- ---------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ___ to ___ Commission File Number 0-20322 ----------------------------- STARBUCKS CORPORATION (Exact name of registrant as specified in its charter) Washington 91-1325671 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2401 Utah Avenue South, Seattle, Washington 98134 (Address of principal executive office, including zip code) (206) 447-1575 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of May 1, 1996, there were 75,687,781 shares of the registrant's Common Stock outstanding. - ------------------------------------------------------------------------------ STARBUCKS CORPORATION INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements. . . . . . . . . . . . . . . . .3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . .10 PART II. OTHER INFORMATION Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . .15 Item 4. Submission of Matters to a Vote of Security Holders.15 Item 5. Other Information. . . . . . . . . . . . . . . . . .15 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . .15 Signatures. . . . . . . . . . . . . . . . . . . . . . . . . .17 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STARBUCKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except earnings per share) <TABLE> Three Months Ended Six Months Ended March 31, April 2, March 31, April 2, 1996 1995 1996 1995 (13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks) - ------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net sales $153,609 $101,113 $323,145 $216,659 Cost of sales and related occupancy costs 76,938 45,639 163,456 97,622 Store operating expenses 47,002 33,882 94,237 69,343 Other operating expenses 3,788 2,875 9,575 6,602 Depreciation and amortization 8,606 5,152 16,161 9,616 General and administrative expenses 9,720 6,489 16,358 12,236 - ------------------------------------------------------------------------- Operating income 7,555 7,076 23,358 21,240 Interest income 2,857 2,371 5,116 3,357 Gain on sale of investment 9,201 0 9,201 0 Interest expense (2,709) (926) (4,959) (1,876) - ------------------------------------------------------------------------- Earnings before income taxes 16,904 8,521 32,716 22,721 Income taxes 6,513 3,391 12,759 8,970 - ------------------------------------------------------------------------- Net earnings $10,391 $5,130 $19,957 $13,751 ========================================================================= Net earnings per share $0.14 $0.07 $0.27 $0.20 ========================================================================= Weighted average shares outstanding 74,429 72,325 74,400 69,406 </TABLE> See notes to consolidated financial statements. 3 STARBUCKS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) <TABLE> March 31, October 1, 1996 1995 - -------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 131,129 $20,944 Short-term investments 91,870 41,507 Accounts receivable (net of allowance for doubtful accounts of $225 and $242, respectively) 12,116 10,157 Inventories 90,806 123,657 Prepaid expenses and other current assets 4,454 4,746 Deferred income taxes, net 4,693 4,644 - ------------------------------------------------------------------- Total current assets 335,068 205,655 Joint ventures and equity investments 3,784 11,628 Property, plant and equipment, net 302,696 244,728 Deposits and other assets 10,404 6,167 - ------------------------------------------------------------------- Total $ 651,952 $468,178 =================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 19,769 $28,668 Checks drawn in excess of bank balances 11,676 13,138 Accrued compensation and related costs 10,602 12,786 Accrued interest payable 3,759 650 Other accrued expenses 18,617 15,804 Income taxes payable 980 0 - ------------------------------------------------------------------ Total current liabilities 65,403 71,046 Deferred income taxes, net 5,073 3,490 Capital lease obligation 766 1,013 Convertible subordinated debentures 244,981 80,398 Shareholders' equity: Common Stock, no par value -- 150,000,000 shares authorized; 71,394,050 and 70,956,990 shares, respectively, issued and outstanding 269,729 265,679 Retained earnings including cumulative translation adjustment of $(877) and $(435), respectively, and net unrealized holding gain(loss) on investments of $(35) and $34, respectively 66,000 46,552 - ------------------------------------------------------------------ Total shareholders' equity 335,729 312,231 - ------------------------------------------------------------------ Total $ 651,952 $468,178 ================================================================== </TABLE> See notes to consolidated financial statements 4 STARBUCKS CORPORATION <TABLE> CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Six Months