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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1997
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)
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WASHINGTON 91-1325671
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
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2401 UTAH AVENUE SOUTH, SEATTLE, WASHINGTON 98134
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (206) 447-1575
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation of S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form l0-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Registrants Common Stock on
December 1, 1997, as reported on the National Market tier of The Nasdaq Stock
Market, Inc. was $3,126,611,409.
As of December l, 1997, there were 86,263,599 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Annual Report to Shareholders for the fiscal year
ended September 28, 1997 have been incorporated by reference into Parts II and
IV of this Annual Report on Form 10-K. Portions of the definitive Proxy
Statement for the Registrant's Annual Meeting of Shareholders to be held on
February 5, 1998 have been incorporated by reference into Part III of this
Annual Report on Form 10-K.
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Cautionary Statement pursuant to the Private Securities Litigation
Reform Act of 1995
Certain statements set forth in or incorporated by reference into this
Annual Report on Form 10-K, including anticipated store openings, planned
capital expenditures and trends in or expectations regarding the Company's
operations, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based on
currently available operating, financial and competitive information and are
subject to various risks and uncertainties. Actual future results and trends may
differ materially depending on a variety of factors, including, but not limited
to, coffee and other raw materials prices and availability, successful execution
of internal performance and expansion plans, the impact of competition, the
availability of financing, the volatility of interest rates and securities
prices, the effect of legal proceedings and other risks detailed herein.
PART I
ITEM 1. BUSINESS
General. Starbucks Corporation and its subsidiaries (collectively
"Starbucks" or the "Company") purchases and roasts high-quality whole bean
coffees and sells them, along with fresh, rich-brewed coffees, Italian-style
espresso beverages, a variety of pastries and confections and coffee-related
accessories and equipment, primarily through its Company-operated retail stores.
In addition to sales through its Company-operated retail stores, Starbucks sells
primarily whole bean coffees through a specialty sales group and a direct
response business. Starbucks, through its joint venture partnerships, also
produces and sells bottled Frappuccino(TM) coffee drink and a line of premium
coffee ice creams. The Company's objective is to establish Starbucks as the most
recognized and respected brand of coffee in the world. To achieve this goal, the
Company plans to continue to rapidly expand its retail operations, grow its
specialty sales and direct response businesses, and selectively pursue other
opportunities to leverage the Starbucks brand through the introduction of new
products and the development of new distribution channels.
Starbucks is committed to selling only the finest whole bean coffees and
coffee beverages. To ensure compliance with its rigorous coffee standards,
Starbucks is vertically integrated, with the Company controlling its coffee
purchasing, roasting and distribution through its retail stores. The Company
purchases green coffee beans for its many blends and varietals from
coffee-producing regions around the world and custom roasts them to its exacting
standards. To allow customers to extend the Starbucks experience to their homes,
the Company continually works with leading manufacturers to develop innovative
and often proprietary coffee-making equipment and accessories.
Company-Operated Retail Stores. The Company's retail goal is to become
the leading retailer and brand of coffee in each of its target markets by
selling the finest quality coffee and related products and by providing superior
customer service, thereby building a high degree of customer loyalty. Starbucks
strategy for expanding its retail business is to increase its market share in
existing markets and to open stores in new markets where the opportunity exists
to become the leading specialty coffee retailer. During the fiscal year ended
September 28, 1997 ("fiscal 1997"), the Company entered 18 new markets in
continental North America, including the major markets of Phoenix, AZ, Detroit,
MI and Miami, FL. As of September 28, 1997, Starbucks had 1,270 Company-operated
stores in 28 states, the District of Columbia and three Canadian provinces.
Company-operated retail stores accounted for approximately 86% of net revenues
during fiscal 1997. The Company and its licensees intend to open 350 new stores
in continental North America during the fiscal year ended September 27, 1998
("fiscal 1998") and to have 2,000 locations by the year 2000. The Company
intends to use cash flow from operations to finance such growth, supplemented by
additional debt or equity financing, if necessary.
Starbucks stores are typically clustered in high-traffic,
high-visibility locations. Because the Company can vary the size and format of
its stores, Starbucks stores are located in a variety of settings, including
downtown and suburban retail centers, office buildings, supermarket foyers and
on university campuses. While the Company selectively locates stores in suburban
malls, it focuses on stores that are convenient for pedestrian street traffic.
All Starbucks stores offer a choice of regular or decaffeinated coffee
beverages including a "coffee of the day," a broad selection of Italian-style
espresso beverages and distinctively packaged, roasted whole bean coffees.
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Starbucks stores also offer a selection of fresh pastries and other food items,
sodas, juices, tea, and coffee-making equipment and accessories. Each Starbucks
store varies its product mix depending upon the size of the store and its
location. Larger stores carry a broad selection of the Company's whole bean
coffees in various sizes and types of packaging, as well as an assortment of
coffee and espresso-making equipment and accessories such as coffee grinders,
drip coffee makers, espresso machines, coffee filters, storage containers,
travel tumblers and mugs. Smaller Starbucks stores and kiosks typically sell a
full line of coffee beverages, a more limited selection of whole bean coffees
and a few accessories such as travel tumblers and logo mugs. During fiscal 1997,
the Company's retail sales mix by product type was approximately 63% coffee
beverages, 14% whole bean coffees, 16% food items, and 7% coffee-making
equipment and accessories.
Specialty Sales. Starbucks specialty sales operations strive to develop
the Starbucks brand outside the retail store environment. The Company's
specialty sales operations reach customers as they shop, travel, work and dine
through relationships with retailers, airlines, hotels and office supply
companies, and numerous fine dining and food service establishments. Through
joint ventures, the Company has developed and introduced new products to
customers of supermarkets, convenience and drug stores. The Company's specialty
sales business also reaches customers through its international operations and
new supermarket initiative. During fiscal 1997, specialty sales revenues (which
include royalties and fees from licensees as well as sales of products to
licensees and joint ventures) accounted for approximately 12% of the Company's
net revenues.
Licensees and Joint Ventures. Although the Company does not generally
relinquish operational control of its stores in North America, in situations in
which a master concessionaire controls desirable retail space, the Company may
consider licensing its operations. As part of such arrangements, Starbucks
receives license fees and royalties and sells coffee for resale in the licensed
locations. Employees working in the licensed locations must follow Starbucks
detailed store-operating procedures and attend the same core training classes
given to Starbucks store managers and employees. As of September 28, 1997, the
Company had 94 licensee-operated stores in continental North America.
In addition to its relationships with licensees, the Company has entered
into joint ventures with the Pepsi-Cola Company, a division of PepsiCo, Inc.
("Pepsi"), and Dreyer's Grand Ice Cream, Inc. ("Dreyer's"). The joint venture
with Pepsi, The North American Coffee Partnership, was formed in fiscal 1994 to
develop and distribute ready-to-drink coffee-based products. In May 1996, The
North American Coffee Partnership introduced bottled Frappuccino coffee drink in
selected supermarkets and other retail points of distribution throughout the
west coast of the United States. In mid-1997, the joint venture began to
distribute Frappuccino to additional supermarkets, convenience and drug stores
on the west coast as well as key cities in the midwest and northeast United
States. The Company's joint venture with Dreyer's was formed in early fiscal
1996 to develop and distribute Starbucks premium coffee ice creams. During
fiscal 1997, the Company expanded the product line produced and distributed
through the joint venture from six flavors of ice cream to eight flavors of ice
cream and two novelty products, including two low-fat ice creams and a low-fat
blended coffee bar. (See Note 5 to the Company's consolidated financial
statements, "Joint Ventures and Other Investments," incorporated by reference to
the Company's 1997 Annual Report to Shareholders in Item 8 of this Form 10-K.)
International. Starbucks considers locations outside of continental
North America to be part of its international operations. In fiscal 1995 and
1996, the Company entered into agreements to develop Starbucks stores in Japan,
Hawaii and Singapore. By the end of fiscal 1997, ten Starbucks stores were
operating in Japan, four were operating in Hawaii and three were operating in
Singapore. During fiscal 1997, the Company continued its international expansion
by entering into an agreement with Rustan Coffee Corporation, a part of the
Rustan Group, to develop Starbucks retail business in the Philippines. The first
store opened in December 1997 and two additional stores are expected to open by
the end of fiscal 1998. The Company also continued its expansion into the
Pacific Rim by entering into agreements with President Chain Store and ESCO (a
subsidiary of Shinsegae Department Store Co., Ltd.) to develop Starbucks retail
stores in Taiwan and the Republic of Korea, respectively.
Supermarket Test. Late in fiscal 1997, Starbucks initiated a major
supermarket test of its whole bean and ground coffees in the greater Chicago,
Illinois area. The Chicago test follows a more limited test conducted in early
1997 in Portland, Oregon and encompasses approximately 500 grocery stores. The
Company is offering five new caffeinated blends and one new decaffeinated blend
in both whole bean and ground form. The packaging and merchandising of the new
blends has been designed to be distinctive and eye-catching on the supermarket
aisle. The
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Company is conducting the test to gauge both consumer response and the effects
of potential cannibalization of its retail business and is planning to extend
the supermarket test to an additional market by mid-1998.
Direct Response. The Company's direct response operations ensure that
fresh Starbucks coffee and products are conveniently available via mail order
and on-line. Starbucks publishes and distributes a mail order catalog that
offers its coffees, certain food items and select coffee-making equipment and
accessories. The Company also operates a standing order coffee delivery service
and an electronic store on America Online that allows customers to order their
favorite coffee and products on-line. Starbucks ships products to customers
located in all 50 states and in many foreign countries. Direct response sales
accounted for approximately 2% of the Company's net revenues in fiscal 1997.
Management believes that the Company's direct response operations support its
retail store expansion into new markets and reinforce brand recognition in
existing markets.
Product Supply. Coffee is the world's second largest traded commodity
and its supply and price are subject to significant volatility. Although most
coffee trades in the commodity market, coffee of the quality sought by the
Company tends to trade on a negotiated basis at a substantial premium above
commodity coffee prices, depending upon the supply and demand at the time of
purchase. Supply and price can be affected by multiple factors in the producing
countries, including weather, political and economic conditions. In addition,
green coffee prices have been affected in the past, and may be affected in the
future, by the actions of certain organizations and associations, such as the
International Coffee Organization and the Association of Coffee Producing
Countries, which have historically attempted to influence commodity prices of
green coffee through agreements establishing export quotas or restricting coffee
supplies worldwide.
The Company depends upon its direct contacts with exporters in countries
of origin and outside brokers for its supply of green coffee. To secure an
adequate supply and to fix costs for future periods, the Company routinely
enters into fixed price purchase commitments for future deliveries of coffee
with such exporters and brokers. As of September 28, 1997, the Company had
approximately $54 million in fixed price purchase commitments which, together
with existing inventory, is expected to provide an adequate supply of green
coffee well into fiscal 1998. The Company believes, based on relationships
established with its suppliers in the past, that the risk of non-delivery on
such purchase commitments is remote. In addition, the Company may from time to
time purchase and sell coffee futures contracts to provide additional price
protection. There can be no assurance that these activities will successfully
protect the Company against the risks of higher coffee prices or that such
activities will not result in the Company having to pay substantially more for
its coffee supply than it would have been required to pay absent such
activities. The Company did not purchase or sell any futures contracts in fiscal
1997.
Products other than whole bean coffees and coffee beverages sold in
Starbucks retail stores are obtained through a number of different channels.
Specialty foods, such as fresh pastries and lunch items, are generally purchased
from local sources based on quality and price. Coffee-making equipment, such as
drip and french press coffee makers, espresso machines and coffee grinders, are
generally purchased directly from their manufacturers for resale. Coffee-related
accessories, including items bearing the Company's logos and trademarks, are
produced and distributed through contracts with a number of different vendors.
Competition. The Company's whole bean coffees compete directly against
specialty coffees sold at retail through supermarkets, specialty retailers, and
a growing number of specialty coffee stores. The Company's coffee beverages
compete directly against all restaurant and beverage outlets that serve coffee
and a growing number of espresso stands, carts, and stores. Both the Company's
whole bean coffees and its coffee beverages compete indirectly against all other
coffees on the market. The Company believes that its customers choose among
retailers primarily on the basis of product quality, service and convenience,
and, to a lesser extent, on price.
Management believes that supermarkets pose the greatest competitive
challenge in the whole bean coffee market, in part because supermarkets offer
customers the convenience of not having to make a separate trip to a specialty
coffee store. A number of nationwide coffee manufacturers, such as Kraft Foods,
Inc., The Procter & Gamble Company, and Nestle USA, Inc., are distributing
premium coffee products in supermarkets that may serve as substitutes for the
Company's coffees. Regional specialty coffee companies also sell whole bean
coffees in supermarkets.
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In addition to the competition generated by supermarket sales of coffee,
Starbucks competes for whole bean coffee sales with franchise operators and
independent specialty coffee stores. In virtually every major metropolitan area
where Starbucks operates and expects to expand, there are local or regional
competitors with substantial market presence in the specialty coffee business.
The Company's primary competitors for coffee beverage sales are
restaurants, shops, and street carts. In almost all markets in which the Company
does business there has been a significant increase in competition in the
specialty coffee beverage business and management expects this trend to
continue. Although competition in the beverage market is currently fragmented, a
major competitor with substantially greater financial, marketing and operating
resources than the Company could enter this market at any time and compete
directly against the Company.
In addition to the competition for whole bean coffee and coffee beverage
retail sales, the Company faces intense competition from both restaurants and
other specialty retailers for suitable sites for new stores and qualified
personnel to operate both new and existing stores. There can be no assurance
that Starbucks will be able to continue to secure adequate sites at acceptable
rent levels or that the Company will be able to attract a sufficient number of
qualified workers. Starbucks specialty sales and direct response businesses also
face significant competition from established wholesale and mail order
suppliers, some of whom have greater financial and marketing resources than the
Company.
Patents, Trademarks and Copyrights. The Company owns and/or has applied
to register numerous trademarks and service marks in the United States, Canada
and in more than eighty additional countries throughout the world. Rights to the
trademarks and service marks in the United States are held by Starbucks U.S.
