| MEMORANDUM
TO: Board of Directors, Probity Investments
FROM: Jennifer Patterson
RE: Shareholder Resolution
DATE: November 22, 1999
I. Reasons for Resolution
I have prepared a
Shareholder Resolution and New Page 1
to be included in Starbucks Corp.'s forthcoming proxy materials.
The resolution addresses Starbucks' plan to become a leading
player in cybercommerce by selling everything from coffee to
furniture via the Internet. After announcing these plans,
Starbucks' share price dropped dramatically. While Starbucks
acknowledged shareholder skepticism regarding its Internet plans,
it simultaneously announced a $20 million investment in an on-line
furniture retailer. See Supporting Statement.
Starbucks' e-commerce activities threaten not only it share price,
but also its core retail coffee business. Therefore, I recommend
Probity's support of this shareholder resolution.
II. Challenges to Resolution
The Securities
and Exchange Commission requires companies to include a
shareholder resolutions in their proxy materials if they meets the
requirements of
SEC
Rule 14a-8. Basic procedural requirements include: share
ownership of 1% or $2,000 for at least one year
(Rule
14a-8(b)(1)); timely submission of the proposal
(Rule
14a-8(e)); and a 500 word limit on both the resolution and
supporting statement
(Rule
14a-8(d)). See Solomon & Palmiter, Corporations:
Answers and Explanations § 9.4.2, at 164-65 (3d ed. 1999).
Probity's investment and its shareholder resolution meet these
requirements.
In addition to the procedural requirements,
companies may exclude shareholder resolutions from their proxy
materials if they fails to meet the substantive requirements of
SEC
Rule 14a-8(i). Management may exclude a shareholder proposal
that is: (1) inconsistent with centralized management
(Rules
14a-8(i)(1), (5), (7), and (13)); (2) a threat to management's
orderly proxy solicitation
(Rules
14a-8(i)(8), (9), (11), and (12)); or (3) illegal, deceptive,
or confused
(Rules
14a-8(i)(2)-(4), (6), and (10)). See id. at
165-67. If management intends to exclude a shareholder proposal
from its proxy materials, it first must seek SEC approval. See
id. at 164-65.
Starbucks is likely to challenge Probity's
shareholder resolution on two grounds. However, the SEC is
unlikely to agree with Starbucks on either of its challenges.
A. Ordinary Business Operations
Under
Rule
14a-8(i)(7), management may exclude proposals related to the
company's "ordinary business operations." Starbucks is likely to
argue that its investment and divestment decisions are management
functions and thus are not the proper subject of a shareholder
resolution.
In response, Probity can rely on two no-action
letters in which the SEC found that shareholder resolutions
similar to Probity's proposal did not violate
Rule
14a-8(i)(7). In a letter to Sears, Roebuck and Co., the SEC
concluded that a proposal requesting the Board of Directors to
consider a spin-off of the company's financial services division
did not violate
Rule
14a-8(i)(7). See
Sears, Roebuck and Co., SEC No-Action Letter (Mar. 16, 1992).
Similarly, in a letter to Stone & Webster, Incorporated, the SEC
concluded that a proposal recommending that the Board take all
necessary steps to sell, distribute or spin-off the company's
non-core businesses and real estate did not violate
Rule
14a-8(i)(7). See
Stone & Webster, Incorporated, SEC No-Action Letter (Feb. 22,
1996). According to the SEC, both resolutions called for the
divestiture of a segment of the companies' businesses, and thus
related to extraordinary corporate transactions. Consequently, in
both cases,
Rule
14a-8(i)(7) provided no basis for excluding the proposals. As
Probity's proposal calls for Starbucks to study the divestiture of
non-core business interests, particularly its ownership of
Internet retail companies, it is directed at extraordinary
corporate transactions outside the purview of
Rule
14a-8(i)(7).
B. False and Misleading Statements
Under
Rule
14a-8(i)(3), management can exclude proposals that violate
SEC
Rule 14a-9, which prohibits false and misleading proxy
statements, including statements that are vague or indefinite.
Starbucks may mimic the management of Sears, and Roebuck Co.,
which argued that the aforementioned shareholder resolution was
vague and indefinite because the proponent was not clear as to
which divisions of the company he proposed to divest. The SEC
concluded that any vagueness could be corrected by ensuring
consistency between the resolution and supporting statement.
