Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 30, 2014
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)
2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive offices)
(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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Washington 91-1325671
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
Title Shares Outstanding as of April 23, 2014
Common Stock, par value $0.001 per share 752.8 million
Table of Contents
STARBUCKS CORPORATION
FORM 10-Q
For the Quarterly Period Ended March 30, 2014
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited):
3
Condensed Consolidated Statements of Earnings
3
Condensed Consolidated Statements of Comprehensive Income
4
Condensed Consolidated Balance Sheets
5
Condensed Consolidated Statements of Cash Flows
6
Notes to Condensed Consolidated Financial Statements
7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
Item 3 Quantitative and Qualitative Disclosures About Market Risk
30
Item 4 Controls and Procedures
30
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
30
Item 1A Risk Factors
30
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
31
Item 6 Exhibits
32
Signatures
33
Index to Exhibits
Table of Contents
PART I — FINANCIAL INFORMATION
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in millions, except per share data)
(unaudited)
See Notes to Condensed Consolidated Financial Statements
3
Item 1.
Financial Statements
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Net revenues:
Company-operated stores
$
3,068.0
$
2,807.7
$
6,411.8
$
5,797.3
Licensed stores
356.2
322.1
758.0
672.2
CPG, foodservice and other
449.6
419.8
943.6
873.2
Total net revenues
3,873.8
3,549.6
8,113.4
7,342.7
Cost of sales including occupancy costs
1,629.2
1,530.4
3,424.2
3,151.1
Store operating expenses
1,134.5
1,038.4
2,309.6
2,127.9
Other operating expenses
110.9
105.8
225.8
231.9
Depreciation and amortization expenses
174.4
153.1
344.1
302.0
General and administrative expenses
240.6
230.3
483.2
462.2
Litigation charge/(credit) —
—
(
20.2
)
—
Total operating expenses
3,289.6
3,058.0
6,766.7
6,275.1
Income from equity investees
59.9
52.5
111.0
107.0
Operating income
644.1
544.1
1,457.7
1,174.6
Interest income and other, net
17.8
50.8
37.6
48.0
Interest expense
(16.7
)
(6.1
)
(31.3
)
(12.7
)
Earnings before income taxes
645.2
588.8
1,464.0
1,209.9
Income taxes
218.3
198.1
496.4
386.8
Net earnings including noncontrolling interests
426.9
390.7
967.6
823.1
Net earnings/(loss) attributable to noncontrolling interests
(0.1
)
0.3
—
0.6
Net earnings attributable to Starbucks
$
427.0
$
390.4
$
967.6
$
822.5
Earnings per share - basic
$
0.57
$
0.52
$
1.28
$
1.10
Earnings per share - diluted
$
0.56
$
0.51
$
1.26
$
1.08
Weighted average shares outstanding:
Basic
755.2
749.1
755.0
747.6
Diluted
764.6
761.3
765.4
761.3
Cash dividends declared per share
$
0.26
$
0.21
$
0.52
$
0.42
Table of Contents
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, unaudited)
See Notes to Condensed Consolidated Financial Statements
4
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Net earnings including noncontrolling interests
$
426.9
$
390.7
$
967.6
$
823.1
Other comprehensive income/(loss), net of tax:
Unrealized holding gains/(losses) on available-for-sale securities
1.1
—
(
0.9
)
—
Tax (expense)/benefit
(0.4
)
—
0.4
—
Unrealized gains/(losses) on cash flow hedging instruments
8.1
(3.8
)
19.9
(20.7
)
Tax (expense)/benefit
(2.1
)
(0.1
)
(6.0
)
0.3
Unrealized gains/(losses) on net investment hedging instruments
(3.9
)
11.7
5.9
26.4
Tax (expense)/benefit
1.4
(4.3
)
(2.2
)
(9.7
)
Reclassification adjustment for net (gains)/losses realized in net earnings for
cash flow hedges and available-for-sale securities
(2.2
)
10.3
5.4
16.1
Tax expense/(benefit)
1.0
(0.8
)
0.9
(1.4
)
Translation adjustment
7.7
(35.7
)
(22.7
)
(49.7
)
Tax (expense)/benefit
(15.1
)
(6.5
)
(3.4
)
(1.3
)
Other comprehensive income/(loss)
(4.4
)
(29.2
)
(2.7
)
(40.0
)
Comprehensive income including noncontrolling interests
422.5
361.5
964.9
783.1
Comprehensive income/(loss) attributable to noncontrolling interests
(0.1
)
0.3
—
0.6
Comprehensive income attributable to Starbucks
$
422.6
$
361.2
$
964.9
$
782.5
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STARBUCKS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
(unaudited)
See Notes to Condensed Consolidated Financial Statements
5
Mar 30,
2014
Sep 29,
2013
ASSETS
Current assets:
Cash and cash equivalents
$
1,190.3
$
2,575.7
Short-term investments
299.2
658.1
Accounts receivable, net
590.0
561.4
Inventories
954.7
1,111.2
Prepaid expenses and other current assets
286.1
287.7
Deferred income taxes, net
258.7
277.3
Total current assets
3,579.0
5,471.4
Long-term investments
449.8
58.3
Equity and cost investments
512.8
496.5
Property, plant and equipment, net
3,278.1
3,200.5
Deferred income taxes, net
943.4
967.0
Other assets
195.9
185.3
Other intangible assets
277.2
274.8
Goodwill
860.8
862.9
TOTAL ASSETS
$
10,097.0
$
11,516.7
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
$
472.6
$
491.7
Accrued litigation charge
—
2,784.1
Accrued liabilities
1,260.1
1,269.3
Insurance reserves
184.5
178.5
Deferred revenue
816.3
653.7
Total current liabilities
2,733.5
5,377.3
Long-term debt
2,048.0
1,299.4
Other long-term liabilities
368.4
357.7
Total liabilities
5,149.9
7,034.4
Shareholders’ equity:
Common stock ($0.001 par value) — authorized, 1,200.0 shares; issued and outstanding, 754.1
shares
and 753.2 shares, respectively
0.8
0.8
Additional paid-in capital
174.6
282.1
Retained earnings
4,705.4
4,130.3
Accumulated other comprehensive income
64.3
67.0
Total shareholders’ equity
4,945.1
4,480.2
Noncontrolling interest
2.0
2.1
Total equity
4,947.1
4,482.3
TOTAL LIABILITIES AND EQUITY
$
10,097.0
$
11,516.7
Table of Contents
STARBUCKS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions, unaudited)
See Notes to Condensed Consolidated Financial Statements
6
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
OPERATING ACTIVITIES:
Net earnings including noncontrolling interests
$
967.6
$
823.1
Adjustments to reconcile net earnings to net cash (used)/provided by operating activities:
Depreciation and amortization
364.2
318.1
Deferred income taxes, net
36.1
(6.9
)
Income earned from equity method investees, net of distributions
(20.8
)
(15.9
)
Gain resulting from sale of equity in joint venture
—
(
35.2
)
Stock-based compensation
91.6
70.9
Other
11.4
11.2
Cash (used)/provided by changes in operating assets and liabilities:
Accounts receivable
(28.6
)
(25.2
)
Inventories
156.2
138.6
Accounts payable
(9.6
)
(37.2
)
Accrued litigation charge
(2,763.9
)
—
Accrued liabilities and insurance reserves
54.2
(36.9
)
Deferred revenue
162.5
154.0
Prepaid expenses, other current assets and other assets
(4.4
)
13.9
Net cash (used)/provided by operating activities
(983.5
)
1,372.5
INVESTING ACTIVITIES:
Purchase of investments
(974.9
)
(119.9
)
Sales, maturities and calls of investments
943.9
569.9
Acquisitions, net of cash acquired
—
(
568.8
)
Additions to property, plant and equipment
(503.6
)
(484.9
)
Other
(14.4
)
(9.3
)
Net cash used by investing activities
(549.0
)
(613.0
)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt
748.5
—
Principal payments on long-term debt
—
(
35.2
)
Proceeds from issuance of common stock
89.5
141.0
Excess tax benefit on share-based awards
87.3
193.2
Cash dividends paid
(392.3
)
(313.5
)
Repurchase of common stock
(290.1
)
(588.1
)
Minimum tax withholdings on share-based awards
(76.0
)
(119.9
)
Other
(9.5
)
4.0
Net cash provided/(used) by financing activities
157.4
(718.5
)
Effect of exchange rate changes on cash and cash equivalents
(10.3
)
(6.4
)
Net (decrease)/increase in cash and cash equivalents
(1,385.4
)
34.6
CASH AND CASH EQUIVALENTS:
Beginning of period
2,575.7
1,188.6
End of period
$
1,190.3
$
1,223.2
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of capitalized interest
$
17.4
$
17.2
Income taxes
$
314.8
$
238.1
Table of Contents
STARBUCKS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Financial Statement Preparation
The unaudited condensed consolidated financial statements as of March 30, 2014 , and for the quarter and two quarters ended March 30, 2014
and March 31, 2013 , have been prepared by Starbucks Corporation under the rules and regulations of the Securities and Exchange Commission
(“SEC”). In the opinion of management, the financial information for the quarter and two quarters ended March 30, 2014 and March 31, 2013
reflects all adjustments and accruals, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods. In this Quarterly Report on Form 10-Q (“10-Q”) Starbucks Corporation is referred to as
“Starbucks,” the “Company,” “we,” “us” or “our.”
The financial information as of September 29, 2013 is derived from our audited consolidated financial statements and notes for the fiscal year
ended September 29, 2013 (“fiscal 2013 ”) included in Item 8 in the Fiscal 2013 Annual Report on Form 10-K (the “10-K”). The information
included in this 10-Q should be read in conjunction with the footnotes and management’s discussion and analysis of the financial statements in
the 10-K.
The results of operations for the quarter and two quarters ended March 30, 2014 are not necessarily indicative of the results of operations that
may be achieved for the entire fiscal year ending September 28, 2014 ("fiscal 2014").
Recent Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued guidance on the financial statement presentation of an unrecognized
tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This guidance requires the unrecognized
tax benefit to be presented in the financial statements as a reduction to a deferred tax asset. When a deferred tax asset is not available, or the asset
is not intended to be used for this purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and not
netted with a deferred tax asset. The guidance will become effective for us at the beginning of our first quarter of fiscal 2015. We do not expect
the adoption of this guidance will have a material impact on our financial statements.
In March 2013, the FASB issued guidance on a parent's accounting for the cumulative translation adjustment upon derecognition of certain
subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance requires a parent to release any
related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation
of the foreign entity in which the subsidiary or group of assets had resided. The guidance will become effective for us at the beginning of our
first quarter of fiscal 2015. We do not expect the adoption of this guidance will have a material impact on our financial statements.
In February 2013, the FASB issued guidance that adds additional disclosure requirements for items reclassified out of accumulated other
comprehensive income. This guidance requires the disclosure of significant amounts reclassified from each component of accumulated other
comprehensive income and the income statement line items affected by the reclassification. The guidance became effective for us at the
beginning of our first quarter of fiscal 2014 and the additional disclosures are provided in Note 7 of this 10-Q.
In January 2013, the FASB issued guidance clarifying the scope of disclosure requirements for offsetting assets and liabilities. The amended
guidance limits the scope of balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the
extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. The guidance
became effective for us at the beginning of our first quarter of fiscal 2014 and did not have a material impact on our financial statements.
7
Note 1:
Summary of Significant Accounting Policies
Table of Contents
Correction of an Immaterial Error
Effective at the beginning of fiscal 2014, we reclassified certain fees related to our US and Seattle's Best Coffee foodservice operations in our
Channel Development segment and All Other Segments, respectively, from other operating expenses to foodservice revenues included in CPG,
foodservice and other net revenues in our consolidated statements of earnings. This reclassification results from a correction of an error in our
prior period financial statements which we have determined to be immaterial.
In order to align prior period classifications with the current period
presentation, the historical consolidated financial statements have been corrected, resulting in reclassifications of $25.4 million and
$22.7 million
for fiscal years 2013 and 2012, respectively. The reclassifications for the quarter and two quarters ended March 31, 2013 were $6.3 million and
$12.7 million , respectively. The consolidated statements of earnings as corrected are presented below (in millions) :
There was no impact on operating income or net earnings as a result of the error correction, nor any impact on our consolidated statements of
comprehensive income, consolidated balance sheets or consolidated statements of cash flows. Additional disclosure regarding this change as it
relates to our segment results is included at Note 11, Segment Reporting.
Note 2: Derivative Financial Instruments
Interest Rates
Depending on market conditions, we enter into interest rate swap agreements to hedge the variability in cash flows due to changes in the
benchmark interest rate related to anticipated debt issuances. These agreements are cash settled at the time of the pricing of the related debt. The
effective portion of the derivative's gain or loss is recorded in accumulated other comprehensive income ("AOCI") and is subsequently
reclassified to interest expense over the life of the related debt.
8
Fiscal 2013
Fiscal 2012
Q1
Q2
Q3
Q4
Full Year
Full Year
Net revenues
Company-operated stores
$
2,989.6
$
2,807.7
$
2,986.3
$
3,009.6
$
11,793.2
$
10,534.5
Licensed stores
350.2
322.1
342.0
346.3
1,360.5
1,210.3
CPG, foodservice and
other
453.4
419.8
407.0
432.9
1,713.1
1,532.0
Total net revenues
3,793.2
3,549.6
3,735.3
3,788.8
14,866.8
13,276.8
Cost of sales including
occupancy costs
1,620.7
1,530.4
1,597.6
1,633.7
6,382.3
5,813.3
Store operating expenses
1,089.5
1,038.4
1,084.1
1,073.9
4,286.1
3,918.1
Other operating expenses
126.1
105.8
98.9
101.1
431.8
407.2
Depreciation and amortization
expenses
148.9
153.1
153.3
166.1
621.4
550.3
General and administrative
expenses
231.9
230.3
249.6
226.1
937.9
801.2
Litigation charge
—
—
—
2,784.1
2,784.1
—
Total operating expenses
3,217.1
3,058.0
3,183.5
5,985.0
15,443.6
11,490.1
Income from equity investees
54.5
52.5
63.4
81.0
251.4
210.7
Operating income/(loss)
630.6
544.1
615.2
(2,115.2
)
(325.4
)
1,997.4
Interest income and other, net
(2.9
)
50.8
3.5
72.1
123.6
94.4
Interest expense
(6.6
)
(6.1
)
(6.3
)
(9.1
)
(28.1
)
(32.7
)
Earnings/(loss) before
income taxes
621.1
588.8
612.4
(2,052.2
)
(229.9
)
2,059.1
Income taxes
188.7
198.1
194.6
(820.1
)
(238.7
)
674.4
Net earnings including
noncontrolling interests
432.4
390.7
417.8
(1,232.1
)
8.8
1,384.7
Net earnings attributable
to noncontrolling interests
0.2
0.3
—
(
0.1
)
0.5
0.9
Net earnings attributable
to Starbucks
$
432.2
$
390.4
$
417.8
$
(1,232.0
)
$
8.3
$
1,383.8
Table of Contents
Foreign Currency
To reduce cash flow volatility from foreign currency fluctuations, we enter into forward and swap contracts to hedge portions of cash flows of
anticipated revenue streams and inventory purchases in currencies other than the entity's functional currency. The effective portion of the
derivative's gain or loss is recorded in AOCI and is subsequently reclassified to revenue or cost of sales when the hedged exposure affects net
earnings.
We also enter into forward contracts to hedge the foreign currency exposure of our net investment in certain of our equity method investees. The
effective portion of the derivative's gain or loss is recorded in AOCI and will be subsequently reclassified to net earnings when the hedged net
investment is either sold or substantially liquidated.
To mitigate the translation risk of certain balance sheet items, we enter into foreign currency swap contracts that are not designated as hedging
instruments. Gains and losses from these derivatives are largely offset by the financial impact of translating foreign currency denominated
payables and receivables; both are recorded in net interest income and other.
Commodities
Depending on market conditions, we enter into coffee futures contracts and collars (the combination of a purchased call option and a sold put
option) to hedge a portion of anticipated cash flows under our price-to-be-fixed green coffee contracts, which are described further in Note 4,
Inventories. The effective portion of the derivative's gain or loss is recorded in AOCI and is subsequently reclassified to cost of sales when the
hedged exposure affects net earnings.
To mitigate the price uncertainty of a portion of our future purchases of dairy products and diesel fuel, we enter into dairy futures and collars, as
well as diesel fuel swap contracts that are not designated as hedging instruments. Gains and losses from these derivatives are recorded in net
interest income and other. Gains and losses from dairy futures largely offset price fluctuations on our dairy purchases, which are included in cost
of sales. Gains and losses from diesel fuel swaps largely offset the financial impact of diesel fuel fluctuations on our shipping costs, which are
included in operating expenses.
Gains and losses on derivative contracts designated as hedging instruments included in AOCI and expected to be reclassified into earnings
within 12 months, net of tax ( in millions ):
Pretax gains and losses on derivative contracts designated as hedging instruments recognized in other comprehensive income ("OCI") and
reclassifications from AOCI to earnings ( in millions )
9
Net Gains/(Losses)
Included in AOCI
Net Gains/(Losses)
Expected to be
Reclassified from AOCI
into Earnings within 12
Months
Contract
Remaining
Maturity
(Months)
Mar 30,
2014
Sep 29,
2013
Cash Flow Hedges:
Interest rates
$
38.0
$
41.4
$
3.2
Foreign currency
10.3
(0.3
)
6.0
34
Coffee
(1.5
)
(12.2
)
(1.9
)
17
Net Investment Hedges:
Foreign currency
(9.2
)
(12.9
)
36
Quarter Ended
Two Quarters Ended
Gains/(Losses) Recognized
in
OCI Before
Reclassifications
Gains/(Losses) Reclassified
from AOCI to Earnings
Gains/(Losses) Recognized
in
OCI Before
Reclassifications
Gains/(Losses) Reclassified
from AOCI to Earnings
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Cash Flow Hedges:
Interest rates
$
—
$
—
$
1.3
$
—
$
0.5
$
—
$
2.5
$
—
Foreign currency
7.0
1.8
2.1
1.2
18.6
6.4
3.3
0.6
Coffee
1.1
(5.6
)
(0.9
)
(11.1
)
0.8
(27.1
)
(10.9
)
(16.3
)
Net Investment Hedges:
Foreign currency
(3.9
)
11.7
—
—
5.9
26.4
—
—
Table of Contents
Pretax gains and losses on derivative contracts not designated as hedging instruments recognized in earnings ( in millions ):
Notional amounts of outstanding derivative contracts
(in millions) :
10
Gains/(Losses) Recognized in Earnings
Quarter Ended
Two Quarters Ended
Mar 30, 2014
Mar 31, 2013
Mar 30, 2014
Mar 31, 2013
Foreign currency
$
(0.1
)
$
3.3
$
(1.0
)
$
2.2
Coffee —
0.6
—
(
2.1
)
Dairy
7.4
(1.1
)
11.9
(2.6
)
Diesel fuel —
0.1
—
0.1
Mar 30, 2014
Sep 29, 2013
Foreign currency
$
512
$
452
Coffee
37
—
Dairy
21
38
Diesel fuel
18
17
Table of Contents
Assets and Liabilities Measured at Fair Value on a Recurring Basis (in millions):
11
Note 3:
Fair Value Measurements
Fair Value Measurements at Reporting Date Using
Balance at
Mar 30, 2014
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Cash and cash equivalents
$
1,190.3
$
1,190.3
$
—
$
—
Short-term investments:
Available-for-sale securities
Commercial paper
4.0
—
4.0
—
Corporate debt securities
16.3
—
16.3
—
Foreign government obligations
6.4
—
6.4
—
US government treasury securities
44.0
44.0
—
—
State and local government obligations
14.4
—
14.4
—
Short-term bond funds
80.1
80.1
—
—
Certificates of deposit
63.8
—
63.8
—
Total available-for-sale securities
229.0
124.1
104.9
—
Trading securities
70.2
70.2
—
—
Total short-term investments
299.2
194.3
104.9
—
Prepaid expenses and other current assets:
Derivative assets
27.7
5.2
22.5
—
Long-term investments:
Available-for-sale securities
Agency obligations
9.2
—
9.2
—
Corporate debt securities
196.8
—
196.8
—
Auction rate securities
13.5
—
—
13.5
Foreign government obligations
4.0
—
4.0
—
US government treasury securities
148.9
148.9
—
—
State and local government obligations
6.9
—
6.9
—
Mortgage and asset-backed securities
70.5
—
70.5
—
Total long-term investments
449.8
148.9
287.4
13.5
Other assets:
Derivative assets
11.8
—
11.8
—
Total
$
1,978.8
$
1,538.7
$
426.6
$
13.5
Liabilities:
Accrued liabilities:
Derivative liabilities
$
0.4
$
0.2
$
0.2
$
—
Other long-term liabilities:
Derivative liabilities
0.2
—
0.2
—
Total
$
0.6
$
0.2
$
0.4
$
—
Table of Contents
There were no material transfers between levels and there was no significant activity within Level 3 instruments during the periods presented. In
the second quarter of fiscal 2014, we revised the classification of coffee and dairy futures from Level 2 to Level 1, as we use quoted prices in
active markets for identical assets to determine fair value. The fair values of any financial instruments presented above exclude the impact of
netting assets and liabilities when a legally enforceable master netting agreement exists.
Gross unrealized holding gains and losses on investments were not material as of March 30, 2014 and September 29, 2013 .
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis include items such as property,
plant and equipment, goodwill and other intangible assets, equity and cost method investments, and other assets. These assets are measured at
fair value if determined to be impaired. During the the quarter and two quarters ended March 30, 2014 and March 31, 2013 , there were no
material fair value adjustments.
The estimated fair value of our long-term debt based on the quoted market price (Level 2) is included at Note 6, Debt.
12
Fair Value Measurements at Reporting Date Using
Balance at
Sep 29, 2013
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets:
Cash and cash equivalents
$
2,575.7
$
2,575.7
$
—
$
—
Short-term investments:
Available-for-sale securities
Agency obligations
20.0
—
20.0
—
Commercial paper
127.0
—
127.0
—
Corporate debt securities
57.5
—
57.5
—
Government treasury securities
352.9
352.9
—
—
Certificates of deposit
34.1
—
34.1
—
Total available-for-sale securities
591.5
352.9
238.6
—
Trading securities
66.6
66.6
—
—
Total short-term investments
658.1
419.5
238.6
—
Prepaid expenses and other current assets:
Derivative assets
12.5
—
12.5
—
Long-term investments:
Available-for-sale securities
Agency obligations
8.1
—
8.1
—
Corporate debt securities
36.8
—
36.8
—
Auction rate securities
13.4
—
—
13.4
Total long-term investments
58.3
—
44.9
13.4
Other assets:
Derivative assets
11.4
—
11.4
—
Total
$
3,316.0
$
2,995.2
$
307.4
$
13.4
Liabilities:
Accrued liabilities:
Derivative liabilities
$
3.5
$
—
$
3.5
$
—
Other long-term liabilities:
Derivative liabilities
0.5
—
0.5
—
Total
$
4.0
$
—
$
4.0
$
—
Table of Contents
Other merchandise held for sale includes, among other items, tea and serveware. Inventory levels vary due to seasonality, commodity market
supply and price fluctuations.