Ended - ---------------------------------------------------------------------- March 31, April 2, 1996 1995 (26 Weeks) (26 Weeks) - --------------------------------------------------------------------- <S> <C> <C> Operating activities: Net earnings $ 19,957 $13,751 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 17,647 10,468 Loss on asset disposals 355 59 Deferred income taxes, net 1,534 (50) Equity in losses of investees 550 334 Gain on sale of equity investment (9,201) 0 Cash provided (used) by changes in operating assets and liabilities: Accounts receivable (1,962) (3,204) Inventories 32,833 (11,115) Prepaid expenses and other current assets 289 (278) Accounts payable (9,000) 8,131 Income taxes payable 1,031 3,474 Accrued compensation and related costs (2,193) 1,537 Accrued interest payable 3,109 15 Other accrued expenses 2,681 3,095 - ------------------------------------------------------------------- Net cash provided by operating activities 57,630 26,217 Investing activities: Purchase of short-term investments (89,930) (108,331) Sale of short-term investments 3,488 7,741 Maturity of short-term investments 35,966 8,360 Investments in joint ventures and equity securities (4,040) (11,000) Proceeds from sale of equity investments 20,535 0 Additions to property, plant and equipment (75,806) (56,032) Increase in deposits and other assets (638) (1,026) - ------------------------------------------------------------------- Net cash used by investing activities (110,425) (160,288) Financing activities: Decrease in cash provided by checks drawn in excess of bank balances (1,473) (6,771) Proceeds from sale of convertible debentures 165,020 0 Debt issuance costs (4,040) 0 Proceeds from notes payable 0 10,000 Principal repayments of notes payable 0 (10,000) Net proceeds from sale of common stock 0 163,873 Proceeds from sale of common stock under employee stock purchase plan 768 0 Exercise of stock options and warrants 1,935 686 Tax benefit from exercise of non-qualified stock options 921 2,603 Payments on capital lease obligation (125) 0 - ------------------------------------------------------------------- Net cash provided by financing activities 163,006 160,391 - ------------------------------------------------------------------- Balance, carried forward 110,211 26,320 </TABLE> (Continued on next page) 5 <TABLE> <S> <C> <C> Balance, brought forward 110,211 26,320 Effect of exchange rate changes on cash and cash equivalents (26) (49) - ------------------------------------------------------------------ Net increase in cash and cash equivalents 110,185 26,271 Cash and cash equivalents: Beginning of the period 20,944 8,394 - ------------------------------------------------------------------ End of the period $ 131,129 $34,665 ================================================================== Supplemental cash flow information: Cash paid during the period for: Interest $ 1,895 $1,841 Income taxes 8,608 2,885 Noncash financing transactions: Net unrealized holding gain on investments 113 93 Conversion of convertible debt into common stock, net of unamortized issue costs 426 0 </TABLE> See notes to consolidated financial statements 6 STARBUCKS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the 13 Weeks and 26 Weeks Ended March 31, 1996 and April 2, 1995 (UNAUDITED) NOTE 1. FINANCIAL STATEMENT PREPARATION: The consolidated financial statements as of March 31, 1996 and October 1, 1995 and for the 13-week and 26-week periods ended March 31, 1996 and April 2, 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"). The financial information for the 13-week and 26-week periods ended March 31, 1996 and April 2, 1995 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 October 1, 1995, is derived from the Company's consolidated financial statements and notes thereto contained in the Company's Annual Report to Shareholders incorporated by reference in the Company's Annual Report on Form 10-K for the year ended October 1, 1995, 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 31, 1996, are not necessarily indicative of the Company's results of operations for the entire fiscal year ending September 29, 1996. NOTE 2. JOINT VENTURES AND EQUITY INVESTMENTS: On March 31, 1995, the Company invested $11.3 million in cash for shares of Noah's New York Bagels, Inc. ("Noah's") Series B Preferred Stock, representing approximately 20% ownership in Noah's. On February 1, 1996, Noah's was merged with Einstein Brothers Bagels, Inc. ("Einstein Brothers"), a retailer operating primarily in the Eastern United States. In exchange for its investment in Noah's, the Company received $20.5 million in cash. Concurrently, the Company purchased $1.8 million of Einstein Brothers common stock. This investment will be accounted for under the cost method. The