<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Danka Business Systems PLC
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
DANKA BUSINESS SYSTEMS PLC
NOTICE TO OWNERS OF AMERICAN DEPOSITARY RECEIPTS
Owners of Record on November 4, 1996, of American Depositary Receipts (each
representing four Ordinary Shares of Danka Business Systems PLC of 1.25 pence
each) issued under the Deposit Agreement dated as of June 25, 1992, as amended,
among Danka Business Systems PLC, The Bank of New York, as Depositary, and the
Owners from time to time of the American Depositary Receipts issued thereunder,
are hereby notified that The Bank of New York, as Depositary, has received
Notice of an Extraordinary General Meeting of the members of Danka Business
Systems PLC, to be held on December 11, 1996 in London, England.
By provision of Section 4.7 of the aforementioned Deposit Agreement, Owners
of American Depositary Shares are entitled, subject to applicable law and the
provisions of the Articles of Association of the Issuer and the provisions of or
governing Deposited Securities, to instruct The Bank of New York, as Depositary,
as to the exercise of the voting rights, if any, pertaining to the Deposited
Securities represented by the American Depositary Shares evidenced by such
Owner's Receipts. Upon the written request of an Owner on such record date,
received on or before December 5, 1996, The Bank of New York, as Depositary,
shall endeavor in so far as practicable and permitted under applicable law and
the provisions of the Articles of Association of the Issuer and the provisions
of or governing the Deposited Securities to vote or cause to be voted the
Deposited Securities represented by such Owner's Receipts in accordance with the
instructions set forth in such request. If after complying with the procedures
set forth in this Section, the Depositary does not receive instructions from the
Owner of a Receipt, the Depositary shall give a discretionary proxy for the
Shares evidenced by such Receipt to a person designated by the Issuer. It is
anticipated that the person designated by the Issuer will vote the discretionary
proxy in favor of the Ordinary Resolution for all such Ordinary Shares
represented by holders of American Depositary Shares, that have failed to timely
file their voting instructional form with The Bank of New York as Depositary.
The Bank of New York, as Depositary, shall not vote or attempt to exercise the
right to vote that attaches to the Deposited Securities, other than in
accordance with such instructions.
In view of the fact that requests from Owners must be received prior to the
close of business on December 5, 1996, there is a pre-addressed envelope
enclosed for your use.
THE BANK OF NEW YORK,
AS DEPOSITARY
Dated: November 7, 1996
<PAGE> 3
[LOGO] DANKA DANKA BUSINESS SYSTEMS PLC
MASTERS HOUSE
107 HAMMERSMITH ROAD
LONDON W14 0QH ENGLAND
NOVEMBER 7, 1996
TO U.S. HOLDERS OF ORDINARY SHARES AND U.S. HOLDERS OF AMERICAN DEPOSITARY
SHARES OF DANKA BUSINESS SYSTEMS PLC (THE "COMPANY").
Holders of Ordinary Shares are cordially invited to attend the Company's
Extraordinary General Meeting (the "Meeting"). The Meeting will be held on
December 11, 1996 at 11:00 a.m. (local time) at Square Mile Communications
Limited, 11 Gough Square, London EC4A 3DE.
The Notice of Extraordinary General Meeting and the Proxy Statement on the
following pages describe the formal business to be conducted at the Meeting,
specifically the Ordinary Resolution requesting holders of Ordinary Shares to
approve the Company's proposed acquisition of certain assets and liabilities of
the Office Imaging Sales and Services Business of Eastman Kodak Company, as
further described in the attached Proxy Statement. The Board of Directors of the
Company has approved the acquisition, believes that it is in the best interests
of the Company and unanimously recommends that holders of Ordinary Shares vote
in favor of the Ordinary Resolution. Please give careful consideration to all of
the information contained in the Proxy Statement and its Appendices before
voting.
It is important that Ordinary Shares be represented at the Meeting. We ask
that holders of Ordinary Shares promptly sign, date and return the enclosed
proxy to the Company's registrars, Royal Bank of Scotland plc (not later than 48
hours before the time fixed for the holding of the Meeting), even if you plan to
attend the Meeting. Returning the proxy will not prevent a holder of Ordinary
Shares from voting in person at the Meeting if they are present and choose to do
so. Holders of American Depositary Shares should follow the special voting
instructions provided in the enclosed materials by The Bank of New York as
Depositary.
Your Board of Directors and management look forward to greeting you at the
Meeting.
Sincerely,
/s/ MARK A. VAUGHAN-LEE
--------------------------------------
MARK A. VAUGHAN-LEE
Chairman
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[LOGO] DANKA DANKA BUSINESS SYSTEMS PLC
---------------------
NOTICE OF EXTRAORDINARY GENERAL MEETING
---------------------
Notice is hereby given that an Extraordinary General Meeting of Danka
Business Systems PLC (the "Company") will be held at the offices of Square Mile
Communications Limited, 11 Gough Square, London EC4A 3DE on Wednesday, 11th
December, 1996 at 11:00 a.m. for the purpose of considering and, if thought fit,
passing the following resolution as an Ordinary Resolution:
ORDINARY RESOLUTION
THAT the proposed acquisition by the Company and/or its subsidiaries
pursuant to an asset purchase agreement between (1) Eastman Kodak Company
and (2) the Company dated 6th September, 1996 (the "Asset Purchase
Agreement"), a copy of which has been produced to the meeting and signed
for the purposes of identification by the Chairman of the meeting, of (i)
certain assets and liabilities relating to (x) the sales, marketing,
distribution and equipment service operations of Eastman Kodak Company's
Office Imaging and Customer Equipment Services business units and (y) the
facilities management services business of Eastman Kodak Company known as
"Kodak Imaging Services" and (ii) the whole of the issued share capital of
the subsidiaries of Eastman Kodak Company which engage in facilities
management services, be and is hereby approved; and the Directors of the
Company (or any duly authorized committee appointed by them) be and are
hereby authorized to cause the Asset Purchase Agreement and all matters
provided therein or related thereto to be completed and at their discretion
to amend, waive, vary or extend any of the terms of the Asset Purchase
Agreement and any other document referred to therein or connected therewith
in whatever way they consider to be necessary or desirable and to do or
procure all such other acts or things as they consider necessary or
desirable in connection therewith.
Dated: 7 November, 1996
By order of the Board
/s/ PAUL G. DUMOND
--------------------------------------
Paul G. Dumond
Company Secretary
Registered No. 1101386
Registered Office: Masters House, 107 Hammersmith Road, London W14 0QH
- ---------------
Note: A member entitled to attend and vote at the Meeting may appoint one or
more proxies to attend and, on a poll, to vote instead of him/her. A proxy need
not be a member of the Company. Members submitting a proxy are not precluded
from attending the meeting and voting if they so wish. A form of proxy is
enclosed and should be signed and returned to the Company's registrars, The
Royal Bank of Scotland plc, Registrar's Department, P.O. Box 82, Caxton House,
Redcliffe Way, Bristol BS99 7YA, not less than 48 hours before the time the
meeting is to be held.
<PAGE> 5
THIS PROXY STATEMENT IS FOR U.S. HOLDERS OF ORDINARY SHARES ("ORDINARY
SHARES") AND U.S. HOLDERS OF AMERICAN DEPOSITARY SHARES ("ADSS") REPRESENTED BY
AMERICAN DEPOSITARY RECEIPTS.
IF YOU HAVE SOLD ANY OF YOUR ORDINARY SHARES IN DANKA BUSINESS SYSTEMS PLC,
PLEASE SEND A COPY OF THIS DOCUMENT TO THE STOCKBROKER OR OTHER AGENT THROUGH
WHOM THE SALE WAS EFFECTED FOR TRANSMISSION TO THE PURCHASER.
(LOGO)DANKA
DANKA BUSINESS SYSTEMS PLC
MASTERS HOUSE
107 HAMMERSMITH ROAD
LONDON W14 0QH ENGLAND
PROXY STATEMENT
EXTRAORDINARY GENERAL MEETING
December 11, 1996
This Proxy Statement is furnished by the Board of Directors of Danka
Business Systems PLC (together, where applicable, with its subsidiaries, the
"Company") in connection with the solicitation of specific voting instructions
("voting instructions") from U.S. holders of ADSs and proxies ("proxies") from
U.S. holders of Ordinary Shares for voting at the Company's Extraordinary
General Meeting (the "Meeting"), which will be held at 11:00 a.m. (local time)
December 11, 1996 at the offices of Square Mile Communications Limited, 11 Gough
Square, London EC4A 3DE. For purposes of this Proxy Statement and related
materials, the term "Shareholders" shall mean holders of Ordinary Shares and
holders of ADSs. At the Extraordinary General Meeting, holders of Ordinary
Shares will consider and vote upon an Ordinary Resolution to authorize the
proposed acquisition (the "Acquisition") by the Company and its subsidiaries
from Eastman Kodak Company ("Kodak") and its subsidiaries, pursuant to the Asset
Purchase Agreement dated as of September 6, 1996 between the Company and Kodak,
as amended, modified or supplemented in the future (the "Asset Purchase
Agreement"), of (i) certain assets and liabilities relating to (x) the sales,
marketing, distribution and services business of Kodak's Office Imaging and
Customer Equipment Services business units and (y) the facilities management
service business, Kodak Imaging Services, and (ii) all the issued and
outstanding stock of the subsidiaries of Kodak engaged in facilities management
services (collectively (i) and (ii) being the "Sales and Services Business").
Ordinary Shares represented by ADSs will be voted by The Bank of New York as
Depositary ("Depositary") for the Company's ADSs represented by American
Depositary Receipts pursuant to instructions received from holders of ADSs.
Pursuant to the Asset Purchase Agreement and subject to the satisfaction of the
conditions set forth therein, including but not limited to the approval by the
holders of Ordinary Shares sought hereby, the Company will acquire the net
assets of the Sales and Services Business in exchange for $684.2 million in cash
payable by the Company at the closing (the "Closing"). See "Financial
Statements -- Pro Forma Combined Financial Statements." The consideration paid
by the Company is subject to adjustment following the Closing to the extent that
the net book value of the Sales and Services Business on the Closing date
differs from $802.0 million. If approved by the holders of Ordinary Shares, and
all conditions to Closing have been satisfied or waived, the Closing of the
Acquisition is expected to occur on or before December 31, 1996, unless another
time or date is agreed to by the Company and Kodak. In conjunction with the
Acquisition, the Company and Kodak have agreed to enter into an Amended and
<PAGE> 6
Restated Supply Agreement (the "Amended Supply Agreement") pursuant to which the
Company will, effective upon Closing, agree to purchase from Kodak its
requirements for certain Kodak manufactured or remanufactured
electrophotographic equipment and accessories, spare parts, supplies and toner
for such equipment. Subject to certain limitations under the Amended Supply
Agreement, the Company will have the exclusive right to distribute in most
worldwide markets Kodak's currently existing line of electrophotographic
equipment for office imaging and reprographics and related software, supplies,
accessories and spare parts manufactured or remanufactured by Kodak and a right
of first refusal to exclusively distribute worldwide certain future
electrophotographic products manufactured by Kodak for office imaging and
reprographics. The Amended Supply Agreement will have an initial term of ten
(10) years with all major provisions subject to renegotiation three (3) years
from Closing. See "THE ACQUISITION -- The Acquisition" and "-- The Amended
Supply Agreement."
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF ADSs PROVIDE
VOTING INSTRUCTIONS TO VOTE FOR AND HOLDERS OF ORDINARY SHARES VOTE "FOR" THE
PROPOSED RESOLUTION. The approximate date on which this Proxy Statement and
related materials has been first mailed to Shareholders is November 7, 1996. IT
IS IMPORTANT THAT THE PROXY OR VOTING INSTRUCTIONS, AS THE CASE MAY BE, IS
RETURNED PROMPTLY BY HOLDERS OF ORDINARY SHARES OR HOLDERS OF ADSs,
RESPECTIVELY.
HOLDERS OF ORDINARY SHARES ARE REQUESTED TO PLEASE COMPLETE, DATE, SIGN AND
RETURN THE PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE, WHETHER OR NOT YOU PLAN
TO ATTEND THE EXTRAORDINARY GENERAL MEETING.
THE DELIVERY OF THIS PROXY STATEMENT DOES NOT IMPLY THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY OR
THE SALES AND SERVICES BUSINESS SINCE THE DATE HEREOF.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and the rules and regulations
thereunder, and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). Such
reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the SEC at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
regional offices located at 500 West Madison Street, Chicago, Illinois
60661-2511, and Suite 1300, Seven World Trade Center, New York, New York 10048.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the SEC, at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company's ADSs are included in the Nasdaq National Market. Such reports,
proxy statements and other information concerning the Company also may be
investigated at the office of the Nasdaq Stock Market, 1735 K Street, N.W.,
Washington, D.C. 20006. This Proxy Statement as well as other information
related to the Company may be obtained through the SEC's Internet address at
"http://www.sec.gov".
Certain information contained in this Proxy Statement concerning Kodak and
its subsidiaries has been supplied by Kodak and has not been independently
verified by the Company. These sections are "THE ACQUISITION -- The Parties to
the Acquisition -- The Sales and Services Business," "Summary Historical
Financial Data -- Sales and Services Business," "-- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Historical Sales
and Services Business," "Select Historical Financial Data -- Sales and Services
Business" and "Financial Statements -- Office Imaging Sales and Services
Business." All other information contained in this Proxy Statement has been
supplied by the Company.
<PAGE> 7
TABLE OF CONTENTS
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SUMMARY...............................................................................
The Extraordinary General Meeting................................................... 1
Vote Required....................................................................... 1
The Parties to the Acquisition...................................................... 1
The Acquisition..................................................................... 2
The Amended Supply Agreement........................................................ 2
Financing the Acquisition........................................................... 2
Recommendation of the Company's Board of Directors.................................. 3
Opinion of the Company's Financial Advisor.......................................... 3
Accounting Treatment of the Acquisition............................................. 3
Regulatory Approval................................................................. 3
Certain Federal Income Tax Consequences of the Acquisition.......................... 3
Summary Historical Financial Data................................................... 4
THE EXTRAORDINARY GENERAL MEETING..................................................... 6
Matters to be Considered at the Extraordinary General Meeting....................... 6
Voting Instructions Holders of Ordinary Shares...................................... 6
Voting Instructions Holders of American Depositary Shares........................... 6
Vote Required....................................................................... 6
No Dissenters' Rights............................................................... 7
Solicitation of Proxies............................................................. 7
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS..................................... 7
THE ACQUISITION....................................................................... 7
The Parties to the Acquisition...................................................... 7
The Company...................................................................... 7
General........................................................................ 7
Market Prices of ADSs and Ordinary Shares...................................... 8
Dividends...................................................................... 9
Security Ownership of Management and Certain Beneficial Owners................. 10
New Developments In Management's Discussion and Analysis of Financial Condition
and Results of Operation -- The Company....................................... 11
The Sales and Services Business.................................................. 12
Overview....................................................................... 12
Sales and Services............................................................. 12
Facilities Management.......................................................... 13
Competition.................................................................... 13
Litigation..................................................................... 14
Customers and Suppliers........................................................ 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Historical Sales and Services Business.......................... 14
The Acquisition..................................................................... 16
The Asset Purchase Agreement..................................................... 16
Closing.......................................................................... 16
Representations and Warranties................................................... 17
Covenants........................................................................ 17
No Solicitation.................................................................. 18
Indemnification.................................................................. 18
Conditions....................................................................... 18
Termination, Amendments and Waivers.............................................. 18
</TABLE>
i
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<TABLE>
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PAGE
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Expenses......................................................................... 19
Conduct of Business Pending the Closing.......................................... 19
The Amended Supply Agreement........................................................ 19
Financing the Acquisition........................................................... 20
Background of the Acquisition....................................................... 21
Recommendation of the Company's Board............................................... 23
Reasons for the Acquisition......................................................... 23
Opinion of the Company's Financial Advisor.......................................... 25
Accounting Treatment of the Acquisition............................................. 25
Certain Federal Income Tax Consequences of the Acquisition.......................... 25
Regulatory Approval................................................................. 26
Select Historical and Pro Forma Financial Data...................................... 27
INDEPENDENT AUDITORS.................................................................. 30
SHAREHOLDERS' PROPOSALS FOR THE 1997 ANNUAL MEETING................................... 30
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 30
FINANCIAL STATEMENTS INDEX............................................................ F-1
APPENDIX "A"
Fairness Opinion.................................................................... A-1
APPENDIX "B"
Form of Proxy for Extraordinary General Meeting..................................... B-1
APPENDIX "C"
Form of Instruction to Bank of New York, as Depositary.............................. C-1
</TABLE>
ii
<PAGE> 9
SUMMARY
The following is a summary of material information contained elsewhere in
this Proxy Statement. This summary is not intended to be a complete description
and is qualified in its entirety by reference to the more detailed information
contained in this Proxy Statement or incorporated by reference in this Proxy
Statement or in the documents attached as Appendices hereto. The financial
information contained herein or incorporated by reference is presented in
accordance with U.S. generally accepted accounting principles ("U.S. GAAP").
Unless the context requires otherwise (i) references to "Danka" or the "Company"
include Danka Business Systems PLC together with all of its direct and indirect
subsidiaries, (ii) references to "Kodak" include Eastman Kodak Company together
with all of its direct and indirect subsidiaries, (iii) references to "fiscal
year" refer to the year ending on March 31 in such year for the Company, (iv)
references to "$" or "Dollars" are to United States currency, and (v) references
to "L," "pounds," "p" or "pence" are to United Kingdom currency. On October 1,
1996 the $ to L exchange rate based on the noon buying rate in New York City for
cable transfers as certified for customs purposes by the Federal Reserve Bank of
New York was $1.564 per L1.00. Each holder of ADSs and holder of Ordinary Shares
is urged to give careful consideration to all of the information contained in
this Proxy Statement and its Appendices as well as information incorporated by
reference herein before voting.
THE EXTRAORDINARY GENERAL MEETING
The Extraordinary General Meeting is scheduled to be held at 11:00 a.m.
(local time) on December 11, 1996 at the offices of Square Mile Communications
Limited, 11 Gough Square, London EC4A 3DE. At the Extraordinary General Meeting,
holders of Ordinary Shares will consider and vote upon the proposal to adopt the
Ordinary Resolution to approve the Acquisition. The proxy committee consists of
Paul G. Dumond and David C. Snell. As of September 30, 1996, there were
226,122,247 Ordinary Shares of 1.25 pence each issued and outstanding, of which
approximately seventy-five percent (75%) were held in the form of ADSs. Each ADS
currently represents four Ordinary Shares. Ordinary Shares represented by ADSs
will be voted by the Depositary pursuant to instructions received from holders
of ADSs. See "THE EXTRAORDINARY GENERAL MEETING."
VOTE REQUIRED
The Ordinary Resolution being voted on requires an affirmative vote of more
than fifty percent (50%) of the Ordinary Share votes cast at the Meeting. Voting
shall be by a poll. Every holder of Ordinary Shares who is entitled to vote and
who is present in person or by proxy will have one (1) vote for every Ordinary
Share owned. See "THE EXTRAORDINARY GENERAL MEETING -- Vote Required."
THE PARTIES TO THE ACQUISITION
The Company
Danka Business Systems PLC is one of the largest independent suppliers of
photocopiers, facsimiles and other automated office equipment in North America,
Europe and Australia. The Company primarily markets these products and related
service, parts and supplies on a direct basis to retail customers. The Company
also markets photocopiers, facsimile equipment and related parts and supplies on
a wholesale basis to dealers. In addition, the Company markets private label
photocopier and facsimile equipment and related supplies on both a direct and
wholesale basis under its Infotec trademark and facsimile equipment under its
dex and Omnifax trademarks. The Company currently has offices in 42 states, nine
Canadian provinces, eight European countries, Australia and New Zealand. The
Company's principal executive office is located at Masters House, 107
Hammersmith Road, London W14 0QH, England, and its telephone number is 011-44-
171-603-1515. See "THE ACQUISITION -- The Parties to the Acquisition."
Kodak's Sales and Services Business
The Sales and Services Business is engaged worldwide in the direct sale and
marketing of Kodak manufactured and branded black and white and accent color
high-volume photocopiers and duplicators, as
1
<PAGE> 10
well as Kodak branded mid-volume black and white and color photocopiers
manufactured by Canon, Inc., and in some cases, remanufactured by Kodak.
Throughout the world the Sales and Services Business provides on-site repair and
technical and field engineering support services for equipment sold, leased and
rented to others by the Sales and Services Business' sales force and by third
party photocopier distributors. In addition, and primarily in the United States
and Europe, with a start up business in Canada, the Sales and Services Business
provides customers with facilities management services, including the management
of central reprographics departments, the placement and maintenance of
convenience copiers, the operation of mail centers, the processing of
statements, print-on-demand operations and document archiving and retrieval
services. In 1995, the Sales and Services Business had total sales of $1.8
billion, of which approximately 60% and 34% were in the United States and
Europe, respectively. The Sales and Services Business has offices in 31
countries worldwide with over 300 separate locations. The principal executive
office of the Sales and Services Business is located at 901 Elmgrove Road,
Rochester, New York 14653, and its telephone number is (716) 724-4000. See "THE
ACQUISITION -- The Parties to the Acquisition -- The Sales and Services
Business."
THE ACQUISITION
On September 6, 1996 the Company and Kodak executed the Asset Purchase
Agreement whereby the Company agreed to acquire the net assets of the Sales and
Services Business. At the Closing, the Company will pay Kodak cash in the amount
of $684.2 million for the net assets of the Sales and Services Business. The
consideration paid by the Company is subject to adjustment following the Closing
to the extent that the net book value of the Sales and Services Business on the
date of Closing differs from $802.0 million. See "THE ACQUISITION -- The
Acquisition."
Consummation of the Acquisition is subject to various conditions,
including, among others: (i) the approval and adoption of the Ordinary
Resolution by the requisite vote of the Company's holders of Ordinary Shares;
(ii) the absence of any injunction preventing consummation of the Acquisition;
(iii) receipt of certain required approvals and consents; and (iv) the
expiration of the applicable waiting period imposed by the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), which occurred
on October 20, 1996. If the Acquisition is approved by the holders of Ordinary
Shares, and the conditions to Closing have been satisfied or waived, the Closing
is expected to occur on or before December 31, 1996. See "THE ACQUISITION -- The
Acquisition -- Regulatory Approval and -- Closing."