As of March 30, 2014 , we had committed to purchasing green coffee totaling $534 million under fixed-price contracts and an estimated $560
million under price-to-be-fixed contracts. As of March 30, 2014 , approximately $33 million of our price-to-be-fixed contracts were effectively
fixed through the use of futures contracts and approximately $4 million were price-protected through the use of collar instruments. Price-to-be-
fixed contracts are purchase commitments whereby the quality, quantity, delivery period, and other negotiated terms are agreed upon, but the
date, and therefore the price, at which the base “C”
coffee commodity price component will be fixed has not yet been established. For these types
of contracts, either Starbucks or the seller has the option to “fix” the base “C” coffee commodity price prior to the delivery date. Until prices are
fixed, we estimate the total cost of these purchase commitments. We believe, based on relationships established with our suppliers in the past,
the risk of non-delivery on these purchase commitments is remote.
In December 2013 , we issued $400 million of 3-year 0.875% Senior Notes ("the 2014 3-year notes") due December 2016 , and $350 million of
5-year 2.000% Senior Notes ("the 2014 5-year notes") due December 2018 , in an underwritten registered public offering. Interest on both of
these notes is payable semi-annually on June 5 and December 5 of each year, commencing on June 5, 2014.
13
Note 4:
Inventories
(in millions) Mar 30, 2014
Sep 29, 2013
Mar 31, 2013
Coffee:
Unroasted
$
400.0
$
493.0
$
590.4
Roasted
189.5
235.4
214.3
Other merchandise held for sale
210.1
243.3
200.7
Packaging and other supplies
155.1
139.5
119.1
Total
$
954.7
$
1,111.2
$
1,124.5
Note 5:
Supplemental Balance Sheet Information
(in millions)
Property, Plant and Equipment, net
Mar 30, 2014
Sep 29, 2013
Land
$
46.9
$
47.0
Buildings
277.9
259.6
Leasehold improvements
4,611.1
4,431.6
Store equipment
1,412.3
1,353.9
Roasting equipment
415.4
397.9
Furniture, fixtures and other
1,007.8
949.7
Work in progress
347.3
342.4
Property, plant and equipment, gross
8,118.7
7,782.1
Less accumulated depreciation
(4,840.6
)
(4,581.6
)
Property, plant and equipment, net
$
3,278.1
$
3,200.5
Accrued Liabilities Mar 30, 2014
Sep 29, 2013
Accrued compensation and related costs
$
379.1
$
420.2
Accrued occupancy costs
114.6
120.7
Accrued taxes
133.6
125.0
Accrued dividend payable
196.1
195.8
Other
436.7
407.6
Total accrued liabilities
$
1,260.1
$
1,269.3
Note 6:
Debt
Table of Contents
Components of long-term debt including the associated interest rates and related fair values ( in millions, except interest rates) :
The indentures under which the above notes were issued also require us to maintain compliance with certain covenants, including limits on
future liens and sale and leaseback transactions on certain material properties. As of March 30, 2014 , we were in compliance with all applicable
covenants.
Note 7: Equity
Changes in total equity (in millions) :
14
Mar 30, 2014
Sep 29, 2013
Stated Interest
Rate
Effective Interest
Rate
(1)
Issuance Due Date
Face Value
Estimated Fair
Value
Face Value
Estimated Fair
Value
2014 3-year notes December 2016
$
400.0
$
400.0
$
—
$
—
0.875
%
0.941
%
2007 notes August 2017
550.0
636.0
550.0
644.0
6.250
%
6.292
%
2014 5-year notes December 2018
350.0
349.0
—
—
2.000
%
2.012
%
2013 notes October 2023
750.0
770.0
750.0
762.0
3.850
%
2.860
%
Total
2,050.0
2,155.0
1,300.0
1,406.0
Aggregate unamortized discount
2.0
0.6
Total
$
2,048.0
$
1,299.4
(1)
Includes the effects of the amortization of any premium or discount and any gain or loss upon settlement of related treasury locks or forward-
starting interest rate swaps utilized to hedge the interest rate risk prior to the debt issuance.
Two Quarters Ended
Mar 30, 2014
Mar 31, 2013
Beginning balance of total equity
$
4,482.3
$
5,114.5
Net earnings including noncontrolling interests
967.6
823.1
Other comprehensive income/(loss)
(2.7
)
(40.0
)
Stock-based compensation expense
92.6
71.9
Exercise of stock options/vesting of RSUs
90.0
205.2
Sale of common stock
11.0
10.2
Repurchase of common stock
(301.2
)
(544.1
)
Cash dividends declared
(392.5
)
(313.3
)
Ending balance of total equity
$
4,947.1
$
5,327.5
Table of Contents
Changes in accumulated other comprehensive income ("AOCI") by component, for the quarter and two quarters ended March 30, 2014 , net of
tax:
Quarter Ended
Two Quarters Ended
Impact of reclassifications from AOCI on the consolidated statements of earnings related to cash flow hedges for the quarter and two quarters
ended March 30, 2014 :
Quarter Ended
15
(in millions)
Available-for-
Sale Securities
Cash Flow
Hedges
Net Investment
Hedges
Translation
Adjustment
Total
Net gains/(losses) in AOCI at December 29, 2013
$
(1.7
)
$
42.2
$
(6.7
)
$
34.9
$
68.7
Net gains/(losses) recognized in OCI before
reclassifications
0.7
6.0
(2.5
)
(7.4
)
(3.2
)
Net (gains)/losses reclassified from AOCI to earnings
0.2
(1.4
)
—
—
(
1.2
)
Other comprehensive income/(loss)
0.9
4.6
(2.5
)
(7.4
)
(4.4
)
Net gains/(losses) in AOCI at March 30, 2014
$
(0.8
)
$
46.8
$
(9.2
)
$
27.5
$
64.3
(in millions)
Available-for-
Sale Securities
Cash Flow
Hedges
Net Investment
Hedges
Translation
Adjustment
Total
Net gains/(losses) in AOCI at September 29, 2013
$
(0.5
)
$
26.8
$
(12.9
)
$
53.6
$
67.0
Net gains/(losses) recognized in OCI before
reclassifications
(0.5
)
13.9
3.7
(26.1
)
(9.0
)
Net (gains)/losses reclassified from AOCI to earnings
0.2
6.1
—
—
6.3
Other comprehensive income/(loss)
(0.3
)
20.0
3.7
(26.1
)
(2.7
)
Net gains/(losses) in AOCI at March 30, 2014
$
(0.8
)
$
46.8
$
(9.2
)
$
27.5
$
64.3
AOCI
Components
Amounts Reclassified
from AOCI
(in millions)
Affected Line Item in
the Statements of Earnings
Gains/(losses) on cash flow hedges
Interest rate hedges
$
1.3
Interest expense
Foreign currency hedges
1.3
Revenue
Foreign currency/coffee hedges
(0.1
)
Cost of sales including occupancy costs
2.5
Total before tax
(1.1
)
Tax (expense)/benefit
$
1.4
Net of tax
Table of Contents
Two Quarters Ended
In addition to 1.2 billion shares of authorized common stock with $0.001 par value per share, the Company has authorized 7.5 million shares of
preferred stock, none of which was outstanding as of March 30, 2014 .
We repurchased 4.1 million shares of common stock at a total cost of $301.2 million , and 10.8 million shares at a total cost of $544.1 million
for
the two quarters ended March 30, 2014 and March 31, 2013 , respectively. As of March 30, 2014 , 22.3 million shares remained available for
repurchase under current authorizations.
During the second quarter of fiscal 2014 , our Board of Directors declared a quarterly cash dividend to shareholders of $0.26
per share to be paid
on May 23, 2014 to shareholders of record as of the close of business on May 8, 2014 .
As of March 30, 2014 , there were 56.2 million shares of common stock available for issuance pursuant to future equity-based compensation
awards and 7.6 million s hares available for issuance under our employee stock purchase plan.
Stock-based compensation expense recognized in the consolidated statements of earnings (in millions) :
Stock option and RSU transactions from September 29, 2013 through March 30, 2014 ( in millions ):
16
AOCI
Components
Amounts Reclassified
from AOCI
(in millions)
Affected Line Item in
the Statements of Earnings
Gains/(losses) on cash flow hedges
Interest rate hedges
$
2.5
Interest expense
Foreign currency hedges
2.3
Revenue
Foreign currency / coffee hedges
(9.9
)
Cost of sales including occupancy costs
(5.1
)
Total before tax
(1.0
)
Tax (expense)/benefit
$
(6.1
)
Net of tax
Note 8:
Employee Stock Plans
Quarter Ended
Two Quarters Ended
Mar 30, 2014
Mar 31, 2013
Mar 30, 2014
Mar 31, 2013
Options
$
9.7
$
7.9
$
22.5
$
19.8
Restricted Stock Units (“RSUs”)
34.1
25.6
69.1
51.1
Total stock-based compensation
$
43.8
$
33.5
$
91.6
$
70.9
Stock Options
RSUs
Options outstanding/Nonvested RSUs, September 29, 2013
22.0
5.8
Granted
3.0
2.4
Options exercised/RSUs vested
(3.2
)
(2.5
)
Forfeited/expired
(0.3
)
(0.4
)
Options outstanding/Nonvested RSUs, March 30, 2014
21.5
5.3
Total unrecognized stock-based compensation expense, net of estimated
forfeitures, as of March 30, 2014
$
51.9
$
153.0
Table of Contents
Note 9: Earnings Per Share
Calculation of net earnings per common share (“EPS”) — basic and diluted ( in millions, except EPS ):
Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and non-
vested) and unvested RSUs, calculated using the treasury stock method. The calculation of dilutive shares outstanding excludes out-of-the-
money stock options (i.e., such options’
exercise prices were greater than the average market price of our common shares for the period) because
their inclusion would have been antidilutive. Out-of-the-money stock options totaled approximately 2.8 million and less than 0.1 million as of
March 30, 2014 and March 31, 2013 , respectively.
Legal Proceedings
On November 12, 2013, the arbitrator in our arbitration with Kraft Foods Global, Inc. (now known as Kraft Foods Group, Inc.) (“Kraft”)
ordered
Starbucks to pay Kraft $2,227.5 million in damages plus prejudgment interest and attorneys' fees. We estimated prejudgment interest, which
included an accrual through the estimated payment date, and attorneys' fees to be approximately $556.6 million . As a result, we recorded a
litigation charge of $2,784.1 million in our fiscal 2013 operating results.
In the first quarter of fiscal 2014, Starbucks paid all amounts due to Kraft under the arbitration, including prejudgment interest and attorneys'
fees, and fully extinguished the litigation charge liability. Of the $2,784.1 million litigation charge accrued in the fourth quarter of fiscal 2013,
$2,763.9 million was paid and the remainder was released as a litigation credit to reflect a reduction to our estimated prejudgment interest
payable as a result of paying our obligation earlier than anticipated.
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including, at times, certain employment litigation
cases that have been certified as class or collective actions, but is not currently a party to any legal proceeding that management believes could
have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Note 11: Segment Reporting
Segment information is prepared on the same basis that our ceo, who is our chief operating decision maker, manages the segments, evaluates
financial results, and makes key operating decisions.
The table below presents financial information for our reportable operating segments and All Other Segments for the quarter and two quarters
ended March 30, 2014 and March 31, 2013 , including reclassifications resulting from the correction of the immaterial error discussed in Note 1.
The reclassifications for fiscal years 2013 and 2012 were $21.8 million and $19.2 million for the Channel Development segment, respectively,
and $3.6 million and $3.5 million for All Other Segments, respectively. The reclassifications for the quarter and two quarters ended March 31,
2013 were $5.4 million and $10.9 million for the Channel Development segment, respectively, and $0.9 million and $1.8 million for All Other
Segments, respectively.
17
Quarter Ended
Two Quarters Ended
Mar 30, 2014
Mar 31, 2013
Mar 30, 2014
Mar 31, 2013
Net earnings attributable to Starbucks
$
427.0
$
390.4
$
967.6
$
822.5
Weighted average common shares outstanding (for basic calculation)
755.2
749.1
755.0
747.6
Dilutive effect of outstanding common stock options and RSUs
9.4
12.2
10.4
13.7
Weighted average common and common equivalent shares
outstanding (for diluted calculation)
764.6
761.3
765.4
761.3
EPS — basic
$
0.57
$
0.52
$
1.28
$
1.10
EPS — diluted
$
0.56
$
0.51
$
1.26
$
1.08
Note 10:
Commitments and Contingencies
Table of Contents
Quarter Ended
Two Quarters Ended
Reconciliation of total segment operating income to consolidated earnings before income taxes (in millions) :
18
(in millions) Americas
EMEA
China /
Asia Pacific
Channel
Development
All Other
Segments
Segment
Total
March 30, 2014
Total net revenues
$
2,808.8
$
309.9
$
265.3
$
370.4
$
119.4
$
3,873.8
Depreciation and amortization expenses
114.8
14.8
11.8
0.4
3.7
145.5
Income from equity investees
—
1.1
37.4
21.4
—
59.9
Operating income/(loss)
605.6
17.7
87.0
127.3
(7.8
)
829.8
March 31, 2013
Total net revenues
$
2,604.1
$
273.2
$
213.6
$
338.1
$
120.6
$
3,549.6
Depreciation and amortization expenses
105.6
13.7
8.5
0.3
3.4
131.5
Income from equity investees
2.4
—
30.8
19.3
—
52.5
Operating income/(loss)
549.7
5.2
68.3
94.1
(4.1
)
713.2
(in millions)
Americas
EMEA
China /
Asia Pacific
Channel
Development
All Other
Segments
Segment
Total
March 30, 2014
Total net revenues
$
5,881.7
$
649.5
$
532.2
$
771.5
$
278.5
$
8,113.4
Depreciation and amortization expenses
227.1
29.4
22.0
0.8
7.3
286.6
Income from equity investees
—
1.9
70.5
38.6
—
111.0
Operating income
1,337.6
51.2
168.0
246.2
6.1
1,809.1
March 31, 2013
Total net revenues
$
5,444.7
$
579.3
$
427.7
$
712.5
$
178.5
$
7,342.7
Depreciation and amortization expenses
211.0
27.9
15.9
0.6
4.3
259.7
Income from equity investees
2.4
—
64.9
39.7
—
107.0
Operating income/(loss)
1,139.8
27.5
140.4
191.0
(8.2
)
1,490.5
Quarter Ended
Two Quarters Ended
Mar 30, 2014
Mar 31, 2013
Mar 30, 2014
Mar 31, 2013
Total segment operating income
$
829.8
$
713.2
$
1,809.1
$
1,490.5
Unallocated corporate operating expenses
(185.7
)
(169.1
)
(351.4
)
(315.9
)
Consolidated operating income
644.1
544.1
1,457.7
1,174.6
Interest income and other, net
17.8
50.8
37.6
48.0
Interest expense
(16.7
)
(6.1
)
(31.3
)
(12.7
)
Earnings before income taxes
$
645.2
$
588.8
$
1,464.0
$
1,209.9
Table of Contents
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements herein, including statements regarding trends in or expectations relating to the expected effects of our initiatives and plans,
as well as trends in or expectations regarding earnings per share, revenues, operating income, operating margins, comparable store sales, sales
leverage, sales growth, profitability, expenses, dividends, share repurchases, other financial results, capital expenditures, scaling and expansion
of international operations, shifts in our store portfolio to more licensed stores in EMEA and to more company-operated stores in CAP,
profitable growth models and opportunities, strategic acquisitions, commodity costs and our mitigation strategies, the transition from our
distribution arrangement with Kraft to a direct distribution model, liquidity, cash flow from operations, use of cash, the potential issuance of
debt and applicable interest rate, anticipated store openings, closings and renovations, the health and growth of our business overall and of
specific businesses or markets, benefits of recent initiatives, increased traffic to our stores, operational efficiencies, product innovation and
distribution, tax rates, and economic conditions in the US and international markets, 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, dairy and other raw materials prices and availability, successful execution of our
initiatives, successful execution of internal plans, fluctuations in US and international economies and currencies, the impact of competitors’
initiatives, the effect of legal proceedings, and other risks detailed in our filings with the SEC, including in Part I Item IA “Risk Factors” in the
10-K.
A forward
-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances
may not occur. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report. We are
under no obligation to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.
This information should be read in conjunction with the condensed consolidated financial statements and the notes included in Item 1 of Part I of
this 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and
Results of Operations, contained in the 10-K.
General
Our fiscal year ends on the Sunday closest to September 30. All references to store counts, including data for new store openings, are reported
net of store closures, unless otherwise noted.
Overview
Starbucks second quarter results reflect improvements across all segments. Consolidated total net revenues increased 9% to $3.9 billion , driven
by global comparable store sales growth of 6% . Consolidated operating income increased $100 million, or 18%, to $644 million. Operating
margin expanded across all reportable segments, contributing to a consolidated operating margin of 16.6%, reflecting growth of 130 basis points
over the prior year quarter. Earnings per share of $0.56 increased 10% over the prior year quarter earnings per share of $0.51, which included a
$0.03 per share gain on the sale of our equity interest in our Mexico joint venture operations.
The Americas segment continued its solid performance in the second quarter, growing revenues by 8% to $2.8 billion, primarily driven by
comparable store sales growth of 6% , comprised of a 3% increase in average ticket and a 2% increase in number of transactions. Successful
promotional beverages and expanded food offerings, including the rollout of our La Boulange
™
food platform in the US, contributed to the
growth in comparable store sales. Operating margin expanded 50 basis points to 21.6%
, primarily due to lower commodity costs, mainly coffee.
Looking forward, we expect to continue to drive revenue growth and margin expansion through new stores and expanded product offerings. We
plan to continue elevating our food program, in part with the completion of the rollout of La Boulange
™
bakery items in our US stores and
enhancements to our lunch options.
In the EMEA segment, the combination of solid company-operated and licensed store growth drove increased revenues and profitability.
Revenues grew 13% to $310 million, driven by favorable foreign currency exchange and comparable store sales growth of 6%, the highest
growth in the region in fourteen quarters. Incremental revenues from 168 net new licensed store openings over the past year also contributed.
Sales leverage, largely driven by our strategic portfolio shift to higher margin licensed stores, and continued cost management drove the increase
in operating margin of 380 basis points over the prior year quarter, to 5.7%. We expect continued disciplined licensed store expansion and a
focus on the customer experience in this region will result in improved operating performance as we progress on our plan towards mid-teens
operating margin over time.
19
Item 2.
Management
’
s Discussion and Analysis of Financial Condition and Results of Operations
Table of Contents
The China/Asia Pacific segment leveraged strong sales in the quarter to offset the unfavorable margin impact of the portfolio shift toward more
company-operated stores in this segment. New store growth, along with a 7% increase in comparable store sales, drove a 24% increase in
revenues to $265 million. The 7% growth in comparable store sales was driven by an increase in number of transactions. Operating income grew
27% to $87 million, while operating margin expanded 80 basis points to 32.8%, primarily driven by sales leverage. We expect this segment will
become a more meaningful contributor to overall company profitability in the future, as we look forward to continued new store openings and
establishing China as our largest market outside of the US.
Channel Development segment revenues grew 10% for the quarter to $370 million, primarily due to increased sales of premium single serve
products, driven by sales of Starbucks- and Tazo-branded K-Cup
®
portion packs. Operating income grew $33 million, or 35%, to $127 million.
Operating margin increased 660 basis points to 34.4% for the second quarter of fiscal 2014, primarily driven by lower coffee costs and sales
leverage. As we continue to expand customer occasions outside of our retail stores, including growing our presence in the premium single serve
category, we expect this segment to become a more significant contributor to future growth.
Fiscal 2014 — Financial Outlook for the Year
For fiscal year 2014, we expect revenue growth will be driven by mid-single digit comparable store sales growth, new store openings, and
continued growth in the Channel Development business. Approximately one-half of new store openings will be in China / Asia Pacific, with the
remaining half coming primarily from the Americas.
We expect full-year consolidated operating margin improvement of 175 to 200 basis points over fiscal 2013 and strong EPS growth when
excluding the Kraft litigation charge and gains from the sales of our equity in our Mexico, Chile and Argentina joint ventures in fiscal 2013.
Comparable Store Sales
Starbucks comparable store sales for the second quarter and the first two quarters of fiscal 2014 :
Our comparable store sales represent the growth in revenue from Starbucks
®
company-operated stores open 13 months or longer. Comparable
store sales exclude the effect of fluctuations in foreign currency exchange rates.
Results of Operations (in millions)
Revenues
Total net revenues for the second quarter and the first two quarters of fiscal 2014 increased $324 million and $771 million , respectively,
primarily due to increased revenues from company-operated stores (contributing $260 million and $614 million, respectively). An increase in
comparable store sales was the primary driver of the increase in company-operated store revenues (approximately 6% for both periods, or $152
million for the second quarter and $312 million for the first two quarters). Also contributing to net revenue growth for both periods were
incremental revenues from 551 net new Starbucks
®
company-operated store openings over the past 12 months (approximately $127 million for
the second quarter and $253 million for the first two quarters).
20
Quarter Ended Mar 30, 2014
Two Quarters Ended Mar 30, 2014
Sales
Growth
Change in
Transactions
Change in
Ticket
Sales
Growth
Change in
Transactions
Change in
Ticket
Consolidated
6%
3%
3%
6%
3%
2%
Americas 6%
2%
3%
5%
3%
2%
EMEA 6%
5%
1%
5%
4%
1%
China/Asia Pacific 7%
7%
—%
7%
7%
1%
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
%
Change
Mar 30,
2014
Mar 31,
2013
%
Change
Company-operated stores
$
3,068.0
$
2,807.7
9.3
%
$
6,411.8
$
5,797.3
10.6
%
Licensed stores
356.2
322.1
10.6
758.0
672.2
12.8
CPG, foodservice and other
449.6
419.8
7.1
943.6
873.2
8.1
Total net revenues
$
3,873.8
$
3,549.6
9.1
%
$
8,113.4
$
7,342.7
10.5
%
Table of Contents
Licensed store revenue growth also contributed to the increase in total net revenues for the second quarter and the first two quarters of fiscal
2014 (approximately $34 million for the second quarter and $86 million for the first two quarters). The increase for both periods was primarily
due to increased product sales to and royalty revenues from our licensees, as a result of improved comparable store sales and the opening of
1,054 net new licensed stores over the past 12 months.
CPG, foodservice and other revenues increased $30 million and $70 million for the second quarter and the first two quarters of fiscal 2014 ,
respectively. These increases were primarily due to increased sales of premium single serve products (approximately $23 million and $48
million, respectively).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 100 basis points and 70 basis points for the second
quarter and first two quarters of fiscal 2014 , respectively, primarily driven by lower commodity costs (approximately 100 basis points for the
second quarter and 90 basis points for the first two quarters), mainly coffee.
Store operating expenses as a percentage of total net revenues were flat for the second quarter and decreased 50 basis points for the first two
quarters of fiscal 2014 . Store operating expenses as a percentage of company-operated store revenues were flat for the second quarter and
decreased 70 basis points for the first two quarters of fiscal 2014 . The decrease for the first two quarters of fiscal 2014 was primarily driven by
higher litigation charges in the first quarter of the prior year period (approximately 40 basis points) and a decrease in marketing (approximately
20 basis points), largely due to lapping the prior year launch of the Verismo
®
system by Starbucks in company-operated stores.
