Circuit City 2006 Annual Report Download - page 11

We were late in the filing of our 2005 quarterly and annual reports and our 2006 quarterly reports required under
the Securities Exchange Act of 1934. Failure to file required reports on a timely basis could result in the de-
listing of the Company’s common stock by the New York Stock Exchange. If we do not file our required annual
and quarterly financial statements in the prescribed time frames we would also be ineligible to file certain
registration statements and could be subject to SEC enforcement action.
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Our success is dependent upon the availability of credit and financing.
We require significant levels of capital in our business to finance accounts receivable and inventory. We
maintain credit facilities in the United States and in Europe to finance increases in our working capital if
available cash is insufficient. The amount of credit available to us at any point in time may be adversely affected
by the quality or value of the assets collateralizing these credit lines. In addition, if we are unable to renew or
replace these facilities at maturity our liquidity and capital resources may be adversely affected. However, we
currently have no reason to believe that we will not be able to renew or replace our facilities when they reach
maturity.
• We have substantial international operations and we are exposed to fluctuations in currency exchange rates and
political uncertainties.
We operate internationally and as a result, we are subject to risks associated with doing business globally. Risks
inherent to operating overseas include:
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Changes in a country’s economic or political conditions
Changes in foreign currency exchange rates
Difficulties with staffing and managing international operations
Unexpected changes in regulatory requirements
For example, we currently have operations located in nine countries outside the United States, and non-
U.S. sales
(Europe and Canada) accounted for 37.5% of our revenue during 2006. To the extent the U.S. dollar strengthens
against the Euro and British pound, our European revenues and profits will be reduced when translated into U.S.
dollars.
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Sales to individual consumers exposes us to credit card fraud, which could adversely affect our business.
Failure to adequately control fraudulent credit card transactions could increase our expenses. Increased sales to
individual consumers, which are more likely to be paid for using a credit card, increases our exposure to fraud.
We employ technology solutions to help us detect the fraudulent use of credit card information. However, if we
are unable to detect or control credit card fraud, we may in the future suffer losses as a result of orders placed
with fraudulent credit card data, which could adversely affect our business.
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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. If we fail to manage our inventory of older products we may have excess or
obsolete inventory. We may have limited rights to return purchases to certain suppliers and we may not be able
to obtain price protection on these items. The elimination of purchase return privileges and lack of availability of
price protection 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.
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Our income tax rate and the value of our deferred tax assets are subject to change.
Changes in our income tax expense due to changes in the mix of U.S. and non-U.S. revenues and profitability,
changes in tax rates or exposure to additional income tax liabilities could affect our profitability. We are subject
to income taxes in the United States and various foreign jurisdictions. Our effective tax rate could be adversely
affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation
of deferred tax assets and liabilities, changes in tax laws or by material audit assessments. The carrying value of
our deferred tax assets, which are primarily in the United States and the United Kingdom, is dependent on our