Office Depot 2007 Annual Report Download - page 15

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Regulatory Environment: While all businesses are subject to regulatory matters relating to the conduct of their
businesses, including consumer protection laws, advertising regulations, wage and hour regulations and the like,
certain jurisdictions have taken a particularly aggressive stance with respect to such matters and have stepped up
enforcement, including fines and other sanctions. We transact substantial amounts of business in certain such
jurisdictions, and to the extent that our business locations are exposed to what might be termed an overly aggressive
enforcement environment or legal or regulatory systems that authorize or encourage private parties to pursue relief
under so-called private attorney general laws and similar authorizations for private parties to pursue enforcement of
governmental laws and regulations, the resulting fines and exposure to third party liability (such as monetary
recoveries and recoveries of attorneys fees) could have a material adverse effect on our business and results of
operations, including the added cost of increased preventative measures that we may determine to be necessary to
conduct business in such locales.
Litigation Risks: Litigation and governmental investigations or proceedings arising out of or related to our Audit
Committee’s internal accounting review could result in substantial costs. The SEC has issued a formal order of
investigation to determine whether we have violated the Federal securities laws. Although we are cooperating with
the SEC in this matter, the SEC may determine that we have violated Federal securities laws. We cannot predict
when this investigation will be completed or its outcome. If the SEC makes a determination that we have violated
Federal securities laws, we may face sanctions, including, but not limited to, significant monetary penalties and
injunctive relief.
In addition, we have been named a defendant in a number of class-action and related lawsuits. The findings and
outcome of the SEC investigation may affect the class-action and derivative lawsuits that are pending. We are
generally obliged, to the extent permitted by law, to indemnify our directors and our former directors and officers
who are named defendants in some of these lawsuits. We are unable to estimate what our liability in these matters
may be, and we may be required to pay judgments or settlements and incur expenses in aggregate amounts that
could have a material adverse effect on our financial condition or results of operations. See “Part II — Item 1 —
Legal Proceedings” for a description of pending litigation and governmental proceedings and investigations.
Regulatory Risks: We are subject to a formal order of investigation from the SEC, in connection with our contacts
and communications with financial analysts during 2007, as well as certain other matters, including inventory
receipt, timing of vendor payments, certain intercompany loans and the timing of recognition of vendor program
funds. We are cooperating with the SEC on all matters. A negative outcome from this investigation could require us
to restate prior financial results and could result in fines, penalties, or other remedies being imposed on us, which
under certain circumstances could have a material adverse effect on our business.
Material Weakness in Internal Controls: In connection with the restatement of our previously issued financial
statements and the related reassessment of our internal control over financial reporting pursuant to the rules
promulgated by the Commission under Section 404 of the Sarbanes-Oxley Act of 2002 and Item 308 of Regulation
S-K, management concluded that as of December 30, 2006, our disclosure controls and procedures were not
effective and that we had a material weakness in our internal control over financial reporting. Please refer to Item
9A of this Form 10-K for further discussion of the remediation of this material weakness as of December 29, 2007.
Should we identify any other material weakness, such weakness could have a material adverse effect on our
business, results of operations and financial condition, as well as impair our ability to meet our quarterly, annual and
other reporting requirements under the Securities Exchange Act of 1934 in a timely manner. These effects could in
turn adversely affect the trading price of our common stock and could result in a material misstatement of our
financial position or results of operations and require a further restatement of our financial statements.
Sales may be Negatively Impacted by Changes in the Economy that Impact Small Business and Consumer
Spending: Sales may be negatively impacted by changes in economic conditions. Our customers in the North
American Retail Division and many of our customers in the North American Business Solutions Division are
predominantly small and home office businesses. Accordingly, these customers may curtail their spending in
reaction to macroeconomic conditions, such as changes in the housing market, higher fuel costs, higher credit costs,
credit availability, possible recession and other factors. This could result in reductions in their spending on office
supplies and negatively impact our sales and profits. Further, our North American sales are heavily concentrated in
California and Florida; two states that have experienced strong economic growth in the past, but which are currently
experiencing a greater economic downturn. Because of this geographic concentration, we may have a