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margin was 23.9% during fiscal 2000, and 29.5% during fiscal 1999. During fiscal
2000, cost of service fee revenue increased related to a large number of new
client implementations.
Gross Profit. Gross profit was $10.5 million, or 12.1% of revenues, for
fiscal 2000, as compared to $7.6 million, or 7.5% of revenues, for fiscal 1999.
The increase in total gross profit resulted primarily from the further expansion
of existing contracts and new service contract relationships, including our new
transaction management services agreement with Daisytek, which commenced on the
completion of the Offering in December 1999. The increase in gross profit as a
percentage of revenues resulted from the restructuring of all of the IBM
contracts into service fee contracts, which typically have a higher gross profit
margin as a percent of revenue as compared to the gross profit margin as a
percent of revenue earned under the IBM master distribution agreements. In the
Adjusted Financial Presentation data above, we have provided, retroactively,
what our service fee gross profit margin would have been considering the impact
of our modified agreement with IBM, our new agreement with Daisytek, our
acquisition of the assets and liabilities which Daisytek transferred to us upon
completion of the Offering and adjustments to the costing methodology applied to
start-up activity on new client implementations and other modifications to
certain contracts. The gross profit margin for fiscal 2000, would have been
35.2% after giving effect to these adjustments. 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 $17.8
million for fiscal 2000, or 20.5% of revenues, as compared to $6.7 million, or
6.6% of revenues, for fiscal 1999. As a result of incremental costs, the
restructuring of the IBM agreements and the related reduction in product
revenue, SG&A expenses as a percentage of total revenue were higher in fiscal
2000 than in fiscal 1999. SG&A expenses increased as a result of costs incurred
to support the higher sales volumes under both new and existing contracts and
incremental investments in resources and technology to support our continued
growth. SG&A expenses also increased as a result of certain incremental charges
effected during fiscal 2000. In the future, while 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 and as a
result of operating as a stand-alone public company, we are targeting our SG&A,
as a percent of sales, to decrease as we increase our service fee revenue.
Interest Expense, Net. Interest expense was $0.5 million for fiscal 2000 as
compared to $0.4 million for fiscal 1999. 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, offset by interest income earned subsequent to the
Offering. The weighted average interest rate was 6.7% during fiscal 2000 and
1999. As indicated below, in December 1999, we used a portion of the funds from
the Offering to repay our intercompany payable balance to Daisytek and purchase
certain assets from Daisytek. The remaining available cash will be used for
future capital expenditures, general working capital needs and possible
acquisitions. To the extent that we have excess cash available, we expect to
generate interest income in future periods.
Income Taxes. Our income tax benefit as a percentage of pre-tax loss was
23.2% for fiscal 2000 as compared to an income tax provision as a percentage of
pre-tax income of 42.3% for fiscal 1999. We will continue to be included in
Daisytek's consolidated tax return for all periods in which Daisytek owns 80% or
more of our capital stock, or through the date of the spin-off from Daisytek. As
part of the tax sharing agreement entered into with Daisytek, we will be
reimbursed for any income tax benefit derived from our inclusion in the
consolidated return. However, any loss generated by us in Europe is not included
in the Daisytek consolidated return and may not be utilized at a consolidated
level. Accordingly, in fiscal 2000, we recorded a benefit for the pre-tax loss
generated in the U.S., however, because of our limited operating history in
Europe, it is uncertain whether it is "more likely than not" that we will be
able to utilize our European losses in future periods and therefore we did not
record an income tax benefit for those pre-tax losses. To the extent we have
future losses in Europe, it will continue to negatively impact our income tax
provision. Additionally, since we will cease to be included in Daisytek's
consolidated return upon completion of the spin-off and we have not established
a sufficient history of earnings, on a stand-alone basis, a valuation allowance
has been provided for the net deferred income tax asset as of March 31, 2000.
For fiscal 1999, the income tax
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