Brands Corporation, a wholly-owned subsidiary of the Company, and are used by
the Company under license. One of the Company's subsidiaries, The Coffee
Connection, Inc. ("The Coffee Connection"), also owns a number of trademarks and
service marks in the United States, Canada and elsewhere, including
registrations for "The Coffee Connection" name and logo. Some of the Company's
trademarks, including "Starbucks," the Starbucks logo and "Frappuccino," are of
material importance to the Company. Trademarks are generally valid as long as
they are in use and/or their registrations are properly maintained, and they
have not been found to have become generic. Trademark registrations can
generally be renewed indefinitely so long as the marks are in use.
The Company also owns numerous copyrights for its product packaging,
promotional materials, in-store graphics and training materials, among other
things. The Company also holds patents on certain products and systems. While
valuable, individual copyrights and patents currently held by the Company are
not viewed as material to the Company's business.
Research and Development. The Company's Research and Development
department is comprised of chemists, engineers, food scientists and technicians
responsible for the formulation and technical development of new food, beverage
and equipment products. The department has played a major role in the
development of bottled Frappuccino and coffee ice cream products, as well as the
development of a home espresso machine with a new portafilter system that
accommodates both ground coffee and espresso filter packs ("pods"). The Company
spent approximately $2.6 million during fiscal 1997 on technical research and
development activities, in addition to customary product testing and development
in all areas of the Company's business.
Seasonality and Quarterly Results. The Company's business is subject to
seasonal fluctuations. Significant portions of the Company's net revenues and
profits are realized during the first quarter of the Company's fiscal year that
includes the December holiday season. In addition, quarterly results are
affected by the timing of the opening of new stores, and the Company's rapid
growth may conceal the impact of other seasonal influences. Because of the
seasonality of the Company's business, results for any quarter are not
necessarily indicative of the results that may be achieved for the full fiscal
year.
Employees. As of September 28, 1997, the Company employed approximately
25,000 individuals, approximately 22,000 in retail stores and regional offices
and the remainder in the Company's administrative, sales, real estate, direct
response, roasting, and warehousing operations. At fiscal year end, ten of the
Company's stores (out of a total of 1,270 Company-operated stores in continental
North America) were unionized. In July 1997,
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Starbucks and the Canadian Auto Workers Union entered into a labor agreement
governing such stores that extends for two years. The Company believes that its
current relations with its employees are excellent.
ITEM 2. PROPERTIES
Starbucks currently operates three roasting and distribution facilities
- - - two in the Seattle, Washington area, and one in East Manchester Township, York
County, Pennsylvania. In the Seattle area, the Company leases approximately
92,000 square feet in one building pursuant to a lease extendable through 2009
(the "Seattle Plant"), owns an additional roasting plant and distribution
facility of approximately 305,000 square feet located in Kent, Washington, and
leases a warehouse facility of approximately 156,000 square feet in Kent,
Washington. The Company has a lease agreement with York County Industrial
Development Corporation for a roasting and distribution facility (the "York
Plant"), providing for approximately 365,000 square feet initially. The lease
has a 15-year term and the Company has an option to purchase the land and
building within five years of the date of occupancy. Such option to purchase
also provides that the Company may purchase, within seven years of occupancy,
additional land adjacent to the York Plant that would expand it to 1,000,000
square feet. The Company is party to a letter of intent and a commitment letter
which provide that in the event that the Company exercises its option to
purchase the York Plant, the Company will have the right to assume loans
incurred in connection with its development. The Company has determined that it
no longer needs its much-smaller roasting plant located in Boston (which
formerly operated as the roasting plant for The Coffee Connection) and has
sublet it to a third party. The lease on this facility runs through 2002.
The Company also leases approximately 350,000 square feet of a building
located in Seattle, Washington for administrative offices and has options to
lease approximately 250,000 additional square feet in such building. The Company
owns 2.36 acres (102,800 square feet) of undeveloped land near its
administrative offices and adjacent to the Seattle Plant, which is currently
used for parking.
As of September 28, 1997, Starbucks operated a total of 1,270 retail
stores. All Starbucks stores are located in leased premises. The Company also
leases space in approximately 50 additional locations for regional, district and
other administrative offices, training facilities and storage, not including
spaces within retail stores used for such purposes and certain seasonal retail
storage locations.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the
ordinary course of its business, but is not currently a party to any legal
proceeding which the Company believes will have a material adverse effect on the
financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal year 1997.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated herein by
reference to the section entitled "Shareholder Information" in the Company's
1997 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by
reference to the section entitled "Selected Financial Data" in the Company's
1997 Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by
reference to the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's 1997 Annual
Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by
reference to the section entitled "Financial Risk Management" in the Company's
1997 Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by
reference to the Consolidated Financial Statements and the notes thereto in the
Company's 1997 Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors of the Company and compliance with
Section 16(a) of the Securities Exchange Act of 1934, as amended, is
incorporated herein by reference to the sections entitled " Proposal 1 -
Election of Directors" and "Executive Compensation Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on February 5, 1998 (the "Proxy
Statement"). The Company intends to file the Proxy Statement within 120 days
after the end of its fiscal year.
The executive officers of the Company, each of whom serves a one-year
term and until his or her successor is elected and qualified, are as follows:
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Name Age Position Executive Officer Since
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Howard Schultz 44 chairman of the board and chief 1985
executive officer
Orin Smith 55 director, president and chief 1990
operating officer
Howard Behar 53 director and president, Starbucks 1989
Coffee International, Inc.
John Richards 49 president, Retail, North America 1997
Michael Casey 52 executive vice president, chief 1995
financial officer and chief
administrative officer
E. R. (Ted) Garcia 50 executive vice president, Supply Chain 1995
Operations
Deidra Wager 42 executive vice president, Retail 1993
Marketing and Operations Services
James Alling 36 senior vice president, Grocery 1997
Scott Bedbury 40 senior vice president, Brand 1995
Development
Bruce Craig 55 senior vice president, Retail Field 1997
Operations
Vincent Eades 38 senior vice president, Specialty Sales 1995
and Marketing
Sharon E. Elliott 46 senior vice president, Human Resources 1994
Deborah Gillotti 40 senior vice president and chief 1997
information officer
Wanda Herndon 45 senior vice president, Communications 1996
and Public Affairs
Shelley B. Lanza 41 senior vice president, Law and 1995
Corporate Affairs and general counsel
Judy Meleliat 40 senior vice president, Marketing 1997
David M. Olsen 51 senior vice president 1991
Arthur I. 44 senior vice president, Store 1992
Rubinfeld Development
Don Valencia 45 senior vice president, Research and 1997
Development
Mary Williams 48 senior vice president, Coffee 1997
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HOWARD SCHULTZ is the founder of the Company and has been chairman of
the board and chief executive officer since its inception in 1985. From 1985 to
June 1994, Mr. Schultz was also the Company's president. From September 1982 to
December 1985, Mr. Schultz was the director of Retail Operations and Marketing
for Starbucks Coffee Company, a predecessor to the Company; and from January
1986 to July 1987, he was the chairman of the board, chief executive officer and
president of Il Giornale Coffee Company, a predecessor to the Company.
ORIN SMITH joined the Company in 1990 and has served as president and
chief operating officer of the Company since June 1994. Prior to June 1994, Mr.
Smith served as the Company's vice president and chief financial officer and
later, as its executive vice president and chief financial officer.
HOWARD BEHAR joined the Company in 1989 and has served as president of
Starbucks Coffee International, Inc. since June 1994. From February 1993 to June
1994, Mr. Behar served as the Company's executive vice president, Sales and
Operations. From February 1991 to February 1993, Mr. Behar served as senior vice
president, Retail Operations of the Company and from August 1989 to January
1991, he served as the Company's vice president, Retail Stores.
JOHN RICHARDS joined the Company in September 1997 as president, Retail,
North America. Prior to joining the Company, Mr. Richards served as the
Executive Vice President of Four Seasons Hotels and Resorts for 10 years. Prior
to that time Mr. Richards held various positions with McKinsey & Company and
Procter & Gamble.
MICHAEL CASEY joined Starbucks in August 1995 as senior vice president
and chief financial officer and was promoted to executive vice president, chief
financial officer and chief administrative officer in September 1997. Prior to
joining Starbucks, Mr. Casey served as executive vice president and chief
financial officer of Family Restaurants, Inc. from its inception in 1986. During
his tenure there, he also served as a director from 1986 to 1993, and as
president and chief executive officer of its El Torito Restaurants, Inc.
subsidiary from 1988 to 1993.
E. R. (TED) GARCIA joined Starbucks in April 1995 as senior vice
president, Supply Chain Operations and was promoted to executive vice president,
Supply Chain Operations in September 1997. From May 1993 to April 1995, Mr.
Garcia was an executive for Gemini Consulting. From January 1990 until May 1993,
he was the vice president of Operations Strategy for Grand Metropolitan PLC,
Food Sector.
DEIDRA WAGER joined Starbucks in 1992 and served as the Company's senior
vice president, Retail Operations from August 1993 to September 1997 when she
was promoted to executive vice president, Retail Marketing and Operations
Services. From September 1992 to August 1993, Ms. Wager served as the Company's
vice president, Operation Services. From March 1992 to September 1992, she was
the Company's California regional manager. From September 1988 to March 1992,
Ms. Wager held several operations positions with Taco Bell(R), Inc., including
having served as its director of operations systems development.
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JAMES ALLING joined Starbucks in September 1997 as senior vice
president, Grocery. From 1985 to 1997, Mr. Alling held several marketing and
general management positions for Nestle, U.S.A., including serving as the vice
president and general manager of the ground coffee division.
SCOTT BEDBURY joined Starbucks in June 1995 as senior vice president,
Marketing and became the senior vice president, Brand Development in November
1997. From November 1987 to October 1994, Mr. Bedbury held the position of
worldwide director of advertising for Nike, Inc. Prior to joining Nike, Inc.,
Mr. Bedbury was vice president for Cole and Weber Advertising in Seattle,
Washington, which is an affiliate of Ogilvy and Mather.
BRUCE CRAIG joined Starbucks in October 1992 and served as regional and
then zone vice president for the Southwest. In September 1997, Mr. Craig was
promoted to the position of senior vice president, Retail Field Operations.
Prior to joining Starbucks, Mr. Craig served for 21 years with Burger King Corp.
in various positions, including executive vice president/division manager and as
an owner/operator.
VINCENT EADES joined Starbucks in April 1995 as senior vice president,
Specialty Sales and Marketing. From February 1993 to April 1995, Mr. Eades
served as a regional sales manager for Hallmark Cards, Inc. From August 1989 to
February 1993, Mr. Eades was general manager of the Christmas Celebrations
business unit at Hallmark Cards, Inc.
SHARON E. ELLIOTT joined Starbucks in 1994 as senior vice president,
Human Resources. From September 1993 to June 1994, Ms. Elliott served as the
corporate director, staffing and development of Allied Signal Corporation. From
July 1987 to August 1993, she held several human resources management positions
with Bristol-Myers Squibb, including serving as the director of human
resources--corporate staff.
DEBORAH J. GILLOTTI joined Starbucks in February 1997 as senior vice
president and chief information officer. Prior to joining Starbucks, Ms.
Gillotti served as vice president, Corporate MIS for Duracell International,
Inc. (now a division of the Gillette Company). She also held several management
positions for KPMG Peat Marwick Management Consulting from 1989 to 1993.
WANDA HERNDON, joined Starbucks in July 1995 as vice president,
Communications and Public Affairs and was promoted to senior vice president,
Communication and Public Affairs in November 1996. From February 1990 to June
1995, Ms. Herndon held several communications management positions at DuPont.
From November 1978 to February 1990, Ms. Herndon held several public affairs and
marketing communications positions for Dow Chemical Company.
SHELLEY B. LANZA joined Starbucks in June 1995 as senior vice president,
Law and Corporate Affairs and general counsel. From 1986 to 1995, Ms. Lanza
served as vice president and general counsel of Honda of America Manufacturing,
Inc. From 1982 to 1986, Ms. Lanza practiced law at the law firm of Vorys, Sater,
Seymour and Pease in Columbus, Ohio.
JUDY MELELIAT joined Starbucks in October 1997 as vice president,
Marketing Operations and was promoted to senior vice president, Marketing in
November 1997. Prior to joining Starbucks, Ms. Meleliat was vice president of
Marketing for InfoAccess. From September 1995 to June 1996, she served at Edmark
Corporation as the vice president of Sales for the Education Channel. From
September 1987 to September 1995, Ms. Meleliat held several executive management
positions at Egghead Software.
DAVID M. OLSEN joined Starbucks in 1986 and served as the Company's
senior vice president, Coffee from September 1991 to October 1997. From November
1987 to September 1991, Mr. Olsen served as vice president, Coffee, and from
February 1986 to November 1987, he served as the Company's director of training.
ARTHUR I. RUBINFELD joined the Company in 1992 as senior vice president,
Real Estate. From April 1986 to May 1992, Mr. Rubinfeld served as a managing
partner of Epsteen & Associates, a commercial real estate company.
DON VALENCIA joined Starbucks in November 1993 as vice president,
Research and Development and was promoted to senior vice president, Research and
Development in October 1997. From 1980 to 1993, Mr. Valencia was president of
Immuno Concepts, Incorporated, a biomedical company.
9
<PAGE> 11
MARY WILLIAMS joined Starbucks in March 1993 as vice president, Green
Coffee and was promoted to senior vice president, Coffee in October 1997. From
May 1988 to March 1993, Ms. Williams served as president of Klein Bros.
International, Coffee Division.
There are no family relationships between any directors or executive
officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the section entitled "Executive Compensation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the section entitled "Beneficial Ownership of Common Stock" in the Company's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the section entitled "Executive Compensation - Certain Transactions" in the
Company's Proxy Statement.
10
<PAGE> 12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Annual Report on
Form l0-K:
1.Financial Statements.
The following financial statements incorporated by reference to
the Company's 1997 Annual Report to Shareholders in Part II, Item 8:
Consolidated Balance Sheets as of September 28, 1997 and September
29, 1996;
Consolidated Statements of Earnings for the fiscal years ending
September 28, 1997, September 29, 1996 and October 1, 1995;
Consolidated Statements of Cash Flows for the fiscal years ending
September 28, 1997, September 29, 1996 and October 1, 1995;
Consolidated Statements of Shareholders' Equity for the fiscal years
ending September 28, 1997, September 29, 1996 and October 1, 1995;
Notes to Consolidated Financial Statements.
