Circuit City 2004 Annual Report Download - page 24

25
could be adversely affected.
A portion of our revenue is derived from the sale of products manufactured using licensed patents, software
and/or technology. Failure to renew these licenses on favorable terms or at all could force us to stop
manufacturing and distributing these products and our financial condition could be adversely affected.
Many product suppliers provide us with co-op advertising support in exchange for featuring their products
in our catalogs and on our internet sites. Certain suppliers provide us with other incentives such as rebates,
reimbursements, payment discounts, price protection and other similar arrangements. These incentives are
offset against cost of goods sold or selling, general and administrative expenses, as applicable. The level of
co-op advertising support and other incentives received from suppliers may decline in the future, which
could increase our cost of goods sold or selling, general and administrative expenses and have an adverse
effect on results of operations and cash flows.
• We are exposed to inventory risks.
A substantial portion of our inventory is subject to risk due to technological change and changes in market
demand for particular products. Certain of our suppliers offer limited price protection from the loss in value
of inventory and we have limited rights to return purchases to certain suppliers. The decrease or elimination
of price protection or purchase returns could lower our gross margin or result in inventory write-
downs. We
also take advantage of attractive product pricing by making opportunistic bulk inventory purchases; any
resulting excess and/or obsolete inventory that we are not able to re-sell could have an adverse impact on
our results of operations. Any inability to make such bulk inventory purchases may significantly impact our
sales and profitability.
• State and local sales tax collection may affect demand for our products.
Our United States subsidiaries collect and remit sales tax in states in which the subsidiaries have physical
presence or in which we believe nexus exists which obligates us to collect sales tax. Other states may, from
time to time, claim that we have state-related activities constituting a sufficient nexus to require such
collection. Additionally, many other states seek to impose sales tax collection obligations on companies
that sell goods to customers in their state, or directly to the state and its political subdivisions, even without
a physical presence. Such efforts by states have increased recently, as states seek to raise revenues without
increasing the tax burden on residents. We rely, as do other direct mail retailers, on United States Supreme
Court decisions which hold that, without Congressional authority, a state may not enforce a sales tax
collection obligation on a company that has no physical presence in the state and whose only contacts with
the state are through the use of interstate commerce such as the mailing of catalogs into the state and the
delivery of goods by mail or common carrier. We cannot predict whether the nature or level of contacts we
have with a particular state will be deemed enough to require us to collect sales tax in that state nor can we
be assured that Congress or individual states will not approve legislation authorizing states to impose tax
collection obligations on all direct mail and/or e-commerce transactions. A successful assertion by one or
more states that we should collect sales tax on the sale of merchandise could result in substantial tax
liabilities related to past sales and would result in considerable administrative burdens and costs for us and
may reduce demand for our products from customers in such states when we charge customers for such
taxes.
• We have substantial international operations and we are exposed to fluctuations in currency exchange
rates and political uncertainties.
We currently have operations located in nine countries outside the United States, and non-U.S. sales
(Europe and Canada) accounted for 40% of our revenue during 2004. Our future results could be materially
adversely affected by a variety of factors, including changes in foreign currency exchange rates, changes in
a country's economic or political conditions and unexpected changes in regulatory requirements.