Company realized a $9.2 million pre- tax gain ($5.6 million net of tax) on this transaction. During the second fiscal quarter, the Company modified its 50/50 joint venture agreement with Pepsi Cola Company to revise the allocation of start-up risks and expenses between the partners. NOTE 3. EARNINGS PER SHARE: Earnings per share is based on the weighted average shares outstanding during the period after consideration of the dilutive effect, if any, of stock options granted. The Company's 4-1/2% Convertible Subordinated Debentures due 2003 and 4-1/4% Convertible Subordinated Debentures due 2002 will be included in fully diluted earnings per share, using the "if converted" method, when such securities are dilutive. 7 NOTE 4. INVENTORIES: Inventories consist of the following (in thousands): <TABLE> March 31, October 1, 1996 1995 - -------------------------------------------------------------- <S> <C> <C> Coffee: Unroasted $ 49,338 $ 75,975 Roasted 8,517 11,612 Other merchandise held for sale 28,419 32,731 Packaging and other supplies 4,532 3,339 - ------------------------------------------------------------- Total $ 90,806 $ 123,657 ============================================================= </TABLE> As of March 31, 1996, the Company had fixed price purchase commitments for green coffee totaling approximately $28 million. NOTE 5. PROPERTY, PLANT, AND EQUIPMENT: Property, plant, and equipment consist of the following (in thousands): <TABLE> March 31, October 1, 1996 1995 - -------------------------------------------------------------- <S> <C> <C> Land $ 3,602 $ 3,602 Building 8,338 8,338 Leasehold improvements 210,869 162,948 Roasting and store equipment 100,676 82,490 Furniture, fixtures and other 30,383 24,602 - -------------------------------------------------------------- 353,868 281,980 Less accumulated depreciation (68,277) (52,215) - -------------------------------------------------------------- 285,591 229,765 Construction in process 17,105 14,963 - -------------------------------------------------------------- Total $ 302,696 $ 244,728 ============================================================== </TABLE> NOTE 6. NEW ACCOUNTING STANDARD: In October 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation. This pronouncement establishes the accounting and reporting standards for stock-based employee compensation plans, including: stock purchase plans, stock options, and stock appreciation rights. This new standard defines a fair value-based method of accounting for these equity instruments. This method measures compensation cost based on the value of the award and recognizes that cost over the service period. Companies may elect to adopt this standard or to continue accounting for these types of equity instruments under current guidance, APB Opinion No. 25, Accounting for Stock Issued to Employees. Companies which elect to continue using the rules of Opinion 25 must make pro forma disclosures of net income and earnings per share as if this new statement had been applied. This new standard is required for fiscal years beginning after December 15, 1995. The Company is in the process of evaluating this statement and its impact on the Company's financial condition and results of operations. 8 NOTE 7. SUBSEQUENT EVENTS: On April 10, 1996, the Company called for redemption its 4-1/2% Convertible Subordinated Debentures due 2003. In total, approximately $80.5 million in principal was converted into the Company's common stock prior to the redemption date, constituting substantially all of the outstanding principal balance. On April 30, 1996, the Company allowed its $30 million revolving line of credit to expire. There had been no advances on the line since November 1994. 9 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Starbucks Corporation ("Starbucks" or the "Company") derives approximately 86% of net sales from its retail store operations. The Company's specialty sales and mail order operations account for the remainder of net sales. The Company's fiscal year ends on the Sunday closest to September 30. Fiscal years ending on September 29, 1996 and October 1, 1995 each include 52 weeks. The following discussion contains forward-looking statements that involve risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, impact of competition, availability of financing, legal proceedings, and other risks detailed in the Company's Securities and Exchange Commission filings, including the Company's Annual Report on Form 10-K for the year ended October 1, 1995. RESULTS OF OPERATIONS -- FOR THE 13 WEEKS ENDED MARCH 31, 1996, COMPARED TO THE 13 WEEKS ENDED APRIL 2, 1995 Revenues. Net sales for the 13 weeks ended March 31, 1996, increased 52% to $153,609,000 from $101,113,000 for the corresponding period in fiscal 1995. Retail