THE AMENDED SUPPLY AGREEMENT
In conjunction with the Acquisition, the Company and Kodak have agreed to
enter into the Amended Supply Agreement at Closing pursuant to which the Company
will, effective upon Closing, agree to purchase from Kodak its requirements for
certain Kodak manufactured and remanufactured electrophotographic equipment and
accessories, spare parts, supplies and toner. Subject to certain limitations,
the Company will have the exclusive right to distribute in most worldwide
markets Kodak's currently existing line of electrophotographic equipment
manufactured or remanufactured by Kodak and related software, supplies,
accessories and spare parts. In addition, the Company will have a right of first
refusal to exclusively distribute worldwide certain future electrophotographic
products manufactured by Kodak for office imaging and reprographics. The Amended
Supply Agreement will have an initial term of ten (10) years with all material
terms subject to renegotiation three (3) years from Closing. See "THE
ACQUISITION -- The Amended Supply Agreement."
FINANCING THE ACQUISITION
To finance the approximately $684.2 million cash purchase price for the
Acquisition, the Company has received a commitment letter for a new credit
agreement (the "Credit Agreement") with NationsBank, N.A., which will provide
financing to the Company in the aggregate amount of up to $1.275 billion. The
Company intends that the proceeds from the Credit Agreement will also be
utilized to refinance the existing bank indebtedness of the Company and for
working capital and general corporate purposes. The closing for the Credit
Agreement is expected to occur at or about December 4, 1996. See "THE
ACQUISITION -- Financing the Acquisition."
2
<PAGE> 11
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
Based on the reasons summarized under "THE ACQUISITION -- Reasons for the
Acquisition," the Board of Directors of the Company (the "Board") has determined
that the Acquisition is advisable to, fair to and in the best interests of the
Company and Shareholders. The Board has unanimously approved the Ordinary
Resolution and accordingly, the Board recommends that holders of Ordinary Shares
vote "FOR" approval and adoption of the Ordinary Resolution. See "THE
ACQUISITION -- Recommendation of the Company's Board -- Reasons for the
Acquisition."
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
The Company engaged Salomon Brothers Inc to act as its financial advisor
and to render a fairness opinion in connection with the Acquisition. On
September 6, 1996, Salomon Brothers Inc rendered a written opinion to the
Company's Board that, subject to the assumptions set forth in the opinion, the
consideration to be paid by the Company for the Sales and Services Business is
fair from a financial point of view. See "THE ACQUISITION -- Opinion of the
Company's Financial Advisor."
ACCOUNTING TREATMENT OF THE ACQUISITION
In accordance with U.S. GAAP, the Company intends to account for the
Acquisition as a purchase. See "THE ACQUISITION -- Accounting Treatment of the
Acquisition."
REGULATORY APPROVAL
The obligation of the Company to consummate the Acquisition is conditioned
upon the parties' compliance with certain regulatory requirements. As of the
date of this Proxy Statement, Kodak and the Company have filed the necessary
notices in compliance with the HSR Act and the waiting period imposed by the HSR
Act has expired. The parties have also filed or intend to file necessary
notices, applications or documents to obtain antitrust or regulatory consents to
complete the Acquisition as are legally required in other jurisdictions and
countries, including Austria, Canada, Germany, Ireland, Japan, and Mexico. To
the Company's knowledge, no other material regulatory filings, approvals or
actions are required prior to Closing. The Company and Kodak have agreed to
cooperate and file such other notices, applications or other documents which are
determined by the parties to be necessary to consummate the Acquisition. See
"THE ACQUISITION -- Regulatory Approval."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
There are no direct tax consequences as a result of the Acquisition to the
Company's holders of Ordinary Shares or holders of ADSs. See "THE
ACQUISITION -- Certain Federal Income Tax Consequences of the Acquisition."
3
<PAGE> 12
SUMMARY HISTORICAL FINANCIAL DATA
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA FOR DANKA BUSINESS SYSTEMS PLC
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
------------------------------------------- -------------------
1993 1994 1995 1996 1995 1996
-------- -------- -------- ---------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER ADS AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA(1):
Total revenue.................... $352,695 $531,408 $802,196 $1,240,304 $249,014 $401,955
Gross profit..................... 139,847 213,768 323,893 496,649 99,818 159,079
Earnings from operations......... 30,358 47,884 71,550 96,155 20,835 28,164
Net earnings..................... 21,212 26,466 39,047 45,215 10,857 14,331
Net earnings per ADS(2).......... $ 0.51 $ 0.59 $ 0.80 $ 0.88 $ 0.22 $ 0.25
Weighted average ADSs(2)......... 41,422 45,210 48,735 51,533 49,213 57,787
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
---------- -----------
1996 1996
---------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA(1)(3):
Working capital................................................... $ 217,674 $ 280,812
Total assets...................................................... 1,091,556 1,181,978
Long-term debt, less current maturities........................... 318,262 379,513
Shareholders' equity.............................................. 441,843 461,339
</TABLE>
- ---------------
(1) Revenue, expenses, assets, and liabilities are significantly affected by the
number and timing of acquisitions made by the Company. See Pro Forma
Condensed Consolidated Financial Statements.
(2) Calculated by using the weighted average number of ADSs outstanding during
the period, as adjusted for Ordinary Shares issuable upon exercise of
options, based on the ratio of four Ordinary Shares to one ADS.
(3) The balance sheet data are as of the last day of the respective periods.
4
<PAGE> 13
SUMMARY HISTORICAL FINANCIAL DATA FOR OFFICE IMAGING SALES AND SERVICES BUSINESS
The summary historical financial data of the Office Imaging Sales and
Services Business presented below as of December 31, 1995 and for each of the
two years in the period then ended are derived from the audited combined
financial statements of the historical Office Imaging Sales and Services
Business set forth elsewhere in this Proxy Statement. The summary historical
combined financial data of the Office Imaging Sales and Services Business
presented below as of June 30, 1996 and for the six month periods ended June 30,
1995 and 1996 are derived from unaudited interim combined financial statements
of the historical Office Imaging Sales and Services Business. Results of
operations for interim periods are not necessarily indicative of results to be
expected for the full year. It is important to recognize that the combined
historical financial data for the Office Imaging Sales and Services Business
includes certain assets, liabilities, revenues and expenses that will not be
part of the Sales and Services Business acquired by the Company. The data
presented below should be read in conjunction with the Combined Financial
Statements of the historical Office Imaging Sales and Services Business and
related notes, as well as the other financial information, including pro forma
financial information included elsewhere in this Proxy Statement, and the
discussions set forth in the sections captioned "The Parties to the
Acquisition -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Historical Sales and Services Business."
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE YEAR MONTHS
ENDED ENDED JUNE
DECEMBER 31, 30,
--------------- -----------
1994 1995 1995 1996
------ ------ ---- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total revenue and income......................................... $1,745 $1,836 $877 $880
Gross profit..................................................... 441 440 208 244
Earnings before income taxes..................................... 36 25 5 44
Net earnings..................................................... 3 6 1 22
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.................................................. $ 505 $ 455
Total assets..................................................... 1,249 1,170
Division equity.................................................. 841 787
</TABLE>
5
<PAGE> 14
THE EXTRAORDINARY GENERAL MEETING
MATTERS TO BE CONSIDERED AT THE EXTRAORDINARY GENERAL MEETING
The Extraordinary General Meeting is scheduled to be held at 11:00 a.m.
(local time) on December 11, 1996 at the offices of Square Mile Communications
Limited, 11 Gough Square, London EC4A 3DE. At the Extraordinary General Meeting,
holders of Ordinary Shares will consider and vote upon the proposal to approve
and adopt the Ordinary Resolution to approve the Acquisition.
As of September 30, 1996, there were 226,122,247 Ordinary Shares of 1.25
pence each issued and outstanding, of which approximately seventy-five percent
(75%) were held in the form of ADSs. Each ADS represents four Ordinary Shares.
VOTING INSTRUCTIONS HOLDERS OF ORDINARY SHARES
Holders of Ordinary Shares entitled to attend and vote at the Meeting may
appoint a proxy to attend and to vote in their place. A proxy need not be a
holder of Ordinary Shares of the Company. Voting shall be by a poll. Every
holder of Ordinary Shares who is entitled to vote and who is present in person
or by proxy will have one (1) vote for every Ordinary Share owned.
A form of proxy is enclosed which, to be effective, must be deposited with
the Company's registrars, The Royal Bank of Scotland plc, Registrars Department,
P.O. Box 82, Caxton House, Redcliffe Way, Bristol BS99 7YA, not later than
forty-eight (48) hours before the time appointed for the holding of the Meeting.
Any proxy delivered pursuant to this solicitation may be revoked, at the
option of the person executing the proxy, at any time before it is exercised by
delivering a written revocation in no specifically required form to the Company
at least 48 hours before the Meeting, by submitting a later-dated proxy, or by
attending the Meeting in person and casting a ballot. If proxies are signed and
returned without a vote indicated, it is anticipated that the proxy will vote
the Ordinary Shares represented by such proxies in favor of the Ordinary
Resolution. Ordinary Shares that are not voted by the holders of Ordinary Shares
or brokers entitled to vote them, either by casting a ballot in person, by
returning a signed proxy or through abstention will not be considered in the
final tabulation.
VOTING INSTRUCTIONS HOLDERS OF AMERICAN DEPOSITARY SHARES
Holders of ADSs should complete and return the voting instructional form
provided to them by the Depositary, in accordance with the terms provided
therein not later than December 5, 1996. The voting instructional form, to be
effective, must be sent to the Depositary, The Bank of New York, ADR Division,
101 Barclay Street, New York, N.Y. 10286, as set forth above.
The close of business on November 4, 1996 has been fixed as the record date
for the determination of the holders of ADSs entitled to provide voting
instructions to the Depositary. It is anticipated that the proxy committee,
which consists of Paul G. Dumond and David C. Snell, shall, pursuant to a
discretionary proxy provided by the Depositary for the Ordinary Shares
represented by holders of ADSs that have failed to timely file their voting
instructional form with the Depositary, vote in favor of the Ordinary
Resolution. For purposes of this document, the term "vote" shall mean either a
vote by a holder of Ordinary Shares or instructions to the Depositary by a
holder of ADSs, unless the context requires otherwise.
VOTE REQUIRED
The Ordinary Resolution being voted on requires an affirmative vote of more
than fifty percent (50%) of the Ordinary Share votes cast at the Meeting. Voting
shall be by a poll. Every holder of Ordinary Shares who is entitled to vote and
who is present in person or by proxy will have one (1) vote for every Ordinary
Share owned.
6
<PAGE> 15
NO DISSENTERS' RIGHTS
The Shareholders do not have any rights of appraisal or similar rights of
dissenters, whether they vote for or against the Acquisition.
SOLICITATION OF PROXIES
The cost of soliciting proxies and voting instructions will be borne by the
Company. In addition to the use of the mails, proxies and voting instructions
may be solicited personally or by telephone by officers of the Company. The
Company does not expect to pay any compensation for the solicitation of proxies
or voting instructions, but will reimburse brokers, the Depositary and other
persons holding stock in their names, or in the names of nominees, for their
expenses in sending proxy materials and/or voting instructions to their
principals and obtaining their proxies and/or voting instructions.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Proxy Statement under the caption "THE
ACQUISITION" and elsewhere in this Proxy Statement or incorporated herein by
reference, such as statements concerning the reasons for and the effect of the
Acquisition on the Company, integration of the Sales and Services Business into
the Company, future intentions and prospects arising from the Acquisition, and
other statements contained herein regarding matters that are not historical
facts are "forward looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995) and because such statements involve
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: (i) the Company's ability to manage and operate the
Sales and Services Business, (ii) the demands that the Acquisition and
integration of the Sales and Services Business will place, and the effect that
such demands will have, on the Company's resources, infrastructure and current
operations, (iii) the Company's ability to successfully operate in new
international markets, (iv) the ability of the Company to attract and retain
current management and other employees of the Sales and Services Business
accustomed to different corporate culture, compensation arrangements and
benefits, (v) the Company's ability to successfully manage the increased debt
resulting from the Acquisition, (vi) the Company's ability to achieve the
minimum equipment purchase commitments under the Amended Supply Agreement, (vii)
the Company's ability to obtain an alternative and acceptable source of
high-volume equipment and related parts and supplies in the event the Amended
Supply Agreement is not renegotiated or Kodak equipment is not competitive in
the marketplace, (viii) increased competition, (ix) fluctuations in foreign
currency, (x) domestic and foreign political developments and governmental
regulations and policies, (xi) technological developments, (xii) general
economic and business conditions, (xiii) future performance of the Sales and
Services Business and the Company's current business, (xiv) the ability of the
Company to successfully implement its growth and business strategy, and (xv) the
ability of the Company to continue to receive acceptable financing as required
in the future.
THE ACQUISITION
THE PARTIES TO THE ACQUISITION
The Company
General. Danka Business Systems PLC is one of the largest independent
suppliers of photocopiers, facsimiles and other automated office equipment in
North America, Europe and Australia. The Company primarily markets these
products and related services, parts and supplies on a direct basis to retail
customers. The Company also markets photocopiers, facsimile equipment and
related parts and supplies on a wholesale basis to dealers. In addition, the
Company markets private label photocopier and facsimile equipment and related
supplies on both a direct and wholesale basis under its Infotec trademark and
facsimile equipment under its dex and Omnifax trademarks. The Company currently
has offices in 42 states, nine Canadian
7
<PAGE> 16
provinces, eight European countries, Australia and New Zealand. Should the
Acquisition occur, the Company will add offices in these existing areas and in
19 other countries. See " -- The Sales and Services Business."
The Company is one of the largest independent suppliers of Konica, Minolta,
Sharp, Canon and Toshiba photocopiers and facsimile equipment. The Company is
also one of the largest independent suppliers of Ricoh products in Europe. Upon
the Closing of the Acquisition, the Company will be the exclusive distributor of
Kodak branded copiers/printers for office imaging and reprographics and related
parts and supplies in most worldwide markets.
The Company provides a wide range of customer-related support services,
maintenance and supply contracts, training and technical support, and
third-party leasing arrangements. The Company's focus on customer service and
the contractual nature of its service business, combined with its service
contract renewals, provide a significant source of recurring revenue. The
Company's operating philosophy is to support its sales and service network
through training in technical, marketing and administrative support procedures,
advertising and promotion campaigns, and volume purchasing and uniform operating
procedures. Upon completion of the Acquisition, the Company will provide
additional products and services included in the Sales and Services Business.
See "-- The Sales and Services Business."
The principal business strategy of the Company is generally to increase its
presence as a leading independent supplier of automated office equipment and
related services, parts and supplies in existing and strategic new geographic
markets. The Company's internal expansion has resulted from increased product
offerings, aggressive marketing to new customers and emphasis on providing
service and supplies. The Company has expanded externally as a result of the
acquisition of selected suppliers of automated office equipment.
The Company's acquisition strategy is focused on acquiring businesses in
existing and new territories to increase market penetration. The Company seeks
to acquire companies that generally have an established customer base, a product
line comparable or complementary with the Company's current and anticipated
products, necessary manufacturer authorizations and the potential to benefit
from the Company's centralized purchasing power as well as from other potential
synergies.
As a result of the Company's acquisitions, it currently has a network of
over 400 locations and, upon completion of the Acquisition, will have in excess
of 700 locations in 31 different countries. Technology has increased the
complexity of future products and the high cost of product support has driven
consolidation within the industry. This trend has caused smaller independent
distributors to consider selling their dealerships to larger marketing and
service organizations such as the Company. The Company believes that select
acquisition opportunities continue to exist in the highly fragmented automated
office equipment industry in certain geographic areas.
The Company is a public limited company organized under the laws of England
and Wales. The registered and principal executive office of the Company is
located at Masters House, 107 Hammersmith Road, London, W14 0QH, England, and
its telephone number is 011-44-171-603-1515. For additional information
regarding the Company and the business it seeks to acquire see "INCORPORATION OF
CERTAIN DOCUMENTS BY REFERENCE" and "-- The Sales and Services Business."
Market Prices of ADSs and Ordinary Shares. The Company's ADSs are included
in the Nasdaq National Market under the Company's sponsored ADS facility with
The Bank of New York under the symbol "DANKY." Each ADS represents four Ordinary
Shares. The principal public trading market for the Ordinary Shares is the
London Stock Exchange Limited. The Ordinary Shares are listed under the symbol
"DNK.L".
8
<PAGE> 17
The following table sets forth the high and low sale price per ADS as
reported by the Nasdaq National Market and the high and low middle market
quotations (which represent an average of bid and offered prices in pence) for
the Ordinary Shares as reported on the London Stock Exchange Limited Daily
Official List:
<TABLE>
<CAPTION>
PENCE PER
U.S. DOLLARS ORDINARY
PER ADS SHARE
--------------- ----------
HIGH LOW HIGH LOW
------ ------ ---- ---
<S> <C> <C> <C> <C>
Fiscal Year 1995:
Quarter ended June 30, 1994............................. $23.38 $17.38 65 p 319p
Quarter ended September 30, 1994........................ 22.38 17.13 352 283
Quarter ended December 31, 1994......................... 22.13 17.13 344 269
Quarter ended March 31, 1995............................ 28.13 21.38 434 341
------ ------ --- ---
Fiscal 1996:
Quarter ended June 30, 1995............................. $27.75 $22.50 420 p 356p
Quarter ended September 30, 1995........................ 37.38 24.13 590 384
Quarter ended December 31, 1995......................... 38.50 29.75 595 489
Quarter ended March 31, 1996............................ 44.50 34.63 714 560
------ ------ --- ---
Fiscal 1997:
Quarter ended June 30, 1996............................. $51.88 $26.50 848 p 468p
Quarter ended September 30, 1996........................ 45.25 22.25 700 403
Quarter ended December 31, 1996 (through
October 25, 1996).................................... 43.25 37.00 670 593
</TABLE>
As of September 30, 1996, 42,461,651 ADSs were held of record by 3,358
registered holders and 56,275,643 Ordinary Shares were held of record by 1,533
registered holders. Since some of the ADSs and Ordinary Shares are held by
nominees, the number of holders may not be representative of the number of
beneficial owners. On September 6, 1996, the trading day preceding the
announcement of the Acquisition, the high and low sale price per ADS as reported
by the Nasdaq National Market, was $30.05 and $29.88 per ADS, respectively. On
October 25, 1996, the average of the high and low sale price per ADS as reported
by the Nasdaq National Market was $40.50 per ADS.
Dividends. The Company has declared and paid semi-annual cash dividends on
its Ordinary Shares each year since fiscal 1988. An interim cash dividend is
normally declared by the Board at the end of October of each fiscal year and
paid the following January. A final dividend is normally recommended by the
Board in May following the end of the fiscal year to which it relates and, after
approval by the Shareholders at the Annual General Meeting, is paid the
following July. The Board currently intends to continue to declare semiannual
cash dividends. Any determination to declare dividends in the future and their
amounts, however, will be at the discretion of the Board and will be dependent
upon the Company's earnings, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors deemed relevant by the
Board.
The following table sets forth dividends paid or payable in respect of ADSs
and Ordinary Shares for each of the past three fiscal years, including the
associated U.K. tax credit available to certain beneficial owners of ADSs or
Ordinary Shares who are residents of the United States or Canada for tax
purposes, but before deduction of U.K. withholding taxes. Dividends have been
converted from pounds sterling into U.S. dollars using exchange rates prevailing
on the date the dividends were paid to holders of ADSs and holders of Ordinary
Shares.
<TABLE>
<CAPTION>
CENTS PER ADS PENCE PER ORDINARY SHARE
------------------------- -------------------------
INTERIM FINAL TOTAL INTERIM FINAL TOTAL
------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
FISCAL
1994............................................ 5.8c 5.8c 11.6 c 0.75p 0.75 p 1.5p
1995............................................ 7.0c 7.0c 14.0 c 0.9p 0.9 p 1.8p
1996............................................ 8.0c 8.0c 16.0 c 1.08p 1.08 p 2.2p
</TABLE>
9
<PAGE> 18
U.S. beneficial owners of ADSs who meet certain requirements may receive
the associated U.K. tax credit at the same time as their dividends (after
deduction of U.K. withholding taxes). Other beneficial owners of ADSs and
Ordinary Shares will receive their dividends without the associated U.K. tax
credit and may make an individual claim for a refund of such tax credit (after
deduction of U.K. withholding taxes). The withholding taxes may be eligible for
credit against the beneficial owners' U.S. federal income taxes.
Security Ownership of Management and Certain Beneficial Owners. As of
September 30, 1996, the directors and executive officers of the Company
beneficially owned, in the aggregate, 13,136,938 Ordinary Shares of the Company,
representing 5.8% of the Ordinary Shares outstanding as set forth in the
following table. To the knowledge of the Company, all directors of the Company
intend to vote their outstanding Ordinary Shares for the approval and adoption
of the Ordinary Resolution.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AS OF SEPTEMBER 30, 1996(2)
-------------------------------------
NUMBER OF
ORDINARY ADS
NAME OF BENEFICIAL OWNER(1) SHARES EQUIVALENT PERCENT
- ------------------------------------------------------------ ---------- ---------- -------
<S> <C> <C> <C>
HOLDINGS OF GREATER THAN 5 PERCENT
Janus Capital Corporation(3)................................ 32,764,160 8,191,040 14.5%
HOLDINGS BY DIRECTORS AND EXECUTIVE OFFICERS
Daniel M. Doyle(4).......................................... 7,527,110 1,881,778 3.3%
Mark A. Vaughan-Lee(5)...................................... 1,112,000 278,000 *
David C. Snell.............................................. 1,040,000 260,000 *
David S. Hooker(6).......................................... 80,000 20,000 *
David W. Kendall............................................ 10,000 2,500 *
James F. White, Jr.......................................... 0 0 *
Pierson M. Grieve........................................... 4,000 1,000 *
Paul M. Natale(7)........................................... 122,864 30,716 *
Martin St. Quinton(8)....................................... 2,544,000 636,000 1.1%
All Directors and executive officers as a group (23
Persons).................................................. 13,136,938 3,284,234 5.8%
</TABLE>
- ---------------
(*) Represents less than one percent (1%) of the share capital.
(1) Except for Messrs. Natale and St. Quinton, all of the listed individuals are
currently Directors of the Company. Messrs. Doyle, Vaughan-Lee and Snell
are executive officers of the Company. Mr. St. Quinton is an officer of
Danka Europe. Mr. Natale is an officer of Danka Holding Company.
