaurants and other specialty retailers for suitable sites for new stores and qualified personnel to operate both new and existing stores. There can be no assurance that Starbucks will be able to continue to secure adequate sites at acceptable rent levels or that the Company will be able to attract a sufficient number of qualified workers. Starbucks specialty sales operations also face significant competition from established wholesale and mail order suppliers, some of whom have greater financial and marketing resources than the Company. Patents, Trademarks and Copyrights. The Company owns and/or has applied to register numerous trademarks and service marks in the United States, Canada and in more than 100 additional countries throughout the world. Rights to the trademarks and service marks in the United States are held by Starbucks U.S. Brands Corporation, a wholly-owned subsidiary of the Company, and are used by the Company under license. Some of the Company's trademarks, including "Starbucks," the Starbucks logo and "Frappuccino," are of material importance to the Company. Trademarks are generally valid as long as they are in use and/or their registrations are properly maintained, and they have not been found to have become generic. Trademark registrations can generally be renewed indefinitely so long as the marks are in use. The Company also owns numerous copyrights for its product packaging, promotional materials, in-store graphics and training materials, among other things. The Company also holds patents on certain products and systems. While valuable, individual copyrights and patents currently held by the Company are not viewed as material to the Company's business. Research and Development. The Company's Research and Development department is comprised of chemists, engineers, food scientists and technicians responsible for the formulation and technical development of new food, beverage and equipment products. The department has played a major role in the development of bottled Frappuccino, coffee ice cream products, a portafilter system for espresso machines that accommodates both ground coffee and espresso filter packs ("pods"), and the Company's blended fruit and tea beverage, Tiazzi(TM). The Company spent approximately $4.0 million during fiscal 1998 on technical research and development activities, in addition to customary product testing and development in all areas of the Company's business. 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 that 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. Employees. As of September 27, 1998, the Company employed approximately 26,000 individuals, approximately 24,000 in retail stores and regional offices and the remainder in the Company's administrative, specialty sales, real estate, roasting, and warehousing operations. At fiscal year end, 11 of the Company's stores (out of a total of 1,688 Company-operated stores in continental North America and the United Kingdom) were unionized. Starbucks has entered into a labor agreement governing such stores that extends until July 1999. The Company believes that its current relations with its employees are excellent. 4
6 ITEM 2. PROPERTIES Starbucks currently operates four roasting and distribution facilities - - - two in the Seattle, Washington area, one in East Manchester Township, York County, Pennsylvania and one in London, England. In the Seattle area, the Company leases approximately 92,000 square feet in one building pursuant to a lease extendable through 2001 (the "Seattle Plant"), and owns an additional roasting plant and distribution facility of approximately 305,000 square feet and leases a warehouse facility of approximately 156,000 square feet in Kent, Washington (the "Kent Plant"). The Company has a lease agreement executed in August 1994 with York County Industrial Development Corporation for a roasting and distribution facility (the "York Plant"), providing for approximately 365,000 square feet initially. The lease has a 15-year term and the Company has an option to purchase the land and building within five years of the date of occupancy. Such option to purchase also provides that the Company may purchase, within seven years of occupancy, additional land adjacent to the York Plant that would expand it to 1,000,000 square feet. The Company is party to a letter of intent and a commitment letter which provide that in the event that the Company exercises its option to purchase the York Plant, the Company will have the right to assume loans incurred in connection with its development. The Company also leases a small roasting and storage facility in London, England that supports its operations in the United Kingdom. The lease for this facility expires in 2007 