-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EwtxDa/oUPn9JKResfI4mCFh8GFr72/gJlF33tzPZ/jHVsnQDk8glWVJjUlPZgXu FnduI5qv43xGH14WGCR/gw== 0000829224-98-000008.txt : 19980514 0000829224-98-000008.hdr.sgml : 19980514 ACCESSION NUMBER: 0000829224-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980329 FILED AS OF DATE: 19980513 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: STARBUCKS CORP CENTRAL INDEX KEY: 0000829224 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING & DRINKING PLACES [5810] IRS NUMBER: 911325671 STATE OF INCORPORATION: WA FISCAL YEAR END: 0928 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20322 FILM NUMBER: 98617864 BUSINESS ADDRESS: STREET 1: 2401 UTAH AVENUE SOUTH CITY: SEATTLE STATE: WA ZIP: 98134 BUSINESS PHONE: 2064471575 MAIL ADDRESS: STREET 1: 2401 UTAH AVENUE SOUTH CITY: SEATTLE STATE: WA ZIP: 98134 10-Q 1 1998 2ND QUARTER 10-Q - ------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 29, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ___ to ___ Commission File Number 0-20322 ----------------------------- STARBUCKS CORPORATION (Exact Name of Registrant as Specified in its Charter) Washington 91-1325671 (State or other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 2401 Utah Avenue South, Seattle, Washington 98134 (Address of Principal Executive Office, including Zip Code) (206) 447-1575 (Registrant's Telephone Number, including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 1, 1998, there were 87,334,030 shares of the Registrant's Common Stock outstanding. - ----------------------------------------------------------- STARBUCKS CORPORATION INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements. . . . . . . . . . . . . . . 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . 14 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . 14 Item 6. Exhibits and Reports on Form 8-K. . . . . . . 14 Signature. . . . . . . . . . . . . . . . . . . . . . . 14 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except earnings per share)
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) - -------------------------------------------------------------------------- Net revenues $289,606 $214,915 $606,558 $454,057 Cost of sales and related occupancy costs 130,320 99,149 274,064 214,705 Store operating expenses 92,021 69,226 187,623 139,327 Other operating expenses 8,492 6,931 18,022 14,713 Depreciation and amortization 17,038 12,381 32,812 23,856 General and administrative expenses 19,307 13,236 37,090 26,157 - -------------------------------------------------------------------------- Operating income 22,428 13,992 56,947 35,299 Interest and other income 2,329 3,520 4,486 7,415 Interest expense (150) (1,834) (884) (3,638) - -------------------------------------------------------------------------- Earnings before income taxes 24,607 15,678 60,549 39,076 Income taxes 9,472 6,035 23,310 15,043 - -------------------------------------------------------------------------- Net earnings $15,135 $9,643 $37,239 $24,033 ========================================================================== Net earnings per common share - basic $0.17 $0.12 $0.44 $0.31 ========================================================================== Net earnings per common and common equivalent share - diluted $0.17 $0.12 $0.42 $0.30 ========================================================================== Weighted average common shares outstanding - basic 87,059 78,127 85,376 77,925 Weighted average common and common equivalent shares outstanding - diluted 89,738 88,403 89,609 88,421 See notes to consolidated financial statements
3 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except numbers of shares)
March 29, September 28, 1998 1997 (unaudited) - ---------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 107,938 $ 70,126 Short-term investments 44,402 83,504 Accounts and notes receivable 34,066 30,524 Inventories 128,279 119,526 Prepaid expenses and other current assets 9,893 8,763 Deferred income taxes, net 5,813 4,164 - ---------------------------------------------------------------------- Total current assets 330,391 316,607 Joint ventures and other equity investments 33,818 34,464 Property, plant and equipment, net 532,483 483,259 Deposits and other assets 14,336 16,342 - ---------------------------------------------------------------------- Total $ 911,028 $ 850,672 ====================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 59,415 $ 46,324 Checks drawn in excess of bank balances 20,968 25,807 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 149,961 139,029 Deferred income taxes, net 15,058 12,784 Capital lease and other obligations 1,313 2,009 Convertible subordinated debentures 0 165,020 Shareholders' equity: Common stock, no par value -- 150,000,000 shares authorized; 87,288,320 (includes 424,275 common stock units) and 79,058,754 shares, respectively, issued and outstanding 563,950 386,877 Retained earnings including cumulative translation adjustment of $(2,643) and $(1,603), respectively, and net unrealized holding (loss) gain on investments of $(343) and $63, respectively 180,746 144,953 - ---------------------------------------------------------------------- Total shareholders' equity 744,696 531,830 - ---------------------------------------------------------------------- Total $ 911,028 $ 850,672 ====================================================================== See notes to consolidated financial statements
