<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
TO _______________
Commission file number: 0-20828
DANKA BUSINESS SYSTEMS PLC
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ENGLAND 98-0052869
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11201 DANKA CIRCLE NORTH
ST. PETERSBURG, FLORIDA 33716
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 813-576-6003
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
The registrant had 226,881,797 Ordinary shares outstanding as of June 30, 1997.
<PAGE> 2
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Statements of Earnings for the three months ended
June 30, 1997 and 1996 (Unaudited) 3
Condensed Consolidated Balance Sheets as of June 30, 1997
(Unaudited) and March 31, 1997 (Audited) 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 1997 and 1996 (Unaudited) 5
Consolidated Statement of Shareholders' Equity for the three months
ended June 30, 1997 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 14
Item 2 - Changes in Securities 14
Item 3 - Defaults upon Senior Securities 14
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 15
Signature 17
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER AMERICAN DEPOSITARY SHARE ("ADS") AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------------------
JUNE 30, JUNE 30,
1997 1996
------------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE:
Retail equipment sales $ 247,240 $ 149,917
Retail service, supplies and rentals 532,175 194,952
Wholesale 63,423 57,086
------------------- ------------------
Total revenue 842,838 401,955
------------------- ------------------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 159,687 92,764
Retail service, supplies and rental costs 314,006 103,222
Wholesale costs of revenue 51,233 46,890
Selling, general and administrative expenses 254,623 126,496
Amortization of intangible assets 4,664 4,419
Research & development costs 12,500 --
------------------- ------------------
Total costs and operating expenses 796,713 373,791
------------------- ------------------
EARNINGS FROM OPERATIONS 46,125 28,164
Interest expense and other, net 16,759 5,033
------------------- ------------------
EARNINGS BEFORE INCOME TAXES 29,366 23,131
Provision for income taxes 10,900 8,800
------------------- ------------------
NET EARNINGS $ 18,466 $ 14,331
=================== ==================
NET EARNINGS PER ADS $ 0.32 $ 0.25
=================== ==================
WEIGHTED AVERAGE ADSS 58,453 57,787
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
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DANKA BUSINESS SYSTEMS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
------------------ ----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 53,489 $ 73,875
Accounts receivable, net 736,146 847,258
Inventories 518,473 488,931
Prepaid expenses and other current assets 42,686 39,534
---------------- -----------------
TOTAL CURRENT ASSETS 1,350,794 1,449,598
Equipment on operating leases, net 311,152 311,069
Property and equipment, net 84,154 87,768
Intangible assets, net 456,767 467,362
Other assets 123,081 143,562
---------------- -----------------
TOTAL ASSETS $ 2,325,948 $ 2,459,359
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and notes payable $ 90,505 $ 41,385
Accounts payable 323,699 446,612
Accrued expenses and other current liabilities 265,515 323,596
Deferred revenue 67,018 69,149
---------------- -----------------
TOTAL CURRENT LIABILITIES 746,737 880,742
Convertible subordinated notes 200,000 200,000
Other long-term debt 844,041 859,823
Deferred income taxes and other long-term liabilities 55,748 53,063
---------------- -----------------
TOTAL LIABILITIES 1,846,526 1,993,628
---------------- -----------------
SHAREHOLDERS' EQUITY:
Ordinary shares, 1.25 pence stated value; 500,000,000
authorized; 226,881,797 and 226,827,049 issued and outstanding 4,735 4,734
Additional paid-in capital 301,864 301,623
Retained earnings 204,772 186,306
Currency translation adjustment (31,949) (26,932)
---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 479,422 465,731
---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,325,948 $ 2,459,359
================ =================
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
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DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------
JUNE 30, JUNE 30,
1997 1996
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 18,466 $ 14,331
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 39,191 18,055
Gain on sale of property and equipment (326) (208)
Proceeds from sale of rental equipment 4,515 2,406
Changes in assets and liabilities, net of effects
from the purchase of subsidiaries:
Accounts receivable (6,463) (15,867)
Inventories (32,241) (20,550)
Prepaid expenses and other current assets (3,589) (503)
Other noncurrent assets 4,414 (1,259)
Accounts payable (54,290) 15,955
Accrued expenses 5,709 (32,112)
Deferred revenue (1,769) (2,683)
Deferred income taxes and other long-term liabilities 3,018 4,943