Other operating expenses as a percentage of total net revenues decreased 10 basis points for the second quarter and 40 basis points for the first
two quarters of fiscal 2014 . Excluding the impact of company-operated store revenues, other operating expenses decreased 50 basis points for
the second quarter and 170 basis points for the first two quarters of fiscal 2014 , primarily due to decreased marketing (approximately 20 basis
points for the second quarter and 60 basis points for the first two quarters). The decrease for the first two quarters of fiscal 2014 was primarily
attributable to the timing of product launches in Channel Development. Sales leverage from licensed store revenue growth (approximately 20
basis points for the second quarter and 30 basis points for the first two quarters) also contributed to the decreases.
General and administrative expenses as a percentage of total net revenues decreased 30 basis points for both the second quarter and the first two
quarters of fiscal 2014
. The decrease for the second quarter was primarily due to increased sales leverage. The decrease for the first two quarters
was primarily due to lapping our leadership conference held in the first quarter of the prior year period.
The $20.2 million litigation credit (contributing approximately 20 basis points for the first two quarters of fiscal 2014) reflects a reduction to our
estimated prejudgment interest payable associated with the Kraft arbitration in the first quarter of fiscal 2014, as a result of paying our obligation
earlier than anticipated. The $2.8 billion litigation charge was accrued in the fourth quarter of fiscal 2013 and fully extinguished in the first
quarter of fiscal 2014.
21
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
% of Total
Net Revenues
% of Total
Net Revenues
Cost of sales including occupancy
costs
$
1,629.2
$
1,530.4
42.1
%
43.1
%
$
3,424.2
$
3,151.1
42.2
%
42.9
%
Store operating expenses
1,134.5
1,038.4
29.3
29.3
2,309.6
2,127.9
28.5
29.0
Other operating expenses
110.9
105.8
2.9
3.0
225.8
231.9
2.8
3.2
Depreciation and amortization
expenses
174.4
153.1
4.5
4.3
344.1
302.0
4.2
4.1
General and administrative
expenses
240.6
230.3
6.2
6.5
483.2
462.2
6.0
6.3
Litigation charge/(credit) —
—
—
—
(
20.2
)
—
(
0.2
)
—
Total operating expenses
3,289.6
3,058.0
84.9
86.2
6,766.7
6,275.1
83.4
85.5
Income from equity investees
59.9
52.5
1.5
1.5
111.0
107.0
1.4
1.5
Operating income
$
644.1
$
544.1
16.6
%
15.3
%
$
1,457.7
$
1,174.6
18.0
%
16.0
%
Store operating expenses as a % of
related revenues
37.0
%
37.0
%
36.0
%
36.7
%
Table of Contents
The combination of these changes resulted in an overall increase in operating margin of 130 basis points for the second quarter and 200 basis
points for the first two quarters of fiscal 2014 .
Other Income and Expenses
For the second quarter and first two quarters of fiscal 2014 , net interest income and other decreased $33 million and $10 million , respectively.
These decreases were primarily due to lapping the gain on the sale of our equity in the joint venture that operates Starbucks
®
stores in Mexico in
the prior year quarter (approximately $35 million). Also contributing to the decreases were unrealized losses on our trading securities portfolio
(approximately $14 million for the second quarter and $10 million for the first two quarters), partially offset by favorable mark-to-market
adjustments from derivatives used to manage our risk of commodity price fluctuations (approximately $8 million for the second quarter and $17
million for the first two quarters).
Interest expense increased $11 million for the second quarter and $19 million for the first two quarters of fiscal 2014 , respectively, due to
interest on the long-term debt we issued in the first quarter of fiscal 2014 and the fourth quarter of fiscal 2013.
The effective tax rate for the quarter ended March 30, 2014 was 33.8% compared to 33.6% for the same quarter in fiscal 2013 . The slight
increase in the rate was driven by the release of a capital loss valuation allowance in the prior year period. The effective tax rate for the two
quarters ended March 30, 2014 was 33.9% compared to 32.0% for the same period in fiscal 2013 . The increase in the rate for the first two
quarters of fiscal 2014 was primarily due to lapping the recognition of a net tax benefit in the first quarter of fiscal 2013 primarily from state
income tax expense adjustments for returns filed in prior years.
22
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
% of Total
Net Revenues
% of Total
Net Revenues
Operating income
$
644.1
$
544.1
16.6
%
15.3
%
$
1,457.7
$
1,174.6
18.0
%
16.0
%
Interest income and other, net
17.8
50.8
0.5
1.4
37.6
48.0
0.5
0.7
Interest expense
(16.7
)
(6.1
)
(0.4
)
(0.2
)
(31.3
)
(12.7
)
(0.4
)
(0.2
)
Earnings before income taxes
645.2
588.8
16.7
16.6
1,464.0
1,209.9
18.0
16.5
Income taxes
218.3
198.1
5.6
5.6
496.4
386.8
6.1
5.3
Net earnings including
noncontrolling interests
426.9
390.7
11.0
11.0
967.6
823.1
11.9
11.2
Net earnings attributable to
noncontrolling interests
(0.1
)
0.3
—
—
—
0.6
—
—
Net earnings attributable to
Starbucks
$
427.0
$
390.4
11.0
%
11.0
%
$
967.6
$
822.5
11.9
%
11.2
%
Effective tax rate including
noncontrolling interests
33.8
%
33.6
%
33.9
%
32.0
%
Table of Contents
Segment Information
Results of operations by segment (in millions) :
Americas
Revenues
Americas total net revenues for the second quarter and the first two quarters of fiscal 2014 increased 8% for both periods or $205 million and
$437 million , respectively. These increases were primarily due to higher revenues from company-
operated stores (contributing $185 million and
$386 million, respectively) and licensed stores (contributing $21 million and $56 million, respectively).
The increase in company-operated store revenues for both periods was driven by an increase in comparable store sales (approximately 6%, or
$129 million, for the second quarter and approximately 5%, or $265 million, for the first two quarters ). Also contributing were incremental
revenues from 311 net new Starbucks
®
company-operated store openings over the past 12 months (approximately $88 million and $178 million,
respectively). Partially offsetting these increases was unfavorable foreign currency exchange (approximately $21 million and $37 million,
respectively), primarily driven by the strengthening of the US dollar against the Canadian dollar.
The increases in licensed store revenues were primarily due to increased product sales to and higher royalty revenues from our licensees, as a
result of improved comparable store sales and the opening of 456 net new licensed stores over the past 12 months.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 70 basis points and 60 basis points for the second quarter
and the first two quarters of fiscal 2014
, respectively. These decreases were primarily driven by lower commodity costs (approximately 60 basis
points for the second quarter and 50 basis points for the first two quarters). Sales leverage on occupancy costs also contributed.
Store operating expenses as a percentage of total net revenues and as a percentage of company-
operated store revenues, increased 10 basis points
for the second quarter and decreased 60 basis points for the first two quarters of fiscal 2014 . The slight increase for the second quarter was
primarily driven by timing of marketing (20 basis points). The decrease for the first two quarters of fiscal 2014 was primarily driven by higher
litigation charges in the first quarter of the prior year period (approximately 40 basis points) and a decrease in marketing (approximately 20 basis
points), largely due to lapping the prior year launch of the Verismo
®
system by Starbucks in company-operated stores.
General and administrative expenses as a percentage of total net revenues were flat for the second quarter and decreased 50 basis points for the
first two quarters of fiscal 2014 , primarily due to lapping our leadership conference held in the first quarter of the prior year period
(approximately 40 basis points).
23
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
% of Americas
Net Revenues
% of Americas
Net Revenues
Total net revenues
$
2,808.8
$
2,604.1
$
5,881.7
$
5,444.7
Cost of sales including occupancy
costs
1,059.6
1,000.0
37.7
%
38.4
%
2,223.8
2,092.5
37.8
%
38.4
%
Store operating expenses
963.9
891.9
34.3
34.2
1,963.5
1,851.7
33.4
34.0
Other operating expenses
23.7
21.2
0.8
0.8
49.0
51.2
0.8
0.9
Depreciation and amortization
expenses
114.8
105.6
4.1
4.1
227.1
211.0
3.9
3.9
General and administrative
expenses
41.2
38.1
1.5
1.5
80.7
100.9
1.4
1.9
Total operating expenses
2,203.2
2,056.8
78.4
79.0
4,544.1
4,307.3
77.3
79.1
Income from equity investees —
2.4
—
0.1
—
2.4
—
—
Operating income
$
605.6
$
549.7
21.6
%
21.1
%
$
1,337.6
$
1,139.8
22.7
%
20.9
%
Store operating expenses as a % of
related revenues
37.6
%
37.5
%
36.7
%
37.3
%
Table of Contents
The combination of these changes resulted in an overall increase in operating margin of 50 basis points for the second quarter and 180 basis
points for the first two quarters of fiscal 2014.
EMEA
Revenues
EMEA total net revenues increased $37 million , or 13% , for the second quarter of fiscal 2014 and increased $70 million , or 12% , for the first
two quarters of fiscal 2014 . These increases were primarily due to higher revenues from company-operated stores (contributing $27 million and
$43 million, respectively). These increases were driven by an increase in comparable store sales (approximately 6%, or $12 million, for the
second quarter and approximately 5%, or $24 million, for the first two quarters) and favorable foreign currency exchange (approximately $12
million and $19 million, respectively), primarily driven by the weakening of the US dollar against the British pound.
Licensed store revenues grew (approximately $8 million, or 18%, for the second quarter and $25 million , or 28% , for the first two quarters ),
due to increased equipment and product sales to and higher royalty revenues from our licensees, primarily from the opening of 168 net new
licensed stores over the past 12 months and improved comparable store sales.
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 40 basis points for the second quarter and 30 basis points
for the first two quarters of fiscal 2014 , primarily driven by sales leverage and continued cost management (approximately 110 basis points for
the second quarter and 100 basis points for the first two quarters). Also contributing to the decreases were lapping higher inventory reserves in
the prior year (approximately 80 basis points for the second quarter and 40 basis points for the first two quarters) and lower coffee costs
(approximately 60 basis points for both periods), partially offset by lapping a reduction to the estimated asset retirement obligations of our store
leases in the region in the second quarter of fiscal 2013 (approximately 190 basis points for the second quarter and 80 basis points for the first
two quarters).
Store operating expenses as a percentage of total net revenues decreased 70 basis points and 80 basis points for the second quarter and the first
two quarters of fiscal 2014 , respectively. These decreases were driven by sales leverage. As a percentage of company-operated store revenues,
store operating expenses decreased 40 basis points for the second quarter and 10 basis point for the first two quarters of fiscal 2014.
Other operating expenses as a percentage of total net revenues decreased 10 basis points for the second quarter and increased 30 basis points for
the first two quarters of fiscal 2014 . Excluding the impact of company-operated store revenues, other operating expenses decreased 140 basis
points for the second quarter and 50 basis points for the first two quarters, primarily driven by sales leverage and continued cost management
(approximately 100 basis points for both periods).
General and administrative expenses as a percentage of total net revenues decreased 200 basis points and 170 basis points for the second quarter
and the first two quarters of fiscal 2014 , respectively. These decreases were primarily due to sales leverage
24
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
% of EMEA
Net Revenues
% of EMEA
Net Revenues
Total net revenues
$
309.9
$
273.2
$
649.5
$
579.3
Cost of sales including occupancy
costs
158.3
140.8
51.1
%
51.5
%
326.5
293.3
50.3
%
50.6
%
Store operating expenses
92.4
83.2
29.8
30.5
188.8
173.5
29.1
29.9
Other operating expenses
11.8
10.7
3.8
3.9
23.4
19.1
3.6
3.3
Depreciation and amortization
expenses
14.8
13.7
4.8
5.0
29.4
27.9
4.5
4.8
General and administrative
expenses
16.0
19.6
5.2
7.2
32.1
38.0
4.9
6.6
Total operating expenses
293.3
268.0
94.6
98.1
600.2
551.8
92.4
95.3
Income from equity investees
1.1
—
0.4
—
1.9
—
0.3
—
Operating income
$
17.7
$
5.2
5.7
%
1.9
%
$
51.2
$
27.5
7.9
%
4.7
%
Store operating expenses as a % of
related revenues
37.6
%
38.0
%
36.7
%
36.8
%
Table of Contents
and reduced support costs, largely driven by the shift to more licensed stores (approximately 180 basis points for the second quarter and 170
basis points for the first two quarters of fiscal 2014).
The combination of these changes resulted in an overall increase in operating margin of 380 basis points for the second quarter and 320 basis
points for the first two quarters of fiscal 2014 .
China / Asia Pacific
Revenues
China/Asia Pacific total net revenues for the second quarter and the first two quarters of fiscal 2014 increased $52 million , or 24% , and $105
million , or 24% , respectively, primarily due to increased revenues from company-operated stores (contributing $46 million for the second
quarter and $97 million for the first two quarters). The increases in company-operated store revenues were primarily driven by the opening of
241 net new company-operated stores over the past 12 months (approximately $37 million for the second quarter and $75 million for the first
two quarters) and an increase in comparable store sales (approximately 7% for both periods, or $11 million for the second quarter and $23
million for the first two quarters).
Operating Expenses
Cost of sales including occupancy costs as a percentage of total net revenues decreased 110 basis points for the second quarter of fiscal 2014
and
50 basis points for the first two quarters of fiscal 2014, primarily due to sales leverage.
Store operating expenses as a percentage of total net revenues increased 90 basis points for both the second quarter and the first two quarters of
fiscal 2014 . As a percentage of company-operated store revenues, store operating expenses increased 10 basis points for the second quarter,
primarily driven by increased costs associated with company-operated store growth (approximately 50 basis points), partially offset by an
insurance claim credit in the current quarter (approximately 40 basis points). As a percentage of company-operated store revenues, store
operating expenses decreased 30 basis points for the first two quarters of fiscal 2014, primarily driven by the insurance claim credit in the second
quarter of fiscal 2014 (approximately 20 basis points).
Other operating expenses as a percentage of total net revenues decreased 120 basis points for the second quarter of fiscal 2014 and 100 basis
points for the first two quarters of fiscal 2014. Excluding the impact of company-operated store revenues, other operating expenses decreased
240 basis points for the second quarter and 110 basis points for the first two quarters. These decreases were primarily due to sales leverage.
Income from equity investees increased $7 million for the second quarter of fiscal 2014 and $6 million for the first two quarters of fiscal 2014,
driven by higher income from our joint venture operations, mainly in South Korea and China, partially offset by unfavorable foreign currency
fluctuations due to the weakening of the Yen against the US dollar. These fluctuations, paired with the accelerated growth in segment revenues
resulting from the shift in the composition of the store portfolio to more company-operated stores, resulted in income from equity investees
declining as a percentage of total net revenues.
25
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
% of CAP
Net Revenues
% of CAP
Net Revenues
Total net revenues
$
265.3
$
213.6
$
532.2
$
427.7
Cost of sales including occupancy
costs
127.4
104.9
48.0
%
49.1
%
260.2
211.4
48.9
%
49.4
%
Store operating expenses
52.4
40.3
19.8
18.9
103.7
79.7
19.5
18.6
Other operating expenses
11.1
11.5
4.2
5.4
21.7
21.7
4.1
5.1
Depreciation and amortization
expenses
11.8
8.5
4.4
4.0
22.0
15.9
4.1
3.7
General and administrative
expenses
13.0
10.9
4.9
5.1
27.1
23.5
5.1
5.5
Total operating expenses
215.7
176.1
81.3
82.4
434.7
352.2
81.7
82.3
Income from equity investees
37.4
30.8
14.1
14.4
70.5
64.9
13.2
15.2
Operating income
$
87.0
$
68.3
32.8
%
32.0
%
$
168.0
$
140.4
31.6
%
32.8
%
Store operating expenses as a % of
related revenues
25.9
%
25.8
%
25.7
%
26.0
%
Table of Contents
The changes in the above items resulted in an overall increase in operating margin of 80 basis points for the second quarter of fiscal 2014 and a
decrease of 120 basis points for the first two quarters of 2014.
Channel Development
Revenues
Total Channel Development net revenues for the second quarter and the first two quarters of fiscal 2014 increased $32 million , or 10% , and
$59
million , or 8% , respectively, primarily driven by increased sales of premium single serve products (approximately $23 million for the second
quarter and $48 million for the first two quarters). Also contributing was an increase in foodservice revenues (approximately $5 million for the
second quarter and $13 million for the first two quarters) driven by increased sales volumes compared to the prior year period. The increased
sales for the first two quarters of fiscal 2014 were partially offset by the impact of the packaged coffee list price reductions (approximately $14
million) effective beginning in the third quarter of fiscal 2013.
Operating Expenses
Cost of sales as a percentage of total net revenues decreased 520 basis points for the second quarter and 330 basis points for the first
two quarters
of fiscal 2014 . The decrease was primarily driven by lower coffee costs (approximately 510 basis points for the second quarter and 420 basis
points for the first two quarters). The decrease for the first two quarters was partially offset by the impact of the list price reductions on total net
revenues (approximately 100 basis points).
Other operating expenses as a percentage of total net revenues decreased 40 basis points for the second quarter and 190 basis points for the first
two quarters of fiscal 2014 . The decrease for the second quarter was primarily due to sales leverage. The decrease for the first two quarters was
primarily due to decreased marketing (approximately 100 basis points), largely due to the timing of product launches.
Income from equity investees increased $2 million for the second quarter of fiscal 2014 and decreased $1 million for the first two quarters of
fiscal 2014. The increase for the second quarter was a result of higher income from our North American Coffee Partnership joint venture,
primarily due to strong sales of bottled Frappuccino
®
and iced coffee drinks. The decrease for the first two quarters was a result of lower income
from our North American Coffee Partnership joint venture, driven by increased investment in support of new product innovation platforms in the
first quarter of fiscal 2014. The growth in segment revenues also contributed to our joint venture income declining as a percentage of total net
revenues for the first two quarters of fiscal 2014.
The combination of these changes resulted in an overall increase in operating margin of 660 basis points for the second quarter and 510 basis
points for the first two quarters of fiscal 2014 .
26
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
% of Channel
Development
Net Revenues
% of Channel
Development
Net Revenues
Total net revenues
$
370.4
$
338.1
$
771.5
$
712.5
Cost of sales
213.6
212.6
57.7
%
62.9
%
459.2
447.8
59.5
%
62.8
%
Other operating expenses
46.6
43.9
12.6
13.0
94.6
101.5
12.3
14.2
Depreciation and amortization
expenses
0.4
0.3
0.1
0.1
0.8
0.6
0.1
0.1
General and administrative
expenses
3.9
6.5
1.1
1.9
9.3
11.3
1.2
1.6
Total operating expenses
264.5
263.3
71.4
77.9
563.9
561.2
73.1
78.8
Income from equity investees
21.4
19.3
5.8
5.7
38.6
39.7
5.0
5.6
Operating income
$
127.3
$
94.1
34.4
%
27.8
%
$
246.2
$
191.0
31.9
%
26.8
%
Table of Contents
All Other Segments
All Other Segments includes Teavana, Seattle's Best Coffee, Evolution Fresh, and Digital Ventures.
Total net revenues for All Other Segments decreased $1 million for the second quarter of fiscal 2014 and increased $100 million for the first two
quarters of fiscal 2014 . The decrease for the second quarter resulted from lower Seattle's Best Coffee revenues (approximately $10 million)
mostly offset by growth in emerging businesses (approximately $6 million), including Teavana and Evolution Fresh. The increase for the first
two quarters was primarily driven by having an additional quarter of Teavana revenues in fiscal 2014 as Teavana was acquired at the beginning
of the second quarter of fiscal 2013 (approximately $92 million).
Total operating expenses increased $3 million for the second quarter and $86 million for the first two quarters of fiscal 2014 . The increase for
the second quarter was driven by investments to support our emerging businesses. The increase for the first two quarters was primarily due to
having an additional quarter of Teavana expenses in fiscal 2014 as Teavana was acquired at the beginning of the second quarter of fiscal 2013.
27
Quarter Ended
Two Quarters Ended
Mar 30,
2014
Mar 31,
2013
%
Change
Mar 30,
2014
Mar 31,
2013
%
Change
Total net revenues
$
119.4
$
120.6
(1.0
)%
$
278.5
$
178.5
56.0
%
Cost of sales
68.8
69.7
(1.3
)
151.3
106.0
42.7
Store operating expenses
25.8
23.0
12.2
53.6
23.0
133.0
Other operating expenses
18.0
18.5
(2.7
)
37.6
38.4
(2.1
)
Depreciation and amortization expenses
3.7
3.4
8.8
7.3
4.3
69.8
General and administrative expenses
10.9
10.1
7.9
22.6
15.0
50.7
Total operating expenses
127.2
124.7
2.0
272.4
186.7
45.9
Operating income/(loss)
$
(7.8
)
$
(4.1
)
90.2%
$
6.1
$
(8.2
)
nm
Table of Contents
Quarterly Store Data
Our store data for the periods presented is as follows:
(1)
EMEA store data has been adjusted for the transfer of certain company-operated stores to licensed stores in the second quarter of fiscal 2014.
(2)
Includes 337 Teavana stores added in the second quarter of fiscal 2013.
Financial Condition, Liquidity and Capital Resources
Investment Overview
Starbucks cash and short-term investments totaled $1.5 billion and $3.2 billion as of March 30, 2014 and September 29, 2013 , respectively. As
discussed below, in the first quarter of fiscal 2014 we paid $2.8 billion for the Kraft arbitration matter that was accrued in the fourth quarter of
fiscal 2013. We actively manage our cash and short-term investments in order to internally fund operating needs, make scheduled interest and
principal payments on our borrowings, and return cash to shareholders through common stock cash dividend payments and share repurchases.
Our short-term and long-term investments consist of highly liquid available-for-sale securities, including agency obligations, corporate bonds,
government treasury securities (foreign and domestic), state and local government obligations, mortgage and asset-
backed securities, commercial
paper, mutual funds, and certificates of deposit. As of March 30, 2014 , approximately $1.1 billion of cash and investments was held in foreign
subsidiaries.
Borrowing Capacity
In December 2013 , we issued $400 million of 3-year 0.875% Senior Notes ("the 2014 3-year notes") due December 2016 , and $ 350 million of
5-year 2.000% Senior Notes ("the 2014 5-year notes") due December 2018 , in an underwritten registered public offering, to fund a portion of
the payment required by the arbitration award in the Kraft litigation matter. The remaining net proceeds will be used for general corporate
purposes, which may include business expansion, payment of cash dividends on our common stock, the repurchase of common stock under our
ongoing share repurchase program, or financing of possible acquisitions. Interest on the notes is payable semi-annually on June 5 and December
5 of each year, commencing on June 5, 2014. See Note 6, Debt, to the condensed consolidated financial statements included in Item 1 of Part I of
this 10-Q for details of the components of our long-term debt.
The indentures under which all of our Senior Notes were issued require us to maintain compliance with certain covenants, including limits on
future liens and sale and leaseback transactions on certain material properties. As of March 30, 2014 , we were in compliance with each of these
covenants.
