Staples 2005 Annual Report Download - page 64

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to find qualified vendors and access products in a timely and efficient manner is a significant challenge, especially with
respect to goods sourced outside the United States. Political instability, the financial instability of suppliers, merchandise
quality issues, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, inflation and other factors
relating to foreign trade are beyond our control. These and other issues affecting our vendors could adversely affect our
business and financial performance.
Our expanded offering of proprietary branded products may not improve our financial performance and may expose us to
product liability claims.
Our product offering includes Staples, Quill and other proprietary branded products which represented
approximately 18% of our total sales in fiscal 2005. While we have focused on the quality of our proprietary branded
products, we rely on third-party manufacturers for these products. Such third party manufacturers may prove to be
unreliable, or the quality of our globally sourced products may not meet our expectations. Furthermore, economic and
political conditions in areas of the world where we source such products may adversely affect the availability and cost of
such products. In addition, our proprietary branded products compete with other manufacturers’ branded items that we
offer. As we continue to increase the number and types of proprietary branded products that we sell, we may adversely
affect our relationships with our vendors, who may decide to reduce their product offerings through Staples and increase
their product offerings through our competitors. Finally, if any of our customers are harmed by our proprietary branded
products, they may bring product liability and other claims against us. Any of these circumstances could have an adverse
effect on our business and financial performance.
Our debt level and operating lease commitments could impact our ability to obtain future financing and continue our growth
strategy.
Our consolidated outstanding debt at January 28, 2006 was $538.0 million. Our future minimum lease commitments
due for retail store and support facilities and equipment leases under non-cancelable operating leases were $5.25 billion
at January 28, 2006. Our consolidated debt and operating lease obligations may have the effect generally of restricting
our flexibility in responding to changing market conditions and could make us more vulnerable in the event of a
downturn in our business. In addition, our level of indebtedness may have other important consequences, including:
restricting our growth; making it more difficult for us to satisfy our obligations; limiting our ability to borrow additional
amounts for working capital, capital expenditures, debt service requirements, future acquisitions or other corporate
purposes; and limiting our ability to use operating cash flow in other areas of our business. In such a situation, additional
funds may not be available on satisfactory terms when needed, or at all, whether in the next twelve months or thereafter.
The California wage and hour class action lawsuit may adversely affect our business and financial performance.
Various class action lawsuits have been brought against us for alleged violations of what is known as California’s
“wage and hour” law. The plaintiffs have alleged that we improperly classified both general and assistant store managers
as exempt under the California wage and hour law, making such managers ineligible for overtime wages. The plaintiffs
are seeking to require us to pay overtime wages to the putative class for the period from October 21, 1995 to the present.
The court has granted class certification to the plaintiffs. The court’s ruling is procedural only and does not address the
merits of the plaintiffs’ allegations. We believe that the class was improperly certified and intend to appeal the decision.
If the case goes to trial, we believe we have meritorious defenses in the litigation and expect to prevail. If, however, there
is an adverse judgment from which there is no successful appeal, damages could range from $10 million to $150 million,
excluding interest and attorneys’ fees.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of January 28, 2006, we operated a total of 1,780 superstores in 47 states and the District of Columbia in the
United States, 11 provinces in Canada, 11 regions in the United Kingdom, 8 regions in Germany and in The Netherlands,
Portugal and Belgium. As of that same date, we also operated 52 distribution and fulfillment centers in 19 states of the
United States, 4 provinces in Canada, 2 regions in the United Kingdom, 2 regions in France, and in Austria, Belgium,
Denmark, Germany, Italy, The Netherlands, Spain, Sweden, Brazil, Argentina and China. The following table sets forth
the locations of our facilities as of January 28, 2006.