Starbucks 2012 Annual Report Download - page 90

84
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 0.2 million, 0.1 million, and 7.9 million as
of September 30, 2012, October 2, 2011, and October 3, 2010, respectively.
Note 15: Commitments and Contingencies
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.
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. 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 arbitration but was based upon facts and circumstances at the time. Kraft
rejected the offer immediately and did not provide a counter-offer, effectively ending the discussions between the
parties with regard to any payment. Moreover, the offer was made prior to our investigation of Kraft's breaches
and without consideration of Kraft's continuing failure to comply with material terms of the agreements.
On April 2, 2012, Starbucks and Kraft exchanged expert reports regarding alleged damages on their affirmative
claims. Starbucks claimed damages of up to $62.9 million from the loss of sales resulting from Kraft's failure to
use commercially reasonable efforts to market Starbucks®coffee, plus attorney fees. Kraft's expert opined that the
fair market value of the Agreement was $1.9 billion. After applying a 35% premium and 9% interest, Kraft
claimed damages of up to $2.9 billion, plus attorney fees. The arbitration hearing commenced on July 11, 2012
and was completed on August 3. Starbucks presented evidence of material breaches on Kraft's part and sought
nominal damages from Kraft for those breaches. Kraft presented evidence denying it had breached the parties'
Agreement and sought damages of $2.9 billion plus attorney fees. We expect a decision from the Arbitrator in the
first half of fiscal 2013.