unless extended by the parties. The Company also leases approximately 400,000 square feet of a building located in Seattle, Washington for administrative offices and has options to lease approximately 150,000 additional square feet in such building. The Company owns 2.36 acres (102,800 square feet) of undeveloped land near its administrative offices and adjacent to the Seattle Plant, which is currently used for parking. As of September 27, 1998, Starbucks operated a total of 1,688 retail stores. All Starbucks stores are located in leased premises. The Company also leases space in approximately 50 additional locations for regional, district and other administrative offices, training facilities and storage, not including spaces within retail stores used for such purposes and certain seasonal retail storage locations. ITEM 3. 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 which the Company believes will 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. No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to the section entitled "Shareholder Information" in the Company's 1998 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to the section entitled "Selected Financial Data" in the Company's 1998 Annual Report to Shareholders. 5
7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1998 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Risk Management" in the Company's 1998 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference to the Consolidated Financial Statements and the notes thereto in the Company's 1998 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the directors of the Company and compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference to the sections entitled " Proposal 1 Election of Directors" and "Executive Compensation - Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on February 23, 1999 (the "Proxy Statement"). The Company intends to file the Proxy Statement within 120 days after the end of its fiscal year. The executive officers of the Company, each of whom serves a one-year term and until his or her successor is elected and qualified, are as follows: <TABLE> <CAPTION> Name Age Position Executive Officer Since ---- --- -------- ----------------------- <S> <C> <C> <C> Howard Schultz 45 chairman of the board and chief executive 1985 officer Orin Smith 56 director, president and chief operating officer 1990 Howard Behar 54 director and president, Starbucks Coffee 1989 International, Inc. John B. Richards 50 president, Retail North America 1997 Michael Casey 53 executive vice president, chief financial 1995 officer and chief administrative officer </TABLE> 6
8 <TABLE> <CAPTION> Name Age Position Executive Officer Since ---- --- -------- ----------------------- <S> <C> <C> <C> E. R. (Ted) Garcia 51 executive vice president, Supply Chain and 1995 Coffee Operations Deidra Wager 43 executive vice president, Retail Marketing and 1993 Operations James Alling 37 senior vice president, Specialty Sales and 1997 Marketing Bruce Craig 56 senior vice president, Retail Field Operations 1997 Sharon E. Elliott 47 senior vice president, Human Resources 1994 Deborah Gillotti 41 senior vice president and chief information 1997 officer Wanda Herndon 46 senior vice president, Communications and 1996 Public Affairs Shelley B. Lanza 42 senior vice president, Law and Corporate 1995 Affairs and general counsel Judy Meleliat 41 senior vice president, Marketing 1997 David M. Olsen 52 senior vice president 1991 Arthur I. Rubinfeld 45 senior vice president, Store Development 1992 Michael Sweeney 40 senior vice president, International 1998 Don Valencia 46 senior vice president, Research and Development 1997 Mary Williams 49 senior vice president, Coffee 1997 Howard Wollner 45 senior vice president, Administration and 1998 Strategic Alliance Management Scott T. Svenson 32 chief executive officer, Starbucks Coffee (UK) 1998 Holdings Limited </TABLE> HOWARD SCHULTZ is the founder of the Company and has been chairman of the board and chief executive officer since its inception in 1985. From 1985 to June 1994, Mr. Schultz was also the Company's president. From September 1982 to December 1985, Mr. Schultz was the director of Retail Operations and Marketing for Starbucks Coffee Company, a predecessor to the Company; and from January 1986 to July 1987, he was the chairman of the board, chief executive officer and president of Il Giornale Coffee Company, a predecessor to the Company. 7
