-----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, AZyEiY7YFu5ULQsvwni40EF9x+VEvK8dE6crixzg+KUukVZvMpjIwsRvHoauu9F8 ceDvsJSrb8VYHBzdYscfMg== 0000891020-98-001090.txt : 19980710 0000891020-98-001090.hdr.sgml : 19980710 ACCESSION NUMBER: 0000891020-98-001090 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980708 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980709 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: 8-K SEC ACT: SEC FILE NUMBER: 000-20322 FILM NUMBER: 98662145 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 8-K 1 FORM 8-K 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) 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 3 (c)Exhibits.
Exhibit No. Description ----------- ----------- 23 Consent of Deloitte & Touche LLP 27 Financial Data Schedules 99 Supplemental Consolidated Financial Statements
3 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 5 EXHIBIT INDEX
Exhibit No. Description Page No. - ----------- ----------- -------- 23 Consent of Deloitte & Touche 6 27 Financial Data Schedules 7 99 Supplemental Consolidated Financial Statements F-1-F-32
5 EX-23 2 CONSENT OF DELOITTE & TOUCHE LLP 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 EX-27.Q296 3 FINANCIAL DATA SCHEDULE FOR 2ND QUARTER OF 1996
5 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. 1,000 6-MOS SEP-29-1996 OCT-02-1995 MAR-31-1996 131,174 91,870 12,388 225 90,822 335,177 371,360 68,305 652,420 65,519 245,747 0 0 270,263 65,818 652,420 323,635 323,635 163,824 136,824 136,635 0 4,959 32,534 12,759 19,775 0 0 0 19,775 0.28 0.26
EX-27.Q396 4 FINANCIAL DATA SCHEDULE FOR 3RD QUARTER OF 1996
5 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. 1,000 9-MOS SEP-29-1996 OCT-02-1995 JUN-30-1996 141,966 89,860 15,523 302 76,974 334,624 413,124 78,320 682,788 77,459 166,038 0 0 357,998 75,386 682,788 500,840 500,840 247,108 247,108 215,926 0 6,919 48,032 18,802 29,230 0 0 0 29,230 0.40 0.38
EX-27.FY96 5 FINANCIAL DATA SCHEDULE FOR FISCAL YEAR END 1996
5 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. 1,000 YEAR SEP-29-1996 OCT-02-1996 SEP-29-1996 127,165 103,221 17,884 116 83,412 340,680 459,023 88,071 729,227 101,315 166,748 0 0 364,020 90,030 729,227 697,872 697,872 336,658 336,658 304,639 0 8,739 68,083 26,373 41,710 0 0 0 41,710 0.56 0.53
EX-27.Q197 6 FINANCIAL DATA SCHEDULE FOR 1ST QUARTER OF 1997
5 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. 1,000 3-MOS SEP-28-1997 SEP-30-1996 DEC-29-1996 129,502 121,522 18,983 180 63,561 343,230 496,661 100,273 757,365 107,223 166,431 0 0 371,403 103,887 757,365 240,154 240,154 116,101 116,101 103,291 0 1,804 22,894 9,008 13,886 0 0 0 13,886 0.18 0.17
EX-27.Q297 7 FINANCIAL DATA SCHEDULE FOR 2ND QUARTER OF 1997
5 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. 1,000 6-MOS SEP-28-1997 SEP-30-1996 MAR-30-1997 90,826 122,026 21,861 228 81,560 327,962 530,895 113,601 774,619 111,877 166,542 0 0 375,472 112,126 774,619 456,424 456,424 216,071 216,071 206,013 0 3,638 38,170 15,043 23,127 0 0 0 23,127 0.29 0.28
EX-27.Q397 8 FINANCIAL DATA SCHEDULE FOR 3RD QUARTER OF 1997
5 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. 1,000 9-MOS SEP-28-1997 SEP-30-1996 JUN-29-1997 90,773 92,032 18,471 280 110,141 324,375 574,462 128,368 811,410 125,713 166,348 0 0 382,281 124,762 811,410 700,665 700,665 319,906 319,906 323,849 0 5,454 61,521 24,194 37,327 0 0 0 37,327 0.47 0.45
EX-27.FY97 9 FINANCIAL DATA SCHEDULE FOR FISCAL YEAR END 1997
5 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. 1,000 YEAR SEP-28-1997 SEP-30-1996 SEP-28-1997 70,126 83,504 31,504 273 119,767 317,555 632,859 144,068 857,152 143,467 167,029 0 0 391,284 142,426 857,152 975,389 975,389 436,942 436,942 452,248 0 7,282 91,310 36,099 55,211 0 0 0 55,211 0.69 0.66
EX-27.Q198 10 FINANCIAL DATA SCHEDULE FOR 2ND QUARTER OF 1998
5 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. 1,000 3-MOS SEP-27-1998 SEP-29-1997 DEC-28-1997 105,646 76,927 36,116 355 116,012 350,224 679,523 158,921 919,804 177,823 1,656 0 0 563,646 161,767 919,804 321,325 321,325 146,235 146,235 141,609 0 845 34,793 13,838 20,955 0 0 0 20,955 0.25 0.23
EX-27.Q298 11 FINANCIAL DATA SCHEDULE FOR 2ND QUARTER OF 1998
5 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. 1,000 6-MOS SEP-27-1998 SEP-29-1997 MAR-29-1998 107,938 44,402 35,768 435 129,223 332,602 723,344 177,928 926,236 160,807 1,313 0 0 573,218 175,840 926,236 616,568 616,568 279,736 279,736 282,010 0 1,080 58,228 23,310 34,918 0 0 0 34,918 0.40 0.39
EX-99 12 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS 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. Financial Statements for Fiscal Year 1997 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
F-1 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 3 STARBUCKS CORPORATION SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
Sept 28, 1997 Sept 29, 1996 - ----------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------
See Notes to Supplemental Consolidated Financial Statements F-3 4 STARBUCKS CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except earnings per share)
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 - ------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------
See Notes to Supplemental Consolidated Financial Statements F-4 5 STARBUCKS CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 - ------------------------------------------------------------------------------------------------------------------ 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
See Notes to Supplemental Consolidated Financial Statements F-5 6 STARBUCKS CORPORATION SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 - ------------------------------------------------------------------------------------------------------- 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
See Notes to Supplemental Consolidated Financial Statements F-6 7 STARBUCKS CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except share data)
Common stock Retained Shares Amount earnings Total - ---------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------
See Notes to Supplemental Consolidated Financial Statements F-7 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 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 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 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):
1997 Starbucks Seattle Coffee Combined - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
Note 3: Cash and Cash Equivalents Cash and cash equivalents consist of the following (in thousands):
Sept 28, 1997 Sept 29, 1996 - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
F-11 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):
Gross Gross unrealized unrealized Fair Amortized holding holding September 28, 1997 value cost gains losses - -------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------
Gross Gross unrealized unrealized Fair Amortized holding holding September 29, 1996 value cost gains losses - -------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------
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 13 Note 5: Inventories Inventories consist of the following (in thousands):
Sept 28, 1997 Sept 29, 1996 - ----------------------------------------------------------------- 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 - -----------------------------------------------------------------
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):
Pepsi All other joint venture joint ventures Total - --------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------