(2) Except as otherwise indicated, all Ordinary Shares are held of record with
sole voting and investment power.
(3) Janus Capital Corporation is a registered investment advisor. Includes
2,828,675 ADSs (the equivalent of 11,314,700 Ordinary Shares) held on
behalf of Janus Twenty Fund, a managed portfolio. The address of Janus
Capital Corporation is 100 Filmore Street, Suite 300 Denver, Colorado
80206-4923.
(4) Includes 229,850 Ordinary Shares (the equivalent of approximately 57,463
ADSs) held of record by Mr. Doyle's wife. Includes options held by Mr.
Doyle to purchase 2,900,000 Ordinary Shares (the equivalent of 725,000
ADSs), all of which are currently exercisable.
(5) Includes 33,000 Ordinary Shares (equivalent of 8,250 ADSs) held of record by
Mr. Vaughan-Lee's wife. Includes options held by Mr. Vaughan-Lee to
purchase 572,000 Ordinary Shares (equivalent of 143,000 ADSs), all of which
are currently exercisable.
(6) Includes options held by Mr. Hooker to purchase 75,000 Ordinary Shares
(equivalent of 18,750 ADSs), all of which are currently exercisable.
(7) Includes options held by Mr. Natale to purchase 66,400 Ordinary Shares
(equivalent of 16,600 ADSs), all of which are currently exercisable.
(8) Includes options held by Mr. St. Quinton to purchase 44,000 Ordinary Shares
(the equivalent of 11,000 ADSs), all of which are currently exercisable.
On September 30, 1996, The Bank of New York as Depositary for the Company
held 169,846,603 Ordinary Shares representing 75% of the Company's issued share
capital.
10
<PAGE> 19
New Developments In Management's Discussion and Analysis of Financial
Condition and Results of Operation -- The Company. The Company incorporates by
reference its previously filed Management's Discussion and Analysis of Financial
Condition and Results of Operation as contained in its Annual Report filed on
Form 10-K for the year ended March 31, 1996 and Quarterly Report filed on Form
10-Q for the Quarter ended June 30, 1996. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE." The following new information to the General, and
Liquidity and Capital Resources sections are provided to update Shareholders.
General -- New Developments. On September 6, 1996, the Company entered
into the Asset Purchase Agreement to acquire the Sales and Services Business of
Kodak. Subject to certain conditions, the Closing is expected to take place on
or before December 31, 1996. The Company will acquire the net assets of the
Sales and Services Business in exchange for $684.2 million in cash payable by
the Company at Closing. The consideration paid by the Company is subject to
adjustment following the Closing to the extent that the net book value of the
Sales and Services Business on the Closing date differs from $802.0 million.
The Sales and Services Business is engaged worldwide in the direct sale and
marketing of Kodak manufactured and branded black and white and accent color
high-volume photocopiers and duplicators, as well as Kodak branded mid-volume
black and white and color photocopiers manufactured by Canon, Inc., and in some
cases, remanufactured by Kodak. The Sales and Services Business also provides
on-site repair and technical and field engineering support for equipment sold,
leased and rented to others by the Sales and Services Business' and by other
photocopier distributors. In addition, the Sales and Services Business provides
customers with facilities management services, including the management of
central reprographics departments, the placement and maintenance of convenience
copiers, the operation of mail centers, the processing of statements,
print-on-demand operations and document archiving and retrieval services. The
facilities management business of the Sales and Services Business will represent
a significant increase in this type of business for the Company, but is expected
to complement the Company's new and existing product lines and services
primarily through its access to current and future major account customers.
In conjunction with the Acquisition, the Company will enter into the
Amended Supply Agreement with Kodak, pursuant to which the Company will
purchase, effective upon Closing, from Kodak its requirements for certain Kodak
manufactured or remanufactured electrophotographic equipment and accessories,
spare parts, supplies and toner. Subject to certain limitations under the
Amended Supply Agreement, the Company will have the worldwide exclusive right to
distribute Kodak's currently existing line of electrophotographic equipment for
office imaging and reprographics manufactured or remanufactured by Kodak and the
related software, supplies, accessories and spare parts and a right of first
refusal to exclusively distribute worldwide certain future electrophotographic
products manufactured by Kodak for office imaging and reprographics. The Company
has agreed to fund a total of $190.0 million (with a possible $30.0 million
additional contribution) over a period of six years for ongoing research and
development. The Amended Supply Agreement will have an initial term of ten (10)
years with all major provisions subject to renegotiation three (3) years from
Closing.
If the Acquisition is consummated, the Company will acquire in excess of
300 new locations, add 10,400 new employees and commence business in 19 new
countries. Currently, 60% of the Sales and Services Business is conducted in
North America and 34% in Europe. Approximately 90% of the Sales and Services
Business is being operated in countries in which the Company currently conducts
its business. The Company's goal is to increase the net margins of the Sales and
Services Business through certain cost efficiencies and synergies it expects to
achieve by operating the businesses. A number of factors are important in
effecting a successful acquisition and aggregation of this size and magnitude,
and there can be no assurances regarding the ultimate impact of the Acquisition
on the Company and its future business and operating results.
For the calendar year ended 1995, the Sales and Services Business had
revenues of approximately $1.8 billion. The Sales and Services Business had net
earnings in the amounts of $6 million and $22 million for calendar year 1995 and
the six-month period ended June 30, 1996, respectively. The Company expects to
record a $25.0 million to $35.0 million dollar pre-tax charge during the third
quarter of its fiscal 1997, related to the Acquisition. While there can be no
assurances, the Company believes that the Acquisition will be
11
<PAGE> 20
accretive to earnings within 12 months following the Closing. See "SPECIAL NOTE
REGARDING FORWARD LOOKING STATEMENTS."
The Company expects to finance the Acquisition with funds to be made
available at or before Closing through a credit facility provided by
NationsBank, N.A. ("NationsBank"). The Company has received a commitment letter
from NationsBank to provide the Credit Facility in the aggregate amount of up to
$1.275 billion, which the Company expects to finalize and close in December 1996
prior to the Meeting. The borrowed funds will also be used to refinance the
existing bank indebtedness of the Company and for working capital and general
corporate purposes.
Liquidity and Capital Resources -- New Developments. The Company has
received a commitment from NationsBank for a new multicurrency Credit Facility
which is expected to provide the Company with a revolving component in the
aggregate amount of up to $725.0 million and a term loan/letter of credit
component of $550.0 million (collectively, the "New Credit Facility"). The New
Credit Facility is expected to be secured by (i) a pledge of the capital stock
of the Company's holding company in each country that the Company and
NationsBank have deemed material (the "Material Countries"); (ii) guarantees, as
permitted under local law, of the Company's operating companies in the Material
Countries; and (iii) a covenant by the Company that it will not pledge its
assets except as specifically permitted under the terms of the credit facility.
The New Credit Facility is expected to have a term of six years and contain
negative and affirmative covenants and agreements restricting the Company's
disposition of assets, capital expenditures, acquisitions, operations,
additional indebtedness, permitted liens and payment of dividends as well as
requiring the maintenance of certain financial ratios. The adjustable interest
rate on the New Credit Facility is expected to be, at the option of the Company,
either (i) the London Interbank Offered Rate plus 0.6% (subject to adjustments
based upon covenants) for the periods of one, two, three or six months or (ii)
an alternate base rate consisting of the higher of the NationsBank prime rate or
the Federal Funds rate plus 0.5%. The Company intends to use the New Credit
Facility to (i) purchase the Sales and Services Business, (ii) refinance the
then existing bank indebtedness of the Company, and (iii) utilize the balance
for working capital and general corporate purposes. After satisfaction of the
obligations described in (i) and (ii) immediately above, the Company is expected
to have approximately $365.0 million available for future borrowings. It is
anticipated that the closing of the New Credit Facility will occur in early
December 1996, prior to the meeting.
Upon completion of the Acquisition, the Company's cash flow from operations
together with the anticipated borrowing capacity under the New Credit Facility
should be adequate to finance its operating cash requirements and capital
expenditures for the foreseeable future. It is anticipated that after the
Closing, future acquisitions and growth will be funded primarily with cash flow
from operations, borrowings expected to be available under the New Credit
Facility, other credit sources and, where desirable, funding from the sale of
additional debt or equity securities.
The Sales and Services Business
Overview. The Sales and Services Business is engaged worldwide in the
direct sale and marketing of Kodak manufactured and branded black and white and
accent color high-volume photocopiers and duplicators, as well as Kodak branded
mid-volume photocopiers manufactured by Canon, Inc. and in some cases,
remanufactured by Kodak. Throughout the world it also provides on-site repair
and technical and field engineering support for equipment sold, leased to others
and rented to others by the Sales and Services Business' sales force and by
other photocopier distributors and provides customers with facilities management
services, including the management of central reprographics departments, the
placement and maintenance of convenience copiers, the operation of mail centers,
the processing of statements, print-on-demand operations and document archiving
and retrieval services. In 1995, the Sales and Services Business had total sales
of $1.8 billion, of which approximately 60% and 34% were in the United States
and Europe, respectively.
Sales and Services. The Sales and Services Business sells and markets
Kodak manufactured and branded black and white and accent color, digital and
analog, high-volume photocopiers and duplicators (generally, equipment capable
of producing 70 or more copies per minute and an average of between 50,000 and
250,000 copies per month) and high speed printers (capable of producing 92
copies per minute and an
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average of 400,000 or more per month). The Sales and Services Business also
sells mid-volume photocopiers (generally, equipment capable of producing between
30 and 65 copies per minute and an average of between 8,000 and 28,000 copies
per month) and color photocopiers (5-7 copies per minute with an average of
between 2,000 and 7,000 copies per month) manufactured by Canon, Inc. and in
some cases, remanufactured by Kodak. Sales representatives of the Sales and
Services Business seek to obtain contracts for equipment sale, lease or rental,
as well as contracts for ongoing maintenance and the provision of consumable
supplies, such as toner and developer, used to produce photocopy images.
Customers also call the Sales and Services Business directly for individual
orders of supplies. See "-- Competition."
The service operations of the Sales and Services Business provide on-site
repair and technical and field engineering support for equipment sold, leased
and rented to third parties by the Sales and Services Business and, more
recently, for office imaging equipment manufactured by a third party
manufacturer.
Sales and service operations are organized into four geographic regions:
(i) the United States and Canada; (ii) Europe, Africa and the Middle East; (iii)
Asia Pacific and (iv) Latin America (including Mexico). Each region is further
divided into geographic zones, with sales representatives typically reporting to
district sales managers who in turn report to country or regional management.
Individual sales representatives are responsible for day-to-day contact with
customers concerning the entire range of office imaging products and services
marketed and sold or rented by the Sales and Services Business. Additional
support, provided by network systems engineers, network sales specialists and
network color specialists, as well as district and regional sales managers, is
available to assist sales representatives and customers in formulating
customized solutions to specific office imaging and reprographic needs. In
addition, the fifty largest customers of the Sales and Services Business in the
United States are each assigned a national account manager who serves as the
single point of contact for the customer's sales and service requirements. Once
an equipment purchase occurs, customer service representatives provide on-site
training to the customer's employees. In addition, field engineers provide
equipment maintenance and repair services pursuant to equipment maintenance
agreements and upon customer request.
The Sales and Services Business occupies service and sales offices in 31
countries worldwide, with over 300 separate locations. The world headquarters
for the Sales and Services Business is located at 901 Elmgrove Road, Rochester,
New York 14653, and the telephone number is (716) 724-4000.
Facilities Management. In 1991, Kodak Imaging Services, Inc. was
established by Kodak in response to customers' requests for reprographic and
related facilities management services. Generally, the facilities management
customers are large multi-national commercial, industrial, financial and
healthcare related companies, including certain Fortune 100 companies. The Sales
and Services Business regularly provides a number of core services to its large
customers, including the management of central reprographics departments, the
placement and maintenance of convenience copiers, the operation of mail centers,
the processing of statements, print-on-demand operations and document archiving
and retrieval services using micrographics.
The Sales and Services Business' facilities management operations are
located in 13 countries worldwide. The business is concentrated in the U.S. (55%
of 1995 revenues and approximately 180 customer sites) and Europe (primarily in
the United Kingdom and France). Start-up operations have also been established
in Canada.
Competition. The primary competitors of the Sales and Services Business
are Xerox, Canon, Ricoh Co., Ltd. and Oce -- van der Grinten N.V. and other
independent distributors of office imaging equipment, such as Alco Standard
Corp. Independent service organizations also compete with the Sales and Services
Business to service and maintain office imaging equipment. The factors of
competition in the Sales and Services Business are similar to those faced
currently by the Company in its core operations.
Competitors in the facilities management business include Xerox, Pitney
Bowes Inc., R.R. Donnelly & Sons Inc. and Alco Standard Corp. Strong local
competition also exists such as the Lea Group, Ltd. in the United Kingdom.
Competition in the facilities management business is based primarily on the
technical solutions devised, the breadth of services offered and pricing.
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<PAGE> 22
Litigation. On February 15, 1996, a permanent injunction was issued
against Kodak by the United States District Court for the Northern District of
California, that is binding upon all successors to Kodak's photocopier equipment
sales business. This injunction requires Kodak to supply parts to independent
service organizations ("ISOs") that service Kodak manufactured high-volume
photocopiers. Pursuant to the Asset Purchase Agreement, the Company has agreed
to be bound by the injunction; cooperate with Kodak in satisfying its liability
for failure to sell spare parts to ISOs (other than by the Company paying
money); assist Kodak with its appeal of the injunction; and, if requested by
Kodak, assist Kodak in obtaining a release from the injunction. Kodak has agreed
to reimburse the Company for 50% of the costs incurred by the Company in
performing its agreed upon obligations.
Customers and Suppliers. The Sales and Services Business derives its
revenues from a broad customer base. In 1995 no single end customer accounted
for more than three percent of the Sales and Services Business sales revenue
except that approximately ten percent of the revenue of the Sales and Services
Business was generated by an unaffiliated leasing company that provides
financing to end customers.
Following the Closing, and for the term of the Amended Supply Agreement,
Kodak's Office Imaging manufacturing unit is expected to continue to be the
primary supplier of the products including spare parts sold by the Sales and
Services Business. See "-- The Amended Supply Agreement."
The Sales and Services Business currently employs approximately 10,400
people worldwide. Of these, 2,800 are engaged in sales, marketing and related
functions, 5,500 are employed as field engineers or in related service functions
and 2,100 are facilities management employees. None of the 6,000 employees in
the United States are covered by collective bargaining agreements. Sales and
Services Business' employees outside of the United States participate in
collective bargaining units, trade unions, works councils and similar
organizations in localities where it is customary or required by law or
regulation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- HISTORICAL SALES AND SERVICES BUSINESS
General. The following table sets forth certain data from the combined
Statement of Operations for the first six months of 1996 and 1995 and full years
1995 and 1994 for the historical Office Imaging Sales and Services Business (the
"Historical Business").
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- ------------------------
1996 1995 CHANGE 1995 1994 CHANGE
---- ---- ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Revenues and income........................... $880 877 0 % $1,836 $1,745 5%
Earnings before income taxes.................. 44 5 >200 % 25 36 (31)%
Net earnings.................................. 22 1 >200 % 6 3 100%
</TABLE>
The Historical Business is comprised of certain worldwide commercial
equipment sales and service businesses of Kodak: the sales and marketing
operations of Kodak's Office Imaging business unit ("OI"), the portion of
Kodak's Customer Equipment Services business unit ("CES") that serves OI, and
the facilities management business known as Kodak Imaging Services ("KIS"). The
sales and marketing operations of the OI business markets, sells and leases
reprographics products worldwide. The CES business is engaged in providing parts
and service for reprographics equipment. KIS provides facilities management
services to customers worldwide, including the operation of copier/duplicator
centers.
Substantially all of the reprographics equipment, supplies and a majority
of parts sold and distributed by the Historical Business have been purchased
from the OI manufacturing division (the "Manufacturing Division") of Kodak.
Historically, the operations of the Historical Business and the Manufacturing
Division have been combined. Consequently, a substantial portion of the
equipment, supplies and parts transferred by the Manufacturing Division to the
Historical Business have been at the Manufacturing Division's cost, with the
remaining portion of equipment, supplies and parts transferred at prices with
predetermined mark-ups. Also, the cost of equipment, supplies and parts
transferred from the Manufacturing Division to the Historical
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<PAGE> 23
Business have not included costs associated with research and development
activities which are incurred by the Manufacturing Division.
In determining the Historical Business' operating expenses certain
allocations were made for expenses incurred by Kodak that are attributed to
services provided to the Historical Business. These allocations relate primarily
to accounting, treasury, legal and other general and administrative functions
performed on behalf of the Historical Business. Costs for such services have
been reflected in the Historical Business' results of operations on the basis of
activity or utilization, estimated support provided to the Historical Business,
or other methods management believes to be reasonable. (See Notes 1 and 11 to
the combined financial statements of the Historical Business).
Pursuant to the Asset Purchase Agreement, there are certain assets and
liabilities reflected in the combined financial statements of the Historical
Business that will not be acquired or assumed by the Company. The most
significant of these items relate to: the net investment in direct finance and
sales-type leases (exclusive of estimated unguaranteed residual values that will
be acquired by the Company); accrued pension expense; accrued post-retirement
benefit costs; intangible assets; deferred income tax assets and liabilities,
and the assets and liabilities related to sales by the Historical Business of
certain equipment manufactured for third parties and toner. Furthermore, certain
obligations related to lawsuits, claims and investigations involving the
Historical Business, will be retained by Kodak. See the related Notes to the
Combined Financial Statements for the Historical Business and the Pro Forma
Condensed Consolidated Financial Statements.
Six Months Ended June 30, 1996 Compared with Six Months Ended June 30,
1995. Worldwide revenues and income for the first six months of 1996 were level
with the comparable period of 1995. Rental and service revenues increased 2%,
while equipment and supplies sales revenues were down 3%.
Earnings before income taxes for the first six months of 1996 increased
significantly over the comparable period of 1995. Earnings before income taxes
benefited from lower purchase prices for equipment, supplies and parts; service
productivity improvements and a favorable shift in product mix.
Cost of goods sold as a percent of revenue for equipment and supplies sales
for the first six months of 1996 decreased 10.8 percentage points from the
comparable period of 1995 as a result of lower purchase prices for equipment,
supplies and parts, service productivity improvements, higher effective selling
prices and a favorable shift in product mix. Costs of goods sold as a percent of
revenue for rental and service revenues for the first six months of 1996
decreased 0.3 percentage points from the comparable period of 1995 as a result
of service productivity improvements.
Selling, general and administrative expenses totaled $205 million and $207
million for the first six months of 1996 and 1995, respectively. Total selling,
general and administrative expenses were 23.3% and 23.6% of revenue in the first
six months of 1996 and 1995, respectively.
The effective tax rate was 50% for the first six months of 1996 compared
with 80% for the comparable period of 1995. The effective tax rates in excess of
the U.S. statutory rate of 35% principally resulted from operating losses in
certain jurisdictions outside the U.S. for which tax benefits have not been
taken.
Year Ended December 31, 1995 Compared with Year Ended December 31,
1994. Worldwide 1995 revenues and income increased 5% versus 1994, due to
higher volumes and the favorable effects of foreign currency rate changes.
Rental and service revenues also increased 5%, while equipment and supplies
sales revenues showed a 4% increase. Revenues in the European region increased
12%, while revenues in the U.S. were unchanged when compared with 1994.
Earnings before income taxes decreased 31% from 1994. Earnings before
income taxes benefited from increased volumes, lower purchase prices for
equipment, supplies and parts; and the favorable effects of foreign currency
rate changes, but were adversely effected by an unfavorable shift in product
mix, higher levels of selling, general and administrative activity and lower
effective selling prices.
Cost of goods sold as a percent of revenue for equipment and supplies sales
decreased 5.4 percentage points from 1994 to 1995 as a result of lower purchase
prices for equipment, supplies and parts. Costs of goods
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<PAGE> 24
sold as a percent of revenue for rental and service revenue increased 5.2
percentage points from 1994 to 1995 as a result of an unfavorable shift in
product mix and lower effective selling prices.
Advertising and sales promotion expenses totaled $12 million in 1995 and
$11 million in 1994. Other selling, general and administrative expenses totaled
$414 million in 1995 and $395 million in 1994. Increases in selling, general and
administrative expenses in 1995 resulted from the effects of foreign currency
rate changes and higher activity levels directly proportional to revenue
increases. Total selling, general and administrative expenses were 23% of
revenue for both 1995 and 1994.
Other income was $13 million in 1995 compared with $8 million in 1994. The
increase in 1995 was primarily due to higher interest income associated with the
increase in direct finance and sales-type leases. Other costs of $2 million in
1995 are down from the $7 million in 1994 as a result of lower foreign currency
losses in 1995 and severance costs recorded in 1994 to realign the Historical
Business' European marketing operations.
The effective tax rates were 76% in 1995 and 92% in 1994. The effective tax
rates in excess of the U.S. statutory rate of 35% principally resulted from
operating losses in certain jurisdictions outside the U.S. for which tax
benefits have not been taken. Valuation allowances related to these losses of
$26 million and $16 million existed at year-end 1995 and 1994, respectively.
Liquidity and Capital Resources -- Sales and Services Business. The
Historical Business has no external borrowings and there has been no allocation
in the combined financial statements of Kodak's consolidated borrowings to the
Historical Business. Funding for all working capital requirements, including
finance and sales-type lease receivables and capital expenditures, were provided
by Kodak. Furthermore, the Historical Business utilizes Kodak's cash management
systems. Under these systems, Kodak's centralized cash accounts receive cash
generated from the collection of the Historical Business' receivables and fund
cash disbursements for use in the Historical Business' operations. The
cumulative net effect of the Historical Business' activity in Kodak's cash
management systems, including funding provided by Kodak for capital
expenditures, is reflected as net advances/distributions from/to Kodak in the
combined statement of cash flows. Net advances from Kodak of $38 million in 1995
were needed to fund capital expenditures of $30 million and cash used in the
operations of $9 million. Net distributions to Kodak of $67 million for the six-
month period ended June 30, 1996 resulted primarily from net cash provided by
operating activities of $66 million.
