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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended March 30, 2003

OR

For the transition period from           to          .

Commission File Number: 0-20322

STARBUCKS CORPORATION

2401 Utah Avenue South, Seattle, Washington 98134
(Address of principal executive offices)

(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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Yes x     No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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STARBUCKS CORPORATION

FORM 10-Q

For the Quarterly Period Ended March 30, 2003

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

See Notes to Consolidated Financial Statements.

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

See Notes to Consolidated Financial Statements.

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STARBUCKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

See Notes to Consolidated Financial Statements.

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STARBUCKS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the 13 Weeks and 26 Weeks Ended March 30, 2003 and March 31, 2002

Note 1: Financial Statement Preparation

The consolidated financial statements as of March 30, 2003, and March 31, 2002, and for the 13-week and 26-week periods ended March 30, 2003, and March 31, 2002, 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 30, 2003, and March 31, 2002, 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 29, 2002, is derived from the Company’s audited consolidated financial statements and notes thereto for the year ended September 29, 2002, included in Item 8 in the Fiscal 2002 Annual Report to Shareholders on Form 10-K, 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 30, 2003, are not necessarily indicative of the results of operations that may be achieved for the entire fiscal year ending September 28, 2003.

Investment Accounting Change

In March 2003, Starbucks announced plans to acquire its licensed operations in Austria and Switzerland from its business partner, Bon appétit Group. This acquisition, which is expected to be completed in the Company’s fiscal third quarter, is not expected to significantly impact the Company’s fiscal 2003 financial results.

Due to the Company’s recent ability to exert significant influence over operating and financial policies, management determined that a change in accounting method, from the cost method to the equity method, was required. Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock,” requires prior period information to be adjusted for the retroactive application of the equity method for the Company’s 19.5% share of net losses.

As shown in the table below, the change to the equity method resulted in a $1.6 million reduction of net earnings for the 13 weeks ended December 29, 2002, and reductions of net earnings for the effects of the accounting change prior to fiscal 2003 of $2.3 million and $0.8 million for the 52 weeks ended September 29, 2002 and September 30, 2001, respectively (in thousands, except earnings per share):

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The following table summarizes the effects of the investment accounting change on net earnings and earnings per share for the periods indicated (in thousands, except earnings per share):

Note 2: Summary of Significant Accounting Policies

Goodwill and Other Intangible Assets

Starbucks adopted Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” on September 30, 2002. As a result, the Company discontinued amortization of its goodwill and indefinite-lived trademarks and determined that provisions for impairment were unnecessary. Impairment tests will be performed on an annual basis and more frequently if facts and circumstances indicate goodwill carrying values exceed estimated reporting unit fair values and if indefinite useful lives are no longer appropriate for the Company’s trademarks. Had the nonamortization provision of SFAS No. 142 been applied to fiscal 2002, as restated per Note 1, net earnings for the 13-week and 26-week periods ended March 31, 2002, would have been $32.2 million and $100.4 million, respectively, versus restated net earnings of $31.7 million and $99.4 million, respectively. Basic and diluted earnings per share would have remained unchanged for the 13-week and 26-week periods ended March 31, 2002. Definite-lived intangibles, which mainly consist of patents and copyrights, will continue to amortize over their estimated useful lives.

Accounting for Stock-Based Compensation

The Company maintains several stock option plans under which incentive stock options and non-qualified stock options may be granted to employees, consultants and non-employee directors. Starbucks accounts for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, because the grant price equals the market price on the date of grant, no compensation expense is recognized by the Company for stock options issued to employees.

On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for voluntary change to the fair value method of accounting for stock-based compensation. In addition, SFAS No. 148 requires more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Starbucks elected to early adopt the annual and interim disclosure requirements of SFAS No. 148 as of September 30, 2002.

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Had compensation cost for the Company’s stock options been recognized based upon the estimated fair value on the grant date under the fair value methodology allowed by SFAS No. 123, as amended by SFAS No. 148, the Company’s net earnings and earnings per share would have been as follows (in thousands, except earnings per share):

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.

Recently Issued Accounting Pronouncements

In January 2003, FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51,” was issued. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. The adoption of this Interpretation will not have a material impact on the Company’s consolidated financial position or disclosures.

In April 2003, SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” was issued. In general, this statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the Company’s consolidated financial position or disclosures.

Note 3: Inventories

Inventories consist of the following (in thousands):

As of March 30, 2003, the Company had fixed-price purchase contracts for green coffee totaling approximately $286.0 million.

