Starbucks 2011 Annual Report Download - page 78

Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock
options (both vested and non-vested) and unvested RSUs, calculated using the treasury stock method. The
calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such options’ exercise
prices were greater than the average market price of our common shares for the period) because their inclusion
would have been antidilutive. Out-of-the-money stock options totaled 0.1 million, 7.9 million, and 15.9 million as of
October 2, 2011, October 3, 2010, and September 27, 2009, respectively.
Note 15: Commitments and Contingencies
Guarantees
We have unconditionally guaranteed the repayment of certain Japanese yen-denominated bank loans and related
interest and fees of an unconsolidated equity investee, Starbucks Japan. The guarantees continue until the loans,
including accrued interest and fees, have been paid in full. These guarantees expire in 2014. Our maximum exposure
under this commitment as of October 2, 2011 was $1.0 million and is limited to the sum of unpaid principal and
interest, as well as other related expenses. Since there has been no modification of these loan guarantees subsequent
to the adoption of accounting requirements for guarantees, we have applied the disclosure provisions only and have
not recorded the guarantees on our consolidated balance sheets.
Legal Proceedings
In the first quarter of fiscal 2011, Starbucks notified Kraft Foods Global, Inc. (“Kraft”) that we were discontinuing
our distribution arrangement with Kraft on March 1, 2011 due to material breaches by Kraft of its obligations under
the Supply and License Agreement between the Company and Kraft, dated March 29, 2004 (the “Agreement”),
which defined the main distribution arrangement between the parties. Through our arrangement with Kraft,
Starbucks sold a selection of Starbucks and Seattle’s Best Coffee branded packaged coffees in grocery and
warehouse club stores throughout the US, and to grocery stores in Canada, the UK and other European countries.
Kraft managed the distribution, marketing, advertising and promotion of these products.
Kraft denies it has materially breached the Agreement. On November 29, 2010, Starbucks received a notice of
arbitration from Kraft putting the commercial dispute between the parties into binding arbitration pursuant to the
terms of the Agreement. In addition to denying it materially breached the Agreement, Kraft further alleges that if
Starbucks wished to terminate the Agreement it must compensate Kraft as provided in the Agreement in an amount
equal to the fair value of the Agreement, with an additional premium of up to 35% under certain circumstances. The
parties are now engaged in extensive discovery with an arbitration trial expected in mid- 2012.
On December 6, 2010, Kraft commenced a federal court action against Starbucks, entitled Kraft Foods Global, Inc.
v. Starbucks Corporation, in the U.S. District Court for the Southern District of New York (the “District Court”)
seeking injunctive relief to prevent Starbucks from terminating the distribution arrangement until the parties’ dispute
is resolved through the arbitration proceeding. On January 28, 2011, the District Court denied Kraft’s request for
injunctive relief. Kraft appealed the District Court’s decision to the Second Circuit Court of Appeals. On
February 25, 2011, the Second Circuit Court of Appeals affirmed the District Court’s decision. As a result,
Starbucks is in full control of our packaged coffee business as of March 1, 2011.
While Starbucks believes we have valid claims of material breach by Kraft under the Agreement that allowed us to
terminate the Agreement and certain other relationships with Kraft without compensation to Kraft, there exists the
possibility of material adverse outcomes to Starbucks in the arbitration or to resolve the matter. At this time, the
Company is unable to estimate the range of possible outcomes with respect to the arbitration as we have not received
any statement or articulation of damages from Kraft nor have we estimated the damages to Starbucks caused by
Kraft’s breaches. Information in this regard will be provided during the discovery process and is currently expected
to be available in late March or early April 2012. And, although Kraft disclosed to the press and in federal court
filings a $750 million offer Starbucks made to Kraft in August 2010 to avoid litigation and ensure a smooth
transition of the business, the figure is not a proper basis upon which to estimate a possible outcome of the
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