<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: JULY 9, 1998
-----------
STARBUCKS CORPORATION
(Exact name of registrant as specified in its charter)
WASHINGTON 0-20322 91-1325671
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
-----------
2401 UTAH AVENUE SOUTH
SEATTLE, WASHINGTON 98134
(Address of principal executive offices, including zip code, of Registrants)
(206) 447-1575
(Registrants' telephone number, including area code)
<PAGE> 2
ITEM 5. OTHER EVENTS
On May 28, 1998, Starbucks Corporation ("Starbucks" or the "Company")
completed the acquisition of all of the equity interests of Seattle Coffee
Holdings Limited ("Seattle Coffee") in a transaction accounted for as a pooling
of interests. This Current Report on Form 8-K contains audited supplemental
consolidated financial statements as of September 28, 1997 and September 29,
1996, and for each of the three years in the period ended September 28, 1997,
which have been restated as if Starbucks and Seattle Coffee had been combined
for all periods presented. This Current Report on Form 8-K also contains
unaudited supplemental consolidated financial statements for the first and
second fiscal quarters of 1998 (the periods ending December 28, 1997and March
29, 1998, respectively), which have also been restated as if Starbucks and
Seattle Coffee had been combined for such periods.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a)Financial Statements.
The following supplemental consolidated financial statements of
Starbucks and its wholly owned subsidiaries, including Seattle Coffee, prepared
under the pooling of interests method of accounting are filed as part of this
Report:
Financial Statements for Fiscal Year 1997
Independent Auditors' Report
Supplemental Consolidated Balance Sheets at September 28, 1997 and
September 29, 1996
Supplemental Consolidated Statements of Earnings for the Years Ended September
28, 1997, September 29, 1996 and October 1, 1995
Supplemental Consolidated Statements of Cash Flows for the Years Ended September
28, 1997, September 29, 1996 and October 1, 1995
Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended
September 28, 1997, September 29, 1996 and October 1, 1995
Notes to Supplemental Consolidated Financial Statements for the Years Ended
September 28, 1997, September 29, 1996 and October 1, 1995
Financial Statements for the First Fiscal Quarter of 1998
Supplemental Consolidated Statements of Earnings for the 13 weeks Ended
December 28, 1997 and December 29, 1996
Supplemental Consolidated Balance Sheets at December 28, 1997 and
September 28, 1997
Supplemental Consolidated Statements of Cash Flows for the 13 weeks Ended
December 28, 1997 and December 29, 1996
Notes to Supplemental Quarterly Consolidated Financial Statements for the 13
Weeks Ended December 28, 1997 and December 29, 1996
Financial Statements for the Second Fiscal Quarter of 1998 Supplemental
Consolidated Statements of Earnings for the 13 and 26 weeks Ended
March 29, 1998 and March 30, 1997
Supplemental Consolidated Balance Sheets at March 29, 1998 and
September 28, 1997
Supplemental Consolidated Statements of Cash Flows for the 26 weeks Ended March
29, 1998 and March 30, 1997
Notes to Supplemental Quarterly Consolidated Financial Statements for the 13 and
26 Weeks Ended March 29, 1998 and March 30, 1997
2
<PAGE> 3
(c)Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedules
99 Supplemental Consolidated Financial Statements
</TABLE>
3
<PAGE> 4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Starbucks Corporation
(Registrant)
Dated: July 8, 1998 /s/ Michael Casey
-----------------------------
By: Michael Casey
executive vice president,
chief financial officer
and chief administrative
officer
4
<PAGE> 5
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
23 Consent of Deloitte & Touche 6
27 Financial Data Schedules 7
99 Supplemental Consolidated Financial Statements F-1-F-32
</TABLE>
5
<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 and Registration Statement No. 333-58725 of Starbucks Corporation on
Form S-3 of our report dated June 8, 1998 appearing in this Current Report
on Form 8-K of Starbucks Corporation.
DELOITTE & TOUCHE LLP
Seattle, Washington
July 7, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS SECOND QUARTER 1996 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS AS SUMMARIZED IN THE REGISTRATION STATEMENT ON FORM S-3
FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> OCT-02-1995
<PERIOD-END> MAR-31-1996
<CASH> 131,174
<SECURITIES> 91,870
<RECEIVABLES> 12,388
<ALLOWANCES> 225
<INVENTORY> 90,822
<CURRENT-ASSETS> 335,177
<PP&E> 371,360
<DEPRECIATION> 68,305
<TOTAL-ASSETS> 652,420
<CURRENT-LIABILITIES> 65,519
<BONDS> 245,747
0
0
<COMMON> 270,263
<OTHER-SE> 65,818
<TOTAL-LIABILITY-AND-EQUITY> 652,420
<SALES> 323,635
<TOTAL-REVENUES> 323,635
<CGS> 163,824
<TOTAL-COSTS> 136,824
<OTHER-EXPENSES> 136,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,959
<INCOME-PRETAX> 32,534
<INCOME-TAX> 12,759
<INCOME-CONTINUING> 19,775
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,775
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION THIRD QUARTER 1996 SUPPLEMENTAL CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS AS SUMMARIZED IN THE REGISTRATION STATEMENTS
ON FORM S-3 FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> OCT-02-1995
<PERIOD-END> JUN-30-1996
<CASH> 141,966
<SECURITIES> 89,860
<RECEIVABLES> 15,523
<ALLOWANCES> 302
<INVENTORY> 76,974
<CURRENT-ASSETS> 334,624
<PP&E> 413,124
<DEPRECIATION> 78,320
<TOTAL-ASSETS> 682,788
<CURRENT-LIABILITIES> 77,459
<BONDS> 166,038
0
0
<COMMON> 357,998
<OTHER-SE> 75,386
<TOTAL-LIABILITY-AND-EQUITY> 682,788
<SALES> 500,840
<TOTAL-REVENUES> 500,840
<CGS> 247,108
<TOTAL-COSTS> 247,108
<OTHER-EXPENSES> 215,926
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,919
<INCOME-PRETAX> 48,032
<INCOME-TAX> 18,802
<INCOME-CONTINUING> 29,230
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,230
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.38
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION FISCAL YEAR 1996 SUPPLEMENTAL CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH SUPPLEMENTAL
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRATION STATEMENT ON FORM