----------------- ----------------
NET CASH USED IN OPERATING ACTIVITIES (23,365) (17,492)
----------------- ----------------
INVESTING ACTIVITIES
Capital expenditures (43,618) (18,822)
Proceeds from sale of property and equipment 4,090 578
Payment for purchase of subsidiaries, net of cash acquired (1,069) (8,559)
Payment for purchase of noncompete agreements (41) (381)
----------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (40,638) (27,184)
----------------- ----------------
FINANCING ACTIVITIES
Net borrowings under line of credit agreements 48,783 67,503
Principal payments on debt (1,168) (18,319)
Proceeds from stock options exercised 242 141
----------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 47,857 49,325
----------------- ----------------
EFFECT OF EXCHANGE RATES (4,240) 1,898
----------------- ----------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (20,386) 6,547
Cash and cash equivalents, beginning of period 73,875 38,217
----------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 53,489 $ 44,764
================= ================
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
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DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY
ORDINARY PAID-IN RETAINED TRANSLATION
SHARES CAPITAL EARNINGS ADJUSTMENT TOTAL
------------ ------------ ------------ -------------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1997 $ 4,734 $ 301,623 $ 186,306 $ (26,932) $ 465,731
Net earnings 18,466 18,466
Shares issued under employee option plan 1 241 242
Currency translation adjustment (5,017) (5,017)
------------ ------------ -------------- ------------- --------------
BALANCES AT JUNE 30, 1997 $ 4,735 $ 301,864 $ 204,772 $ (31,949) $ 479,422
============ ============ ============ ============= ==============
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
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DANKA BUSINESS SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of June 30,
1997, consolidated statements of earnings for the three months ended June
30, 1997 and 1996, the consolidated statement of shareholders' equity for
the three months ended June 30, 1997, and the consolidated statements of
cash flows for the three months ended June 30, 1997 and 1996 are unaudited.
In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results of
operations for the interim periods presented have been reflected herein.
The results of operations for the interim periods are not necessarily
indicative of the results which may be expected for the entire fiscal year.
The consolidated financial statements should be read in conjunction with
the consolidated financial statements and the notes thereto included in
Danka Business Systems PLC's Annual Report for the year ended March 31,
1997.
NOTE 2. RECLASSIFICATIONS
Certain items in the condensed consolidated balance sheet as of June
30, 1997 presented herein have been reclassified.
NOTE 3. RESTRUCTURING CHARGE
During the third quarter of fiscal 1997, the Company recorded a $35.0
million pre-tax restructuring charge, related to the integration of the
Office Imaging division acquired from Eastman Kodak and the related
transition to the Company's Market Based Approach in North America. As of
June 30, 1997, approximately $20.3 million remained in accrued liabilities,
comprised of $2.2 million for severance and other employee termination
benefits, $16.5 million for the closing of duplicate facilities, and $1.6
million for the write-off of leasehold improvements.
NOTE 4: PENDING ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
impact is expected to result in an increase in primary earnings per share.
The Company has not yet determined what the impact of Statement No. 128 will
be on the calculation of fully diluted earnings per share.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Danka Business Systems PLC and its Subsidiaries (the "Company") is
one of the world's largest independent suppliers of photocopiers,
facsimiles and other related automated office equipment. The Company
primarily markets these products and related services, parts and supplies
on a direct basis to retail customers. The Company also markets
photocopiers, facsimiles, and related parts and supplies on a wholesale
basis to independent dealers. The Company principally distributes the
products of Canon, Kodak, Konica, Minolta, Ricoh, Sharp and Toshiba. In
addition, the Company markets private label photocopiers and facsimiles
and related supplies on a direct basis under the Company's Infotec
trademark, and facsimile equipment under its dex and Omnifax trademarks.
The Company became the exclusive distributor of Kodak branded photocopiers
and printers in December 1996, after completing the acquisition of the
sales, marketing, and equipment service operations of Kodak's Office
Imaging division and facilities management business. The acquired
businesses are now known as Danka Office Imaging and Danka Imaging
Services.