Our $750 million unsecured, revolving credit facility with various banks, of which $150 million may be used for issuances of letters of credit, is
available for working capital, capital expenditures and other corporate purposes, including acquisitions and share repurchases, and is currently
set to mature on February 5, 2018. Starbucks has the option, subject to negotiation and agreement with the related banks, to increase the
maximum commitment amount by an additional $750 million. Borrowings under the credit facility will bear interest at a variable rate based on
Net stores opened/(closed) during the period
Quarter Ended
Two Quarters Ended
Stores open as of
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Mar 30,
2014
Mar 31,
2013
Americas
Company-operated stores
59
24
86
50
8,164
7,852
Licensed stores
69
71
184
132
5,599
5,143
Total Americas
128
95
270
182
13,763
12,995
EMEA
(1)
Company-operated stores
1
(4
)
4
(24
)
842
843
Licensed stores
31
26
92
53
1,223
1,055
Total EMEA
32
22
96
29
2,065
1,898
China / Asia Pacific
Company-operated stores
53
66
114
113
1,020
779
Licensed stores
121
81
269
159
3,245
2,787
Total China / Asia Pacific
174
147
383
272
4,265
3,566
All Other Segments
(2)
Company-operated stores
4
306
11
309
368
323
Licensed stores
(3
)
20
(8
)
10
58
86
Total All Other Segments
1
326
3
319
426
409
Total Company
335
590
752
802
20,519
18,868
LIBOR, and, for US dollar-denominated loans under certain circumstances, a Base Rate (as defined in the credit facility), in each case plus an
applicable margin. The applicable margin is based on the better of (i) the Company's long-term credit ratings assigned by Moody's and Standard
& Poor's rating agencies, and (ii) the Company's fixed charge coverage ratio, pursuant to a pricing grid set forth in the credit facility. The current
applicable margin is 0.795% for Eurocurrency Rate Loans and 0.00%
for Base Rate Loans. The credit facility contains provisions requiring us to
maintain compliance with certain covenants, including a minimum fixed charge coverage ratio, which measures our ability to cover financing
expenses. As of March 30, 2014 , we were in compliance with each of these covenants. No amounts were outstanding under our credit facility as
of March 30, 2014 .
Under our commercial paper program, as approved by our Board of Directors, we may issue unsecured commercial paper notes up to a
maximum aggregate amount outstanding at any time of $1 billion , with individual maturities that may vary but not exceed 397 days from the
date of issue. Amounts outstanding under the commercial paper program are to be backstopped by available commitments under our credit
facility. Currently, we may issue up to $727 million under our commercial paper program (the $750 million committed credit facility amount,
less $23 million in outstanding letters of credit). The proceeds from borrowings under our commercial paper program may be used for working
capital needs, capital expenditures and other corporate purposes, including acquisitions and share repurchases. In the first quarter of fiscal 2014 ,
we issued and subsequently repaid commercial paper borrowings of $225 million to fund a portion of the $2.8 billion payment for the Kraft
arbitration matter. We had no borrowings under our commercial paper program during the second quarter of fiscal 2014.
28
Table of Contents
Use of Cash
In the first quarter of fiscal 2014, Starbucks paid all amounts due to Kraft under the arbitration, including prejudgment interest and attorneys'
fees, and fully extinguished the litigation charge liability. Of the $2,784.1 million litigation charge accrued in the fourth quarter of fiscal 2013,
$2,763.9 million was paid and the remainder was released as a litigation credit to reflect a reduction to our estimated prejudgment interest
payable as a result of paying our obligation earlier than anticipated.
We expect to use additional available cash and short-term investments, including additional potential future borrowings under the credit facility
and commercial paper program, to invest in our core businesses, including new product innovations and related marketing support, as well as
other new business opportunities related to our core businesses. We believe that future cash flows generated from operations and existing cash
and short-term investments both domestically and internationally will be sufficient to finance capital requirements for our core businesses in
those respective markets as well as shareholder distributions for the foreseeable future.
We consider the majority of undistributed earnings of our foreign subsidiaries and equity investees as of March 30, 2014 to be indefinitely
reinvested and, accordingly, no US income and foreign withholding taxes have been provided on such earnings. We have not, nor do we
anticipate the need to, repatriate funds to the US to satisfy domestic liquidity needs; however, in the event that we need to repatriate all or a
portion of our foreign cash to the US we would be subject to additional US income taxes, which could be material. We do not believe it is
practical to calculate the potential tax impact of repatriation, as there is a significant amount of uncertainty around the calculation, including the
availability and amount of foreign tax credits at the time of repatriation, tax rates in effect, and other indirect tax consequences associated with
repatriation.
We may use our available cash resources to make proportionate capital contributions to our equity method and cost method investees. We may
also seek strategic acquisitions to leverage existing capabilities and further build our business in support of our growth agenda. Acquisitions may
include increasing our ownership interests in our equity method and cost method investees. Any decisions to increase such ownership interests
will be driven by valuation and fit with our ownership strategy. Significant new joint ventures, acquisitions and/or other new business
opportunities may require additional outside funding.
Other than normal operating expenses, cash requirements for the remainder of fiscal 2014 are expected to consist primarily of capital
expenditures for remodeling and refurbishment of, and equipment upgrades for, existing company-operated stores; new company-operated
stores; systems and technology investments in the stores and in the support infrastructure; and additional investments in manufacturing capacity.
Total capital expenditures for fiscal 2014 are expected to be approximately $1.2 billion .
During the second quarter of fiscal 2014 , our Board of Directors declared a quarterly cash dividend to shareholders of $0.26
per share to be paid
on May 23, 2014 to shareholders of record as of the close of business on May 8, 2014 . We repurchased 4.1 million shares of common stock
( $301.2 million ) during the first two quarters of fiscal 2014 under share repurchase authorizations. The number of remaining shares authorized
for repurchase as of March 30, 2014 totaled 22.3 million .
Cash Flows
Cash used by operating activities was $983.5 million for the first two quarters of fiscal 2014 , compared to cash provided by operating activities
of $1.4 billion for the same period in fiscal 2013 . The decrease was driven by the first quarter payment of $2.8 billion for the Kraft arbitration
matter discussed above. This was partially offset by cash provided by operating activities of $1.8 billion resulting from increased earnings and
improvements in working capital accounts.
Cash used by investing activities for the first two quarters of fiscal 2014 totaled $549.0 million , compared to $613.0 million for the same period
in fiscal 2013 . The change was primarily due to the use of cash to acquire Teavana in the second quarter of fiscal 2013, partially offset by
increased investment in long-term securities during the first two quarters of fiscal 2014.
Cash provided by financing activities for the first two quarters of fiscal 2014 totaled $157.4 million , compared to cash used by financing
activities of $718.5 million for the same period in fiscal 2013 . The increase was primarily due to the proceeds from the issuance of long-term
debt in the first quarter of fiscal 2014 and decreased share repurchases compared to the first two quarters of fiscal 2013.
Contractual Obligations
In Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 10-K, we disclosed that we had
$10.0 billion in total contractual obligations as of September 29, 2013. Other than the items discussed below, there have been no material
changes to this total obligation during the period covered by this 10-Q outside of the ordinary course of our business.
In the first quarter of fiscal 2014, we issued $750 million of debt, as described in Note 6 to the condensed consolidated financial statements
included in Item 1 of Part I of this 10-Q. In addition, the $2.8 billion that was accrued for the Kraft arbitration matter as of September 29, 2013
was removed from total contractual obligations, as this obligation was fully extinguished in the first quarter of fiscal 2014.
29
Table of Contents
Off-Balance Sheet Arrangements
There has been no material change in our off-balance sheet arrangements discussed in Management’s Discussion and Analysis of Financial
Condition and Results of Operations included in the 10-K.
Commodity Prices, Availability and General Risk Conditions
Commodity price risk represents our primary market risk, generated by our purchases of green coffee and dairy products, among other items. We
purchase, roast and sell high quality whole bean arabica coffee and related products and risk arises from the price volatility of green coffee. In
addition to coffee, we also purchase significant amounts of dairy products to support the needs of our company-operated stores. The price and
availability of these commodities directly impact our results of operations and we expect commodity prices, particularly coffee, to impact future
results of operations. For additional details see Product Supply in Item 1 of the 10-K, as well as Risk Factors in Item 1A of the 10-K.
Seasonality and Quarterly Results
Our business is subject to seasonal fluctuations, including fluctuations resulting from the holiday season in December. Notwithstanding our $2.8
billion cash payment in the first quarter of 2014 related to the Kraft arbitration matter, our cash flows from operations are considerably higher in
the first fiscal quarter than the remainder of the year. This is largely driven by cash received as Starbucks Cards are purchased and loaded during
the holiday season. Since revenues from the Starbucks Card are recognized upon redemption and not when purchased, seasonal fluctuations on
the consolidated statements of earnings are much less pronounced. Quarterly results are affected by the timing of the opening of new stores and
the closing of existing stores. For these reasons, results for any quarter are not necessarily indicative of the results that may be achieved for the
full fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1 to the condensed consolidated financial statements included in Item 1 of Part I of this 10-Q.
There has been no material change in the commodity price risk, foreign currency exchange risk, equity security price risk, or interest rate risk
discussed in Item 7A of the 10-K.
We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic
reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms. Our disclosure controls and procedures are also designed to ensure that
information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to our
management, including our principal executive officer and principal financial officer as appropriate, to allow timely decisions regarding required
disclosure.
During the second quarter of fiscal 2014 , we carried out an evaluation, under the supervision and with the participation of our management,
including our chief executive officer and our chief financial officer, of the effectiveness of the design and operation of the disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and procedures were effective, as of the end of the period covered by this report
( March 30, 2014 ).
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during
our most recently completed fiscal quarter that materially affected or are reasonably likely to materially affect internal control over financial
reporting.
The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1 and 31.2 to this 10-Q.
PART II — OTHER INFORMATION
See Note 10 to the condensed consolidated financial statements included in Item 1 of Part I of this 10-Q for information regarding certain legal
proceedings in which we are involved.
30
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Table of Contents
There have been no material changes to the risk factors previously disclosed in the 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Information regarding repurchases of our common stock during the quarter ended March 30, 2014 :
31
Total
Number of
Shares
Purchased
Average
Price
Paid per
Share
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Maximum
Number of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs
(2)
Period
(1)
December 30, 2013 — January 26, 2014
1,025,288
$
75.97
1,025,288
24,729,132
January 27, 2014 — February 23, 2014
1,276,100
72.50
1,276,100
23,453,032
February 24, 2014 — March 30, 2014
1,161,688
72.33
1,161,688
22,291,344
Total
3,463,076
$
73.47
3,463,076
(1)
Monthly information is presented by reference to our fiscal months during the second quarter of fiscal 2014
.
(2)
The share repurchase program is conducted under authorizations made from time to time by our Board of Directors. On November 3,
2011 , we publicly announced the authorization of up to an additional 20 million shares, and on November 15, 2012 , we publicly
announced the authorization of up to an additional 25 million shares. These authorizations have no expiration date.
Table of Contents
* Furnished herewith.
32
Item 6.
Exhibits
Incorporated by Reference
Exhibit
No.
Exhibit Description
Form
File No.
Date of
Filing
Exhibit
Number
Filed
Herewith
3.1
Restated Articles of Incorporation of Starbucks Corporation
10-Q
0-20322
5/12/2006
3.1
3.2
Amended and Restated Bylaws of Starbucks Corporation (As
amended and restated through November 13, 2012)
10-K
0-20322
11/16/2012
3.2
10.1
Letter Agreement dated January 29, 2014 between Starbucks
Corporation and Troy Alstead
8-K
0-20322
1/29/2014
10.1
10.2
Letter Agreement dated January 29, 2014 between Starbucks
Corporation and Scott Maw
8-K
0-20322
1/29/2014
10.2
10.3
Exclusive Aircraft Sublease (S/N 6003) dated as of September
27, 2013 by and between Cloverdale Services, LLC and
Starbucks Corporation
—
—
—
—
X
31.1
Certification of Principal Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
—
—
—
—
X
31.2
Certification of Principal Financial Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
—
—
—
—
X
32*
Certifications of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
—
—
—
—
—
101
The following financial statements from the Company’s 10-Q
for the fiscal quarter ended March 30, 2014, formatted in
XBRL: (i) Condensed Consolidated Statements of Earnings, (ii)
Condensed Consolidated Statements of Comprehensive Income,
(iii) Condensed Consolidated Balance Sheets, (iv) Condensed
Consolidated Statements of Cash Flows and (v) Notes to
Condensed Consolidated Financial Statements
—
—
—
—
X
Table of Contents
SIGNATURES
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.
April 29, 2014
33
STARBUCKS CORPORATION
By:
/s/ Scott Maw
Scott Maw
executive vice president and chief financial
officer
Signing on behalf of the registrant and as
principal financial officer
EXHIBIT 10.3
EXCLUSIVE AIRCRAFT SUBLEASE (S/N 6003)
THIS EXCLUSIVE AIRCRAFT SUBLEASE (S/N 6003) (together with all Supplements, Riders and Addenda hereto, this “
Sublease ”) is dated as of September 27, 2013 (the “ Effective Date ”) by and between CLOVERDALE SERVICES, LLC
, a
Washington limited liability company, as sublessor (“ Sublessor ”) and STARBUCKS CORPORATION
, a Washington corporation,
as sublessee (“ Sublessee ”).
Capitalized and certain other terms used but not otherwise defined in this Sublease shall have the
meanings ascribed to them in Annex A attached hereto and made a part hereof.
In consideration of the mutual agreements contained herein, and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1.1 Sublease
. Subject to the terms and conditions provided in this Sublease and the other Sublease Documents,
Sublessor agrees to sublease the Aircraft to Sublessee, and Sublessee agrees to sublease the Aircraft from Sublessor.
1.2 Sublease Supplement
. The execution by Sublessee of the Sublease Supplement will evidence that the Aircraft
is subleased under, and is subject to all of the terms, provisions and conditions of, this Sublease and the other Sublease
Documents, and shall constitute Sublessee’
s unconditional and irrevocable acceptance of the Aircraft for all purposes hereof and
thereof. The sublease of the Aircraft to Sublessee shall commence on the Acceptance Date and end on the Expiration Date, unless
extended or earlier terminated or cancelled pursuant to this Sublease. Sublessee warrants that as of, and at all times after the
Acceptance Date, Lessor will be the legal owner of the Aircraft, and Sublessee shall have only the right to use and possess the
Aircraft in accordance with the Sublease Documents, in each case, except as otherwise expressly provided in this Sublease.
1.3 Monthly Report.
Within thirty (30) days after the end of each month, Sublessee shall provide a monthly report to
Sublessor which shall include flight segments and hours for the preceding month in the form attached hereto as Schedule No. 4.
SECTION 2. RENT, NET LEASE, TERMINATION .
2.1 Rent . Sublessee shall pay to Sublessor the following amounts (any and all such amounts, as applicable, “
Rent ”): (a) as “ Basic Rent ”,
on the Rent Commencement Date, Daily Rent for each day starting with the Acceptance Date, to but
excluding the Rent Commencement Date; and (b) on the First Basic Rent Date and on each Basic Rent Date following that date, an
amount equal to the product of (i) the Lessor’s Cost, multiplied by (ii) the Basic Rent Percentage set forth on Schedule No. 2-A
;
and (b) as “ Supplemental Rent ”, (
i) as and when due, any other amount that Sublessee is obligated to pay under this Sublease
or any of the Sublease Documents to Sublessor (including Casualty Value and/or any amounts due pursuant to any Addendum),
and (ii) interest accruing at the Late Payment Rate on any Rent not paid when due, until paid. Sublessee shall make all payments
of Rent in United States Dollars (“ U.S. Dollars ”),
in immediately available funds on the date payable under this Sublease or the
other Sublease Documents, in the manner (whether by check, wire transfer or otherwise) directed by Sublessor, in writing to
Sublessee.
2.2 Net Lease .
(a)
This Sublease is a net lease, and Sublessee acknowledges and agrees that, except for a termination of
this Sublease by either party as set forth herein, a termination by Lessor pursuant to Section 9.7 or as provided in Section 2.2(b)
Sublessee’s obligation to pay, and Sublessor’
s right to receive, all Rent in accordance with this Sublease shall be absolute,
irrevocable, and unconditional (except for the defense of payment in accordance with the terms hereof).
(b)
Sublease shall be permitted to setoff against amounts required to be paid by Sublessee to Sublessor
any and all past due amounts required to be paid by Sublessor, its principal or affiliates to Sublessee or its affiliates in connection
with the Aircraft.
2.3 Termination by Either Party
. Either Sublessor or Sublessee may terminate this Sublease by giving at least
forty-five (45) days’ written notice to the other party.
SECTION 1. SUBLEASE OF AIRCRAFT
.
SECTION 3. QUIET ENJOYMENT; DISCLAIMERS .
(a)
Sublessor represents and warrants that during the Term, (i) Sublessor is and will remain (A) duly organized,
validly existing and in good standing under the laws of the state of its organization, (B) duly qualified to do business in each
jurisdiction where the failure to be so qualified would cause a material adverse effect on Sublessor
’
s ability to perform its obligations
under this Sublease, and (C) a “citizen of the United States”
within the meaning of the Transportation Code; (ii) Sublessor has the
necessary authority and power to transact the business in which it is engaged; (iii) Sublessor’
s execution and delivery of, and
performance of its obligations under and with respect to, each of the Sublease Documents to which it is a party (including leasing
the Aircraft, and participating in the other transactions contemplated herein and therein), (A) have been duly authorized by all
necessary action on the part of Sublessor consistent with its form of organization, (B) do not contravene or constitute a default
under any Applicable Law, any of Sublessor’
s Organizational Documents, or any agreement, indenture, or other instrument to
which Sublessor is a party or by which it may be bound, (C) do not require the approval of or notice to (I) any Governmental
Authority, except for the filings and registrations specified in the Section 10(b) of the Sublease Consent, all of which shall have
been duly effected, prior to or concurrently with Sublessor’s leasing the Aircraft from Lessor, Sublessor’
s subleasing of the Aircraft
to Sublessee and Sublessee’
s acceptance of the Aircraft under this Sublease, or (II) any other party (including any trustees or
holders of indebtedness), (D) will not result in the creation or imposition of any Lien (except Permitted Liens) on any of the asset of
any Sublessee Party with respect to the Aircraft other than the Lessor’
s Interest created under the Lease and by the other Lease
Documents with respect to the Aircraft and Sublessee’
s interest created by the Sublease and (E) [reserved]; (iv) each of the
Sublease Documents have been duly authorized, executed and delivered by an authorized representative of Sublessor, and
constitutes the legal, valid and binding obligation of Sublessor, enforceable against it in accordance with the respective terms of
such Sublease Documents, and constitutes the legal, valid and binding obligation of Sublessor except to the extent that the
enforcement of remedies may be limited under applicable bankruptcy and insolvency laws; (v) there are no proceedings pending or,
so far as the managers or members of Sublessor know, threatened against or affecting Sublessor or any of its property before any
Governmental Authority that reasonably could impair Lessor’
s or Sublessor's Interests in, to or with respect to the Aircraft, or that, if
decided adversely, reasonably could materially affect the financial condition or operations of Sublessor or its ability to perform its
obligations under the Lease Documents or the Sublease Documents, as applicable; and (vi) so long as no Event of Default has
occurred and is continuing, the possession and use of the Aircraft by Sublessee pursuant to and during the Term of this Sublease,
shall not be interfered with by Sublessor or anyone claiming an interest by or through Sublessor, including but not limited to the
Lessor Parties.
(b)
(i) EXCEPT AS EXPRESSLY PROVIDED IN SECTION 3(a) ABOVE, SUBLESSOR SHALL NOT BE DEEMED
TO HAVE MADE, AND HEREBY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS
TO THE AIRCRAFT, INCLUDING ANY ENGINE, PART OR RECORD, OR ANY MATTER WHATSOEVER, INCLUDING, THE
AIRCRAFT’
S DESIGN, CONDITION, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, TITLE, ABSENCE OF
ANY PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT OR LATENT DEFECT (WHETHER OR NOT DISCOVERABLE
BY SUBLESSEE), COMPLIANCE OF THE AIRCRAFT WITH ANY APPLICABLE LAW, CONFORMITY OF THE AIRCRAFT TO
THE DESCRIPTION SET FORTH IN THE SUBLEASE, OR ANY INTERFERENCE OR INFRINGEMENT, OR ARISING FROM
ANY COURSE OF DEALING OR USAGE OF TRADE, NOR SHALL SUBLESSOR BE LIABLE, FOR ANY INDIRECT,
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OR FOR STRICT OR ABSOLUTE LIABILITY IN TORT (EXCEPT TO
THE EXTENT SUCH LIABILITY ARISES OUT OF THE NON-
RECOURSE AGREEMENT OR ITS OBLIGATIONS THEREUNDER
TO SUBLESSEE OR ANY LESSOR PARTY); AND SUBLESSEE HEREBY WAIVES ANY CLAIMS ARISING OUT OF ANY OF
THE FOREGOING. (ii) Without limiting the foregoing, (A) Sublessor will not be responsible to Sublessee with respect to, and
Sublessee agrees to bear sole responsibility for, any risk or other matter that is the subject of Sublessor’
s disclaimer; PROVIDED
THAT, THE SUBLESSEE SHALL NOT BE LIABLE TO SUBLESSOR FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR
CONSEQUENTIAL DAMAGES OR FOR STRICT OR ABSOLUTE LIABILITY IN TORT, AND SUBLESSOR HEREBY WAIVES
ANY CLAIMS ARISING OUT OF ANY OF THE FOREGOING; (B) Sublessee, with Sublessor’
s prior written consent (which consent
shall not be unreasonably withheld, delayed or conditioned), may exercise Sublessor’
s rights, if any, under any warranty of any
manufacturer (including the Manufacturer) or any supplier (including the Supplier(s)) with respect to the Aircraft; except that
Sublessee’
s exercise of such rights (1) shall be at no cost or risk to Sublessor (except as otherwise provided in the Sublease
Documents), and any such cost and risk shall be the sole responsibility of Sublessee by indemnification or other related promise
hereunder, (2) shall not result in any prejudice to Sublessor, (3) shall not be enforced by legal proceeding without Sublessor’
s prior
written consent, such consent not to be unreasonably delayed, withheld or conditioned, and (4) may be exercised unless and until
the Aircraft is returned to Sublessor pursuant to this Sublease or to Lessor under the
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Sublease Consent or the Non-
Recourse Agreement and only so long as no Event of Default has occurred and is continuing; and
(C) Sublessee hereby agrees that Sublessor’s warranty in Section 3(a) above, and Sublessee’s rights pursuant to sub-
clause (B),
are in lieu of any other representations or warranties by Sublessor, express or implied, with respect to the condition of the Aircraft,
all of which have been effectively disclaimed and waived pursuant to this Section 3(b). For the avoidance of doubt, for purposes of
Section 3(b)(ii)(A) above, Sublessor and Sublessee hereby agree that any amount, cost or expense paid by Sublessor shall not be
deemed an indirect, incidental special or consequential damage.
SECTION 4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF SUBLESSEE .