S-3 FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-29-1996
<PERIOD-START> OCT-02-1996
<PERIOD-END> SEP-29-1996
<CASH> 127,165
<SECURITIES> 103,221
<RECEIVABLES> 17,884
<ALLOWANCES> 116
<INVENTORY> 83,412
<CURRENT-ASSETS> 340,680
<PP&E> 459,023
<DEPRECIATION> 88,071
<TOTAL-ASSETS> 729,227
<CURRENT-LIABILITIES> 101,315
<BONDS> 166,748
0
0
<COMMON> 364,020
<OTHER-SE> 90,030
<TOTAL-LIABILITY-AND-EQUITY> 729,227
<SALES> 697,872
<TOTAL-REVENUES> 697,872
<CGS> 336,658
<TOTAL-COSTS> 336,658
<OTHER-EXPENSES> 304,639
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,739
<INCOME-PRETAX> 68,083
<INCOME-TAX> 26,373
<INCOME-CONTINUING> 41,710
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,710
<EPS-PRIMARY> 0.56
<EPS-DILUTED> 0.53
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION FIRST QUARTER FISCAL 1997 SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRATION
STATEMENT ON FORM S-3 FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> DEC-29-1996
<CASH> 129,502
<SECURITIES> 121,522
<RECEIVABLES> 18,983
<ALLOWANCES> 180
<INVENTORY> 63,561
<CURRENT-ASSETS> 343,230
<PP&E> 496,661
<DEPRECIATION> 100,273
<TOTAL-ASSETS> 757,365
<CURRENT-LIABILITIES> 107,223
<BONDS> 166,431
0
0
<COMMON> 371,403
<OTHER-SE> 103,887
<TOTAL-LIABILITY-AND-EQUITY> 757,365
<SALES> 240,154
<TOTAL-REVENUES> 240,154
<CGS> 116,101
<TOTAL-COSTS> 116,101
<OTHER-EXPENSES> 103,291
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,804
<INCOME-PRETAX> 22,894
<INCOME-TAX> 9,008
<INCOME-CONTINUING> 13,886
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,886
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION SECOND QUARTER FISCAL 1997 SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRATION
STATEMENT ON FORM S-3 FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 90,826
<SECURITIES> 122,026
<RECEIVABLES> 21,861
<ALLOWANCES> 228
<INVENTORY> 81,560
<CURRENT-ASSETS> 327,962
<PP&E> 530,895
<DEPRECIATION> 113,601
<TOTAL-ASSETS> 774,619
<CURRENT-LIABILITIES> 111,877
<BONDS> 166,542
0
0
<COMMON> 375,472
<OTHER-SE> 112,126
<TOTAL-LIABILITY-AND-EQUITY> 774,619
<SALES> 456,424
<TOTAL-REVENUES> 456,424
<CGS> 216,071
<TOTAL-COSTS> 216,071
<OTHER-EXPENSES> 206,013
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,638
<INCOME-PRETAX> 38,170
<INCOME-TAX> 15,043
<INCOME-CONTINUING> 23,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,127
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION THIRD QUARTER FISCAL 1997 SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AS SUMMARIZED IN THE REGISTRATION
STATEMENT ON FORM S-3 FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 90,773
<SECURITIES> 92,032
<RECEIVABLES> 18,471
<ALLOWANCES> 280
<INVENTORY> 110,141
<CURRENT-ASSETS> 324,375
<PP&E> 574,462
<DEPRECIATION> 128,368
<TOTAL-ASSETS> 811,410
<CURRENT-LIABILITIES> 125,713
<BONDS> 166,348
0
0
<COMMON> 382,281
<OTHER-SE> 124,762
<TOTAL-LIABILITY-AND-EQUITY> 811,410
<SALES> 700,665
<TOTAL-REVENUES> 700,665
<CGS> 319,906
<TOTAL-COSTS> 319,906
<OTHER-EXPENSES> 323,849
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,454
<INCOME-PRETAX> 61,521
<INCOME-TAX> 24,194
<INCOME-CONTINUING> 37,327
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,327
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.45
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION FISCAL 1997 SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRATION
STATEMENT ON FORM S-3 FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<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> 31,504
<ALLOWANCES> 273
<INVENTORY> 119,767
<CURRENT-ASSETS> 317,555
<PP&E> 632,859
<DEPRECIATION> 144,068
<TOTAL-ASSETS> 857,152
<CURRENT-LIABILITIES> 143,467
<BONDS> 167,029
0
0
<COMMON> 391,284
<OTHER-SE> 142,426
<TOTAL-LIABILITY-AND-EQUITY> 857,152
<SALES> 975,389
<TOTAL-REVENUES> 975,389
<CGS> 436,942
<TOTAL-COSTS> 436,942
<OTHER-EXPENSES> 452,248
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,282
<INCOME-PRETAX> 91,310
<INCOME-TAX> 36,099
<INCOME-CONTINUING> 55,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,211
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.66
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION FIRST QUARTER FISCAL 1998 SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRATION
STATEMENT ON FORM S-3 FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> DEC-28-1997
<CASH> 105,646
<SECURITIES> 76,927
<RECEIVABLES> 36,116
<ALLOWANCES> 355
<INVENTORY> 116,012
<CURRENT-ASSETS> 350,224
<PP&E> 679,523
<DEPRECIATION> 158,921
<TOTAL-ASSETS> 919,804
<CURRENT-LIABILITIES> 177,823
<BONDS> 1,656
0
0
<COMMON> 563,646
<OTHER-SE> 161,767
<TOTAL-LIABILITY-AND-EQUITY> 919,804
<SALES> 321,325
<TOTAL-REVENUES> 321,325
<CGS> 146,235
<TOTAL-COSTS> 146,235
<OTHER-EXPENSES> 141,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 845
<INCOME-PRETAX> 34,793
<INCOME-TAX> 13,838
<INCOME-CONTINUING> 20,955
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,955
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STARBUCKS CORPORATION SECOND QUARTER FISCAL 1998 SUPPLEMENTAL CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE REGISTRATION
STATEMENT ON FORM S-3 FILING DATED JULY 8, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 107,938
<SECURITIES> 44,402
<RECEIVABLES> 35,768
<ALLOWANCES> 435
<INVENTORY> 129,223
<CURRENT-ASSETS> 332,602
<PP&E> 723,344
<DEPRECIATION> 177,928
<TOTAL-ASSETS> 926,236
<CURRENT-LIABILITIES> 160,807
<BONDS> 1,313
0
0
<COMMON> 573,218
<OTHER-SE> 175,840
<TOTAL-LIABILITY-AND-EQUITY> 926,236
<SALES> 616,568
<TOTAL-REVENUES> 616,568
<CGS> 279,736
<TOTAL-COSTS> 279,736
<OTHER-EXPENSES> 282,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,080
<INCOME-PRETAX> 58,228
<INCOME-TAX> 23,310
<INCOME-CONTINUING> 34,918
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,918
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
</TABLE>
<PAGE> 1
EXHIBIT 99
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
The following supplemental consolidated financial statements give
retroactive effect to the acquisition by Starbucks of all of the equity
interests of Seattle Coffee on May 28, 1998. This transaction has been accounted
for as a pooling of interests as described in Notes 1 and 2 to the supplemental
consolidated financial statements.
