Starbucks 2005 Annual Report Download - page 73

amounts, as well as other related expenses. These amounts will vary based on fluctuations in the yen foreign
exchange rate. As of October 2, 2005, the maximum amount of the guarantees was approximately
$9.0 million. Since there has been no modification of these loan guarantees subsequent to the Company's
adoption of FASB Interpretation No. 45, ""Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indebtedness of Others,'' Starbucks has applied the disclosure provisions only and has
not recorded the guarantee on its consolidated balance sheet.
During fiscal 2005, Starbucks entered into commitments under which it unconditionally guaranteed its
proportionate share, or 50%, of bank line of credit borrowings of certain unconsolidated equity investees. The
Company's maximum exposure under these commitments is approximately $4.8 million, excluding interest
and other related costs, and the majority of these commitments expire in 2007. As of October 2, 2005, the
Company recorded $2.7 million to ""Equity and other investments'' and ""Other long-term liabilities'' on the
consolidated balance sheet for the fair value of the guarantee arrangements.
Coffee brewing and espresso equipment sold to customers through Company-operated and licensed retail
stores, as well as equipment sold to the Company's licensees for use in retail licensing operations, are under
warranty for defects in materials and workmanship for a period ranging from 12 to 24 months. The Company
establishes an accrual for estimated warranty costs at the time of sale, based on historical experience.
The following table summarizes the activity related to product warranty reserves during fiscal years 2005 and
2004 (in thousands):
Fiscal Year Ended Oct 2, 2005 Oct 3, 2004
Balance at beginning of fiscal yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,091 $ 2,227
Provision for warranties issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7,494 5,093
Warranty claims ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (8,827) (4,229)
Balance at end of fiscal yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,758 $ 3,091
Legal Proceedings
On June 3, 2004, two current employees of the Company filed a lawsuit, entitled Sean Pendlebury and Laurel
Overton v. Starbucks Coffee Company, in the U.S. District Court for the Southern District of Florida claiming
the Company violated requirements of the Fair Labor Standards Act (FLSA). The suit alleges that the
Company misclassified its retail store managers as exempt from the overtime provisions of the FLSA and that
the managers are therefore entitled to overtime compensation for any week in which they worked more than
40 hours during the past three years. Plaintiffs seek to represent themselves and all similarly situated
U.S. current and former store managers of the Company. Plaintiffs seek reimbursement for an unspecified
amount of unpaid overtime compensation, liquidated damages, attorney's fees and costs. Plaintiffs also filed on
June 3, 2004 a motion for conditional collective action treatment and court-supervised notice to additional
putative class members under the opt-in procedures in section 16(b) of the FLSA. On January 3, 2005, the
district court entered an order authorizing nationwide notice of the lawsuit to all current and former store
managers employed by the Company during the past three years. The Company filed a motion for summary
judgment as to the claims of the named plaintiffs on September 24, 2004. The court denied that motion
because this case is in the early stages of discovery, but the court noted that the Company may resubmit this
motion at a later date. Starbucks believes that the plaintiffs are properly classified as exempt under the federal
wage laws and that a loss in this case is unlikely. Due to the early status of this case, the Company cannot
estimate the possible loss to the Company, if any. No trial date currently is set. The Company intends to
vigorously defend the lawsuit.
71