4 STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended - ---------------------------------------------------------------------- March 29, March 30, 1998 1997 (26 Weeks) (26 Weeks) (unaudited) - ---------------------------------------------------------------------- Operating activities: Net earnings $ 37,239 $ 24,033 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 36,479 26,583 Deferred income taxes, net 881 1,015 Equity in losses of investees 177 2,176 Cash provided/(used) by changes in operating assets and liabilities: Accounts and notes receivable (3,546) (3,757) Inventories (8,784) 1,955 Prepaid expenses and other current assets (1,138) (1,677) Accounts payable 12,863 2,953 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 77,185 56,681 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 (85,952) (69,569) Additions to deposits and other assets (1,351) (3,116) - ---------------------------------------------------------------------- Net cash used by investing activities (48,397) (104,769) Financing activities: (Decrease)/increase in cash provided by checks drawn in excess of bank balances (4,867) 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) - --------------------------------------------------------------------- Net cash provided by financing activities 9,079 12,690 - --------------------------------------------------------------------- Balance, carried forward 37,867 (35,398) (Continued on next page) 5 Balance, brought forward 37,867 (35,398) Effect of exchange rate changes on cash and cash equivalents (55) (4) - ----------------------------------------------------------------------- Net (decrease)/increase in cash and 37,812 (35,402) cash equivalents Cash and cash equivalents: Beginning of the period 70,126 126,215 - ---------------------------------------------------------------------- End of the period $107,938 $ 90,813 ====================================================================== Supplemental cash flow information: Cash paid during the period for: Interest $ 3,632 $ 3,614 Income taxes 18,756 11,259 Net unrealized holding (loss)/gain (406) 1,044 on investments Conversion of convertible debt into common stock, net of unamortized issue costs and accrued interest 162,036 0 Common stock tendered in settlement of stock options exercised 4,859 0 See notes to consolidated financial statements
6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks and 26 Weeks Ended March 29, 1998 and March 30, 1997 NOTE 1. FINANCIAL STATEMENT PREPARATION: The 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"). 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 consolidated financial statements and notes thereto contained in the Company's Annual Report to Shareholders and incorporated by reference into the Company's Annual Report on Form 10-K for the year ended September 28, 1997, 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. SUBSEQUENT EVENT: As of April 29, 1998, Starbucks has agreed to acquire all of the equity interests of Seattle Coffee Holdings Limited (d/b/a Seattle Coffee Company) of the United Kingdom in exchange for approximately 1.8 million shares of Starbucks common stock in a business combination transaction that will be accounted for as a pooling of interests. The transaction is scheduled to close by the end of May 1998. This transaction is expected to result in dilution to Starbucks after-tax earnings per share from ongoing operations of approximately $0.06 in 1998 and $0.05 in 1999 as the Company continues the aggressive growth plan initiated by Seattle Coffee Company in the United Kingdom and builds the foundation for expansion into Europe. It is also 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. 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. 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. 7 NOTE 5. INVENTORIES: Inventories consist of the following (in thousands):
March 29, September 28, 1998 1997 - ---------------------------------------------------------------------- Coffee: Unroasted $ 77,436 $ 65,197 Roasted 13,405 13,932 Other merchandise held for sale 30,589 33,168 Packaging and other supplies 6,849 7,229 - --------------------------------------------------------------------- $ 128,279 $ 119,526 ====================================================================
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): March 29, September 28, 1998 1997 - -------------------------------------------------------------------- Land $ 3,602 $ 3,602 Building 8,338 8,338 Leasehold improvements 396,479 350,173 Roasting and store equipment 188,831 167,547 Furniture, fixtures and other 59,044 47,378 - -------------------------------------------------------------------- 656,294 577,038 Less accumulated depreciation and amortization (176,524) (143,339) - -------------------------------------------------------------------- 479,770 433,699 Construction in process 52,713 49,560 - -------------------------------------------------------------------- $ 532,483 $ 483,259 ====================================================================