2.Financial Statement Schedules.
Financial statement schedules are omitted because they are not
required or are not applicable, or the required information is
provided in the consolidated financial statements or notes thereto
described in Item 14(a)(1) above.
3.Exhibits.
The Exhibits listed below and on the accompanying Index to
Exhibits immediately following the signature page hereto are filed as
part of, or incorporated by reference into, this Annual Report on
Form 10-K.
Exhibit No. Description
3.1 Restated Articles of Incorporation of Starbucks
Corporation (incorporated herein by reference to Exhibit
3. 1 to the Company's Form 10-Q for the fiscal quarter
ended March 31, 1996, filed with the SEC on May 15, 1996)
3.1.1 Amendment dated November 22, 1995 to the Restated Articles
of Incorporation of Starbucks Corporation (incorporated
herein by reference to Exhibit 3.1.1 to the Company's Form
10-Q for the fiscal quarter ended March 31, 1996, filed
with the SEC on May 15, 1996)
3.1.2 Amendment dated March 18, 1996 to the Restated Articles of
Incorporation of Starbucks Corporation (incorporated
herein by reference to Exhibit 3.1.2 to the Company's Form
10-Q for the quarterly period ended March 31, 1996, filed
with the SEC on May 15, 1996)
3.2 Amended and Restated Bylaws of Starbucks Corporation
(incorporated herein by reference to Exhibit 3.2 to the
Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed with the SEC on May 15, 1996)
11
<PAGE> 13
4.1 Indenture, dated as of October 24, 1995, between Starbucks
Corporation and First Interstate Bank of Washington, N.A.,
as Trustee (incorporated herein by reference to Exhibit
4.3 to the Company's Form l0-K for the fiscal year ended
October 1, 1995, filed with the SEC on December 28, 1995)
4.2 Form of Debenture relating to the Indenture described in
Exhibit 4.1 hereto (incorporated herein by reference to
Exhibit 4.4 to the Company's Form l0-K for the fiscal year
ended October 1, 1995, filed with the SEC on December 28,
1995)
10.1 Starbucks Corporation Key Employee Stock Option Plan--1994
(incorporated herein by reference to Appendix A to the
Company's 1994 Proxy Statement filed with the SEC on
December 23, 1994)*
10.1.1 Starbucks Corporation Key Employee Stock Option Plan--
1994, as amended (incorporated herein by reference to
Exhibit 10.1.1 to the Company's Form 10-K for the fiscal
year ended September 29, 1996, filed with the SEC on
December 26, 1996)*
10.2 Starbucks Corporation 1989 Stock Option Plan for
Non-Employee Directors, as amended (incorporated herein by
reference to Appendix B to the Company's 1994 Proxy
Statement filed with the SEC on December 23, 1994)*
10.2.1 Starbucks Corporation 1989 Stock Option Plan for
Non-Employee Directors, as amended (incorporated herein by
reference to Exhibit 10.2.1 to the Company's Form 10-K for
the fiscal year ended on September 29, 1996, filed with
the SEC on December 26, 1996)*
10.3 Starbucks Corporation 1991 Company-Wide Stock Option Plan,
as amended (incorporated herein by reference to the
Company's Registration Statement No. 33-52528 on Form S-8,
filed with the SEC on September 28, 1992)*
10.3.1 Starbucks Corporation 1991 Company-Wide Stock Option Plan,
as amended (incorporated by reference to Exhibit 10.3.1 to
the Company's Annual Report on Form 10-K for the fiscal
year ended September 29, 1996, filed with the SEC on
December 26, 1996)*
10.4 Starbucks Corporation Employee Stock Purchase Plan --1995
(incorporated herein by reference to Appendix C to the
Company's 1994 Proxy Statement filed with the SEC on
December 23, 1994)*
10.5 Industrial Lease, dated March 31, 1989, between Starbucks
Corporation and the City of Seattle (successor in interest
to David A. Sabey and Sandra L. Sabey) (incorporated
herein by reference to Exhibit 10.4 to the Company's
Registration Statement No. 33-47951 on Form S-1, filed
with the SEC on May 15, 1992)
10.6 Office Lease, dated as of July 15, 1993, between First and
Utah Street Associates, L.P. and Starbucks Corporation
(incorporated herein by reference to Exhibit 10.17 to the
Company's Form 10-K for the Fiscal Year ended October 3,
1993, filed with the SEC on December 30, 1993)
10.6.1 Second Amendment to Office Lease, dated as of January 1,
1995, between First & Utah Street Associates, L.P. and
Starbucks Corporation (incorporated herein by reference to
the Company's Registration Statement No. 33-93974 on Form
S-3, filed with the SEC on June 27, 1995)
12
<PAGE> 14
10.6.2 Third Amendment to Office Lease, dated as of September 30,
1995, between First and Utah Street Associates, L.P. and
Starbucks Corporation (incorporated herein by reference to
Exhibit 10.19 to the Company's Form 10-K for the fiscal
year ended October l, 1995, filed with the SEC on December
28, 1995)
10.7 Development Agreement, dated as of February 11, 1994,
between Starbucks Corporation and Host International, Inc.
(incorporated herein by reference to Exhibit 10.18 to the
Company's Form 10-K for the Fiscal Year ended October 2,
1994, filed with the SEC on December 23, 1994)
10.8 Special Warranty Deed, dated March 7, 1994, between Kent
North Corporate Park, as grantor and Starbucks
Corporation, as grantee (incorporated herein by reference
to Exhibit 10.14 to the Company's Form 10-K for the Fiscal
Year ended October 2, 1994, filed with the SEC on December
23, 1994)
10.9 Joint Venture and Partnership Agreement, dated August 10,
1994, between Pepsi-Cola Company, a division of PepsiCo,
Inc., and Starbucks New Venture Company (incorporated
herein by reference to Exhibit 10 to the Company's Form
10-Q for the Quarterly Period ended July 3, 1994, filed
with the SEC on August 16, 1994)
10.10 Lease, dated August 22, 1994, between York County
Industrial Development Corporation and Starbucks
Corporation (incorporated herein by reference to Exhibit
l0 to the Company's Form 10-Q for the Quarterly Period
Ended July 2, 1995, filed with the SEC on August 15, 1995)
10.11 Starbucks Corporation Amended and Restated
Consulting/Employment Agreement with Jeffrey H. Brotman,
dated as of January 14, 1995 (incorporated herein by
reference to Exhibit 10.14 to the Company's Form 10-K for
the Fiscal Year ended October l, 1995, filed with the SEC
on December 28, 1995)*
10.12 Protective Covenants Agreement dated March 31, 1995, among
Starbucks Corporation, Noah's New York Bagels, Inc. and
certain shareholders of Noah's New York Bagels, Inc.
(incorporated herein by reference to the Company's
Registration Statement No. 33-91780 on Form S-3, filed
with the SEC on April 28, 1995)
10.13 Merger Agreement among Noah's New York Bagels, Inc.
Shareholders and Certain Optionholders of Noah's New York
Bagels, Inc., Einstein Brothers Bagels, Inc. and NNYB
Acquisition Corporation, dated January 22, 1996
(incorporated herein by reference to Exhibit 10.21 to the
Company's Form 10-Q for the Quarterly Period Ended March
31, 1996, filed with the SEC on May 15, 1996)
10.13.1 Amendment dated February l, 1996, to Merger Agreement
among Noah's New York Bagels, Inc., Shareholders and
Certain Optionholders of Noah's New York Bagels, Inc.,
Einstein Brothers Bagels, Inc. and NNYB Acquisition
Corporation dated January 22, 1996 (incorporated herein by
reference to Exhibit 10.22 to the Company's Form 10-Q for
the Quarterly Period Ended March 31, 1996, filed with the
SEC on May 15, 1996)
10.14 Master Licensing Agreement between the Company and ARAMARK
Food and Services Group, Inc. dated as of January 30,
1996, as amended and restated May 7, 1996 (incorporated
herein by reference to Exhibit 10.23 to the Company's Form
l0-Q for the Quarterly Period Ended March 31, 1996, filed
with the SEC on May 15, 1996)
11 Computation of Per Share Earnings
12 Ratio of Earnings to Fixed Charges
13
<PAGE> 15
13 Portions of the 1997 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Independent Auditors' Consent
27 Financial Data Schedule
- - ------------------------
* Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the fiscal
quarter ended September 28, 1997.
14
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
STARBUCKS CORPORATION
By: /s/ Howard Schultz
----------------------------------
Howard Schultz
chairman of the Board of Directors
and chief executive officer
December 19, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ Howard Schultz chairman of the Board of Directors December 19, 1997
- - -------------------------- and chief executive officer
Howard Schultz
/s/ Orin C. Smith director, president and chief operating December 16, 1997
- - -------------------------- officer
Orin C. Smith
/s/ Howard Behar director, president of Starbucks Coffee December 19, 1997
- - -------------------------- International, Inc.
Howard Behar
/s/ Michael Casey executive vice president, chief financial December 19, 1997
- - ------------------------- officer and chief administrative officer
Michael Casey (principal financial officer and principal
accounting officer)
/s/ Barbara Bass director December 15, 1997
- - --------------------------
Barbara Bass
/s/ Jeffrey H. Brotman director December 22, 1997
- - --------------------------
Jeffrey H. Brotman
/s/ Craig J. Foley director December 16, 1997
- - --------------------------
Craig J. Foley
/s/ Arlen I. Prentice director December 15, 1997
- - --------------------------
Arlen I. Prentice
/s/ James G. Shennan, Jr. director December 12, 1997
- - --------------------------
James G. Shennan, Jr.
</TABLE>
15
<PAGE> 17
EXHIBIT INDEX
Exhibit No. Description Page No.
3.1 Restated Articles of Incorporation of Starbucks Corporation
(incorporated herein by reference to Exhibit 3.1 to the
Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed with the SEC on May 15, 1996)
3.1.1 Amendment dated November 22, 1995 to the Restated Articles of
Incorporation of Starbucks Corporation (incorporated herein by
reference to Exhibit 3.1.1 to the Company's Form 10-Q for the
fiscal quarter ended March 31, 1996, filed with the SEC on May
15, 1996)
3.1.2 Amendment dated March 18, 1996 to the Restated Articles of
Incorporation of Starbucks Corporation (incorporated herein by
reference to Exhibit 3.1.2 to the Company's Form 10-Q for the
quarterly period ended March 31, 1996, filed with the SEC on
May 15, 1996)
3.2 Amended and Restated Bylaws of Starbucks Corporation
(incorporated herein by reference to Exhibit 3.2 to the
Company's Form 10-Q for the fiscal quarter ended March 31,
1996, filed with the SEC on May 15, 1996)
4.1 Indenture, dated as of October 24, 1995, between Starbucks
Corporation and First Interstate Bank of Washington, N.A., as
Trustee (incorporated herein by reference to Exhibit 4.3 to
the Company's Form l0-K for the fiscal year ended October 1,
1995, filed with the SEC on December 28, 1995)
4.2 Form of Debenture relating to the Indenture described in
Exhibit 4.1 hereto (incorporated herein by reference to
Exhibit 4.4 to the Company's Form l0-K for the fiscal year
ended October 1, 1995, filed with the SEC on December 28,
1995)
10.1 Starbucks Corporation Key Employee Stock Option Plan--1994
(incorporated herein by reference to Appendix A to the
Company's 1994 Proxy Statement filed with the SEC on December
23, 1994)*
10.1.1 Starbucks Corporation Key Employee Stock Option Plan-- 1994,
as amended (incorporated herein by reference to Exhibit 10.1.1
to the Company's Form 10-K for the fiscal year ended September
29, 1996, filed with the SEC on December 26, 1996)*
10.2 Starbucks Corporation 1989 Stock Option Plan for Non-Employee
Directors, as amended (incorporated herein by reference to
Appendix B to the Company's 1994 Proxy Statement filed with
the SEC on December 23, 1994)*
10.2.1 Starbucks Corporation 1989 Stock Option Plan for Non-Employee
Directors, as amended (incorporated herein by reference to
Exhibit 10.2.1 to the Company's Form 10-K for the fiscal year
ended on September 29, 1996, filed with the SEC on December
26, 1996)*
10.3 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as
amended (incorporated herein by reference to the Company's
Registration Statement No. 33-52528 on Form S-8, filed with
the SEC on September 28, 1992)*
10.3.1 Starbucks Corporation 1991 Company-Wide Stock Option Plan, as
amended (incorporated by reference to Exhibit 10.3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 29, 1996, filed with the SEC on December 26, 1996)*
10.4 Starbucks Corporation Employee Stock Purchase Plan --1995
(incorporated herein by reference to Appendix C to the
Company's 1994 Proxy Statement filed with the SEC on December
23, 1994)*
E-1
<PAGE> 18
10.5 Industrial Lease, dated March 31, 1989, between Starbucks
Corporation and the City of Seattle (successor in interest to
David A. Sabey and Sandra L. Sabey) (incorporated herein by
reference to Exhibit 10.4 to the Company's Registration
Statement No. 33-47951 on Form S-1, filed with the SEC on May
15, 1992)
10.6 Office Lease, dated as of July 15, 1993, between First and
Utah Street Associates, L.P. and Starbucks Corporation
(incorporated herein by reference to Exhibit 10.17 to the
Company's Form 10-K for the Fiscal Year ended October 3, 1993,
filed with the SEC on December 30, 1993)
10.6.1 Second Amendment to Office Lease, dated as of January 1, 1995,
between First & Utah Street Associates, L.P. and Starbucks
Corporation (incorporated herein by reference to the Company's
Registration Statement No. 33-93974 on Form 5-3, filed with
the SEC on June 27, 1995)
10.6.2 Third Amendment to Office Lease, dated as of September 30,
1995, between First and Utah Street Associates, L.P. and
Starbucks Corporation (incorporated herein by reference to
Exhibit 10.19 to the Company's Form 10-K for the Fiscal Year
ended October l, 1995, filed with the SEC on December 28,
1995)
10.7 Development Agreement, dated as of February 11, 1994, between
Starbucks Corporation and Host International, Inc.