See
Sears, Roebuck and Co., SEC No-Action Letter (Mar. 16, 1992).
In contrast to the Sears proposal, Probity's
Shareholder Resolution and
Supporting Statement are
clearly directed at Starbucks' investments in Internet retail
companies whose primary focus is not the sale of coffee or other
gourmet or specialty foods. In addition, the
Supporting Statement is not false or misleading, in part
because it includes hypertext links to information corroborating
its content. Thus, the proposal is neither false, misleading,
vague nor indefinite, and therefore cannot be exclude under Rule
14a-8(i)(3).
As Starbucks' challenges will likely fail,
Probity's resolution should be included in Starbucks' proxy
materials, and shareholders will be able to vote on the resolution
in the proxy card.
SHAREHOLDER
RESOLUTION
WHEREAS, Starbucks Corporation is a leading
specialty-coffee retailer; and
WHEREAS, Starbucks announced plans to greatly
expand its Internet-based retail business; and
WHEREAS, in response, the value of Starbucks'
shares declined sharply; and
WHEREAS, Starbucks has continued to invest in
Internet retailers; therefore
BE IT RESOLVED, that the shareholders hereby
request the Board of Directors to cause a study to be conducted of
the divestiture of all of Starbucks' ownership interests in any
Internet retail companies whose primary focus is not the sale of
coffee or other gourmet or specialty foods.
SUPPORTING STATEMENT
In April 1999,
Starbucks announced plans to become a leading player in
cybercommerce. See Starbucks Corp. Says It
Has a Plan to Use Internet for New Category,
Wall St. J., Apr. 26, 1999. Starbucks already maintains a
website where it sells
coffee beans, coffee-making paraphernalia, and compact disks.
However, Starbucks' vision is to sell everything from gourmet food
to furniture via the Internet. See
Starbucks Holders Wake Up, Smell the Coffee and Sell, Wall St.
J., July 2, 1999.
Despite Starbucks'
multi-billion dollar estimate of the potential business waiting to
be mined on the Internet, within three months of Starbucks'
announcement, its share price dropped 28%. This drop followed an
announcement of a 10% earnings shortfall for the year ending
October 3. This shortfall was attributed to rising labor costs,
flat sales of its bottled coffee-flavored Frappuccino drink, and
start-up expenses for its Internet venture. See
Starbucks Predicts Profit for Fiscal Year
Will Fall 10% Short of Expectations, Wall St. J., July 1, 1999.
Within weeks of the 28% drop in
share price, Starbucks told analysts that the company had
retreated from its aggressive Internet plans. However, it
simultaneously announced a $20 million investment in
Living.com, a company that
sells furniture via the Internet. See
Starbucks Cyberspace Mission Returns to
Earth After Big Bank on Wall Street, Wall St. J., July 23,
1999. This investment suggests that Starbucks continues to
maintain a strong interest in broad-based e-commerce activities.
This shareholder resolution
calls upon Starbucks to refocus its attentions on its core
competency -- selling coffee -- by studying the divestiture of its
holdings in all Internet companies which market products outside
Starbucks' core business areas. This strategy should optimize
shareholder value and encourage the ongoing improvement of and
growth in Starbucks' retail coffee business.
WALL STREET JOURNAL ARTICLES
Return to
Supporting Statement
4/26/99 WSJ
B10
4/26/99 Wall St. J. B10
1999 WL-WSJ 5449896
The Wall Street Journal
Copyright (c) 1999, Dow Jones &
Company, Inc.
Monday, April 26, 1999
Marketing & Media
Starbucks Corp. Says It Has a
Plan To Use Internet for New Category
By Richard Gibson
Staff Reporter of The Wall Street
Journal
SEATTLE -- Starbucks Corp.'s
chairman and chief executive officer tantalized Wall Street by
disclosing intentions of making the chain the leading player in a
"multibillion-dollar category" in cybercommerce.
While Howard Schultz didn't
identify the category, one person familiar with the situation said
Starbucks was looking at gourmet foods, among related areas, as a
potential Internet-based business. A company spokesman declined to
comment, saying that details would be forthcoming this summer.
While short on specifics, Mr.