8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements which follow, including anticipated store openings, planned capital expenditures, and trends in or expectations regarding the Company's operations, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information, and are subject to risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the impact of competition, the effect of legal proceedings and other risks detailed herein and in the Company's annual and quarterly reports filed with the Securities and Exchange Commission. General The Company's fiscal year ends on the Sunday closest to September 30. Fiscal years ending on September 27, 1998 and September 28, 1997 each include 52 weeks. The fiscal year ending on October 3, 1999 will include 53 weeks. Management's discussion and analysis of financial condition and results of operations that follows does not include combined financial information related to the planned acquisition of Seattle Coffee Holdings Limited (See "Seattle Coffee Company" below). During the 26-week period ending March 29, 1998, Starbucks Corporation ("Starbucks" or the "Company") derived approximately 86% of net revenues from its Company-operated retail stores. The Company's specialty sales operations, which include product sales to and royalties and fees from licensees and joint ventures, as well as sales to wholesale customers and grocery stores, accounted for approximately 13% of net revenues. Direct response operations accounted for the remainder of net revenues. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED MARCH 29, 1998, COMPARED TO THE 13 WEEKS ENDED MARCH 30, 1997 Revenues. Net revenues for the 13 weeks ended March 29, 1998, increased 35% to $289.6 million from $214.9 million for the corresponding period in fiscal 1997. Retail sales increased 34% to $247.8 million from $185.1 million due primarily to the opening of new retail stores combined with an increase in comparable store sales (sales from stores open 13 months or longer) of 7% for the period. The increase in comparable store sales resulted from an increase in the average dollar value per transaction combined with an increase in the number of transactions. During the 13 weeks ended March 29, 1998, the Company opened 74 stores in continental North America. The Company ended the period with 1,462 Company-operated stores in continental North America. As part of its expansion strategy of clustering stores in existing markets, Starbucks has experienced a certain level of cannibalization of existing stores by new stores as the store concentration has increased. This cannibalization, as well as increased competition and other factors, has and may continue to put downward pressure on the Company's comparable store sales growth. Specialty sales revenues increased 48% to $37.8 million for the 13 weeks ended March 29, 1998, compared to $25.5 million for the corresponding period in fiscal 1997. Specialty sales growth was broad-based across numerous categories, including sales to the Company's joint ventures and licensees, a chain of wholesale clubs, business dining accounts and grocery sales. Starbucks sells roasted coffee to its 9 joint venture with Pepsi-Cola Company, a division of PepsiCo, Inc., (the "North American Coffee Partnership") for use in the manufacture of its bottled Frappuccino(TM) beverage. The Company also sells coffee extract to Dreyer's Grand Ice Cream, Inc. ("Dreyer's") for use in the manufacture of Starbucks branded ice cream sold by the Company's joint venture with Dreyer's (the "Ice Cream Joint Venture"). During the 13 weeks ended March 29, 1998, licensees (including those in which the Company is a joint venture partner) opened seven stores in continental North America and 12 stores in the Pacific Rim. The Company ended the period with 110 licensed stores in continental North America and 38 licensed stores in the Pacific Rim. Direct response sales decreased 8% to $4.0 million for the 13 weeks ended March 29, 1998, compared to $4.4 million for the corresponding period in fiscal 1997. Cost and Expenses. Cost of sales and related occupancy costs as a percentage of net revenues decreased to 45.0% for the 13 weeks ended March 29, 1998, from 46.1% for the corresponding period in fiscal 1997. This decrease as a percentage of net revenues was primarily the result of prior year sales price increases effected during March and May of 1997 partially offset by higher green coffee costs. Cost of sales continue to reflect the higher cost of coffees purchased during the sustained increase in green coffee costs which began in December 1996. Store operating expenses as a percentage of retail sales decreased to 37.1% for the 13 weeks ended March 29, 1998, from 37.4% for the corresponding period in fiscal 1997. The decrease was due to lower regional overhead, store preopening, and advertising costs partially offset by higher payroll- related expenditures. Other operating expenses (expenses associated with the Company's operations other than North American retail, as well as the Company's share of joint venture profits and losses) decreased to 2.9% of net revenues for the 13 weeks ended March 29, 1998, from 3.2% for the corresponding period in fiscal 1997. The decrease was due primarily to improved results of both the Company's North American Coffee Partnership and Ice Cream Joint Venture partially offset by higher payroll expenditures. General and administrative expenses as a percentage of net revenues were 6.7% for the 13 weeks ended March 29, 1998, compared to 6.2% for the same period in fiscal 1997. This increase was primarily due to systems-related expenditures and research and