Net working capital at year-end 1995 increased to $505 million from $483
million at year-end 1994. The net change was caused primarily by increases in
accounts receivable and direct finance and sales-type leases, which resulted
from higher revenues. Capital additions were $21 million, $30 million and $6
million in 1994, 1995 and for the six-month period ended June 30, 1996,
respectively.
THE ACQUISITION
The Asset Purchase Agreement. On September 6, 1996 the Company and Kodak
executed the Asset Purchase Agreement, pursuant to which the Company agreed to
acquire for $684.2 million, in cash, payable at Closing, the net assets of
Kodak's Sales and Services Business including (i) certain assets and liabilities
relating to (x) the sales, marketing, distribution and services business of
Kodak's Office Imaging and Customer Equipment Services business units and (y)
the facilities management service business, Kodak Imaging Services, and (ii) all
the issued and outstanding stock of the subsidiaries of Kodak engaged in
facilities management services. The consideration paid by the Company will be
adjusted following Closing to the extent the net book value of the Sales and
Services Business on the Closing date differs from $802.0 million. During the
period between September 6, 1996 and Closing, the Company may suggest to Kodak
and, if requested, assist Kodak in the implementation of a transition plan for
the Sales and Services Business.
Closing. The Closing of the Acquisition will take place on the fifth
business day after the following conditions are satisfied or waived: (i) the
approval, clearance or decision not to intervene by certain governmental
antitrust authorities (ii) the absence of any court or governmental statute,
rule, regulation or non-appealable judgment, decree, injunction or other order
prohibiting the consummation of the Acquisition;
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<PAGE> 25
(iii) the receipt of certain required approvals and consents; and (iv) the
approval and adoption of the Ordinary Resolution by the requisite vote of the
Company's Shareholders. The parties expect the Closing to occur on or before
December 31, 1996.
Representations and Warranties. The Asset Purchase Agreement contains
various representations and warranties of the parties thereto, including
representations and warranties, among other things, as to organization;
ownership of subsidiaries; the authorization and enforceability of the Asset
Purchase Agreement, the Amended Supply Agreement and other documents; compliance
with laws; consents required with respect to the Acquisition; financial
statements; certain tax matters; employee benefit plans; title to properties;
enforceability of contracts; legal proceedings; and the conduct of the Sales and
Services Business pending closing. The Company has represented and warranted
that it will have adequate financing to consummate the Acquisition at the time
of the Closing. Subject to certain exceptions, the representations and
warranties of the Company and Kodak shall terminate 18 months after the Closing.
Covenants. The Asset Purchase Agreement contains various agreements and
covenants of the parties thereto, including, among other things, covenants of
the Company and Kodak to (i) grant each other access to their respective books
and records; (ii) cooperate with each other and use reasonable best efforts to
obtain any consents or approvals required to consummate the Acquisition and
fulfill the other conditions precedent to their respective obligations under the
Asset Purchase Agreement; (iii) cooperate with each other to determine and
allocate their respective tax obligations; (iv) cooperate with each other to
negotiate certain arrangements with third parties; (v) maintain the
confidentiality of any information obtained from the other; (vi) mutually
approve in advance any press release or similar public announcement regarding
the Acquisition; and (vii) enter into the Amended Supply Agreement and other
ancillary agreements.
Kodak has agreed (i) prior to Closing to conduct the Sales and Services
Business in the ordinary course and to use its reasonable best efforts to
preserve intact the Sales and Services Business and its relationship with its
customers, suppliers and employees; (ii) not to take certain actions prior to
Closing, see "-- Conduct of Business Pending the Closing"; (iii) that, for at
least three (3) years following the Closing, all of Kodak's purchases of its
electrophotographic systems for office imaging and reprographics and related
parts, service and supplies will be made exclusively from the Company; and (iv)
for at least three (3) years following the Closing, to treat the Company as a
preferred provider of Kodak's requirements for other automated office equipment.
The Company has agreed prior to Closing to offer employment, in comparable
positions, to all persons who, as of the Closing, are employees of the Sales and
Services Business and to offer employment to certain employees, in comparable
positions, who are shared by the Sales and Services Business and other
businesses of Kodak, to provide such employees with the same benefits that the
Company provides to its existing employees as of the Closing, which benefits
shall include certain additional benefits that were not provided as of September
6, 1996 and, for an 18 month period following Closing, to provide those Kodak
employees who accept employment with the Company with severance benefits at
least equal to those provided by Kodak. Kodak has agreed to share 75% of any
severance benefits payable to such employees during the first 12 months
following the Closing and 50% of any such benefits payable during the
immediately following six months up to an aggregate of $75.0 million for the 18
month period. The Company has also agreed to a variety of lease arrangements for
certain real property used in the Sales and Services Business; to be bound by
the injunction to which Kodak is subject relating to the selling of spare parts
to ISOs who are engaged in the business of servicing Kodak equipment and to
cooperate with and assist Kodak in its appeal of such injunction; and to
guarantee the performance of each of its subsidiaries under any of the
agreements to which such subsidiaries are a party. See "The Parties to the
Acquisition -- The Sales and Services Business -- Litigation."
Kodak and the Company have also agreed to use their reasonable efforts to
obtain Canon's consent to the assignment to the Company of agreements pursuant
to which the Sales and Services Business currently purchases from Canon, Canon
manufactured, Kodak branded electrophotographic equipment for resale ("Canon
Agreements"). The Asset Purchase Agreement provides that in lieu of obtaining
Canon's consent to the assignment of the Canon Agreements, Kodak and the Company
may enter into arrangements with another manufacturer of mid-volume photocopiers
pursuant to which the Company would obtain Kodak branded
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<PAGE> 26
photocopiers comparable to those which the Sales and Services Business purchases
for resale under the Canon Agreements. On September 6, 1996, Canon agreed in
principle to the assignment of the Agreements, subject to certain modifications
requested by Kodak and certain conditions.
Kodak has incurred certain ongoing obligations to General Electric Capital
Corporation ("GECC") in its operation of the Sales and Services Business.
Pursuant to the Asset Purchase Agreement, the Company and Kodak have agreed to
use their reasonable best efforts, until the Closing, to reach an agreement with
GECC that would further the economic interests of both the Company and Kodak.
The Company has further agreed that, failing such an agreement, it will not, for
a period of 40 months from the signing of the Asset Purchase Agreement, take any
action that would be reasonably likely to interfere with Kodak's ability to
conclude an agreement with GECC to resolve Kodak's obligations to GECC. Such
agreement would preclude the Company from utilizing financing services provided
by GECC for the Sales and Services Business.
No Solicitation. Kodak has agreed that it will not, until the earlier of
either the termination of the Asset Purchase Agreement or the Closing of the
Acquisition, initiate or solicit any inquiries or proposals or conduct any
discussions regarding the sale of any of the assets subject to the Asset
Purchase Agreement including the Sales and Services Business.
Indemnification. The Asset Purchase Agreement provides for indemnification
of Kodak and certain related parties by the Company for any damages, claims or
losses imposed on them relating to, arising out of or resulting from (i) any
breach of a representation or warranty or covenant made by the Company in the
Asset Purchase Agreement; (ii) any liability assumed by the Company; (iii) any
liability arising out of or relating to the Sales and Services Business to the
extent attributable to occurrences and circumstances arising following Closing;
and (iv) any taxes for which the Company is responsible under the Asset Purchase
Agreement. The Company shall only be liable to Kodak or its related parties for
breaches of its representations and warranties to the extent their aggregate
losses exceed $250,000 and then only to an aggregate amount equal to 50% of the
purchase price.
Kodak has agreed to indemnify the Company and certain related parties for
any damages, claims or losses imposed on them relating to, arising out of or
resulting from (i) any breach of a representation or warranty or covenant made
by Kodak in the Asset Purchase Agreement; (ii) any liability not assumed by the
Company; (iii) any taxes for which Kodak is responsible under the Asset Purchase
Agreement; and (iv) certain liabilities under environmental laws for certain
conditions, actions or failures to take action with respect to certain real
property owned or leased by Kodak. Kodak shall only be liable to the Company or
its related parties for breaches of its representations and warranties to the
extent that aggregate losses exceed $20.5 million and then only to an aggregate
amount of not more than 50% of the purchase price.
Conditions. The obligations of the parties to consummate the Acquisition
are subject to the satisfaction or waiver of certain conditions. These include:
(i) the approval, clearance or decision not to intervene by certain governmental
antitrust authorities, including the expiration of the relevant waiting period
under the HSR Act which occurred on October 20, 1996; (ii) the absence of any
court or governmental statute, rule, regulation or non-appealable judgment,
decree, injunction or other order prohibiting the consummation of the
Acquisition; (iii) the receipt of certain required approvals and consents; and
(iv) the approval and adoption of the Ordinary Resolution by the requisite vote
of the Company's Shareholders.
Termination, Amendments and Waivers. The Asset Purchase Agreement may be
terminated (i) by mutual agreement of the Company and Kodak; (ii) if the Closing
has not occurred by February 28, 1997 (provided the Company may not terminate
the Asset Purchase Agreement if the Closing has not occurred by such date due to
the failure to have obtained certain governmental antitrust consents); (iii) if
the Acquisition is prohibited by applicable law; or (iv) if the Closing has not
occurred within ten business days after all of the conditions to Closing have
been satisfied or waived.
Any provision of the Asset Purchase Agreement may be amended or waived if,
and only if, such amendment or waiver is in writing and signed, in the case of
an amendment, by the Company and Kodak, or in the case of a waiver, by the party
against whom the waiver is to be effective.
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<PAGE> 27
Expenses. The Asset Purchase Agreement provides that, whether or not the
Acquisition is consummated, all costs and expenses incurred in connection with
the Acquisition shall be borne by the party incurring such expenses unless
expressly provided otherwise in the Asset Purchase Agreement.
Conduct of Business Pending the Closing. Kodak has agreed that until the
Closing it shall not (i) intentionally incur, create or assume any encumbrance
on any of its assets other than certain permitted encumbrances; (ii) acquire,
sell, lease, license, transfer or dispose of any assets other than in the
ordinary course of business; (iii) terminate or materially extend or materially
modify any material contract; (iv) enter into any contract, arrangement or
commitment other than in the ordinary course of business; (v) incur indebtedness
for borrowed money; (vi) issue, grant or sell any shares of capital stock of any
of the Kodak subsidiaries comprising Kodak Imaging Services or issue, grant or
sell any options, warrants or other rights to purchase any such shares or
securities convertible into or exchangeable for such shares; (vii) do any other
act which would cause any representation or warranty of Kodak in the Asset
Purchase Agreement to be or become untrue in any material respect or
intentionally omit to take any action necessary to prevent any such
representation or warranty from being untrue in any material respect at such
time; or (viii) enter into any agreement or commitment with respect to any of
the foregoing.
THE AMENDED SUPPLY AGREEMENT
On September 5, 1995, a subsidiary of the Company entered into reseller
agreements (collectively "Reseller Agreement") with Kodak whereby the Company
was granted the non-exclusive right to sell and service Kodak high-volume
copiers in the United States and Canada. The Reseller Agreement was cancelable
at any time without cause by either party upon 120 days notice. In conjunction
with the Acquisition, the parties will enter into the Amended Supply Agreement
at Closing.
Pursuant to the Amended Supply Agreement, effective at Closing, the Company
will agree to purchase from Kodak its requirements for Kodak branded
electrophotographic equipment for office imaging and reprographics manufactured
or remanufactured by Kodak ("Equipment") and accessories, spare parts, supplies
and toner for such Equipment, and "Kodak" branded third party remanufactured
equipment.
For the first three years of the Amended Supply Agreement, the Company has
committed to certain minimum purchases of Equipment at fixed prices. Thereafter,
product prices will be mutually agreed upon by Kodak and the Company. If the
Company fails to purchase certain targeted volumes of Equipment during the years
1997 through 1999, it is obligated to reimburse Kodak for certain costs incurred
by Kodak associated with shortfalls. In the event the Company exceeds certain
targeted volumes during such period, Kodak has agreed to make cash payments to
the Company equal to certain additional margins resulting from such increased
purchases. The Company is not able to estimate with any certainty the amounts
that could be due to or from Kodak for under/over achievement of targeted
volumes as such sums are dependent upon future market conditions, responses to
the Company's sales and promotional efforts and matters generally not within its
direction and control.
Under the Amended Supply Agreement, the Company will have, with limited
exceptions for certain applications, market segments and geographic areas, the
exclusive right to distribute in most worldwide markets Kodak's currently
existing line of Equipment and related software, supplies, accessories and spare
parts manufactured or remanufactured by Kodak ("Current Products"). The Company
will also have a right of first refusal to exclusively distribute worldwide each
proposed new electrophotographic product for office imaging or reprographics
other than Equipment capable of producing full color images ("New Products")
with limited exceptions for certain applications, market segments and geographic
areas. The Company's exclusivity rights with respect to Current Products shall
terminate upon the earlier of (i) the Company's failure to purchase the minimums
specified in the Amended Supply Agreement and (ii) the Company's failure to pay
any contributions to research and development required by the Amended Supply
Agreement. Kodak may terminate the Company's exclusivity rights with respect to
any New Product if the Company fails to meet its minimum purchase requirements
for such product.
Until the earlier of (i) the termination of the Company's exclusivity
rights described above and (ii) five years from the date of the Amended Supply
Agreement, the Company shall have a nonexclusive right to
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distribute certain electrophotographic equipment capable of producing full color
images and related software, supplies, accessories and spare parts developed and
manufactured by Kodak.
The Company has agreed to fund a total of $190.0 million to Kodak for
ongoing research and development over a six-year period (plus an additional
$30.0 million if certain research milestones are met). The Company and Kodak
shall each appoint three representatives to serve as members of an advisory
committee, which shall meet on a regular basis to discuss overall research and
development progress and plans for the development of New Products.
Kodak may not assign any of its rights under the Amended Supply Agreement
or sell its Manufacturing Division during the first 30 months of the Amended
Supply Agreement. Thereafter, the Company shall have the right of first offer to
purchase the Manufacturing Division in the event Kodak were to offer to sell its
Manufacturing Division. Kodak has also agreed not to market, sell, distribute,
maintain, service or repair any equipment that is a Current Product or a New
Product, except as expressly permitted by the Amended Supply Agreement, until
such time that the Company's exclusivity rights with respect to Current Products
terminate.
The Amended Supply Agreement will have an initial term of ten (10) years
and may be renewed for an additional term of three (3) years upon the mutual
agreement of the parties. The Amended Supply Agreement may be terminated (i) by
mutual agreement of the Company and Kodak; (ii) after material breach of one of
the parties; or (iii) by Kodak after the third anniversary thereof if it
determines that the manufacturing business has failed to achieve adequate
profitability, in which case Kodak may elect to begin a 24 month winding down
period at the end of which Kodak shall cease to engage in such business and the
Amended Supply Agreement will be terminated.
FINANCING THE ACQUISITION
Source and Amount of Funds. The cash funds required by the Company at the
Closing to purchase the Sales and Services Business pursuant to the Asset
Purchase Agreement is approximately $684.2 million. The Company has received a
commitment letter from NationsBank whereby, subject to various contingencies,
NationsBank has agreed to provide financing to the Company in the aggregate
amount of up to $1.275 billion. The commitment letter provides that, upon
satisfaction of certain ordinary and customary conditions, the Company shall
under a credit agreement with NationsBank as Agent and the Lenders (the "Credit
Agreement") obtain (i) a six-year term revolving credit facility in the
aggregate amount of up to $725.0 million which will include a $75.0 million
sublimit for the issuance of standby and commercial letters of credit (each a
"Letter of Credit") and a sublimit for multi-currency borrowings in readily
available currencies to be determined, and (ii) a six-year term loan/letter of
credit facility of $550.0 million (collectively, the "New Credit Facility"). The
New Credit Facility is expected to be secured by (i) a pledge of the capital
stock of the Company's holding company in each of the Material Countries; (ii)
guarantees, as permitted under local law, of the Company's operating companies
in the Material Countries; and (iii) a covenant by the Company that it will not
pledge its assets except as specifically permitted under the terms of the credit
facility. NationsBank will act as sole and exclusive administrative agent for
the New Credit Facility. NationsBanc Capital Markets, Inc. ("NCMI") will act as
the arranger and syndication agent for the New Credit Facility to form a
syndicate of financial institutions (the "Lenders") reasonably acceptable to the
Company for the New Credit Facility. Letters of Credit will be issued by
NationsBank and other Lenders, and each Lender will purchase an irrevocable and
unconditional participation in each Letter of Credit. The Company intends to use
the proceeds provided from the New Credit Facility (i) to purchase the Sales and
Services Business, (ii) to refinance the then existing bank indebtedness of the
Company and (iii) to apply a portion of such proceeds for working capital and
general corporate purposes of the Company. The Company, at October 1, 1996, had
approximately $220.0 million of outstanding bank indebtedness to be refinanced
in connection with the consummation of the Acquisition. Loans under the Credit
Agreement would bear interest, at the option of the Company, at either: (i) the
London InterBank Offered Rate plus 0.6% for the periods of one, two, three or
six months or (ii) an alternate base rate, consisting of the higher of (A) the
NationsBank prime rate and (B) the Federal Funds rate plus 0.5%.
20
<PAGE> 29
Conditions. The Credit Agreement will be subject to the satisfaction of
various conditions precedent related to financial information regarding the
Sales and Services Business, no adverse material changes in the Company or the
financial market, compliance with and satisfaction of certain existing financial
obligations and the acceptability of certain documents relating to the Credit
Agreement. The conditions also require certain legal opinions, as well as
satisfaction of any other conditions as are appropriate, normal and customary to
similar financing arrangements.
Covenants and Restrictions. The Credit Agreement will contain certain
negative and affirmative covenants and agreements which place requirements and
restrictions on the Company regarding disposition of assets, financial ratios,
capital expenditures, acquisitions, operations, additional indebtedness,
permitted liens and payment of dividends similar to those contained in the
Company's current principal credit facility.
BACKGROUND OF THE ACQUISITION
On January 18, 1996, Kodak announced its intention to strengthen and
reposition its Office Imaging Business by exploring various strategic options
and structural alternatives. Following Kodak's announcement, its investment and
financial advisor, Goldman, Sachs & Co. ("Goldman") contacted the Company and
expressed an interest in exploring such strategic options and structural
alternatives. In late January, Kodak advised the Company that Kodak would
entertain bids for the purchase of its Office Imaging Business. In February, the
Company engaged Salomon Brothers Inc ("Salomon") as its financial advisor to
represent the Company in conjunction with its interest in purchasing Kodak's
Office Imaging Business.
On February 6, 1996, Kodak and the Company executed a confidentiality
agreement. Shortly thereafter, the Company received a short sales memorandum
from Goldman, which discussed industry information and set forth the
requirements for the submission of a bid for the Office Imaging Business. At the
end of February, Goldman distributed a Confidential Memorandum to the Company,
which contained detailed descriptions of, and financial information with respect
to, Kodak's Office Imaging Business.
In late March 1996, the Company submitted a non-binding preliminary
indication of interest letter to Goldman. In its March non-binding letter, the
Company expressed an interest in acquiring 100% of the worldwide sales and
service network of the Office Imaging Business and proposed that the
manufacturing and research and development business segment of the Office
Imaging Business be owned by a consortium, including the Company and Kodak
and/or an, as yet unidentified, alternative manufacturing and technology
company. The non-binding letter provided that the Company would be interested in
discussing the possible purchase of the Office Imaging Business at a price range
between $475.0 million and $1.0 billion.
In early April 1996, Kodak invited representatives of the Company to visit
its headquarters in Rochester, New York for management presentations, facilities
tours and data room visits to review certain agreements and financial data. In
mid-April, Company management, accompanied by its legal and financial advisors,
visited Kodak's headquarters in Rochester, New York to conduct due diligence
with respect to the Office Imaging Business, and to listen to Kodak management
presentations. On May 5, 1996 the Board met in Atlanta, Georgia and discussed
the status of the Kodak negotiations.
In mid-May 1996 the Company received a letter from Goldman, on behalf of
Kodak, which invited the Company to submit a definitive non-binding proposal to
Kodak for the acquisition of the Office Imaging Business. Goldman set the date
of June 10, 1996 as the deadline for submitting the definitive non-binding
proposal.
On June 3, 1996 an informal meeting was held in London, during which the
Company's Chief Executive Officer, Mr. Daniel M. Doyle updated the Chairman of
the Company's Board, Mr. Mark Vaughan-Lee, and the other U.K. Directors on the
progress of the negotiations with Kodak. Mr. Doyle also had face to face
meetings with the Company's U.S. Directors. The Company's Directors also had
periodic informal communications with management regarding the ongoing
negotiations.
In early June, Company management and the Company's legal and financial
advisors prepared a detailed letter which set forth the Company's proposal to
Kodak. On June 9, 1996, a telephonic Board meeting was held during which the
Board approved the sending of the detailed non-binding letter which set forth
the
21
<PAGE> 30
Company's proposal. In advance of such meeting, all Directors of the Company
were supplied with information prepared by Salomon regarding Kodak, the industry
and the Company's opportunity. The following day, June 10, 1996, the Company
submitted its detailed non-binding proposal, which was subject to the Board's
final approval. In its proposal, the Company offered to purchase the worldwide
Sales and Services Business and to form a joint venture to own the Manufacturing
Division for a total consideration of $823.0 million.
In mid-June 1996, Goldman sent a letter to Salomon, which set forth
portions of the Company's proposal that required clarification as well as
portions that were objected to by Kodak. On June 17, 1996 the Company responded
to Goldman's objections with a revised proposal, pursuant to which the Company
agreed to assume certain additional obligations with respect to employee
transfers, benefits and severance and reduced its previous offer by $20.0
million.
On June 18, 1996, Goldman contacted the Company and requested that face to
face meetings be held to discuss the Company's latest proposal. On June 19th and
20th representatives of Kodak, the Company and their respective legal and
financial advisors met in New York City to discuss further alternatives and
concepts with respect to a possible acquisition by the Company of the Office
Imaging Business.
On June 21, 1996, in a telephone conference meeting between certain members
of the Company's and Kodak's management as well as the parties' respective
financial advisors, Kodak indicated that it would entertain a proposal from the
Company to purchase just the sales and services portion of Kodak's Office
Imaging Business, which would include a commitment by the Company to enter into
a long term supply agreement with Kodak.
On June 28, 1996 Salomon advised Goldman that the Company was interested in
the possibility of purchasing the worldwide sales and services portions of
Kodak's Office Imaging Business and entering into a long term supply agreement
with Kodak.
