Starbucks 2013 Annual Report Download - page 81

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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 has been in full control of our packaged coffee business
since March 1, 2011.
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, 2012.
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 believe we had 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. 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 was 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. As a
result, prior to receiving the arbitrator's ruling we could not reasonably estimate the possible loss. Accordingly, no loss
contingency was recorded for this matter.
On November 12, 2013, the arbitrator ordered Starbucks to pay Kraft $2,227.5 million in damages plus prejudgment interest
and attorneys' fees. We have estimated prejudgment interest, which includes an accrual through the estimated payment date,
and attorneys fees to be approximately $556.6 million. As a result, we recorded a litigation charge of $2,784.1 million in our
fiscal 2013 operating results.
Starbucks is party to various other legal proceedings arising in the ordinary course of business, including certain employment
litigation cases that have been certified as class or collective actions, but, except as noted above, is not currently a party to any
legal proceeding that management believes could have a material adverse effect on our consolidated financial position, results
of operations or cash flows.
Note 16: Segment Reporting
Segment information is prepared on the same basis that our ceo, who is our chief operating decision maker, manages the
segments, evaluates financial results, and makes key operating decisions. Beginning with the first quarter of fiscal 2012, we
redefined our reportable operating segments to align with the three-region leadership and organizational structure of our retail
business that took effect at the beginning of fiscal 2012. The three-region structure includes: 1) Americas, inclusive of the US,
Canada, and Latin America; 2) Europe, Middle East, and Africa (“EMEA”); and 3) China / Asia Pacific (“CAP”).
Accordingly, beginning with the first quarter of fiscal 2012, we revised our reportable operating segments from 1) US, 2)
International, and 3) Global Consumer Products Group to the following four reportable segments: 1) Americas, 2) EMEA, 3)
CAP, and 4) Global Consumer Products Group. In the second quarter of fiscal 2012, we renamed our Global Consumer
Products Group segment “Channel Development.”
Effective at the beginning of fiscal 2013, we decentralized certain leadership functions in the areas of retail marketing and
category management, global store development and partner resources to support and align with the respective operating
segment presidents. In conjunction with these moves, certain general and administrative and depreciation and amortization
expenses associated with these functions, which were previously reported as unallocated corporate expenses within "Other," are
now reported within the respective reportable operating segments to align with the regions which they support.
Concurrent with the change in reportable operating segments and realignment of certain operating expenses noted above, we
revised our prior period financial information to reflect comparable financial information for the new segment structure and
2013 10-K
Starbucks Corporation Form