The Company's goal is to increase the net margins of the Office
Imaging and Imaging Services businesses through certain cost efficiencies
and synergies it expects to achieve by integrating the businesses with the
Company's core operations. The Company expects to have the integration of
the Office Imaging and Imaging Services businesses completed on a
worldwide basis by the end of 1998. The entire process will require
significant investments and resources. Since the acquisition, key
managers from the Company and Office Imaging's North American and European
operations, have been working together to identify and monitor the costs,
benefits and timing issues related to the integration of the Company and
the Office Imaging and Imaging Services businesses. To successfully
complete the unification of the businesses and create a single
organization, the Company is focusing on three primary areas of
importance. The first objective involves the overall integration of the
businesses, including a consolidated organizational structure and the
realignment of geographic reporting responsibilities. The second
undertaking is to redesign the general workflow processes. The Company
will integrate the billings, dispatching, distribution and other similar
functions, to create a "single face to the customer." This process is
expected to improve operating efficiencies while ultimately serving the
customer better. The third area of focus is the development of a global
information technology ("IT") infrastructure and the standardization of
the Company's IT systems.
The Company has already tested its integration model in Canada and
will start to implement its integration plans throughout the United States
and Europe during the second quarter. The Company expects to generate
over $100 million in annual costs savings by integrating the Office
Imaging and Imaging Services businesses with the Company's core
operations. The Company expects to generate these cost savings through
increasing sales and service productivity, streamlining operations and
capitalizing on the combined purchasing power.
The Company has completed numerous acquisitions throughout its
history. The acquisition of the Office Imaging and Imaging Services
businesses, which is expected to add over $1.5 billion in annual revenue,
was the Company's largest to date. The acquisition was completed on
December 31, 1996 and added over 300 new locations, approximately 10,000
employees and operations in more than 15 new countries. The Company's
acquisition activity will be limited over the next twelve to eighteen
months as the Company concentrates on the integration of the Office Imaging
and Imaging Services businesses.
8
<PAGE> 9
The following table sets forth for the periods indicated the
percentage of total revenue represented by certain items in the Company's
Consolidated Statements of Earnings:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenue:
Retail equipment sales . . . . . . . . . . . . . . 29.3 % 37.3 %
Retail service, supplies and rentals. . . . . . . . 63.2 48.5
Wholesale . . . . . . . . . . . . . . . . . . . . . 7.5 14.2
--- ----
Total revenue . . . . . . . . . . . . 100.0 100.0
Cost of revenue . . . . . . . . . . . . . . . . . . . 62.3 60.4
---- ----
Gross profit . . . . . . . . . . . . . . . . . . . 37.7 39.6
Selling, general and administrative expenses . . . . 30.2 31.5
Amortization of intangible assets . . . . . . . . . . 0.5 1.1
Research and development costs . . . . . . . . . . 1.5 --
--- ----
Earnings from operations . . . . . . . . . . 5.5 7.0
Interest expense and other, net . . . . . . . . . . . 2.0 1.2
--- ---
Earnings before income taxes . . . . . . . . 3.5 5.8
Provision for income taxes . . . . . . . . . . . . . 1.3 2.2
--- ---
Net earnings . . . . . . . . . . . . . . . 2.2 % 3.6 %
=== ===
</TABLE>
The following table sets forth for the periods indicated the
gross profit margin percentage for each of the Company's revenue
classifications:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
---- -----
<S> <C> <C>
Retail equipment sales . . . . . . . . . . . . . . 35.4 % 38.1 %
Retail service, supplies and rentals . . . . . . . 41.0 47.0
Wholesale . . . . . . . . . . . . . . . . . . . . . 19.2 17.9
</TABLE>
QUARTER ENDED JUNE 30, 1997 COMPARED TO QUARTER ENDED JUNE 30, 1996:
Revenue
Revenue increased 110% to a record $842.8 million for the three
months ended June 30, 1997 ("first quarter of fiscal 1998") compared to
$402.0 million for the three months ended June 30, 1996 ("first quarter of
fiscal 1997"). The increase resulted from core growth as well as
significant contributions from acquisitions, principally the Office
Imaging and Imaging Services businesses. In addition, the Company's
revenue mix has significantly changed due to the acquisition of the Office
Imaging and Imaging Services businesses. The acquired businesses generate
a higher percentage of revenue from service, supplies and rentals compared
to the Company's core operations. As a percentage of total revenue,
retail equipment and wholesale sales declined, as retail service, supplies
and rentals increased. The Company's current revenue mix is expected to
continue in the future.
An increasing amount of the Company's revenue is generated in
countries outside of the United States. Due to the strength of the U.S.
dollar against certain foreign currencies, the Company's revenue
comparisons were negatively impacted by approximately $15.0 million during
the first quarter of fiscal 1998.
