Starbucks Corporation Form 10-Q
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002

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
(State or other Jurisdiction of
Incorporation or Organization)
 
91-1325671
(I.R.S. Employer
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 August 12, 2002, there were 388,340,847 shares of the Registrant’s Common Stock outstanding.



 


Table of Contents

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
    12  
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
    20  
PART II. OTHER INFORMATION
Item 1.
 
Legal Proceedings
    20  
Item 6.
 
Exhibits and Reports on Form 8-K
    21  
Signature
 
 
    21  

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TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
EXHIBIT 99


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except earnings per share)

                                   
      13 Weeks Ended   39 Weeks Ended
     
 
      June 30,   July 1,   June 30,   July 1,
      2002   2001   2002   2001
     
 
 
 
      (unaudited)   (unaudited)
Net revenues:
                               
 
Retail
  $ 711,834     $ 558,920     $ 2,058,361     $ 1,644,604  
 
Specialty
    123,324       103,849       365,349       314,840  
 
 
   
     
     
     
 
 
Total net revenues
    835,158       662,769       2,423,710       1,959,444  
Cost of sales and related occupancy costs
    337,401       271,350       994,511       834,748  
Store operating expenses
    291,445       226,614       822,921       644,912  
Other operating expenses
    29,269       22,695       93,137       68,266  
Depreciation and amortization expenses
    50,873       41,884       151,146       118,043  
General and administrative expenses
    46,997       35,651       155,440       112,961  
Income from equity investees
    8,536       6,732       22,580       17,704  
 
 
   
     
     
     
 
 
Operating income
    87,709       71,307       229,135       198,218  
Interest and other income, net
    1,456       2,910       6,084       6,183  
Gain on sale of investment
                13,361        
 
 
   
     
     
     
 
 
Earnings before income taxes
    89,165       74,217       248,580       204,401  
Income taxes
    32,991       27,460       91,974       76,439  
 
 
   
     
     
     
 
Net earnings
  $ 56,174     $ 46,757     $ 156,606     $ 127,962  
 
 
   
     
     
     
 
Net earnings per common share — basic
  $ 0.14     $ 0.12     $ 0.41     $ 0.34  
Net earnings per common share — diluted
  $ 0.14     $ 0.12     $ 0.39     $ 0.32  
Weighted average shares outstanding:
                               
Basic
    388,155       381,944       384,433       379,868  
Diluted
    401,191       394,482       397,179       394,617  

See notes to consolidated financial statements

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STARBUCKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

                       
          June 30,   September 30,
          2002   2001
         
 
          (unaudited)        
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 209,143     $ 113,237  
 
Available-for-sale securities
    206,827       101,399  
 
Trading securities
    10,446       5,913  
 
Accounts receivable, net of allowance of $3,397 and $4,590, respectively
    93,770       90,425  
 
Inventories
    218,996       221,253  
 
Prepaid expenses and other current assets
    38,467       29,829  
 
Deferred income taxes, net
    41,043       31,869  
 
 
   
     
 
   
Total current assets
    818,692       593,925  
Equity and other investments
    108,249       63,097  
Property, plant and equipment, net
    1,224,154       1,135,784  
Other assets
    44,129       31,868  
Goodwill, net
    20,536       21,845  
 
 
   
     
 
   
Total
  $ 2,215,760     $ 1,846,519  
 
 
   
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
 
Accounts payable
  $ 121,993     $ 127,905  
 
Checks drawn in excess of bank balances
    58,964       61,987  
 
Accrued compensation and related costs
    107,594       81,458  
 
Accrued occupancy costs
    42,525       35,835  
 
Accrued taxes
    19,104       70,346  
 
Other accrued expenses
    65,609       40,117  
 
Deferred revenue
    44,511       26,919  
 
Current portion of long-term debt
    706       697  
 
 
   
     
 
     
Total current liabilities
    461,006       445,264  
Deferred income taxes, net
    36,381       19,133  
Long-term debt
    5,254       5,786  
Other liabilities
    1,031       409  
Shareholders’ equity:
               
 
Common stock and additional paid-in capital — $0.001 par value; authorized, 600,000,000; issued and outstanding, 390,216,497 and 380,044,042 shares, respectively, (includes 1,697,100 common stock units in both periods)
    933,164       791,622  
 
Other additional paid-in capital
    39,393        
 
Retained earnings
    746,319       589,713  
 
Accumulated other comprehensive loss
    (6,788 )     (5,408 )
 
 
   
     
 
     
Total shareholders’ equity
    1,712,088       1,375,927  
 
 
   
     
 
     
Total
  $ 2,215,760     $ 1,846,519  
 
 
   
     
 

See notes to consolidated financial statements

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STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

                         
            39 Weeks Ended
           
            June 30,   July 1,
            2002   2001
           
 
            (unaudited)
Operating activities:
               
   
Net earnings
  $ 156,606     $ 127,962  
   
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
       
Depreciation and amortization
    162,764       128,120  
       
Gain on sale of investment
    (13,361 )      
       
Provisions for asset impairment and disposals
    19,324       12,506  
       
Deferred income taxes, net
    10,310       (6,335 )
       
Equity in income of investees
    (12,536 )     (7,541 )
       
Tax benefit from exercise of non-qualified stock options
    43,260       29,686  
Cash provided/(used) by changes in operating assets and liabilities:
               
       
Net purchases of trading securities
    (4,860 )     (3,600 )
       
Accounts receivable
    (2,174 )     (18,075 )
       
Inventories
    2,970       11,772  
       
Prepaid expenses and other current assets
    (10,852 )     (9,051 )
       
Accounts payable
    (7,662 )     21,662  
       
Accrued compensation and related costs
    25,628       19,627  
       
Accrued occupancy costs
    6,615       5,114  
       
Accrued taxes
    (51,501 )     11,676  
       
Other liabilities
    616       849  
       
Deferred revenue
    17,512       6,227  
       
Other accrued expenses
    27,054       8,452  
   
 
   
     
 
Net cash provided by operating activities
    369,713       339,051  
Investing activities:
               
       
Purchase of available-for-sale securities
    (272,646 )     (137,105 )
       
Maturity of available-for-sale securities
    129,260       76,500  
       
Sale of available-for-sale securities
    36,849       2,000  
       
Changes to equity and other investments
    (5,277 )     (12,628 )
       
Proceeds from sale of equity investment
    14,843        
       
Distributions from joint ventures
    12,141       12,011  
       
Additions to property, plant and equipment
    (269,117 )     (255,498 )
       
Changes to other assets
    (15,879 )     (5,617 )
   
 
   
     
 
Net cash used by investing activities
    (369,826 )     (320,337 )
Financing activities:
               
       
Decrease in cash provided by checks drawn in excess of bank balances
    (3,023 )     9,660  
       
Proceeds from sale of common stock under employee stock purchase plan
    11,743       9,244  
       