9 ORIN SMITH joined the Company in 1990 and has served as president and chief operating officer of the Company since June 1994. Prior to June 1994, Mr. Smith served as the Company's vice president and chief financial officer and later, as its executive vice president and chief financial officer. HOWARD BEHAR joined the Company in 1989 and has served as president of Starbucks Coffee International, Inc. since June 1994. From February 1993 to June 1994, Mr. Behar served as the Company's executive vice president, Sales and Operations. From February 1991 to February 1993, Mr. Behar served as senior vice president, Retail Operations of the Company and from August 1989 to January 1991, he served as the Company's vice president, Retail Stores. JOHN B. RICHARDS joined the Company in September 1997 as president, Retail North America. Prior to joining the Company, Mr. Richards served as the Executive Vice President of Four Seasons Hotels and Resorts for 10 years. Prior to that time Mr. Richards held various positions with McKinsey & Company and Procter & Gamble. MICHAEL CASEY joined Starbucks in August 1995 as senior vice president and chief financial officer and was promoted to executive vice president, chief financial officer and chief administrative officer in September 1997. Prior to joining Starbucks, Mr. Casey served as executive vice president and chief financial officer of Family Restaurants, Inc. from its inception in 1986. During his tenure there, he also served as a director from 1986 to 1993, and as president and chief executive officer of its El Torito Restaurants, Inc. subsidiary from 1988 to 1993. E. R. (TED) GARCIA joined Starbucks in April 1995 as senior vice president, Supply Chain Operations and was promoted to executive vice president, Supply Chain and Coffee Operations in September 1997. From May 1993 to April 1995, Mr. Garcia was an executive for Gemini Consulting. From January 1990 until May 1993, he was the vice president of Operations Strategy for Grand Metropolitan PLC, Food Sector. DEIDRA WAGER joined Starbucks in 1992 and served as the Company's senior vice president, Retail Operations from August 1993 to September 1997 when she was promoted to executive vice president, Retail Marketing and Operations. From September 1992 to August 1993, Ms. Wager served as the Company's vice president, Operation Services. From March 1992 to September 1992, she was the Company's California regional manager. From September 1988 to March 1992, Ms. Wager held several operations positions with Taco Bell(R), Inc., including having served as its director of operations systems development. JAMES ALLING joined Starbucks in September 1997 as senior vice president, Grocery and became senior vice president, Specialty Sales and Marketing in December 1998. From 1985 to 1997, Mr. Alling held several marketing and general management positions for Nestle, U.S.A., including serving as the vice president and general manager of the ground coffee division. BRUCE CRAIG joined Starbucks in October 1992 and served as regional and then zone vice president for the Southwest. In September 1997, Mr. Craig was promoted to the position of senior vice president, Retail Field Operations. Prior to joining Starbucks, Mr. Craig served for 21 years with Burger King Corp. in various positions, including executive vice president/division manager and as an owner/operator. SHARON E. ELLIOTT joined Starbucks in 1994 as senior vice president, Human Resources. From September 1993 to June 1994, Ms. Elliott served as the corporate director, staffing and development of Allied Signal Corporation. From July 1987 to August 1993, she held several human resources management positions with Bristol-Myers Squibb, including serving as the director of human resources--corporate staff. DEBORAH GILLOTTI joined Starbucks in February 1997 as senior vice president and chief information officer. Prior to joining Starbucks, Ms. Gillotti served as vice president, Corporate MIS for Duracell International, Inc. (now a division of the Gillette Company). She also held several management positions for KPMG Peat Marwick Management Consulting from 1989 to 1993. WANDA HERNDON joined Starbucks in July 1995 as vice president, Communications and Public Affairs and was promoted to senior vice president, Communication and Public Affairs in November 1996. From February 1990 to June 1995, Ms. Herndon held several communications management positions at DuPont. From November 1978 to 8