<TABLE>
Financial Statements for Fiscal Year 1997
<S> <C>
Independent Auditors' Report F-2
Supplemental Consolidated Balance Sheets at September 28, 1997 and
September 29, 1996 F-3
Supplemental Consolidated Statements of Earnings for the Years Ended
September 28, 1997, September 29, 1996 and October 1, 1995 F-4
Supplemental Consolidated Statements of Cash Flows for the Years Ended
September 28, 1997, September 29, 1996 and October 1, 1995 F-5
Supplemental Consolidated Statements of Shareholders' Equity for the Years Ended
September 28, 1997, September 29, 1996 and October 1, 1995 F-7
Notes to Supplemental Consolidated Financial Statements for the Years
Ended September 28, 1997, September 29, 1996 and October 1, 1995 F-8
Financial Statements for the First Fiscal Quarter of 1998
Supplemental Consolidated Statements of Earnings for the 13 weeks Ended
December 28, 1997 and December 29, 1996 F-21
Supplemental Consolidated Balance Sheets at December 28, 1997 and
September 28, 1997 F-22
Supplemental Consolidated Statements of Cash Flows for the 13 Weeks Ended
December 28, 1997 and December 29, 1996 F-23
Notes to Supplemental Quarterly Consolidated Financial Statements for the
13 Weeks Ended December 28, 1997 and December 29, 1996 F-24
Financial Statements for the Second Fiscal Quarter of 1998 Supplemental
Consolidated Statements of Earnings for the 13 and 26 weeks Ended
March 29, 1998 and March 30, 1997 F-27
Supplemental Consolidated Balance Sheets at March 29, 1998 and
September 28, 1997 F-28
Supplemental Consolidated Statements of Cash Flows for the 26 weeks Ended
March 29, 1998 and March 30, 1997 F-29
Notes to Supplemental Quarterly Consolidated Financial Statements for the 13 and
26 Weeks Ended March 29, 1998 and March 30, 1997 F-30
</TABLE>
F-1
<PAGE> 2
INDEPENDENT AUDITORS' REPORT
Starbucks Corporation
Seattle, Washington
We have audited the accompanying supplemental consolidated balance sheets of
Starbucks Corporation and subsidiaries (the Company) as of September 28, 1997,
and September 29, 1996, and the related supplemental consolidated statements of
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended September 28, 1997. The supplemental financial statements give
retroactive effect to the merger of Seattle Coffee Holdings Limited ("Seattle
Coffee"), with and into a wholly owned subsidiary of Starbucks Corporation on
May 28, 1998, which has been accounted for as a pooling-of-interests as
described in Notes 1 and 2 to the supplemental financial statements. These
supplemental financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these supplemental
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 supplemental 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 supplemental
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such supplemental 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, after giving retroactive effect to
the merger between Starbucks Corporation and subsidiaries and Seattle Coffee as
described in Notes 1 and 2, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Seattle, Washington
June 8, 1998
F-2
<PAGE> 3
STARBUCKS CORPORATION
SUPPLEMENTAL 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 $127,165
Short-term investments 83,504 103,221
Accounts and notes receivable 31,231 17,768
Inventories 119,767 83,412
Prepaid expenses and other current assets 8,763 6,534
Deferred income taxes, net 4,164 2,580
- -----------------------------------------------------------------------------------------------
Total current assets 317,555 340,680
Joint ventures and other investments 34,464 4,401
Property, plant, and equipment, net 488,791 370,952
Deposits and other assets 16,342 13,194
- ----------------------------------------------------------------------------------------------
Total $857,152 $729,227
- ----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 47,987 $ 38,258
Checks drawn in excess of bank balances 28,582 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 143,467 101,315
Deferred income taxes, net 12,946 7,114
Capital lease obligations 2,009 1,728
Convertible subordinated debentures 165,020 165,020
Commitments and contingencies (notes 5, 6, 9, and 13)
Shareholders' Equity:
Common stock--Authorized, 150,000,000 shares;
issued and outstanding, 80,559,023
and 78,711,488 shares, respectively 391,284 364,020
Retained earnings, including cumulative translation
adjustment of $(1,511) and $(679) respectively, and net
unrealized holding gain on investments of $63 and
$2,046, respectively 142,426 90,030
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 533,710 454,050
Total $857,152 $729,227
- ----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-3
<PAGE> 4
STARBUCKS CORPORATION
SUPPLEMENTAL 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 $ 975,389 $ 697,872 $ 465,213
Cost of sales and related occupancy costs 436,942 336,658 211,279
Store operating expenses 314,064 211,575 148,757
Other operating expenses 28,239 19,787 13,932
Depreciation and amortization 52,801 36,019 22,486
General and administrative expenses 57,144 37,258 28,643
- -------------------------------------------------------------------------------------------------
Operating income 86,199 56,575 40,116
Interest and other income 12,393 11,029 6,792
Interest expense (7,282) (8,739) (3,765)
Gain on sale of investment in Noah's -- 9,218 --
- -------------------------------------------------------------------------------------------------
Earnings before income taxes 91,310 68,083 43,143
Income taxes 36,099 26,373 17,041
- -------------------------------------------------------------------------------------------------
Net earnings $ 55,211 $ 41,710 $ 26,102
- -------------------------------------------------------------------------------------------------
Net earnings per common share - basic $ 0.69 $ 0.56 $ 0.38
Net earnings per common
and common equivalent share - diluted $ 0.66 $ 0.53 $ 0.37
Weighted average common shares outstanding -
basic 79,645 74,667 68,898
Weighted average common shares and common
equivalent shares outstanding - diluted 90,159 80,916 71,309
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-4
<PAGE> 5
STARBUCKS CORPORATION
SUPPLEMENTAL 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 $ 55,211 $ 41,710 $ 26,102
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 58,864 39,438 24,827
Provision for store remodels and asset disposals 1,049 412 2,745
Deferred income taxes, net 5,490 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 (13,475) (7,918) (4,456)
Inventories (36,382) 40,237 (67,579)
Prepaid expenses and other current assets (2,236) (1,769) 519
Accounts payable 9,559 9,527 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 100,294 136,381 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 (174,363) (163,284) (129,386)
Additions to deposits and other assets (1,004) (1,132) (854)
- ------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (191,700) (208,349) (176,470)
Financing Activities:
Increase in cash provided by checks drawn
in excess of bank balances 12,287 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 1,696 2,711 163,873
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 34,385 178,192 176,451
Effect of exchange rate changes on cash and cash equivalents (18) (3) 18
- ------------------------------------------------------------------------------------------------------------------
Decrease (increase) in cash and cash equivalents (57,039) 106,221
12,550
Cash and Cash Equivalents:
Beginning of year 127,165 20,944 8,394
End of year $ 70,126 $ 127,165 $ 20,944