Throughout the month of July various meetings were held in New York between
the parties' respective financial and legal advisors and certain members of each
parties' management to discuss the possible purchase by the Company of the
worldwide sales and service portion of the Office Imaging Business and the
structure of a long term supply agreement. The Company's Board met in Virginia
on July 12, 1996 to discuss the status of the negotiations with Kodak.
On July 17, 1996, Salomon sent Goldman a letter which set forth the
Company's offer to purchase, solely the sales and services portions of the
Office Imaging Business, for $725.0 million and in conjunction therewith, enter
into a long term supply agreement with Kodak.
Throughout the later half of July and the month of August, the parties
negotiated the details of a possible purchase by the Company of the sales and
services businesses of Kodak's Office Imaging Business. On August 9, 1996, Mr.
Doyle, for the Company, and Mr. Wilbur J. Prezzano, for Kodak, spoke by
telephone and reached an understanding in general terms to proceed to structure
an asset purchase agreement with respect to the sales and services businesses
coupled with a long term supply agreement.
From August 9, 1996 forward, the Company and Kodak negotiated the details
of an asset purchase agreement and supply agreement in daily meetings. On August
19, 1996 the Board held a conference call meeting to discuss the status of the
negotiations. On August 22, 1996, the Company's Board was briefed by Salomon
with respect to the revised structure of the Company's proposed acquisition of
Kodak's worldwide sales and services businesses.
On August 28, 1996, the Company's Board held a conference call meeting and
Mr. Doyle advised the Board as to the strategic aspects of the proposed
acquisition as well as the implementation thereof and Salomon briefed the Board
on the current structure of the proposed asset purchase agreement. On September
3, 1996, the Company's Board convened in New York City and reviewed with its
financial advisor the terms of the proposed acquisition and the potential
financial and strategic benefits of the proposed acquisition and after receiving
Salomon's oral opinion that the consideration to be paid by the Company was
22
<PAGE> 31
fair to the Company from a financial point of view, the Board approved the
proposed acquisition subject to final agreement on the terms of the asset
purchase agreement.
On September 6, 1996, the Company and Kodak finalized their negotiations
and as a result executed the Asset Purchase Agreement wherein the Company agreed
to acquire the Sales and Services Business in exchange for $684.2 million in
cash payable at Closing, subject to adjustment following the Closing to the
extent that the net book value of the Sales and Services Business on the Closing
date differs from $802.0 million. The Company's previous cash offer of $725.0
million was reduced as a result of the parties' negotiations with respect to,
among other things, potential employee severance contingencies. The Company and
Kodak also agreed upon the principal terms of various future agreements,
including the Amended Supply Agreement, which would govern their future
relationship.
RECOMMENDATION OF THE COMPANY'S BOARD OF DIRECTORS
The Board has determined that the Acquisition is advisable to, fair to and
in the best interests of the Company and its Shareholders and has unanimously
approved the Ordinary Resolution. Accordingly, the Board unanimously recommends
that holders of Ordinary Shares vote "FOR" approval and adoption of the Ordinary
Resolution.
By virtue of London Stock Exchange requirements, in excess of fifty percent
of Danka Business Systems PLC's Ordinary Share votes cast at the Extraordinary
General Meeting are required to approve the acquisition of the Sales and
Services Business. Upon adoption of the Ordinary Resolution set forth below,
Danka Business Systems PLC directors and officers will be authorized to effect
the Acquisition upon such final terms and conditions as the Board or a duly
authorized Committee thereof determines in their sole discretion. To accomplish
the foregoing, the Board proposes adoption of the following Ordinary Resolution:
THAT the proposed acquisition by the Company and/or its subsidiaries
pursuant to an asset purchase agreement between (1) Eastman Kodak Company
and (2) the Company dated 6th September, 1996 (the "Asset Purchase
Agreement"), a copy of which has been produced to the meeting and signed
for the purposes of identification by the Chairman of the meeting, of (i)
certain assets and liabilities relating to (x) the sales, marketing,
distribution and equipment service operations of Eastman Kodak Company's
Office Imaging and Customer Equipment Services business units and (y) the
facilities management services business of Eastman Kodak Company known as
"Kodak Imaging Services" and (ii) the whole of the issued share capital of
the subsidiaries of Eastman Kodak Company which engage in facilities
management services, be and is hereby approved; and the Directors of the
Company (or any duly authorized committee appointed by them) be and are
hereby authorized to cause the Asset Purchase Agreement and all matters
provided therein or related thereto to be completed and at their discretion
to amend, waive, vary or extend any of the terms of the Asset Purchase
Agreement and any other document referred to therein or connected therewith
in whatever way they consider to be necessary or desirable and to do or
procure all such other acts or things as they consider necessary or
desirable in connection therewith.
REASONS FOR THE ACQUISITION
The following "Reasons for the Acquisition" section should be read in
conjunction with "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS."
In reaching its unanimous determination to approve the Acquisition and to
recommend that the holders of Ordinary Shares approve the Acquisition and vote
for the Ordinary Resolution, the Board consulted with the Company's management
as well as its financial advisor and considered the factors set forth below. The
Board did not assign any relative or specific weight to the factors considered.
The Board considered a number of things including the following items of
consideration that it believes to be material:
1. The written opinion of the Company's financial advisor, Salomon
Brothers Inc, that the consideration to be paid by the Company is fair from
a financial point of view. See "-- Opinion of the Company's Financial
Advisor."
23
<PAGE> 32
2. The Company's high-volume equipment growth strategy. The Board
believes that high-volume (segment 5 and 6) equipment is an important
product segment and expects sales of this equipment and related parts and
service to be a major contributor to the Company's future growth. The Board
further believes that Kodak is one of only three manufacturers which
currently produce reliable high-volume equipment. In the absence of a
competitive high-volume effort, the Board believes that the Company's
growth rate could be adversely affected. High-volume equipment produces
forty-three percent (43%) of the total copies made in North America and is
the fastest growing segment in the market. High-volume equipment is also
the choice of major market and Fortune and FT-SE 100 companies and is
essential for a significant national account program. The continued
availability to the Company of such high-volume products would position the
Company to also sell other products and services to such large customers.
If the Company were to lose its access to high-volume copiers, the Company
could be placed at a competitive disadvantage.
3. The Acquisition's enhancement of the Company's competitiveness. The
Acquisition will allow the Company to provide a full line of equipment
ranging from small copiers to high-volume duplicators, fax machines and
state of the art digital copiers/printers and will make the Company the
principal full line competitor to Xerox. The Board believes that the
Acquisition would increase the Company's competitiveness by providing it
with desirable high-volume equipment, a global presence, excellent brand
name recognition, established relationships with Fortune 500 accounts, and
substantial high-volume equipment service which has garnered favorable
historical customer satisfaction.
4. The impact of the Acquisition on the Company's earnings. The Board
expects, based upon financial models presented to them, that the
Acquisition will be accretive to earnings within 12 months.
5. The likelihood of the Acquisition being approved by the appropriate
regulatory authorities. The Acquisition is subject to the approval of
certain regulatory authorities and the Board believes that the Acquisition
will be approved by the appropriate regulatory authorities.
6. The Company's familiarity with Kodak's Office Imaging Business
operations and future prospects. The Company has had an ongoing
relationship with Kodak's Office Imaging business unit and the Board
believes that such familiarity has assisted the Company in making an
informed assessment and evaluation of the Acquisition.
7. The economic conditions and prospects in the industry in which the
Company operates.
8. The overlay of the Company's existing sales and services branch
network with the Sales and Services Business. Ninety percent of the Sales
and Services Business' revenue is generated in the countries where the
Company currently operates which provides significant opportunities for
synergies.
9. The likelihood of the Company to enhance the net margins of the
Sales and Services Business through the benefits of various cost
efficiencies and synergies.
10. The potential increased international scope of the Company's
operations and the Company's potential increased presence in 19 new
countries including countries in Europe, Africa, the Middle East, Asia and
Latin America.
11. The potential addition to the Company of over 300 sales and
service locations around the world.
12. The Board believes that the representations, warranties,
covenants, conditions and indemnities contained in the Asset Purchase
Agreement and other documents adequately protects the Company's interests.
13. The impact and likelihood of integrating Kodak employees into a
new corporate culture.
14. The importance of the Amended Supply Agreement on the Company's
future operations and the material terms thereof.
15. The demands that the Acquisition and the integration of the Sales
and Services Business will place on the Company's resources, infrastructure
and current operations and the impact on the same.
24
<PAGE> 33
16. The Company's ability to finance the Transaction.
Based upon all of these matters and after carefully considering the various
benefits and detriments set forth above and concluding that the benefits
outweighed the detriments, the Board unanimously approved the Acquisition and
the Ordinary Resolution.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
On September 6, 1996, Salomon, financial advisor to the Company, delivered
its written opinion to the Board that, subject to the assumptions set forth
therein, the consideration to be paid by the Company is fair from a financial
point of view. The full text of the written opinion of Salomon dated September
6, 1996, which sets forth the assumptions made, general procedures followed,
matters considered and limits on the review undertaken, is attached hereto as
Appendix A. The Salomon opinion is directed only to the fairness, from a
financial point of view, of the consideration paid by the Company and does not
address the Company's underlying business decision to effect the Acquisition or
constitute a recommendation to any Shareholder as to how such Shareholder should
vote with respect to the Acquisition. The amount of the Acquisition
consideration was determined by arms'-length negotiations between the Company
and Kodak, in consultation with their respective financial advisors and other
representatives, but the amount of the Acquisition consideration was not set by
such financial advisors. The summary of Salomon's opinion is qualified in its
entirety by reference to the full text of such opinion attached as Appendix A.
SHAREHOLDERS ARE URGED TO READ THE OPINION CAREFULLY AND IN ITS ENTIRETY.
Salomon is an internationally recognized investment banking firm engaged,
among other things, in the valuation of businesses and their securities in
connection with mergers and acquisitions, restructurings, leveraged buyouts,
negotiated underwritings, competitive biddings, secondary distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. The Company retained Salomon because of its
reputation and expertise in transactions similar to the Acquisition, as well as
its familiarity with the Company. Salomon has previously rendered certain
investment banking and financial advisory services to the Company for which
Salomon received customary compensation. In addition, in the ordinary course of
its business, Salomon actively trades the debt and equity securities of both the
Company and Kodak for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Pursuant to an engagement letter with Salomon, the Company has agreed to
pay Salomon $7.5 million upon the consummation of the Acquisition. Should the
Acquisition not be closed as anticipated, the Company shall pay to Salomon the
sum of $500,000 in connection with its services. The Company has also agreed
that in the event of Closing, to reimburse Salomon for reasonable travel and
out-of-pocket expenses incurred in connection with its engagement (including
certain reasonable fees and expenses of its counsel) and to indemnify Salomon
and certain related persons against certain liabilities and expenses relating to
or arising out of its engagement, including certain liabilities under federal
securities laws.
ACCOUNTING TREATMENT OF THE ACQUISITION
In accordance with U.S. GAAP, the Company intends to account for the
Acquisition as a purchase. Under such purchase accounting, the assets and
liabilities acquired will be recorded at their fair values, and the excess of
the fair value of the net assets acquired over the cost of the Acquisition
(negative goodwill) will be allocated to reduce the net book value of
identifiable intangible assets and other noncurrent assets acquired.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION
There are no direct tax consequences as a result of the Acquisition to the
Company's holders of Ordinary Shares or holders of ADSs.
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<PAGE> 34
REGULATORY APPROVAL
Status of Regulatory Approvals. The obligation of the Company to
consummate the Acquisition is conditioned upon the parties' compliance with
certain regulatory requirements, including the HSR Act. The parties have filed
or intend to file necessary notices, applications or documents to obtain
antitrust or regulatory consents to complete the Acquisition as are legally
required in other jurisdictions or countries including Austria, Canada, Germany,
Ireland, Japan, and Mexico. The Company and Kodak have agreed to cooperate and
file such other notices, applications or other documents which are determined by
the parties to be necessary to consummate the Acquisition.
Hart-Scott-Rodino. The HSR Act provides that certain acquisition
transactions (including the Acquisition) may not be consummated until
notifications have been given and certain information has been furnished to the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
the Federal Trade Commission (the "FTC") and the mandatory waiting period has
expired. The Antitrust Division and the FTC received the required notices from
Kodak and the Company and the waiting period commenced on September 20, 1996 and
expired on October 20, 1996. At any time before or after the consummation of the
Acquisition, the Antitrust Division, the FTC or another third party could seek
to enjoin or rescind the Acquisition on antitrust grounds. In addition, at any
time before or after the consummation of the Acquisition, and notwithstanding
that the waiting period under the HSR Act has expired, any state could take such
action under state antitrust laws as it deems necessary or desirable in the
public interest.
The Company is not aware of any other material regulatory filings,
approvals or actions that may be required prior to Closing for consummation of
the Acquisition. Should any other approval or action be required, it is
presently contemplated by the Company that such approval or action would be
sought. There can be no assurance, however, that any such other approval or
action, if needed, could be obtained and would not be conditioned in a manner
that would cause the parties to abandon the Acquisition.
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<PAGE> 35
SELECT HISTORICAL AND PRO FORMA FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE COMPANY
The selected historical consolidated financial data of the Company
presented below for, and as of the end of, each of the years in the five-year
period ended March 31, 1996 are derived from the audited consolidated financial
statements of the Company, which are incorporated by reference into this Proxy
Statement. The selected historical consolidated financial data of the Company
presented below for, and as of the end of, the three-month period ended June 30,
1995 and 1996 are derived from unaudited interim consolidated financial
statements of the Company, which have been prepared by management on the same
basis as the audited consolidated financial statements of the Company and, in
the opinion of management, include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the interim periods. Results of operations for interim periods
are not necessarily indicative of results to be expected for the full year. The
data presented below should be read in conjunction with the Company's
Consolidated Historical Financial Statements and related notes and other
financial information and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" incorporated by reference into this Proxy
Statement.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------------------ ---------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS, EXCEPT PER ADS AMOUNTS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA(1):
Revenue:
Retail equipment sales..................... $ 79,904 $126,175 $202,246 $324,758 $ 474,116 $ 98,470 $ 149,917
Retail service, supplies and rentals....... 114,577 166,363 250,972 377,982 595,477 120,721 194,952
Wholesale.................................. 41,541 60,157 78,190 99,456 170,711 29,823 57,086
-------- -------- -------- -------- ---------- -------- ----------
Total revenue........................ 236,022 352,695 531,408 802,196 1,240,304 249,014 401,955
Costs and operating expenses:
Retail equipment sales..................... 48,680 78,002 122,964 196,953 288,000 61,039 92,764
Retail service, supplies and rentals....... 58,778 84,853 131,174 199,585 315,060 63,479 103,222
Wholesale.................................. 35,446 49,993 63,502 81,765 140,595 24,678 46,890
Selling, general and administrative
expenses................................... 73,383 107,668 162,119 245,525 378,407 76,627 126,496
Amortization of intangible assets............ 10,111 1,821 3,765 6,818 13,587 2,356 4,419
Restructuring charges........................ -- -- -- -- 8,500 -- --
-------- -------- -------- -------- ---------- -------- ----------
Total costs and operating expenses... 226,398 322,337 483,524 730,646 1,144,149 228,179 373,791
Earnings from operations..................... 9,624 30,358 47,884 71,550 96,155 20,835 28,164
Interest expense and other, net.............. 3,338 2,751 3,667 7,742 21,566 3,278 5,033
-------- -------- -------- -------- ---------- -------- ----------
Earnings before income taxes................. 6,286 27,607 44,217 63,808 74,589 17,557 23,131
Provision for income taxes................... 1,721 6,395 17,751 24,761 28,241 6,700 8,800
-------- -------- -------- -------- ---------- -------- ----------
Earnings before extraordinary item........... 4,565 21,212 26,466 39,047 46,348 10,857 14,331
-------- -------- -------- -------- ---------- -------- ----------
Extraordinary item -- loss on early
extinguishment of debt, net of income tax
benefit of $691............................ -- -- -- -- 1,133 -- --
-------- -------- -------- -------- ---------- -------- ----------
Net earnings................................. $ 4,565 $ 21,212 $ 26,466 $ 39,047 $ 45,215 $ 10,857 $ 14,331
======== ======== ======== ======== ========== ======== ==========
Net earnings per ADS(2)...................... $ 0.11 $ 0.51 $ 0.59 $ 0.80 $ 0.88 $ 0.22 $ 0.25
Dividends per ADS............................ $ 0.06 $ 0.07 $ 0.09 $ 0.11 $ 0.13 $ -- $ --
Weighted average ADSs(2)..................... 40,584 41,422 45,210 48,735 51,533 49,213 57,787
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
------------------------------------------------------ ---------------------
1992 1993 1994 1995 1996 1995 1996
-------- -------- -------- -------- ---------- -------- ----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1)(3):
Working capital.............................. $ 15,086 $ 24,387 $ 96,250 $192,928 $ 217,674 $167,672 $ 280,812
Total assets................................. 125,070 164,504 356,804 635,314 1,091,556 657,474 1,181,978
Long-term debt, less current maturities...... 20,595 19,954 67,520 233,681 318,262 238,073 379,513
Shareholders' equity......................... 43,540 62,154 169,925 206,408 441,843 218,631 461,339
</TABLE>
- ---------------
(1) Revenue, expenses, assets, and liabilities are significantly affected by the
number and timing of acquisitions made by the Company.
(2) Calculated by using the weighted average number of ADSs outstanding during
the period, as adjusted for Ordinary Shares issuable upon exercise of
options, based on the ratio of four Ordinary Shares to one ADS.
(3) The balance sheet data are as of the last day of the respective periods.
27
<PAGE> 36
SELECTED HISTORICAL FINANCIAL DATA FOR THE HISTORICAL OFFICE IMAGING SALES AND
SERVICES BUSINESS
The selected historical financial data of the historical Office Imaging
Sales and Services Business presented below as of December 31, 1995 and for each
of the two years in the period then ended are derived from the audited combined
financial statements of the historical Office Imaging Sales and Services
Business set forth elsewhere in this Proxy Statement. The selected historical
combined financial data of the historical Office Imaging Sales and Services
Business presented below as of June 30, 1996 and for the six month periods ended
June 30, 1995 and 1996 are derived from unaudited interim combined financial
statements of the historical Office Imaging Sales and Services Business. Results
of operations for interim periods are not necessarily indicative of results to
be expected for the full year. It is important to recognize that the combined
historical financial data for the historical Office Imaging Sales and Services
Business includes various assets and liabilities, and revenues and expenses,
which will not be part of the Sales and Services Business acquired by the
Company. The data presented below should be read in conjunction with the
Combined Financial Statements of the historical Office Imaging Sales and
Services Business and related notes, as well as the other financial information,
including pro forma financial information included elsewhere in this Proxy
Statement and the discussions set forth in the sections captioned "The Parties
to the Acquisition -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Historical Sales and Services Business."
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SIX
ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- ------------
1994 1995 1995 1996
------ ------ ----- ----
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES AND INCOME:
Rental and services revenues................................... $1,093 $1,152 $ 572 $585
Equipment and supplies sales................................... 644 671 299 289
Other income................................................... 8 13 6 6
------ ------ ----- -----
Total Revenues and Income.............................. 1,745 1,836 877 880
COSTS
Costs of goods sold:
Rental and service............................................. 762 863 397 404
Equipment and supplies......................................... 534 520 266 226
Selling, general and administrative expenses..................... 406 426 207 205
Other costs...................................................... 7 2 2 1
------ ------ ----- -----
Total Costs............................................ 1,709 1,811 872 836
Earnings before income taxes..................................... 36 25 5 44
Provision for income taxes....................................... 33 19 4 22
------ ------ ----- -----
Net Earnings................................................ $ 3 $ 6 $ 1 $ 22
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................... $ 505 $ 455
Total assets...................................................... 1,249 1,170
Division equity................................................... 841 787
</TABLE>
28
<PAGE> 37
SELECTED PRO FORMA HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected pro forma historical consolidated financial data presented
below for the year ended March 31, 1996 and for, and as of the end of, the three
months ended June 30, 1996 are derived from the unaudited pro forma historical
consolidated financial statements included elsewhere in the Proxy Statement. The
unaudited pro forma historical consolidated statement of earnings data for the
year ended March 31, 1996 gives effect to the following as if each had occurred
on April 1, 1995: (i) the acquisitions completed during fiscal 1996 (the "Fiscal
1996 Acquisitions"), (ii) acquisitions completed on or after April 1, 1996 other
than the Acquisition (the "Fiscal 1997 Acquisitions") and (iii) the Acquisition.
The unaudited pro forma historical consolidated statement of earnings data for
the three months ended June 30, 1996 gives effect to the following as if each
had occurred on April 1, 1996: (i) the Fiscal 1997 Acquisitions and (ii) the
Acquisition. The unaudited pro forma condensed consolidated balance sheet data
gives effect to the following as if each had occurred as of June 30, 1996: (i)
acquisitions completed after June 30, 1996 other than the Acquisition (the
"Recent Acquisitions") and (ii) the Acquisition. The selected pro forma
historical consolidated financial data does not purport to be indicative of the
combined results of operations that actually would have occurred if the
transactions described above had been effected at the dates indicated or to
project future results of operations for any period. See the Unaudited Pro Forma
Condensed Consolidated Financial Statements and related notes included elsewhere
in this Proxy Statement.
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED JUNE
ENDED MARCH 30,
31, 1996 1996
----------- ------------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C>
STATEMENT OF EARNINGS DATA(1):
Total revenue..................................................... $ 3,486 $ 883
Costs of sales.................................................... 2,333 577
Selling, general and administrative expenses...................... 952 238
Amortization of intangible assets................................. 20 4
Restructuring charges............................................. 9 --
------- -------
Total costs and operating expenses...................... 3,314 819
Earnings from operations.......................................... 172 64
Interest expense and other, net................................... 80 18
------- -------
Earnings before income taxes...................................... 92 46
Provision for income taxes........................................ 46 21
------- -------
Earnings before extraordinary item................................ 46 25
Extraordinary item, net of income tax benefit..................... 1 --
------- -------
Net earnings...................................................... $ 45 $ 25
======= =======
Net earnings per ADS(2)........................................... $ 0.85 $ 0.43
Dividends per ADS................................................. $ 0.13 $ --
Weighted average ADSs (in thousands)(2)........................... 52,233 57,787
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
1996
------------
(UNAUDITED)
(DOLLARS IN
MILLIONS)
<S> <C>
BALANCE SHEET DATA(1):
Working capital................................................................ $ 648
Total assets................................................................... 2,160
Long-term debt, less current maturities........................................ 1,126
Shareholders' equity........................................................... 461
</TABLE>
- ---------------
(1) Revenue, expenses, assets, and liabilities are significantly affected by the
number and timing of acquisitions made by the Company.
