Circuit City 2007 Annual Report Download - page 21

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Systemax is primarily a direct marketer of brand name and private label products. Our operations are organized in three reportable business
segments — Technology Products, Industrial Products and Hosted Software. Our Technology Products segment sells computers, computer
supplies and consumer electronics which are marketed in North America and Western Europe. Most of these products are manufactured by
other companies. We assemble our own PCs and sell them under our own trademarks Systemax™ and Ultra™ . We also sell certain computer-
related products manufactured for us to our own design under the trademark Ultra™.
Technology products accounted for 92% of our net sales in
2007. Our Industrial Products segment sells a wide array of material handling equipment, storage equipment and consumable industrial items
which are marketed in North America. Most of these products are manufactured by other companies. Some products are manufactured for us to
our own design and marketed under the trademarks Global™ , GlobalIndustrial.com™ and Nexel™.
Industrial products accounted for 8% of our
net sales in 2007. In both of these product groups, we offer our customers a broad selection of products, prompt order fulfillment and extensive
customer service. Our Hosted Software segment, which became a reportable segment in 2006, participates in the emerging market for on-
demand, web-based business software applications through the marketing of our PCS ProfitCenter Software ™ application. See Note 11 to the
consolidated financial statements included in Item 15 of this Form 10-K for additional financial information about our business segments as well
as information about our geographic operations.
The market for computer products and consumer electronics is subject to intense price competition and is characterized by narrow gross profit
margins. The North American industrial products market is highly fragmented and we compete against multiple distribution channels.
Distribution of information technology and our industrial products is working capital intensive, requiring us to incur significant costs associated
with the warehousing of many products, including the costs of leasing warehouse space, maintaining inventory and inventory management
systems, and employing personnel to perform the associated tasks. We supplement our on-hand product availability by maintaining relationships
with major distributors and manufacturers, utilizing a combination of stocking and drop-shipment fulfillment.
The primary component of our operating expenses historically has been employee related costs, which includes items such as wages,
commissions, bonuses, and employee benefits and stock option expenses. We have made substantial reductions in our workforce and closed or
consolidated several facilities over the past several years. Our restructuring actions and other cost savings measures implemented over the last
several years resulted in reducing our consolidated selling, general and administrative expenses from 15.2% of net sales in 2003 to 11.9% of net
sales in 2007. We will continue to monitor our costs and evaluate the need for additional actions.
During the first quarter of 2008 the Company entered into an asset purchase agreement with CompUSA Inc. and acquired CompUSA’s e-
commerce business and 16 of its retail leases and related fixtures for direct consideration of approximately $30.4 million. This acquisition
accelerates the Company’s planned expansion into the retail market place for Technology Products and gives the Company 26 retail outlets in
North America and Puerto Rico.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 to the consolidated financial statements. The policies below have been identified as
critical to our business operations and understanding the results of operations. Certain accounting policies require the application of significant
judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are
subject to an inherent degree of uncertainty, and as a result, actual results could differ from those
estimates. These judgments are based on historical experience , observation of trends in the industry, information provided by customers and
information available from other outside sources, as appropriate. Management believes that full consideration has been given to all relevant
circumstances that we may be subject to, and the consolidated financial statements of the Company accurately reflect management’s best
estimate of the consolidated results of operations, financial position and cash flows of the Company for the years presented. Actual results may
differ from these estimates under different conditions or assumptions.
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