development expenses. Interest and other income for the 13 weeks ended March 29, 1998 was $2.3 million compared to $3.5 million for the corresponding period in fiscal 1997. The decrease in interest and other income is due to lower average investment balances. Interest expense for the 13 weeks ended March 29, 1998 was $0.1 million compared to $1.8 million for the corresponding period in fiscal 1997 due to the conversion of the Company's convertible subordinated debentures to common stock during the first quarter of fiscal 1998. Income Taxes. The Company's effective tax rate for the 13 weeks ended March 29, 1998 and March 30, 1997 was 38.5%. The Company expects the effective tax rate to be significantly higher in the third quarter of fiscal 1998 due to certain one- time expenses related to the planned Seattle Coffee Company transaction which are not tax-deductible (See "Seattle Coffee Company" below). RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED MARCH 29, 1998, COMPARED TO THE 26 WEEKS ENDED MARCH 30, 1997 Revenues. Net revenues for the 26 weeks ended March 29, 1998, increased 34% to $606.6 million from $454.1 million for the corresponding period in fiscal 1997. Retail sales increased 33% to $518.7 million from $390.4 million due primarily to the opening of new retail stores combined with an increase in comparable store sales (sales from stores open 13 months or longer) of 6% for the period. The increase in comparable store sales resulted from an increase in the average dollar value per transaction combined with an increase in the number of transactions. During the 26 weeks ended March 29, 1998, the Company opened 193 stores in continental North America. 10 Specialty sales revenues increased 51% to $76.3 million for the 26 weeks ended March 29, 1998, compared to $50.5 million for the corresponding period in fiscal 1997. Specialty sales growth was broad-based across numerous categories, including sales to licensees and joint ventures, a chain of wholesaleclubs, business dining accounts, multi-unit retailers, and office coffee distributors. During the 26 weeks ended March 29, 1998, licensees (including those in which the Company is a joint venture partner) opened 18 stores in continental North America and 21 stores in the Pacific Rim. Direct response sales decreased 12% to $11.6 million for the 26 weeks ended March 29, 1998, compared to $13.1 million for the corresponding period in fiscal 1997. Costs and Expenses. Cost of sales and related occupancy costs as a percentage of net revenues decreased to 45.2% for the 26 weeks ended March 29, 1998, from 47.3% for the corresponding period in fiscal 1997. This decrease was primarily the result of the March and May 1997 sales price increases partially offset by higher green coffee costs. Store operating expenses as a percentage of retail sales increased to 36.2% from 35.7% for the corresponding period in fiscal 1997. The increase was due to higher payroll-related costs partially offset by lower advertising expenditures. Other operating expenses as a percentage of net revenues were 3.0% for the 26 weeks ended March 29, 1998, compared to 3.2% for the corresponding period in fiscal 1997. The decrease was due primarily to improved results of the Company's North American Coffee Partnership and Ice Cream Joint Venture. General and administrative expenses increased to 6.1% for the 26 weeks ended March 29, 1998, compared to 5.8% for the same period in fiscal 1997. This increase was due primarily to systems-related expenses. Interest and other income for the 26 weeks ended March 29, 1998 was $4.5 million compared to $7.4 million for the corresponding period in 1997. The decrease in interest and other income was due primarily to lower average investment balances. Interest expense for the 26 weeks ended March 29, 1998 was $0.9 million compared to $3.6 million for the corresponding period in fiscal 1997 due to the conversion of the Company's convertible subordinated debentures to common stock during the first quarter of fiscal 1998. Income Taxes. The Company's effective tax rate for the 26 weeks ended March 29, 1998 and March 30, 1997 was 38.5%. The Company expects the effective tax rate to be significantly higher in the third quarter of fiscal 1998 due to certain one- time expenses related to the planned Seattle Coffee Company transaction which are not tax-deductible (See "Seattle Coffee Company" below). LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $152.3 million in total cash and investments and working capital of $180.4 million. Cash and cash equivalents increased by $37.8 million for the 26 weeks ended March 29, 1998 to $107.9 million. Cash provided by operating activities totaled $77.2 million for the first 26 weeks of fiscal 1998 resulting primarily from net earnings before non-cash charges of $74.8 million. Cash used by investing activities for the first 26 weeks of fiscal 1998 totaled $48.4 million. This included capital additions to property, plant and equipment of $86.0 million related to opening 193 new Company-operated stores, purchasing roasting and packaging equipment, enhancing information systems and remodeling certain existing stores. The Company's investing activities in marketable debt securities during the 26-week period provided $43.6 million. During the 26-week period ending March 29, 1998, the Company made equity investments of $6.1 million in its North American