Sublessee represents, warrants and covenants to Sublessor that:
4.1 Organization
. Sublessee is and will remain (a) duly organized, validly existing and in good standing under the
laws of the state of its organization and (b) duly qualified to do business in the jurisdiction of the Primary Hangar Location, as well
as in each other jurisdiction where the failure to be so qualified would cause a material adverse effect on Sublessee’
s ability to
perform its obligations under this Sublease. Sublessee has the necessary authority and power to transact the business in which it is
engaged.
4.2 Authority; Enforceability; Etc .
(a) Authorized . Sublessee’
s execution and delivery of, and performance of its obligations under and with
respect to, each of the Sublease Documents to which it is a party (including its subleasing, possessing and operating the Aircraft,
and participating in the other transactions contemplated herein and therein), (i) have been duly authorized by all necessary action
on the part of Sublessee consistent with its form of organization, (ii) do not contravene or constitute a default under any Applicable
Law, any of Sublessee’
s Organizational Documents, or any agreement, indenture, or other instrument to which Sublessee is a party
or by which it may be bound, (iii) except with respect to operational or maintenance requirements, do not require the approval of or
notice to (A) any Governmental Authority, except for the filings and registrations specified in the Section 8(b) of the Sublease
Consent, all of which shall have been duly effected, prior to or concurrently with Lessor’
s purchasing the Aircraft and leasing it to
the Sublessor and, Sublessor’s subleasing of the Aircraft to Sublessee, and Sublessee’
s acceptance of the Aircraft under this
Sublease, or (B) any other party (including any trustees or holders of indebtedness), and (iv) will not result in the creation or
imposition of any Lien (except Permitted Liens) with respect to the Aircraft.
(b) Enforceable
. Each of the Sublease Documents has been duly authorized, executed and delivered by
an authorized representative of Sublessee, and constitutes the legal, valid and binding obligation of Sublessee, enforceable against
Sublessee in accordance with their respective terms except to the extent that the enforcement of remedies may be limited under
applicable bankruptcy and insolvency laws or the application of equitable principles.
(c) Proceedings
. There are no proceedings pending or, so far as the officers of Sublessee know,
threatened against or affecting Sublessee or any of its property before any Governmental Authority that reasonably could impair
Lessor’s Interests in, to or with respect to the Aircraft, or that, if decided adversely, reasonably could materially affect Sublessee’
s
ability to perform its obligations under the Sublease Documents.
(d) Reserved.
4.3 Acceptance; Title, Etc . Without limiting the foregoing, upon Sublessee’
s acceptance of the Aircraft under this
Sublease, on the Acceptance Date:
(a) Conditions Satisfied
. Sublessee has satisfied or complied with all applicable conditions precedent as
set forth in the Sublease Documents; and no Default or Event of Default is existing.
(b) Acceptance
. As of the Acceptance Date, the Aircraft has been delivered to Sublessee, is in
Sublessee’
s possession, has been inspected by Sublessee to its complete satisfaction and is, unconditionally, irrevocably and fully
accepted by Sublessee. Without limiting the foregoing, (i) the Aircraft has been found to be in good working order, repair and
condition and fully equipped to operate for its intended purpose, is in conformity with the requirements of the Applicable Standards,
is currently certified under all existing applicable FARs and any other Applicable Laws, and is airworthy in all respects; (ii) solely as
between Sublessor and Sublessee (and without prejudicing Sublessee’
s rights against Supplier or any other third party, which
rights are not being disclaimed hereby) Sublessee has no pending claims and has no current knowledge of any facts upon which a
future claim may be based,
3
against any prior owner, Manufacturer or Supplier or any other supplier of the Aircraft, for breach of warranty or otherwise; (iii)
Sublessee has furnished no equipment for the Aircraft, or permitted as an Addition pursuant to this Sublease; and (iv) all of the
information contained in Schedules No. 1 and No. 2
, including the Primary Hangar Location, the registration number of the Aircraft,
and each of the serial numbers, manufacturer and model numbers of the Airframe and Engines and any APU are true and accurate.
(c) Reserved .
(d) Cape Town Convention
. For the purposes of the Cape Town Convention and any other Applicable
Law: (i) upon the acceptance of the Aircraft by Sublessee under this Sublease, Sublessee shall be situated in the United States
(which is a contracting state); (ii) Sublessee consents to the registration with the International Registry of Sublessor’
s international
interest created by the Sublease and Sublessor’
s security assignment to Lessor of such international interest together with all
associated rights relating thereto, solely for purposes of Lessor’
s protecting its interest in the Aircraft and such associated rights
under the Cape Town Convention and other applicable commercial law; (iii) Sublessee is a transacting user entity, has appointed
an administrator (which administrator is Kirk Woford at Insured Aircraft Title Service, Inc.) and has designated a professional user
entity reasonably acceptable to Sublessor; (iv) Sublessee has paid all required fees and taken all actions necessary to enable
Lessor and Sublessor to register any international interests created with respect to this Sublease with the International Registry; (v)
Sublessee authorizes its professional user entity to consent to the registrations contemplated herein with the International Registry
upon request therefor by Sublessor or Lessor; and (vii) Sublessee will not discharge any international interest created in favor of
Lessor, or assigned to Lessor, without Lessor’s prior written consent.
SECTION 5. COMPLIANCE, USE AND MAINTENANCE .
5.1 Compliance; Organizational Issues
. On the Acceptance Date, and at all times thereafter until the Aircraft is
returned to Sublessor pursuant to this Sublease, Sublessee agrees that it shall fully and timely perform and comply with, or shall
cause to be so fully and timely performed, all of the following:
(a)
Sublessee shall (i) duly observe and conform to all requirements of Applicable Law relating to the
Aircraft, (ii) obtain and keep in full force and effect all rights, franchises, licenses and permits, and all approvals by any
Governmental Authority, in each case, required with respect to Sublessee’
s performance of its obligations under the Sublease
Documents and the operation of the Aircraft, (iii) cause the Aircraft to (A) remain primarily hangared at the Primary Hangar Location
(except as may be otherwise directed by Sublessor or its principal), and (B) (subject to Section 5.6) be and remain duly registered
in Lessor’
s name under the Transportation Code, including by fully and timely complying with any and all informational and other
requests by the FAA, and taking all other actions required by Applicable Law, and (iv) pay and perform all of its obligations and
liabilities when due (except in the case of a good faith dispute being pursued with due diligence and by appropriate proceedings).
(b) Reserved .
(c)
Sublessee agrees to (i) prominently display on the Aircraft the FAA registration number, specified in
Schedule No. 1
, or such other registration number as has been approved by and exclusively reserved to Lessor in its name and
duly reflected on the FAA Registry; and (ii) notify Sublessor in writing thirty (30) days prior to making any material change in the
appearance or coloring of the Aircraft.
5.2 Operation, Etc .
Sublessee agrees that the Aircraft will be operated in compliance with Part 91 and any other
applicable provision of the FARs, and all other Applicable Standards, for purposes that are incidental to the business of Sublessee,
including for the purposes permitted under FAR 91.501(b)(5), and in a manner that is consistent with the transactions hereunder
being deemed commercial (and not consumer) transactions under Applicable Law. Unless otherwise expressly permitted
hereunder, (a) Sublessee shall not operate or permit the Aircraft to be operated for air taxi operations or otherwise under Part 135
of the FARs; and (b) Sublessee shall at all times have, and maintain, “operational control”
of the Aircraft (as such term is then
interpreted by the FAA or such other applicable Governmental Authority), and no other Person shall operate the Aircraft. The
Aircraft at all times will be operated by duly qualified pilots having satisfied all requirements established and specified by the FAA,
the TSA and any other applicable Governmental Authority and the Required Coverages. Sublessee may fly the Aircraft temporarily
to any country in the world, provided that the Aircraft (x) shall at all times be based and predominantly used, operated and located
in the continental United States (except as authorized by Sublessor, its principal or its affiliate); and (y) shall not be flown, operated,
used or located in, to or over any such country or area (temporarily or otherwise) (i) that is excluded from the Required Coverages
(or specifically not covered by such insurance), (ii) with which the United States does not
4
maintain favorable diplomatic relations (except for such flights permitted with respect to Sublessee, as well as the Lessor Parties
and the Aircraft, under Applicable Law, and otherwise in compliance with all of the other provisions of this Sublease and the other
Sublease Documents, including, all of the other clauses of this sentence), (iii) in any area of recognized or threatened hostilities, (iv)
if as a result, payment of any related claim under the Required Coverages is likely to be prohibited under any trade or other
economic sanction or embargo by the United States, (v) in violation of any of the Sublease Documents or any Applicable
Standards, or (vi) in a manner that causes it to be deemed to have been used or operated “predominantly”
outside of the United
States, as that phrase is used in Section 168(g)(1)(A) of the Code. Sublessee shall adopt, implement and comply with all security
measures required by any Applicable Law (except as authorized by Sublessor, its principal or its affiliate) the provisions of the
Required Coverages, or that Sublessee reasonably deems are necessary for the proper protection of the Aircraft (whether on the
ground or in flight) against theft, vandalism, hijacking, destruction, bombing, terrorism or similar acts.
5.3 Maintenance
. Sublessee agrees that, with respect to the Airframe, the Engines, the APU and each Part,
Sublessee will at its own expense, perform or cause to be performed the following: (a) maintain, inspect, service, repair, overhaul
and test the same in accordance with Applicable Standards, (b) make any alterations or modifications that may at any time be
required to comply with Applicable Standards, and to cause the Aircraft to remain airworthy, (c) furnish all required parts,
replacements, mechanisms, devices and servicing so that the condition and operating efficiency thereof will at all times be no less
than its condition and operating efficiency as and when delivered to Sublessee, ordinary wear and tear from proper use alone
excepted, (d) promptly replace all Parts (i) which become worn out, lost, stolen, taken, destroyed, damaged beyond repair or
permanently rendered or declared unfit for use for any reason whatsoever, or (ii) if not previously replaced pursuant to clause (i), as
and when required by any Applicable Standards, including any applicable life limits, (e) maintain (in English) all Records in
accordance with Applicable Standards, and (f) enroll and maintain the Engines in an Engine Maintenance Program. All
maintenance procedures shall be performed by properly trained, licensed, and certified maintenance sources and personnel, as
applicable, utilizing replacement parts approved by the FAA and the manufacturer of (as applicable) the Airframe, the Engine, any
APU, or any Part. Without limiting the foregoing, Sublessee shall comply with all mandatory service bulletins and airworthiness
directives by causing compliance with such bulletins and directives to be completed, as and when required thereby, through
corrective modification in lieu of operating manual restrictions; provided , however
, that, so long as no Default or Event of Default is
then existing and a method of compliance other than terminating action is permitted by the airworthiness directive or mandatory
service bulletin, and conforms to the other Applicable Standards, then Sublessee shall have one hundred twenty (120) days (or
such shorter period as may be required under such airworthiness directive or mandatory service bulletin)to complete the
terminating action and/or corrective modification (as applicable) with regard to any such applicable mandatory service bulletin
and/or airworthiness directive, as the case may be, and Sublessee may continue to operate the Aircraft under Applicable Law
and/or Applicable Standards, as the case may be, during such one hundred twenty (120) day period (or such shorter period as may
be required under the airworthiness directive or service bulletin) by repetitive inspections or by operating manual restrictions but
only to the extent that such Applicable Law and/or Applicable Standards, as the case may be, permit such operation of the Aircraft
by any such repetitive inspections or operating manual restrictions, as the case may be.
5.4 Additions, Alterations, Etc
. Except as required by Applicable Law, Sublessee will not make or authorize any
improvement, change, addition or alteration to the Aircraft that will impair the originally intended function or use of the Aircraft,
diminish the value of the Aircraft as it existed immediately prior thereto, or violate any Applicable Standard. All repairs, parts,
replacements (other than temporary replacements), mechanisms and devices added by Sublessee or on its behalf shall
immediately, without further act, become part of the Aircraft and subject to this Sublease and the other Sublease Documents
(including Lessor’
s Interest granted or otherwise created hereby and thereby), and title thereto shall immediately vest in Lessor and
Owner Participant without any payment by, or any cost or expense to any Lessor Party.
5.5 Loaner Engines or APU
. In the event any Engine or the APU is damaged, being inspected, repaired or
overhauled and provided no Event of Default has occurred and is continuing, Sublessee, at its option, may temporarily substitute
another engine or APU, as applicable, of the same make and model as the Engine or APU, as applicable, being repaired or
overhauled (any such substitute engine or APU, as applicable, being hereinafter referred to as a “ Loaner Engine ” or “
Loaner
APU ”,
as applicable) during the period of such repair or overhaul, and provided further (a) installation of the Loaner Engine or
Loaner APU, as applicable, is performed by a maintenance facility certified by the FAA and the manufacturer with respect to an
aircraft of this type, (b) the Loaner Engine or Loaner APU, as applicable, is removed and the repaired or overhauled original Engine
or APU, as applicable, is reinstalled on the Airframe promptly upon completion of the repair or overhaul but in no event later than
the earlier of one hundred eighty (180) days after removal, or the expiration, cancellation or earlier termination of this Sublease, and
(c) the Loaner Engine or Loaner
5
APU, as applicable, is free and clear of any Lien that is reasonably likely (in Sublessor’
s reasonable good faith discretion) to impair
Lessor’s rights or interests in the Aircraft, and is maintained in accordance herewith.
5.6 Aircraft Registration
. On the Acceptance Date, and at all times thereafter until this Sublease is terminated or
the Aircraft is returned to Sublessor in accordance with the terms of this Sublease, Sublessee shall cause the Aircraft to be
effectively and otherwise validly registered in Lessor’
s name on the Registry, and the currently assigned U.S. registration number to
remain authorized for use by Lessor on the Aircraft, in each case, in accordance with the Registration Requirements (except for any
such failure that is the direct result of a Lessor-
Related Deregistration); and without limiting the foregoing (including the referenced
exception), or any other provision of this Sublease, Sublessee shall:
(a)
cause a valid Registration Certificate to be maintained at all times within the Aircraft and without limiting
the foregoing Sublessee shall (i) notify Sublessor immediately of any event or circumstance of which it becomes aware with respect
to which the Registration Requirements require further action by Sublessor or Lessor (other than those for which Sublessor or
Lessor receives sole notification from the Governmental Authority or any other party), and (ii) comply with any and all of the
Registration Requirements;
(b) with respect to any Defective Registration (and without waiving Sublessee’
s responsibility to avoid such
circumstance as set forth in Section 5.6(a) above), the Aircraft shall not be operated until authorized by the Registration
Requirements, and Sublessee shall (i) comply with the FARs and other Applicable Laws relating to such Defective Registration, and
(ii) ground and store the Aircraft in accordance with terms of this Sublease; and
(c)
fully and timely cooperate with Sublessor; pay or reimburse Sublessor upon its demand for all
reasonable and documented fees, charges, or other amounts payable or incurred in connection with any of the foregoing, and take
any and all of the other actions contemplated herein, as and when required by the Registration Requirements or as otherwise
reasonably requested by Sublessor, including with respect to any disposition permitted under the Sublease Documents.
Sublessor agrees to provide and to cause Lessor to provide its reasonable cooperation to Sublessee with respect to
Sublessee’
s compliance with the provisions of this Section 5.6; provided, however, with respect to any such Defective Registration,
(unless directly resulting from a Lessor-
Related Deregistration), in no event will Lessor be deemed liable to Sublessee as a result of
any Defective Registration (unless directly resulting from a Lessor-Related Deregistration).
Notwithstanding the foregoing, if there is any NCT Law Change, each of Sublessor and Sublessee shall reasonably
cooperate with the other party and with Lessor for the purpose of promptly resolving any related Aircraft registration issues.
5.7 No Disposition or Liens; and Exceptions .
(a) No Dispositions, Liens, Etc.
Except as permitted by this Sublease or instructed or directly caused by
Sublessor or Lessor, Sublessee shall not sell, assign, enter into any Third Party Agreement, convey, mortgage, exchange or
otherwise transfer or relinquish possession of (including by any seizure or other taking by any foreign or domestic Governmental
Authority) or dispose of, or grant or otherwise create a Lien (other than a Permitted Lien) against, the Airframe, or any Engine, APU
or Part, related associated rights, international interests, prospective international interests, or any proceeds, nor shall it attempt, or
suffer or permit, any of the foregoing. Sublessee shall be permitted, however, to enter into Permitted Third Party Agreements and
shall be permitted to deliver possession of the Airframe, or any Engine, APU or Part to another Person for the purpose of complying
with any of the other provisions of this Section 5, in each case, if and to the extent consistent with the provisions of the Sublease
Documents. Sublessee will warrant and defend Lessor’s Interest in and to the Aircraft (including Lessor’
s good and marketable title
thereto), and the validity, perfection and first priority of Lessor’
s Interest in the Aircraft, against all other Liens, claims and demands
whatsoever, except Permitted Liens; and without limiting the foregoing, Sublessee will (a) not create, assume or suffer to exist any
Liens on or with respect to the Aircraft, or Sublessor’
s interest therein (other than Permitted Liens); and (b) promptly take such
action as directed by Sublessor or by Lessor to duly discharge any such unpermitted Liens and in the event of conflicting
instructions by Sublessor and Lessor, shall follow the written instruction of Lessor.
6
(b) Exceptions
. So long as no Event of Default has occurred and is continuing, Sublessee may enter into
and remain a party to one or more time sharing agreements under §91.501(b)(6) of the FARs with officials or guests of Sublessee
(each, a “ Timesharer ”),
subject to the satisfaction of, and compliance by Sublessee and such Timesharer with, all of the following
throughout the term of such arrangement (a “ Permitted Third Party Agreement ”):
(i) Reserved.
(ii)
Any operation of the Aircraft pursuant to any such Permitted Third Party Agreement shall be
limited to operation by Lessee pursuant to a time sharing or other arrangement or agreement with an affiliated Interested
Third Party pursuant to either Section 91.501(b)(5) or Section 91.501(b)(6) of the FARs, and so long as Lessee does not
relinquish possession or operational control of the Aircraft pursuant thereto, and any such operation by Sublessee shall
comply with (1) Part 91 and any other applicable provision of the FARs, and all other Applicable Standards, and (2) the
provisions hereof and of the other Sublease Documents pertinent to the operation of the Aircraft by such party.
(iii) The Permitted Third Party Agreement shall (A) be and remain, subordinate to Lessor’
s Interest
in and with respect to the Aircraft, and under the Sublease Documents (and such subordination shall be expressly
acknowledged therein), (B) not convey any Lien on, or other property interest in or against the Airframe or the Engines, (C)
not permit any further disposition of or Lien against the Aircraft by Timesharer, or any change in registration or unpermitted
change in the Primary Hangar Location of the Aircraft, (D) not contain material provisions that are inconsistent with the
material provisions of any of the Sublease Documents or cause Sublessee to breach any of its representations, warranties
or agreements under any of the Sublease Documents, and (E) be in conformity with all applicable requirements of the
FARs and other Applicable Laws.
(iv) Reserved.
(v) Reserved.
(vi) (A) No such Permitted Third Party Agreement shall reduce any of Sublessee’
s obligations, or
any Lessor Party’s rights or Sublessor’
s rights, under any of the Lease Documents or any of the Sublease Documents, (B)
all of Sublessee’
s obligations under the Sublease Documents shall be and remain primary as to Sublessor and continue in
full force and effect as the obligations of a principal and not of a guarantor or surety, and (C) none of the Lessor Parties and
Sublessor is waiving the right to require full and timely performance of any such obligations in strict accordance with the
provisions hereof and of the other Sublease Documents except as provided by the Non-Recourse Agreement.
5.8 Return Requirements
. Upon the expiration, cancellation, or other termination of this Sublease, Sublessee shall
at its sole expense return the Aircraft to Sublessor in accordance with, and otherwise pay, perform and comply with, all of the
provisions of the Return Addendum (all of which are hereby incorporated herein), in each case as and when required hereby.
SECTION 6. LOSS OR DAMAGE .
6.1 Risk of Loss
. As of the Acceptance Date, and at all times thereafter unless and until the Aircraft is returned to
Sublessor pursuant to the provisions of this Sublease, Sublessee shall bear the risk of any Event of Loss or other loss, theft,
confiscation, taking, unavailability, damage or partial destruction of the Aircraft, and shall not be released from its obligations
hereunder in the event of any damage or Event of Loss to the Aircraft or any part thereof. With respect to any repairable damage to
the Aircraft, Sublessee shall: (a) repair the same in accordance with all of the applicable provisions of this Sublease (including as
provided in Section 5.3); and (b) provide written notice to Sublessor thereof if constituting Material Damage either concurrently with
its report of same to the applicable Governmental Authority, or (if no such report is required) within ten (10) days of the occurrence
of such Material Damage. The required notice must be provided together with any damage reports provided to the FAA or any other
Governmental Authority, the insurer or Supplier, and any documents existing at the time of such notice pertaining to the repair of
such damage, including copies of work orders, and all invoices for related charges.
6.2 Loss of Aircraft
. Upon the occurrence of any Event of Loss with respect to the Airframe or the Aircraft,
Sublessee shall notify Sublessor within five (5) Business Days of the date thereof. On the Casualty Payment Date, Sublessee shall
pay to Sublessor any Rent then due, plus the Casualty Value of the Aircraft determined as of such Casualty Payment Date,
together with interest at the Late Payment Rate for the period (if any) from the Casualty
7
Payment Date through the date of payment. Upon making the applicable payment required hereby, Sublessee’
s obligation to pay
further Basic Rent for the Aircraft subsequent to such payment shall cease, but Sublessee shall remain liable for, and pay as and
when due, all Supplemental Rent, and this Sublease shall terminate (except for the provisions hereof which by their terms survive
any termination of this Sublease, and except for any right of Sublessee to recover possession of the Aircraft, if recoverable, subject
to the requirements of any third party insurance carrier, the rights of any other Person claiming an interest therein (other than if
constituting a Lessor Lien), and any other pertinent terms of this Sublease). Notwithstanding the foregoing, this Section 6.2 shall not
apply in the event that such occurrence does not trigger a corresponding demand from Lessor to Sublessor under the Lease.
6.3 Loss of an Engine or an APU . Upon an Event of Loss with respect to any Engine or APU (as applicable, a “
Lost Item ”),
but not the Airframe, Sublessee shall give Sublessor prompt written notice thereof, and within one hundred twenty
(120) days after the occurrence of such Event of Loss replace such Lost Item with a Permitted Replacement by complying with the
provisions of this Section 6.3, and during such one hundred twenty (120) day period, Sublessee may temporarily substitute a
Loaner Engine or Loaner APU as set forth in Section 5.5 above. Any engine or auxiliary power unit constituting a “
Permitted
Replacement ”
for a Lost Item shall (i) be of the same make and model number as the Lost Item, (ii) be free and clear of all Liens
and (iii) have a value, utility and useful life at least equal to, and be in as good an operating condition as, the Lost Item, assuming
such Lost Item was in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of
Loss. Sublessee, at its own cost and expense, shall (i) furnish Sublessor with such documents to evidence such replacement,
(ii) cause Lessor to have good and marketable title to the Permitted Replacement as provided for under this Sublease, and (iii) take
such other actions as may reasonably be required by Lessor to cause Lessor’
s Interest in such Permitted Replacement to be validly
created and have first priority, including as evidenced on the FAA Registry, the International Registry, and any other recording
office, as applicable. Each such Permitted Replacement shall, after such conveyance, be deemed an “Engine” or “APU”,
as
applicable, and shall be deemed part of the same Aircraft as was the Lost Item replaced thereby. Upon full compliance by
Sublessee with the terms of this paragraph, and to the extent that Sublessor receives the same from Lessor, Sublessor will transfer
to Sublessee all of Sublessor’s right, title and interest, if any, in and to such Lost Item, which transfer shall be “AS-IS, WHERE-IS”.