Proceeds from exercise of stock options
    88,368       44,154  
       
Principal payments on long-term debt
    (522 )     (513 )
       
Repurchase of common stock
    (1,829 )      
   
 
   
     
 
Net cash provided by financing activities
    94,737       62,545  
Effect of exchange rate changes on cash and cash equivalents
    1,282       (85 )
   
 
   
     
 
Net increase in cash and cash equivalents
    95,906       81,174  
Cash and cash equivalents:
               
   
Beginning of the period
    113,237       70,817  
   
 
   
     
 
   
End of the period
  $ 209,143     $ 151,991  
   
 
   
     
 
Supplemental cash flow information:
               
   
Cash paid during the period for:
               
     
Interest
  $ 200     $ 617  
     
Income taxes
    91,486       45,796  

See notes to consolidated financial statements

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STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the 13 Weeks and 39 Weeks Ended June 30, 2002, and July 1, 2001

NOTE 1: FINANCIAL STATEMENT PREPARATION

The consolidated financial statements as of June 30, 2002, and July 1, 2001, and for the 13-week periods and 39-week periods ended June 30, 2002, and July 1, 2001, have been prepared by Starbucks Corporation (together with its subsidiaries, “Starbucks” or the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information for the 13-week periods and 39-week periods ended June 30, 2002, and July 1, 2001, is unaudited, but, in the opinion of management, reflects all 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 30, 2001, is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended September 30, 2001, 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 period and 39-week period ended June 30, 2002, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 29, 2002.

NOTE 2: REVENUE RECOGNITION

In most instances, retail store revenues are recognized when payment is tendered at the point of sale. Revenues from stored value cards are recognized upon redemption. Until the redemption of stored value cards, outstanding customer balances on such cards are included in “Deferred revenue” on the accompanying consolidated balance sheets. Specialty revenues, consisting mainly of product sales, are generally recognized upon shipment to customers. Initial non-refundable fees required under licensing agreements are earned upon substantial performance of services. Royalty revenues based upon a percentage of sales and other continuing fees are recognized when earned. All revenues are recognized net of any discounts.

NOTE 3: NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires, among other things, the use of a nonamortization approach for purchased goodwill and certain intangibles. Goodwill and certain intangibles with indefinite lives will not be amortized into earnings but instead will be reviewed for impairment at least annually. Remaining intangibles with finite useful lives will continue to be amortized. As of June 30, 2002, the Company had goodwill and other intangible assets, net of accumulated amortization, of $20.5 million and $9.1 million, respectively, which would be subject to the transitional assessment provisions of SFAS No. 142. The Company’s management does not expect the adoption of SFAS No. 142 on September 30, 2002, to have a material impact on future results of operations or its financial position.

In November 2001, FASB issued Emerging Issues Task Force (“EITF”) No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.” This Issue clarifies the FASB Staff’s position that all reimbursements received for incidental expenses incurred in conjunction with providing services as part of a company’s central on-going operations should be characterized as revenue in the income statement. The Company adopted EITF No. 01-14 on December 31, 2001, and it did not have a material impact on the Company’s consolidated results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which nullifies EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires, among other things, that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability. The Company will adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002, and it is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

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NOTE 4: INVENTORIES

Inventories consist of the following (in thousands):

                   
      June 30,   September 30,
      2002   2001
     
 
Coffee:
               
 
Unroasted
  $ 110,380     $ 98,557  
 
Roasted
    33,548       33,958  
Other merchandise held for sale
    45,631       63,458  
Packaging and other supplies
    29,437       25,280  
 
 
   
     
 
Total
  $ 218,996     $ 221,253  
 
 
   
     
 

As of June 30, 2002, the Company had fixed-price purchase commitments for green coffee totaling approximately $240.3 million.

NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS

The Company manages its exposure to foreign currency risk within the consolidated financial statements according to a hedging policy. Under the policy, the Company may engage in transactions involving various derivative instruments with maturities generally not longer than five years to hedge assets, liabilities, revenues and purchases denominated in foreign currencies.

The Company has several forward foreign exchange contracts that qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to hedge a portion of anticipated foreign currency denominated revenue. The Company also has forward foreign exchange contracts that qualify as hedges of a net investment in a foreign operation. These contracts expire within 22 months and are intended to minimize certain foreign currency exposures that can be confidently identified and quantified.

For the 13 weeks and 39 weeks ended June 30, 2002, and July 1, 2001, there was no ineffectiveness related to cash flow hedges. For net investment hedges, the spot-to-spot method is used by the Company to calculate effectiveness. As a result of using this method, net gains of $0.6 million and $0.9 million were recognized in earnings for the 13-week and 39-week periods ended June 30, 2002, respectively, and net gains of $0.3 million and $0.8 million were recognized in earnings during the 13-week and 39-week periods ended July 1, 2001, respectively.

The Company had accumulated derivative losses of $1.9 million, net of taxes, in other comprehensive income as of June 30, 2002, related to cash flow and net investment hedges. Of this amount, $0.6 million is expected to be reclassified into earnings within 12 months.

NOTE 6: EQUITY INVESTMENT TRANSACTIONS

On October 10, 2001, the Company sold 30,000 of its existing shares of Starbucks Coffee Japan, Ltd. (“Starbucks Japan”) at approximately $495 per share, net of related costs. In connection with this sale, the Company received cash proceeds of $14.8 million. The Company’s ownership interest in Starbucks Japan was reduced from 50.0% to 47.5% following the sale of the aforementioned shares. The Company recorded a gain from this sale of $13.4 million on the accompanying consolidated statement of earnings.

Also on October 10, 2001, Starbucks Japan issued 220,000 shares of common stock at approximately $495 per share, net of related costs, in an initial public offering in Japan. In connection with this offering, the Company’s ownership interest in Starbucks Japan was reduced from 47.5% to 40.1%. The Company recorded a credit to “Other additional paid-in capital” on the accompanying consolidated balance sheet of $39.4 million, reflecting the increase in value of its share of the net assets of Starbucks Japan related to the stock offering. As of June 30, 2002, the quoted closing price of Starbucks Japan shares was approximately $260.

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NOTE 7: PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment are recorded at cost and consist of the following (in thousands):

                 
    June 30,   September 30,
    2002   2001
   
 
Land
  $ 11,312     $ 6,023  
Building
    30,481       19,795  
Leasehold improvements
    1,094,234       960,732  
Roasting and store equipment
    499,350       421,150  
Furniture, fixtures and other
    274,832       239,900  
 
   
     
 
 
    1,910,209       1,647,600  
Less accumulated depreciation and amortization
    (762,280 )     (605,247 )
 
   
     
 
 
    1,147,929       1,042,353  
Work in progress
    76,225       93,431  
 
   
     
 
Property, plant and equipment, net
  $ 1,224,154     $ 1,135,784  
 
   
     
 

NOTE 8: SHAREHOLDERS’ EQUITY

In September 2001, the Company’s Board of Directors approved a plan to repurchase up to $60.0 million of its common stock in the open market. During the 39 weeks ended June 30, 2002, the Company acquired 125,000 shares at a cost of $1.8 million. Since the program’s inception, the Company has acquired 3.5 million shares at a cost of $51.6 million, leaving $8.4 million for repurchases available under this plan.