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-5
<PAGE> 6
STARBUCKS CORPORATION
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 7,179 $ 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 gain (loss) on investments (1,983) 2,012 141
Conversion of convertible debt into common stock,
net of unamortized issue costs -- 79,345 100
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-6
<PAGE> 7
STARBUCKS CORPORATION
SUPPLEMENTAL 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 gain, 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
Sale of common stock 1,127,620 2,711 2,711
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 -- -- 41,710 41,710
Unrealized holding gain, net -- -- 2,012 2,012
Translation adjustment -- -- (244) (244)
- ----------------------------------------------------------------------------------------------
Balance, September 29, 1996 78,711,488 364,020 90,030 454,050
Exercise of stock options including
tax benefit of $9,626 1,381,915 23,255 -- 23,255
Sale of common stock 372,649 1,696 1,696
Sale of common stock under employee
stock purchase plan 92,971 2,313 -- 2,313
Net earnings -- -- 55,211 55,211
Unrealized holding loss, net -- -- (1,983) (1,983)
Translation adjustment -- -- (832) (832)
- ---------------------------------------------------------------------------------------
Balance, September 28, 1997 80,559,023 $391,284 $142,426 $533,710
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-7
<PAGE> 8
STARBUCKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(YEARS ENDED SEPTEMBER 28, 1997, SEPTEMBER 29, 1996, AND OCTOBER 1, 1995)
Note 1: Summary of Significant Accounting Policies
BASIS OF PRESENTATION. The supplemental consolidated financial statements as of
and for the periods ending September 28, 1997, September 29, 1996 and October 1,
1995 have been prepared by Starbucks Corporation ("Starbucks" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). As described in Note 2, on May 28, 1998, the Company acquired all
of the equity interests of Seattle Coffee Holdings Limited ("Seattle Coffee").
These supplemental consolidated financial statements have been prepared under
the pooling of interests method of accounting and reflect the combined financial
position and operating results of Starbucks and its wholly owned subsidiaries,
including Seattle Coffee, for all periods presented. These supplemental
consolidated financial statements will become the historical financial
statements of the Company when the Company issues its financial statements for
the third fiscal quarter of 1998. Investments in unconsolidated joint ventures
are accounted for under the equity method. Material intercompany transactions
during the periods covered by these supplemental consolidated financial
statements have been eliminated.
DESCRIPTION OF BUSINESS. Starbucks purchases and roasts high-quality whole bean
coffees and sells 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, in parts of Canada, the United Kingdom, 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 FrappuccinoTM coffee drink and a line of premium coffee ice
creams.
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
F-8
<PAGE> 9
$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 4. The fair value of the Company's 4-1/4% Convertible Subordinated
Debentures due 2002 (see Note 8) 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 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, from time to time, enters 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 does not hold or issue derivative instruments for trading purposes. In
accordance with SFAS 80 "Accounting for Futures Contracts," these futures
contracts meet the hedge criteria and are accounted for as hedges. Gains and
losses are calculated based on the difference between the cost basis and the
market value of the coffee contracts. Accordingly, gains and losses are deferred
and recognized as adjustments to the carrying amount of coffee inventory when
purchased, and recognized in results of operations as coffee products are sold.
The market risk related to coffee futures is substantially offset by changes in
the cost of coffee purchased. 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 and the United Kingdom. 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 shareholders' equity.
F-9
<PAGE> 10
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 basic earnings per share, in accordance
with Statement of Financial Accounting Standards ("SFAS") 128 "Earnings per
Share," is based on the weighted average number of common shares outstanding
during the period. The numbers of shares resulting from this computation for
fiscal 1997, 1996, and 1995 were 79.6 million, 74.7 million, and 68.9 million,
respectively.
The computation of diluted earnings per share, in accordance with SFAS 128,
includes the dilutive effect of common stock equivalents consisting of certain
shares subject to stock options for both Starbucks and Seattle Coffee during the
year using the treasury stock method. The computation of diluted earnings per
share also 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 of
issuance costs applicable to these debentures. The numbers of shares resulting
from this computation for fiscal 1997, 1996, and 1995 were 90.2 million, 80.9
million, and 71.3 million, respectively. All periods presented have been
calculated in accordance with SFAS 128.
RECENT ACCOUNTING PRONOUNCEMENTS
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: Seattle Coffee
On May 28, 1998, the Company acquired all of the equity interests of Seattle
Coffee, a United Kingdom roaster/retailer of specialty coffee, in exchange for
1,817,894 shares of Starbucks common stock.
The business combination transaction has been accounted for as a pooling of
interests for accounting and financial reporting purposes. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common shareholders' interests which were previously
independent; accordingly, the historical financial statements for the periods
prior to the business combination are restated as though the companies had been
combined. The restated financial statements are adjusted to conform the
accounting policies and fiscal reporting periods to Starbucks accounting
policies and fiscal reporting periods.
F-10
<PAGE> 11
This transaction is expected to result in one-time transaction and other related
after-tax charges of approximately $0.14 per share in the third fiscal quarter
of 1998.
The following table compares amounts previously reported by Starbucks prior to
the transaction with combined amounts for fiscal 1997 and 1996. Fiscal 1995
results have not been restated, as Seattle Coffee results of operations were not
material to the combined totals (in thousands, except earnings per share):
<TABLE>
<CAPTION>
1997 Starbucks Seattle Coffee Combined
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $ 966,946 $ 8,443 $975,389
Net earnings 57,412 (2,201) 55,211
Net earnings per share-diluted $ 0.70 $ (0.04) $ 0.66
1996
Net revenues $ 696,481 $ 1,391 $697,872
Net earnings 42,128 (418) 41,710
Net earnings per share-diluted $ 0.54 $(0.01) $ 0.53
- --------------------------------------------------------------------------------
</TABLE>
Note 3: 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 $ 12,019
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 $127,165
- --------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE> 12
Note 4: 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 $ --
U.S. 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.