9
<PAGE> 10
Gross Profit
Gross profit increased 99% to $317.9 million for the first
quarter of fiscal 1998 from $159.1 million in the first quarter of fiscal
1997. The gross profit margin as a percentage of total revenue decreased
to 37.7% for the first quarter of fiscal 1998 from 39.6% for the first
quarter of fiscal 1997. The decrease was primarily related to the
acquisition of the Office Imaging and Imaging Services businesses which
have lower individual gross profit margins than the Company's core
operations. Gross profit as a percentage of retail equipment sales
decreased to 35.4% for the first quarter of fiscal 1998 from 38.1% for the
first quarter of fiscal 1997 due to the Office Imaging business as well as
the higher mix of high-volume equipment sold during the first quarter of
fiscal 1998. The Company's high-volume equipment sales generate a lower
gross profit margin than the Company's other equipment sales. As a
percentage of revenue, the gross profit margin on retail service, supplies
and rentals decreased to 41.0% for the first quarter of fiscal 1998 from
47.0% for the first quarter of fiscal 1997 due to the acquisition of the
Office Imaging and Imaging Services businesses which have lower individual
gross profit margins. The Company expects to increase the service margins
of the Office Imaging business through increased productivity. Imaging
Services, the Company's outsourcing operations, has significantly lower
gross profit margins due to the nature of the business, and as it continues
to grow, this business is expected to impact the Company's overall gross
profit margin. The Company's wholesale gross profit margin increased to
19.2% for the first quarter of fiscal 1998 from 17.9% for the first quarter
of fiscal 1997 primarily due to stronger margins on the Company's private
label sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 101% to
$254.6 million for the first quarter of fiscal 1998. The increase related
to acquisitions made after June 30, 1996, principally the acquisition of
the Office Imaging and Imaging Services businesses. As a percentage of
revenue, selling, general and administrative expenses decreased to 30.2%
for the first quarter of fiscal 1998 from 31.5% for the first quarter of
fiscal 1997. The decrease is primarily due to the completion of the
Market Based Approach in the Company's core North American operations.
The Market Based Approach reduced certain duplicative administrative costs
through the centralization of various management and administrative
functions. The Company had also incurred additional costs during the
first quarter of fiscal 1997 when it aggressively hired and trained new
sales representatives and support personnel for its core North American
operations. In addition, the Company's selling, general and
administrative expenses as a percentage of revenue were affected during
the first quarter of fiscal 1998 by the acquisition of the Imaging
Services business, which has significantly lower levels of selling,
general and administrative expenses.
Amortization of Intangible Assets
Amortization of intangible assets increased to $4.7 million for
the first quarter of fiscal 1998 from $4.4 million for the first quarter
of fiscal 1997. The increase related to acquisitions made after June 30,
1996 for which additional intangible assets are being amortized.
Research and Development Costs
In connection with the acquisition of the Office Imaging and
Imaging Services businesses, the Company is providing funding to Kodak for
ongoing research and development through December 31, 2002. For the first
quarter of fiscal 1998, research and development costs totaled $12.5
million.
Earnings from Operations
Earnings from operations increased 64% to $46.1 million for the
first quarter of fiscal 1998. The increase primarily related to increased
revenue. As a percentage of revenue, earnings from operations decreased
to 5.5% for the
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first quarter of fiscal 1998 from 7.0% for the first quarter of fiscal
1997. The decrease was due to the $12.5 million of research and development
costs and to lower gross profit margins, which were partially offset by the
lower margin on selling, general & administrative expenses.
Interest Expense and Other, Net
Interest expense increased to $16.8 million for the first quarter
of fiscal 1998 compared to $5.0 million for the first quarter of fiscal
1997. The increase primarily related to higher levels of borrowings used
to finance the acquisition of the Office Imaging and Imaging Services
businesses.
Income Taxes
Income taxes increased to $10.9 million for the first quarter of
fiscal 1998 from $8.8 million for the first quarter of fiscal 1997 due to
higher levels of earnings. The combined effective income tax rate
decreased to 37.1% for the first quarter of fiscal 1998 as compared with
an effective income tax rate of 38.0% for the first quarter of fiscal
1997. The rate has decreased due to higher earnings outside of the U.S.
for which the effective tax rates are lower.