(2) Calculated by using the weighted average number of ADSs outstanding during
the period, as adjusted for Ordinary Shares issuable upon exercise of
options, based on the ratio of four Ordinary Shares to one ADS.
29
<PAGE> 38
INDEPENDENT AUDITORS
The consolidated financial statements of the Company at and for the three
years ended March 31, 1996, incorporated in this Proxy Statement by reference to
the Company's Annual Report on Form 10-K for such period, have been incorporated
by reliance on the report of KPMG Chartered Accountants and Registered Auditors,
which is also incorporated by reference herein. The Company's present auditors
have served as auditors in such capacity for the Company for more than twenty
(20) years. Representatives of the firm are expected to be present at the
Meeting, will be afforded an opportunity to make a statement if they desire to
do so and will be available to respond to appropriate questions. It is not
expected that the Chartered Accountants and Registered Auditors of Kodak will be
available at the meeting.
SHAREHOLDERS' PROPOSALS FOR THE 1997 ANNUAL MEETING
If a holder of Ordinary Shares desires to present a proposal for action at
the Company's next Annual General Meeting to be held in 1997, and such proposal
conforms to the rules and regulations of the SEC and is in accordance with other
U.S. federal laws as well as the laws of the United Kingdom, such proposal must
be received by the Company by February 10, 1997 to be included in the Company's
Proxy Statement and proxy for such 1997 meeting.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are hereby incorporated by reference the following documents filed by
the Company with the Commission pursuant to the Exchange Act:
1. The Company's Annual Report on Form 10-K for the year ended March
31, 1996.
2. The Company's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1996.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the date of
the Extraordinary General Meeting shall be deemed to be incorporated herein by
reference and to be a part hereof from the date of filing of such documents. Any
statement contained herein or in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein or in any
other subsequently filed document which also is, or is deemed to be,
incorporated herein by reference and modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed to constitute a
part hereof except as so modified or superseded.
This Proxy Statement incorporates documents by reference which are not
presented herein or delivered herewith. The Company hereby undertakes to provide
without charge to each person to whom a copy of this Proxy Statement has been
delivered, upon the written or oral request of any such person and by first
class mail or other equally prompt means, within one business day of receipt of
such request, a copy of any of or all documents referred to above which have
been or may be incorporated by reference in this Proxy Statement (other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference). Requests for such copies should be directed to Investor
Relations, Danka Holding Company, 11201 Danka Circle North, St. Petersburg,
Florida 33716, telephone number (813) 576-6003.
By order of the Board
/s/ PAUL G. DUMOND
--------------------------------------
Paul G. Dumond
Secretary
Dated: November 7, 1996
30
<PAGE> 39
FINANCIAL STATEMENTS INDEX
<TABLE>
<S> <C>
DANKA BUSINESS SYSTEMS PLC
Introduction to Unaudited Pro Forma Condensed Consolidated Financial Statements..... F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1996........ F-3
Unaudited Pro Forma Condensed Consolidated Statement of Earnings For the Three
Months Ended June 30, 1996....................................................... F-4
Unaudited Pro Forma Condensed Consolidated Statement of Earnings For the Year Ended
March 31, 1996................................................................... F-5
OFFICE IMAGING SALES AND SERVICES BUSINESS
Report of Independent Accountants................................................... F-7
Combined Statement of Financial Position as of December 31, 1995 and 1994........... F-8
Combined Statement of Operations for the Years Ended December 31, 1995 and 1994..... F-9
Combined Statement of Cash Flows for the Years Ended December 31, 1995 and 1994..... F-10
Notes to Combined Financial Statements.............................................. F-11
Unaudited Combined Statement of Financial Position as of June 30, 1996 and 1995..... F-23
Unaudited Combined Statement of Operations for the Six Months Ended June 30, 1996
and 1995......................................................................... F-24
Unaudited Combined Statement of Cash Flows for the Six Months Ended June 30, 1996
and 1995......................................................................... F-25
</TABLE>
F-1
<PAGE> 40
DANKA BUSINESS SYSTEMS PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect
to the following as if each had occurred as of June 30, 1996: (i) the
Acquisition and (ii) the Recent Acquisitions. The unaudited Pro Forma Condensed
Consolidated Statement of Earnings for the three months ended June 30, 1996
gives effect to the following as if each had occurred on April 1, 1996: (i) the
Acquisition and (ii) the Fiscal 1997 Acquisitions. The unaudited Pro Forma
Condensed Consolidated Statement of Earnings for fiscal 1996 gives effect to the
following as if each had occurred on April 1, 1995: (i) the Acquisition, (ii)
the Fiscal 1996 Acquisitions and (iii) the Fiscal 1997 Acquisitions.
The unaudited Pro Forma Condensed Consolidated Financial Statements are
based on: (i) the Company's audited Consolidated Statement of Earnings for the
year ended March 31, 1996, unaudited Consolidated Statement of Earnings for the
three months ended June 30, 1996 and unaudited Consolidated Balance Sheet as of
June 30, 1996, and (ii) the historical Office Imaging Sales and Services
Business' audited Combined Statement of Operations for the year ended December
31, 1995, unaudited Combined Statement of Operations for the three months ended
June 30, 1996 and unaudited Statement of Financial Position as of June 30, 1996.
The Acquisition will be accounted for under the purchase method of
accounting. The total purchase price for the Acquisition will be allocated to
tangible and identifiable intangible assets and liabilities based on
management's estimate of their fair values, with the excess of the fair value of
the Net Assets Acquired over the cost of the Acquisition (negative goodwill)
allocated to reduce the value of identifiable intangible assets and other
noncurrent assets acquired.
These unaudited Pro Forma Condensed Consolidated Financial Statements do
not purport to be indicative of the combined results of operations that actually
would have occurred if the transactions described above had been effected at the
dates indicated or to project future results of operations for any period. The
unaudited Pro Forma Condensed Consolidated Financial Statements and respective
related notes thereto should be read in conjunction with the financial
statements and related notes of the Company and the combined financial
statements of the historical Office Imaging Sales and Services Business and
related notes.
F-2
<PAGE> 41
DANKA BUSINESS SYSTEMS PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
OFFICE PURCHASE AND PRO FORMA
IMAGING PRO FORMA ADJUSTMENTS
DANKA SALES AND ADJUSTMENTS FOR
BUSINESS SERVICES FOR THE RECENT RECENT
SYSTEMS PLC BUSINESS(1) ACQUISITION ACQUISITIONS(6) ACQUISITIONS PRO FORMA
----------- ----------- ------------ --------------- ------------ ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....... $ 45 $ 45
Accounts receivable, net........ 280 $ 391 $ (66)(4) $13 618
Inventories..................... 243 244 (17)(4) 10 480
Other current assets............ 11 23 (8)(4) 1 27
------ ------ ----- --- ------
Total current assets..... 579 658 (91) 24 1,170
Equipment on operating leases,
net............................. 84 292 9(4) 385
Property and equipment, net....... 47 53 (28)(4) 5 73
(4)(5)
Intangible assets, net............ 440 7 (7)(4) $ 37(8) 477
Investment in Subsidiaries........ 697(2) 39(7)
(697)(5) (39)(8)
Other assets...................... 32 160 6(2) 55
(143)(4)
------ ------ ----- --- ---- ------
Total assets............. $ 1,182 $ 1,170 $ (258) $29 $ 37 $ 2,160
====== ====== ===== === ==== ======
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Current maturities of long-term
debt.......................... $ 29 $ 1 $ 30
Accounts payable and accrued
expenses...................... 198 $ 203 $ 60(3) 18 417
(62)(4)
Deferred revenue................ 71 4 75
------ ------ ----- --- ------
Total current
liabilities............ 298 203 (2) 23 522
Convertible subordinated notes.... 200 200
Other long-term debt.............. 180 703(2) 4 $ 39(7) 926
Deferred income taxes and other
long-term liabilities........... 43 180 (172)(4) 51
------ ------ ----- --- ---- ------
Total liabilities........ 721 383 529 27 39 1,699
Shareholders' equity.............. 461 787 (60)(3) 2 (2)(8) 461
(26)(4)
(701)(5)
Total shareholders'
equity................. 461 787 (787) 2 (2) 461
------ ------ ----- --- ---- ------
Total liabilities and
shareholders' equity... $ 1,182 $ 1,170 $ (258) $29 $ 37 $ 2,160
====== ====== ===== === ==== ======
</TABLE>
- ---------------
(1) Information derived from the unaudited Combined Statement of Financial
Position of the historical Office Imaging Sales and Services Business as of
June 30, 1996.
(2) Reflects the purchase and expected borrowings, including bank fees and
expenses associated with obtaining financing in conjunction with the
Acquisition.
(3) Reflects accruals for certain costs expected to be incurred with the
integration and restructuring of the Acquisition, primarily severance and
relocation expenses.
(4) Reflects the adjustments needed to eliminate certain assets and liabilities
which the Company is not acquiring or assuming in the Acquisition.
(5) Reflects the expected excess of the total values assigned to the net assets
acquired over the purchase price of the Acquisition.
(6) Reflects the Recent Acquisitions, completed subsequent to June 30, 1996.
(7) Reflects the borrowings incurred to finance the Recent Acquisitions.
(8) Reflects the excess of the purchase price of the Recent Acquisitions over
the fair market value of the net assets acquired.
F-3
<PAGE> 42
DANKA BUSINESS SYSTEMS PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE THREE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
OFFICE PRO FORMA
DANKA IMAGING PRO FORMA ADJUSTMENTS
BUSINESS SALES AND ADJUSTMENTS FOR
SYSTEMS SERVICES FOR THE FISCAL 1997 FISCAL 1997
PLC BUSINESS(1)(2) ACQUISITION ACQUISITIONS(13) ACQUISITIONS PRO FORMA
----------- -------------- ----------- ---------------- ------------ ---------
(DOLLARS IN MILLIONS, EXCEPT PER ADS AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Total Revenue...................... $ 402 $452 $ 1(9) $ 28 $ 883
------- ---- ---- ---- -------
Cost and operating expenses:
Cost of sales.................... 243 321 (4)(5) 19 577
(2)(8)
Selling, general and
administrative expenses........ 127 101 (2)(5) 7 238
13(6)
(6)(7)
(2)(8)
Amortization of intangible
assets......................... 4 2 (2)(10) $ 0(14) 4
------- ---- ---- ---- ---- -------
Total costs and operating
expenses................ 374 424 (5) 26 0 819
------- ---- ---- ---- ---- -------
Earnings from operations......... 28 28 6 2 0 64
Interest expense & other, net...... 5 (3) 11(3) 1 1(15) 18
0(4)
3(11)
------- ---- ---- ---- ---- -------
Earnings before income taxes..... 23 31 (8) 1 (1) 46
Provision for income taxes......... 9 15 (3)(12) 0 0(16) 21
------- ---- ---- ---- ---- -------
Net earnings.............. $ 14 $ 16 $ (5) $ 1 $ (1) $ 25
======= ==== ==== ==== ==== =======
Net earnings per ADS............... $ 0.25 $ 0.43
Weighted average ADSs (in
thousands)....................... 57,787 57,787
</TABLE>
- ---------------
(1) Information derived from the unaudited Combined Statement of Operations of
the historical Office Imaging Sales and Services Business for the
three-months ended June 30, 1996.
(2) Certain amounts have been reclassified to conform to the Company's
presentation.
(3) Reflects the interest expense on the debt incurred as a result of the
Acquisition, using an estimated interest rate of 6.2%.
(4) Reflects the amortization of deferred costs associated with establishing
the $1.275 billion loan facility.
(5) Reflects a decrease in pension and post-retirement benefits under the
Company's benefits policy.
(6) Reflects payments expected to be made to Kodak for ongoing research and
development.
(7) Reflects payments expected to be received from Kodak for the purpose of
funding the development of emerging markets.
(8) Reflects a reduction of certain employee benefits to employees of the
Office Imaging Sales and Services Business.
(9) Reflects a normal profit for sales by the Office Imaging Sales and Services
Business to Kodak which were previously billed at cost.
(10) Reflects the elimination of the amortization of costs in excess of net
tangible assets on the historical financial statements of the Office
Imaging Sales and Services Business.
(11) Reflects the elimination of interest income related to finance leases which
the Company is not acquiring in conjunction with the Acquisition.
(12) Reflects the net change in the provision for income taxes based upon the
pro forma results of operations. Pro forma rate used is the Company's
effective rate of 37.9%.
(13) Relates to the revenue and expenses of each of the Fiscal 1997 Acquisitions
made by the Company, as if they had occurred on April 1, 1996. Revenue and
expenses subsequent to the effective date of each of the Fiscal 1997
Acquisitions are included in the Company's consolidated financial
statements.
(14) Reflects the amortization of intangible assets recorded in connection with
the Fiscal 1997 Acquisitions. Goodwill is amortized over 30 years.
(15) Reflects the interest expense resulting from the Fiscal 1997 Acquisitions,
assuming an average interest rate of 3.6%.
(16) Reflects the income tax benefit of the pro forma adjustments for the Fiscal
1997 Acquisitions (using the Company's consolidated effective income tax
rate of 37.9%).
F-4
<PAGE> 43
DANKA BUSINESS SYSTEMS PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
OFFICE ADJUSTMENTS
IMAGING PRO FORMA FOR FISCAL 1996
DANKA SALES AND ADJUSTMENTS AND
BUSINESS SERVICES FOR THE FISCAL 1996 FISCAL 1997 FISCAL 1997
SYSTEMS PLC BUSINESS(1)(2) ACQUISITION ACQUISITIONS(13) ACQUISITIONS(13) ACQUISITIONS PRO FORMA
----------- -------------- ----------- ---------------- ---------------- --------------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER ADS AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenue......... $ 1,240 $1,823 $ 4(9) $202 $217 $ 3,486
------- ------ ---- ---- ---- -------
Cost and operating
expenses:
Cost of sales....... 744 1,362 (14)(5) 104 149 2,333
(12)(8)
Selling, general and
administrative
expenses.......... 378 426 (9)(5) 85 55 952
50(6)
(25)(7)
(8)(8)
Amortization of
intangible
assets............ 13 21 (21)(10) 1 $ 6(14) 20
Restructuring
charges........... 9 9
------- ------ ---- ---- ---- ---- -------
Total costs and
operating
expenses...... 1,144 1,809 (39) 190 204 6 3,314
------- ------ ---- ---- ---- ---- -------
Earnings from
operations........ 96 14 43 12 13 (6) 172
Interest expense
(income), net....... 22 (11) 43(3) 3 2 8(15) 80
1(4)
12(11)
------- ------ ---- ---- ---- ---- -------
Earnings before
income
taxes............. 74 25 (13) 9 11 (14) 92
Provision for income
taxes............... 28 19 (5)(12) 2 4 (2)(16) 46
------- ------ ---- ---- ---- ---- -------
Earnings before
extraordinary
item.......... 46 6 (8) 7 7 (12) 46
Extraordinary item.... 1 1
------- ------ ---- ---- ---- ---- -------
Net
earnings.... $ 45 $ 6 $ (8) $ 7 $ 7 $ (12) $ 45
======= ====== ==== ==== ==== ==== =======
Net earnings per ADS:
Before extraordinary
Item.............. $ 0.90 $ 0.87
Extraordinary
Item.............. (0.02) (0.02)
------- -------
Net earnings per
ADS............... $ 0.88 $ 0.85
------- -------
Weighted average ADSs
(in thousands)...... 51,533 52,233(17)
</TABLE>
- ---------------
(1) Information derived from the audited Combined Statement of Operations of
the historical Office Imaging Sales and Services Business for the year
ended December 31, 1995.
(2) Certain amounts have been reclassified to conform to the Company's
presentation.
(3) Reflects the interest expense on the debt incurred as a result of the
Acquisition, using an estimated interest rate of 6.2%.
(4) Reflects the amortization of deferred costs associated with establishing
the $1.275 billion loan facility.
(5) Reflects a decrease in pension and post-retirement benefits under the
Company's benefits policy.
(6) Reflects payments expected to be made to Kodak for ongoing research and
development.
(7) Reflects payments expected to be received from Kodak for the purpose of
funding the development of emerging markets.
(8) Reflects a reduction of certain employee benefits to employees of the
Office Imaging Sales and Services Business.
(9) Reflects a normal profit for sales by the Office Imaging Sales and Services
Business to Kodak which were previously billed at cost.
(10) Reflects the elimination of the amortization of costs in excess of net
tangible assets on the historical financial statements of the Office
Imaging Sales and Services Business.
(11) Reflects the elimination of interest income related to finance leases which
the Company is not acquiring in conjunction with the Acquisition.
(12) Reflects the net change in the provision for income taxes based upon the
pro forma results of operations. Pro forma rate used is the Company's
effective rate of 37.9%.
F-5
<PAGE> 44
(13) Relates to the revenue and expenses of each of the Fiscal 1996 and Fiscal
1997 Acquisitions made by the Company, as if they had occurred on April 1,
1995. Revenue and expenses subsequent to the effective date of each of the
Fiscal 1996 and Fiscal 1997 Acquisitions are included in the Company's
consolidated financial statements.
(14) Reflects the amortization of intangible assets recorded in connection with
the Fiscal 1996 and Fiscal 1997 Acquisitions. Goodwill is amortized over 30
years.
(15) Reflects the interest expense resulting from the Fiscal 1996 and Fiscal
1997 Acquisitions, assuming an average interest rate of 4.9%.
(16) Reflects the income tax benefit of the pro forma adjustments for the Fiscal
1996 and Fiscal 1997 Acquisitions (using the Company's consolidated
effective income tax rate of 37.9%).
(17) Reflects the issuance of 1,700,000 ADSs issued in conjunction with one of
the Fiscal 1997 Acquisitions.
F-6
<PAGE> 45
REPORT OF INDEPENDENT ACCOUNTANTS
September 17, 1996
To the Board of Directors of
Eastman Kodak Company
In our opinion, the accompanying combined statement of financial position,
and the related combined statements of operations and of cash flows present
fairly, in all material respects, the financial position of the Office Imaging
Sales and Services Business ("the Business"), a group of wholly owned businesses
of Eastman Kodak Company ("Kodak"), at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Business's and Kodak's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Notes 1 and 11, the Business is wholly owned by Kodak and
has extensive transactions and relationships with Kodak. Because of these
relationships and the related allocation of certain assets, liabilities and
expenses, it is possible that the terms of these transactions are not the same
as those that would result from transactions among unrelated parties.
Price Waterhouse LLP
F-7
<PAGE> 46
OFFICE IMAGING SALES AND SERVICES BUSINESS
COMBINED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables (net of allowances of $24 and $26)............................... $ 396 $ 366
Net investment in direct finance and sales-type leases....................... 41 26
Inventories.................................................................. 273 294
Deferred income tax charges.................................................. 20 24
Other........................................................................ 7 7
------ ------
Total current assets............................................... 737 717
------ ------
PROPERTIES
Equipment on operating leases, net........................................... 295 277
Buildings and equipment, net................................................. 52 37
------ ------
Total properties................................................... 347 314
------ ------
OTHER ASSETS
Long-term receivables and other noncurrent assets............................ 29 50
Net investment in direct finance and sales-type leases....................... 82 56
Deferred income tax charges.................................................. 54 55
------ ------
Total Assets....................................................... $1,249 $1,192
====== ======
LIABILITIES AND DIVISION EQUITY
CURRENT LIABILITIES
Payables..................................................................... $ 202 $ 197
Accrued other taxes.......................................................... 30 37
------ ------
Total current liabilities.......................................... 232 234
------ ------
OTHER LIABILITIES
Pension and other post employment liabilities................................ 156 158
Other long-term liabilities.................................................. 20 18
------ ------
Total liabilities.................................................. 408 410
------ ------
DIVISION EQUITY
Common stock (owned by Kodak)................................................ 6 6
Additional paid in capital................................................... 1 1
Division equity.............................................................. 796 752
Accumulated translation adjustment........................................... 38 23
------ ------
Total division equity.............................................. 841 782
------ ------
Total Liabilities and Division Equity.............................. $1,249 $1,192
====== ======
</TABLE>
The notes are an integral part of these combined financial statements.
F-8
<PAGE> 47
OFFICE IMAGING SALES AND SERVICES BUSINESS
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED DECEMBER
31,
---------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
REVENUES AND INCOME
Rental and service revenues.................................................. $1,152 $1,093
Equipment and supplies sales................................................. 671 644
Other income................................................................. 13 8
------ ------
Total Revenues and Income.......................................... 1,836 1,745
------ ------
COSTS
Cost of goods sold:
Rental and service......................................................... 863 762
Equipment and supplies..................................................... 520 534
Selling, general and administrative expenses................................. 426 406
Other costs.................................................................. 2 7
------ ------
Total Costs........................................................ 1,811 1,709
------ ------
Earnings before income taxes................................................. 25 36
Provision for income taxes................................................... 19 33
------ ------
Net Earnings....................................................... $ 6 $ 3
====== ======
</TABLE>
The notes are an integral part of these combined financial statements.
F-9
<PAGE> 48
OFFICE IMAGING SALES AND SERVICES BUSINESS
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
------------
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings................................................................... $ 6 $ 3
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization.................................................. 121 112
Deferred income taxes.......................................................... 5 (11)
Loss/(gain) on sale/retirement of properties................................... 1 (2)
(Increase)/decrease in receivables............................................. (21) 46
Increase in direct finance and sales-type leases............................... (42) (27)
Increase in inventories and equipment on operating leases...................... (75) (73)
(Decrease)/increase in liabilities............................................. (7) 71
Other items, net............................................................... 3 (3)
---- -----
Total adjustments.................................................... (15) 113
---- -----
Net cash (used in) provided by operating activities.................. (9) 116
---- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to buildings and equipment........................................... (30) (21)
Proceeds from sale of properties............................................... 1 8
---- -----
Net cash used in investing activities................................ (29) (13)
---- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances/distributions from/(to) Kodak..................................... 38 (105)
---- -----
Net cash provided by (used in) financing activities............................ 38 (105)
---- -----
Net decrease in cash........................................................... -- (2)
Cash, beginning of year........................................................ -- 2
---- -----
Cash, end of year.............................................................. $ -- $ --
==== =====
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
The Office Imaging Sales and Services Business (the "Historical Business")
routinely transfers rental equipment between properties and inventories as a
part of the lease or rental of these assets to customers. These are non-cash
transactions and, therefore, should not affect the determination of cash flows
from operating and investing activities of the Historical Business. In 1995 and
1994, net transfers of inventory to rental equipment were approximately $100
million and $110 million, respectively, and have been appropriately excluded
from the Combined Statement of Cash Flows.