6.4 Credit for Loss Payments
. If Sublessor or Lessor receives a payment under any of the Required Coverages, or
from a Manufacturer or Governmental Authority, in connection with an Event of Loss of an Airframe, or an Engine
or any APU, and
such payment is in immediately available funds, then provided no Event of Default shall have occurred and be continuing, and
Sublessee shall have complied with the provisions of Sections 6.2 or 6.3, as applicable, Sublessor shall, at Sublessee’
s option,
remit or cause such proceeds to be remitted to Sublessee (a) up to an amount equal to (i) the amount paid by Sublessee to
Sublessor as the Casualty Value pursuant to Section 6.2, if applicable, or (ii) the amount of the replacement costs actually incurred
by Sublessee with respect to any Permitted Replacement pursuant to Section 6.3, or (b) if payment has not yet been made under
Section 6.3, credit such proceeds against any amounts owed by Sublessee pursuant to Section 6.3. In addition, any excess
insurance proceeds shall be retained by Sublessor. If recoverable, Sublessor shall be entitled to recover possession of the Aircraft
and to any salvage value in excess of the Casualty Value paid to Sublessor, but subject to the requirements of any third party
insurance carrier, the rights of any other Person claiming an interest therein (other than if constituting a Lessor Lien) and any other
pertinent terms of this Sublease). Sublessor shall not be under any duty to Sublessee to pursue any claim against any Person in
connection with an Event of Loss, but Sublessee, in its sole discretion, may do so at its own cost and expense and with Sublessor’
s
prior written consent, which shall not be unreasonably withheld, delayed or conditioned.
SECTION 7. INSURANCE .
7.1 Insured Risks
. Sublessee agrees to maintain at all times, at its sole cost and expense, with insurers of
recognized reputation and responsibility reasonably satisfactory to Lessor and Sublessor (but in no event having an A.M. Best or
comparable agency rating of less than “A-”):
(a)
(i) comprehensive aircraft liability insurance against bodily injury or property damage claims including,
without limitation, contractual liability, premises liability, death and property damage liability, public and passenger legal liability
coverage, and sudden accident pollution coverage resulting from a crash or collision of the Aircraft or recorded in flight emergency
causing abnormal operating of the Aircraft, in an amount not less than $300,000,000.00
for each single occurrence, and
(ii) personal injury liability in an amount not less than $25,000,000.00; but, in no event shall the amounts of coverage required by
sub-clauses (i) and (ii) be less than the coverage amounts as may then be required by Applicable Law;
8
(b) “all-risk” ground, taxiing, and flight hull insurance on an agreed-
value basis, covering the Aircraft,
provided that such insurance shall at all times be in an amount not less than the Casualty Value of the Aircraft (as set forth in
Schedule No. 3); and
(c)
war risk and allied perils (including confiscation, appropriation, expropriation, terrorism and hijacking
insurance) in the amounts required in paragraphs (a) and (b), as applicable.
7.2 Policy Terms
. Any policies of insurance carried in accordance with this Section 7 and any policies taken out in
substitution or replacement of any such policies shall (a) be endorsed to name Sublessor and each Lessor Party as an additional
insured as its interests may appear (but without responsibility for premiums), (b) provide, with respect to insurance carried in
accordance with Section 7.1(b) or (c) above, that, except as set forth in Section 7.3, any amount payable thereunder paid directly to
Servicing Agent as sole loss payee and not to Servicing Agent and Sublessee jointly, (c) provide for thirty (30) days’ (ten (10 days’
in the case of nonpayment and seven (7) days’
in the case of war, hijacking and allied perils) prior written notice by such insurer of
cancellation, material adverse change, or non-
renewal, (d) include a severability of interest clause providing that such policy shall
operate in the same manner as if there were a separate policy covering each insured, (e) waive any right of set-
off against
Sublessor and each Lessor Party, and any rights of subrogation against such party, (f) provide that in respect of the interests of
Sublessor and each Lessor Party in such policies, that the insurance shall not be invalidated by any action or inaction of Sublessee
or any other Person operating or in possession of the Aircraft, regardless of any breach or violation of any warranties, declarations
or conditions contained in such policies by or binding upon Sublessee or any other Person operating or in possession of the
Aircraft, and (g) be primary, not subject to any co-
insurance clause and shall be without right of contribution from any other
insurance. Sublessor expressly acknowledges and agrees that the Required Coverage does not cover loss of the Records.
7.3 Proceeds to Sublessee
. Provided that no Event of Default has occurred and is continuing, (a) proceeds that
are equal to or less than $500,000.00 shall be paid directly to Sublessee for the purpose of repairing and remediating any loss or
casualty to the Aircraft which does not constitute an Event of Loss; or (b) if the aggregate amount thereof is more than
$500,000.00, it shall be paid to Lessor and Sublessor shall promptly upon receipt of Sublessee’
s written request therefor either (i)
reimburse (to the extent of the proceeds paid by the insurer) Sublessee for payments made by Sublessee to the facility that
repaired and/or remediated such loss or casualty or (ii) make payment of the proceeds directly to the facility that repaired and/or
remediated such loss or casualty; in either such case, upon and after (A) the completion of such repairs and/or remediation, and
confirmation that the same have caused the Aircraft to fully conform to the standards set forth in this Sublease, including Section
5.3 hereof, (B) upon presentation of the invoice from such facility for such repair and/or remediation for the amount being requested
by Sublessee, and (C) with respect to any request for reimbursement, proof that the amount being requested was fully and finally
paid by Sublessee to such facility. Sublessor shall provide its cooperation to Sublessee and the applicable insurer, and shall
coordinate with Servicing Agent to provide its cooperation, for the purpose of authorizing the insurer’
s payment of such insurance
proceeds directly to Sublessee.
7.4 Additional Requirements . Sublessee shall not self-
insure (by deductible, premium adjustment, or risk retention
arrangement of any kind) with respect to any of the risks required to be insured pursuant to this Section 7. Sublessee agrees that it
shall obtain and maintain such other insurance coverages, or cause adjustments to be made to the scope, amount or other aspects
of the existing insurance coverages, promptly upon Sublessor’
s reasonable request, as and when Sublessor or Lessor reasonably
and in good faith deems such additional insurance coverages or modifications to be appropriate in light of any changes in
Applicable Law, prudent industry practices, the insurance market, Timesharer’
s anticipated use of the Aircraft or other similar
pertinent circumstances. All of the coverages required herein shall be in full force and effect worldwide throughout any geographical
areas to, in or over which the Aircraft is operated. All insurance proceeds payable under the requisite policies shall be payable in
U.S. Dollars. At least ten (10) days prior to the policy expiration date for any Required Coverages, Sublessee shall furnish to
Sublessor and to Lessor an insurance certificate or other evidence requested by Sublessor or Lessor of the renewal or replacement
of any such coverages complying with the terms hereof, for a twelve (12) month or greater period commencing from and after such
expiration date.
SECTION 8. GENERAL AND TAX INDEMNIFICATIONS .
8.1 General Indemnification
. Sublessee hereby agrees to pay, indemnify, and hold Sublessor, its agents,
employees, officers, members, attorneys-in-fact, lawyers, successors and assigns (collectively, the “ Indemnified Parties ”
)
harmless on an after-
tax basis, from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions,
suits, demands, costs, expenses and disbursements of any kind and nature whatsoever (each, a
9
“ Claim ”),
which may be imposed on, incurred by or asserted against any Indemnified Party, but only to the extent such
Indemnified Party shall not also be indemnified as to any such Claim by any other Person, in any way relating to or arising out of (a)
Sublessee’
s sublease, management, pooling, interchange, time sharing, chartering, possession, use, operation, maintenance,
security, condition (after delivery or acceptance of any of the same), registration or re-
registration, return, removal, repossession,
storage or other disposition of any of the same, or any accident in connection therewith, including Claims involving or alleging
environmental damage, criminal acts, hijacking, acts of terrorism or similar acts, including the same that result in injuries, death,
destruction, or other harm or loss to persons or property, Persons or property, with respect to the Aircraft or (b) the breach
(including any Default or Event of Default) or enforcement of any of the terms of the Sublease Documents, provided
, that
Sublessee shall have no obligation to indemnify an Indemnified Party with respect to Claims directly (a) arising from the gross
negligence or willful misconduct or fraud of such Indemnified Party; (b) covered under Section 8.2; (c) arising from acts or events
that occur after redelivery of the Aircraft to Sublessor in accordance with this Sublease; or (d) to the extent such Claims would not
have arisen if Sublessor owned the Aircraft rather than leasing the Aircraft from Lessor. In the event that any Indemnified Party
receives from any Party, including but not limited to the insurer or a Lessor Party, any insurance proceeds in good and immediately
available funds pursuant to any of the liability policies required by Section 7.1(a) or (c) hereof or receives any other indemnification
payment with respect to any monetary Claim for which Sublessee has previously paid to such Indemnified Party in good and
immediately available funds an indemnity payment, such Indemnified Party shall refund such indemnity payment to Sublessee
solely out of and up to the amount of such insurance proceeds or such other payment, as applicable. If any Claim is made against
any Indemnified Party, the party receiving notice or otherwise becoming aware of such Claim shall promptly notify the other, but the
failure of the party having knowledge of a Claim to so notify the other party shall not relieve Sublessee of any obligation hereunder
except to the extent any such failure by an Indemnitee to notify Sublessee materially prejudices Sublessee’
s ability to limit or avoid
by practical means the responsibility to pay the amounts being indemnified hereunder with respect to such Claim.
8.2 General Tax Indemnity
. On the Acceptance Date, and at all times thereafter (subject to the exceptions
provided below):
(a) Tax Reporting
. Sublessee shall prepare and file only such tax returns, registrations, declarations and
other documentation with respect to any personal property taxes (or any other taxes in the nature of or imposed in lieu of property
taxes) due or to become due with respect to the Aircraft, or any part of either thereof that Sublessee is required to file under
Applicable Law. With respect to the payment of property taxes, Sublessor and Sublessee will cooperate with each other, and
Sublessor will cause Lessor to cooperate, with all reasonable and good faith
requests of Sublessor or Sublessee to mitigate,
reduce and apportion such property taxes, so long as such requests do not violate any Applicable Law, do not result in any risk of
civil or criminal liability for Sublessee, Sublessor or Lessor, do not result in any reasonable risk of the imposition of a Lien on or the
sale, forfeiture or loss of the Aircraft or any part thereof or interest therein (unless, in the case of the imposition of a Lien, Sublessee
has provided security for such Lien reasonably satisfactory to Lessor).
(b) Impositions.
Sublessee hereby further agrees to pay on or before the due date, directly to the
appropriate federal, state, local or foreign taxing authority or other Governmental Authority (a “ Taxing Authority ”)
when required
by Applicable Law to make such direct payment or, if such direct payment to a Taxing Authority by Sublessee is not required under
Applicable Law, directly to Sublessor with sufficient prior notice and assistance as reasonably requested in order for Sublessor to
timely cause payment before the due date (i) the Washington State business and occupation (B&O) taxes on the Basic Rent
Payment, (ii) as shown on said returns and all taxes assessed, billed or otherwise payable with respect to Sublessee’
s operation of
the Aircraft, any part of or interest thereof, or the transactions contemplated by the Sublease Documents and the Permitted Third
Party Agreements; (iii) all license and/or registration or filing fees, assessments, governmental charges and use, property, excise,
privilege, value added, withholding and other taxes (including any related
interest, charges or penalties) or other charges or fees
now or hereafter imposed by any Taxing Authority, on Sublessor or any other Person in possession of the Aircraft or any part
thereof, the Aircraft or any part of or interest thereof, the Rent (or other amounts payable under the Sublease Documents and the
Permitted Third Party Agreements), or the transactions contemplated by the Sublease Documents and the Permitted Third Party
Agreements, including any of the same imposed with respect to the landing, airport use, manufacturing, ordering, shipment,
inspection, acceptance, rejection, delivery, installation, management, pooling, interchange, time sharing, chartering, operation,
possession, use, maintenance, repair, condition, removal, registration, de-
registration, abandonment, repossession, storage, return,
or other disposition of the Aircraft or any part thereof, the Rent (or other amounts under the Sublease Documents and the Permitted
Third Party Agreements) or any part thereof, or any interest in any thereof; provided, however, Sublessor shall bear all costs
associated with importing the Aircraft into the EU and the risk of the assessment of any value added taxes arising from EU
operations; and (iii) any penalties, charges, interest, fines, additions to tax or costs imposed with respect to any items referred to in
sub-
10
clauses (i) and (ii); the items referred to in sub-clauses (i) and (ii) above being referred to herein collectively, as “ Impositions ”
;
except that “Impositions”
shall expressly exclude, and Sublessee shall have no such obligation in respect of, any of the same if
(A) such tax is a property or similar tax owed by Lessor or Sublessor on the ownership of the Aircraft, (B) imposed against Lessor
or Sublessor and imposed on or measured by the net income, capital or net worth of Lessor or Sublessor by the jurisdiction in
which Lessor or Sublessor was incorporated or formed, or in which a Lessor Party or Sublessor has a place of business,
(C) imposed as a result of the manufacturing, ordering, shipment, inspection, acceptance, delivery, or registration of the Aircraft, (D)
arising from the gross negligence or willful misconduct of Sublessor or a Lessor Party (unless imputed by Applicable Law),
(E) arising from acts or events that occur after redelivery of the Aircraft to Sublessor or Lessor in accordance with this Sublease or
the Sublease Consent or (F) imposed on Sublessor or Lessor as a result of its failure to timely make any filing or return for which
Sublessor or a Lessor Party is responsible pursuant to this Section 8.2 and for which Sublessee has timely and properly paid to
Sublessor all Impositions in good and immediately available funds, and has provided such information and assistance as Sublessor
may reasonably require from Sublessee to enable Sublessor to fulfill its filing and return obligations (or exercise its rights with
respect thereto). Sublessee will indemnify Sublessor from, and defend and hold Sublessor harmless, on an after-
tax basis against,
any and all such Impositions. Any Impositions which are not paid when due and which are paid by Sublessor shall, at Sublessor’
s
option, become immediately due from Sublessee. For the avoidance of doubt, Sublessee shall not be obligated to indemnify
Sublessor or any of the Lessor Parties for any Tax Loss or under the Special Tax Indemnity Rider (each as defined in the Lease) or
for or resulting from a breach of any provision in the Lease involving the operation of the Aircraft that would impact the classification
of the Aircraft or the Transaction Documents or impact the Lessor Parties' tax treatment of the Aircraft or the Transaction
Documents to the extent Sublessee is directed by or on behalf of Guarantor to operate the flights affecting such classification or
treatment.
(c) Notices, Payment, Etc.
Sublessor shall provide or cause to be provided to Sublessee notice of any such
Impositions for which Sublessor intends to hold Sublessee responsible under this Section 8.2, provided that the failure to give such
notice shall not relieve Sublessee of responsibility under this Section 8.2 except to the extent such failure or delay materially
prejudices Sublessee’
s ability to limit or avoid by practical means the responsibility for such Impositions, and upon such notice to
Sublessee, such Impositions shall become due to Sublessor and shall be paid [ten(10)] days in advance of the due date of such
Imposition; provided, however, if such notice is received by Sublessee less than [ten (10)] days in advance of the due date of such
Imposition, the Imposition shall be paid by Sublessee no later than the end of the next Business Day. Sublessee shall promptly
provide Sublessor, at Sublessee’
s cost and expense, with copies of all returns and documents for which it is responsible under this
Section 8.2, as well as receipts for payment of such Impositions.
(d) Right to Contest
. Notwithstanding anything to the contrary herein, Sublessee may contest, at its sole
cost and expense, any assessment of any Imposition so long as such contest is pursued directly with the appropriate Taxing
Authority, in good faith, with due diligence and by appropriate proceedings, so long as Sublessor has not advised Sublessee in
writing that Lessor has determined that such proceedings involve, in Sublessor
’s and Lessor’
s sole but good faith judgment, a
material danger of the sale, foreclosure, transfer, forfeiture or loss of the Aircraft or any property comprising the Aircraft or Lessor’
s
title thereto, or the respective rights or interest of any Lessor Party, Sublessor or Sublessee therein.
8.3 Survival . Sublessee’
s obligations under this Section 8 shall survive any expiration, cancellation or other
termination of this Sublease.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES .
9.1 Events of Default . The term “ Event of Default ”, wherever used herein, shall mean:
(a) any non-
payment of, including any failure by Sublessee to pay, (i) any Basic Rent or Casualty Value, or
other accelerated amount, as and when due pursuant to this Sublease or any of the other Sublease Documents (whether on a
specified payment date, or by acceleration, upon demand or otherwise), and such non-
payment or other failure continues for a
period of ten (10) days from and including such date; or (ii) any Supplemental Rent or any other amount as and when due pursuant
to this Sublease or any of the other Sublease Documents, excluding any amounts covered by clause (i) (whether on a specified
payment date, or by acceleration, upon demand or otherwise) and such non-
payment or other failure continues for a period of ten
(10) days from and including the date of receipt of written notice of a payment default from Sublessor; or
(b) Reserved;
11
(c)
(i) any of the Required Coverages are not kept in full force and effect, or a breach or violation shall exist
with respect to any provisions thereof; or the Aircraft is operated in a manner, at a time or in or over or located at a place with
respect to which such Required Coverages shall not be in effect; (ii) Sublessee shall fail to cause the Airframe or the Engines to be
used, operated, maintained or otherwise kept in a condition so as to be in compliance with all Applicable Laws; (iii) Sublessee shall
fail to comply with any provision of any of the Sublease Documents restricting Liens and other dispositions relating to the Aircraft or
the unpermitted assignment or delegation or Sublessee’
s respective rights or obligations under any of the Sublease Documents
(including Section 5.6 hereof); or (iv) any failure to return the Aircraft to Sublessor on the date and in the manner required by this
Sublease or any of the other Sublease Documents; or
(d)
(i) any representation or warranty made by Sublessee to or in favor of Sublessor or in any of the
Sublease Documents or in any related agreement, document or certificate shall prove to have been incorrect, misleading, or
inaccurate in any material respect when made or given (or, if a continuing representation or warranty, at any time) and such
representation or warranty and any harm suffered by Sublessor and any of the Lessor Parties is not cured within thirty (30) days
after written notice from Sublessor identifying the representation or warranty that is incorrect, misleading or inaccurate (but such
notice and cure period will not be applicable unless such representation or warranty and related harm are all curable by practical
means within such notice period);
or (ii) Sublessee shall fail to (A) perform or observe any other agreement (other than those
specifically referred to in this Section 9.1) required to be performed or observed by it under this Sublease or in any of the other
Sublease Documents, and such failure remains uncured for thirty (30) days after written notice thereof from Sublessor to Sublessee
specifying the nature of such non-
compliance (but such notice and cure period will not be applicable unless such breach is curable
by practical means within such notice period) or (B) notify Sublessor of any Default or Event of Default within ten (10) days
of an
officer of Sublessee becoming aware of its occurrence; or
(e)
(i) Sublessee shall (A) generally fail to pay its debts as they became due, admit its inability to pay its
debts or obligations generally as they fall due, or shall file a voluntary petition in bankruptcy or a voluntary petition or an answer
seeking reorganization in a proceeding under any bankruptcy laws or other insolvency laws, or an answer admitting the material
allegations of such a petition filed against Sublessee in any such proceeding; or (B) by voluntary petition, answer or consent, seek
relief under the provisions of any other bankruptcy or other insolvency or similar law providing for the reorganization or liquidation of
corporations, or providing for an assignment for the benefit of creditors, or providing for an agreement, composition, extension or
adjustment with its creditors; or (ii) a petition against Sublessee in a proceeding under applicable bankruptcy laws or other
insolvency laws, as now or hereafter in effect, shall be filed and shall not be withdrawn or dismissed within sixty (60) days
thereafter, or if, under the provisions of any law providing for reorganization or liquidation of business entities that may apply to
Sublessee, any court of competent jurisdiction shall assume jurisdiction, custody or control of Sublessee or of any substantial part
of its property and such jurisdiction, custody or control shall remain in force unrelinquished, unstayed or unterminated for a period of
sixty (60) days after the filing date; or
(f) Reserved; or
(g)
(i) any repudiation by Sublessee of its obligation for the payment or performance of the Obligations, or
(ii) any allegation or judicial determination that any of the Sublease Documents is unenforceable in any material respect; or
(h)
any event or condition constituting a material breach or other material default by Sublessee under the
Sublease Consent, after giving effect to any notice or grace period described in the related clause of this Section 9.1.
9.2 Remedies
. If an Event of Default occurs and is continuing, in addition to all other rights and remedies granted
to it in this Sublease and in the other Sublease Documents. Sublessor may exercise all rights and remedies of a lessor under the
UCC or as a creditor, chargee or security assignee under the Cape Town Convention (including any and all remedies thereunder
requiring agreement by Sublessee), or otherwise available to Sublessor under any other Applicable Law. Without limiting the
generality of the foregoing, Sublessee agrees that upon the occurrence of an Event of Default, Sublessor, following thirty (30) days
after receipt written notice from Sublessor or Servicing Agent to Sublessee, if such Event of Default is curable, in its sole discretion,
may exercise any one or more of the following remedies: (a) proceed at law or in equity, to enforce specifically Sublessee’
s
performance or to recover damages; (b) declare this Sublease in default, or cancel this Sublease or otherwise terminate
Sublessee’s rights, but not its obligations under this Sublease and the other Sublease Documents (including Sublessee’
s right to
use and possess
12
the Aircraft), and Sublessee shall promptly return the Aircraft, to Sublessor (or such other party as shall be identified to Sublessee
in writing by Sublessor) in accordance with the terms hereof and thereof; (c) to the extent permitted by Applicable Law, enter the
premises where the Aircraft is located and take immediate possession of and remove (or disable in place) the Aircraft (or the APU,
any Engines and Parts then unattached to the Aircraft), by self-
help, summary proceedings or otherwise without liability or cost
(including for storage or rent) (provided, however, the remedies in Section 9.2(c) shall not give Sublessor or any of the Lessor
Parties the right to keep the Aircraft in the Primary Hangar Location where it will be based during the Term); (d) [reserved];
(e) preserve the Airframe and Engines, and their respective value (but without any obligation to do so), immobilize or keep idle the
Airframe or any Engine, manage, re-
sublease or otherwise dispose of the Airframe, any Engine or other property relating to the
Aircraft, whether or not in Sublessor’
s possession to the extent permitted under the Lease; (f) apply any deposit or other cash
collateral, or collect and apply any proceeds, at any time to reduce any amounts due to Sublessor; (g) [reserved]; (h) terminate any
Permitted Third Party Agreement without regard as to the existence of any event of default thereunder and recover, or cause
Sublessee to relinquish possession and return the Aircraft, including the Engines and Parts, pursuant to this Section 9.2, or
exercise any and all other remedies under the Sublease Consent; (i) demand and obtain from any court speedy relief pending final
determination available at law (including, without limitation, possession, control, custody or immobilization of the Aircraft or
preservation of the Aircraft or its fair market value); and (j) exercise any and all other remedies provided in Section 9.3, elsewhere
in this Sublease or in any of the other Sublease Documents. For the avoidance of doubt, Sublessor shall not be permitted to
exercise any of the Remedies set forth in this Section 9.2 to the extent the Event of Default was caused by the act or omission of
Sublessor.