sales increased 52% to $132,301,000 from $86,894,000, primarily due to the opening of new retail stores. Comparable store sales (sales from stores open 13 months or longer) increased by 8% for the period. This increase resulted primarily from an increase in the average number of transactions combined with an increase in the average dollar value per transaction. As part of its expansion strategy of clustering stores in existing markets, Starbucks has experienced a certain level of cannibalization of existing stores by new stores as the store concentration has increased. The Company anticipates that this cannibalization, as well as increased competition and other factors, may continue to put downward pressure on its comparable store sales growth in future periods. During the 13 weeks ended March 31, 1996, the Company opened 87 Starbucks stores (including five licensed airport stores). The Company ended the period with 771 Company-operated stores and 57 licensed airport stores. Specialty sales increased 58% to $18,024,000 for the 13 weeks ended March 31, 1996, compared to $11,439,000 for the corresponding period in fiscal 1995. Increased sales to airlines, hotels, a chain of wholesale clubs, restaurants, and several multi-unit retailers accounted for the majority of the increase in sales. Mail order sales increased 18% to $3,284,000 for the 13 weeks ended March 31, 1996, compared to $2,780,000 for the corresponding period in fiscal 1995. Cost and Expenses. Cost of sales and related occupancy costs as a percentage of net sales increased to 50.1% for the 13 weeks ended March 31, 1996, from 45.1% for the corresponding fiscal 1995 period. This increase was primarily the result of higher green coffee costs and higher occupancy costs as a percentage of sales, partially offset by a shift in the retail sales mix towards higher margin products. Figures for both years reflect the cost of markouts (items that no longer meet the Company's strict quality standards), which prior to fiscal 1996 were included in store operating expenses. Store operating expenses as a percentage of retail sales decreased to 35.5% for the 13 weeks ended March 31, 1996, from 39.0% for the corresponding period in fiscal 1995. The 3.5% of retail sales improvement was due primarily to lower advertising, employee benefits, regional overhead and preopening expenses as a percentage of retail sales. The leverage achieved in regional overhead expense is the result of adding stores to existing markets. Preopening expenses as a percentage of retail sales have decreased due to lower average preopening costs per new store and because sales are increasing at a faster rate than new store openings. 10 Other operating expenses as a percentage of net sales decreased to 2.5% for the 13 weeks ended March 31, 1996, from 2.8% for the corresponding period in fiscal 1995. The decrease was due primarily to a modification in the allocation of start-up risks and expenses between partners in the Company's 50/50 joint venture with Pepsi-Cola Company, a division of PepsiCo, Inc. Depreciation and amortization as a percentage of net sales increased 0.5% to 5.6% for the 13 weeks ended March 31, 1996. This increase was due primarily to higher per-store build-out costs. General and administrative expenses as a percentage of net sales were 6.3% for the 13 weeks ended March 31, 1996, compared to 6.4% for the same period in fiscal 1995. This decrease as a percentage of sales was due primarily to leverage on administrative costs combined with cost containment measures which the Company began implementing during the first quarter of fiscal 1996. Operating Income. Operating income for the 13 weeks ended March 31, 1996 increased to $7,555,000 or 4.9% of net sales from $7,076,000 or 7.0% of net sales for the corresponding period in fiscal 1995. Operating income as a percentage of net sales decreased due to lower gross margins and higher depreciation and amortization expense as a percentage of sales, partially offset by lower store operating and other operating expenses as a percentage of sales. Interest Income. Interest income for the 13 weeks ended March 31, 1996 was $2,857,000 compared to $2,371,000 for the corresponding period in fiscal 1995. The increase in interest income is due primarily to higher average investment balances. Gain on Sale of Investment. On March 31, 1995, the Company invested $11.3 million in cash for shares of Noah's New York Bagels, Inc. ("Noah's") Series B Preferred Stock, representing approximately 20% ownership in Noah's. On February 1, 1996, Noah's was merged with Einstein Brothers Bagels, Inc. ("Einstein Brothers"), a retailer operating primarily in the Eastern United States. In exchange for its investment in Noah's, the Company received $20.5 million in cash. Concurrently, the