(incorporated herein by reference to Exhibit 10.18 to the
Company's Form 10-K for the Fiscal Year ended October 2, 1994,
filed with the SEC on December 23, 1994)
10.8 Special Warranty Deed, dated March 7, 1994, between Kent North
Corporate Park, as grantor and Starbucks Corporation, as
grantee (incorporated herein by reference to Exhibit 10.14 to
the Company's Form 10-K for the Fiscal Year ended October 2,
1994, filed with the SEC on December 23, 1994)
10.9 Joint Venture and Partnership Agreement, dated August 10,
1994, between Pepsi-Cola Company, a division of PepsiCo, Inc.,
and Starbucks New Venture Company (incorporated herein by
reference to Exhibit 10 to the Company's Form 10-Q for the
Quarterly Period ended July 3, 1994, filed with the SEC on
August 16, 1994)
10.10 Lease, dated August 22, 1994, between York County Industrial
Development Corporation and Starbucks Corporation
(incorporated herein by reference to Exhibit l0 to the
Company's Form 10-Q for the Quarterly Period Ended July 2,
1995, filed with the SEC on August 15, 1995)
10.11 Starbucks Corporation Amended and Restated
Consulting/Employment Agreement with Jeffrey H. Brotman, dated
as of January 14, 1995 (incorporated herein by reference to
Exhibit 10.14 to the Company's Form 10-K for the Fiscal Year
ended October l, 1995, filed with the SEC on December 28,
1995)*
10.12 Protective Covenants Agreement dated March 31, 1995, among
Starbucks Corporation, Noah's New York Bagels, Inc. and
certain shareholders of Noah's New York Bagels, Inc.
(incorporated herein by reference to the Company's
Registration Statement No. 33-91780 on Form 5-3, filed with
the SEC on April 28, 1995)
10.13 Merger Agreement among Noah's New York Bagels, Inc.
Shareholders and Certain Optionholders of Noah's New York
Bagels, Inc., Einstein Brothers Bagels, Inc. and NNYB
Acquisition Corporation, dated January 22, 1996 (incorporated
herein by reference to Exhibit 10.21 to the Company's Form
10-Q for the Quarterly Period Ended March 31, 1996, filed with
the SEC on May 15, 1996)
10.13.1 Amendment dated February l, 1996, to Merger Agreement among Noah's
New York Bagels, Inc., Shareholders and Certain Optionholders of
Noah's New York
E-2
<PAGE> 19
Bagels, Inc., Einstein Brothers Bagels, Inc. and NNYB Acquisition
Corporation dated January 22, 1996 (incorporated herein by
reference to Exhibit 10.22 to the Company's Form 10-Q for the
Quarterly Period Ended March 31, 1996, filed with the SEC on May
15, 1996)
10.14 Master Licensing Agreement between the Company and ARAMARK
Food and Services Group, Inc. dated as of January 30, 1996, as
amended and restated May 7, 1996 (incorporated herein by
reference to Exhibit 10.23 to the Company's Form l0-Q for the
Quarterly Period Ended March 31, 1996, filed with the SEC on
May 15, 1996)
11 Computation of Per Share Earnings E-4
12 Ratio of Earnings to Fixed Charges E-5
13 Portions of the 1997 Annual Report to Shareholders E-6
21 Subsidiaries of the Registrant E-34
23 Independent Auditors' Consent E-35
27 Financial Data Schedule E-36
- - -------------
* Management contract or compensatory plan or arrangement.
E-3
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
September 28, 1997 September 29, 1996 October 1, 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CALCULATION OF EARNINGS PER
COMMON AND COMMON EQUIVALENT
SHARE - PRIMARY:
Net earnings ($) 57,412 42,128 26,102
==================================================================================================================================
Weighted average shares outstanding calculation:
Weighted average number of common shares outstanding 78,359 73,849 68,898
Dilutive effect of outstanding common stock options and warrants 3,279 3,115 2,411
- - ----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 81,638 76,964 71,309
==================================================================================================================================
Earnings per share ($) 0.70 0.55 0.37
==================================================================================================================================
CALCULATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
- - - FULLY DILUTED(1):
Net earnings calculation:
Net earnings ($) 57,412 42,128 26,102
Add after tax interest expense on debentures 4,300 1,248 --
Add after tax amortization of issuance costs related to the debentures 354 93 --
- - ----------------------------------------------------------------------------------------------------------------------------------
Adjusted net earnings ($) 62,066 43,469 26,102
==================================================================================================================================
Weighted average shares outstanding calculation:
Weighted average number of common shares outstanding 78,359 73,849 68,898
Dilutive effect of outstanding common stock options and warrants 3,774 3,956 3,011
Assuming conversion of convertible subordinated debentures 7,098 3,026 --
- - ----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding 89,231 80,831 71,909
==================================================================================================================================
Earnings per common and common equivalent share - fully diluted ($) 0.70 0.54 0.36
</TABLE>
- - -----------------
(1) Fully diluted earnings per share assumes conversion of the Company's
convertible subordinated debentures using the "if converted" method, when
such securities are dilutive, with income adjusted for the after-tax
interest expense and amortization applicable to these debentures.
E-4
<PAGE> 1
EXHIBIT 12
STATEMENT REGARDING COMPUTATION OF
RATIO OF EARNINGS TO FIXED CHARGES(1)
(in thousands, except ratio data)
<TABLE>
<CAPTION>
September 28, September 29, October 1, October 2, October 3,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------------
COMPUTATION OF EARNINGS:
Earnings before income taxes ($) 93,349 68,501 43,143 17,754 13,526
Interest expense 7,266 8,739 3,765 3,807 772
Amortization of debt expense 578 682 260 260 43
Portion of rents representative of interest factor 27,054 20,612 14,713 7,144 3,892
Less: Capitalized interest (241) (306) (160) (99) --
- - ----------------------------------------------------------------------------------------------------------------------------
Total earnings (as calculated) ($) 128,006 98,228 61,721 28,866 18,233
============================================================================================================================
COMPUTATION OF FIXED CHARGES:
Interest expense ($) 7,266 8,739 3,765 3,807 772
Amortization of debt expense 578 682 260 260 43
Portion of rents representative of interest factor 27,054 20,612 14,713 7,144 3,892
- - ----------------------------------------------------------------------------------------------------------------------------
Total fixed charges ($) 34,898 30,033 18,738 11,211 4,707
============================================================================================================================
Ratio of earnings to fixed charges 3.67x 3.27x 3.29x 2.57x 3.87x
- - ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- - -------------------------------------------
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
include earnings before income taxes, amortization of debt expense, and
interest expense, including that portion of rental expense attributable to
interest costs. Fixed charges consist of interest expense, including that
portion of rental expense attributable to interest costs, and interest
capitalized during the period.
E-5
<PAGE> 1
EXHIBIT 13
PORTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS
SHAREHOLDER INFORMATION
STARBUCKS CORPORATION
Market Information and Dividend Policy The Company's Common Stock is
traded on the National Market tier of The Nasdaq Stock Market, Inc. ("Nasdaq")
under the symbol "SBUX". The following table sets forth the quarterly high and
low sale prices per share of the Common Stock as reported by Nasdaq for each
quarter during the last two fiscal years, retroactively adjusted for the
two-for-one stock split on December 1, 1995.
<TABLE>
<CAPTION>
Fiscal year ended High Low
- - ---------------------------------------------------------------------------------
<S> <C> <C>
September 28, 1997
First Quarter $40 1/4 $28 7/8
Second Quarter 37 1/4 27 3/8
Third Quarter 39 1/2 26 1/8
Fourth Quarter 44 3/4 34 1/8
September 29, 1996
First Quarter $23 1/2 16 15/16
Second Quarter 23 5/8 14 1/2
Third Quarter 29 5/8 24 1/8
Fourth Quarter 35 7/8 23
- - ---------------------------------------------------------------------------------
</TABLE>
As of December 1, 1997, the Company had 7,209 shareholders of record.
The Company has never paid any dividends on its Common Stock. The Company
presently intends to retain earnings for use in its business and therefore does
not anticipate declaring and paying a cash dividend in the near future.
Form 10-K and Quarterly Shareholder Information The Company's annual
report on Form 10-K for the fiscal year ended September 28, 1997, without the
Exhibits thereto, may be obtained without charge by sending a written request to
Investor Relations at the address below.
Quarterly information is available to all shareholders immediately upon
its release, free of charge, via fax, by calling (800) 239-0317 or through
access on the Internet at www.businesswire.com/cnn/sbux.htm. To receive a copy
by mail, please send your written request to:
Investor Relations - M/S S-FP1
Starbucks Corporation
P.O. Box 34067
Seattle, WA 98124-1067
E-6
<PAGE> 2
SELECTED FINANCIAL DATA
(in thousands, except earnings per share)
The following selected financial data have been derived from the
consolidated financial statements of the Company. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and notes thereto.
<TABLE>
<CAPTION>
As of and for the fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 Oct 2, 1994 Oct 3, 1993
(52 Wks) (52 Wks) (52 Wks) (52 Wks) (53 Wks)
- - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations Data:
Net revenues
Retail $828,074 $600,067 $402,655 $248,495 $153,610
Specialty Sales 117,635 78,655 48,143 26,543 15,952
Direct Response 21,237 17,759 14,415 9,885 6,979
- - ---------------------------------------------------------------------------------------------------------------------------
Total net revenues 966,946 696,481 465,213 284,923 176,541
Operating income 88,222 56,993 40,116 23,298 12,618
Provision for merger costs(1) -- -- -- 3,867 --
Gain on sale of investment in Noah's(2) -- 9,218 -- -- --
Net earnings $ 57,412 $ 42,128 $ 26,102 $ 10,206 $ 8,282
Net earnings per common and common
equivalent share fully diluted(3) $ 0.70 $ 0.54 $ 0.36 $ 0.17 $ 0.14
- - ---------------------------------------------------------------------------------------------------------------------------
Cash dividends per share -- -- -- -- --
Balance Sheet Data:
Working capital $177,578 $238,450 $134,304 $ 44,162 $ 42,092
Total assets 850,672 726,613 468,178 231,421 201,712
Long-term debt (including current portion) 168,832 167,980 81,773 80,500 82,100
Redeemable preferred stock -- -- -- -- 4,944
Shareholders equity $531,830 $451,660 $312,231 $109,898 $ 88,686
- - ---------------------------------------------------------------------------------------------------------------------------
Store Operating Data:
Percentage change in comparable store sales(4) 5% 7% 9% 9% 19%
Stores open at year end - North America:
Company-operated stores 1,270 929 627 399 260
Licensed stores (5) 94 75 49 26 12
- - ---------------------------------------------------------------------------------------------------------------------------
1,364 1,004 676 425 272
Stores open at year end - outside North America:
Licensed stores(5) 17 2 -- -- --
Total stores 1,381 1,006 676 425 272
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Provision for merger costs reflects expenses related to the merger with The
Coffee Connection, Inc. in fiscal 1994.
(2) Gain on sale of investment in Noah's results from the sale of Noah's New
York Bagel, Inc. ("Noah's") stock in fiscal 1996.
(3) Earnings per share is based on the weighted average shares outstanding
during the period plus, when their effect is dilutive, common stock equivalents
consisting of certain shares subject to stock options. Fully diluted earnings
per share assumes conversion of the Company's convertible subordinated
debentures using the "if converted" method, when such securities are dilutive,
with net income adjusted for the after-tax interest expense and amortization
applicable to these debentures.
(4) Includes only Company-operated stores open 13 months or longer.
E-7
<PAGE> 3
(5) Operated by licensees through either licensing agreements or joint ventures.
Product sales to and royalties and fees from the Company's licensees are
included in the Company's specialty sales revenues. Joint ventures are accounted
for on the equity method and therefore the operations are not consolidated into
the Company's operations.
E-8
<PAGE> 4
Cautionary Statement pursuant to the Private Securities Litigation
Reform Act Of 1995
Certain statements set forth in this Annual Report, including anticipated
store openings, planned capital expenditures, and trends in or expectations
regarding the Company's operations constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are based on currently available operating, financial and
competitive information and are subject to risks and uncertainties. Actual
future results and trends may differ materially depending on a variety of
factors, including, but not limited to, coffee and other raw materials prices
and availability, successful execution of internal performance and expansion
plans, the impact of competition, availability of financing, the volatility of
interest rates and securities prices, the effect of legal proceedings, and
other risks detailed herein and in the Company's Securities and Exchange
Commission filings, including the Company's Annual Report on Form 10-K for the
fiscal year ended September 28, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Starbucks presently derives approximately 86% of net revenues
from its Company-operated retail stores. The Company's specialty sales
operations, which include product sales to and royalties and fees from
wholesale customers, licensees, and joint ventures, accounted for approximately
12% of net revenues in fiscal 1997. Direct response operations accounted for
the remainder of net revenues.
The Company's net revenues increased from $465.2 million in fiscal 1995 to
$966.9 million in fiscal 1997, due primarily to the Company's store expansion
program and comparable store sales increases. Comparable store sales increased
by 5%, 7%, and 9% in fiscal 1997, 1996, and 1995, respectively. As part of its
expansion strategy of clustering stores in existing markets, Starbucks has
experienced a certain level of cannibalization of existing stores by new stores
as the store concentration has increased. However, management believes such
cannibalization has been justified by the incremental sales and return on new
store investment. This cannibalization, as well as increased competition and
other factors, may continue to put downward pressure on the Company's
comparable store sales growth in future periods.
The Company's fiscal year ends on the Sunday closest to September 30. Fiscal
years 1997, 1996, and 1995 each had 52 weeks.