In June 2002, the Board of Directors authorized the repurchase of up to an additional 10.0 million shares. As of June 30, 2002, the Company had not acquired any shares under this additional plan.

NOTE 9: COMPREHENSIVE INCOME

Comprehensive income, net of related tax effects, is as follows (in thousands):

                                   
      13 Weeks ended   39 Weeks ended
     
 
      June 30,   July 1,   June 30,   July 1,
      2002   2001   2002   2001
     
 
 
 
Net earnings
  $ 56,174     $ 46,757     $ 156,606     $ 127,962  
 
Unrealized holding gains/ (losses) on cash flow hedging instruments
    (1,842 )     284       (15 )     273  
 
Unrealized holding gains/ (losses) on net investment hedging instruments
    (2,803 )     (493 )     (1,498 )     1,479  
 
Unrealized holding gains/ (losses) on available- for-sale investments
    244       (142 )     298       744  
 
Reclassification adjustment for net (gains)/losses realized in net earnings
    (785 )           (2,592 )     14  
 
   
     
     
     
 
Net unrealized gain/(loss)
    (5,186 )     (351 )     (3,807 )     2,510  
Translation adjustment
    18,757       1,295       2,427       (7,294 )
 
   
     
     
     
 
Total comprehensive income
  $ 69,745     $ 47,701     $ 155,226     $ 123,178  
 
   
     
     
     
 

The Company is subject to foreign currency translation adjustments because its international operations use their local currencies as their functional currencies. Assets and liabilities are translated at exchange rates in effect at the balance sheet date, and the resulting translation adjustments are recorded as a separate component of “Accumulated other comprehensive loss” on the accompanying consolidated balance sheets. The change in translation adjustment of $18.8 million for the 13 weeks ended June 30, 2002, was primarily due to the strengthening of the British pound, Japanese yen and Euro against the United States dollar.

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NOTE 10: EARNINGS PER SHARE

The following table represents the calculation of net earnings per common share — basic (in thousands, except earnings per share data):

                                   
      13 Weeks ended   39 Weeks ended
     
 
      June 30,   July 1,   June 30,   July 1,
      2002   2001   2002   2001
     
 
 
 
Net earnings
  $ 56,174     $ 46,757     $ 156,606     $ 127,962  
Weighted average common shares and common stock units outstanding
    388,155       381,944       384,433       379,868  
 
   
     
     
     
 
Net earnings per common
                               
 
share — basic
  $ 0.14     $ 0.12     $ 0.41     $ 0.34  
 
   
     
     
     
 

The following table represents the calculation of net earnings per common and common equivalent share — diluted (in thousands, except per share data):

                                 
    13 Weeks ended   39 Weeks ended
   
 
    June 30,   July 1,   June 30,   July 1,
    2002   2001   2002   2001
   
 
 
 
Net earnings
  $ 56,174     $ 46,757     $ 156,606     $ 127,962  
Weighted average shares outstanding calculation:
                               
Weighted average common shares and common stock units outstanding
    388,155       381,944       384,433       379,868  
Dilutive effect of outstanding common stock options
    13,036       12,538       12,746       14,749  
 
   
     
     
     
 
Weighted average common and common equivalent shares outstanding
    401,191       394,482       397,179       394,617  
 
   
     
     
     
 
Net earnings per common and common equivalent share — diluted
  $ 0.14     $ 0.12     $ 0.39     $ 0.32  
 
   
     
     
     
 

Options with exercise prices greater than the average market price for the periods indicated were not included in the computation of diluted earnings per share. These options totaled 0.5 million and 8.9 million for the 13 weeks ended June 30, 2002, and July 1, 2001, respectively, and 1.5 million and 0.7 million for the 39 weeks ended June 30, 2002, and July 1, 2001, respectively.

NOTE 11: LEGAL PROCEEDINGS

On June 20, 2001, and July 2, 2001, two purported class action lawsuits against the Company entitled James Carr, et.al. v. Starbucks Corporation and Olivia Shields, et.al. v. Starbucks Corporation were filed in the Superior Courts of California, Alameda and Los Angeles Counties, respectively. Each lawsuit subsequently was removed to the United States District Court, Northern District of California and Central District of California, respectively. Each of the lawsuits was filed by two plaintiffs who are current or former store managers and assistant store managers on behalf of themselves and other similarly situated store managers, assistant store managers and retail management trainees. The lawsuits alleged that the Company improperly classified such employees as exempt under California’s wage and hour laws and sought damages, restitution, reclassification and attorneys fees and costs. On April 19, 2002, Starbucks announced that it had reached an agreement to settle the lawsuits to fully resolve all claims brought by the plaintiffs without engaging in protracted litigation. Starbucks recorded an $18.0 million charge during the second quarter, which is included in “General and administrative expenses” on the accompanying consolidated statement of earnings for the 39 weeks ended June 30, 2002, for the estimated payment of claims to eligible class members, attorneys’ fees and costs, and costs to a third-party claims administrator, as well as applicable employer payroll taxes. On July 19, 2002, the settlement of the lawsuits was preliminarily approved by the Court.

In addition to the California lawsuits described above, the Company is party to various legal proceedings arising in the ordinary course of its business, but it is not currently a party to any legal proceeding that management believes would have a material adverse effect on the financial position or results of operations of the Company.

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NOTE 12: SEGMENT REPORTING

Starbucks is organized into a number of business units that correspond to the Company’s operating segments.

North American Retail

North American Retail, which represents over 90% of total retail revenues and almost 80% of total net revenues, sells coffee and other beverages, whole bean coffees, complementary food, hardware and merchandise through Company-operated retail stores in the United States and Canada.

Business Alliances

Business Alliances, which represents over 40% of total specialty revenues and approximately 7% of total net revenues, sells whole bean and ground coffees through foodservice accounts. In addition, Business Alliances sells coffee and related products for resale through North American retail store licensing agreements and receives license fees and royalties.

All other business units

The remainder of the Company’s business units individually represent less than 10% of total net revenues. These include International Retail (comprised of international Company-operated retail stores), international retail store licensing, grocery channel licensing, warehouse club accounts, direct-to-consumer marketing channels, joint ventures and other initiatives related to the Company’s core businesses. These business units are managed and evaluated independently and do not meet the quantitative thresholds of a reportable segment under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

Revenues from these segments include both sales to unaffiliated customers and sales between segments, which are accounted for on a basis consistent with sales to unaffiliated customers. Segment information has been prepared using a management approach that is consistent with the basis and manner in which the Company’s management internally reviews financial information for operational decision making purposes. However, intersegment revenues, consisting primarily of product sales to and from subsidiaries and equity method investees, and other intersegment transactions, which are included in the information presented below, have been eliminated on the accompanying consolidated financial statements.