F-12
<PAGE> 13
Note 5: Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Sept 28, 1997 Sept 29, 1996
- -----------------------------------------------------------------
<S> <C> <C>
Coffee
Unroasted $ 65,296 $ 37,127
Roasted 13,954 9,759
Other merchandise held for sale 33,253 29,542
Packaging and other supplies 7,264 6,984
- -----------------------------------------------------------------
$119,767 $ 83,412
- -----------------------------------------------------------------
</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 6: 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 Hawaii Partners 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>
F-13
<PAGE> 14
Note 7: 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 352,640 256,134
Roasting and store equipment 168,929 121,261
Furniture, fixtures, and other 49,790 39,084
- --------------------------------------------------------------------
583,299 428,419
Less accumulated depreciation
and amortization (144,068) (88,071)
- --------------------------------------------------------------------
439,231 340,348
Work in progress 49,560 30,604
- --------------------------------------------------------------------
$ 488,791 $ 370,952
- --------------------------------------------------------------------
</TABLE>
Note 8: 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.
Note 9: Leases
The Company leases retail stores, roasting and distribution facilities, and
office space under operating leases expiring through 2023. 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.
F-14
<PAGE> 15
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 $54,093 $37,675 $21,590
Contingent rentals 1,193 1,190 1,088
- --------------------------------------------------------------------------------
$55,286 $38,865 $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 $ 54,521
1999 1,543 54,793
2000 783 55,023
2001 -- 55,327
2002 -- 55,226
Thereafter -- 218,450
- --------------------------------------------------------------------------------
Total minimum lease payments $ 4,481 $493,340
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.
Note 10: 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.
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.
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.
F-15
<PAGE> 16
The Company has authorized 7,500,000 shares of its preferred stock, none of
which is outstanding at September 28, 1997.
Share amounts outstanding are based on the historical outstanding shares of both
Starbucks and Seattle Coffee adjusted for the exchange of 1,817,894 shares of
Starbucks stock for all of the equity interests of Seattle Coffee.
Note 11: 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 2,538,466 18.64
Exercised (1,177,736) 6.78
Cancelled (449,158) 13.99
- ----------------------------------------------------------------------------
Outstanding, September 29, 1996 7,786,228 12.69
Granted 2,929,796 33.24
Exercised (1,381,915) 9.92
Cancelled (380,448) 21.30
- ----------------------------------------------------------------------------
Outstanding, September 28, 1997 8,953,661 $ 19.32
- ----------------------------------------------------------------------------
Exercisable, September 28, 1997 3,713,676 $ 10.86
- ----------------------------------------------------------------------------
</TABLE>
At September 29, 1996 and October 1, 1995, 3,316,967 and 3,108,578 outstanding
options, respectively, were exercisable. The weighted average exercise prices
for options were $8.43 and $6.36 at September 29, 1996 and October 1, 1995,
respectively.
At September 28, 1997, there were 10,640,907 shares of common stock reserved for
issuance pursuant to future stock option grants.
F-16
<PAGE> 17
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>
$ 0.33 $ 8.91 1,750,141 3.36 $ 5.98 1,650,024 $ 5.00
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
- -------------------------------------------------------------------------------------
$ 0.33 $ 43.50 8,953,661 7.12 $ 19.32 3,713,676 $ 10.86
</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> <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
F-17
<PAGE> 18
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.
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 $10.85
and $5.64 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 $ 55,211 $ 45,808
Net earnings per common & common
equivalent share:
Basic $ 0.69 $ 0.58
Diluted $ 0.66 $ 0.56
September 29, 1996
Net Income $ 41,710 $ 37,801
Net earnings per common & common
equivalent share:
Basic $ 0.56 $ 0.51
Diluted $ 0.53 $ 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.
DEFERRED STOCK PLAN. During the first quarter of fiscal 1998, the Company
adopted a Deferred Stock Plan for certain key employees that enables
participants in the plan to defer receipt of ownership of common shares from the
exercise of non-qualified stock options. The minimum deferral period is five
years.
F-18
<PAGE> 19
Note 12: 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 0.9 0.6 0.9
- ----------------------------------------------------------------------------------
Effective tax rate 39.5% 38.7% 39.5%
- ----------------------------------------------------------------------------------
</TABLE>
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 5,490 4,407 84
- ----------------------------------------------------------------------
$36,099 $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 carryforwards 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 (777) (1,857)
- -------------------------------------------------------------------------------
$ 8,782 $ 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 13: 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
F-19
<PAGE> 20
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.
During fiscal 1997, the Company, through its Seattle Coffee subsidiary, entered
into a financing arrangement for a line of credit for $5.0 million, an overdraft
facility of $0.8 million and a rental guarantee of $0.5 million. As of September
28, 1997, the amount outstanding on the line of credit of $2.8 million is
included in "Accounts payable" on the balance sheet. Upon completion of the
acquisition of Seattle Coffee, the amount outstanding on the line of credit was
repaid.
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 14: 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.
Note 15: Quarterly Financial Information (Unaudited)
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 $240,154 $216,269 $244,241 $274,725
Gross margin 124,053 116,297 140,406 157,691
Net earnings 13,886 9,241 14,199 17,885
Net earnings per
common and common
equivalent share -
diluted $ 0.17 $ 0.12 $ 0.17 $ 0.21
1996 quarter:
Net revenues $169,798 $153,838 $177,205 $197,031
Gross margin 83,022 76,790 93,921 107,481
Net earnings 9,359 10,416 9,454 12,481
Net earnings per
common and common
equivalent share -
diluted $ 0.12 $ 0.14 $ 0.12 $ 0.15
- -----------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE> 21
STARBUCKS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended
December 28, December 29,
1997 1996
(13 Weeks) (13 Weeks)
(unaudited)
- ---------------------------------------------------------------------------
<S> <C> <C>
Net revenues $ 321,325 $ 240,154
Cost of sales and related
occupancy costs 146,235 116,101
Store operating expenses 98,101 71,016
Other operating expenses 9,674 7,779
Depreciation and amortization 16,051 11,576
General and administrative
expenses 17,783 12,920
- ---------------------------------------------------------------------------
Operating income 33,481 20,762
Interest and other income 2,157 3,936
Interest expense (845) (1,804)
- ---------------------------------------------------------------------------
Earnings before income taxes 34,793 22,894
Income taxes 13,838 9,008
- ---------------------------------------------------------------------------
Net earnings $ 20,955 $ 13,886
- ---------------------------------------------------------------------------
Net earnings per common share - basic $ 0.25 $ 0.18
Net earnings per common and
common equivalent share - diluted $ 0.23 $ 0.17
Weighted average common shares
outstanding - basic 84,978 78,905
Weighed average common and
common equivalent shares - diluted 90,962 89,726
- ---------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-21
<PAGE> 22
STARBUCKS CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In thousands, except numbers of shares)
