Circuit City 2005 Annual Report Download - page 30

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may positively or negatively affect sales, gross margins, operating expenses and retained earnings as expressed in U.S.
dollars. Sales would have fluctuated by approximately $72 million and income from operations would have fluctuated
by approximately $0.2 million if average foreign exchange rates changed by 10% in 2005. We have limited
involvement with derivative financial instruments and do not use them for trading purposes. We may enter into foreign
currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but
as of December 31, 2005 we had no outstanding forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. Our variable
rate debt consists of short-term borrowings under our credit facilities. As of December 31, 2005, the balance
outstanding on our variable rate debt was approximately $26.2 million. A hypothetical change in average interest rates
of one percentage point is not expected to have a material effect on our financial position, results of operations or cash
flows over the next fiscal year.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 of Part II is incorporated herein by reference to the Consolidated Financial
Statements filed with this report; see Item 15 of Part IV.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company establishes and maintains disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed by the Company in the reports it files under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms. Disclosure controls are also designed to provide reasonable assurance that such information
is accumulated and reported to management, including the Chief Executive Officer and the Chief Financial Officer, to
allow timely decisions regarding required disclosure.
Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures will
prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in control systems, misstatements due to error or fraud may occur and
not be detected. These limitations include the circumstances that breakdowns can occur as a result of error or mistake,
the exercise of judgment by individuals or that controls can be circumvented by acts of misconduct. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with
the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and the operation of our disclosure controls and procedures pursuant to Exchange Act Rules
13a-15 and 15d-15 of the Securities Exchange Act of 1934.
Based on their evaluation, as of December 31, 2005, the Chief Executive Officer and the Chief Financial
Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-
15(e) under
the Securities Exchange Act of 1934, as amended) were not effective to ensure that the information required to be
disclosed by us in this annual report on Form 10-K was recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. This conclusion is based on our identification of three material
weaknesses in our internal controls over financial reporting as of December 31, 2005. The material weaknesses are:
•
We do not maintain sufficiently and adequately trained personnel resources at certain locations outside of