10 February 1990, Ms. Herndon held several public affairs and marketing communications positions for Dow Chemical Company. SHELLEY B. LANZA joined Starbucks in June 1995 as senior vice president, Law and Corporate Affairs and general counsel. From 1986 to 1995, Ms. Lanza served as vice president and general counsel of Honda of America Manufacturing, Inc. From 1982 to 1986, Ms. Lanza practiced law at the law firm of Vorys, Sater, Seymour and Pease in Columbus, Ohio. JUDY MELELIAT joined Starbucks in October 1997 as vice president, Marketing Operations and was promoted to senior vice president, Marketing in November 1997. Prior to joining Starbucks, Ms. Meleliat was vice president of Marketing for InfoAccess. From September 1995 to June 1996, she served at Edmark Corporation as the vice president of Sales for the Education Channel. From September 1987 to September 1995, Ms. Meleliat held several executive management positions at Egghead Software. DAVID M. OLSEN joined Starbucks in 1986 and served as the Company's senior vice president, Coffee from September 1991 to October 1997. From November 1987 to September 1991, Mr. Olsen served as vice president, Coffee, and from February 1986 to November 1987, he served as the Company's director of training. ARTHUR I. RUBINFELD joined the Company in 1992 as senior vice president, Real Estate. From April 1986 to May 1992, Mr. Rubinfeld served as a managing partner of Epsteen & Associates, a commercial real estate company. MICHAEL SWEENEY joined the Company in November 1998 as senior vice president, International. Prior to joining Starbucks, Mr. Sweeney served from September 1995 to November 1998 as the President of Minnesota Pizza Company, a franchise of Papa Johns, International, which operated 37 locations. From May 1992 to July 1995, Mr. Sweeney served as the President of Blockbuster Mid-America, a franchisee of Blockbuster Entertainment, Inc. that operated 35 locations. DON VALENCIA joined Starbucks in November 1993 as vice president, Research and Development and was promoted to senior vice president, Research and Development in October 1997. From 1980 to 1993, Mr. Valencia was president of Immuno Concepts, Incorporated, a biomedical company. MARY WILLIAMS joined Starbucks in March 1993 as vice president, Green Coffee and was promoted to senior vice president, Coffee in October 1997. From May 1988 to March 1993, Ms. Williams served as president of Klein Bros. International, Coffee Division. HOWARD WOLLNER joined Starbucks in January 1992 as vice president, Administration and was promoted to senior vice president, Administration and Strategic Alliance Management in October 1998. Prior to joining Starbucks, Mr. Wollner was executive vice president of Watts Silverstein Associates from July 1990 to July 1991. From 1977 to 1990, Mr. Wollner was associated with Canoon & Black Corporation where he was president of C&B Consulting Group, an employee benefits consulting firm. SCOTT T. SVENSON joined Starbucks in June 1998 as chief executive officer of Starbucks Coffee (UK) Holdings Limited following the acquisition of Seattle Coffee Company. Mr. Svenson co-founded Seattle Coffee Company in January 1995 and served as its chief executive officer until June 1998. From September 1993 to May 1996 Mr. Svenson was a director of Crestacare plc, assuming the role of deputy chief executive for 1995 and 1996. There are no family relationships between any directors or executive officers of the Company. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the section entitled "Executive Compensation" in the Company's Proxy Statement. 9
11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the section entitled "Beneficial Ownership of Common Stock" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the section entitled "Executive Compensation - Certain Transactions" in the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Annual Report on Form l0-K: 1.Financial Statements. The following financial statements are incorporated by reference to Part II, Item 8 of the Company's 1998 Annual Report to Shareholders: Consolidated Balance Sheets as of September 27, 1998 and September 28, 1997; Consolidated Statements of Earnings for the fiscal years ending September 27, 1998, September 28, 1997 and September 29, 1996; Consolidated Statements of Cash Flows for the fiscal years ending September 27, 1998, September 28, 1997 and September 29, 1996; Consolidated Statements of Shareholders' Equity for the fiscal years ending September 27, 1998, September 28, 1997 and September 29, 1996; Notes to Consolidated Financial Statements. 2.Financial Statement Schedules. Financial statement schedules are omitted because they are not required or are not applicable, or the required information is provided in the consolidated financial statements or notes thereto described in Item 14(a)(1) above. 3.Exhibits. The Exhibits listed below and on the accompanying Index to Exhibits immediately following the signature page hereto are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K. <TABLE> <CAPTION> Exhibit No. Description ----------- ----------- <S> <C> 3.1 Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3. 1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 3.1.1 Amendment dated November 22, 1995 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1.1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) </TABLE> 10