Schultz said in a conference call with securities analysts Friday
that he is "dedicated to building a new and significant e-commerce
business -- one that will be the undisputed leader in its
category."
"We are not just another
company trying to add 'dot com' to its name," Mr. Schultz
insisted. Starbucks already maintains a Web site where it sells
coffee beans, coffee-making paraphernalia and compact disks.
An early investor in Internet
stocks and a director of eBay Inc., an electronic auction site,
and Drugstore.com Inc., he is known to be enamored of the Web's
sway. "You can't get a latte through your PC yet -- that's a big
advantage for us -- but what the Internet has done is provide a
sense of community to millions of people," he said in a recent
interview.
While his preannouncement
intrigued analysts, some had cautionary reactions. Coupled with
the pending introduction of several new products, "such an
aggressive, broad-based development strategy raises concerns about
going too far with the brand, taking one's eye off the ball and
spreading resources too thin," Lehman Brothers analyst Mitchell J.
Speiser advised clients.
Still, Robert F. Ohmes of
Morgan Stanley Dean Witter said in a report Friday that Starbucks
"appears to attract the ideal demographics for e-commerce, with an
above-average number of its customers (about 70%) already on the
Web and the typical customer's household income around $75,000."
Shares of Starbucks closed
Friday at $32, down 75 cents, in Nasdaq Stock Market trading.
Return to Supporting Statement
7/1/99
WSJ A4
7/1/99 Wall St. J. A4
1999 WL-WSJ 5458739
The Wall Street Journal
Copyright (c) 1999, Dow Jones &
Company, Inc.
Thursday, July 1, 1999
Starbucks Predicts Profit for
Fiscal Year Will Fall 10% Short of Expectations
By Richard Gibson
Staff Reporter of The Wall Street
Journal
Starbucks Corp. stunned Wall
Street by predicting that full-year earnings will fall 10% short
of expectations because of rising labor costs, start-up expenses
on an Internet venture and flat sales of its bottled
coffee-flavored Frappuccino drink.
Shares of the specialty-coffee
retailer plunged 29% in after-hours trading, dropping to $26.50
from a Nasdaq Stock Market close of $37.5625. The Seattle- based
company didn't announce the expected earnings shortfall until
regular trading had ended yesterday.
The announcement raises
questions about Starbucks' aggressive pursuit of an Internet
retailing business and other offshoots while problems are
beginning to surface in its basic coffeehouse operation.
While it said sales at its
2,000 North American retail coffee shops remain strong, it now
expects per-share earnings for the full year ending Oct. 3 of
about 54 cents, or six cents below analysts' consensus of 60
cents. The shortfall is expected to be evenly split between its
fiscal third and fourth quarters, management said.
In fiscal 1998 Starbucks
reported net income of $68.4 million, or 45 cents a share, on
revenue of $1.3 billion.
Besides $5 million in
higher-than-budgeted labor costs for the final two quarters of the
fiscal year, the company blamed the likely shortfall on about $4
million in additional expenses to build what it has touted as a
breakthrough Internet strategy.
There was no immediate
explanation for the lagging sales of Frappuccino, a product the
company has previously called an eventual $1 billion global
business and which it is heavily advertising this summer.
Frappuccino is distributed by PepsiCo Inc. as part of a joint
venture with Starbucks. The company won't disclose current annual
sales of the product.
Moreover, the company's coffee
service to offices and other institutional users hasn't been
meeting targets, the company said in a conference call with
securities analysts late yesterday. Finally, the pace of new-store
openings temporarily fell behind schedule, meaning that new stores
won't be contributing as much revenue as originally anticipated.
Management erred in assuming
that its core North American coffee-shop business, plus a recent
10-cents-a-cup price boost, would offset shortfalls elsewhere.
They didn't, and "we now recognize we raised our expectations too
high," Chairman and Chief Executive Officer Howard Schultz said in
the call.
One reason Starbucks cited in
raising prices in May was higher labor costs, largely incurred in
staffing its shops with "baristas," those who prepare the pricey
drinks.
Undoubtedly adding to
management's concern is that the price of green, unroasted coffee
beans remains among the lowest in years. So in many ways, this
should be the best of times for the aggressively growing company.
In recent months, under Mr.