Company purchased $1.8 million of Einstein Brothers common stock. This investment will be accounted for under the cost method. The Company realized a $9.2 million pre-tax gain ($5.6 million net of tax) on this transaction. Interest Expense. Interest expense for the 13 weeks ended March 31, 1996 was $2,709,000 compared to $926,000 for the corresponding period in fiscal 1995. The increase in interest expense is due primarily to interest on the Company's convertible debentures issued in October 1995. Income Taxes. The Company's effective tax rate for the 13 weeks ended March 31, 1996 was 38.5% compared to 39.8% for the corresponding period in fiscal 1995. The Company reduced its tax rate in the second quarter to bring its year-to-date rate down to 39.0%, its expected effective rate for fiscal 1996. RESULTS OF OPERATIONS -- FOR THE 26 WEEKS ENDED MARCH 31, 1996, COMPARED TO THE 26 WEEKS ENDED APRIL 2, 1995 Revenues. Net sales for the 26 weeks ended March 31, 1996, increased 49% to $323,145,000 from $216,659,000 for the corresponding period in fiscal 1995. Retail sales increased 50% to $278,032,000 from $185,007,000, primarily due to the addition of new retail stores. Comparable store sales increased by 5%. This increase resulted primarily from an increase in the average dollar value per transaction combined with an increase in the number of transactions. During the 26 weeks ended March 31, 1996, the Company opened 155 Starbucks stores (including eight licensed airport stores and two replacement stores), converted one Coffee Connection store to a Starbucks store, and closed one store. The Company anticipates opening at least 145 new Company-operated and licensed airport stores during the remainder of fiscal 1996. Specialty sales increased 51% to $34,640,000 for the 26 weeks ended March 31, 1996, compared to $22,979,000 for the corresponding period in fiscal 1995. Increased sales to hotels, airlines, a chain of wholesale clubs, restaurants, and several multi-unit retailers accounted for the majority of the increase in sales. Mail order sales increased 21% to $10,473,000 for the 26 weeks ended March 31, 1996, compared to $8,673,000 for the corresponding period in fiscal 1995. Costs and Expenses. Cost of sales and related occupancy costs as a percentage of net sales increased to 50.6% for the 26 weeks ended March 31, 1996, from 45.1% for the corresponding fiscal 1995 period. This increase was primarily the result of higher green coffee costs and higher occupancy costs as a percentage of sales, partially offset by a shift in the retail sales mix towards higher margin products. 11 Store operating expenses as a percentage of retail sales decreased to 33.9% from 37.5% for the corresponding period in fiscal 1995. The 3.6% of retail sales improvement reflects lower regional overhead, advertising, employee benefits, and preopening expenses as a percentage of retail sales. Other operating expenses as a percentage of net sales remained constant at 3.0%. Depreciation and amortization as a percentage of net sales increased 0.6% to 5.0% for the 26 weeks ended March 31, 1996. The increase in depreciation and amortization is due primarily to higher per-store build-out costs. General and administrative expenses as a percentage of net sales were 5.1% for the 26 weeks ended March 31, 1996, compared to 5.6% for the same period in fiscal 1995. This decrease as a percentage of sales was due primarily to leverage on administrative costs combined with the implementation of cost containment measures. Operating Income. Operating income for the 26 weeks ended March 31, 1996 increased to $23,358,000 or 7.2% of net sales from $21,240,000 or 9.8% of net sales for the corresponding period in fiscal 1995. Operating income as a percentage of net sales decreased due to lower gross margins and higher depreciation and amortization expense as a percentage of sales, partially offset by lower store operating and general and administrative expenses as a percentage of sales. Interest Income. Interest income for the 26 weeks ended March 31, 1996 was $5,116,000 compared to $3,357,000 for the corresponding period in 1995. The increase in interest income is due primarily to higher average investment balances. Gain on Sale of Investment. The Company recorded a $9.2 million ($5.6 million net of taxes) gain on the sale of its investment in Noah's New York Bagels, Inc. Interest Expense. Interest expense for the 26 weeks ended March 31, 1996 was $4,959,000 compared to $1,876,000 for the corresponding period in fiscal 1995. The increase in interest expense is due primarily to interest on the Company's convertible debentures issued in October 1995. Income Taxes. The Company's effective tax rate for the 26 weeks ended March 31, 1996 was 39.0% compared to 39.5% for the corresponding