Office Depot 2009 Annual Report Download - page 74

Indemnification of Private Label Credit Card Receivables: Office Depot has a private label credit card
program that is managed by a third-party financial services company. We transfer the credit card receivable
balance each business day, with the difference between the transferred amount and the amount received
recognized in store and warehouse operating and selling expense. At December 26, 2009, the outstanding balance
of credit card receivables transferred was approximately $148.3 million. The company’s estimated liability
associated with risk of loss totaled approximately $16 million and $23 million at December 26, 2009 and
December 27, 2008, respectively. This accrual is included in accrued expenses on the Consolidated Balance
Sheets. Following the company’s credit rating downgrade in December 2008, the underlying agreement was
amended to permanently eliminate a provision that allowed both parties to terminate the agreement early in the
event either party suffered a material adverse change, and put in place a letter of credit arrangement supporting
the company’s potential exposure on indemnification of the transferred receivable balance. See Note F for
additional discussion.
Change in Control Features in Certain Employment Contracts: Following shareholder approval of our
Preferred Stock transaction, the vesting of certain employee share-based awards accelerated, resulting in the
recognition of approximately $9 million of compensation expense during the fourth quarter of 2009.
Additionally, change in control features in certain employment contracts could result in additional expenses in
future periods if covered executives are involuntarily, or in certain cases, voluntarily terminated. In February
2010, the employment agreement between the company and its Chief Executive Officer was modified to amend,
among other things, certain change in control provisions. Following this amendment, if all remaining executives
covered by voluntary termination provisions elected to leave, the required cash payment would aggregate to
approximately $8 million.
Legal Matters: We are involved in litigation arising in the normal course of our business. While, from time to
time, claims are asserted that make demands for a large sum of money (including, from time to time, actions
which are asserted to be maintainable as class action suits), we do not believe that contingent liabilities related to
these matters, either individually or in the aggregate, will materially affect our financial position, results of our
operations or cash flows.
As previously disclosed, the company reached a proposed settlement with the staff of the U.S. Securities and
Exchange Commission (“SEC”) to resolve the previously disclosed SEC inquiry that commenced in July of 2007
and the formal investigation disclosed in January of 2008 with respect to contacts and communications with
financial analysts, inventory receipt and reserves, timing of vendor payments, certain intercompany loans, certain
payments to foreign officials, inventory obsolescence and timing and recognition of vendor program funds. The
company and its officers and employees have cooperated with the SEC staff in this investigation. The SEC staff
intends to recommend to the SEC a proposed settlement with respect to the company which would conclude for
the company all matters arising from the SEC investigation. Under the proposed settlement, the company,
without admitting or denying liability, has agreed to pay a civil penalty and to consent to a cease and desist order
from committing or causing violations of Regulation FD and Sections 13(a) and 13(b) of the Securities Exchange
Act of 1934 (and related rules) which require the maintenance of accurate books and records and internal
controls. Regulation FD is a rule regarding communication with analysts and investors. The proposed settlement
is contingent on the review and approval of final documentation by the company and the SEC staff, and is subject
to approval by the SEC Commissioners. There can be no assurance that the SEC Commissioners will approve the
staff’s recommendation. The company has also been informed that the company’s CEO and two former
employees each received “Wells” notices from the staff of the SEC’s Miami Regional Office advising them that
the regional staff has made a preliminary decision to recommend that the SEC bring civil enforcement actions
against them for possible violations of Regulation FD. Under the processes established by the SEC, these
individuals will have an opportunity to present their perspective and to address the issues raised by the SEC staff
prior to any action being taken by the SEC.
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