Schultz's leadership, Starbucks has devoted considerable time and
money to fashioning an Internet strategy. Coincident with
yesterday's earnings warning, the company said its forthcoming
site would be a "canopy" of brands where customers could buy items
ranging from gourmet foods to kitchen products and home
furnishings.
Return to Supporting Statement
7/2/99 WSJ B3
7/2/99 Wall St. J. B3
1999 WL-WSJ 5458880
The Wall Street Journal
Copyright (c) 1999, Dow Jones &
Company, Inc.
Friday, July 2, 1999
Corporate Focus
Starbucks Holders Wake Up,
Smell the Coffee and Sell
---
Analysts Question CEO's Focus
on Web in Wake of Lower Profit Forecast
By Richard Gibson
Staff Reporter of The Wall Street
Journal
Earth to Howard Schultz: Return
from cyberspace. Your coffee needs you.
That message flashed across
Wall Street yesterday as investors dropped Starbucks Corp. stock
like a cup of scalding mocha after the company said late Wednesday
that it goofed big time in estimating the strength of its coffee
businesses and would have a 10% earnings shortfall in the year
ending Oct. 3.
Shares dropped $10.625, or 28%,
to $26.9375, losing a breathtaking $1.91 billion in market
capitalization, as more than 73 million of Starbucks's 180 million
shares outstanding traded on the Nasdaq Stock Market.
Last year, Mr. Schultz,
chairman and chief executive officer, set up a venture-capital
fund with other high rollers that invested in such Internet plays
as eBay Inc., an online auction house, and he is on the board of
Drugstore.com, a closely held Web-based pharmacy.
In a conference call with Wall
Street analysts Wednesday, he volunteered: "I've spent the better
part of a year trying to crack the code for our business" in
cyberspace. "I'm part of a small group of traditional brick-and-
mortar retailers who understand the Web as well as Web-site CEOs."
He also suggested that Starbucks may want to sell part of its
evolving Web business, which he calls Starbucks X, to the public.
Analysts and portfolio
managers, however, were hoping to learn how Starbucks management
could have so misjudged performance. And there was growing concern
that Mr. Schultz's infatuation with the Internet may have diverted
attention within the company from selling coffee.
In recent months, Mr. Schultz
has spoken with increasing frequency and passion about a
"category" of electronic commerce worth $100 billion in potential
business that is waiting to be mined. Just how Starbucks might do
this, however, remains fuzzy, beyond statements about becoming a
kind of cyber- megamerchant, where customers would go to buy
everything from gourmet foods to furniture.
In the conference call, Mr.
Schultz spent more time waxing about the Web's potential for
Starbucks than worrying about restoring confidence in the
coffeehouse business. He spoke of a "feeling of romance,
relaxation and trust in products and services we offer at our Web
site," a notion some listeners found unsettling.
"This Internet thing needs to
go away. I don't think it makes a lot of sense," said Stacy Jamar,
who is a restaurant analyst for Banc of America Securities. "I
think they've lost their focus in an attempt to keep a growth rate
up which ultimately is not supportable," she said. "Moving into
the furniture business is straying an awfully long way from what
they do extremely well."
She and others worry that the
shortfall announcement may be a precursor to more cold water for
investors. "They admitted that to maintain the growth rate, they
need these nonretail aspects of the business to contribute," Ms.
Jamar noted.
Indeed, Mr. Schultz and other
senior executives conceded they had budgeted unrealistic earnings
expectations from the core North American coffee-shop business.
Management thought those profits would be hefty enough to offset
disappointments in ancillary ventures and ballooning costs in
developing Starbucks's Internet strategy.
Among the problem areas that
management failed to anticipate was its institutional food-service
business, which sells coffee to offices; its joint venture with
PepsiCo Inc. to distribute bottled Frappuccino, a coffee-flavored
drink; and higher labor costs.
"We didn't focus enough of our
resources . . . on developing new business," Chief Financial
Officer Michael Casey said of the food-service operation. He said
the company had budgeted for "a significant uptick" in sales of
bottled Frappuccino, which remain flat despite heavy advertising.
Meanwhile, though year-to-date sales at its retail stores open at
least 13 months rose 5%, that didn't yield enough to offset
shortfalls elsewhere.