period in fiscal 1995. This decrease is due primarily to a decrease in the effective state tax rate due to changes in the allocation and apportionment formulas. LIQUIDITY AND CAPITAL RESOURCES The Company ended the period with $223.0 million in total cash and investments. Working capital as of March 31, 1996 totaled $269.7 million compared to $134.6 million at October 1, 1995. The increase of $135.1 million was due primarily to proceeds from an October 1995 offering of 4-1/4% Convertible Subordinated Debentures due 2002 which generated proceeds of approximately $161 million, net of issuance costs. Cash provided by operating activities totaled $57.6 million for the first 26 weeks of fiscal 1996. Cash provided from financing activities for the first 26 weeks of fiscal 1996 totaled $163.0 million. This includes the Company's October 1995 offering of convertible debentures discussed above. Cash provided from financing activities also included cash generated in connection with the Company's employee stock purchase plan, and with the exercise of options to purchase shares of the Company's common stock and the related income tax benefit available to the Company upon exercise of such options. The Company will continue to receive proceeds and a tax deduction as a result of its employees participating in stock purchase and option plans; however, neither the amounts nor the timing thereof can be predicted. 12 Cash used by investing activities for the first 26 weeks of fiscal 1996 totaled $110.4 million. This included capital expenditures (additions to property, plant and equipment) of $75.8 million. Capital expenditures included the costs to open 147 new Company-operated stores, remodel certain existing stores, purchase equipment, expand existing office space, and enhance existing information systems. The Company received approximately $20.5 million for the sale of its investment in Noah's and concurrently purchased $1.8 million of common stock in Einstein Brothers. The Company's wholly-owned subsidiary, Starbucks Coffee International, Inc. ("SBI"), contributed $1.5 million to its joint venture with SAZABY, Inc. The Company made equity investments of $0.5 million in its 50/50 joint venture with Pepsi-Cola Company and $0.2 million in its joint venture with Dreyer's Grand Ice Cream, Inc. Excess cash was invested in investment-grade marketable debt securities, the majority of which are classified as cash equivalents. Future cash requirements, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new company-operated retail stores. The Company also anticipates remodeling certain existing stores and incurring additional expenditures for enhancing its computer systems. Planned capital expenditures for the remainder of fiscal 1996 are estimated to be approximately $95 million. The Company will also have cash requirements for its joint venture partnerships with Pepsi-Cola Company, Dreyer's Grand Ice Cream, Inc., and SAZABY Inc., a Japanese retailer and restauranteur. The Company plans to open, through SBI's joint venture partnership with SAZABY, the first Starbucks retail store in Tokyo, Japan in the summer of 1996. In addition, under the terms of the Company's corporate office lease, the Company has agreed to provide financing to the building owner to be used exclusively for facilities and leasehold development costs to accommodate the Company. During fiscal 1996, the Company expects to provide approximately $3.5 million under this agreement. The maximum amount available under the agreement is $17 million. Any funds advanced by the Company will be repaid with interest over a term not to exceed 20 years. Management believes that the existing cash and investments plus cash generated from operations should be more than sufficient to finance its capital requirements for the remainder of fiscal 1996. The Company anticipates that it will seek additional funds from public or private sources in fiscal 1997; however, there can be no assurance that such funds will be available when needed or be available on terms favorable to the Company. COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS The following important factors, among others, could impact the Company's actual results and could cause such results to differ materially from those expressed in the Company's forward-looking statements. Green coffee commodity prices are subject to substantial price fluctuations, generally a result of reports of adverse growing conditions in certain coffee-producing countries. Due to green coffee commodity price increases, the Company effected sales price increases during fiscal 1994 and 1995 in its coffee beverages and whole bean coffees to mitigate the effects of increases in its costs of supply. Because the Company had established fixed purchase prices