The following table sets forth the percentage relationship to total net
revenues, unless otherwise indicated, of certain items included in the
Company's consolidated statements of earnings:
<TABLE>
<CAPTION>
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995
(52 Wks) (52 Wks) (52 Wks)
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statements of Earnings Data:
Net revenues
Retail 85.6% 86.2% 86.6%
Specialty Sales 12.2 11.3 10.3
Direct Response 2.2 2.5 3.1
- - ----------------------------------------------------------------------------------------------
Total net revenues 100.0 100.0 100.0
Cost of sales and related occupancy costs 44.7 48.2 45.4
Store operating expenses(1) 37.3 35.1 36.9
Other operating expenses 2.9 2.8 3.0
Depreciation and amortization 5.4 5.2 4.8
General and administrative expenses 5.9 5.3 6.2
Operating income 9.1 8.2 8.6
Interest and other income 1.3 1.6 1.5
Interest expense (0.8) (1.3) (0.8)
Gain on sale of investment in Noah's 0.0 1.3 0.0
- - ----------------------------------------------------------------------------------------------
Earnings before income taxes 9.6 9.8 9.3
Income taxes 3.7 3.8 3.7
- - ----------------------------------------------------------------------------------------------
Net earnings 5.9% 6.0% 5.6%
- - ----------------------------------------------------------------------------------------------
</TABLE>
(1) Shown as a percentage of retail sales.
E-9
<PAGE> 5
RESULTS OF OPERATIONS - FISCAL 1997 COMPARED TO FISCAL 1996
Revenues Net revenues increased 39% to $966.9 million for fiscal 1997,
compared to $696.5 million for fiscal 1996. Retail sales increased 38% to $828.1
million from $600.1 million. The increase in retail sales was due primarily to
the addition of new Company-operated stores. In addition, comparable store
sales increased 5% for the 52 weeks ended September 28, 1997 compared to the
same 52- week period in fiscal 1996. Comparable store sales increases resulted
from an increase in the number of transactions combined with an increase in the
average dollar value per transaction. During fiscal 1997, the Company opened 341
Starbucks stores. The Company opened stores in the new major markets of Phoenix,
Detroit and Miami, as well as 15 smaller markets in continental North America
and ended the fiscal year with 1,270 Company-operated stores in continental
North America.
Specialty Sales revenues increased 50% to $117.6 million for fiscal
1997 from $78.7 million for fiscal 1996. The increase was due primarily to
increased revenues from sales to the Company's joint ventures, a chain of
wholesale clubs, and business dining accounts. The Company sells roasted coffee
to its joint venture with Pepsi-Cola Company, a division of PepsiCo, Inc. for
use in the manufacture of its bottled Frappuccino(TM) beverage, and coffee
extract to Dreyer's Grand Ice Cream, Inc. for use in the manufacture of
Starbucks branded ice cream sold by the Company's joint venture with Dreyer's.
Licensees (including those in which the Company is a joint venture partner)
opened 20 stores and closed one store in continental North America and opened 15
stores in the Pacific Rim. The Company ended the year with 94 licensed stores
in continental North America and 17 in the Pacific Rim. Direct Response sales
increased 20% to $21.2 million for fiscal 1997 from $17.8 million for fiscal
1996.
Costs and Expenses Cost of sales and related occupancy costs as a
percentage of net revenues decreased to 44.7% for fiscal 1997 compared to 48.2%
for fiscal 1996. This decrease was primarily the result of lower green coffee
costs as a percentage of net revenues and, to a much lesser extent, the impact
of sales price increases. Management expects cost of sales as a percentage of
net revenues in fiscal 1998 to increase relative to fiscal 1997 as higher cost
coffees are reflected in cost of sales.
Store operating expenses as a percentage of retail sales increased to
37.3% for fiscal 1997 from 35.1% for fiscal 1996. This was due to higher
advertising expenses and higher payroll-related costs.
Other operating expenses (expenses associated with the Company's
specialty sales, direct response, and international operations, as well as the
Company's share of joint venture profits and losses) increased to 2.9% of net
revenues for fiscal 1997 from 2.8% for fiscal 1996. The increase was
attributable to higher payroll-related costs offset by lower business taxes and
improved contribution from joint ventures. Management anticipates that the joint
ventures with Pepsi and Dreyer's will be profitable in fiscal 1998 and that the
international operations will remain dilutive to earnings in fiscal 1998.
Depreciation and amortization as a percentage of net revenues increased to 5.4%
for fiscal 1997 from 5.2% for fiscal 1996.
General and administrative expenses were 5.9% of net revenues for
fiscal 1997 compared to 5.3% for fiscal 1996. This increase was due primarily to
higher payroll-related costs which were tightly constrained in 1996.
Interest and Other Income Interest and other income for fiscal 1997 was
$12.4 million, compared to $11.0 million for fiscal 1996. The increase was due
to gains on sales of investments and higher average interest rates earned on
investments, partially offset by lower average investment balances during fiscal
1997.
Interest Expense Interest expense for fiscal 1997 was $7.3 million
compared to $8.7 million for fiscal 1996. The decrease in interest expense is
due to the conversion of the Company's $80.5 million of 4 1/2% Convertible
Subordinated Debentures during the third quarter of fiscal 1996. Management
believes that interest expense will be lower in fiscal 1998 due to the
conversion of substantially all of the Company's $165.0 million of 4 1/4%
Convertible Subordinated Debentures into approximately 7.1 million shares of the
Company's common stock following the Company's October 21, 1997 call for
redemption.
Income Taxes The Company's effective tax rate for fiscal 1997 was 38.5%
which was unchanged from fiscal 1996. Management does not anticipate any
significant fluctuations in the tax rate for fiscal 1998.
RESULTS OF OPERATIONS - FISCAL 1996 COMPARED TO FISCAL 1995
Revenues Net revenues increased 50% to $696.5 million for fiscal 1996,
compared to $465.2 million for fiscal 1995. Retail sales increased 49% to $600.1
million from $402.7 million. The increase in retail sales was due primarily to
the addition of new Company- operated stores. In addition, comparable store
sales increased 7% for the 52 weeks ended September 29, 1996 compared to the
same 52- week period in fiscal 1995. Comparable store sales increases resulted
from an increase in the number of transactions combined with an increase in the
average dollar value per transaction.
E-10
<PAGE> 6
During fiscal 1996, the Company opened 307 Starbucks stores (including
four replacement stores), converted 19 Coffee Connection stores to Starbucks
stores, and closed one store. Licensees opened 26 stores. The Company opened
stores in several new markets including North Carolina, Rhode Island, and
Ontario, Canada. The Company ended the fiscal year with 929 Company-operated
stores and 75 licensed stores in North America.
Specialty Sales revenues increased 63% to $78.7 million for fiscal 1996
from $48.1 million for fiscal 1995. The increase was due primarily to the
Company signing an agreement with a major U.S. airline as well as increased
revenues from several hotels, a chain of wholesale clubs, office coffee
distributors, and restaurants. Direct Response sales increased 23% to $17.8
million for fiscal 1996 from $14.4 million for fiscal 1995.
Costs and Expenses Cost of sales and related occupancy costs as a
percentage of net revenues increased to 48.2% for fiscal 1996 compared to 45.4%
for fiscal 1995. This increase was primarily the result of higher green coffee
costs as a percentage of net revenues, partially offset by a shift in retail
sales mix towards higher-margin products.
Store operating expenses as a percentage of retail sales decreased to
35.1% for fiscal 1996 from 36.9% for fiscal 1995. This improvement reflected
lower retail advertising expense, store remodel expense, and preopening expense
as a percentage of retail sales.
Other operating expenses (those associated with the Company's specialty
sales and direct response operations as well as the Company's joint ventures)
decreased to 2.8% of net revenues for fiscal 1996 from 3.0% for fiscal 1995
primarily from operational leverage on the Company's net revenue increase.
Depreciation and amortization as a percentage of net revenues increased to 5.2%
for fiscal 1996 from 4.8% for fiscal 1995. This increase was primarily the
result of increased per-store buildout costs in recent years relative to earlier
history. After several years of increased per-store buildout costs, average
store buildout costs declined in fiscal 1996 relative to fiscal 1995.
General and administrative expenses as a percentage of net revenues were
5.3% for fiscal 1996 compared to 6.2% for fiscal 1995. This decrease as a
percentage of revenues was due primarily to lower payroll-related costs and
professional fees as a percentage of net revenues.
Operating Income Operating income for fiscal 1996 increased to $57.0
million (8.2% of net revenues) from $40.1 million (8.6% of net revenues) for
fiscal 1995. Operating income as a percentage of net revenues decreased due to
higher cost of sales and an increase in depreciation and amortization, partially
offset by lower store operating expenses, general and administrative expenses,
and other operating expenses as a percentage of revenues.
Interest and Other Income Interest and other income for fiscal 1996 was
$11.0 million compared to $6.8 million for fiscal 1995. Average investment
balances were higher during fiscal 1996 as a result of proceeds from the
Company's October 1995 offering of 4 1/4% Convertible Subordinated Debentures
due 2002, which generated $161.0 million, net of issuance costs.
Gain on Sale of Investment in Noah's In March 1995, the Company
invested $11.3 million in cash for shares of Noah's New York Bagel, Inc.
("Noah's") Series B Preferred Stock. On February 1, 1996, Noah's was merged with
Einstein Brothers Bagels, Inc., a retailer operating primarily in the Eastern
United States. In exchange for its investment in Noah's, the Company received
$20.6 million in cash and recognized a $9.2 million pre-tax gain ($5.7 million,
net of tax) on the transaction.
Interest Expense Interest expense for fiscal 1996 was $8.7 million
compared to $3.8 million for fiscal 1995. The increase in interest expense is
due to the Company's convertible subordinated debentures issued in October 1995.
Income Taxes The Company's effective tax rate for fiscal 1996 was 38.5%
compared to 39.5% for fiscal 1995. The Company's fiscal 1996 effective tax rate
was lower than in fiscal 1995 due primarily to changes in state tax allocations
and apportionment factors as well as the implementation of tax-saving
strategies.
E-11
<PAGE> 7
LIQUIDITY AND CAPTIAL RESOURCES
The Company ended fiscal 1997 with $158.8 million in total cash and
investments. Working capital as of September 28, 1997 totaled $177.6 million
compared to $238.5 million at September 29, 1996. Cash and cash equivalents
decreased by $56.1 million during fiscal 1997 to $70.1 million at September 28,
1997.
Cash provided by operating activities for fiscal 1997 totaled $101.0
million and resulted primarily from net income before non-cash charges of
$124.8 million, partially offset by a $36.2 million increase in inventories.
Cash used by investing activities for fiscal 1997 totaled $187.0
million. This included capital additions to property, plant, and equipment of
$169.7 million related to opening 341 new Company-operated retail stores and
remodeling certain existing stores, purchasing roasting and packaging equipment
for the Company's roasting and distribution facilities, enhancing information
systems, and expanding existing office space. During fiscal 1997, the Company
made equity investments of $27.3 million in its joint venture with Pepsi-Cola
Company and $0.9 million in its joint venture with SAZABY, Inc to develop
Starbucks retail stores in Japan. The Company's joint venture with Dreyer's
Grand Ice Cream, Inc. repaid advances of $0.6 million to the Company. The
Company invested excess cash primarily in short-term investment-grade marketable
debt securities.
Cash provided by financing activities for fiscal 1997 totaled $29.9
million and included cash generated from the exercise of employee stock options
and the related income tax benefit available to the Company upon exercise of
such options and cash generated from the Company's employee stock purchase plan.
As options granted under the Company's stock option plans vest, the Company will
continue to receive proceeds and a tax deduction as a result of option
exercises; however, neither the amounts nor the timing thereof can be predicted.
Cash requirements for fiscal 1998, other than normal operating
expenses, are expected to consist primarily of capital expenditures related to
the addition of new Company-operated retail stores. The Company and its
licensees plan to open at least 350 new stores in continental North America
during fiscal 1998. The Company also anticipates incurring additional
expenditures for enhancing its production capacity and information systems and
remodeling certain existing stores. While there can be no assurance that current
expectations will be realized, management expects capital expenditures for
fiscal 1998 to be approximately $200 million. Longer term, the Company expects
to reach its goal of 2000 stores in continental North America by the year 2000
using cash flow generated from operations supplemented by additional debt or
equity financing, if necessary.
Management currently anticipates additional cash requirements of
approximately $10 million for its domestic joint ventures and international
expansion during fiscal 1998. In addition, under the terms of the Company's
corporate office lease, the Company provides financing to the building owner to
be used exclusively for facilities and leasehold development costs to
accommodate the Company. Any funds advanced by the Company are repaid with
interest over a term not to exceed 20 years. During fiscal 1997, the Company
provided approximately $3.6 million under this agreement. As of September 28,
1997, the total amount provided to date was $8.2 million. During fiscal 1998,
the Company intends to provide additional funds of approximately $2 million
under this agreement. The maximum amount available under the agreement is $17
million.
Management believes that existing cash and investments plus cash
generated from operations should be sufficient to finance capital requirements
for its core businesses through fiscal 1998. Any new joint ventures, other new
business opportunities, or store expansion rates substantially in excess of that
presently planned may require outside funding.
YEAR 2000 COMPLIANCE
The Company has evaluated the costs necessary to make its computer
systems Year 2000 compliant. The bulk of these costs are expected to be incurred
during fiscal 1998 and are not expected to have a material impact on the
Company's cash flows, results of operations or financial condition.
COFFEE PRICES, AVAILABILITY AND GENERAL RISK CONDITIONS
Green coffee commodity prices are subject to substantial price
fluctuations, generally caused by multiple factors including weather, political
and economic conditions in certain coffee-producing countries and other
supply-related matters. In addition, green coffee prices have been affected in
the past, and may be affected in the future, by the actions of certain
organizations and associations, such as the International Coffee Organization
and the Association of Coffee Producing Countries, which have historically
attempted to influence commodity prices of green coffee through agreements
establishing export quotas or restricting coffee supplies worldwide. During
fiscal 1997, worldwide green coffee commodity prices increased significantly and
remain high relative to historical levels.In response, the Company effected
sales price increases on its whole bean coffees and its coffee beverages to
mitigate the effects of anticipated increases in its costs of supply. The
Company's margins were favorably impacted by these sales price increases during
most of the second half of fiscal 1997 because the Company had existing
inventories and fixed price purchase commitments for some of its supply of green
coffees. During the fourth quarter of fiscal 1997, cost of goods began
reflecting the higher cost coffees purchased since the sustained rise in coffee
costs. Management believes the Company's gross margins may experience
compression in fiscal 1998 due to these higher cost coffees.
