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SIX MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTH PERIOD ENDED
SEPTEMBER 30, 1998
Product Revenue. Product revenue was $55.8 million for the six months
ended September 30, 1999 as compared to $41.3 million for the six months ended
September 30, 1998, an increase of $14.5 million or 35.0%. Product revenue
increased as a result of an increase of $15.3 million under new European IBM
distributor agreements and a decrease of $0.8 million in sales under our North
American IBM master distributor agreements. As stated above, during the quarter
ended September 30, 1999, we, Daisytek and IBM entered into new agreements
applicable to all of our IBM relationships. One of these agreements was
effective as of July 15, 1999, and all others are effective as of the end of
September 30, 1999. The contract effective as of July 15, 1999, had a negative
impact on our product revenue during the six month period ended September 30,
1999, as the activities performed under this contract since that date were
accounted for as service fee revenues as opposed to product revenue. As a result
of these new IBM contract arrangements, we expect no product revenue in future
periods.
Service Fee Revenue. Service fee revenue was $7.0 million during the six
months ended September 30, 1999 as compared to $2.8 million during the six
months ended September 30, 1998, an increase of $4.2 million or 153.7%. The
increase in service fee revenue was attributable to an increase in existing
contracts of $1.5 million and the addition of $2.8 million related to new
service contract relationships, including the restructured IBM agreements
referred to above, during the six months ended September 30, 1999. The
restructuring of all the IBM contracts, combined with our new transaction
management services agreement with Daisytek beginning upon completion of this
offering, should result in an increase in service fee revenues over prior
periods.
Cost of Product Revenue. Cost of product revenue was $52.6 million during
the six months ended September 30, 1999 as compared to $39.2 million during the
six months ended September 30, 1998, an increase of $13.4 million or 34.1%. Cost
of product revenue as a percent of product revenue was 94.4% during the six
months ended September 30, 1999 and 95.0% during the six months ended September
30, 1998. The resulting product gross profit margin was 5.6% during the six
months ended September 30, 1999 and 5.0% during the six months ended September
30, 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, and differences in our customer and product mix. As a result of the
new IBM arrangements, we do not expect to incur any cost of product revenue in
future periods.
Cost of Service Fee Revenue. Cost of service fee revenue was $4.9 million
for the six months ended September 30, 1999 as compared to $2.2 million during
the six months ended September 30, 1998, an increase of $2.7 million or 127.3%.
The increase in cost of service fee revenue during the six months ended
September 30, 1999 was due to increased activity from growth in existing
contracts as well as new client relationships. The resulting service fee gross
profit margin was 30.1% during the six months ended September 30, 1999 and 21.9%
during the six months ended September 30, 1998. The increase in service fee
gross profit margin was due to certain initial incremental costs incurred to
implement several new contracts during the six months ended September 30, 1998.
Gross Profit. Gross profit was $5.2 million for the six months ended
September 30, 1999 or 8.4% of revenues as compared to $2.7 million or 6.1% of
revenues for the six months ended September 30, 1998. The increase in total
gross profit margin resulted primarily from the increase in service fee revenue
of 153.7%, which typically earn higher gross profit margins, compared to the
increase in product revenue of 35.0%. In the Future Financial Presentation data
above, we have provided, retroactively, what our service fee gross profit margin
would have been considering the impact of the new IBM and Daisytek agreements
and our acquisition of the assets and liabilities which Daisytek will transfer
to us upon completion of this offering. The gross profit margin for the
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