for some of its supply of green coffees, the Company's margins were favorably impacted by such sales price increases during much of fiscal 1995. During the latter part of fiscal 1995 and the first half of fiscal 1996, gross margins were negatively impacted relative to the prior year by the sell-through of higher-cost coffee inventories. As the Company continues to sell through these inventories for the remainder of fiscal 1996, it expects gross margins will continue to be negatively impacted relative to the prior year. The Company has entered into fixed price purchase commitments in order to secure an adequate supply of quality green coffee and fix a cost for future periods. As of March 31, 1996 the Company had approximately $28 million in fixed price purchase commitments which, together with existing inventory, the Company believes will provide an adequate supply of green coffee for the remainder of fiscal 1996 and into fiscal 1997. The Company believes that, based on relationships established with its suppliers in the past, the risk of non-delivery on such purchase commitments is remote. 13 In addition to fluctuating coffee prices, management believes that in the future, the Company's results of operations and earnings could be significantly impacted by other factors such as increased competition within the specialty coffee industry, the Company's ability to find optimal store locations at favorable lease rates, the increased costs associated with opening and operating retail stores in new markets, the Company's continued ability to hire, train and retain qualified personnel, and the Company's continued ability to obtain adequate capital to finance its planned expansion. Due to the factors noted above, the Company's future earnings and the prices of the Company's securities may be subject to volatility. There can be no assurance that the Company will continue to generate increases in net sales and net earnings, or growth in comparable store sales. Any variance in the factors noted above, or other areas, from what is expected by investors could have an immediate and adverse effect on the trading price of Company's securities. SEASONALITY AND QUARTERLY RESULTS The Company's business is subject to seasonal fluctuations. A significant portion of the Company's net sales and profits are realized during the first quarter of the Company's fiscal year which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company's rapid growth may conceal the impact of seasonal influences. Because of the seasonality of the Company's business, results for the 26 weeks ended March 31, 1996, are not necessarily indicative of the results that may be achieved for the full fiscal year ended September 29, 1996. NEW ACCOUNTING STANDARD In October 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation. This pronouncement establishes the accounting and reporting standards for stock-based employee compensation plans, including: stock purchase plans, stock options, and stock appreciation rights. This new standard defines a fair value-based method of accounting for these equity instruments. This method measures compensation cost based on the value of the award and recognizes that cost over the service period. Companies may elect to adopt this standard or to continue accounting for these types of equity instruments under current guidance, APB Opinion No. 25, Accounting for Stock Issued to Employees. Companies which elect to continue using the rules of Opinion 25 must make pro forma disclosures of net income and earnings per share as if this new statement had been applied. This new standard is required for fiscal years beginning after December 15, 1995. The Company is in the process of evaluating this statement and its impact on the Company's financial condition and results of operations. 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to various legal proceedings arising in the ordinary course of its business, but is not currently a party to any legal proceeding that the Company believes would have a material adverse effect on the financial position or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders The annual meeting of shareholders of the Company was held on February 28, 1996 in Kent, Washington for the purposes of electing six directors, approving an amendment to the Company's Articles of Incorporation to increase the number of shares of authorized common stock, no par value, from 100,000,000 to 150,000,000 shares, as well as ratifying the selection of the independent public auditors for fiscal 1996. The table below shows the results of the shareholders' voting: <TABLE> Votes in Votes Broker Favor Opposed Abstain Non-Votes ---------- ------- ------- --------- Election of directors <S> <C> <C> <C> <C> Craig J. Foley 61,856,855 -- 1,484,315 