F-10
<PAGE> 49
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The Historical Business is comprised of certain worldwide commercial
equipment sales and service businesses which are wholly owned by Eastman Kodak
Company ("Kodak"): the sales and marketing operations of Kodak's Office Imaging
Business ("OI"), the portion of Kodak's Customer Equipment Services ("CES")
business that serves OI, and Kodak Imaging Services ("KIS"). The sales and
marketing operations of the OI business market, sell and lease reprographics
products worldwide. The CES business is engaged in providing parts and service
for reprographics equipment. KIS provides facilities management to customers
worldwide, including the operation of copier/duplicator centers.
The accompanying combined financial statements include all of the combined
assets, liabilities, revenues and expenses of the Historical Business. Because
certain allocations and transactions may not be the same as those that would
result from transactions among unrelated parties, the combined financial
statements may not necessarily present the financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles as if the Historical Business were an independent entity. All
significant transactions and balances between entities included in the combined
financial statements have been eliminated.
Substantially all of the reprographics equipment, supplies and a majority
of the parts sold and distributed by the Historical Business are purchased from
the OI manufacturing division (the "Manufacturing Division") of Kodak.
Historically, the operations of the Historical Business and the Manufacturing
Division were combined. Consequently, a substantial portion of the equipment,
supplies and parts transferred by the Manufacturing Division to the Historical
Business have been at the Manufacturing Division's cost, with the remaining
portion of equipment, supplies and parts transferred at prices with
predetermined markups. Also, the cost of equipment, supplies and parts
transferred from the Manufacturing Division to the Historical Business have not
included costs associated with research and development activities which are
incurred by the Manufacturing Division. Research and Development expenses
incurred by the Manufacturing Division in 1995 and 1994 were $58 million and $65
million, respectively.
In determining the Historical Business' operating expenses on a standalone
basis, certain allocations were made for expenses incurred by Kodak that are
attributed to services provided to the Historical Business. These allocations
relate primarily to accounting, treasury and legal services, as well as
occupancy and information systems costs and other general and administrative
functions performed on behalf of the Historical Business. Costs for such
services have been reflected in the Historical Business' results of operations
on the basis of activity or utilization, estimated support provided to the
Historical Business, or other methods management believe to be reasonable.
Included in Selling, General and Administrative Expenses and Costs of Goods Sold
is approximately $160 million and $110 million of such allocated costs in 1995
and 1994, respectively. Other significant allocations included in the financial
statements have been disclosed throughout the respective footnotes to the
combined financial statements.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year-end and the reported
amounts of revenues and expenses during the reporting period. For purposes of
preparing the financial statements of the Historical Business, estimates have
been used to allocate certain asset, liability and expense amounts to the
Historical Business on a standalone basis. Certain significant estimates are
disclosed throughout the financial statements.
F-11
<PAGE> 50
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY
Generally, the local currency is the functional currency for translating
the accounts of operations outside the U.S. and translation adjustments are
accumulated in a separate component of division equity.
For subsidiaries and branches that operate in U.S. dollars or whose
economic environment is highly inflationary, the U.S. dollar is the functional
currency and gains and losses that result from translation are included in Other
Costs.
CASH
Several legal subsidiaries of the Historical Business held cash balances at
December 31, 1995 and 1994. Except for these cash accounts, which are immaterial
in the aggregate, the Historical Business has no other cash accounts and
utilizes Kodak's cash management systems for all receipt and disbursements.
Consequently, cash and cash equivalent accounts are not reflected in the
combined statement of financial position.
INVENTORIES
Inventories are valued at the lower of cost or net realized value, cost
generally being determined on the basis of average costs for the year.
Inventories transferred from the Manufacturing Division to the Historical
Business are reflected in the combined financial statements of the Historical
Business immediately upon completion of the manufacturing process.
PROPERTIES
Building, machinery and equipment included in Properties are directly owned
by or fully dedicated to the Historical Business.
Properties are recorded at cost reduced by accumulated depreciation.
Depreciation is provided based on historical cost and estimated useful lives
ranging from approximately 10 years to 50 years for buildings and building
equipment and 5 years to 20 years for machinery and equipment. Equipment on
operating leases consists principally of copier equipment with estimated useful
lives of 3 to 7 years. The Historical Business generally uses the straight-line
method for calculating the provision for depreciation. Depreciation expense is
recorded in Cost of Goods Sold and Selling, General and Administrative expenses
in the combined statement of operations. Depreciation expense on buildings and
equipment was $13 million in 1995 and $12 million in 1994. Depreciation expense
on copier equipment was $97 million and $89 million in 1995 and 1994,
respectively.
INTANGIBLE ASSETS
The excess of the Historical Business' costs of its acquired investments
over the value ascribed to the equity in such companies at the time of
acquisition is amortized on a straight-line basis over the future periods
benefited but not exceeding 15 years. Management reviews the carrying value of
intangible assets on an ongoing basis. Amortization of these assets for both
1995 and 1994 was $11 million. Accumulated amortization as of December 31, 1995
and 1994 was $151 million and $140 million, respectively. In 1995, approximately
$10 million of the carrying value of intangible assets was assessed by
management as being impaired based upon an analysis of discounted cash flows and
charged to expense.
REVENUE
Revenue is recognized from the sale of equipment and supplies (including
sales-type leases for equipment) when the product is shipped; from maintenance
and service contracts over the contractual period,
F-12
<PAGE> 51
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
or as the services are performed; from rentals under operating leases in the
month in which they are earned; and from financing transactions at level rates
of return over the term of the lease or receivable.
ADVERTISING
Advertising costs are expensed as incurred and included in selling, general
and administrative expenses. Advertising expenses amounted to $12 million and
$11 million in 1995 and 1994, respectively.
INCOME TAXES
Income tax expense/benefit is based on reported earnings/loss before income
taxes. Deferred income taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. Deferred taxes are based
on the tax laws as currently enacted.
Substantially all of the Historical Business' operations are included in
Kodak's U.S. federal, state or foreign income tax returns. However, for purposes
of preparing the combined financial statements of the Historical Business, the
tax provision has been determined as if the Historical Business filed separate
tax returns in each tax jurisdiction.
DIVISION EQUITY
Division equity represents the net difference in assets and liabilities of
the Historical Business. Division equity is comprised of the capital stock of
separate legal entities included in the combined financial statements, the
retained earnings or accumulated deficit of each operation determined on a
standalone basis, changes in the cumulative translation account and the net
advances to and from Kodak. The components of division equity at January 1, 1994
cannot be identified as there has never been any specific identification of
these accounts for the Historical Business. All amounts due to and from Kodak
for the purchase and sale of products and services have been reflected in
division equity because such amounts are not expected to be repaid. Dividends
paid to Kodak by its subsidiaries and other cash distributions to or from Kodak
have not been reflected as deductions or increases to division equity,
respectively, since such amounts are not attributable to the Historical
Business.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables and payables approximates their fair
value.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Historical Business sells to customers in a variety of industries,
markets and geographies around the world. A significant portion of the
Historical Business' U.S. sales is through an unaffiliated leasing company that
provides financing to the Historical Business' end customers. Sales to this
leasing company accounted for approximately 10% of the Historical Business'
worldwide sales in 1995 and 1994. As of December 31, 1995, receivables from
sales to this leasing company were approximately $39 million. The Historical
Business sells equipment to this leasing company under an agreement which
includes provisions pursuant to which Kodak may elect to provide credit
indemnification with respect to receivables associated with sales by the leasing
company to end customers. With respect to these receivables, the Historical
Business has surrendered control over any future economic benefit and has
provided for anticipated losses related to the credit indemnification, based
upon management's estimate of the risk of loss. The Historical Business'
estimated obligation under this credit indemnification provision has been
recorded in the combined financial statements. The balance of receivables owing
to the leasing company subject to this credit indemnification amounted to $54
million and $65 million at December 31, 1995 and 1994, respectively. Proceeds
remitted by Kodak for the Historical
F-13
<PAGE> 52
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Business to satisfy obligations under this credit indemnification agreement were
approximately $3 million and $2 million in 1995 and 1994, respectively.
Financial instruments which expose the Historical Business to significant
concentrations of credit risk consist principally of receivables and the net
investment in direct finance and sales-type leases. Receivables arising from
customer sales are generally not collateralized; however, the Historical
Business does have a secured interest in equipment underlying finance lease
receivables. The Historical Business performs ongoing credit evaluations of its
customers' financial condition and the Historical Business maintains adequate
provisions for uncollectible receivables.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," must be adopted in 1996. The standard requires that impairment losses be
recognized when the carrying value of an asset exceeds its fair value. Kodak and
the Historical Business regularly assess long-lived assets, including equipment
on operating leases, for impairment and, therefore, management believes the
adoption of the standard will not have a material effect on the Historical
Business' financial position or results of operations.
NOTE 3: NET INVESTMENT IN DIRECT FINANCE AND SALES-TYPE LEASES
Direct finance and sales-type lease receivables consist principally of
copier equipment with lease terms from 3 to 7 years. The components of the net
investment in direct finance and sales-type leases are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Total minimum lease payments to be received........................... $142 $ 92
Allowance for receivable losses....................................... (3) (4)
---- ----
Net minimum lease payments receivable....................... 139 88
Estimated unguaranteed residual values................................ 4 4
Initial direct costs -- direct finance leases......................... 1 2
Unearned income....................................................... (21) (12)
---- ----
Total....................................................... $123 $ 82
==== ====
</TABLE>
The scheduled maturities of minimum lease payments outstanding at December
31, 1995, for each of the next five years and thereafter are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: (IN MILLIONS)
------------------------------------------------------------------------- -------------
<S> <C>
1996..................................................................... $ 44
1997..................................................................... 39
1998..................................................................... 30
1999..................................................................... 20
2000 and thereafter...................................................... 9
----
Total.......................................................... $ 142
====
</TABLE>
F-14
<PAGE> 53
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Equipment to be remanufactured................................................ $ 45 $ 60
Finished goods................................................................ 228 234
---- ----
Total............................................................... $273 $294
==== ====
</TABLE>
NOTE 5: EQUIPMENT ON OPERATING LEASES
Operating leases consist principally of copier equipment, with lease terms
generally from 3 to 5 years. The components of equipment on operating leases are
as follows:
<TABLE>
<CAPTION>
1995 1994
----- -----
(IN MILLIONS)
<S> <C> <C>
Equipment on lease to customers..................................... $ 542 $ 557
Equipment on lease to Kodak......................................... 33 32
Accumulated depreciation............................................ (280) (312)
----- -----
Total..................................................... $ 295 $ 277
===== =====
</TABLE>
Minimum future noncancelable rentals on operating leases were approximately
$144 million at December 31, 1995. The scheduled maturities of the minimum
future rentals at December 31, 1995 for each of the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
DECEMBER 31: (IN MILLIONS)
------------------------------------------------------------------------- -------------
<S> <C>
1996..................................................................... $ 59
1997..................................................................... 40
1998..................................................................... 24
1999..................................................................... 15
2000 and thereafter...................................................... 6
----
Total.......................................................... $ 144
====
</TABLE>
Minimum future rentals do not include contingent rentals which may be
received under certain equipment leases on the basis of usage in excess of
stipulated levels. Contingent rentals amounted to $9 million in 1995 and $6
million in 1994.
NOTE 6: BUILDINGS AND EQUIPMENT
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Buildings and building equipment................................................ $ 17 $ 17
Machinery and equipment......................................................... 92 68
---- ----
109 85
Accumulated depreciation and amortization....................................... (57) (48)
---- ----
Net buildings and equipment........................................... $ 52 $ 37
==== ====
</TABLE>
In determining the Historical Business' buildings and equipment on a
standalone basis, the amounts above include only those facilities and equipment
which are directly owned or fully dedicated to the Historical Business. Except
for the facility used by the Historical Business as its primary administrative
headquarters, all other facilities used by the Historical Business in its
operations are leased directly from Kodak.
F-15
<PAGE> 54
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7: PAYABLES
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Trade creditors................................................................. $ 45 $ 42
Accrued payrolls................................................................ 22 18
Accrued vacation................................................................ 36 35
Wage dividend................................................................... 20 18
Restructuring liabilities....................................................... 8 10
Equipment maintenance reserves.................................................. 23 30
Other employment related liabilities............................................ 13 13
Other........................................................................... 35 31
---- ----
Total................................................................. $202 $197
==== ====
</TABLE>
In determining the Historical Business' payables on a standalone basis, the
amounts above include certain liabilities which have been allocated to the
Historical Business generally on the following basis: headcount or compensation
expense for employee benefit-related liabilities and utilization or square
footage for certain payables for utilities and other facility costs included in
trade creditors. Total payables include approximately $95 million of such
allocated items in 1995 and 1994, respectively. Substantially, all of the
equipment, supplies and a majority of parts are transferred from the
Manufacturing Division to the Historical Business. Since these purchases will
not be settled with the Manufacturing Division, these amounts are reflected as
changes in Division equity and consequently there are no payables reflected for
these transactions in the combined financial statements.
NOTE 8: DIVISION EQUITY
The following is a summary of activity comprising the changes in total
division equity for the two years in the period ended December 31, 1995:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Division equity, beginning............................................ $782 $861
Net earnings.......................................................... 6 3
Net advances/distributions from/(to) Kodak............................ 38 (105)
Change in cumulative translation adjustment........................... 15 23
---- ----
Division equity, ending............................................... $841 $782
==== ====
</TABLE>
NOTE 9: COMMITMENTS AND CONTINGENCIES
Kodak, on behalf of its business units, has entered into an operating and
outsourcing agreement with a leasing company to provide long-term financing and
other activities that support its manufacturing and distribution operations.
This agreement includes certain guarantees and penalties which would become
effective upon the early termination of the agreement. These penalties and
guarantees could range from $1 million to $40 million, payable over a term of up
to 18 years, if this agreement is terminated early.
Kodak, on behalf of the Historical Business, has entered into agreements
with several companies to both provide and/or purchase products and services.
These agreements allow for early termination on the part of the Historical
Business. However, the Historical Business would be obligated to continue to
provide and/or purchase certain parts and services to/from these other companies
for future periods up through the year 2004.
Kodak is committed, on behalf of the Historical Business, under the terms
of various lease agreements covering the rental of equipment, properties and
sales offices occupied by the Historical Business. Gross
F-16
<PAGE> 55
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
rentals for the Historical Business approximated $40 million in both 1995 and
1994. Of these amounts, approximately $30 million in each year represented the
cost of facilities leased by the Historical Business as the sole or major tenant
in these facilities. In addition, approximately $10 million of facility usage
charges was allocated to the Historical Business by Kodak for the use of either
Kodak-owned facilities or for the Historical Business' share of facilities
leased directly by Kodak where the Historical Business was a minor tenant. The
portion of noncancelable lease commitments in excess of one year, principally
for the rental of real property, which has been allocated to the Historical
Business is estimated at approximately: $27 million in 1996, $20 million in
1997, $14 million in 1998, $11 million in 1999, $9 million in 2000 and $14
million in years 2001 and beyond.
NOTE 10: LEGAL MATTERS
In April 1987, Kodak was sued in federal district court in San Francisco by
a number of independent service organizations who alleged violations of Sections
1 and 2 of the Sherman Act and of various state statutes in the sale by the
Historical Business and other Kodak units of repair parts for copier and
micrographics equipment (Image Technical Service, Inc. (ITS), et al v. Eastman
Kodak Company). The complaint sought unspecified compensatory and punitive
damages. Trial began on June 19, 1995 and concluded on September 18, 1995 with a
jury verdict for plaintiffs of $23,948,300, before trebling. Kodak has appealed
the jury's verdict and intends to continue to defend this action vigorously.
There are three other cases that raise essentially the same antitrust
issues as ITS. The complaints in all three cases seek unspecified compensatory
and punitive damages. As is the case in ITS, Kodak is defending these cases
vigorously. Kodak and its General Counsel do not believe the outcome of these
cases will have a material adverse affect on the Historical Business' financial
position or results of operations.
Kodak and its subsidiary companies are involved in lawsuits, claims,
investigations, and proceedings which are being handled and defended in the
ordinary course of business. There are no such matters pending that Kodak and
its General Counsel expect to be material in relation to the Historical
Business' financial condition or results of operations.
NOTE 11: RELATED PARTY TRANSACTIONS
As described in Note 1, historically the operations of the Historical
Business and the Manufacturing Division were combined; wherein, all
reprographics equipment, supplies and parts manufactured by the Manufacturing
Division were transferred to the Historical Business to be sold or used by the
Historical Business in its operations. Historically, a substantial portion of
the equipment, supplies and parts transferred to the Historical Business by the
Manufacturing Division were at the Manufacturing Division's cost with the
remaining portion of equipment, supplies and parts transferred at prices with
predetermined mark-ups. Historical transfer prices represent the Historical
Business' cost of goods sold as reflected in the combined financial statements
and are not necessarily indicative of what the Historical Business' cost of
goods sold would have been if it were an independent entity. The amount of
equipment, supplies and parts transferred from the Manufacturing Division to the
Historical Business was approximately $925 million in 1995 and 1994,
respectively. Included in the Historical Business' cost of goods sold are
aggregate mark-ups from the manufacturing division of approximately $55 million
in both 1995 and 1994.
As described in Note 1, Kodak provides accounting, treasury, legal and
other general and administrative functions on behalf of the Historical Business.
Costs for such services have been reflected in the Historical Business' results
of operations on the basis of activity or utilization, estimated support
provided to the Historical Business, or other methods management believe to be
reasonable. The estimated cost of services provided by Kodak and facility usage
charges allocated to the Historical Business were approximately $160 million and
$110 million in 1995 and 1994, respectively.
F-17
<PAGE> 56
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Historical Business participates in a number of employee benefit plans,
including pension, savings, health care and life insurance, which are
administered by Kodak. Obligations and related expenses of such benefits have
been recorded by the Historical Business as described in Notes 13 and 14.
As described in Note 2, substantially all of the Historical Business'
operations are included in Kodak's U.S. federal, state or foreign income tax
returns. However, for purposes of preparing the combined financial statements of
the Historical Business, the tax provision has been determined as if the
Historical Business filed separate tax returns in each tax jurisdiction. The
current tax liability balances at December 31, 1995 and 1994 of $14 million and
$44 million, respectively, were determined on this separate return basis and
therefore do not represent actual obligations to the respective tax authorities.
These balances have been reflected as a component of Division equity since it is
assumed that they have been or will be paid by Kodak.
The Historical Business supplies Kodak with copiers and other equipment
under operating and direct finance lease arrangements and service contracts.
These transactions and services are generally provided to Kodak at cost. Sales
of products and services to Kodak approximated $15 million in both 1995 and
1994.
The Historical Business has no external borrowings and there has been no
allocation of Kodak's consolidated borrowings and related interest expense to
the Historical Business. Therefore, if the Historical Business were an
independent entity, its capital structure may have been significantly different.
The Historical Business utilizes Kodak's cash management systems. Under
these systems, Kodak's centralized cash accounts receive cash generated from the
collection of the Historical Business' receivables and fund cash disbursements
for use in the Historical Business' operations. The cumulative net effect of the
Historical Business' activity in Kodak's cash management systems and certain
other transactions between the Historical Business and Kodak is presented as a
change in division equity.
NOTE 12: INCOME TAXES
The components of earnings/(loss) before income taxes and the related
provision (benefit) for U.S. and other income taxes were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Earnings/(loss) before income taxes:
U.S................................................................... $32 $ 77
Outside the U.S....................................................... (7 ) (41)
--- ----
Total......................................................... $25 $ 36
=== ====
U.S. income taxes:
Current provision..................................................... $10 $ 35
Deferred provision (benefit).......................................... 2 (9)
Income taxes outside the U.S.:
Current provision..................................................... 2 2
Deferred provision (benefit).......................................... 2 (1)
State and other income taxes:
Current provision..................................................... 2 7
Deferred provision (benefit).......................................... 1 (1)
--- ----
Total......................................................... $19 $ 33
=== ====
</TABLE>
F-18
<PAGE> 57
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Amount computed using the statutory rate............................... $ 9 $13
Increase in taxes resulting from:
State and other income taxes......................................... 2 4
Operations outside the U.S........................................... 9 14
Other, net........................................................... (1 ) 2
--- ---
Provision for income taxes............................................. $19 $33
=== ===
</TABLE>
The significant components of deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets:
Post-employment obligations......................................... $ 60 $ 61
Inventories......................................................... 13 16
Tax loss carryforwards.............................................. 26 16
Other............................................................... 19 17
---- ----
Total....................................................... 118 110
Valuation allowance................................................. (26) (16)
---- ----
Total....................................................... $ 92 $ 94
==== ====
Deferred tax liabilities:
Depreciation........................................................ $ 3 $ 2
Leasing............................................................. 15 13
---- ----
Total....................................................... $ 18 $ 15
==== ====
</TABLE>
The valuation allowance is attributable to certain net operating loss
carryforwards outside the U.S. determined on a standalone basis which begin to
expire after 1999.
NOTE 13: RETIREMENT PLANS
The Historical Business participates in Kodak's principal defined benefit
pension plan covering substantially all U.S. employees. Retirement benefits
earned by employees prior to January 1, 1996 are based on a point system.
Retirement benefits earned by employees subsequent to December 31, 1995 will be
based on age and years of service. The benefit formula used to calculate the
actual benefit dollars paid to an individual once retired will not change as a
result of these new plan provisions. Retirement benefits generally become vested
upon the completion of five years of service. Retirement plan benefits are paid
to eligible employees from a trust fund whose assets are held for the sole
benefit of retired employees.