9.3 Reserved .
9.4 Costs, Etc
. Sublessee shall be liable for, and pay to Sublessor upon demand, all reasonable and documented
costs, charges and expenses incurred by Sublessor in enforcing or protecting its rights under this Sublease or any other Sublease
Documents, whether by reason of any Default or Event of Default, or otherwise, including, (a) any reasonable and documented
expenses incurred by Sublessor in connection with effecting performance on Sublessee’
s behalf (when Sublessee has been
notified by Sublessor and has failed to perform; except that no such notice requirement shall be applicable upon or after the
occurrence of an Event of Default of the type described in Sections 9.1(a) or (e) shall have occurred and be continuing), together
with interest thereon at the Late Payment Rate, until repaid, and (b) any other reasonable and documented legal fees,
disbursements, insurance, expert witness fees, consultant fees, repossession, Impositions, Lien removal, recovery, storage,
inspection, appraisal and repair.
9.5 Acknowledgments, Waivers, Etc
. Sublessee hereby acknowledges and agrees as follows: (a) None of the
provisions of this Section 9, including any remedies set forth or referenced herein, is “manifestly unreasonable”
for the purposes of
the Cape Town Convention. (b) No right or remedy is exclusive, and each may be used successively and cumulatively and in
addition to any other right or remedy referred to above or otherwise available to Sublessor at law or in equity, including, such rights
and/or remedies as are provided for in the Cape Town Convention or the UCC (but solely as and to the extent the provisions
thereof may otherwise entitle Lessor to exercise remedies directly against Sublessee, any such exercise of remedies against
Sublessee shall be subject to the Sublessee Limitation and the Non-
Recourse Agreement), but in no event shall Sublessor be
entitled to recover any amount in excess of the maximum amount recoverable under Applicable Law with respect to any Event of
Default. (c) No express or implied waiver by Sublessor of any Default or Event of Default hereunder shall in any way be, or be
construed to be, a waiver of any future or subsequent Default or Event of Default. (d) The failure or delay of Sublessor in exercising
any available rights or remedies upon the occurrence of any event shall not constitute a waiver of any such right or remedy upon
the continuation or reoccurrence of any such contingencies or similar contingencies, and any single or partial exercise of any
particular right by Sublessor shall not exhaust the same or constitute a waiver of any other right provided for or otherwise referred
to herein. (e) All remedies set forth herein shall survive the expiration, cancellation or other termination of this Sublease for any
reason whatsoever. (f) Sublessee hereby waives any rights under the UCC or the Cape Town Convention to cancel or repudiate
this Sublease or any of the other Sublease Documents, to reject or revoke acceptance of the Aircraft or any component thereof, to
suspend performance, and to recover from Sublessor any general, special, incidental or consequential damages, for any reason
whatsoever.
9.6 Reserved .
9.7 Sublessor’s Default under the Lease .
(a)
Sublessee acknowledges and agrees that upon the occurrence of any Event of Default by Sublessor
under the Lease, Lessor shall have the right at its sole election to exercise any and all of the following remedies: (i) Lessor may
exercise all of its rights, powers and remedies under the Lease, including, without limitation,
13
its right to demand and recover possession of the Aircraft, notwithstanding any rights or interests Sublessee or Timesharer may
have; (ii) Lessor may terminate the Sublease to the extent still in effect (provided, however, that if the Aircraft is in flight when
Sublessee is notified in writing of the existence and continuation of such Event of Default or when Sublessee receives a
Termination Notice, Sublessee shall promptly (consistent with the flight crew's regulatory obligations) return the Aircraft to the
Primary Hangar Location (after disembarking the passenger(s) at the scheduled destination, if applicable) and, notwithstanding
anything to the contrary in the Termination Notice, the termination of the Lease and/or Sublease, as applicable, shall not be
effective until the Aircraft has returned to the Primary Hangar Location and Sublessee has completed its post flight inspection and
the Sublease shall terminate automatically and without further action; and (iii) Lessor may exercise any other remedy (including
interim remedies) available to it pursuant to Applicable Law, including without limitation, under the UCC and/or the Cape Town
Convention, subject to the Non-
Recourse Agreement. All rights granted in this Section 9.7 shall be cumulative and not alternative,
shall be in addition to and shall in no manner impair or affect Lessor’
s right under the Lease, or any other agreement, statute or rule
of law (other than the Non-Recourse Agreement).
(b)
Sublessee agrees to cooperate with all reasonable requests of Lessor to enable Lessor to exercise of
any such rights, powers and remedies, including Lessor's right to recover possession of the Aircraft. Sublessee agrees that it shall,
(i) upon receipt of Lessor’s written notice of its termination of the Sublease (the “ Termination Notice ”)
and demand with respect
thereto, take all reasonable steps to promptly make the Aircraft (including any Engine, APU, or any Part thereof, or Records relating
thereto) available to Lessor or its authorized designee, (A) at either the Primary Hangar Location provide reasonable access to
Lessor subject to security requirements subject to Lessor, its employees, agents and representatives complying with all security
procedures imposed by Applicable Law and all other security procedures reasonably imposed by Sublessee or any third party at
the location where the Aircraft is located; and (ii) provide reasonable cooperation with the reasonable requests of Lessor in
connection therewith. Sublessor shall be liable for any costs, charges or expenses incurred by Lessor or Sublessee in enforcing or
protecting their respective rights under the Sublease Documents. Notwithstanding anything to the contrary in Section 9.7,
Sublessee shall be paid or reimbursed by Lessor for any reasonable costs incurred by Sublessee in connection with the return of
the Aircraft to the Primary Hangar Location if Sublessee is in flight at the time Sublessee is notified in writing of the existence and
continuation of such Event of Default or when Sublessee receives a Termination Notice, and Sublessor shall remain responsible to
Lessor for any amounts so paid by Lessor. Notwithstanding anything to the contrary in this Section 9.7 or in Section 10.4,
Sublessee shall not be obligated to provide such assistance nor shall it be obligated to pay damages or the Casualty Loss Value to
the Lessor Parties when the provision of such assistance could, in the reasonable business judgment of Sublessee, cause undue
business risk to Sublessee.
SECTION 10. NOTICES, REPORTS, FURTHER ASSURANCES AND INSPECTIONS .
10.1 Notices
. Sublessee shall give written notice to Sublessor of (a) the occurrence of any Event of Default of
which Sublessee
’
s officers have knowledge, within five (5) Business Days of acquiring such knowledge; (b) the occurrence of any
Event of Loss within the time period set forth in Section 6.2; and (c) the commencement or threat of any material litigation or
proceedings that would reasonably be expected to impair Sublessee’
s ability to perform its obligations under the Sublease
Documents or any material litigation or proceedings that would reasonably be expected to adversely affect the Aircraft or any
Collateral, or the ability of Lessee to comply with its obligations under the Sublease Documents, within five (5) Business Days of
acquiring knowledge of the same (For purposes of this clause (c), “material litigation or proceedings”
shall be limited to litigation or
proceedings involving an amount in excess of $10,000,000.00); and (d) any dispute between Sublessee and any Governmental
Authority or other party that involves Aircraft and that is reasonably likely to materially interfere with Sublessee’
s ability to fulfill its
obligations hereunder, within five (5) Business Days of acquiring knowledge of any such dispute.
10.2 Reserved .
10.3 Further Assurances . Sublessee shall, at Sublessor’
s sole expense, promptly execute and deliver to Sublessor
such further instruments, UCC and FAA filings and other documents, make, cause to be made and/or consent to all registrations
(including any discharges and subordinations, or as to the prospective or actual sale of, and any international interest in, the
Engines) with the International Registry, and take such further action, as Sublessor or, upon written notification from Lessor that an
Event of Default under the Lease has occurred and is continuing, Lessor may from time to time reasonably request in order to
further carry out the intent and purpose of the Sublease Documents and to establish, protect and enforce the rights, interests,
remedies and Liens (including Lessor’s Interest) created, or intended to be created, in favor of Sublessor or Lessor thereby.
14
10.4 Inspection
. Sublessor or Lessor (or any other Lessor Party) shall have the right, but not the duty, to inspect
the Aircraft, any component thereof and the Records, at any reasonable time and from time to time, wherever located, upon
reasonable prior written notice to Sublessee provided that the parties will reasonably cooperate in arranging for such inspection so
as not to interfere with the normal operation of the Aircraft by Sublessee or Timesharer, or the conduct of business by Sublessee
or, if applicable, such Timesharer; except that no advance notice shall be necessary prior to any inspection conducted, and such
inspection may be conducted at any time, after the occurrence of a Default that is continuing or an Event of Default that is
continuing subject to compliance with security procedures reasonably imposed at the Primary Hangar Location, or at such other
permitted location by the applicable Permitted Sublessee or Permitted Manager or a third party landlord or owner of the hangar
location of the Aircraft at such time (the “ Applicable Security Procedures ”).
Upon request of Sublessor or Lessor, Sublessee
promptly shall confirm to Sublessor or Lessor the location of the Aircraft and the Records and shall, subject to the provisions of the
preceding sentence and the last sentence of this Section 10.4, take all reasonable steps to make the Aircraft and the Records
available to such party for inspection. Sublessee shall be responsible for the reasonable and documented cost of any inspection
conducted after the occurrence of a Default by Sublessee that is continuing or an Event of Default by Sublessee that is continuing,
and shall pay Sublessor such amount as additional Rent within ten (10) days of written demand. Notwithstanding anything to the
contrary in Section 9.7 or in this Section 10.4, Sublessee shall not be obligated to provide such assistance nor shall it be obligated
to pay damages or the Casualty Loss Value to the Lessor Parties when the provision of such assistance could, in the reasonable
business judgment of Sublessee, cause undue business risk to Sublessee.
SECTION 11. MISCELLANEOUS .
11.1 Construction and Related Matters
. All representations and warranties made in this Sublease and in the other
Sublease Documents shall survive the execution and delivery of this Sublease, and the timesharing of the Aircraft pursuant to the
Sublease Documents. Without limiting any other provision of this Sublease regarding the survival of Sublessee’
s obligations
hereunder or under any of the other Sublease Documents, Sublessee’
s obligation to pay Supplemental Rent, and any of its other
obligations under this Section 11, shall survive the expiration, cancellation or other termination of this Sublease. This Sublease may
be executed by the parties hereto on any number of separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute but one and the same instrument. IF, NOTWITHSTANDING THE
PARTIES’ CONTRARY INTENTION, THIS SUBLEASE CONSTITUTES “CHATTEL PAPER,”
ONLY COUNTERPART NO. 1 OF
THIS LEASE AND THE LEASE SUPPLEMENT SHALL BE CONSIDERED “CHATTEL PAPER”
FOR PURPOSES OF THE UCC.
The execution hereof on behalf of Sublessee and Sublessor shall be deemed to constitute the acceptance by Sublessee and
Sublessor of the terms and conditions of each and every addendum, rider, supplement, annex and exhibit hereto as if such
document was separately and individually executed on behalf of such party hereto and shall constitute a part of this Sublease. The
headings of the Sections hereof are for convenience only, are not part of this Sublease and shall not be deemed to affect the
meaning or construction of any of the provisions hereof. Time is of the essence in the payment and performance of all of
Sublessee’s and Sublessor’
s obligations under this Sublease. Any provision of this Sublease that may be determined to be
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective in such jurisdiction to the extent thereof
without invalidating the remaining provisions of this Sublease, which shall remain in full force and effect.
11.2 Notices
. All communications and notices provided for herein shall be in writing and shall be deemed to have
been duly given or made (i) upon hand delivery, (ii) upon delivery by a nationally recognized overnight delivery service, or (iii) five
(5) Business Days after being deposited in the U.S. mail, return receipt requested, first class postage prepaid, and addressed to
Sublessor or Sublessee, as the case may be, at their respective addresses set forth under their signatures hereto or such other
address as either party may hereafter designate by written notice to the other, or (iv) when sent by telecopy (with customary
confirmation of receipt of such telecopy) on the Business Day when sent if sent during the normal business hours of the recipient
or, if sent after such normal business hours or if sent on other than a Business Day, the next Business Day.
11.3 No Third Party Beneficiary
. This Sublease does not confer any rights or remedies upon any Person other
than Sublessor except for such rights and remedies available to any Lessor Party through the Sublease Consent subject to the
Non-Recourse Agreement.
11.4 Sublessor’s Performance. If Subles
see fails to perform or comply with any of its agreements within the time
period provided for such performance or compliance, including any applicable grace periods, that are contained herein or in the
other Sublease Documents, including its obligations to keep the Aircraft free of Liens (other than the Permitted Liens), comply with
Applicable Standards, or obtain the Required Coverages, Sublessor shall have the right,
15
but shall not be obligated, to effect such performance or compliance, with such agreement, and Sublessor shall provide prompt
written notice thereof to Sublessee; provided, however, the above
-
referenced grace periods and notice requirements shall not apply
to any payments made by Sublessor pursuant to Section 9.4, unless such grace and notice requirements are expressly provided for
in Section 9.4. Any reasonable and documented expenses of Sublessor incurred in connection with effecting such performance or
compliance, together with interest thereon at the Late Payment Rate from the date incurred until reimbursed, shall be payable by
Sublessee to Sublessor as Rent promptly on demand. Any such action shall not be a cure or waiver of such Default or Event of
Default hereunder.
11.5 Assignment
. This Sublease is not assignable by Sublessor or Sublessee. Should the Lease or Lease
Documents be assigned by any Lessor Party (each, an “ Assignor ”),
upon the written request and at the cost of Sublessor,
Sublessee agrees (i) to promptly execute and deliver an insurance certificate naming the beneficiary of such assignment (the “
Assignee ”)
as additional insured and (if applicable) loss payee and otherwise evidencing the Required Coverages and such other
documents and assurances reasonably requested by such Assignor or Assignee, as provided herein, (ii) to make, or cause to be
made, all registrations (including all assignments and subordinations) and all amendments, extensions and discharges with the
International Registry reasonably requested by Sublessor (and give or obtain any necessary consent thereto, as well as renew any
authorization required by the International Registry in connection therewith, including renewing its transacting user entity status and
re-designating a professional user entity, if necessary in Sublessor’
s reasonable and good faith judgment), and (iii) to comply with
any and all other reasonable requirements of any Assignee in connection with any such assignment.
11.6 Entire Agreement
. This Sublease and the other Sublease Documents constitute the entire understanding and
agreement between Sublessor and Sublessee with respect to the matters contained herein and therein, and shall completely and
fully supersede all other prior agreements, both written and oral, between Sublessor and Sublessee relating to the transactions
contemplated herein. The terms of this Sublease may not be changed, waived, discharged or terminated except by an instrument in
writing signed by the party against which enforcement of a change, waiver, discharge or termination is sought.
11.7 Governing Law, Forum and Jury Trial Waiver .
(a) Jurisdiction
. Sublessee and Sublessor hereby irrevocably consent and agree that any legal action, suit
or proceeding arising out of or in any way in connection with this Sublease or any of the other Sublease Documents may be
instituted or brought in the courts of the State of New York or in the United States Courts for the Southern District of New York, as
either party may elect or in any other state or Federal court as either party shall deem appropriate, and by execution and delivery of
this Sublease, each of Sublessee and Sublessor hereby irrevocably accepts and submits to, for itself and in respect of its property,
generally and unconditionally, the non-
exclusive jurisdiction of any such court, and to all proceedings in such courts. Each of
Sublessee and Sublessor irrevocably consent to service of any summons and/or legal process in accordance with the notice
provisions of Section 11.2 (to the extent such provisions are not inconsistent with Applicable Law) at the address set forth below its
signature hereto, such method of service to constitute, in every respect, sufficient and effective service of process in any such legal
action or proceeding. Nothing in this Sublease or in any of the other Sublease Documents shall affect the right to service of process
in any other manner permitted by law or limit the right of either party to bring actions, suits or proceedings in the courts of any other
jurisdiction. Each party further agrees that final judgment against it in any such legal action, suit or proceeding shall be conclusive
and may be enforced in any other jurisdiction, within or outside the United States of America, by suit on the judgment, a certified or
exemplified copy of which shall be conclusive evidence of the fact and the amount of the liability. Notwithstanding anything in the
foregoing to the contrary, Sublessor and Sublessee may bring a judicial proceeding in the Republic of Ireland, solely with respect to
matters relating to the International Registry.
(b) Governing Law; Binding Effect
. This Sublease shall be construed and enforced in accordance with,
and the rights of both parties shall be governed by, the internal laws of the State of New York (without regard to the conflict of laws
principles of such state, except as to the effect of Title 14, Section 5-
1401 of the New York General Obligations Law), including all
matters of construction, validity, and performance. This Sublease shall be binding upon and inure to the benefit of Sublessee and
Sublessor and their respective successors and assigns, except as otherwise expressly provided herein.
(c) Jury Waiver
. EACH OF SUBLESSEE AND SUBLESSOR HEREBY KNOWINGLY AND FREELY
WAIVES ITS RIGHTS TO A JURY TRIAL IN ANY ACTION, SUIT OR PROCEEDING RELATING TO, ARISING UNDER OR IN
CONNECTION WITH THIS SUBLEASE OR ANY OF THE OTHER SUBLEASE DOCUMENTS.
16
11.8 No Assumption
. Nothing in this Sublease or the Transaction Documents shall constitute an assumption by
Sublessee of any responsibility for Sublessor’s compliance with the terms of the Lease and the Lease Documents.
SECTION 12. TRUTH IN LEASING
. UPON ENTERING INTO THE SUBLEASE SUPPLEMENT FOR THE
PURPOSE OF, AMONG OTHER THINGS, ACCEPTING THE AIRCRAFT UNDER THIS SUBLEASE IN ACCORDANCE WITH
THE TERMS HEREOF AND THEREOF, SUBLESSOR CERTIFIES AS FOLLOWS: THE AIRCRAFT, AS EQUIPMENT, BECAME
SUBJECT TO THE MAINTENANCE REQUIREMENTS OF PART 91 OF THE FEDERAL AVIATION REGULATIONS (“ FARS ”
)
UPON THE REGISTRATION OF THE AIRCRAFT WITH THE FAA. SUBLESSOR FURTHER CERTIFIES THAT DURING THE
TWELVE (12) MONTHS (OR PORTION THEREOF AFTER THE AIRCRAFT WAS DELIVERED TO SUBLESSOR), THE
AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER PART 91 OF THE FARS. SUBLESSEE CERTIFIES THAT THE
AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER PART 91 OF THE FARS FOR OPERATIONS TO BE
CONDUCTED UNDER THIS SUBLEASE. UPON EXECUTION OF THIS SUBLEASE, AND DURING THE TERM HEREOF,
SUBLESSEE, WHOSE NAME AND ADDRESS ARE SET FORTH IMMEDIATELY BELOW, ACTING BY AND THROUGH THE
SIGNATORY HERETO, WHO EXECUTES THIS SUBLEASE SOLELY IN THE CAPACITY SET FORTH BELOW HER/HIS
SIGNATURE, CERTIFIES THAT SUBLESSEE SHALL BE RESPONSIBLE FOR THE OPERATIONAL CONTROL OF THE
AIRCRAFT UNDER THIS SUBLEASE (WHILE IT HAS POSSESSION OF THE AIRCRAFT). SUBLESSEE FURTHER CERTIFIES
THAT IT UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FARS. AN EXPLANATION OF
FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FARS CAN BE OBTAINED FROM THE NEAREST
FEDERAL AVIATION FLIGHT STANDARDS DISTRICT OFFICE, GENERAL AVIATION DISTRICT OFFICE, OR AIR CARRIER
DISTRICT OFFICE.
[Signatures on Next Page]
17
IN WITNESS THEREOF
the parties hereto have caused this Sublease to be duly executed as of the date first written above by their
respective officers thereunto duly authorized.
Signature Page
Sublessor:
CLOVERDALE SERVICES, LLC
Sublessee:
STARBUCKS CORPORATION
By:/s/Timothy Donlan
By:/s/ Troy Alstead
Name: Timothy Donlan
Name: Troy Alstead
Title: Manager
Title: Chief Financial Officer
Address:
c/o The McCutchen Group
925 Fourth Avenue, Suite 2288
Seattle, WA 98104
Address:
2401 Utah Avenue South
Seattle, WA 98134
United States of America
ANNEX A
DEFINITIONS
The following terms shall have the following meanings for all purposes of the Sublease:
A. Rules of Interpretation . (1) The following terms shall be construed as follows: (a) “ herein ,” “ hereof ,”
“
hereunder ,”
etc.: means in, of, under, etc. the Sublease as a whole (and not merely in, of, under, etc. the section or provision
where the reference occurs); (b)
” including ”: means including without limitation unless such term is followed by the words “
and
limited to ,” or similar words; and (c) “ or ”:
means at least one, but not necessarily only one, of the alternatives enumerated.
(2) Any defined term used in the singular preceded by “ any ”
indicates any number of the members of the relevant class.
(3) Except as otherwise indicated, all the agreements and instruments defined herein or in the Sublease shall mean such
agreements and instruments as the same may from time to time be supplemented or amended, or as the terms thereof may be
expressly waived or modified to the extent permitted by, and in accordance with, the terms thereof. (4) Any reference in the
Sublease Documents to the “ Return Addendum ”,
shall mean that certain rider or addendum titled as such; and upon execution of
the Sublease by Sublessee and Sublessor, shall be deemed to constitute execution and acceptance of the terms and conditions of
such rider or addendum, and it shall supplement and be a part of the Sublease (each, an “ Addendum ”). (
5) The terms defined
herein and in the Sublease shall, for purposes of the Sublease and the Sublease Supplement, Addenda, annexes, schedules, and
exhibits hereto and thereto, have the meanings assigned to them and shall include the plural as well as the singular as the context
requires.
B. CTC Terms. Certain of the terms used in the Sublease (“ CTC Terms ”)
have the meaning set forth in and/or
intended by the “ Cape Town Convention ”,
which term means, collectively, (i) the official English language text of the Convention
on International Interests in Mobile Equipment, adopted on 16 November 2001 at a diplomatic conference held in Cape Town,
South Africa, as the same may be amended or modified from time to time (the “ Convention ”), (
ii) the official English language text
of the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, adopted
on 16 November 2001 at a diplomatic conference held in Cape Town, South Africa, as the same may be amended or modified from
time to time (the “ Protocol ”),
and (iii) the related procedures and regulations for the International Registry of Mobile Assets
located in Dublin, Ireland and established pursuant to the Cape Town Convention, along with any successor registry (the “
International Registry ”),
issued by the applicable supervisory authority pursuant to the Convention and the Aircraft Protocol, as
the same may be amended or modified from time to time. By way of example, but not limitation, these CTC Terms include,
“administrator”, “associated rights”, “contract of sale”, “sale”, “prospective sale”, “proceeds”, “international interests”, “
prospective
international interest”, “security assignment”, “transfer”, “working days”, “consent”, “final consent”, “priority search certificate”
,
“professional user entity”, “transacting user entity” and “contract”; except “proceeds” shall also have the meaning set forth below.