<TABLE>
<CAPTION>
December 28, September 28,
1997 1997
(unaudited)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $105,646 $ 70,126
Short-term investments 76,927 83,504
Accounts and notes receivable 35,761 31,231
Inventories 116,012 119,767
Prepaid expenses and other current assets 9,395 8,763
Deferred income taxes, net 6,483 4,164
- -------------------------------------------------------------------------------------------
Total current assets 350,224 317,555
Joint ventures and other investments 35,364 34,464
Property, plant and equipment, net 520,602 488,791
Deposits and other assets 13,614 16,342
- -------------------------------------------------------------------------------------------
Total $919,804 $857,152
- -------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 62,091 $ 47,987
Checks drawn in excess of bank balances 33,243 28,582
Accrued compensation and related costs 27,226 25,894
Accrued interest payable -- 2,927
Accrued occupancy costs 14,022 12,184
Other accrued expenses 41,241 25,893
- -------------------------------------------------------------------------------------------
Total current liabilities 177,823 143,467
Deferred income taxes, net 14,912 12,946
Capital lease obligations 1,656 2,009
Convertible subordinated debentures -- 165,020
Shareholders' equity:
Common stock, no par value -- 150,000,000
shares authorized; 88,316,635
(includes 424,275 common stock
units) and 80,559,023 shares,
respectively, issued and outstanding 563,646 391,284
Retained earnings, including cumulative
translation adjustment of $(2,777) and $(1,511),
respectively, and net unrealized holding (loss) gain
on investments of $(285) and $63, respectively 161,767 142,426
- -------------------------------------------------------------------------------------------
Total shareholders' equity 725,413 533,710
Total $919,804 $857,152
- -------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-22
<PAGE> 23
STARBUCKS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 28, December 29,
1997 1996
(13 Weeks) (13 Weeks)
(unaudited)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 20,955 $ 13,886
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 17,764 12,603
Deferred income taxes, net (134) 1,159
Equity in losses of investees 45 1,318
Cash provided (used) by changes in operating assets and liabilities:
Accounts and notes receivable (4,557) (1,032)
Inventories 3,714 19,861
Prepaid expenses and other current assets (640) (363)
Accounts payable 13,740 (7,413)
Income taxes payable 9,905 3,863
Accrued compensation and related costs 1,292 750
Accrued occupancy costs 1,838 1,280
Accrued interest payable (2,927) (1,792)
Other accrued expenses 5,601 2,407
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 66,596 46,527
Investing activities:
Purchase of investments (22,698) (51,442)
Maturity of investments 28,740 882
Sale of investments 4,150 31,700
Investments in joint ventures and equity securities (6,131) (35)
Distributions from joint venture 1,000 0
Additions to property, plant and equipment (49,979) (37,734)
Additions to deposits and other assets (443) (1,579)
- -----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (45,361) (58,208)
Financing activities:
Increase in cash provided by checks
drawn in excess of bank balances 4,631 6,817
Proceeds from sale of common stock
under employee stock purchase plan 879 684
Exercise of stock options 2,950 2,868
Tax benefit from exercise of non-qualified stock options 1,565 1,912
Payments on capital lease obligations (545) (217)
Proceeds from sale of common stock 4,912 1,919
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,392 13,983
Effect of exchange rate changes
on cash and cash equivalents (107) 35
- -----------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 35,520 2,337
Cash and cash equivalents:
Beginning of the period 70,126 127,165
End of the period $ 105,646 $ 129,502
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,679 $ 3,555
Income taxes 2,569 2,071
Noncash financing and investing transactions:
Net unrealized holding loss on investments (348) (344)
Conversion of convertible debt into common
stock, net of unamortized issue costs and
accrued interest 162,056 --
Common stock tendered in settlement of stock
options exercised 4,859 --
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-23
<PAGE> 24
STARBUCKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks Ended December 28, 1997 and December 29, 1996
Note 1: Financial Statement Preparation
The supplemental consolidated financial statements as of December 28, 1997 and
September 28, 1997 and for the 13-week periods ended December 28, 1997 and
December 29, 1996 have been prepared by Starbucks Corporation ("Starbucks" or
the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). As described in Note 2, on May 28, 1998, the
Company acquired all of the equity interests of Seattle Coffee Holdings Limited
("Seattle Coffee"). These supplemental consolidated financial statements have
been prepared under the pooling of interests method of accounting and reflect
the combined financial position and operating results of Starbucks and its
wholly owned subsidiaries including, Seattle Coffee, for all periods presented.
The financial information for the 13-week periods ended December 28, 1997 and
December 29, 1996 is unaudited, but, in the opinion of management, reflects all
adjustments (consisting only of normal recurring adjustments and accruals)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods.
The financial information as of September 28, 1997, is derived from the
Company's audited supplemental consolidated financial statements and notes
thereto for the year ended September 28, 1997 included in this Registration
Statement, and should be read in conjunction with such financial statements.
Certain reclassifications of prior year's balances have been made to conform to
the current format.
The results of operations for the 13-week periods ended December 28, 1997, are
not necessarily indicative of the results of operations that may be achieved for
the entire fiscal year ending September 27, 1998.
Note 2: Seattle Coffee
On May 28, 1998, the Company acquired all of the equity interests of Seattle
Coffee, a United Kingdom roaster/retailer of specialty coffee, in exchange for
1,817,894 shares of Starbucks common stock.
The business combination transaction has been accounted for as a pooling of
interests for accounting and financial reporting purposes. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common shareholders' interests which were previously
independent; accordingly, the historical financial statements for the periods
prior to the business combination are restated as though the companies had been
combined. The restated financial statements are adjusted to conform the
accounting policies and fiscal reporting periods to Starbucks accounting
policies and fiscal reporting periods.
This transaction is expected to result in one-time transaction and other related
after-tax charges of approximately $0.14 per share in the third fiscal quarter
of 1998.
F-24
<PAGE> 25
The following table compares amounts previously reported by Starbucks prior to
the transaction with combined amounts for fiscal 1998 and 1997 (in thousands,
except earnings per share):
<TABLE>
<CAPTION>
Starbucks Seattle Coffee Combined
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Q1 1998
Net revenues $316,952 $ 4,373 $321,325
Net earnings 22,104 (1,149) 20,955
Net earnings
per share-diluted $ 0.25 $ (0.02) $ 0.23
Q1 1997
Net revenues $239,142 $ 1,012 $240,154
Net earnings 14,390 (504) 13,886
Net earnings
per share-diluted $ 0.18 $ (0.01) $ 0.17
- --------------------------------------------------------------------------
</TABLE>
Note 3: Earnings Per Share
During the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) 128 "Earnings per Share." The computation
of basic earnings per share, in accordance with SFAS 128, is based on the
weighted average number of common shares outstanding during the period. The
computation of diluted earnings per share, in accordance with SFAS 128, also
includes the dilutive effect of common stock equivalents consisting primarily of
certain shares subject to stock options. The computation of 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 of issuance
costs applicable to these debentures. All periods presented have been calculated
in accordance with SFAS 128.
