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To: William T. Katz who wrote (238)	1/14/1999 2:49:00 AM
From: Larry Brubaker	Respond to of 2383

William, you asked the following question: <<The press releases indicate it's because of a shift to lower margin business (i.e. expansion of corporate reselling which is to big companies buying bulk purchases at discount), but if your business to the little guys is also increasing and your aren't losing money from corporate reselling (which in 97 they weren't) then why should profits decrease if sales are ramping nicely? Thoughts anyone?>> Near as I can tell, the answer is something like this. You are right in that gross profits did increase in the third quarter and in the 9-month period ending September 30. However, the net profit decline (9 months '98 from 9 months quarter '97) seems primarily attributable to a $1 million per quarter increase in SGA expenses. Following is the explanation for this increase in the 10-Q. SG&A expenses in absolute dollars for the three-month and nine-month periods ended September 30, 1998 increased by $1,185,000 and $3,132,000, respectively, when compared to the same period in 1997. This increase reflects the costs associated with the start-up of the Canadian operations in August 1997 and the acquisition of Logicsoft in September 1997, as well as additional infrastructure in the form of personnel-related costs as the Company moves into the e-commerce arena. As Zeev suggested, they are investing in additional infrastructure (both through acquisitions and through the development of e-commerce) that is growing the top-line, but has a negative impact on the bottom-line. The costs of this additional infrastructure should be relatively fixed. Therefore, as sales continue to increase, there should also be increases to the bottom line. In fact, these new investments already look like they are close to contributing to the bottom-line in that third-quarter net income only declined from .14 in '97 to .13 in '98, while the 9-month net income had declined from .48 to .33. As of the third quarter, they seemed to have generated enough of an increase in sales to pay for almost all of the additional $1 million in quarterly SGA expenses.

To: William T. Katz who wrote (238)	1/14/1999 3:24:00 AM
From: Larry Brubaker	Respond to of 2383

One more follow-up to your question, William. Since sales for the year were at least $230 million, sales for the 4th quarter were probably around $72 million, compared with $54 million in the 3rd quarter. Assuming the same gross margin in the 4th quarter, these sales would have generated nearly $9 million in gross profit. Assuming no increase in SGA expenses in the 4th quarter, this amount of gross profit would generate about 50 cents per share in net profit. Zeev has suggested they should take some $900,000 of this additional profit and reinvest it back into the business. If Zeev's speculation is correct, I get a number for net profits within a few cents of his 30 cents per share prediction. 30 cents per share in the 4th quarter would almost equal the combined profits of the first 3 quarters.