E-12
<PAGE> 8
The Company enters into fixed price purchase commitments in order to
secure an adequate supply of quality green coffee and fix costs for future
periods. As of September 28, 1997 the Company had approximately $54 million in
fixed price purchase commitments which, together with existing inventory, is
expected to provide an adequate supply of green coffee well into fiscal 1998.
The Company believes, based on relationships established with its suppliers in
the past, that the risk of non-delivery on such purchase commitments is remote.
Although green coffee commodity prices are lower than the highs reached
during mid-fiscal 1997, they are still high relative to historical levels. If
coffee commodity prices remain at their current levels, the Company will
continue to incur substantially higher costs for the specialty coffees it
purchases compared to fiscal 1997. The Company's ability to raise sales prices
in response to rising coffee prices may be limited.
In addition to fluctuating coffee prices, management believes that the
Company's future results of operations and earnings could be significantly
impacted by other factors such as increased competition within the specialty
coffee industry, the Company's ability to find optimal store locations at
favorable lease rates, the increased costs associated with opening and operating
retail stores in new markets, the Company's continued ability to hire, train,
and retain qualified personnel, and the Company's ability to obtain adequate
capital to finance its planned expansion.
FINANCIAL RISK MANAGEMENT
The Company maintains investment portfolio holdings of various issuers,
types, and maturities. These securities are classified as available-for-sale,
and are recorded on the balance sheet at fair value with unrealized gains or
losses reported as a separate component of retained earnings. As of September
28, 1997, approximately 93% of the total portfolio was invested in short-term
marketable debt securities with maturities less than one year. An additional 6%
was invested in long-term marketable debt securities with maturities of 12 to 18
months, and the remaining 1% was invested in marketable equity securities. The
Company does not hedge its interest rate exposures. Based on the current
portfolio, a 100 basis point move in the Federal Funds Rate, which has occurred
in only three of the past 40 quarters, would not have a material impact on the
Company's financial condition.
The Company has retail operations in Canada and is, therefore, subject
to foreign currency exchange rate exposure. Historically, the exchange rate
volatility and related exposure to the Company has been minimal. At the present
time, the Company does not hedge foreign currency risk, but management is
currently evaluating a foreign exchange hedging strategy.
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal fluctuations. Significant
portions of the Company's net revenues and profits are realized during the first
quarter of the Company's fiscal year, which includes the December holiday
season. In addition, quarterly results are affected by the timing of the opening
of new stores, and the Company's rapid growth may conceal the impact of other
seasonal influences. Because of the seasonality of the Company's business,
results for any quarter are not necessarily indicative of the results that may
be achieved for the full fiscal year.
E-13
<PAGE> 9
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per
Share." This pronouncement establishes new standards for the computation,
presentation and disclosure requirements for earnings per share (EPS). SFAS 128
is effective for periods ending after December 15, 1997 and requires restatement
of all prior period EPS data presented. The Company is required to adopt SFAS
128 in its first quarter of fiscal 1998. If the provisions of SFAS 128 had been
used to calculate EPS for the 1997, 1996, and 1995 fiscal years, pro forma EPS
would have been as follows:
Pro forma earnings per share under SFAS 128:
<TABLE>
<CAPTION>
Sept 28, Sept 29, Oct 1,
1997 1996 1995
(52 Weeks) (52 Weeks) (52 Weeks)
-------- -------- --------
<S> <C> <C> <C>
Basic Earnings per share $ 0.73 $ 0.57 $ 0.38
Diluted Earnings per share $ 0.70 $ 0.54 $ 0.37
</TABLE>
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Company will adopt SFAS 130 in
fiscal 1999.
In June 1997, the FASB issued SFAS 131 "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. The Company will adopt SFAS 131 in
fiscal 1999. This statement, which is based on the management approach to
segment reporting, establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers, and the major countries in which the company holds
assets and reports revenues.
Management believes that the adoption of these new standards will not
have a material impact on the Company's financial position or results of
operations.
E-14
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Sept 28, 1997 Sept 29, 1996
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 70,126 $126,215
Short-term investments 83,504 103,221
Accounts and notes receivable 30,524 17,621
Inventories 119,526 83,370
Prepaid expenses and other current assets 8,763 6,534
Deferred income taxes, net 4,164 2,580
- - ----------------------------------------------------------------------------------------------------------------
Total current assets 316,607 339,541
Joint ventures and other investments 34,464 4,401
Property, plant, and equipment, net 483,259 369,477
Deposits and other assets 16,342 13,194
---------------------------
Total $850,672 $726,613
- - ----------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 46,324 $ 38,034
Checks drawn in excess of bank balances 25,807 16,241
Accrued compensation and related costs 25,894 15,001
Accrued interest payable 2,927 3,004
Accrued occupancy costs 12,184 7,976
Other accrued expenses 25,893 20,835
- - ----------------------------------------------------------------------------------------------------------------
Total current liabilities 139,029 101,091
Deferred income taxes, net 12,784 7,114
Capital lease obligations 2,009 1,728
Convertible subordinated debentures 165,020 165,020
Commitments and contingencies (notes 4, 5, 8, and 12)
Shareholders' Equity:
Common stock--Authorized, 150,000,000 shares;
issued and outstanding, 79,058,754 and 77,583,868 shares 386,877 361,309
Retained earnings, including cumulative translation adjustment of $(1,603)
and $(776) respectively, and net unrealized holding gain on investments
of $63 and $2,046, respectively 144,953 90,351
---------------------------
Total shareholders' equity 531,830 451,660
---------------------------
Total $850,672 $726,613
- - ----------------------------------------------------------------------------------------------------------------
</TABLE>
E-15
<PAGE> 11
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except earnings per share)
<TABLE>
<CAPTION>
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 966,946 $ 696,481 $ 465,213
Cost of sales and related occupancy costs 432,190 335,800 211,279
Store operating expenses 309,133 210,693 148,757
Other operating expenses 28,116 19,787 13,932
Depreciation and amortization 52,141 35,950 22,486
General and administrative expenses 57,144 37,258 28,643
- - -------------------------------------------------------------------------------------------------------------------------------
Operating income 88,222 56,993 40,116
Interest and other income 12,393 11,029 6,792
Interest expense (7,266) (8,739) (3,765)
Gain on sale of investment in Noah's -- 9,218 --
- - -------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 93,349 68,501 43,143
Income taxes 35,937 26,373 17,041
- - -------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 57,412 $ 42,128 $ 26,102
- - -------------------------------------------------------------------------------------------------------------------------------
Net earnings per common and common equivalent share - primary $ 0.70 $ 0.55 $ 0.37
Net earnings per common and common equivalent share - fully diluted $ 0.70 $ 0.54 $ 0.36
Weighted average shares outstanding:
Primary 81,638 76,964 71,309
Fully diluted 89,231 80,831 71,909
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
E-16
<PAGE> 12
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net earnings $ 57,412 $ 42,128 $ 26,102
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 58,203 39,370 24,827
Provision for store remodels and asset disposals 1,049 412 2,745
Deferred income taxes, net 5,328 4,407 84
Equity in losses of investees 2,760 1,935 1,156
Gain on sale of investment in Noah's -- (9,218) --
Cash (used) provided by changes in operating assets and liabilities:
Accounts and notes receivable (12,907) (7,771) (4,456)
Inventories (36,185) 40,274 (67,579)
Prepaid expenses and other current assets (2,236) (1,769) 519
Accounts payable 8,113 9,291 19,590
Accrued compensation and related costs 10,871 2,208 3,717
Accrued interest payable (77) 3,207 24
Accrued occupancy costs 4,208 3,345 2,353
Other accrued expenses 4,452 8,860 3,469
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 100,991 136,679 12,551
Investing Activities:
Purchase of investments (171,631) (178,643) (136,256)
Sale of investments 9,257 17,144 27,702
Maturity of investments 173,665 103,056 74,808
Investments in joint ventures and other investments (27,624) (6,040) (12,484)
Proceeds from sale of equity investments -- 20,550 --
Additions to property, plant, and equipment (169,667) (161,814) (129,386)
Additions to deposits and other assets (1,004) (1,132) (854)
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (187,004) (206,879) (176,470)
Financing Activities:
Increase in cash provided by checks drawn in excess of bank balances 9,543 3,096 1,180
Proceeds from sale of convertible debentures -- 165,020 --
Debt issuance costs -- (4,045) --
Proceeds from notes payable -- -- 19,000
Principal repayments of notes payable -- -- (19,000)
Net proceeds from sale of common stock -- -- 163,873
Proceeds from sale of common stock under employee stock purchase plan 2,313 1,735 263
Exercise of stock options and warrants 13,629 8,032 3,157
Tax benefit from exercise of nonqualified stock options 9,626 6,808 4,754
Payments received on subscription notes receivable -- -- 3,671
Payments on capital lease obligations (1,566) (575) (147)
Debt conversion costs -- (290) --
Advances to landlord (3,600) (4,300) (300)
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 29,945 175,481 176,451
Effect of exchange rate changes on cash and cash equivalents (21) (10) 18
- - ---------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (56,089) 105,271 12,550
Cash and Cash Equivalents:
Beginning of year 126,215 20,944 8,394
- - ---------------------------------------------------------------------------------------------------------------------------------
End of year $ 70,126 $ 126,215 $ 20,944
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
E-17
<PAGE> 13
<TABLE>
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 7,111 $ 5,630 $ 3,738
Income taxes 19,679 12,127 10,761
Noncash Financing and Investing Transactions:
Equipment acquired under capital lease $ 2,434 $ 2,089 $ 1,522
Net unrealized holding (losses) gains on investments (1,983) 2,012 141
Conversion of convertible debt into common stock,
net of unamortized issue costs -- 79,345 100
</TABLE>
E-18
<PAGE> 14
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common stock Retained
Shares Amount earnings Total
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, October 2, 1994 57,936,988 $ 89,861 $ 20,037 $ 109,898
Exercise of stock options including
tax benefit of $4,754 945,780 7,911 -- 7,911
Sale of common stock 12,050,000 163,873 -- 163,873
Payments received on stock
subscription notes -- 3,671 -- 3,671
Conversions of convertible debt into
common stock 6,798 100 -- 100
Sale of common stock under employee
stock purchase plan 17,424 263 -- 263
Net earnings -- -- 26,102 26,102
Unrealized holding gains, net -- -- 141 141
Translation adjustment -- -- 272 272
- - ------------------------------------------------------------------------------------------------
Balance, October 1, 1995 70,956,990 265,679 46,552 312,231
Exercise of stock options including
tax benefit of $6,808 1,177,736 14,840 -- 14,840
Conversions of convertible debt into
common stock 5,359,769 79,055 -- 79,055
Sale of common stock under employee
stock purchase plan 89,373 1,735 -- 1,735
Net earnings -- -- 42,128 42,128
Unrealized holding gains, net -- -- 2,012 2,012
Translation adjustment -- -- (341) (341)
- - ------------------------------------------------------------------------------------------------
Balance, September 29, 1996 77,583,868 361,309 90,351 451,660
Exercise of stock options including
tax benefit of $9,626 1,381,915 23,255 -- 23,255
Sale of common stock under employee
stock purchase plan 92,971 2,313 -- 2,313
Net earnings -- -- 57,412 57,412
Unrealized holding losses, net -- -- (1,983) (1,983)
Translation adjustment -- -- (827) (827)
- - ------------------------------------------------------------------------------------------------
Balance, September 28, 1997 79,058,754 $ 386,877 $ 144,953 $ 531,830
- - ------------------------------------------------------------------------------------------------
</TABLE>
E-19
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(years ended September 28, 1997, September 29, 1996, and October 1, 1995)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business Starbucks Corporation and its subsidiaries
("Starbucks" or the "Company") purchase and roast high-quality whole bean
coffees and sell them, along with a variety of coffee beverages, pastries,
confections, and coffee-related accessories and equipment, primarily through
Company-operated and licensed retail stores located throughout the United
States and in parts of Canada and the Pacific Rim. In addition to sales through
its Company-owned retail stores, the Company sells primarily whole bean coffees
through a specialty sales group and a direct response business. Starbucks,
through its joint venture partnerships, also produces and sells bottled
Frappuccino(TM) coffee drink and a line of premium coffee ice creams.
Basis of Presentation The consolidated financial statements include
the accounts of Starbucks Corporation and its wholly owned subsidiaries.
Investments in unconsolidated joint ventures are accounted for under the equity
method. Material intercompany transactions during the periods covered by these
consolidated financial statements have been eliminated.
Fiscal Year End The Company's fiscal year ends on the Sunday closest
to September 30. Fiscal years 1997, 1996, and 1995 each had 52 weeks.
Estimates and Assumptions The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results may differ from these
estimates.
Cash and Cash Equivalents The Company considers all highly liquid
instruments with a maturity of three months or less at the time of purchase to
be cash equivalents.
Cash Management The Company's cash management system provides for the
reimbursement of all major bank disbursement accounts on a daily basis. Checks
issued but not presented for payment to the bank are reflected as "Checks drawn
in excess of bank balances" in the accompanying financial statements.
Investments The Company's investments consist primarily of
investment-grade marketable debt securities, all of which are classified as
available-for-sale and recorded at fair value as defined below. Unrealized
holding gains and losses are recorded, net of any tax effect, as a component of
retained earnings.
Fair Value of Financial Instruments The carrying value of cash and cash
equivalents approximates fair value because of the short-term maturity of those
instruments. The fair value of the Company's investments in marketable debt and
equity securities is based upon the quoted market price on the last business day
of the fiscal year plus accrued interest, if any. The fair value and amortized
cost of the Company's investments (short- and long-term) at September 28, 1997,
were $88.7 million and $88.6 million, respectively. The fair value and amortized
cost of the Company's short-term investments at September 29, 1996, were $103.2
million and $99.9 million, respectively. For further detail on investments, see
Note 3. The fair value of the Company's 4 1/4% Convertible Subordinated
Debentures due 2002 (see Note 7) is based on the quoted market price on the last
business day of the fiscal year. As of September 28, 1997, the fair value and
principal amount of the 4 1/4% Convertible Subordinated Debentures due 2002 were
$294.6 million and $165.0 million, respectively. The fair value and principal
amount of these Debentures at September 29, 1996, were $248.0 million and $165.0
million, respectively.