The tables below present information by operating segment (in thousands):

                                 
    13 Weeks ended   39 Weeks ended
   
 
    June 30,   July 1,   June 30,   July 1,
    2002   2001   2002   2001
   
 
 
 
NET REVENUES:
                               
North American Retail
  $ 658,938     $ 522,929     $ 1,909,411     $ 1,546,317  
Business Alliances
    56,336       47,363       163,685       144,257  
All other business units
    140,725       107,977       400,738       306,055  
Intersegment revenues
    (20,841 )     (15,500 )     (50,124 )     (37,185 )
 
   
     
     
     
 
Total net revenues
  $ 835,158     $ 662,769     $ 2,423,710     $ 1,959,444  
 
   
     
     
     
 
EARNINGS BEFORE INCOME TAXES:
                               
North American Retail
  $ 112,320     $ 83,783     $ 323,068     $ 250,083  
Business Alliances
    16,009       12,919       42,104       36,369  
All other business units
    14,086       16,349       45,160       45,247  
Unallocated corporate expenses
    (54,327 )     (41,610 )     (180,537 )     (131,976 )
Intersegment eliminations
    (379 )     (134 )     (660 )     (1,505 )
 
   
     
     
     
 
Operating Income
    87,709       71,307       229,135       198,218  
Interest and other income, net
    1,456       2,910       6,084       6,183  
Gain on sale of investment
                13,361        
 
   
     
     
     
 
Earnings before income taxes
  $ 89,165     $ 74,217     $ 248,580     $ 204,401  
 
   
     
     
     
 

The Company’s provisions for asset impairment are recorded when facts and circumstances indicate that the carrying values of long-lived assets exceed their estimated fair values. For its retail assets, Starbucks regularly monitors the financial results of its Company-operated retail stores and accumulates historical operating measures to identify performance trends in various markets. As part of this process, the Company identified $6.4 million and $10.0 million for the 13 weeks and 39 weeks ended June 30, 2002, respectively, for certain international Company-operated retail stores included in All other business units. Management determined that these retail stores are unable to generate current and future estimated undiscounted cash flows in excess of carrying values for retail assets,

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primarily leasehold improvements. These impairment losses are included in “Store operating expenses” on the accompanying consolidated statement of earnings.

Unallocated corporate expenses pertain to corporate functions that are not specifically attributable to the Company’s operating segments and include “General and administrative expenses” as well as certain depreciation and amortization expenses. Unallocated corporate expenses include depreciation and amortization expenses of $7.3 million and $6.0 million for the 13 weeks ended June 30, 2002, and July 1, 2001, respectively, and $25.1 million and $19.0 million for the 39 weeks ended June 30, 2002, and July 1, 2001, respectively. Additionally, as described in Note 11, the 39 weeks ended June 30, 2002, includes an $18.0 million litigation settlement charge.

The table below represents information by geographic area (in thousands):

                                 
    13 Weeks ended   39 Weeks ended
   
 
    June 30,   July 1,   June 30,   July 1,
    2002   2001   2002   2001
   
 
 
 
NET REVENUES FROM EXTERNAL CUSTOMERS:
                               
United States
  $ 717,643     $ 573,566     $ 2,092,467     $ 1,708,352  
Foreign countries
    117,515       89,203       331,243       251,092  
 
   
     
     
     
 
Total net revenues
  $ 835,158     $ 662,769     $ 2,423,710     $ 1,959,444  
 
   
     
     
     
 

Foreign revenues are classified based on the location of the customers and consist primarily of revenues from the United Kingdom and Canada.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements herein, including anticipated Company-operated and licensed store openings, planned capital expenditures, and expected cash requirements and other trends in or expectations regarding Starbucks Corporation’s operations and financial results, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, coffee and other raw materials prices and availability, successful execution of internal performance and expansion plans, the effect of slowing United States and international economies, the effect of legal proceedings and other risks detailed herein and in Starbucks Corporation’s other filings with the Securities and Exchange Commission.

GENERAL

Starbucks Corporation’s fiscal year ends on the Sunday closest to September 30. Fiscal year 2001 had 52 weeks. The fiscal years ending on September 29, 2002, and September 28, 2003, will also include 52 weeks.

Starbucks Corporation (together with its subsidiaries, “Starbucks” or the “Company”) is organized into a number of business units that correspond to the Company’s operating segments:

North American Retail

North American Retail, which represents over 90% of total retail revenues and almost 80% of total net revenues, sells coffee and other beverages, whole bean coffees, complementary food, hardware and merchandise through Company-operated retail stores in the United States and Canada.

Business Alliances

Business Alliances, which represents over 40% of total specialty revenues and approximately 7% of total net revenues, sells whole bean and ground coffees through foodservice accounts. In addition, Business Alliances sells coffee and related products for resale through North American retail store licensing agreements and receives license fees and royalties.

At the beginning of fiscal 2001, Starbucks combined its foodservice and domestic retail store licensing operations to form Business Alliances. As a result of this internal reorganization and the manner in which the operations of foodservice and domestic retail store licensing are measured and evaluated as one combined business unit, the Company’s management determined that separate segment reporting of Business Alliances was appropriate under Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

All other business units

The remainder of the Company’s business units individually represent less than 10% of total net revenues. These include International Retail (comprised of international Company-operated retail stores), international retail store licensing, grocery channel licensing, warehouse club accounts, direct-to-consumer marketing channels, joint ventures and other initiatives related to the Company’s core businesses. These business units are managed and evaluated independently and do not meet the quantitative thresholds of a reportable segment under SFAS No. 131.

Segment information is prepared using a management approach that is consistent with the basis and manner in which the Company’s management internally reviews financial information for operational decision making purposes. However, intersegment transactions have been eliminated for Management’s Discussion & Analysis to comply with accounting principles generally accepted in the United States of America.

RESULTS OF OPERATIONS — FOR THE 13 WEEKS ENDED JUNE 30, 2002, COMPARED TO THE 13 WEEKS ENDED JULY 1, 2001

SYSTEMWIDE RETAIL STORE SALES

Systemwide retail store sales, which include net sales for both Company-operated and licensed retail stores, were $972 million for the 13 weeks ended June 30, 2002, an increase of 29% from $755 million in the corresponding period in fiscal 2001, primarily due to the opening of 1,173 stores in the last 12 months. Systemwide retail store sales provide a broad perspective of global brand sales; however, they exclude net revenues from non-retail channels.