12 <TABLE> <S> <C> 3.1.2 Amendment dated March 18, 1996 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1.2 to the Company's Form 10-Q for the quarterly period ended March 31, 1996, filed with the SEC on May 15, 1996) 3.2 Amended and Restated Bylaws of Starbucks Corporation (incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 10.1 Starbucks Corporation Key Employee Stock Option Plan - 1994 (incorporated herein by reference to Appendix A to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.1.1 Starbucks Corporation Key Employee Stock Option Plan - 1994, as amended (incorporated herein by reference to Exhibit 10.1.1 to the Company's Form 10-K for the fiscal year ended September 29, 1996, filed with the SEC on December 26, 1996)* 10.2 Starbucks Corporation 1989 Stock Option Plan for Non-Employee Directors, as amended (incorporated herein by reference to Appendix B to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.2.1 Starbucks Corporation 1989 Stock Option Plan for Non-Employee Directors, as amended (incorporated herein by reference to Exhibit 10.2.1 to the Company's Form 10-K for the fiscal year ended on September 29, 1996, filed with the SEC on December 26, 1996)* 10.3 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as amended (incorporated herein by reference to the Company's Registration Statement No. 33-52528 on Form S-8, filed with the SEC on September 28, 1992)* 10.3.1 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1996, filed with the SEC on December 26, 1996)* 10.4 Starbucks Corporation Employee Stock Purchase Plan - 1995 (incorporated herein by reference to Appendix C to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.5 Industrial Lease, dated March 31, 1989, between Starbucks Corporation and the City of Seattle (successor in interest to David A. Sabey and Sandra L. Sabey) (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement No. 33-47951 on Form S-1, filed with the SEC on May 15, 1992) 10.6 Office Lease, dated as of July 15, 1993, between First and Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to Exhibit 10.17 to the Company's Form 10-K for the Fiscal Year ended October 3, 1993, filed with the SEC on December 30, 1993) 10.6.1 Second Amendment to Office Lease, dated as of January 1, 1995, between First & Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to the Company's Registration Statement No. 33-93974 on Form S-3, filed with the SEC on June 27, 1995) </TABLE> 11
13 <TABLE> <S> <C> 10.6.2 Third Amendment to Office Lease, dated as of September 30, 1995, between First and Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to Exhibit 10.19 to the Company's Form 10-K for the fiscal year ended October l, 1995, filed with the SEC on December 28, 1995) 10.7 Development Agreement, dated as of February 11, 1994, between Starbucks Corporation and Host International, Inc. (incorporated herein by reference to Exhibit 10.18 to the Company's Form 10-K for the Fiscal Year ended October 2, 1994, filed with the SEC on December 23, 1994) 10.8 Special Warranty Deed, dated March 7, 1994, between Kent North Corporate Park, as grantor and Starbucks Corporation, as grantee (incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year ended October 2, 1994, filed with the SEC on December 23, 1994) 10.9 Joint Venture and Partnership Agreement, dated August 10, 1994, between Pepsi-Cola Company, a division of PepsiCo, Inc., and Starbucks New Venture Company (incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the Quarterly Period ended July 3, 1994, filed with the SEC on August 16, 1994) 10.10 Lease, dated August 22, 1994, between York County Industrial Development Corporation and Starbucks Corporation (incorporated herein by reference to Exhibit l0 to the Company's Form 10-Q for the Quarterly Period Ended July 2, 1995, filed with the SEC on August 15, 1995) 10.11 Starbucks Corporation Amended and Restated Consulting/Employment Agreement with Jeffrey H. Brotman, dated as of January 14, 1995 (incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year ended October l, 1995, filed with the SEC on December 28, 1995)* 10.14 Master Licensing Agreement between the Company and ARAMARK Food and Services Group, Inc. dated as of January 30, 1996, as amended and restated May 7, 1996 (incorporated herein by reference to Exhibit 10.23 to the Company's Form l0-Q for the Quarterly Period Ended March 31, 1996, filed with the SEC on May 15, 1996) 11 Computation of Per Share Earnings 13 Portions of the 1998 Annual Report to Shareholders 21 Subsidiaries of the Registrant 23 Independent Auditors' Consent 27 Financial Data Schedule </TABLE> - - ------------- * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K dated as of and filed on July 9, 1998 reporting in Item 5 the completion of the acquisition of all of the equity interests of Seattle Coffee Company. The Current Report contained the audited supplemental consolidated financial statements listed below as of September 28, 1997 and September 29, 1996, and for each of the three years ended September 28, 1997, which had been restated as if Starbucks and Seattle Coffee Company had been combined for all periods presented. The Current Report also contained the unaudited supplemental consolidated financial statements listed below for the first and second quarters of fiscal 1998 (the periods ending December 28, 1997 and March 29, 1998, respectively), which had also been restated as if Starbucks and Seattle Coffee Company had been combined for such periods. <TABLE> <S> <C> Financial Statements for Fiscal Year 1997 - - ----------------------------------------- Independent Auditors' Report Supplemental Consolidated Balance Sheets at September 28, 1997 and September 29, 1996 Supplemental Consolidated Statements of Earnings for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 Supplemental Consolidated Statements of Cash Flows for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 Notes to Supplemental Consolidated Financial Statements for the Years Ended September 28, 1997, September 29, 1996 and October 1, 1995 Financial Statements for the First Fiscal Quarter of 1998 - - --------------------------------------------------------- Supplemental Consolidated Statements of Earnings for the 13 weeks Ended December 28, 1997 and December 29, 1996 Supplemental Consolidated Balance Sheets at December 28, 1997 and September 28, 1997 Supplemental Consolidated Statements of Cash Flows for the 13 weeks Ended December 28, 1997 and December 29, 1996 Notes to Supplemental Quarterly Consolidated Financial Statements for the 13 Weeks Ended December 28, 1997 and December 29, 1996 Financial Statements for the Second Fiscal Quarter of 1998 Supplemental - - ----------------------------------------------------------------------- Consolidated Statements of Earnings for the 13 and 26 weeks Ended March 29, 1998 and March 30, 1997 Supplemental Consolidated Balance Sheets at March 29, 1998 and September 28, 1997 Supplemental Consolidated Statements of Cash Flows for the 26 weeks Ended March 29, 1998 and March 30, 1997 Notes to Supplemental Quarterly Consolidated Financial Statements for the 13 and 26 Weeks Ended March 29, 1998 and March 30, 1997 </TABLE> 12
14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. STARBUCKS CORPORATION By: /s/ Howard Schultz -------------------------------------- Howard Schultz chairman of the Board of Directors and chief executive officer December 17, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signature Title Date - - --------- ----- ---- <S> <C> <C> /s/ Howard Schultz chairman of the Board of Directors December 17, 1998 - - ------------------------ Howard Schultz and chief executive officer /s/ Orin C. Smith director, president and chief operating December 15, 1998 - - ------------------------ Orin C. Smith officer /s/ Howard Behar director, president of Starbucks Coffee December 15, 1998 - - ------------------------ Howard Behar International, Inc. /s/ Michael Casey executive vice president, chief December 15, 1998 - - ------------------------ Michael Casey financial officer and chief administrative officer (principal financial officer and principal accounting officer) /s/ Barbara Bass director December 15, 1998 - - ------------------------ Barbara Bass /s/ Jeffrey H. Brotman director December 12, 1998 - - ------------------------ Jeffrey H. Brotman /s/ Craig J. Foley director December 18, 1998 - - ------------------------ Craig J. Foley /s/ Arlen I. Prentice director December 15, 1998 - - ------------------------ Arlen I. Prentice /s/ James G. Shennan, Jr. director December 15, 1998 - - ------------------------ James G. Shennan, Jr. </TABLE> 13
