Contents - AL-Tax

9.3 Analysis Under Existing Regime 131 All firms with the terms “resell” and “equipment” in their Form 10-K filings;and, All firms with the terms “transportation” and “distribute” in their Form 10-Kfilings.We reviewed descriptions of business for all companies identified through thesesearches to ascertain which firms are functionally comparable to USS. We initiallyeliminated from our sample those firms that (a) were in a start-up mode, (b) engagedin activities unrelated to the wholesale distribution of equipment used in commercialapplications, or (c) reported losses in sequential years, were in receivership orotherwise evidenced significant financial difficulties.After this first “cut,” wholesale distributors of large-scale IT products remainedin our sample, among others. However, upon calculating resale margins for thesecompanies, it became apparent that distributors of commercial computer productsutilized a much more expansive definition of above-the-line costs than distributorsof other types of commercial and industrial equipment, and generally reported verymeager gross margins (in the range of 5%–10%). Hence, in our second round ofeliminations, we excluded distributors of commercial computer products.Our final sample consists of 18 firms, all of which are in the business of sourcingequipment and parts from independent suppliers for resale to commercial, industrialand governmental end-users. In all cases, these firms also supply consumablesor render ongoing maintenance or other services. Most of the sample companiesseparately report revenues, above-the-line costs and gross profits on (a) the sale ofequipment, and (b) the sale of consumables, the provision of maintenance and otherservices and/or equipment rentals. Because our objective is to establish USS’ arm’slength gross margin only on the distribution of equipment, we do not include thesample companies’ consumables revenues, services fees or rental income and costsin their resale margins. The resellers included in our sample reported gross marginson the sale of equipment ranging from 28.5% to 44.8% in 2007, 29.5% to 39.0% in2006, and 30.7% to 36.9% in 2005. The median gross margin amounted to 34.8% in2007, 34.5% in 2006 and 34.7% in 2005. Hence, USS should earn a gross margin of34%–35% on the resale of equipment, and retain all associated services fee income.To further confirm the reasonableness of these results, we also reference the pricingprovisions contained in an arm’s length distribution agreement between ImageSensing Systems, Inc. and Wireless Technologies, Inc., dated January 1, 2001. 2Wireless Technologies, Inc. is in the business of designing and manufacturing videocamera systems and wireless video, audio and data communications equipment2 We identified one additional arm’s length distribution agreement, between GVI Security Solutionsand Samsung Electronics, granting the former exclusive rights to sell, market, lease, licenseand distribute Samsung security products throughout North, Central and South America. Whilethe agreement is attached to GVI Security Solutions’ Form SB-2 (No. 33-11321), filed with theSecurities and Exchange Commission, the document stipulates only that prices will be “establishedby mutual agreement.” Hence, it contains insufficient data to use in establishing arm’s length resalemargins on USS’ sale of equipment.