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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 1
TO
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.
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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 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)
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)
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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
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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)
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Earnings before income taxes 16,904 8,521 32,716 22,721
Income taxes 6,513 3,391 12,759 8,970
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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
See notes to consolidated financial statements.
3
STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, October 1,
1996 1995
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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
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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
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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
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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
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Total shareholders' equity 335,729 312,231
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Total $ 651,952 $468,178
==================================================================
See notes to consolidated financial statements
4
STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
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March 31, April 2,
1996 1995
(26 Weeks) (26 Weeks)
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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
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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)
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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
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Net cash provided by financing activities 163,006 160,391
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Balance, carried forward 110,211 26,320
(Continued on next page)
5
Balance, brought forward 110,211 26,320
Effect of exchange rate changes
on cash and cash equivalents (26) (49)
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Net increase in cash and cash equivalents 110,185 26,271
Cash and cash equivalents:
Beginning of the period 20,944 8,394
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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
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):
March 31, October 1,
1996 1995
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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
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Total $ 90,806 $ 123,657
=============================================================
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):
March 31, October 1,
1996 1995
- --------------------------------------------------------------
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
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353,868 281,980
Less accumulated depreciation (68,277) (52,215)
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285,591 229,765
Construction in process 17,105 14,963
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Total $ 302,696 $ 244,728
==============================================================
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:
Votes in Votes Broker
Favor Opposed Abstain Non-Votes
---------- ------- ------- ---------
Election of directors
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
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:
Term expires at the
Director annual meeting for fiscal:
- ---------------------------------------------------------------
James G. Shennan, Jr. 1996
Jeffrey H. Brotman 1997
Arlen I. Prentice 1997
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
27 Financial Data Schedule
(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: June 25, 1996 By: /s/ Michael Casey
----------------------
Michael Casey
chief financial officer
Signing on behalf of the
registrant and as principal
financial officer
17