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The following table summarizes the Company’s systemwide retail stores:

                                   
      Net stores opened during the        
      periods ended June 30, 2002   Stores open
     
  as of
      13 Weeks   39 Weeks   52 Weeks   June 30, 2002
     
 
 
 
Continental North America:
                               
 
Company-operated
    116       423       561       3,394  
 
Licensed
    33       186       208       995  
 
 
   
     
     
     
 
 
    149       609       769       4,389  
International:
                               
 
Company-operated
    17       72       112       367  
 
Licensed
    74       218       292       852  
 
 
   
     
     
     
 
 
    91       290       404       1,219  
 
 
   
     
     
     
 
 
    240       899       1,173       5,608  
 
 
   
     
     
     
 

Starbucks expects to achieve its fiscal 2002 global store-opening target of 1,200 new stores. During fiscal 2003, Starbucks also expects to open at least 1,200 new stores; including 525 Company-operated and 225 licensed stores in North America, and 75 Company-operated and 375 licensed stores in international markets.

CONSOLIDATED REVENUES

During the 13-week period ended June 30, 2002, Starbucks derived approximately 85% of net revenues from its Company-operated retail stores. Retail revenues include North American Retail and International Retail business units. The remaining 15% of net revenues was derived from the Company’s Specialty Operations, which includes Business Alliances and all other non-retail business units.

The table below reconciles revenues by operating segment to revenues on the accompanying consolidated statements of earnings (in thousands):

                   
      13 Weeks Ended
     
      June 30,   July 1,
      2002   2001
     
 
North American Retail
  $ 658,938     $ 522,929  
International Retail
    52,896       35,991  
 
   
     
 
 
Subtotal Retail revenues
    711,834       558,920  
Business Alliances
    56,336       47,363  
All other business units (excluding International Retail)
    87,829       71,986  
Intersegment revenues
    (20,841 )     (15,500 )
 
   
     
 
 
Subtotal Specialty revenues
    123,324       103,849  
 
   
     
 
Total net revenues
  $ 835,158     $ 662,769  
 
   
     
 

TOTAL NET REVENUES

Net revenues for the 13 weeks ended June 30, 2002, increased 26% to $835.2 million from $662.8 million for the corresponding period in fiscal 2001.

REVENUES BY SEGMENT

North American Retail

North American Retail revenues increased by $136.0 million, or 26%, to $658.9 million for the 13 weeks ended June 30, 2002, from $522.9 million for the corresponding period of fiscal 2001, primarily due to the opening of new retail stores and an increase in comparable store sales of 9% for the period. The increase in comparable store sales was entirely due to higher transaction volume. Management believes increased customer demand was driven by new product innovation, which continues to broaden the customer base during non-peak hours of operation, and by expanding the Company’s capacity to satisfy customer demand through enhanced technology, training and execution at retail stores.

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Business Alliances

Business Alliances revenues increased by $9.0, or 19%, to $56.3 million for the 13 weeks ended June 30, 2002, from $47.4 million in the corresponding period in fiscal 2001, primarily due to the opening of new licensed stores and the resulting increase in royalty revenues from and product sales to those licensees.

All other business units (including International Retail)

Revenues for all other business units increased by $27.4 million, or 30%, to $119.9 million for the 13 weeks ended June 30, 2002, from $92.5 million in the corresponding period in fiscal 2001. This increase was mainly related to growth in the number of international licensed and Company-operated retail stores.

CONSOLIDATED RESULTS OF OPERATIONS

Cost of sales and related occupancy costs decreased to 40.4% of net revenues for the 13 weeks ended June 30, 2002, from 40.9% in the corresponding period in fiscal 2001. The decrease was primarily due to a shift in sales mix to higher margin products, such as hand-crafted beverages. Additionally, the Company continues to derive benefit from lower green coffee costs. These benefits have been diminishing as the Company’s long-term fixed-price purchase contracts are used and new contracts are negotiated at higher prices. Improvements in cost of sales were partially offset by higher occupancy costs due to increased repair and maintenance activities on Company-operated retail stores.

Store operating expenses as a percentage of retail revenues increased to 40.9% for the 13 weeks ended June 30, 2002, from 40.5% in the corresponding period in fiscal 2001. The increase was primarily due to provisions for asset impairment and store remodels, partially offset by reductions in advertising expenditures as a percentage of retail revenues.

Other operating expenses (expenses associated with non-retail operations) were 23.7% of specialty revenues for the 13 weeks ended June 30, 2002, compared to 21.9% in the corresponding period in fiscal 2001. The increase was a result of continued development of the Company’s international infrastructure, including additional regional offices and employees to support global expansion.

Depreciation and amortization expenses increased to $50.9 million for the 13 weeks ended June 30, 2002, from $41.9 million in the corresponding period in fiscal 2001. The increase was mainly the result of additional leasehold improvements, computer system upgrades and equipment purchased for the 561 North American and 112 international Company-operated retail stores opened in the last 12 months.

General and administrative expenses increased to $47.0 million for the 13 weeks ended June 30, 2002, compared to $35.7 million in the corresponding period in fiscal 2001. The increase was primarily due to modest growth in payroll-related expenditures and contract labor costs for information technology personnel to support the Company’s infrastructure development.

Income from equity investees was $8.5 million for the 13 weeks ended June 30, 2002, compared to $6.7 million in the corresponding period in fiscal 2001. The increase was primarily due to improved profitability from the North American Coffee Partnership, the Company’s joint venture with the Pepsi-Cola Company, which experienced favorable results from extended product lines and manufacturing efficiencies. The Company’s income from its investment in Starbucks Coffee Japan, Ltd. increased modestly year-over-year due to the addition of 113 stores in the last 12 months.

Operating income increased 23% to $87.7 million for the 13 weeks ended June 30, 2002, from $71.3 million in the corresponding period in fiscal 2001. The operating margin declined to 10.5% of total net revenues in the 13 weeks ended June 30, 2002, compared to 10.8% in the same period in fiscal 2001 primarily due to higher expenses as discussed above, partially offset by the improvements in cost of sales.

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RESULTS OF OPERATIONS BY SEGMENT

The table below reconciles results of operations by operating segment to operating income on the accompanying consolidated statements of earnings (in thousands):

                                                 
    13 Weeks Ended
   
    June 30, 2002   July 1, 2001
   
 
    Consoli-   Inter-   Segment   Consoli-   Inter-   Segment
    dated   segment   Results   dated   segment   Results
   
 
 
 
 
 
North American Retail
  $ 109,332     $ 2,988     $ 112,320     $ 83,783     $     $ 83,783  
Business Alliances
    15,517       492       16,009       12,919             12,919  
All other business units
    17,187       (3,101 )     14,086       16,215       134       16,349  
Intersegment eliminations
          (379 )     (379 )           (134 )     (134 )
Unallocated corporate expenses
    (54,327 )           (54,327 )     (41,610 )           (41,610 )
 
   
     
     
     
     
     
 
Operating Income
  $ 87,709     $     $ 87,709     $ 71,307     $     $ 71,307  
 
   
     
     
     
     
     
 

North American Retail

Operating income for North American Retail increased by 30% to $109.3 million for the 13 weeks ended June 30, 2002, from $83.8 million in the corresponding period in fiscal 2001. The North American Retail operating margin increased to 16.6% of related revenues from 16.0% in the prior year, primarily due to the shift in sales to higher margin products and continued benefit from lower green coffee costs.

