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resulted primarily from the increase in service fee revenue of 242.3%, which
typically earn higher gross profit margins, compared to the increase in product
revenue of 176.9%.
Selling, General and Administrative Expenses. SG&A expenses were $3.7
million for fiscal 1998 or 7.5% of revenues as compared to $1.1 million or 6.1%
of revenues for fiscal 1997. The increase in SG&A expenses for fiscal 1998 was
primarily the result of 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.
Interest Expense, Net. Interest expense was $0.1 million during each of
fiscal 1998 and fiscal 1997. Interest expense increased slightly as a result of
an increase in the average payable to Daisytek to support our working capital
requirements applicable primarily to its master distributor agreements. The
weighted average interest rate was 6.9% during fiscal 1998 and 6.1% during
fiscal 1997.
Income Taxes. Our income tax benefit as a percentage of pretax loss was
28.6% for fiscal 1998 as compared to income tax expense as a percentage of
pretax income of 61.3% for fiscal 1997. This difference resulted from a change
in the ratio of pretax income or loss between our U.S. and foreign subsidiaries
which are taxed at different rates, combined with certain nondeductible expenses
in fiscal 1998. See also Note 7 to the "Combined Financial Statements" included
elsewhere in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
As a subsidiary of Daisytek, we have historically funded our business
through intercompany borrowings from Daisytek. The net proceeds of this offering
will be used to repay our intercompany borrowings from Daisytek. We currently
believe that the net available proceeds from this offering and funds generated
from operations will satisfy our working capital and capital expenditure
requirements for the next twelve months. Because Daisytek will be prohibited
from advancing funds to us following the completion of this offering and we will
be prohibited from borrowing from Daisytek after the spinoff, we plan to seek
our own credit facility.
Working capital decreased to $1.2 million at September 30, 1999 from $14.6
million at March 31, 1999, and from $1.3 million at March 31, 1998. A
significant portion of our working capital needs has historically been related
to our master distributor agreements with IBM which required us to purchase and
resell the product inventory to IBM customers. Under our new agreements with
IBM, Daisytek will act as the master distributor (and be responsible for the
purchase and resale of the product inventory and retain the customer revenue),
and we will continue to perform most of the other transaction management
services we had provided previously. As part of these new IBM agreements, we
will receive service fees from Daisytek for the transaction management services
that we provide. In connection with the restructuring of our IBM agreements,
during the quarter ended September 30, 1999, we transferred to Daisytek the
IBM-related product inventory, customer accounts receivable and accounts payable
that we held under our prior agreements. In consideration of this transfer,
Daisytek paid to us the net book value of these assets and liabilities
(approximately $20 million). This offering is expected to generate $46.1 million
in net proceeds. A portion of the net proceeds from this offering will be used
to repay the intercompany payable balance to Daisytek ($22.3 million as of
September 30, 1999). As a result of these transactions, our historical working
capital requirements may not be indicative of our future needs.
Net cash used in financing activities was $6.7 million for the six months
ended September 30, 1999. This usage relates to the reduction in the
intercompany payable arising primarily from the transfer of the IBM related
working capital assets from us to Daisytek in conjunction with the new IBM
agreements, which was partially offset by capital expenditures and incremental
financing of one of our client's inventory. Net cash provided by financing
activities was $9.2 million for the six months ended September 30, 1998. Net
cash provided by financing activities was $27.7 million for
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