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Note 4: Derivative Financial Instruments

Cash Flow Hedges

During the 13-week and 26-week periods ended March 30, 2003, and March 31, 2002, the Company had forward foreign exchange contracts that qualify as hedges of portions of anticipated product and royalty revenues denominated in Japanese yen and Canadian dollars. These contracts expire within 18 months. The Company had accumulated net derivative gains of $0.5 million, net of taxes, in other comprehensive income as of March 30, 2003, related to cash flow hedges. Of this amount, $0.1 million of net derivative gains will be reclassified into earnings within 12 months. There was no ineffectiveness related to cash flow hedges for the 13-week and 26-week periods ended March 30, 2003, and March 31, 2002.

Net Investment Hedges

During the 13-week and 26-week periods ended March 30, 2003, and March 31, 2002, the Company had forward foreign exchange contracts that qualify as hedges of the Company’s net investment in Starbucks Coffee Japan, Ltd. These contracts expire within 20 months and are intended to minimize foreign currency exposure to fluctuations in the Japanese yen. As a result of using the spot-to-spot method, the Company recognized net gains of $0.6 million and $1.0 million for the 13-week and 26-week periods ended March 30, 2003, respectively, and net gains of $0.1 million and $0.3 million for the 13-week and 26-week periods ended March 31, 2002, respectively. In addition, the Company had accumulated net derivative losses of $1.4 million, net of taxes, in other comprehensive income as of March 30, 2003.

Note 5: Property, Plant, and Equipment

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

Note 6: Shareholders’ Equity

In June 2002, the Company’s Board of Directors authorized the repurchase of up to 10.0 million shares of common stock in the open market. During the 26 weeks ended March 30, 2003, Starbucks acquired 1.5 million shares at an average price of $20.63 per share, for a total cost of $30.1 million. During fiscal year 2002, the Company acquired 2.1 million shares under this program at an average price of $19.81 per share, for a total cost of $42.0 million. All repurchases were effected through Morgan Stanley & Co. Incorporated. As of March 30, 2003, there were 6.4 million additional shares available for repurchase under this program.

In March 2003, the Company’s Board of Directors authorized an additional program to repurchase up to 10.0 million shares of the Company’s common stock. The Board of Directors also authorized management to repurchase shares under any of the Company’s programs pursuant to a contract, instruction or written plan meeting the requirements of Rule 10b5-1(c)(1) of the Securities Exchange Act of 1934.

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Note 7: Comprehensive Income

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

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.

Note 8: Earnings Per Share

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

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

Options with exercise prices greater than the average market price were not included in the computation of diluted earnings per share. For the 13-week periods ended March 30, 2003, and March 31, 2002, these options totaled 0.8 million and 0.5 million, respectively, during which periods the average market price of the Company’s common stock was $22.60 and $22.43, respectively. For the 26-week periods ended March 30, 2003, and March 31, 2002, these options totaled 1.4 million and 8.8 million, respectively, during which periods the average market price of the Company’s common stock was $22.24 and $20.10, respectively.

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Note 9: Guarantees

In November, 2002, the FASB issued FASB Interpretation No. 45 (“FIN No. 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which elaborates on existing disclosure of most guarantees, and clarifies when a company must recognize an initial liability for the fair value of obligations it assumes under guarantee agreements. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted FIN No. 45 on September 30, 2002.

The Company has unconditionally guaranteed the repayment of certain yen denominated bank loans and related interest and fees of an unconsolidated equity investee, Starbucks Coffee Japan, Ltd. The guarantees continue until the loans, including accrued interest and fees, have been paid in full. The maximum amount is limited to the sum of unpaid principal and interest amounts, as well as other related expenses. These amounts will vary based on fluctuations in the yen foreign exchange rate. As of March 30, 2003, the maximum amount of the guarantees was approximately $11.6 million.

Note 10: Commitments and Contingencies

On June 20, 2001, and July 2, 2001, two 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. On April 19, 2002, Starbucks announced that it had reached an agreement to settle both lawsuits and fully resolve all claims brought by the plaintiffs without engaging in protracted litigation. Accordingly, in March 2002, Starbucks recorded an $18.0 million charge for the estimated claims to eligible class members, attorneys’ fees and costs, and costs of a third-party claims administrator, as well as applicable employer payroll taxes. On December 17, 2002, the settlement was approved. As expected, all class member attorneys’ fees and costs, and costs of the third-party claims administrator have been paid as of the second quarter of fiscal 2003, as have nearly all claims to eligible class members along with applicable employer payroll taxes. The Company expects that the few remaining claims to eligible class members, along with applicable payroll taxes, will be paid in the third quarter of fiscal 2003.

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.

Note 11: Segment Reporting

Starbucks is organized into a number of business units, which correspond to the Company’s operating segments. 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. Included in the information below are intersegment transactions, consisting primarily of product sales and related cost of sales to and from subsidiaries and equity method investees. However, these intersegment transactions have been eliminated on the accompanying consolidated financial statements.

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