The assumptions used to compute pension amounts for the principal U.S. plan
of Kodak were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
---- ----
<S> <C> <C>
Discount rate.......................................................... 7.25% 8.50%
Salary increase rate................................................... 4.50% 5.00%
Long-term rate of return on plan assets................................ 9.50% 9.50%
</TABLE>
F-19
<PAGE> 58
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The annual costs of employee benefits related to post-retirement are based
on assumed discount rates set relative to the general level of interest rates in
the economy. As a result, significant year-to-year changes in interest rates can
cause material year-to-year changes in assumed discount rates and employee
benefit liabilities and costs based on these rates.
The tables below reflect the net periodic pension expense and the pension
obligation for the Historical Business' major U.S. plan as reflected in the
combined financial statements for the Historical Business. The actuarial
valuation was calculated based on the identification of employees specific to
the Historical Business and an allocated number of employees considered to be
employee equivalents based on their job functions. The market value of assets
were allocated to the Historical Business in accordance with Employee Retirement
Income Security Act requirements.
The Historical Business' financial statements include the estimated net
pension expense for active and inactive employees of the Historical Business,
which consists of the following:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Service cost.......................................................... $ 10 $ 11
Interest cost......................................................... 37 34
Return on plan assets................................................. (36) (35)
Net amortization...................................................... (5) (4)
--- ---
Net periodic pension expense.......................................... 6 6
Non-U.S. plans........................................................ 11 10
--- ---
Total pension expense....................................... $ 17 $ 16
=== ===
</TABLE>
Separate actuarial valuations were not prepared for the Historical
Business' non-U.S. units. Consequently, the non-U.S. units were treated as
participants in multi-employer plans and pension expense was generally based on
an allocated amount of contributions for the respective plan determined on the
basis of salaries for active employees of the Historical Business.
The funded status of the Historical Business' major U.S. plan relating to
active employees at December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Accumulated benefits.................................................... $138 $122
---- ----
Projected benefits...................................................... $232 $203
Market value of assets.................................................. 148 121
---- ----
Projected benefits in excess of plans assets............................ 84 82
Unrecognized net loss................................................... (29) (24)
Unrecognized net transition asset....................................... 16 19
Unrecognized prior service cost......................................... (6) (6)
---- ----
Accrued pension expense....................................... $ 65 $ 71
==== ====
</TABLE>
The obligation for inactive employees of the Historical Business has not
been included as this can not be specifically identified with the Historical
Business.
NOTE 14: NON-PENSION POST RETIREMENT BENEFITS
The Historical Business provides health care, dental and life insurance
benefits to eligible retirees and eligible survivors of retirees. In general,
these benefits are provided to U.S. retirees eligible to retire under
F-20
<PAGE> 59
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Kodak's principal U.S. pension plan. Kodak adopted SFAS No. 106 on January 1,
1993. As a result, the Historical Business now accrues during the years
employees render service, the expected costs of providing post-retirement health
and life insurance benefits to such employees.
The tables below reflect the net periodic post-retirement expense and the
accumulated post-retirement obligation for the Historical Business' U.S. plans
as reflected in the combined financial statements of the Historical Business.
The actuarial valuation was calculated based on the identification of employees
specific to the Historical Business and an allocated number of employees
considered to be employee equivalents based on their job functions.
The combined financial statements include the estimated net periodic
post-retirement benefit cost for active and inactive employees of the Historical
Business, which consists of the following components:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Service cost............................................................ $ 3 $ 4
Interest cost........................................................... 17 21
Net amortization........................................................ (4) (4)
---- ----
Net post-retirement benefit cost........................................ $ 16 $ 21
==== ====
</TABLE>
The total obligation and amount recognized in the Historical Business'
consolidated statement of financial position, relating only to active employees
at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
(IN MILLIONS)
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Fully eligible active plan participants................................ $ 3 $ 4
Other active plan participants......................................... 51 45
--- ---
Total obligation............................................... 54 49
Unrecognized net loss.................................................. -- (1 )
Unrecognized negative plan amendment................................... 17 17
--- ---
Accrued post-retirement benefit cost........................... $71 $65
=== ===
</TABLE>
The obligation for inactive employees of the Historical Business has not
been included as this can not be specifically identified with the Historical
Business.
To estimate the Historical Business' costs, health care costs were assumed
to increase 9% in 1996 with the rate of increase declining ratably to 5% by 2002
and thereafter. The discount rates utilized to measure the obligation at
December 31, 1995 and 1994 were 7.25% and 8.5% respectively. The annual costs of
employee benefits related to post-retirement are based on assumed discount rates
set relative to the general level of interest rates in the economy. As a result,
significant year-to-year changes in interest rates can cause material
year-to-year changes in assumed discount rates and employee benefit liabilities
and costs based on these rates. Based on Kodak's total principal U.S. plans, if
the health care cost trend rates were increased by one percentage point, the
Historical Business' accumulated post-retirement benefit obligation for active
employees, as of December 31, 1995, would increase by approximately $2 million
while the net post-retirement benefit cost for the year then ended for active
and inactive employees of the Historical Business would increase by
approximately $1 million.
A few of Kodak's subsidiaries and branches operating outside the U.S. offer
health care benefits under which employees of the Historical Business are
covered, however, the cost of such benefits is insignificant to the Historical
Business.
F-21
<PAGE> 60
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15: GEOGRAPHIC INFORMATION
Sales are reported in the geographic area in which they originate and are
shown net of intercompany sales. Financial information by geographic areas is as
follows:
<TABLE>
<CAPTION>
UNITED CANADA AND ASIA, AFRICA,
STATES LATIN AMERICA EUROPE AUSTRALIA ELIMINATIONS CONSOLIDATED
------ ------------- ------ ------------- ------------ ------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1995
Total Sales.............. $1,088 $ 104 $611 $20 $ -- $1,823
Earnings/(loss) from
operations............. $ 33 $ (10) $ (9) $ 4 $ (4) 14
Identifiable assets...... $ 697 $ 147 $398 $14 $ (7) 1,249
1994
Total Sales.............. $1,093 $ 94 $529 $21 $ -- 1,737
Earnings/(loss) from
operations............. $ 80 $ (11) $(24) $(5) $ (5) 35
Identifiable assets...... $ 716 $ 117 $346 $16 $ (3) 1,192
</TABLE>
NOTE 16: SUBSEQUENT EVENT
On January 18, 1996, Kodak announced its intention to reposition the
Historical Business by exploring various strategic options and structural
alternatives. In connection with this repositioning program, on September 9,
1996, Kodak announced the signing of an agreement to sell certain assets and
liabilities of the Historical Business to Danka Business Systems, PLC (Danka).
There are no adjustments reflected in these combined financial statements
related to the proposed sale to Danka.
F-22
<PAGE> 61
OFFICE IMAGING SALES AND SERVICES BUSINESS
UNAUDITED COMBINED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
JUNE 30,
-----------------
1996 1995
------ ------
(IN MILLIONS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Receivables (net of allowances of $19 and $21)............................. $ 348 $ 347
Net investment in direct finance and sales-type leases..................... 43 32
Inventories................................................................ 244 309
Deferred income tax charges................................................ 16 13
Other...................................................................... 7 6
------ ------
Total current assets............................................. 658 707
------ ------
PROPERTIES
Equipment on operating leases, net......................................... 292 304
Buildings and equipment, net............................................... 53 37
------ ------
Total properties................................................. 345 341
------ ------
OTHER ASSETS
Long-term receivables and other noncurrent assets.......................... 25 47
Net investment in direct finance and sales-type leases..................... 94 67
Deferred income tax charges................................................ 48 52
------ ------
Total Assets..................................................... $1,170 $1,214
====== ======
LIABILITIES AND DIVISION EQUITY
CURRENT LIABILITIES
Payables................................................................... $ 175 $ 191
Accrued income and other taxes............................................. 28 2
------ ------
Total current liabilities........................................ 203 193
------ ------
OTHER LIABILITIES
Pension and other post-employment liabilities.............................. 166 166
Other long-term liabilities................................................ 14 13
------ ------
Total liabilities................................................ 383 372
------ ------
DIVISION EQUITY
Common stock (owned by Kodak).............................................. 6 6
Additional paid in capital................................................. 1 1
Division equity............................................................ 751 786
Accumulated translation adjustment......................................... 29 49
------ ------
Total division equity............................................ 787 842
------ ------
Total Liabilities and Division Equity............................ $1,170 $1,214
====== ======
</TABLE>
F-23
<PAGE> 62
OFFICE IMAGING SALES AND SERVICES BUSINESS
UNAUDITED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED
JUNE 30,
-----------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
REVENUES AND INCOME
Rental and service revenues..................................................... $585 $572
Equipment and supplies sales.................................................... 289 299
Other income.................................................................... 6 6
---- ----
Total Revenues and Income............................................. 880 877
---- ----
COSTS
Cost of goods sold:
Rental and service............................................................ 404 397
Equipment and supplies........................................................ 226 266
Selling, general and administrative expenses.................................... 205 207
Other costs..................................................................... 1 2
---- ----
Total Costs........................................................... 836 872
---- ----
Earnings before income taxes.................................................... 44 5
Provision for income taxes...................................................... 22 4
---- ----
Net Earnings.......................................................... $ 22 $ 1
==== ====
</TABLE>
F-24
<PAGE> 63
OFFICE IMAGING SALES AND SERVICES BUSINESS
UNAUDITED COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
JUNE 30,
-------------
1996 1995
---- ----
(IN MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.................................................................. $ 22 $ 1
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization................................................. 63 58
Deferred income taxes......................................................... 22 4
Gain on sale/retirement of properties......................................... (6) (7)
Decrease in receivables....................................................... 43 30
Increase in direct finance and sales-type leases.............................. (13) (16)
Increase in inventories and equipment on operating leases..................... (17) (62)
Decrease in liabilities....................................................... (22) (48)
Other items, net.............................................................. (26) 16
---- ----
Total adjustments........................................................ 44 (25)
---- ----
Net cash (used in) provided by operating activities................. 66 (24)
---- ----
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to buildings and equipment.......................................... (6) (16)
Proceeds from sale of properties.............................................. 7 8
---- ----
Net cash provided by (used in) investing activities................. 1 (8)
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances/distributions from (to) Kodak.................................... (67) 32
---- ----
Net cash provided by (used in) financing activities................. (67) 32
---- ----
Net decrease.................................................................. -- --
Cash, beginning of year....................................................... -- --
---- ----
Cash, end of year............................................................. $ -- $ --
==== ====
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
The Historical Business routinely transfers rental equipment between
properties and inventories as a part of the lease or rental of these assets to
customers. These are noncash transactions and, therefore, should not effect the
determination of cash flows from operating and investing activities of the
Historical Business. For the six months ended June 30, 1996 and 1995, transfers
of inventory to rental equipment were approximately $43 million and $55 million,
respectively, and have been appropriately excluded from the Combined Statement
of Cash Flows.
F-25
<PAGE> 64
APPENDIX "A"
<TABLE>
<S> <C>
SOLOMON BROTHERS INC
Seven World Trade Center
New York, New York 10048 ------------------------
212-783-7000 SALOMON BROTHERS
------------------------
</TABLE>
September 6, 1996
Board of Directors
Danka Business Systems plc
Masters House
107 Hammersmith Road
London W14 0QH
England
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to Danka Business Systems plc (the "Company") of
the consideration to be paid by the Company in the proposed acquisition by the
Company and certain of its subsidiaries from Eastman Kodak Company ("Seller")
and certain of its subsidiaries of certain assets of the Office Imaging business
unit of Seller, the Customer Equipment Services business unit of Seller, and all
of the issued and outstanding stock of Seller's subsidiary, Kodak Imaging
Services, Inc., and its subsidiaries (collectively, the "Subject Business")
pursuant to the Asset Purchase Agreement, dated as of September 6, 1996 (the
"Agreement"), between Seller and the Company (the "Proposed Acquisition").
As more specifically set forth in the Agreement, and on the terms and
subject to the conditions thereof, the Company will acquire the Subject Business
for an aggregate cash price of $684.2 million, subject to adjustment, and the
assumption of certain liabilities. In addition, as set forth in the Agreement,
Seller and a subsidiary of the Company will enter into an amended and restated
Master Agreement between Seller and a subsidiary of the Company (the "Supply
Agreement") pursuant to which Seller will agree to sell, and such subsidiary of
the Company will agree to buy, on an exclusive basis, certain equipment,
accessories, supplies, parts and software on the terms and conditions set forth
therein.
In connection with rendering our opinion, we have reviewed and analyzed,
among other things, the following: (i) the final draft of the Agreement; (ii)
the final draft of the form of the Supply Agreement; (iii) the Transitional
Advisory Agreement between Seller and the Company; (iv) certain other internal
information, primarily financial in nature, including projections, concerning
the business and operations of Seller and the Subject Business furnished to us
by Seller for purposes of our analysis; (v) certain other internal information,
primarily financial in nature, including projections, concerning the business
and operations of the Company and the Subject Business, including pro forma
projections of the Company and the Subject Business, furnished to us by the
Company for purposes of our analysis; (vi) certain publicly available
information with respect to certain other companies that we believe to be
comparable to the Subject Business and the trading markets for certain of such
other companies' securities; and (vii) certain publicly available information
concerning the nature and terms of certain other transactions that we consider
relevant to our inquiry. We have also considered such other information,
financial studies, analyses, investigations and financial, economic and market
criteria that we deemed relevant. We have also met with certain officers and
employees of Seller, the Subject Business and the Company, to discuss the
foregoing as well as other matters we believe relevant to our inquiry.
- --------------------------------------------------------------------------------
SALOMON BROTHERS INC AND WORLDWIDE AFFILIATES
- --------------------------------------------------------------------------------
Atlanta - Bankok - Beijing - Boston - Chicago - Frankfurt - Hong
Kong - London - Los Angeles - Madrid - Melbourne
Mexico City - Milan - New York - Osaka - Paris - San
Francisco - Seoul - Singapore - Sydney - Taipei - Tokyo - Toronto - Zurich
A-1
<PAGE> 65
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. We have not conducted a physical inspection of any of the
properties or facilities of the Subject Business, nor have we made or obtained
or assumed any responsibility for making or obtaining any independent
evaluations or appraisals of any of such properties or facilities. We have
assumed that the definitive Agreement and the definitive Supply Agreement will
not, when executed, contain any terms or conditions that differ materially from
the terms and conditions contained in the drafts of such documents we have
reviewed. With respect to projections, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the managements of Seller, the Subject Business and the Company
as to the respective future financial performances of the Subject Business and
the Company and we express no view with respect to such projections or the
assumptions on which they were based.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following: (i)
the historical and current pro forma financial position and results of
operations of the Subject Business and the Company; (ii) the business prospects
of the Subject Business and the Company, including pro forma projections of the
Subject Business and the Company; (iii) the historical and current market for
the equity securities of certain other companies that we believe to be
comparable to the Subject Business; and (iv) the nature and terms of certain
other acquisition transactions that we believe to be relevant. We have also
taken into account our assessment of general economic, market and financial
conditions, as well as our experience in connection with similar transactions
and securities valuation generally. Our opinion necessarily is based upon
conditions as they exist and can be evaluated on the date hereof and we assume
no responsibility to update or revise our opinion based upon circumstances or
events occurring after the date hereof. Our opinion is for the sole benefit of
the Board of Directors in its consideration of the Proposed Acquisition and is,
in any event, limited to the fairness, from a financial point of view, of the
consideration to be paid by the Company in the Proposed Acquisition and does not
address the Company's underlying business decision to effect the Proposed
Acquisition or constitute a recommendation to any holder of equity securities of
the Company as to how such holder should vote with respect to the Proposed
Acquisition.
As you are aware, Salomon Brothers Inc has acted as financial advisor to
the Company in connection with the Proposed Acquisition and will receive a fee
for our services, a substantial portion of which is contingent upon consummation
of the Proposed Acquisition. Additionally, Salomon Brothers Inc served as a
co-manager of the February 13, 1996, equity public offering of the Company and
received customary compensation. In addition, in the ordinary course of our
business, we actively trade the debt and equity securities of both the Company
and Seller for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
Based upon and subject to the foregoing, we are of the opinion as
investment bankers that the consideration to be paid by the Company in the
Proposed Acquisition is fair, from a financial point of view, to the Company.
Very truly yours,
/s/ Salomon Brothers Inc.
A-2
<PAGE> 66
APPENDIX "B"
DANKA BUSINESS SYSTEMS PLC
MASTERS HOUSE
107 HAMMERSMITH ROAD
LONDON W14 0QH ENGLAND
PROXY FOR THE EXTRAORDINARY GENERAL MEETING TO BE HELD DECEMBER 11, 1996
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
The undersigned, having received notice of the Extraordinary General Meeting
of Danka Business Systems PLC (the "Company") to be held at 11:00 a.m. (local
time) on December 11, 1996 (the "Meeting"), at Square Mile Communications
Limited, 11 Gough Square, London EC4A 3DE, hereby designates and appoints Paul
G. Dumond and David C. Snell, and each of them with authority to act without the
other, or , as attorneys and proxies for the undersigned (the
"proxies"), with full power of substitution, to vote all Ordinary Shares of 1.25
pence each (net) of Danka Business Systems PLC that the undersigned is entitled
to vote at such Meeting or at any adjournment thereof, such proxies being
directed to vote as specified on the reverse side.
THIS PROXY WILL BE VOTED: (1) AS DIRECTED ON THE MATTERS LISTED ON THE
REVERSE SIDE; AND (2) WHERE A CHOICE IS NOT SPECIFIED, IT IS ANTICIPATED THAT
THE PROXY WILL VOTE THE ORDINARY SHARES REPRESENTED BY SUCH PROXIES FOR THE
ORDINARY RESOLUTION.
(Continued and to be dated and signed on the reverse side)
The Board of Directors recommends a vote "FOR" the following matter. Please
make an "X" in one space. To be effective, this Proxy must be deposited at the
Company's registrars not later than 48 hours before the time appointed for the
Meeting. Please mark, sign, date and return this Proxy promptly using the
enclosed envelope.
To adopt the ordinary resolution as set forth in the Proxy Statement for the
Meeting, which would approve the proposed acquisition pursuant to an asset
purchase agreement, as amended from time to time, between Eastman Kodak Company
and the Company dated September 6, 1996 (the "Asset Purchase Agreement") of (i)
certain assets and liabilities relating to (x) the sales, marketing,
distribution and equipment service operations of Eastman Kodak Company's Office
Imaging and Customer Equipment Services business units and (y) the facilities
management services business of Eastman Kodak Company known as Kodak Imaging
Services and (ii) the whole of the issued share capital of the subsidiaries of
Eastman Kodak Company which engage in facilities management services, and
authorize the Board of Directors to cause the Asset Purchase Agreement to be
completed and at their discretion to do or procure all such other acts or things
as they consider necessary or desirable in connection therewith.
<TABLE>
<S> <C> <C>
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
</TABLE>
The undersigned reserves the right to
revoke this Proxy at any time prior to
the Proxy being voted at the Meeting.
The Proxy may be revoked by delivering
a signed revocation to the Company at
any time prior to the Meeting, by
submitting a later-dated Proxy, or by
attending the Meeting in person and
casting a ballot. The undersigned
hereby revokes any proxy previously
given to vote such Ordinary Shares at
the Meeting.
Signature(s)
Date
(Please sign exactly as your name
appears on your share certificate(s).
In the case of joint owners, the
signature of any one of them will
suffice. When signing as attorney,
executor, administrator, trustee,
guardian or corporate officer, please
give your full title as such).
B-1
<PAGE> 67
APPENDIX "C"
DANKA BUSINESS SYSTEMS PLC
INSTRUCTIONS TO THE BANK OF NEW YORK, AS DEPOSITARY
(MUST BE RECEIVED PRIOR TO THE CLOSE OF BUSINESS ON DECEMBER 5, 1996)
The undersigned Owner of American Depositary Receipts hereby requests and
instructs The Bank of New York, as Depositary, to endeavor, insofar as
practicable, to vote or cause to be voted the Deposited Securities represented
by such Receipts registered in the name of the undersigned on the books of the
Depositary as of the close of business on November 4, 1996 at the Extraordinary
General Meeting of Danka Business Systems PLC to be held in London, England, on
December 11, 1996 in respect of the Ordinary Resolution specified in the Notice
of the Meeting.
NOTE:
INSTRUCTIONS AS TO VOTING ON THE SPECIFIED RESOLUTION SHOULD BE INDICATED BY AN
"X" IN THE APPROPRIATE BOX. THE DEPOSITARY SHALL NOT VOTE OR ATTEMPT TO EXERCISE
THE RIGHT TO VOTE THAT ATTACHES TO THE SHARES OR OTHER DEPOSITED SECURITIES
OTHER THAN IN ACCORDANCE WITH SUCH INSTRUCTIONS.
DANKA BUSINESS SYSTEMS PLC
P.O. Box 11124
New York, NY 10203-0124
(Continued and to be dated and signed on the reverse side)
RESOLUTION:
To adopt the ordinary resolution as set forth in the Proxy Statement for the
Meeting, which would approve the proposed acquisition pursuant to an asset
purchase agreement, as amended from time to time, between Eastman Kodak Company
and the Company dated September 6, 1996 (the "Asset Purchase Agreement") of (i)
certain assets and liabilities relating to (x) the sales, marketing,
distribution and equipment service operations of Eastman Kodak Company's Office
Imaging and Customer Equipment Services business units and (y) the facilities
management services business of Eastman Kodak Company known as Kodak Imaging
Services and (ii) the whole of the issued share capital of the subsidiaries of
Eastman Kodak Company which engage in facilities management services, and
authorize the Board of Directors to cause the Asset Purchase Agreement to be
completed and at their discretion to do or procure all such other acts or things
as they consider necessary or desirable in connection therewith.
FOR [ ] AGAINST [ ]
THE VOTING INSTRUCTION MUST BE SIGNED
BY THE PERSON IN WHOSE NAME THE
RELEVANT RECEIPT IS REGISTERED ON THE
BOOKS OF THE DEPOSITARY. IN THE CASE OF
A CORPORATION, THE VOTING INSTRUCTION
MUST BE EXECUTED BY A DULY AUTHORIZED
OFFICER OR ATTORNEY. IN THE CASE OF
JOINT HOLDERS, THE SIGNATURE OF ANY ONE
WILL SUFFICE.
DATED:, 1996
SIGNATURE
VOTES MUST BE INDICATED
(X) IN BLACK OR BLUE INK.
Please Mark, Sign, Date and Return the Voting Instruction Card Promptly Using
the Enclosed Envelope.
C-1