Note 4: Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 28, September 28,
1997 1997
- --------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 63,143 $ 65,296
Roasted 16,418 13,954
Other merchandise held for sale 29,719 33,253
Packaging and other supplies 6,732 7,264
- --------------------------------------------------------------------
$116,012 $119,767
- --------------------------------------------------------------------
</TABLE>
As of December 28, 1997, the Company had fixed-price purchase commitments for
green coffee totaling approximately $44 million.
F-25
<PAGE> 26
Note 5: Property, Plant, and Equipment
Property, plant, and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 28, September 28,
1997 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 377,637 352,640
Roasting and store equipment 178,314 168,929
Furniture, fixtures and other 60,458 49,790
- ----------------------------------------------------------------------
628,349 583,299
Less accumulated depreciation
and amortization (158,921) (144,068)
- ----------------------------------------------------------------------
469,428 439,231
Work in progress 51,174 49,560
- ----------------------------------------------------------------------
$ 520,602 $ 488,791
- ----------------------------------------------------------------------
</TABLE>
Note 6: Convertible Subordinated Debentures
On October 21, 1997, the Company called for redemption its 4 1/4% Convertible
Subordinated Debentures Due 2002. Substantially all of these debentures were
converted into the Company's common stock prior to the redemption date. The
total principal amount converted, net of unamortized issue costs, accrued but
unpaid interest, and costs of conversion, was credited to common stock.
Note 7: Deferred Stock Plan
During the first quarter of fiscal 1998, the Company adopted a Deferred Stock
Plan for certain key employees that enables participants in the plan to defer
receipt of ownership of common shares from the exercise of non-qualified stock
options. The minimum deferral period is five years. During the first quarter of
fiscal 1998, receipt of 424,275 shares was deferred under the terms of this
plan. The rights to receive these shares, represented by common stock units, are
included in the calculation of basic and diluted earnings per share as common
stock equivalents.
F-26
<PAGE> 27
STARBUCKS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
(unaudited) (unaudited)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 295,243 $ 216,269 $ 616,568 $ 456,424
Cost of sales and related
occupancy costs 133,501 99,972 279,736 216,071
Store operating expenses 95,026 70,057 193,126 141,073
Other operating expenses 8,634 6,931 18,307 14,713
Depreciation and amortization 17,435 12,494 33,487 24,070
General and administrative
expenses 19,307 13,236 37,090 26,157
- -----------------------------------------------------------------------------------------------------------------
Operating income 21,340 13,579 54,822 34,340
Interest and other income 2,329 3,531 4,486 7,468
Interest expense (235) (1,834) (1,080) (3,638)
- -----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 23,434 15,276 58,228 38,170
Income taxes 9,472 6,035 23,310 15,043
- -----------------------------------------------------------------------------------------------------------------
Net earnings $ 13,962 $ 9,241 $ 34,918 $ 23,127
- -----------------------------------------------------------------------------------------------------------------
Net earnings per common share - basic $ 0.16 $ 0.12 $ 0.40 $ 0.29
Net earnings per common and
common equivalent share - diluted $ 0.15 $ 0.12 $ 0.39 $ 0.28
Weighted average common shares
outstanding - basic 88,579 79,425 86,778 79,164
Weighted average common and
common equivalent shares
outstanding - diluted 91,440 89,822 91,191 89,766
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-27
<PAGE> 28
STARBUCKS CORPORATION
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In thousands, except numbers of shares)
<TABLE>
<CAPTION>
March 29, September 28,
1998 1997
(unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $107,938 $ 70,126
Short-term investments 44,402 83,504
Accounts and notes receivable 35,333 31,231
Inventories 129,223 119,767
Prepaid expenses and other current assets 9,893 8,763
Deferred income taxes, net 5,813 4,164
- --------------------------------------------------------------------------------------------------------
Total current assets 332,602 317,555
Joint ventures and other equity investments 33,818 34,464
Property, plant and equipment, net 545,416 488,791
Deposits and other assets 14,400 16,342
- --------------------------------------------------------------------------------------------------------
Total $926,236 $857,152
- --------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 69,711 $ 47,987
Checks drawn in excess of bank balances 21,518 28,582
Accrued compensation and related costs 30,564 25,894
Accrued occupancy costs 14,850 12,184
Other accrued expenses 24,164 28,820
- --------------------------------------------------------------------------------------------------------
Total current liabilities 160,807 143,467
Deferred income taxes, net 15,058 12,946
Capital lease and other obligations 1,313 2,009
Convertible subordinated debentures -- 165,020
Shareholders' equity:
Common stock, no par value -- 150,000,000 shares authorized;
88,789,274 (includes 424,275 common stock units) and
80,559,023 shares, respectively, issued and outstanding 573,218 391,284
Retained earnings including cumulative translation adjustment
of $(2,609) and $(1,511), respectively, and net unrealized
holding (loss) gain on investments of $(343) and $63, respectively 175,840 142,426
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 749,058 533,710
Total $926,236 $857,152
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-28
<PAGE> 29
STARBUCKS CORPORATION
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------------------
March 29, March 30,
1998 1997
(26 Weeks) (26 Weeks)
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net earnings $ 34,918 $ 23,127
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 37,154 26,797
Deferred income taxes, net 719 1,015
Equity in losses of investees 177 2,176
Cash provided (used) by changes in operating assets and liabilities:
Accounts and notes receivable (4,120) (3,865)
Inventories (9,489) 1,853
Prepaid expenses and other current assets (1,138) (1,677)
Accounts payable 21,401 3,175
Accrued compensation and related costs 4,636 4,200
Accrued occupancy costs 2,666 1,939
Other accrued expenses (4,288) (2,739)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 82,636 56,001
Investing activities:
Purchase of short-term investments (47,140) (107,010)
Maturity of short-term investments 85,640 76,760
Sale of investments 5,137 9,747
Investments in joint ventures and equity securities (6,131) (11,581)
Distributions from joint venture 1,400 0
Additions to property, plant and equipment (93,993) (71,614)
Additions to deposits and other assets (1,415) (3,116)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (56,502) (106,814)
Financing activities:
(Decrease)/increase in cash provided by checks
drawn in excess of bank balances (7,090) 3,546
Proceeds from sale of common stock
under employee stock purchase plan 2,020 684
Exercise of stock options 8,609 5,388
Tax benefit from exercise of non-qualified
stock options 4,408 3,597
Payments on capital lease obligations (1,091) (525)
Proceeds from the sale of common stock 4,861 1,783
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,717 14,473
Effect of exchange rate changes
on cash and cash equivalents (39) 1
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents 37,812 (36,339)
Cash and cash equivalents:
Beginning of the period 70,126 127,165
End of the period $ 107,938 $ 90,826
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 3,828 $ 3,614
Income taxes 18,756 11,259
Noncash financing and investing activities:
Net unrealized holding (loss) gain on
investments (406) 1,044
Conversion of convertible debt into common
stock, net of unamortized issue costs and
accrued interest 162,036 --
Common stock tendered in settlement of stock
options exercised 4,859 --
</TABLE>
See Notes to Supplemental Consolidated Financial Statements
F-29
<PAGE> 30
STARBUCKS CORPORATION
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 26 Weeks Ended March 29, 1998 and March 30, 1997
Note 1: Financial Statement Preparation
The supplemental consolidated financial statements as of March 29, 1998 and
September 28, 1997 and for the 13-week and 26-week periods ended March 29, 1998
and March 30, 1997 have been prepared by Starbucks Corporation ("Starbucks" or
the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). As described in Note 2, on May 28, 1998, the
Company acquired all of the equity interests of Seattle Coffee Holdings Limited
("Seattle Coffee"). These supplemental consolidated financial statements have
been prepared under the pooling of interests method of accounting and reflect
the combined financial position and operating results of Starbucks and its
wholly owned subsidiaries including, Seattle Coffee, for all periods presented.