Business Alliances

Operating income for Business Alliances increased by 20% to $15.5 million for the 13 weeks ended June 30, 2002, from $12.9 million in the corresponding period in fiscal 2001. The segment’s operating margin increased to 27.5% of related revenues from 27.3% in the prior year due to lower operating expenses resulting from payment on a previously determined uncollectible receivable, partially offset by an increase in advertising expenditures.

All other business units

Operating income for all other business units increased to $17.2 million for the 13 weeks ended June 30, 2002, from $16.2 million in the corresponding period in fiscal 2001. The segment’s operating margin decreased to 14.3% of related revenues from 17.5% in the prior year, primarily due to provisions for asset impairment and higher average rent expense for International Retail operations, as well as higher operating expenses associated with the expansion of internal resources to support the growth of the international licensee channel.

The Company’s provisions for asset impairment are recorded when facts and circumstances indicate that the carrying values of long-lived assets exceed their estimated fair values. For its retail assets, Starbucks regularly monitors the financial results of its Company-operated retail stores and accumulates historical operating measures to identify performance trends in various markets. As part of this process, the Company identified $6.4 million for the 13 weeks ended June 30, 2002, for certain international Company-operated retail stores. Management determined that these retail stores are unable to generate current and future estimated undiscounted cash flows in excess of carrying values for retail assets, primarily leasehold improvements. These impairment losses are included in “Store operating expenses” on the accompanying consolidated statement of earnings.

Unallocated corporate expenses

Unallocated corporate expenses pertain to corporate functions that are not specifically attributable to the Company’s operating segments and include “General and administrative expenses” and certain depreciation and amortization expenses. Depreciation and amortization expenses of $7.3 million and $6.0 million are included in unallocated corporate expenses for the 13 weeks ended June 30, 2002, and July 1, 2001, respectively.

RESULTS OF OPERATIONS — FOR THE 39 WEEKS ENDED JUNE 30, 2002, COMPARED TO THE 39 WEEKS ENDED JULY 1, 2001

SYSTEMWIDE RETAIL STORE SALES

Systemwide retail store sales were $2.8 billion for the 39 weeks ended June 30, 2002, an increase of 29% from $2.2 billion in the corresponding period in fiscal 2001 primarily due to the opening of additional stores in the last 12 months.

CONSOLIDATED REVENUES

During the 39-week period ended June 30, 2002, Starbucks derived approximately 85% of net revenues from its Company-operated retail stores. The remaining 15% of net revenues was derived from the Company’s Specialty Operations.

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The table below reconciles revenues by operating segment to revenues on the accompanying consolidated statements of earnings (in thousands):

                   
      39 Weeks Ended
     
      June 30,   July 1,
      2002   2001
     
 
North American Retail
  $ 1,909,411     $ 1,546,317  
International Retail
    148,950       98,287  
 
   
     
 
 
Subtotal Retail revenues
    2,058,361       1,644,604  
Business Alliances
    163,685       144,257  
All other business units (excluding International Retail)
    251,788       207,768  
Intersegment revenues
    (50,124 )     (37,185 )
 
   
     
 
 
Subtotal Specialty revenues
    365,349       314,840  
 
   
     
 
Total net revenues
  $ 2,423,710     $ 1,959,444  
 
   
     
 

TOTAL NET REVENUES

Net revenues for the 39 weeks ended June 30, 2002, increased 24% to $2.4 billion from $2.0 billion for the corresponding period in fiscal 2001.

REVENUES BY SEGMENT

North American Retail

North American Retail revenues increased by $363.1 million, or 23%, to $1.9 billion from $1.5 billion, primarily due to the opening of additional retail stores and an increase in comparable store sales of 6% for the 39 weeks ended, June 30, 2002. The increase in comparable store sales resulted from a 7% increase in the number of transactions offset slightly by a 1% decrease in the average dollar value per transaction. The continuing shift in sales mix to beverages, which was driven in part through the introduction of new products, and the absence of a price increase resulted in a slight decrease in the average transaction value.

Business Alliances

For the 39 weeks ended, June 30, 2002, Business Alliances revenues increased by $19.4 million, or 13%, to $163.7 million from $144.3 million in the corresponding period in fiscal 2001, primarily due to opening of new licensed stores and the resulting increase in royalty revenues from and product sales to those licensees.

All other business units (including International Retail)

Revenues related to all other business units increased by $81.7 million, or 30%, to $350.6 million for the 39 weeks ended June 30, 2002, from $268.9 million in the corresponding period in fiscal 2001. This increase was mainly related to the growth in the number of international licensed and Company-operated retail stores.

CONSOLIDATED RESULTS OF OPERATIONS

Cost of sales and related occupancy costs decreased to 41.0% of net revenues for the 39 weeks ended June 30, 2002, from 42.6% for the corresponding period in fiscal 2001. The decrease was primarily due to a shift in sales mix to higher margin products as well as continued benefit from lower green coffee costs. These were partially offset by higher occupancy costs, mainly rent expense, for both International Retail and North American Retail stores.

Store operating expenses as a percentage of retail revenues increased to 40.0% for the 39 weeks ended June 30, 2002, from 39.2% for the corresponding period in fiscal 2001. The increase was primarily due to higher payroll-related expenditures resulting from higher average wage rates and the continuing shift to more labor-intensive handcrafted beverages.

Other operating expenses were 25.5% of specialty revenues for the 39 weeks ended June 30, 2002, compared to 21.7% in the corresponding period in fiscal 2001. The increase was attributed to the continuing growth of licensee channels, both international and domestic, as the Company expands these businesses geographically and develops its internal resources to support them, as well as higher advertising expenditures for the Company’s direct-to-consumer catalog channel.

Depreciation and amortization expenses increased to $151.1 million for the 39 weeks ended June 30, 2002, from $118.0 million for the corresponding period in fiscal 2001. The increase was mainly the result of additional leasehold improvements, computer system upgrades and equipment purchased for new North American and international Company-operated retail stores opened in the last 12 months.

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General and administrative expenses were $155.4 million for the 39 weeks ended June 30, 2002, compared to $113.0 million in the corresponding period in fiscal 2001. The increase was primarily due to higher payroll-related expenditures and the $18 million litigation settlement charge recorded in the second quarter of fiscal 2002.