Net Earnings
As a result of the above factors, net earnings increased 29% to
$18.5 million for the first quarter of fiscal 1998 from $14.3 million for
the first quarter of fiscal 1997. As a percentage of revenue, net
earnings decreased to 2.2% for the first quarter of fiscal 1998 as
compared to 3.6% for the first quarter of fiscal 1997. The decrease was
primarily due to the $12.5 million of research and development costs and
to lower gross profit margins, which were partially offset by the lower
margin on selling, general & administrative expenses. The first quarter
of fiscal 1998 was also impacted by the higher level of interest expense.
EXCHANGE RATES
Fluctuations in the exchange rate between the pound sterling and
the U.S. dollar affect the dollar equivalent of the pound sterling of the
Ordinary Shares of the Company on the London Stock Exchange and, as a
result, are likely to affect the market price of the ADSs. Additionally,
the Company declares its dividends in pounds sterling. Fluctuations in
exchange rates will affect dividend income measured in U.S. dollars because
the Depositary is required to convert pounds sterling into U.S. dollars at
the prevailing exchange rates at the time of making any dividend payments
or other distributions. The Company operates in over 30 countries
worldwide, and therefore, fluctuations in exchange rates between the U.S.
dollar and the currencies in each of the countries in which the Company
operates, will affect the results of the Company's international operations
reported in U.S. dollars and the value of such operations' net assets
reported in U.S. dollars. The Company has significantly increased its
international business over the last few years and most recently, with the
acquisition of the Office Imaging and Imaging Services businesses, the
Company added 19 new countries. The results of operations, financial
condition and competitive position of the Company's business may be
affected by the relative strength of its currencies in countries where its
products are currently sold. The Company's results of operations and
financial condition may be adversely affected by fluctuations in foreign
currencies and by translations of the financial statements of the Company's
foreign subsidiaries from local currencies into U.S. dollars.
The Company purchases a significant amount of its automated
office equipment, related parts and supplies from Japanese manufacturers.
The purchase price for most of these products is denominated in local
currencies and therefore, short term fluctuations in the local currencies
relative to the Japanese yen do not impact the Company's purchase price.
However, if the yen were to strengthen significantly against the U.S.
dollar, this would impact the yen amounts received by the Company's
Japanese manufacturers as they converted the U.S. dollars received from
the Company and other dealers into yen. As a result, these Japanese
manufacturers could raise prices. The Company has historically been
11
<PAGE> 12
successful in passing price increases on to its customers. However, there
can be no assurances that it can continue to do so in the future. Also,
most of the Company's service contracts are for one year periods and
accordingly, pricing for parts and supplies could not be adjusted until the
contract was renewed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flow used in operating activities was
$23.4 million and $17.5 million for the three months ended June 30, 1997
and 1996, respectively. The Company experiences increases in certain
balance sheet accounts which result primarily from acquisitions as well as
from normal working capital needs. During the three months ended June 30,
1997, the Company paid down a significant amount of accounts payable which
had built up during the prior quarter due to the acquisition of the Office
Imaging and Imaging Services businesses. In addition, there was an
increase in the Company's inventory levels related to the requirements to
purchase various levels of equipment pursuant to the supply agreements
("Supply Agreements") with Kodak. The Company has not sold all the
inventory purchased from Kodak, due to the decline in the Office Imaging
salesforce since the acquisition. The Company is rebuilding the
salesforce and currently expects to meet the purchasing requirements
contained in the Supply Agreements with Kodak. Cash flow used in
investing activities was $40.6 million and $27.2 million for the three
months ended June 30, 1997 and 1996, respectively. The increase was
primarily related to higher capital expenditures. Net cash provided by
financing activities was $47.9 million and $49.3 million for the three
months ended June 30, 1997 and 1996, respectively.
In December 1996 the Company signed a six-year $1.275 billion
multicurrency credit agreement (the "Credit Agreement") with a consortium
of international banks. The proceeds from the Credit Agreement were
utilized to purchase the Office Imaging and Imaging Services businesses
from Eastman Kodak, to repay the outstanding balance under the Company's
previous credit facility, as well as for ongoing working capital and
general corporate purposes. The Credit Agreement provides the Company
with a revolving component in an aggregate amount of up to $725.0 million,
and a term loan/letter of credit component of $550.0 million. The Credit
Agreement is secured and guaranteed by certain of the Company's
subsidiaries and a covenant that the Company will not pledge its assets
except as specifically permitted under the terms of the Credit Agreement.