"The fundamental issue with our
North American retail business," Mr. Casey told analysts, "is that
we raised our expectations to the point that [they] couldn't be
delivered on." Last year, that core business accounted for about
85% of revenue and 81% of operating earnings.
Starbucks also said new stores
are delivering about $600,000 in annual sales their first year-on
target -- and that by year's end it hopes to have about 400 new
outlets world-wide. Mr. Schultz expressed hopes Starbucks could
eventually have 10,000 coffee shops globally.
The onetime Xerox salesman
often alludes to "the Starbucks experience," a bond that occurs
when a customer comes in for caffeine. Because Starbucks is among
the most frequently visited retailers in the country, that gives
the chain what its chairman sees as a unique opportunity to
capitalize on customer ties.
Yesterday Mr. Schultz was said
to be traveling and couldn't be reached for comment on the plunge
in his company's stock -- and his personal fortune. But a
spokesman for the Seattle concern noted that its basic business
remains healthy and said, "Like many of the bold steps the company
has taken in the past . . . the Internet is another vehicle that
can realistically position Starbucks for significant and
profitable growth in the years ahead."
Among those still dubious after
the call was Doug Christopher, senior equity analyst at Crowell,
Weedon & Co. in Los Angeles. "The discipline is in not doing
everything, but discerning between the nice-to-have business and
the need-to-have," he said. "Their bread and butter is in their
backyard."
Return to Supporting Statement
7/23/99
WSJ B4
7/23/99 Wall St. J. B4
1999 WL-WSJ 5461684
The Wall Street Journal
Copyright (c) 1999, Dow Jones &
Company, Inc.
Friday, July 23, 1999
Marketing & Media
Starbucks Cyberspace Mission
Returns To Earth After Big Bang on Wall Street
By Richard Gibson
Staff Reporter of The Wall Street
Journal
Starbucks Corp., chastened by
Wall Street's rejection of its leader's Internet dreams, said it
is abandoning a significant plunge into cyberspace soon.
The Seattle specialty-coffee
retailer also issued its second-quarter results, as well as a
per-share growth outlook for next year that is below what some
analysts were expecting.
Chairman and Chief Executive
Howard Schultz told analysts the company has "decided not to
pursue any major acquisitions outside our core competencies at
this time." Instead, he said, Starbucks plans "a more conservative
approach near term" than many had thought, given Mr. Schultz's
recent waxing about the potential for entering a
multibillion-dollar retailing opportunity on the Web.
Still, Mr. Schultz followed
that seeming turnabout by announcing what is expected to be a $20
million investment in Living.com Inc., a company that sells
furniture via the Internet.
Starbucks's decision not to go
full-bore into cyberspace with a major partner follows the
company's disclosure late last month that it was facing a 10%
shortfall from earnings expectations, in part because of
Internet-development expenditures. The resulting 28% plunge in the
value of Starbucks's stock slashed more than $1.9 billion in
market capitalization from the company and set Wall Street buzzing
over Mr. Schultz's priorities. Those concerns followed reports
that Starbucks had unsuccessfully sought to acquire
Williams-Sonoma Inc. as a cyber-commerce partner.
Mr. Schultz sought to reassure
investors that he and his management retain "our absolute ongoing
commitment and passion for our core business." He said that while
Starbucks would continue to study Web-commerce opportunities, it
recently "has become clear that our enthusiasm for the Net has
been interpreted by some investors as a lack of focus on our core
business" and concern about potential earnings dilution from it.
The company outlined its
revised Internet strategy while unveiling fiscal third-quarter
earnings that reflected the predicted shortfall. Net income
totaled $24.6 million, or 13 cents a diluted share, compared with
$7.9 million, or four cents a share, a year earlier including
acquisition costs. Without those costs, Starbucks would have
reported earnings of $20.9 million, or 11 cents a share, last
year.
Revenue for the latest quarter
rose 27% to $423.8 million from $334.4 million, while sales at
units open more than a year increased 6%. Starbucks also lowered
its per-share growth target for next year to 25% from the 30% that
some analysts had plugged in to their models.
Starbucks, which unveiled the
results and its Internet plans after the markets closed, fell
$1.3125, or 5.2%, to $23.9375 on the Nasdaq Stock Market.
Return to Supporting Statement |