Coffee Partnership and international joint ventures and 11 received $1.4 million in distributions from its Ice Cream Joint Venture. The Company invested excess cash primarily in short- term, investment-grade marketable debt securities. Cash provided from financing activities for the first 26 weeks of fiscal 1998 totaled $9.1 million. The exercise of employee stock options and the related income tax benefit available to the Company upon exercise of these options provided approximately $13.0 million. A decrease in checks drawn in excess of bank balances used $4.9 million. Cash requirements for the remainder of fiscal 1998, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores. The Company and its licensees plan to open a total of at least 350 new stores in continental North America during fiscal 1998. The Company also anticipates making additional expenditures for enhancing its production capacity and information systems and remodeling certain existing stores. While there can be no assurance that current expectations will be realized, management expects capital expenditures for the remainder of fiscal 1998 to be approximately $115 million excluding the effects of the planned acquisition of Seattle Coffee Company. Management currently anticipates additional cash requirements of approximately $6 million for its domestic and international joint ventures during the remainder of fiscal 1998. Management believes that existing cash and investments plus cash generated from operations should be sufficient to finance capital requirements for the remainder of fiscal 1998. Longer term, the Company expects to reach its goal of at least 2000 stores in continental North America by the end of the year 2000 and 500 stores in Asia and 500 stores in Europe by the end of 2003 using cash flow generated from operations supplemented by additional debt or equity financing, if necessary. COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS Green coffee commodity prices are subject to substantial price fluctuations, generally caused by multiple factors including weather, political and economic conditions in certain coffee- producing countries and other supply-related concerns. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations, such as the International Coffee Organization and the Association of Coffee Producing Countries, which have historically attempted to influence commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. During fiscal 1997, worldwide green coffee commodity prices increased significantly and remained high relative to historical levels through the second fiscal quarter of 1998. In response, the Company effected sales price increases last fiscal year on its whole bean coffees and its coffee beverages to mitigate the effects of increases in its costs of supply. Because the Company had existing inventories and fixed-price purchase commitments for some of its green coffee requirements at the time of these sales price increases, the Company's margins during the first two quarters of fiscal 1998 were favorably impacted by these sales price increases relative to the corresponding periods of fiscal 1997. However, cost of sales is increasingly impacted by the higher cost coffees purchased during the sustained rise in coffee costs. The Company enters into fixed price purchase commitments in order to secure an adequate supply of quality green coffee and bring greater certainty to the cost of sales in future periods. As of March 29, 1998, the Company had approximately $55 million in fixed price purchase commitments which, together with existing inventory, is expected to meet a substantial portion of its remaining fiscal 1998 green coffee requirements. 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. To further reduce its exposure to rising coffee costs, the Company, from time to time, enters into futures contracts to hedge price-to-be-established coffee purchase commitments. The specific risks associated with these activities are described below in Item 3 "Quantitative and Qualitative Disclosures about Market Risk." Because the Company uses the moving average cost method for its coffee inventories, the cost of sales in future periods will be impacted by future 12 receipts under these fixed-price commitments as well as price- to-be-established contracts and currently uncontracted purchases. The Company's ability to raise sales prices in response to future increases in coffee prices may be limited. In addition to fluctuating coffee prices, management believes that the Company's future results of operations and earnings could be significantly impacted by factors such as increased competition within the specialty coffee industry, the Company's ability to find optimal store locations at favorable lease rates, the increased costs associated with opening and operating retail stores in new markets, the Company's ability to hire, train and retain qualified personnel, and the Company's ability to obtain adequate capital to finance its planned expansion. SEATTLE COFFEE COMPANY As of April 29, 1998, Starbucks has agreed to acquire all of the equity interests of Seattle Coffee Holdings Limited (d/b/a Seattle Coffee Company) of the United Kingdom in exchange for approximately 1.8 million shares of Starbucks common stock in a business combination transaction that will be accounted for as a pooling of interests. The transaction is scheduled to close by the end of May 1998. This transaction is expected to result in dilution to Starbucks after-tax earnings per share from ongoing operations of approximately $0.06 in 1998 and $0.05 in 1999 as the Company continues the aggressive growth plan initiated by Seattle Coffee Company in the United Kingdom and builds the foundation for expansion into Europe. It is also 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. SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal fluctuations. Significant portions of the Company's net revenues and profits are realized during the first quarter of the Company's fiscal year, which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of seasonal influences. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company maintains investment portfolio holdings of various issuers, types and maturities. These securities are classified as available-for-sale, and are recorded on the balance sheet at fair value, with unrealized gains or losses reported as a separate component of retained earnings. The Company does not hedge its interest rate exposures. The Company is subject to foreign currency exchange rate exposure, primarily related to its retail operations in Canada. Historically, this exposure has had a minimal impact on the Company. At the present time, the Company does not hedge foreign currency risk, but may hedge known transaction exposure in the future. 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 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. 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to various legal proceedings arising in the ordinary course of its business, but is not currently a party to any legal proceeding that management believes would have a material adverse effect on the financial position or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Company was held on February 5, 1998 for the purposes of electing three Class 2 directors to serve until the Annual Meeting of Shareholders for fiscal year 2000 and ratifying the selection of Deloitte & Touche LLP as the Company's independent auditors for fiscal 1998. All proposals were approved. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 11 Statement re: computation of per share earnings 27 Financial data schedule 27.Q296 Financial data schedule Q2 96 Restated under FAS 128 27.Q396 Financial data schedule Q3 96 Restated under FAS 128 27.FY96 Financial data schedule FY 96 Restated under FAS 128 27.Q197 Financial data schedule Q1 97 Restated under FAS 128 27.Q297 Financial data schedule Q2 97 Restated under FAS 128 27.Q397 Financial data schedule Q3 97 Restated under FAS 128 27.FY97 Financial data schedule FY 97 Restated under FAS 128 (b) Forms 8-K: No reports on Form 8-K were filed by the Company during the 13-week period ended March 29, 1998. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STARBUCKS CORPORATION Dated: May 12, 1998 By: /s/ Michael Casey ---------------------- Michael Casey executive vice president and chief financial officer Signing on behalf of the registrant and as principal financial officer 14
STARBUCKS CORPORATION --------------------- EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) 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) - -------------------------------------------------------------------------- NET EARNINGS PER COMMON SHARE CALCULATION - -BASIC: Net earnings $ 15,135 $ 9,643 $ 37,239 $ 24,033 ========================================================================= Weighted average common shares calculation-basic: Weighted average number of common shares and common stock units outstanding 87,059 78,127 85,376 77,925 ========================================================================= Net earnings per common share -basic $ 0.17 $ 0.12 $ 0.44 $ 0.31 ========================================================================= NET EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE CALCULATION - -DILUTED(1): Net earnings calculation: Net earnings $ 15,135 $ 9,643 $ 37,239 $ 24,033 Add after tax interest expense on Debentures 0 1,075 348 2,151 Add after tax amortization of issuance costs related to the Debentures 0 89 30 178 - ------------------------------------------------------------------------- Adjusted net earnings $ 15,135 $ 10,807 $ 37,617 $ 26,362 ========================================================================= Weighted average common and common equivalent shares calculation- diluted: Weighted average number of common shares and common stock units outstanding 87,059 78,127 85,376 77,925 Dilutive effect of outstanding common stock options 2,679 3,178 2,829 3,398 Assuming conversion of Convertible Subordinated Debentures 0 7,098 1,404 7,098 - ------------------------------------------------------------------------- Weighted average common and common equivalent shares - diluted 89,738 88,403 89,609 88,421 ========================================================================= Net earnings per common and common equivalent share - diluted $ 0.17 $ 0.12 $ 0.42 $ 0.30 ========================================================================= - ------------------- (1) Diluted earnings per share assumes conversion of the Company's convertible subordinated debentures using the "if converted' method, when such securities are dilutive, with income adjusted for the after-tax interest expense and amortization applicable to these debentures.