The Credit Agreement contains negative and affirmative covenants and
agreements which place restrictions on the Company regarding disposition
of assets, capital expenditures, additional indebtedness, permitted liens
and payment of dividends, as well as requiring the maintenance of certain
financial ratios. The adjustable interest rate on the Credit Agreement is,
at the option of the Company, either: (i) the London InterBank Offered Rate
plus a tiered margin based on leverage for the periods of one, two, three
or six months or (ii) an alternative base rate, consisting of the higher of
the lead bank's prime rate or the Federal Funds Rate plus 0.5%. As of June
30, 1997 the Credit Agreement had an outstanding balance of approximately
$374.6 million under the revolving component and $522.9 million under the
term loan, all of which was incurring interest at a weighted average rate
of 5.7% per annum. Therefore, subject to availability under the covenants,
$377.5 million was available for future borrowings.
In March 1995, the Company issued $200.0 million of 6.75%
Convertible Subordinated Notes (the "Notes") at par, in a private
placement offering, due April 2002. The Notes are convertible into the
Company's ADSs at a conversion rate of $29.125 per ADS, or into the
Company's Ordinary Shares at a conversion rate of $7.281 per Ordinary
share (equivalent to approximately 34.335 ADSs or 137.339 Ordinary Shares
for each $1,000 principal amount of Notes). Interest is payable
semi-annually on April 1 and October 1. The Notes are not subject to
sinking fund requirements.
The Company has a number of other loans and credit facility
arrangements with banks, financial institutions and certain individuals,
which had an aggregate balance of $37.1 million at June 30, 1997. This
balance is primarily comprised of various cash management lines of credit
(the "Lines") in each of the countries in which the Company operates. The
Lines provide for daily liquidity of local operations in each such
country. These loans vary widely in terms and conditions.
While the Company does not have any other material contractual
commitments for capital expenditures other than the funding of Kodak's
research and development efforts, additional investments in facilities and
computer equipment will continue to be necessary to support the
anticipated growth of the business, and the transition of Office Imaging
and Imaging Services off of Kodak's computer system. The Company's cash
flow from operations together with
12
<PAGE> 13
the borrowing capacity under the Credit Agreement are expected to be
adequate to finance its operating cash requirements and capital
expenditures for the short-term. It is anticipated that future
acquisitions and growth in the long-term will be funded primarily with cash
flow from operations, borrowings available under the Credit Agreement,
other credit sources and, where desirable, funding from the sale of
additional debt or equity securities.
SEASONALITY
The Company experiences some seasonality in its business. The
Company's European and Canadian operations have historically experienced
lower revenues and net earnings for the three month period ended September
30 due to increased vacation time by Europeans and Canadians during July
and August. This has resulted in reduced sales activity and reduced usage
of photocopiers, facsimiles and other automated office equipment during
such period.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained throughout this Form 10-Q such as
statements concerning the anticipated effect of the acquisition of the
Office Imaging and Imaging Services businesses (the "Acquisition") on the
Company's expenses, productivity, and earnings, the expected synergies and
efficiencies resulting from the integration of the Acquisition, future
intentions for reducing costs and prospects for improving margins and
maximizing profitability from the Acquisition, and from the anticipated
growth of digital and color equipment 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. Factors that might cause such
differences include, among others, the following: (i) the Company's ability
to manage and operate the Office Imaging and Imaging Services businesses,
(ii) the demands that the Acquisition and integration of the Office Imaging
and Imaging Services businesses 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 retain current
management and other employees of the Office Imaging and Imaging Services
businesses accustomed to different corporate culture, compensation
arrangements and benefits, (v) the Company's ability to successfully manage
and reduce the increased debt resulting from the Acquisition, (vi) the
Company's ability to achieve the minimum equipment purchase commitments
under the Supply Agreements, (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 Supply Agreements are not renegotiated
or Kodak equipment is not competitive in the marketplace, (viii) increased
competition resulting from other high-volume copier distributors and the
discounting of such copiers by competitors, (ix) fluctuations in foreign
currency, (x) domestic and foreign political developments and governmental
regulations and policies, (xi) increased costs resulting from technological
developments, (xii) general economic and business conditions, (xiii) future
performance of the Office Imaging and Imaging Services businesses and the
Company's current business, (xiv) the ability of the Company to
successfully implement its growth and business strategy, (xv) the ability
of the Company to continue to receive acceptable financing as required in
the future, (xvi) the Company's inability to achieve substantial operating
cost reductions and efficiencies in productivity, (xvii) the potential for
unanticipated increases in expenditures for labor, equipment, inventory,
materials and supplies required to manage the increased size of the Company
as a result of the Acquisition, (xviii) the ability of the Company to
continue to gain access to and successfully distribute new and current
products brought to the marketplace at competitive costs and prices, and
(xix) there can be no assurances that the implementation of the Company's
integration model tested in Canada will be successful in other areas of the
world. Readers are cautioned not to place undue reliance on the forward
looking statements, which reflect management's analysis only as of the date
hereof. The Company undertakes no obligation to update the forward looking
statements to reflect events or circumstances that arise after the date
hereof.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
14
<PAGE> 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
2.1* Asset Purchase Agreement between Eastman Kodak Company and Danka Business
Systems PLC dated as of September 6, 1996, including Exhibit 5.19 (a) which
is the form of Amended and Restated Supply Agreement by and between Eastman
Kodak Company and _______________________ dated as of ____________________,
1996. (Exhibit 2.1 to the Company's Form 8-K dated November 14, 1996.)