The financial information for the 13-week and 26-week periods ended March 29,
1998 and March 30, 1997 is unaudited, but, in the opinion of management,
reflects all adjustments (consisting only of normal recurring adjustments and
accruals) necessary for a fair presentation of the financial position, results
of operations and cash flows for the interim periods.
The financial information as of September 28, 1997, is derived from the
Company's audited supplemental consolidated financial statements and notes
thereto for the year ended September 28, 1997 included in this Registration
Statement, and should be read in conjunction with such financial statements.
Certain reclassifications of prior year's balances have been made to conform to
the current format.
The results of operations for the 13-week and 26-week periods ended March 29,
1998 are not necessarily indicative of the results of operations that may be
achieved for the entire fiscal year ending September 27, 1998.
Note 2: Seattle Coffee
On May 28, 1998, the Company acquired all of the equity interests of Seattle
Coffee, a United Kingdom roaster/retailer of specialty coffee, in exchange for
1,817,894 shares of Starbucks common stock.
The business combination transaction has been accounted for as a pooling of
interests for accounting and financial reporting purposes. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common shareholders' interests which were previously
independent; accordingly, the historical financial statements for the periods
prior to the business combination are restated as though the companies had been
combined. The restated financial statements are adjusted to conform the
accounting policies and fiscal reporting periods to Starbucks accounting
policies and fiscal reporting periods.
This transaction is expected to result in one-time transaction and other related
after-tax charges of approximately $0.14 per share in the third fiscal quarter
of 1998.
F-30
<PAGE> 31
The following table compares amounts previously reported by Starbucks prior to
the transaction with combined amounts for fiscal 1998 and 1997 (in thousands,
except earnings per share):
<TABLE>
<CAPTION>
Starbucks Seattle Coffee Combined
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Q2 1998
Net revenues $289,606 $ 5,637 $295,243
Net earnings 15,135 (1,173) 13,962
Net earnings
per share-diluted $ 0.17 $ (0.02) $ 0.15
Q2 1997
Net revenues $214,915 $ 1,354 $216,269
Net earnings 9,643 (402) 9,241
Net earnings
per share-diluted $ 0.12 $ -- $ 0.12
- -----------------------------------------------------------------------
</TABLE>
Note 3: Earnings Per Share
The computation of basic earnings per share, in accordance with Statement of
Financial Accounting Standards ("SFAS") 128 "Earnings per Share," is based on
the weighted average number of common shares and common stock units outstanding
during the period. The computation of diluted earnings per share, in accordance
with SFAS 128, includes the dilutive effect of common stock equivalents
consisting of certain shares subject to stock options. The computation of
diluted earnings per share also 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 of issuance costs applicable to these debentures. The convertible
subordinated debentures were converted to equity in the first quarter of fiscal
1998. All periods presented have been calculated in accordance with SFAS 128.
Note 4: Deferred Stock Plan
During the first quarter of fiscal 1998, the Company adopted a Deferred Stock
Plan for certain key employees that enables participants in the plan to defer
receipt of ownership of common shares from the exercise of non-qualified stock
options. The minimum deferral period is five years. During the first quarter of
fiscal 1998, receipt of 424,275 shares was deferred under the terms of this
plan. The rights to receive these shares, represented by common stock units, are
included in the calculation of basic and diluted earnings per share as common
stock equivalents.
F-31
<PAGE> 32
Note 5: Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 29, September 28,
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Coffee:
Unroasted $ 77,826 $ 65,296
Roasted 13,490 13,954
Other merchandise held for sale 30,923 33,253
Packaging and other supplies 6,984 7,264
- ---------------------------------------------------------------------
$129,223 $119,767
- ---------------------------------------------------------------------
</TABLE>
As of March 29, 1998, the Company had fixed price purchase commitments for green
coffee totaling approximately $55 million.
The Company, from time to time, enters 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 does not hold or
issue derivative instruments for trading purposes. In accordance with SFAS 80
"Accounting for Futures Contracts," these futures contracts meet the hedge
criteria and are accounted for as hedges. Gains and losses are calculated based
on the difference between the cost basis and the market value of the coffee
contracts. Accordingly, gains and losses are deferred and recognized as
adjustments to the carrying amount of coffee inventory when purchased, and
recognized in results of operations as coffee products are sold. The market risk
related to coffee futures is substantially offset by changes in the cost of
coffee purchased. The aggregate commitment underlying the Company's futures
contracts and deferred losses from the hedged coffee were immaterial as of March
29, 1998. Such losses in fair value, if realized, would be offset by lower costs
of coffee purchased during the remainder of fiscal 1998 and 1999.
Note 6: Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost and consist of the following
(in thousands):
<TABLE>
<CAPTION>
March 29, September 28,
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Land $ 3,602 $ 3,602
Building 8,338 8,338
Leasehold improvements 402,128 352,640
Roasting and store equipment 191,996 168,929
Furniture, fixtures and other 64,567 49,790
- ---------------------------------------------------------------------
670,631 583,299
Less accumulated depreciation
and amortization (177,928) (144,068)
- ---------------------------------------------------------------------
492,703 439,231
Work in progress 52,713 49,560
- ---------------------------------------------------------------------
$ 545,416 $ 488,791
- ---------------------------------------------------------------------
</TABLE>
F-32
