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large contracts at lower gross profit margins and incremental costs related to
implementing several new contracts during fiscal 1999.
Gross Profit. Our gross profit was $7.6 million or 7.5% of revenues for
fiscal 1999 as compared to $3.7 million or 7.6% of revenues for fiscal 1998. 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 year ended March 31, 1999 would have been 41.2%.
Selling, General and Administrative Expenses. SG&A expenses for fiscal
1999 were $6.7 million or 6.6% of revenues as compared to $3.7 million or 7.5%
of revenues for fiscal 1998. The increase in SG&A expenses for fiscal 1999 was a
result of costs incurred to support the growth in client orders processed 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 $0.4 million during fiscal
1999 and $0.1 million during fiscal 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. The
weighted average interest rate was 6.7% during fiscal 1999 and 6.9% during
fiscal 1998.
Income Taxes. Our income tax expense as a percentage of pretax income was
42.3% for fiscal 1999 as compared to an income tax benefit as a percentage of
pretax loss of 28.6% for fiscal 1998. 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.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
Product Revenue. Product revenue was $45.8 million for fiscal 1998 as
compared to $16.5 million for fiscal 1997, an increase of $29.3 million or
176.9%. Product revenue increased during fiscal 1998 as a result of higher sales
volumes of products under our existing IBM master distributor agreements.
Service Fee Revenue. Service fee revenue was $3.5 million during fiscal
1998 as compared to $1.0 million during fiscal 1997, an increase of $2.5 million
or 242.3%. The increase in service fee revenue was due to growth in client
orders processed primarily under existing fee-based contracts.
Cost of Product Revenue. Cost of product revenue was $43.4 million during
fiscal 1998 as compared to $15.8 million during fiscal 1997, an increase of
$27.6 million or 175.2%. Cost of product revenue as a percent of product revenue
was 94.7% for fiscal 1998 and 95.3% for fiscal 1997. The resulting product gross
profit margin was 5.3% for fiscal 1998 and 4.7% for fiscal 1997. The increase in
product gross profit margin was related to changes in customer and product mix.
Cost of Service Fee Revenue. Cost of service fee revenue was $2.2 million
for fiscal 1998 as compared to $0.6 million for fiscal 1997, an increase of $1.6
million or 270.5%. The increase in cost of service fee revenue during fiscal
1998 was due to growth in client orders processed during the period. The
resulting service fee gross profit margin was 37.6% during fiscal 1998 and 42.4%
during fiscal 1997. The decrease in service fee gross profit margin was due to
the addition of certain large contracts at lower gross profit margins during the
last quarter of fiscal 1997, which impacted operating results for all of fiscal
1998.
Gross Profit. Our gross profit was $3.7 million or 7.6% of revenues for
fiscal 1998 as compared to $1.2 million or 6.9% of revenues for fiscal 1997. The
increase in our gross profit for fiscal 1998 was primarily the result of
increased product revenue. The increase in total gross profit margin
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