Inventories Inventories are stated at the lower of cost (primarily
moving average cost) or market.
Property, Plant, and Equipment Property, plant, and equipment are
carried at cost less accumulated depreciation and amortization. Depreciation
of property, plant, and equipment, which includes amortization of assets under
capital leases, is provided on the straight-line method over estimated useful
lives, generally ranging from three to seven years for
E-20
<PAGE> 16
equipment and 40 years for buildings. Leasehold improvements are amortized over
the shorter of their estimated useful lives or the related lease life,
generally ten years. The portion of depreciation expense related to production
and distribution facilities is included in "Cost of sales and related occupancy
costs". When facts and circumstances indicate that the cost of long-lived
assets may be impaired, an evaluation of recoverability is performed by
comparing the carrying value of the asset to projected future cash flows. Upon
indication that the carrying value of such assets may not be recoverable, the
Company recognizes an impairment loss by a charge against current operations.
Hedging and Futures Contracts The Company may, from time to time,
enter into futures contracts to hedge price-to-be-established coffee purchase
commitments with the objective of minimizing cost risk due to market
fluctuations. The Company did not purchase or sell futures contracts during
fiscal 1997, 1996, or 1995.
Advertising The Company expenses costs of advertising the first time
the advertising campaign takes place, except for direct response advertising,
which is capitalized and amortized over its expected period of future benefit.
Direct response advertising consists primarily of mail order catalog costs and
customer retention program costs. Catalog costs are amortized over the period
from the catalog mailing until the issuance of the next catalog, typically
three months. Customer retention program costs are amortized over six months.
Store Preopening Expenses Costs incurred in connection with start-up
and promotion of new store openings are expensed as incurred.
Rent Expense Certain of the Company's lease agreements provide for
scheduled rent increases during the lease terms, or for rental payments
commencing at a date other than the date of initial occupancy. Rent expenses
are recognized on a straight-line basis over the terms of the leases.
Foreign Currency Translation The accumulated foreign currency
translation relates to the Company's operations in Canada. Assets and
liabilities are translated at exchange rates in effect at the balance sheet
date and income and expense accounts at the average exchange rates during the
year. Resulting translation adjustments are recorded directly to a separate
component of retained earnings.
Income Taxes The Company computes income taxes using the asset and
liability method, under which deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities.
Earnings per Share The computation of primary earnings per share is
based on the weighted average number of shares outstanding during the period
plus dilutive common stock equivalents consisting primarily of certain shares
subject to stock options. The numbers of shares resulting from this computation
for fiscal 1997, 1996, and 1995 were 81.6 million, 77.0 million, and 71.3
million, respectively.
The computation of fully diluted earnings per share assumes conversion
of the Company's convertible subordinated debentures using the "if converted"
method, when such securities are dilutive, with net income adjusted for the
after-tax interest expense and amortization applicable to these debentures.
The numbers of shares resulting from this computation for fiscal 1997, 1996,
and 1995 were 89.2 million, 80.8 million, and 71.9 million, respectively.
E-21
<PAGE> 17
Recent Accounting Pronouncements In February 1997, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") 128, "Earnings Per Share." This pronouncement establishes
new standards for the computation, presentation and disclosure requirements for
earnings per share ("EPS"). SFAS 128 is effective for periods ending after
December 15, 1997 and requires restatement of all prior period EPS data
presented. The Company is required to adopt SFAS 128 in its first quarter of
fiscal 1998. If the provisions of SFAS 128 had been used to calculate EPS for
the 1997, 1996, and 1995 fiscal years, pro forma EPS would have been as
follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
Pro forma earnings per share under SFAS 128:
Sept 28, Sept 29, Oct 1,
1997 1996 1995
(52 Weeks) (52 Weeks) (52 Weeks)
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings per share $ 0.73 $ 0.57 $ 0.38
Diluted Earnings per share $ 0.70 $ 0.54 $ 0.37
</TABLE>
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenue, expenses, gains, and losses) in a full set
of general-purpose financial statements. The Company will adopt SFAS 130 in
fiscal 1999.
In June 1997, the FASB issued SFAS 131 "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. The Company will adopt SFAS 131 in
fiscal 1999. This statement, which is based on the management approach to
segment reporting, establishes requirements to report selected segment
information quarterly and to report entity-wide disclosures about products and
services, major customers, and the major countries in which the Company holds
assets and reports revenues.
Management believes that the adoption of these new standards will not
have a material impact on the Company's financial position or results of
operations.
Reclassifications Certain reclassifications of prior years' balances
have been made to conform to the fiscal 1997 presentation.
NOTE 2: CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following (in thousands):
<TABLE>
<CAPTION>
Sept 28, 1997 Sept 29, 1996
- - --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating funds and interest-bearing deposits $ 14,482 $ 11,069
Commercial paper 39,649 93,306
Money market funds 8,152 14,590
Local government obligations 4,022 7,250
Corporate debt securities 3,821 --
- - --------------------------------------------------------------------------------------------------
$ 70,126 $126,215
- - --------------------------------------------------------------------------------------------------
</TABLE>
E-22
<PAGE> 18
NOTE 3: INVESTMENTS
The company's investments, including aggregate fair values, cost,
gross unrealized holding gains, and gross unrealized holding losses, consist of
the following (in thousands):
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Fair Amortized holding holding
September 28, 1997 value cost gains losses
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current investments:
Corporate debt securities $25,948 $25,944 $ 10 $ (6)
U.S. Government obligations 30,532 30,540 8 (16)
Commercial paper 25,720 25,721 -- (1)
Marketable equity securities 1,304 1,198 106 --
- - --------------------------------------------------------------------------------------
$83,504 $83,403 $ 124 (23)
- - --------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------
Non-current investments:
Corporate debt securities $ 4,196 $ 4,194 $ 2 $--
US. Government obligations 1,005 1,006 -- (1)
- - --------------------------------------------------------------------------------------
$ 5,201 $ 5,200 $ 2 $ (1)
- - --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Fair Amortized holding holding
September 29, 1996 value cost gains losses
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current investments:
Corporate debt securities $33,112 $33,118 $ 11 $ (17)
U.S. Government obligations 45,041 45,017 36 (12)
Commercial paper 19,958 19,959 -- (1)
Marketable equity securities 5,110 1,800 3,310 --
- - --------------------------------------------------------------------------------------
$103,221 $99,894 $ 3,357 $ (30)
- - --------------------------------------------------------------------------------------
</TABLE>
All investments are classified as available-for-sale as of September
28, 1997 and September 29, 1996. Securities with remaining maturity dates of one
year or less are classified as short-term investments. Securities with remaining
maturity dates beyond one year are classified as long-term and are included in
the line item "Joint ventures and other investments" in the accompanying balance
sheets. The specific identification method is used to determine a cost basis for
computing realized gains and losses.
During fiscal 1995, the Company invested $11.3 million in cash for
shares of Noah's New York Bagel, Inc. ("Noah's") Series B Preferred Stock. On
February 1, 1996, Noah's merged with Einstein Brothers Bagels, Inc. In exchange
for its investment in Noah's, the Company received $20.6 million in cash and
recognized a $9.2 million pre-tax gain ($5.7 million net of tax) on the
transaction.
In fiscal 1997, 1996, and 1995, proceeds from the sale of investment
securities were $9.3 million, $17.1 million, and $27.7 million, respectively.
Gross realized gains and losses were not material in 1997, 1996, and 1995 except
for the sale of Noah's stock, which occurred in fiscal 1996.
E-23
<PAGE> 19
NOTE 4: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Sept 28, 1997 Sept 29, 1996
- - -------------------------------------------------------------------------------------
<S> <C> <C>
Coffee
Unroasted $ 65,197 $ 37,127
Roasted 13,932 9,753
Other merchandise held for sale 33,168 29,518
Packaging and other supplies 7,229 6,972
- - -------------------------------------------------------------------------------------
$119,526 $ 83,370
- - -------------------------------------------------------------------------------------
</TABLE>
As of September 28, 1997, the Company had fixed price inventory
purchase commitments for green coffee totaling approximately $54 million. The
Company believes, based on relationships established with its suppliers in the
past, that the risk of non-delivery on such purchase commitments is remote.
NOTE 5: JOINT VENTURES AND OTHER INVESTMENTS
Joint Ventures Starbucks has entered into several joint ventures, all
of which are accounted for using the equity method. The Company's share of joint
venture income or losses is included in "Other operating expenses."
The Company has domestic joint ventures with two companies to produce
and distribute Starbucks branded coffee-related products. During fiscal 1994,
the Company entered into a 50/50 joint venture and partnership agreement (the
"Partnership Agreement") with Pepsi-Cola Company ("Pepsi") to develop
ready-to-drink coffee-based beverages. During fiscal 1996, the Company modified
the Partnership Agreement to revise the allocation of start-up risks and
expenses between partners. Also during fiscal 1996, the Company entered into a
50/50 joint venture agreement with Dreyer's Grand Ice Cream, Inc. to develop and
distribute premium coffee ice creams.
The Company is a partner in two other joint ventures. During fiscal
1996, the Company signed an agreement with SAZABY Inc., a Japanese retailer and
restaurateur, to form a joint venture partnership (50/50) to develop Starbucks
retail stores in Japan. On August 3, 1996, the Company entered into a joint
venture partnership as a 5% partner with Cafe Partners Hawaii to develop
Starbucks retail stores in Hawaii.
The Company's investments in and losses from these joint ventures are
as follows (in thousands):
<TABLE>
<CAPTION>
Pepsi All other
joint venture joint ventures Total
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, October 2, 1994 $ 300 $ -- $ 300
Allocated share of losses (1,156) -- (1,156)
Capital contributions 1,150 -- 1,150
- - --------------------------------------------------------------------------------
Balance, October 1, 1995 294 -- 294
Allocated share of losses (401) (1,534) (1,935)
Capital contributions 2,725 3,315 6,040
- - --------------------------------------------------------------------------------
Balance, September 29, 1996 2,618 1,781 4,399
Allocated share of losses (2,384) (376) (2,760)
Capital contributions 27,259 365 27,624
- - --------------------------------------------------------------------------------
Balance, September 28, 1997 $ 27,493 $ 1,770 $ 29,263
</TABLE>
E-24
<PAGE> 20
NOTE 6: PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are recorded at cost and consist of the
following (in thousands):
<TABLE>
<CAPTION>
Sept 28, 1997 Sept 29, 1996
- - -------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 350,173 255,567
Roasting and store equipment 167,547 120,575
Furniture, fixtures, and other 47,378 38,794
- - -------------------------------------------------------------------------------------
577,038 426,876
Less accumulated depreciation
and amortization (143,339) (88,003)
- - -------------------------------------------------------------------------------------
433,699 338,873
Work in progress 49,560 30,604
- - -------------------------------------------------------------------------------------
$ 483,259 $ 369,477
- - -------------------------------------------------------------------------------------
</TABLE>
NOTE 7: CONVERTIBLE SUBORDINATED DEBENTURES
During fiscal 1993, the Company issued $80.5 million in principal
amount of 4 1/2% Convertible Subordinated Debentures Due 2003. On April 12,
1996, the Company called these debentures for redemption. The total principal
amount converted, net of unamortized issue costs, accrued but unpaid interest,
and costs of conversion was credited to common stock.
During the first quarter of fiscal 1996, the Company issued
approximately $165.0 million in principal amount of 4 1/4% Convertible
Subordinated Debentures Due 2002 (the "Debentures"). Net proceeds to the Company
were approximately $161.0 million. Interest was payable on May 1 and November 1
of each year. The Debentures were convertible into common stock of the Company
at a price of $23.25, subject to adjustment under certain conditions, and were
redeemable on or after November 10, 1997 at the option of the Company, at
specified redemption prices and subject to certain conditions. Costs incurred in
connection with the issuance of the Debentures were included in "Deposits and
other assets" and were amortized on a straight-line basis over the seven-year
period to maturity.
On October 21, 1997, the Company called the Debentures for redemption.
Substantially all of these Debentures were converted into approximately 7.1
million shares of the Company's common stock prior to the redemption date.
E-25
<PAGE> 21
NOTE 8: LEASES
The Company leases retail stores, roasting and distribution facilities,
and office space under operating leases expiring through 2015. Most lease
agreements contain renewal options and rent escalation clauses. Certain leases
provide for contingent rentals based upon gross sales. The Company also leases
certain computer equipment and software under agreements classified as capital
leases with original lease terms ranging from two to four years.
Rental expense under these lease agreements was as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $52,919 $37,527 $21,590
Contingent rentals 1,193 1,190 1,088
- - -------------------------------------------------------------------------------------------
$54,112 $38,717 $22,678
- - -------------------------------------------------------------------------------------------
</TABLE>
Minimum future rental payments under non-cancelable lease
obligations as of September 28, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending: Capital Leases Operating Leases
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 2,155 $ 52,845
1999 1,543 53,179
2000 783 53,420
2001 -- 53,787
2002 -- 53,705
Thereafter -- 205,525
- - -------------------------------------------------------------------------------------------
Total minimum lease payments $ 4,481 $472,461
Less: Amounts representing interest
and other expenses (669)
- - -------------------------------------------------------------------------------------------
Present value of net minimum
lease payments 3,812
Less: Current portion (1,803)
- - -------------------------------------------------------------------------------------------
Long-term capital lease obligations $ 2,009
- - -------------------------------------------------------------------------------------------
</TABLE>
Assets recorded under capital leases are included in "Property, plant,
and equipment" within the "Furniture, fixtures, and other" category. Assets
recorded under capital leases, net of accumulated amortization, totaled $3.9
million and $3.6 million at September 28, 1997, and September 29, 1996,
respectively.
The Company opened a roasting and distribution facility in York County,
Pennsylvania in September 1995 (the "York Plant"). Under the terms of this lease
agreement, the Company has an option to purchase the land and building
comprising the York Plant for approximately $14 million within five years of the
date of occupancy. Such option to purchase also provides that the Company may
purchase, within seven years of occupancy, additional land adjacent to the York
Plant.