15 EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description Page No. ----------- ----------- -------- <S> <C> <C> 3.1 Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 3.1.1 Amendment dated November 22, 1995 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1.1 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 3.1.2 Amendment dated March 18, 1996 to the Restated Articles of Incorporation of Starbucks Corporation (incorporated herein by reference to Exhibit 3.1.2 to the Company's Form 10-Q for the quarterly period ended March 31, 1996, filed with the SEC on May 15, 1996) 3.2 Amended and Restated Bylaws of Starbucks Corporation (incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-Q for the fiscal quarter ended March 31, 1996, filed with the SEC on May 15, 1996) 10.1 Starbucks Corporation Key Employee Stock Option Plan - 1994 (incorporated herein by reference to Appendix A to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.1.1 Starbucks Corporation Key Employee Stock Option Plan - 1994, as amended (incorporated herein by reference to Exhibit 10.1.1 to the Company's Form 10-K for the fiscal year ended September 29, 1996, filed with the SEC on December 26, 1996)* 10.2 Starbucks Corporation 1989 Stock Option Plan for Non-Employee Directors, as amended (incorporated herein by reference to Appendix B to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.2.1 Starbucks Corporation 1989 Stock Option Plan for Non-Employee Directors, as amended (incorporated herein by reference to Exhibit 10.2.1 to the Company's Form 10-K for the fiscal year ended on September 29, 1996, filed with the SEC on December 26, 1996)* 10.3 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as amended (incorporated herein by reference to the Company's Registration Statement No. 33-52528 on Form S-8, filed with the SEC on September 28, 1992)* 10.3.1 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as amended (incorporated by reference to Exhibit 10.3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1996, filed with the SEC on December 26, 1996)* </TABLE> E-1
16 <TABLE> <S> <C> <C> 10.4 Starbucks Corporation Employee Stock Purchase Plan - 1995 (incorporated herein by reference to Appendix C to the Company's 1994 Proxy Statement filed with the SEC on December 23, 1994)* 10.5 Industrial Lease, dated March 31, 1989, between Starbucks Corporation and the City of Seattle (successor in interest to David A. Sabey and Sandra L. Sabey) (incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement No. 33-47951 on Form S-1, filed with the SEC on May 15, 1992) 10.6 Office Lease, dated as of July 15, 1993, between First and Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to Exhibit 10.17 to the Company's Form 10-K for the Fiscal Year ended October 3, 1993, filed with the SEC on December 30, 1993) 10.6.1 Second Amendment to Office Lease, dated as of January 1, 1995, between First & Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to the Company's Registration Statement No. 33-93974 on Form 5-3, filed with the SEC on June 27, 1995) 10.6.2 Third Amendment to Office Lease, dated as of September 30, 1995, between First and Utah Street Associates, L.P. and Starbucks Corporation (incorporated herein by reference to Exhibit 10.19 to the Company's Form 10-K for the Fiscal Year ended October l, 1995, filed with the SEC on December 28, 1995) 10.7 Development Agreement, dated as of February 11, 1994, between Starbucks Corporation and Host International, Inc. (incorporated herein by reference to Exhibit 10.18 to the Company's Form 10-K for the Fiscal Year ended October 2, 1994, filed with the SEC on December 23, 1994) 10.8 Special Warranty Deed, dated March 7, 1994, between Kent North Corporate Park, as grantor and Starbucks Corporation, as grantee (incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year ended October 2, 1994, filed with the SEC on December 23, 1994) 10.9 Joint Venture and Partnership Agreement, dated August 10, 1994, between Pepsi-Cola Company, a division of PepsiCo, Inc., and Starbucks New Venture Company (incorporated herein by reference to Exhibit 10 to the Company's Form 10-Q for the Quarterly Period ended July 3, 1994, filed with the SEC on August 16, 1994) 10.10 Lease, dated August 22, 1994, between York County Industrial Development Corporation and Starbucks Corporation (incorporated herein by reference to Exhibit l0 to the Company's Form 10-Q for the Quarterly Period Ended July 2, 1995, filed with the SEC on August 15, 1995) </TABLE> E-2
17 <TABLE> <S> <C> <C> 10.11 Starbucks Corporation Amended and Restated Consulting/Employment Agreement with Jeffrey H. Brotman, dated as of January 14, 1995 (incorporated herein by reference to Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year ended October l, 1995, filed with the SEC on December 28, 1995)* 10.14 Master Licensing Agreement between the Company and ARAMARK Food and Services Group, Inc. dated as of January 30, 1996, as amended and restated May 7, 1996 (incorporated herein by reference to Exhibit 10.23 to the Company's Form l0-Q for the Quarterly Period Ended March 31, 1996, filed with the SEC on May 15, 1996) 11 Computation of Per Share Earnings E-4 13 Portions of the 1998 Annual Report to Shareholders E-5 21 Subsidiaries of the Registrant E-31 23 Independent Auditors' Consent E-32 27 Financial Data Schedule E-33 </TABLE> - - ------------- * Management contract or compensatory plan or arrangement. E-3