Income from equity investees was $22.6 million for the 39 weeks ended June 30, 2002, compared to $17.7 million for the corresponding period in fiscal 2001. The increase was primarily due to improved profitability from the North American Coffee Partnership resulting from extended product lines and manufacturing efficiencies. The Company’s income from its investment in Starbucks Coffee Japan, Ltd. increased modestly year-over-year due to the addition of new stores.

Operating income increased 16% to $229.1 million for the 39 weeks ended June 30, 2002, compared to $198.2 million in the corresponding period in fiscal 2001. The operating margin decreased to 9.5% of total net revenues from 10.1% in the same period in fiscal 2001 due to expenses as discussed above partially offset by cost of sales improvements.

RESULTS OF OPERATIONS BY SEGMENT

The table below reconciles results of operations by operating segment to operating income on the accompanying consolidated statements of earnings (in thousands):

                                                 
    39 Weeks Ended
   
    June 30, 2002   July 1, 2001
   
 
    Consoli-   Inter-   Segment   Consoli-   Inter-   Segment
    dated   segment   Results   dated   segment   Results
   
 
 
 
 
 
North American Retail
  $ 323,068     $     $ 323,068     $ 250,083     $     $ 250,083  
Business Alliances
    42,104             42,104       36,369             36,369  
All other business units
    44,500       660       45,160       43,742       1,505       45,247  
Intersegment eliminations
          (660 )     (660 )           (1,505 )     (1,505 )
Unallocated corporate expenses
    (180,537 )           (180,537 )     (131,976 )           (131,976 )
 
   
     
     
     
     
     
 
Operating Income
  $ 229,135     $     $ 229,135     $ 198,218     $     $ 198,218  
 
   
     
     
     
     
     
 

North American Retail

Operating income for North American Retail increased 29% to $323.1 million for the 39 weeks ended June 30, 2002, compared to $250.1 million in the corresponding period in fiscal 2001. The North American Retail operating margin increased to 16.9% of related revenues from 16.2% in the prior year, due to the shift in sales to higher margin products and the continued benefit from lower green coffee costs.

Business Alliances

Operating income for Business Alliances increased 16% to $42.1 million for the 39 weeks ended June 30, 2002, from $36.4 million in the corresponding period in fiscal 2001. The segment’s operating margin increased to 25.7% of related revenues from 25.2% in the prior year primarily due to revenue growth driven by the licensee channel.

All other business units

Operating income for all other business units increased 2% to $44.5 million for the 39 weeks ended June 30, 2002, from $43.7 million in the corresponding period in fiscal 2001. The segment’s operating margin decreased to 12.7% of related revenues from 16.3% in the prior year, primarily due to provisions for asset impairment and higher occupancy costs for international Company-operated stores, as well as higher operating expenses associated with the development of internal resources to support the international expansion of the licensee channel. These increases were partially offset by cost of sales improvements.

The Company’s provisions for asset impairment are recorded when facts and circumstances indicate that the carrying values of long-lived assets exceed their estimated fair values. For its retail assets, Starbucks regularly monitors the financial results of its Company-operated retail stores and accumulates historical operating measures to identify performance trends in various markets. As part of this process, the Company identified $10.0 million for the 39 weeks ended June 30, 2002, for certain international Company-operated retail stores. Management determined that these retail stores are unable to generate current and future estimated undiscounted cash flows in excess of carrying values for retail assets, primarily leasehold improvements. These impairment losses are included in “Store operating expenses” on the accompanying consolidated statement of earnings.

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Unallocated corporate expenses

Unallocated corporate expenses pertain to corporate functions that are not specifically attributable to the Company’s operating segments and include “General and administrative expenses” and certain depreciation and amortization expenses. Depreciation and amortization expenses of $25.1 million and $19.0 million are included in unallocated corporate expenses for the 39 weeks ended June 30, 2002, and July 1, 2001, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company ended the period with total cash and cash equivalents and short-term investments of $426.4 million. Working capital as of June 30, 2002, totaled $357.7 million compared to $231.2 million as of July 1, 2001. Cash and cash equivalents increased by $95.9 million for the 39 weeks ended June 30, 2002, to $209.1 million. The Company intends to use its available cash resources to invest in its existing businesses and other new business opportunities related to its core businesses. Depending on market conditions, Starbucks may acquire additional shares of its common stock pursuant to its stock repurchase plans.

Cash provided by operating activities totaled $369.7 million for the first 39 weeks of fiscal 2002, resulting primarily from net earnings adjusted for non-cash items of $366.4 million. The increase in other accrued expenses provided $27.1 million, $18 million of which was for the litigation settlement charge recorded in the second quarter of fiscal 2002. The increase in accrued compensation and related costs provided $25.6 million. Decreases in accounts payable and accrued taxes used $59.2 million resulting from differences in the timing of purchases and payments.

Cash used by investing activities for the 39 weeks ended June 30, 2002, totaled $369.8 million. This included capital additions to property, plant and equipment of $269.1 million related to opening 495 new Company-operated retail stores, purchasing land and constructing the Company’s new roasting and distribution facility in Nevada, remodeling certain existing stores, enhancing information systems, expanding the Company’s corporate headquarters, and increasing the warehouse space and upgrading processing capacity at the roasting facility in York, Pennsylvania. The Company invested excess cash primarily in short-term, investment-grade marketable debt securities. The net activity in the Company’s marketable securities portfolio during the 39-week period used $106.5 million. Proceeds from the sale of a portion of the Company’s shares in Starbucks Japan provided $14.8 million.

Cash provided by financing activities for the first 39 weeks of fiscal 2002 totaled $94.7 million. This included $100.1 million generated by the exercise of employee stock options and by the Company’s employee stock purchase plan. As options granted under the Company’s stock option plans vest and are exercised, the Company will continue to receive proceeds and may receive a tax deduction; however, neither the amounts nor timing can be predicted. A decrease in checks not yet presented for payment used $3.0 million. On September 17, 2001, the Company announced a share repurchase plan to acquire up to $60.0 million of the Company’s common stock from time to time on the open market. On June 19, 2002, the Company’s Board of Directors authorized an additional plan to repurchase up to 10 million shares of its common stock. Share repurchases are at the discretion of management, in accordance with the terms of each plan, and depend on market conditions, capital requirements and such other factors as the Company may consider relevant. During the 39-week period ending June 30, 2002, the Company repurchased 125,000 shares under the original plan, which used $1.8 million of cash. Since inception, Starbucks has repurchased 3.5 million shares using $51.6 million.

Cash requirements for the remainder of fiscal 2002, other than normal operating expenses, are expected to consist primarily of capital expenditures related to the addition of new Company-operated retail stores. While there can be no assurance that current expectations will be realized, management expects capital expenditures during the fourth quarter of fiscal 2002 to be approximately $130 million, bringing the total for fiscal 2002 to approximately $400 million. Capital expenditures for fiscal 2003 are expected to be approximately $425 million for opening new stores, remodeling certain existing stores and enhancing the Company’s information systems and roasting and distribution capacity.

