six month period ended September 30, 1999, would have been 36.5%. Our service
fee gross profit margin in the future is targeted to be between 35-40%.
Selling, General and Administrative Expenses. SG&A expenses were $5.9
million for the six months ended September 30, 1999 or 9.4% of revenues as
compared to $2.6 million or 5.8% of revenues for the six months ended September
30, 1998. SG&A expenses increased primarily as a result of costs incurred to
support the higher sales volumes under both new and existing contracts.
Incremental investments in resources and technology to support our continued
growth also contributed to increased SG&A expenses. We anticipate that we will
continue to incur incremental costs as we make further SG&A investments in our
sales, marketing, and technology areas to support our growth strategies. We also
expect to incur incremental SG&A expenses as a result of operating as a
stand-alone public company. As a result of these expected incremental costs, and
as a result of the restructuring of the IBM agreements and the related reduction
in product revenue, SG&A expenses as a percentage of service fee revenue will be
higher in future periods.
Interest Expense, Net. Interest expense was $0.7 million for the six
months ended September 30, 1999 as compared to $0.1 million for the six months
ended September 30, 1998. Interest expense increased as a result of an increase
in the average payable to Daisytek to support working capital requirements
applicable primarily to our master distributor agreements and for capital
expenditures. The weighted average interest rate was 6.3% during the six months
ended September 30, 1999 and 7.0% during the six months ended September 30,
1998. As indicated in "Use of Proceeds", we plan to utilize the funds from this
offering to repay our intercompany payable balance to Daisytek and therefore
eliminate the related interest expense. Remaining cash will be utilized to
finance the transfer of certain assets from Daisytek, future capital
expenditures, general working capital needs and possible acquisitions. To the
extent that we have excess cash available after considering these items, we
expect to generate interest income in future periods.
Income Taxes. Our income tax benefit as a percentage of pretax loss was
39.4% for the six months ended September 30, 1999 and 36.0% for the six months
ended September 30, 1998. This difference resulted primarily from a change in
the ratio of pretax loss between our U.S. and foreign subsidiaries which are
taxed at different rates.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1998
Product Revenue. Product revenue was $93.7 million for fiscal 1999
compared to $45.8 million for fiscal 1998, an increase of $47.9 million or
104.6%. Product revenue increased as a result of an increase of $10.5 million
under new European IBM distributor agreements and an increase of $37.4 million
or 81.7% in sales under our North American IBM master distributor agreements.
Service Fee Revenue. Service fee revenue was $7.5 million during fiscal
1999 as compared to $3.5 million during fiscal 1998, an increase of $4.0 million
or 113.3%. The increase in service fee revenue was attributable to an increase
in existing contracts of $1.3 million or 37.1% and the addition of $2.7 million
related to new service contract relationships.
Cost of Product Revenue. Cost of product revenue was $88.3 million during
fiscal 1999 as compared to $43.4 million during fiscal 1998, an increase of
$44.9 million or 103.6%. Cost of product revenue as a percent of product revenue
was 94.3% for fiscal 1999 and 94.7% for fiscal 1998. The resulting product gross
profit margin was 5.7% for fiscal 1999 and 5.3% for fiscal 1998. The increase in
product gross profit margin was due to our European IBM business, which had a
higher gross profit margin than our domestic IBM business due to differences in
customer and product mix.
Cost of Service Fee Revenue. Cost of service fee revenue was $5.3 million
for fiscal 1999 compared to $2.2 million during fiscal 1998, an increase of $3.1
million or 141.1%. The increase in cost of service fee revenue during fiscal
1999 was due to growth in client orders processed during the period. The
resulting service fee gross profit margin was 29.5% during fiscal 1999 and 37.6%
during fiscal 1998. The decrease in service fee gross profit margin was due to
the addition of certain