C. Schedule Terms.
The following terms shall have the respective meanings set forth for such terms in Schedules
No. 2 and 2-A for all purposes of the Sublease:
Basic Rent Date, Basic Rent Percentage, Basic Term, Renewal Term, Daily Rent
Percentage, Expiration Date, First Basic Rent Date, Last Basic Rent Date, Lessor’s Cost and Rent Commencement Date .
D. Other Defined Terms.
“ Acceptance Date ”
shall mean the date on which Sublessee irrevocably and unconditionally accepts the Aircraft for
sublease under the Sublease as evidenced by the execution and delivery of, and specified as such in, the Sublease Supplement.
“ Aircraft ”
shall mean, collectively, the Airframe, the Engines, the APU and the Records; and all accessories, additions,
accessions, alterations, modifications, Parts, repairs and attachments now or hereafter affixed thereto or used in connection
therewith, and all Permitted Replacements and all other replacements, substitutions and exchanges (including trade-
ins) for any of
the foregoing.
“ Airframe ” shall mean, collectively, (i) the airframe described in Schedule No. 1 , and shall not include the Engines
or
APU, and (ii) any and all related Parts.
“ airworthiness directives ” shall have the meaning set forth in the FARs.
ANNEX A
page 1
“ Applicable Law ”
shall mean all applicable laws, statutes, treaties, conventions, judgments, decrees, injunctions, writs
and orders of any Governmental Authority and rules, regulations, orders, directives, licenses and permits of any Governmental
Authority as amended and revised, and any judicial or administrative interpretation of any of the same, including the airworthiness
certificate issued with respect to the Aircraft, the Cape Town Convention, the UCC, the Transportation Code, TSA regulations,
FARs, airworthiness directives, and/or any of the same relating to the Aircraft generally or to noise, the environment, security, public
safety, insurance, taxes and other Impositions, exports or imports or contraband.
“ Applicable Standards ”
shall mean, collectively, (i) Applicable Law, (ii) the requirements of the Required Coverages, and
(iii) all Maintenance Requirements.
“ APU ” shall mean (i) the auxiliary power unit described and listed by manufacturer’s serial number in Schedule No. 1
,
whether or not hereafter installed on the Aircraft or any other airframe from time to time; (ii) any auxiliary power unit constituting a
Permitted Replacement; and (iii) any and all related Parts.
“ Article 2A ” shall mean that certain version of “Uniform Commercial Code - Subleases”
as adopted and in effect in the
applicable jurisdiction.
“ Assignee ” and “ Assignor ” shall each have the meanings respectively set forth in Section 11.5 hereof.
“ AS-IS, WHERE-IS ” shall mean “AS-IS WHERE-IS” , and “WITH ALL FAULTS” ,
without any representation or
warranty, express or implied, of any kind whatsoever, by, or any recourse of any kind whatsoever, to Sublessor or any Lessor
Party, except that Sublessor will warrant the absence of Lessor’s Liens and Sublessor’s Liens.
“ Basic Rent ” shall have the meaning set forth in Section 2.1 of the Sublease.
“ Business Day ”
shall mean any day other than a Saturday, Sunday or other day on which banks located in New York,
New York or Seattle, Washington are closed or are authorized to close.
“ Casualty Payment Date ”
shall mean, with respect to an Event of Loss, whichever of the following dates as may then be
applicable: (a) the next Basic Rent Date following the earlier of either (i) the receipt of the related casualty insurance proceeds
payable pursuant to the Required Coverages, or (ii) the sixtieth (60th) day following the
occurrence of such Event of Loss; or (b) if
such Event of Loss occurs after the last Basic Rent Date, then on the earlier of either (i) the receipt of the related casualty
insurance proceeds payable pursuant to the Required Coverages, or (ii) the sixtieth (60
th
) day following the occurrence of such
Event of Loss.
“ Casualty Value ”
shall mean, for any Casualty Payment Date, an amount equal to, whichever of the following amounts as
may then be applicable: (a) the Lessor’s Cost, multiplied by the applicable percentage set forth on Schedule No. 3
for the
corresponding Basic Rent Date, or (b) if the Casualty Payment Date is after the last Basic Rent Date, an amount equal to the
Lessor’s Cost, multiplied by the applicable percentage set forth on Schedule No. 3 for the last Basic Rent Date.
“ charter ” or “ chartering ” means the provision of on-
demand commercial air transportation in accordance with Part 135
of the FARs.
“ Claim ” shall have the meaning set forth in Section 8.1 hereof.
“ Code ” shall mean the Internal Revenue Code of 1986, as amended.
“ Effective Date ” shall have the meaning set forth in the preamble of the Sublease.
“ Daily Rent ”
shall mean any daily rent payable during the Term pursuant to this Sublease in a per diem amount equal to
the product of (a) the Lessor’s Cost, multiplied by (b) the Daily Rent Percentage, for each day of the referenced period.
“ Default ”
shall mean an event or circumstance that, after the giving of notice or lapse of time, or both, would become an
Event of Default.
ANNEX A
page 2
“ Defective Registration ”
shall mean any failure to cause the Aircraft to be effectively registered with the Registry in the
name of Lessor in accordance with the applicable Registration Requirements, for any reason whatsoever, including should such
registration be revoked, canceled or expired or otherwise deemed to have ended or been invalidated pursuant to the Registration
Requirements; provided, however, no such failure shall constitute a “ Defective Registration ”
for the purposes of this definition if
such failure is the direct result of a Lessor-Related Deregistration.
“ Engine ” shall mean (i) each of the engines described in Schedule No. 1
, whether or not hereafter installed on the
Airframe or any other airframe from time to time; (ii) any engine constituting a Permitted Replacement; and (iii) any and all related
Parts.
“ Engine Maintenance Program ”
shall mean an agreement, in form and substance reasonably satisfactory to Sublessor
entered into from time to time between Sublessee and such vendor as Sublessee may designate and as may be reasonably
satisfactory to Sublessor, which provides for the maintenance and/or overhaul of the Engines consistent with the Engine
manufacturer’s service program.
“ Estimated Annual Hours ”
shall mean the anticipated number of average annual flight hours as shown on
Schedule No. 2-A .
“ Event of Default ” shall have the meaning set forth in Section 9.1 of the Sublease.
“ Event of Loss ”
with respect to the Aircraft (other than the Records), the Airframe, an Engine, or any APU shall mean any
of the following events: (i) loss, theft or disappearance of such property or the use thereof due to theft or disappearance
for a period
of more than thirty (30) consecutive days, (ii) destruction, damage beyond repair or rendition of such property permanently unfit for
normal use for any reason whatsoever; (iii) any damage to such property that results in an insurance settlement with respect to
such property on the basis of a total loss or constructive total loss; (iv) the condemnation, confiscation or seizure of, or requisition of
title to or use of, such property by the act of any foreign or domestic Governmental Authority for a period of more than thirty (30)
consecutive days (“ Requisition of Use ”); (
v) [reserved]; or (vi) with respect to an Engine or any APU, the removal thereof from the
Airframe for a period of six (6) consecutive months or longer, whether or not such Engine or APU is operational. The date of such
Event of Loss shall be the date of such destruction, damage or Return to Manufacturer, or the expiration date of the periods
specified above for such theft, disappearance, Requisition of Use, prohibition, unfitness for use, or removal for the applicable stated
period.
“ FAA ”
shall mean the United States Federal Aviation Administration, or such other Governmental Authority succeeding to
the functions of such aeronautical authority.
“ FARs ”
shall mean the Federal Aviation Regulations and any Special Federal Aviation Regulations (Title 14 C.F.R. Part 1
et seq.), together with all successor regulations thereto.
“ GAAP ” shall mean generally accepted accounting principles consistently applied.
“ Governmental Authority ”
shall mean any court, governmental or administrative body, instrumentality, department,
bureau, commission, agency or authority having jurisdiction over the party or matter at issue.
“ Impositions ” shall have the meaning set forth in Section 8.2(b) of the Sublease.
“ Indemnified Parties ” shall have the meaning set forth in Section 8.1 of the Sublease.
“ Late Payment Rate ”
shall mean the lesser of a rate equal to 1.0% per month or the highest rate permitted by Applicable
Law. The Late Payment Rate shall be computed on the basis of a 360-day year and a 30-day month.
“ Lease ”
shall mean that certain Aircraft Lease dated as of September __, 2013 by and between Lessor and Sublessor, as
amended and supplemented.
“ Lease Documents ” shall have the meaning set forth in Annex A of the Lease.
“ Lessor ” shall have the meaning set forth in the preamble of the Lease.
“ Lessor Parties ” shall mean Lessor, Trust Bank, Owner Participant, Servicing Agent and any Assignees.
ANNEX A
page 3
“ Lessor-Related Deregistration ” shall mean any de-registration resulting from either (i) Lessor’
s failure to accurately
complete or effectively file any required registration filing (including the Lessor’s failure to file the AC Form 8050-
1A in a timely
fashion) despite Sublessee’
s having provided Sublessor or Lessor, on a timely basis, with all of the information and other
cooperation requested by Lessor or otherwise required in connection with such filing; (ii) Lessor not being deemed a “
citizen of the
United States” within the meaning of the Transportation Code; or (iii) Sublessor’
s failure to provide necessary information or
cooperation to Lessor without direct fault of Sublessee.
“ Lessor’s Interest ” shall mean (a) Lessor’
s good and marketable title to the Aircraft (including the Airframe and each
Engine), (b) the first priority international interest, or other Lien granted to or created in favor of any of the Lessor Parties pursuant
to the Sublease (including Section 11.3 thereof), or any of the other Transaction Documents, in, against, under and with respect to
the Airframe and Engines or any other property comprising the Aircraft, and (c) any and all rights, interests and remedies of any of
the Lessor Parties under the Sublease or any of the other Transaction Documents relating to any of the foregoing.
“ Lessor’s Liens ”
shall mean any Liens against the Aircraft or any Engine, APU or Parts created or granted by any of the
Lessor Parties or resulting from claims against such Lessor Party, in either such case, unrelated to either (a) the transactions
contemplated in the Lease Documents, or (b) any matter, the responsibility for which is allocated to Sublessee under any of the
Sublease Documents, whether the subject of any representation, warranty, agreement, acknowledgment, indemnity or other
assurance.
“ Liens ”
shall mean all liens, claims, demands, charges, security interests, leaseholds, international interests and other
Registerable Interests and encumbrances of every nature and description whatsoever, including, without limitation, any rights of
third parties under Third Party Agreements and any registrations on the International Registry.
“ Loaner APU ” shall have the meaning set forth in Section 5.5 of the Sublease.
“ Loaner Engine ” shall have the meaning set forth in Section 5.5 of the Sublease.
“ Lost Item ” shall have the meaning set forth in Section 6.3 of the Sublease.
“ Maintenance Program ” shall mean the manufacturer’
s airframe maintenance program to the extent covered by any
applicable warranty, and thereafter, in accordance with the manufacturer’s prescribed maintenance program and procedures.
“ Maintenance Requirements ”
shall mean, with respect to the Airframe or the Engines, APU or any Part, all compliance
requirements set forth in or under (A) all maintenance manuals (in electronic format or otherwise) initially furnished with respect
thereto, including any subsequent amendments or supplements to such manuals issued by the manufacturer or supplier thereof
from time to time, (B) all applicable mandatory service bulletins issued, supplied, or available by or through the applicable
manufacturer with respect thereto, (C) all conditions to the enforcement of any warranties pertaining thereto, (D) Sublessee’s FAA-
approved maintenance program with respect to the Airframe, the Engines, APUs or Part, as applicable, and (E) any Maintenance
Program or Engine Maintenance Program.
“ Manufacturer ” shall mean each manufacturer identified on Schedule No. 1 and its successors and assigns.
“ Material Damage ”
shall mean any damage: (a) (i) the repair of which is required to be reported pursuant to any
governmental reporting requirement on an FAA Form 337, or (ii) to the extent that no FAA Form 337 was required or issued in
connection with any damage incident, the cost to repair or replace all items in connection with such damage incident exceeds
$25,000.00 (except that, solely for the purposes of Section 6.1(b), such amount shall be $75,000), or (b) with respect to which an
insurance claim is being made
“ NCT Law Change ” shall mean any change to Applicable Law pertinent to the use of a non-
citizenship trust for the
purpose of Lessor’s maintaining the valid registration of the Aircraft in Lessor’
s name on the FAA Registry, which change when
deemed effective creates a reasonable risk to Lessor’
s maintaining such valid registration, or renders such continued registration
impractical in any material respect.
“ Non-Recourse Agreement ” shall mean that certain Non-
Recourse Agreement dated as of the date hereof among
Lessor, Sublessor, Sublessee and Guarantor.
ANNEX A
page 4
“ Obligations ”
shall mean all obligations and liabilities of Sublessee under the Sublease and any and all of the Sublease
Documents at any time owing to Sublessor, whether direct or indirect, matured or unmatured, primary or secondary, certain or
contingent, or acquired by or otherwise created in favor of Sublessor, including without limitation any and all Rent or other periodic
payments, taxes and other Impositions, indemnities, liquidated damages, accelerated amounts, return deficiency charges, Casualty
Value Payments, and other reimbursements, administrative charges, all interest, including interest at the Late Payment Rate,
attorneys’
fees or enforcement and other costs, which may at any time be payable in accordance with the Sublease Documents,
together with all claims for damages arising from or in connection with the failure to punctually and completely pay or perform such
obligations.
“ Parts ”
shall mean all appliances, avionics, parts, instruments, appurtenances, accessories, furnishings and other
equipment of whatever nature (other than a complete Engine or APU) that may from time to time be incorporated or installed in or
attached to the Airframe, the Engines or the APU, and any and all such appliances, avionics, parts, instruments, appurtenances,
accessories, furnishings and other equipment removed therefrom so long as the same have not been released from the Lessor’
s
Lien pursuant to the applicable terms of the Sublease.
“ Permitted Liens ” shall mean (a) the Lessor’s Liens and Sublessor’
s Liens, (b) any Permitted Third Party Agreements,
(c) Liens for taxes either not yet due or being contested, and (d) inchoate materialmen’s, mechanic’s, workmen’s, repairmen’
s,
employee’
s, or other like Liens arising in the ordinary course of business of Sublessee or Timesharer for sums not yet delinquent or
being contested; except that any such contest described in clauses (c) or (d) must be conducted by Sublessee or a Timesharer, in
good faith, with due diligence and by appropriate proceedings, so long as Sublessor has not advised Sublessee in writing that
Lessor has determined in accordance with the Lease that such proceedings involve, in Lessor’
s sole but good faith judgment,
material danger of the sale, foreclosure, transfer, forfeiture or loss of the Aircraft or any property comprising the Aircraft, or Lessor’
s
title thereto, or the respective rights or interest of any Lessor Party or Sublessor therein, and for the payment of which adequate
reserves are being maintained in accordance with GAAP or other appropriate provisions reasonably satisfactory to Lessor have
been made; and with respect to any such Lien existing at the time the Aircraft shall become subject to Lessor’
s Interest, such Lien
must be subordinated, as and to the extent required in any of the Sublease Documents.
“ Permitted Replacement ” shall have the meaning provided in Section 6.3.
“ Permitted Third Party Agreement ” shall have the meaning provided in Section 5.7(b).
“ Person ”
shall mean any individual, partnership, corporation, limited liability company, trust, association, joint venture,
joint stock company, or non
-incorporated organization or Governmental Authority, or any other entity of any kind whatsoever.
“ Primary Hangar Location ” shall mean the location identified as such on Schedule No. 1 hereto.
“ proceeds ”
shall have the meaning assigned to it in the UCC, and in any event, shall include, but not be limited to, all
goods, accounts, chattel paper, documents, instruments, general intangibles, investment property, deposit accounts, letter of credit
rights, investment property, deposit accounts and supporting obligations (to the extent any of the foregoing terms are defined in the
UCC, any such foregoing terms shall have the meanings given to the same in the UCC), and all of Sublessee’
s rights in and to any
of the foregoing, and any and all rents, payments, charter hire and other amounts of any kind whatsoever due or payable under or
in connection with the Airframe or the Engines, including, without limitation, (A) any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to Sublessee from time to time, (B) any and all payments (in any form whatsoever) made or due and
payable to Sublessee from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture by any
Governmental Authority or any other Person (whether or not acting under color of any Governmental Authority), and (C) any and all
other rents or profits or other amounts from time to time paid or payable.
“ Records ”
shall mean any and all logs, manuals, certificates and data and inspection, modification, maintenance,
engineering, technical, and overhaul records (whether in written or electronic form) with respect to the Airframe, the Engines, any
APU, and all Parts, including, without limitation, all records (i) required to be maintained by the FAA or any other Governmental
Authority having jurisdiction, or by any manufacturer or supplier with respect to the enforcement of warranties or otherwise,
(ii) evidencing Sublessee’
s compliance with Applicable Standards, or (iii) with respect to any maintenance service program;
provided, however, that Records shall not include any financial records Sublessor or any Timesharer or any passenger records.
ANNEX A
page 5
“ Registerable Interests ”
shall mean all existing and prospective international interests and other interests, rights and/or
notices, sales and prospective sales, assignments, subordinations, and discharges, in each case, susceptible to being registered at
the International Registry pursuant to the Cape Town Convention.
“ Registration Certificate ” shall mean a currently effective Certificate of Aircraft Registration, AC Form 8050-
3, or any
other certificate issued to Lessor evidencing the currently effective registration of the Aircraft in its name, in connection with the
operation of the Aircraft in the United States pursuant to the Registration Requirements, or any other document as may then be
required to be maintained within the Aircraft by such Registration Requirements, either together with or in lieu of such certificate.
“ Registration Requirements ”
shall mean the requirements for registering aircraft with the Registry under 49 U.S.C. §§
44101-
44104, and 14 C.F.R. Part 47 as then in effect, any successor laws, rules or regulations pertaining to applicants for and
holders of a Registration Certificate, the U.S. registration number for the Aircraft, and any such other FARs and other Applicable
Laws, in each case as and to the extent pertaining to the registration of Lessor’
s ownership of the Aircraft with the Registry,
including any renewal of such registration, or replacement of any such Registration Certificate.
“ Registry ”
shall mean the FAA Civil Aviation Registry, Aircraft Registration Branch, or any successor registry having an
essentially similar purpose pertinent to the ownership registration of the Aircraft pursuant to the Registration Requirements.
“ Rent ” shall have the meaning set forth in Section 2.1 of the Sublease.
“ Required Coverages ”
shall mean any of the insurance coverages required under the Sublease or any of the other
Sublease Documents.
“ Requisition of Use ” shall have the meaning set forth in the Event of Loss definition contained herein.
“ Return to Manufacturer ” shall have the meaning set forth in the Event of Loss definition contained herein.
“ Schedules No. 1, 2, 2-A, or 3 ” shall mean any of Schedules No. 1, 2, 2-A,
or 3, as applicable, to the Sublease
Supplement.
“ service bulletins ” shall have the meaning set forth in the FARs.
“ Servicing Agent ”
shall mean RBS Asset Finance, Inc. and its successors, and any Assignee permitted under Section
11.5 of the Sublease.
“ Sublease Consent ”
shall mean that certain Consent to Sublease dated as of the date hereof between and among
Lessor, Sublessor and Sublessee.
“ Sublease Documents ” shall mean the Sublease (including the Sublease Supplement), the Sublease Consent, the Non-
Recourse Agreement and all other agreements, instruments, or documents entered into pursuant to or in connection with the
Sublease.
“ Sublease Supplement ”
shall mean a supplement to the Sublease to be entered into as of the Acceptance Date by
Sublessee, which supplement shall be substantially in the form attached to the Sublease, and upon execution by Sublessee shall
constitute a part of the Sublease.
“ Sublessee Party ” shall mean Sublessee together with its successors and permitted assigns.
“ Sublessor’s Liens ”
shall mean any Liens against the Aircraft or any Engine, APU or Parts created or granted by
Sublessor or resulting from claims against Sublessor to the extent not caused by a Default by Sublessee of any matter, the
responsibility for which is allocated to Sublessee under any of the Sublease Documents, whether the subject of any representation,
warranty, agreement, acknowledgment, indemnity or other assurance.
“ Supplemental Rent ” shall have the meaning set forth in Section 2.1 of the Sublease.
ANNEX A
page 6
“ Supplier ” shall mean the “Supplier” or “Suppliers”, as the case may be, identified as such on Schedule No. 1
and their
respective successors and assigns.
“ Taxing Authority ” shall have the meaning set forth in Section 8.2(b).
“ Term ”
shall mean, collectively, (a) the period, if any, from and including the Acceptance Date through, but not including,
the Rent Commencement Date, (b) the Basic Term and (c) any Renewal Term or Renewal Terms entered into pursuant to the
Sublease.
“ Termination Notice ” shall have the meaning set forth in Section 9.7.
“ Third Party Agreements ”
shall mean any and all subleases, interchange agreements, management agreements, charter
agreements, pooling agreements, timeshare agreements, engine, airframe or aircraft maintenance programs and any other similar
agreements or arrangements of any kind whatsoever relating to the Airframe, the Engines or the APU.
“ Timesharer ” shall have the meaning set forth in Section 5.7(b).
“ Transaction Documents ”
shall mean, collectively, the Sublease Documents and any other document, agreement or
instrument entered into for the purposes of effectuating the transactions contemplated in the Sublease Documents, or relating
thereto.
“ Transportation Code ” shall mean Subtitle VII of Title 49 of the United States Code, as amended and recodified.
“ Trust Bank ” shall mean Wells Fargo Bank Northwest, National Association.
“ TSA ”
shall mean the Transportation Security Administration and/or the Administrator of the TSA, or any Person,
Governmental Authority succeeding the functions of any of the foregoing.
“ U.S. Dollars ” shall have the meaning set forth in Section 2.1 hereof.
“ UCC ” shall mean the Uniform Commercial Code as then in effect in the applicable jurisdiction.
ANNEX A
page 7
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard Schultz, certify that:
Date: April 29, 2014
1. I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2014
of Starbucks Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’
s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ Howard Schultz
Howard Schultz
chairman, president and chief executive officer
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Scott Maw, certify that:
Date: April 29, 2014
1. I have reviewed this Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2014
of Starbucks Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’
s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
/s/ Scott Maw
Scott Maw
executive vice president and chief financial officer
Exhibit 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Starbucks Corporation (“Starbucks”) on Form 10-Q for the fiscal quarter ended March 30, 2014 , as
filed with the Securities and Exchange Commission on April 29, 2014 (the “Report”), Howard Schultz, chairman, president and chief executive
officer, and Scott Maw, executive vice president and chief financial officer of Starbucks, each hereby certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
April 29, 2014
April 29, 2014
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
Starbucks.
/s/ Howard Schultz
Howard Schultz
chairman, president and chief executive officer
/s/ Scott Maw
Scott Maw
executive vice president and chief financial officer