F-13 14 Note 7: Property, Plant, and Equipment Property, plant, and equipment are recorded at cost and consist of the following (in thousands):
Sept 28, 1997 Sept 29, 1996 - -------------------------------------------------------------------- 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 - --------------------------------------------------------------------
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 15 Rental expense under these lease agreements was as follows (in thousands):
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 - -------------------------------------------------------------------------------- Minimum rentals $54,093 $37,675 $21,590 Contingent rentals 1,193 1,190 1,088 - -------------------------------------------------------------------------------- $55,286 $38,865 $22,678 - --------------------------------------------------------------------------------
Minimum future rental payments under non-cancelable lease obligations as of September 28, 1997 are as follows (in thousands):
Fiscal year ending: Capital Leases Operating Leases - -------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------
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 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.
Weighted average price Shares per share - ---------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------
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 17 Additional information regarding options outstanding as of September 28, 1997 is as follows:
Options Outstanding Options Exercisable --------------------------------- ------------------------ Weighted Average Weighted Weighted Remaining Average Average Range of Contractual Exercise Exercise Exercise Prices Shares Life (Years) Price Shares Price --------------- ------ ------------- ----- ------ ----- $ 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
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:
Employee Stock Options Employee Stock Purchase Plan - ---------------------------------------------------------------------------------------------- 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------------- 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% - ----------------------------------------------------------------------------------------------
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 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):
Pro Forma Fiscal Year Ended: As Reported Under SFAS 123 - ------------------ ----------- -------------- 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
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 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:
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 - ---------------------------------------------------------------------------------- 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% - ----------------------------------------------------------------------------------
The provision for income taxes consists of the following (in thousands):
Fiscal year ended: Sept 28, 1997 Sept 29, 1996 Oct 1, 1995 - ---------------------------------------------------------------------- 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 - ----------------------------------------------------------------------
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):
Sept 28, 1997 Sept 29, 1996 - ------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------
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 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):
First Second Third Fourth - ----------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------
F-20 21 STARBUCKS CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except earnings per share)
Three Months Ended December 28, December 29, 1997 1996 (13 Weeks) (13 Weeks) (unaudited) - --------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------
See Notes to Supplemental Consolidated Financial Statements F-21 22 STARBUCKS CORPORATION SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS (In thousands, except numbers of shares)
December 28, September 28, 1997 1997 (unaudited) - ------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------
See Notes to Supplemental Consolidated Financial Statements F-22 23 STARBUCKS CORPORATION SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended December 28, December 29, 1997 1996 (13 Weeks) (13 Weeks) (unaudited) - ----------------------------------------------------------------------------------------------------------- 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 --
See Notes to Supplemental Consolidated Financial Statements F-23 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 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):
Starbucks Seattle Coffee Combined - -------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------
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):
December 28, September 28, 1997 1997 - -------------------------------------------------------------------- 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 - --------------------------------------------------------------------
As of December 28, 1997, the Company had fixed-price purchase commitments for green coffee totaling approximately $44 million. F-25 26 Note 5: Property, Plant, and Equipment Property, plant, and equipment consist of the following (in thousands):
December 28, September 28, 1997 1997 - ---------------------------------------------------------------------- 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 - ----------------------------------------------------------------------
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 27 STARBUCKS CORPORATION SUPPLEMENTAL 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 $ 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 - -----------------------------------------------------------------------------------------------------------------
See Notes to Supplemental Consolidated Financial Statements F-27 28 STARBUCKS CORPORATION SUPPLEMENTAL 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 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 - --------------------------------------------------------------------------------------------------------
See Notes to Supplemental Consolidated Financial Statements F-28 29 STARBUCKS CORPORATION SUPPLEMENTAL 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 $ 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 --
See Notes to Supplemental Consolidated Financial Statements F-29 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 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):
Starbucks Seattle Coffee Combined - ----------------------------------------------------------------------- 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 - -----------------------------------------------------------------------
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 32 Note 5: Inventories Inventories consist of the following (in thousands):
March 29, September 28, 1998 1997 - --------------------------------------------------------------------- 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 - ---------------------------------------------------------------------
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 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 - ---------------------------------------------------------------------
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