Management believes that existing cash and investments plus cash generated from operations should be sufficient to finance capital requirements for its core businesses for the foreseeable future. New joint ventures, other new business opportunities or store expansion rates substantially in excess of that presently planned may require outside funding.

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COFFEE PRICES AND AVAILABILITY AND GENERAL RISK CONDITIONS

The supply and price of coffee are subject to significant volatility. Although most coffee trades in the commodity market, coffee of the quality sought by the Company tends to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. Supply and price can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee through agreements establishing export quotas or restricting coffee supplies worldwide. The Company’s ability to raise sales prices in response to rising coffee prices may be limited and the Company’s profitability could be adversely affected if coffee prices were to rise substantially.

The Company depends upon its relationships with outside trading companies and exporters for its supply of green coffee. Because world coffee prices have recently experienced 30-year lows, the Company is negotiating contracts with its suppliers at levels equal to, or greater than, prior years in order to encourage the continuing supply of high quality coffee in the future and has been successful in securing long-term contracts on this basis. The Company enters into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee and bring greater certainty to the cost of sales in future periods. As of June 30, 2002, the Company had approximately $240.3 million in fixed-price purchase commitments which, together with existing inventory, is expected to provide an adequate supply of green coffee through 2003. The Company believes, based on relationships established with its suppliers in the past, that the risk of non-delivery on such purchase commitments is low.

In addition to fluctuating coffee prices, management believes that the Company’s future 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, increased costs associated with opening and operating retail stores in new markets, increases in the cost of dairy products and the Company’s continued ability to hire, train and retain qualified personnel.

SEASONALITY AND QUARTERLY RESULTS

The Company’s business is subject to seasonal fluctuations. Significant portions of the Company’s net revenues and profits are realized during the first quarter of the Company’s fiscal year, which includes the December holiday season. In addition, quarterly results are affected by the timing of the opening of new stores, and the Company’s rapid growth may conceal the impact of other seasonal influences. Because of the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Starbucks prepares its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period (see Note 1 to the Company’s Consolidated Financial Statements included in the Annual Report on Form 10-K). Actual results could differ from those estimates.

Critical accounting policies are those that management believes are both most important to the portrayal of the Company’s financial condition and results, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions.

Starbucks considers its policy on impairment of long-lived assets to be most critical in understanding the judgments that are involved in preparing its consolidated financial statements.

Impairment of Long-Lived Assets

When facts and circumstances indicate that the carrying values of long-lived assets, including intangibles, may be impaired, an evaluation of recoverability is performed by comparing the carrying value of the assets to projected future cash flows in addition to other quantitative and qualitative analyses. Upon indication that the carrying value of such assets may not be recoverable, the Company recognizes an impairment loss as a charge against current operations. Property, plant and equipment assets are grouped at the lowest level for which there are identifiable cash flows when assessing impairment. Cash flows for retail assets are identified at the individual store level. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs

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to sell. Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying amounts of its long-lived assets, these factors could cause the Company to realize a material impairment charge.

NEW ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires, among other things, the use of a nonamortization approach for purchased goodwill and certain intangibles. Goodwill and certain intangibles with indefinite lives will not be amortized into earnings but instead will be reviewed for impairment at least annually. Remaining intangibles with finite useful lives will continue to be amortized. As of June 30, 2002, the Company had goodwill and other intangible assets, net of accumulated amortization, of $20.5 million and $9.1 million, respectively, which would be subject to the transitional assessment provisions of SFAS No. 142. The Company’s management does not expect the adoption of SFAS No. 142 on September 30, 2002, to have a material impact on future results of operations or its financial position.

In November 2001, FASB issued Emerging Issues Task Force (“EITF”) No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.” This Issue clarifies the FASB Staff’s position that all reimbursements received for incidental expenses incurred in conjunction with providing services as part of a company’s central on-going operations should be characterized as revenue in the income statement. The Company adopted EITF No. 01-14 on December 31, 2001, and it did not have a material impact on the Company’s consolidated results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which nullifies EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires, among other things, that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability. The Company will adopt SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002, and it is not expected to have a material impact on the Company’s results of operations, financial position or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the information to be disclosed under this Item 3 pursuant to Item 305 of Regulation S-K since the disclosure provided for fiscal year ended September 30, 2001. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Risk Management” in the Company’s Fiscal 2001 Annual Report to Shareholders, which is incorporated by reference into Item 7A of the Company’s Annual Report on Form 10-K for the year ended September 30, 2001 and attached as Exhibit 13 thereto.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As previously reported in the Company’s Form 10-K for the fiscal year ended September 30, 2001 and the Company’s Quarterly Reports on Form 10-Q for the periods ended December 30, 2001, and March 31, 2002, on June 20, 2001, and July 2, 2001, two purported class action lawsuits against the Company entitled James Carr, et.al. v. Starbucks Corporation and Olivia Shields, et.al. v. Starbucks Corporation were filed in the Superior Courts of California, Alameda and Los Angeles Counties, respectively. Each lawsuit subsequently was removed to the United States District Court, Northern District of California and Central District of California, respectively. Each of the lawsuits was filed by two plaintiffs who are current or former store managers and assistant store managers on behalf of themselves and other similarly situated store managers, assistant store managers and retail management trainees. The lawsuits alleged that the Company improperly classified such employees as exempt under California’s wage and hour laws and sought damages, restitution, reclassification and attorneys fees and costs. On April 19, 2002, Starbucks announced that it had reached an agreement to settle the lawsuits to fully resolve all claims brought by the plaintiffs without engaging in protracted litigation. Starbucks recorded an $18.0 million charge, which is included in “General and administrative expenses” on the accompanying consolidated statement of

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earnings, for the estimated payment of claims to eligible class members, attorneys’ fees and costs, and costs to a third-party claims administrator, as well as applicable employer payroll taxes. On July 19, 2002, the settlement of the lawsuits was preliminarily approved by the Court.

In addition to the California lawsuits described above, the Company is party to various legal proceedings arising in the ordinary course of its business, but it is not currently a party to any legal proceeding that management believes would have a material adverse effect on the financial position or results of operations of the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits filed as part of this Quarterly Report on Form 10-Q:

         
 
 
  Exhibit 99:   Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer.

(b) Current Reports on Form 8-K filed during the 13 weeks ended June 30, 2002:

     
 
 
  The Company filed a Current Report on Form 8-K on April 24, 2002, announcing the agreement to settle two California class action lawsuits.
     
 
 
  The Company filed a Current Report on Form 8-K on June 19, 2002, announcing a second stock repurchase plan.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
      STARBUCKS CORPORATION
 
Dated: August 14, 2002     By:    /s/ Michael Casey

Michael Casey
executive vice president and
chief financial officer
 
        Signing on behalf of the
registrant and as principal
financial officer

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