7,816,338 Howard Schultz 61,764,018 -- 1,577,152 7,816,338 Adrian D.P. Bellamy 61,852,477 -- 1,488,693 7,816,338 Howard P. Behar 61,735,935 -- 1,605,235 7,816,338 Orin C. Smith 61,614,334 -- 1,726,836 7,816,338 Barbara Bass 61,832,613 -- 1,508,557 7,816,338 Approve amendment to Articles of Incorporation to increase number of authorized shares of common stock 62,087,876 952,787 300,507 7,816,338 Ratification of independent auditors 62,991,487 141,573 208,110 7,816,338 </TABLE> The following members of the Board of Directors, who were not up for re-election during the current year, have terms that expire at the annual meeting for fiscal years 1996 and 1997: <TABLE> Term expires at the Director annual meeting for fiscal: - --------------------------------------------------------------- <S> <C> James G. Shennan, Jr. 1996 Jeffrey H. Brotman 1997 Arlen I. Prentice 1997 </TABLE> 15 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 3.1 Restated Articles of Incorporation of Starbucks Corporation 3.1.1 Articles of Amendment to the Restated Articles of Incorporation of Starbucks Corporation dated November 22, 1995 3.1.2 Articles of Amendment to the Restated Articles of Incorporation of Starbucks Corporation dated March 18, 1996 3.2 Amended and Restated Bylaws of Starbucks Corporation 10.21 Merger Agreement among Noah's New York Bagels, Inc., Shareholders and Certain Optionholders of Noah's New York Bagels, Inc., Einstein Brothers Bagels, Inc. and NNYB Acquisition Corporation dated January 22, 1996. 10.22 Amendment dated February 1, 1996 to Merger Agreement among Noah's New York Bagels, Inc., Shareholders and Certain Optionholders of Noah's New York Bagels, Inc., Einstein Brothers Bagels, Inc. and NNYB Acquisition Corporation dated January 22, 1996. 10.23 Master Licensing Agreement between the Company and ARAMARK Food and Services Group, Inc. dated as of January 30, 1996, as amended and restated May 7, 1996. 11 Statement re: computation of per share earnings (b) Forms 8-K: No reports on Form 8-K were filed by the Company during the 13-week period ended March 31, 1996. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STARBUCKS CORPORATION Dated: May 13, 1996 By: /s/ Michael Casey ---------------------- Michael Casey chief financial officer Signing on behalf of the registrant and as principal financial officer 17 STARBUCKS CORPORATION --------------------- EXHIBIT 11 - COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT EARNINGS PER SHARE) <TABLE> Three Months Ended Six Months Ended March 31, April 2, March 31, April 2, 1996 1995 1996 1995 (13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks) - -------------------------------------------------------------------------- <S> <C> <C> <C> <C> EARNINGS PER SHARE CALCULATION: Net earnings $10,391 $5,130 $19,957 $13,751 ========================================================================= Weighted average shares outstanding calculation: Weighted average number of common shares outstanding 71,257 70,351 71,186 67,187 Dilutive effect of outstanding common stock options 3,172 1,974 3,214 2,219 - ------------------------------------------------------------------------- Weighted average shares outstanding 74,429 72,325 74,400 69,406 ========================================================================= Earnings per share $ 0.14 $ 0.07 $ 0.27 $ 0.20 ========================================================================= EARNINGS PER SHARE CALCULATION ASSUMING CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES(1): Net earnings calculation: Net earnings $ 10,391 $ 5,130 $ 19,957 $ 13,751 Add after tax interest expense on Debentures 1,615 546 2,994 1,093 Add after tax amortization of issuance costs related to the Debentures 128 39 226 79 - ------------------------------------------------------------------------- Net earnings assuming conversion of Debentures $ 12,134 $ 5,715 $ 23,177 $ 14,923 ========================================================================= Weighted average shares outstanding calculation: Weighted average number of common shares outstanding 71,257 70,351 71,186 67,187 Dilutive effect of outstanding common stock options 3,172 1,974 3,214 2,219 Assuming conversion of 4.5% Convertible Subordinated Debentures due 2003 5,331 5,367 5,340 5,367 Assuming conversion of 4.25% Convertible Subordinated Debentures due 2002 7,098 0 6,240 0 - ------------------------------------------------------------------------- Weighted average shares outstanding 86,858 77,692 85,980 74,773 ========================================================================= Earnings per share $ 0.14 $ 0.07 $ 0.27 $ 0.20 ========================================================================= - ------------------- (1) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. 18 </TABLE>