E-26
<PAGE> 22
NOTE 9: SHAREHOLDERS' EQUITY
In November 1994, the Company completed a public offering of 12,050,000
shares of newly issued common stock for proceeds of approximately $163.9
million, net of expenses.
On February 28, 1996, the Company's shareholders approved an amendment
to the Company's articles of incorporation increasing the number of authorized
common shares from 100,000,000 to 150,000,000.
The Company's common stock was split two-for-one on December 1, 1995.
All applicable share and per-share data in these consolidated financial
statements have been restated to give effect to this stock split.
The Company has authorized 7,500,000 shares of its preferred stock,
none of which is outstanding at September 28, 1997.
NOTE 10: EMPLOYEE BENEFIT PLANS
The Company maintains several stock option plans under which the
Company may grant incentive stock options and nonqualified stock options to
employees and non-employee directors. Stock options have been granted at prices
at or above the fair market value on the date of grant. Options vest and expire
according to terms established at the grant date.
The following summarizes all stock option transactions from October 2,
1994, through September 28, 1997.
<TABLE>
<CAPTION>
Weighted average price
Shares per share
- - ---------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, October 2, 1994 6,117,966 $ 6.61
Granted 2,853,476 13.19
Exercised (945,780) 3.34
Cancelled (1,151,006) 10.12
- - ---------------------------------------------------------------------------------------------
Outstanding, October 1, 1995 6,874,656 9.52
Granted 2,394,617 19.72
Exercised (1,177,736) 6.78
Cancelled (449,158) 13.99
- - ---------------------------------------------------------------------------------------------
Outstanding, September 29, 1996 7,642,379 12.92
- - ---------------------------------------------------------------------------------------------
Granted 2,782,295 34.26
Exercised (1,382,443) 9.92
Cancelled (379,920) 21.30
- - ---------------------------------------------------------------------------------------------
Outstanding, September 28. 1997 8,662,311 $ 19.72
- - ---------------------------------------------------------------------------------------------
Exercisable, September 28, 1997 3,503,676 $ 11.49
- - ---------------------------------------------------------------------------------------------
</TABLE>
At September 29, 1996, 3,316,967 outstanding options were exercisable
at the weighted average exercise price of $8.43. At October 1, 1995, 3,108,578
outstanding options were exercisable at the weighted average exercise price of
$6.36.
At September 28, 1997, there were 10,640,907 shares of common stock
reserved for issuance pursuant to future stock option grants.
E-27
<PAGE> 23
Additional information regarding options outstanding as of September
28, 1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Exercise
Exercise Prices Shares Life (Years) Price Shares Price
- - ---------------------- --------- ---- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
$ 0.75 $ 8.91 1,458,791 2.61 $ 5.69 1,440,024 $ 5.68
10.28 14.56 2,344,737 6.77 12.44 1,355,532 12.44
15.00 18.81 1,564,803 8.02 18.43 383,811 18.15
19.38 32.50 926,701 8.35 24.35 305,213 24.91
33.00 43.50 2,367,279 9.16 34.62 19,096 34.58
- - ----------------------------------------------------------------------------------------------
$ 0.75 $ 43.50 8,662,311 7.12 $ 19.72 3,503,676 $ 11.49
</TABLE>
Employee Stock Purchase Plan During fiscal 1995, the Company
implemented an employee stock purchase plan. The Company's plan provides that
eligible employees may contribute up to 10% of their base earnings toward the
quarterly purchase of the Company's common stock up to $25,000 of common stock.
The employee's purchase price is 85% of the lesser of the fair market value of
the stock on the first business day or the last business day of the quarterly
offering period. No compensation expense is recorded in connection with the
plan. The total number of shares issuable under the plan is 4,000,000. There
were 92,971 shares issued under the plan during fiscal 1997 at prices ranging
from $23.59 to $25.71. There were 89,373 shares issued under the plan during
fiscal 1996 at prices ranging from $15.99 to $24.65. There were 17,424 shares
issued under the plan during fiscal 1995 at a price of $15.09. Of the 14,583
employees eligible to participate, 2,549 were participants in the plan as of
September 28, 1997.
Accounting For Stock-Based Compensation The Company accounts for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related interpretations. Accordingly, no compensation expense
has been recognized in the financial statements for employee stock arrangements.
Statement of Financial Accounting Standards 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") requires the disclosure of pro forma net
income (loss) and net income (loss) per share as if the Company adopted the fair
value method as of the beginning of fiscal 1996. The fair value of stock-based
awards to employees is calculated using the Black-Scholes option pricing model
with the following weighted average assumptions:
<TABLE>
<CAPTION>
Employee Stock Options Employee Stock Purchase Plan
------------------------------------------------------------------------------------
1997 1996 1997 1996
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life (years) 1.5 - 6 1.5 - 6 .25 .25
Expected volatility 40% 40% 45 - 47% 39-61%
Risk-free interest rate 5.41 - 6.54% 5.01 - 6.74% 5.27 - 5.53% 5.27 - 5.49%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's valuations are based upon a multiple option valuation
approach and forfeitures are recognized as they occur. The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
E-28
<PAGE> 24
As required by SFAS 123, the Company has determined that the weighted
average estimated fair values of options granted during fiscal 1997 and 1996
were $11.28 and $6.20 per share, respectively. Had compensation costs for the
Company's stock-based compensation plans been accounted for using the fair value
method of accounting described by SFAS 123, the Company's net income and
earnings per share would have been as follows (in thousands, except earnings per
share):
<TABLE>
<CAPTION>
Pro Forma
Fiscal Year Ended: As Reported Under SFAS 123
------------- -------------
<S> <C> <C>
September 28, 1997
Net Income $ 57,412 $ 47,921
Net earnings per common & common
equivalent share:
Primary $ 0.70 $ 0.59
Fully diluted $ 0.70 $ 0.59
September 29, 1996
Net Income $ 42,128 $ 38,525
Net earnings per common & common
equivalent share:
Primary $ 0.55 $ 0.50
Fully diluted $ 0.54 $ 0.49
</TABLE>
In applying SFAS 123, the impact of outstanding non-vested stock
options granted prior to 1996 has been excluded from the pro forma calculations;
accordingly, the 1997 and 1996 pro forma adjustments are not indicative of
future period pro forma adjustments.
Defined Contribution Plans Starbucks maintains voluntary defined
contribution plans covering eligible employees as defined in the plan documents.
Participating employees may elect to defer and contribute a percentage of their
compensation to the plan, not to exceed the dollar amount set by law. The
Company matches 25% of each employee's contribution up to a maximum of the first
4% of each employee's compensation.
The Company's matching contributions to the plans were approximately
$0.6 million, $0.3 million, and $0.3 million for fiscal 1997, 1996, and 1995,
respectively.
NOTE 11: INCOME TAXES
A reconciliation of the statutory federal income tax rate with the
Company's effective income tax rate is as follows:
<TABLE>
<CAPTION>
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal
income tax benefit 3.6 3.1 3.6
Other (.1) 0.4 0.9
- - --------------------------------------------------------------------------------------------------------
Effective tax rate 38.5% 38.5% 39.5%
- - --------------------------------------------------------------------------------------------------------
</TABLE>
E-29
<PAGE> 25
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $25,884 $19,568 $14,672
State 4,725 2,398 2,285
Deferred liability 5,328 4,407 84
- - -----------------------------------------------------------------------------------------------
$35,937 $26,373 $17,041
- - -----------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes (benefits) reflect the tax effect of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and amounts as measured for tax purposes. The tax effect of
temporary differences and carry forwards that cause significant portions of
deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
Sept 28, 1997 Sept 29, 1996
- - -------------------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation $ 17,136 $ 10,699
Accrued rent (4,356) (2,839)
Accrued compensation and related costs (1,786) (1,219)
Inventory (1,474) (1,531)
Unrealized holding gain on investments, net 39 1,281
Other, net (939) (1,857)
- - -------------------------------------------------------------------------------------------------
$ 8,620 $ 4,534
- - -------------------------------------------------------------------------------------------------
</TABLE>
Taxes payable of $4.5 million and $2.7 million are included in "Other
accrued expenses" as of September 28, 1997 and September 29, 1996, respectively.
NOTE 12: COMMITMENTS AND CONTINGENCIES
Under the amended terms of the Company's corporate office lease, the
Company provides financing to the building owner to be used exclusively for
facilities and leasehold development costs to accommodate the Company. Under
this agreement, the Company advanced approximately $3.6 million, $4.3 million
and $0.3 million during fiscal 1997, 1996, and 1995, respectively. As of
September 28, 1997 and September 29, 1996, the amounts outstanding under the
agreement totaled $8.2 million and $4.6 million, respectively. These amounts are
included in "Deposits and other assets" on the balance sheet. The maximum amount
available under the agreement is $17.0 million. Any funds advanced by the
Company will be repaid with interest at 9.5% over a term not to exceed 20 years.
In the normal course of business, the Company has various legal claims
and other contingent matters outstanding. Management believes that any ultimate
liability arising from these actions would not have a material adverse effect on
the Company's results of operations or financial condition as of and for the
fiscal year ended September 28, 1997.
NOTE 13: RELATED PARTY TRANSACTIONS
An employee director of the Company serves as chairman of a wholesale
customer of the Company. Sales to this customer were $31.0 million, $22.7
million, and $18.5 million for fiscal 1997, 1996, and 1995, respectively.
Amounts receivable from this customer totaled $4.6 million and $2.7 million as
of September 28, 1997 and September 29, 1996, respectively.
E-30
<PAGE> 26
NOTE 14: QUARTERLY FINANCIAL INFORMATION
Summarized quarterly financial information for fiscal years 1997 and 1996 is as
follows (in thousands, except earnings per share):
<TABLE>
<CAPTION>
First Second Third Fourth
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 quarter:
Net revenues $239,142 $214,915 $242,190 $270,699
Gross margin 123,583 115,766 139,565 155,842
Net earnings 14,390 9,643 14,616 18,763
Net earnings per
common & common
equivalent share -
fully diluted $ 0.18 0.12 $ 0.18 $ 0.22
1996 quarter:
Net revenues $169,537 $153,609 $176,950 $196,385
Gross margin 83,019 76,671 93,786 107,205
Net earnings 9,566 10,391 9,446 12,725
Net earnings per
common & common
equivalent share -
fully diluted $ 0.13 0.14 $ 0.12 $ 0.16
</TABLE>
E-31
<PAGE> 27
STARBUCKS CORPORATION
SEATTLE, WASHINGTON
We have audited the accompanying consolidated balance sheets of
Starbucks Corporation and subsidiaries (the Company) as of September 28, 1997
and September 29, 1996, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the three years in the period
ended September 28, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Starbucks Corporation and
subsidiaries as of September 28, 1997 and September 29, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 28, 1997, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Seattle, Washington
November 21, 1997
E-32
<PAGE> 28
- - --------------------------------------------------------------------------------
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
STARBUCKS CORPORATION
The management of Starbucks Corporation is responsible for the
preparation and integrity of the financial statements included in this Annual
Report to Shareholders. The financial statements have been prepared in
conformity with generally accepted accounting principles and include amounts
based on management's best judgment where necessary. Financial information
included elsewhere in this Annual Report is consistent with these financial
statements.
Management maintains a system of internal controls and procedures
designed to provide reasonable assurance that transactions are executed in
accordance with proper authorization, that transactions are properly recorded in
the Company's records, that assets are safeguarded, and that accountability for
assets is maintained. The concept of reasonable assurance is based on the
recognition that the cost of maintaining our system of internal accounting
controls should not exceed benefits expected to be derived from the system.
Internal controls and procedures are periodically reviewed and revised, when
appropriate, due to changing circumstances and requirements.
Independent auditors are appointed by the Company's Board of Directors
and ratified by the Company's share-holders to audit the financial statements in
accordance with generally accepted auditing standards and to independently
assess the fair presentation of the Company's financial position, results of
operations, and cash flows. Their report appears in this Annual Report.
The Audit Committee of the Board of Directors, a majority of whom are
outside directors, is responsible for monitoring the Company's accounting and
reporting practices. The Audit Committee meets periodically with management and
the independent auditors to ensure that each is properly discharging its
responsibilities. The independent auditors have full and free access to the
Committee without the presence of management to discuss the results of their
audits, the adequacy of internal accounting controls, and the quality of
financial reporting.
- - --------------------------------------------------------------------------------
Howard Schultz Orin Smith Michael Casey
chairman and president and executive vice president and
chief executive officer chief operating officer chief financial officer
E-33
<PAGE> 1
- - --------------------------------------------------------------------------------
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Coffee Connection, Inc.
Starbucks New Venture Company
Starbucks Coffee International, Inc.
Starship I, Inc.
Starbucks Holding Company
Starbucks Manufacturing Corporation
SBI Nevada, Inc. (a wholly-owned subsidiary of
Starbucks Coffee International, Inc.)
Circadia Corporation
Starbucks U.S. Brands Corporation
Starbucks Foreign Sales Corporation
E-34
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-52526, 33-52528, 33-92208 and 33-92184 of Starbucks Corporation on Forms S-8
of our report dated November 21, 1997, incorporated by reference in the Annual
Report on Form 10-K of Starbucks Corporation for the year ended September 28,
1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Seattle, Washington
December 19, 1997
E-35
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 70,126
<SECURITIES> 83,504
<RECEIVABLES> 30,524
<ALLOWANCES> 273
<INVENTORY> 119,526
<CURRENT-ASSETS> 316,607
<PP&E> 626,598
<DEPRECIATION> 143,339
<TOTAL-ASSETS> 850,672
<CURRENT-LIABILITIES> 139,029
<BONDS> 167,029
0
0
<COMMON> 386,877
<OTHER-SE> 144,953
<TOTAL-LIABILITY-AND-EQUITY> 850,672
<SALES> 966,946
<TOTAL-REVENUES> 966,946
<CGS> 432,190
<TOTAL-COSTS> 432,190
<OTHER-EXPENSES> 446,534
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,266
<INCOME-PRETAX> 93,349
<INCOME-TAX> 35,937
<INCOME-CONTINUING> 88,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,412
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0.70
</TABLE>