15 EX-27 2 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARBUCKS CORPORATION SECOND QUARTER FISCAL 1998 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS SEP-27-1998 SEP-29-1997 MAR-29-1998 107,938 44,402 34,066 435 128,279 330,391 709,007 176,524 911,028 149,961 1,313 0 0 563,950 180,746 911,028 606,558 606,558 274,064 274,064 275,547 0 884 60,549 23,310 37,239 0 0 0 37,239 .44 .42
EX-27.Q296 3 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARBUCKS CORPORATION SECOND QUARTER FISCAL 1996 10-Q AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. EPS ARE RESTATED UNDER FAS 128. 1,000 6-MOS SEP-29-1996 OCT-02-1995 MAR-31-1996 131,129 91,870 12,341 225 90,806 335,068 370,973 68,277 651,952 65,403 244,981 0 0 269,729 66,000 651,952 323,145 323,145 163,456 163,456 136,331 0 4,959 32,716 12,759 19,957 0 0 0 19,957 0.28 0.27
EX-27.Q396 4 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARBUCKS CORPORATION THIRD QUARTER 1996 10-Q AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. EPS ARE RESTATED UNDER FAS 128. 1,000 9-MOS SEP-29-1996 OCT-02-1995 JUN-30-1996 139,944 89,860 15,140 302 76,949 332,496 412,621 78,282 680,195 77,363 165,020 0 0 355,308 75,579 680,195 500,095 500,095 246,619 246,619 215,497 0 6,919 48,205 18,802 29,403 0 0 0 29,403 0.40 0.39
EX-27.FY96 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARBUCKS CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 1996 AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. EPS ARE RESTATED UNDER FAS 128. 1,000 YEAR SEP-29-1996 OCT-02-1996 SEP-29-1996 126,215 103,221 17,621 116 83,370 339,541 457,480 88,003 726,613 101,091 165,020 0 0 361,309 90,351 726,613 696,481 696,481 335,800 335,800 303,688 0 8,739 68,501 26,373 42,128 0 0 0 42,128 .57 .54
EX-27.Q197 6 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARBUCKS CORPORATION FIRST QUARTER FISCAL 1997 10-Q AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. EPS ARE RESTATED UNDER FAS 128. 1,000 3-MOS SEP-28-1997 SEP-30-1996 DEC-29-1996 127,754 121,522 18,356 180 63,410 340,884 494,245 100,105 752,771 106,289 165,020 0 0 366,773 104,857 752,771 239,142 239,142 115,559 115,559 102,276 0 1,804 23,398 9,008 14,390 0 0 0 14,390 0.19 0.18
EX-27.Q297 7 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARBUCKS COPORATION SECOND QUARTER FISCAL 1997 10-Q AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. EPS ARE RESTATED UNDER FAS 128. 1,000 6-MOS SEP-28-1997 SEP-30-1996 MAR-30-1997 90,813 122,026 21,378 228 81,414 327,549 527,274 113,319 770,867 111,447 165,020 0 0 370,978 113,298 770,867 454,057 454,057 214,705 214,705 204,053 0 3,638 39,076 15,043 24,033 0 0 0 24,033 0.31 0.30
EX-27.Q397 8 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARBUCKS CORPORATION THIRD QUARTER FISCAL 1997 10-Q AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. EPS ARE RESTATED UNDER FAS 128. 1,000 9-MOS SEP-28-1997 SEP-30-1996 JUN-29-1997 90,773 92,032 17,605 280 109,936 323,584 569,244 127,923 805,846 123,080 165,020 0 0 377,732 126,388 805,846 696,247 696,247 317,330 317,330 320,639 0 5,454 62,844 24,194 38,650 0 0 0 38,650 .50 .48
EX-27.FY97 9 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STARBUCKS CORPORATION FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1997 AND IS QUALIFIED BY REFERENCE TO SUCH FINANCIAL STATEMENTS. EPS ARE RESTATED UNDER FAS 128. 1,000 YEAR SEP-28-1997 SEP-30-1996 SEP-28-1997 70,126 83,504 30,524 273 119,526 316,607 626,598 143,339 850,672 139,029 167,029 0 0 386,877 144,953 850,672 966,946 966,946 432,190 432,190 446,534 0 7,266 93,349 35,937 57,412 0 0 0 57,412 .73 .70
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