2.2* Amendment No. 1 to Asset Purchase Agreement between Eastman Kodak Company and
Danka Business Systems PLC dated December 20, 1996 (Excluding schedules and
similar attachments). (Exhibit 2.2 to the Company's Form 8-K dated January
15, 1997).
4.1* Memorandum of Association of the Company, including paragraphs 5 and 6.
(Exhibit 2.1 of the Company's Registration Statement on Form 20-F, No. 0-
20828, filed on November 10, 1992 (the "1992 Registration Statement").
4.2* Articles of Association of the Company, including sections relating to
Shares, Variation of Rights and Votes of Members. (Exhibit 2.2 to the 1992
Registration Statement).
4.3* Deposit Agreement dated June 25, 1992, Amendment No. 1 dated February 26,
1993 and Amendment No. 2 dated July 2, 1993 (Exhibit 4.9 of the Company's
Form S-1 Registration Statement No. 33-68278 (the "1993 Form S-1")., and
Amendment No. 3 dated August 16, 1994 between The Bank of New York, the
Company and Owners and Holders of American Depositary Receipts.
4.4* Indenture dated March 13, 1995 between the Company and The Bank of New York
as Depositary and the Company. (Exhibit 2 to the Company's Form 8-K dated
March 21, 1995).
4.5* Deposit and Custody Agreement dated March 13, 1995, between The Bank of New
York as Depositary and the Company. (Exhibit 3 to the Company's Form 8-K
dated March 21, 1995).
4.6* Registration Rights Agreement dated as of March 13, 1995 relating to $175
million in Aggregate Principal Amount of 6.75% Convertible Subordinated Notes
Due 2002 by and among the Company and Prudential Securities Incorporated and
Smith Barney, Inc. and Robert W. Baird & Co. and Raymond James & Associates,
Inc. (Exhibit 4.12 to the Company's Form 10-K dated June 16, 1995).
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
4.8* Credit Agreement dated December 5, 1996, by and among Danka Business Systems
PLC, Dankalux Sarl & Co. SCA, Danka Holding Company, the several financial
institutions from time to time a party and NationsBank, N.A., as agent
(Exhibit 4 to the Company's Form 8-K December 16, 1996).
No other instruments defining the rights of holders of long-term debt of the
Company and its subsidiary have been included as exhibits because the total
amount of obligations authorized under any such agreement does not exceed 10%
of the total assets of the Company and its subsidiaries on a consolidated
basis. The Company hereby agrees to furnish supplementally a copy of any
omitted long-term debt instrument to the Commission upon request.
27 Financial Data Schedule (for SEC purposes only)
* Document has heretofore been filed with the Commission and is incorporated by
reference and made a part hereof.
</TABLE>
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during this
period.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANKA BUSINESS SYSTEMS PLC
---------------------------------------
(Registrant)
Date: August 12, 1997 /S/ DAVID C. SNELL, Finance Director
----------------------------------------
David C. Snell, Finance Director
(The Chief Operating Officer, and the
Principal Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DANKA BUSINESS SYSTEMS PLC AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 53,489
<SECURITIES> 0
<RECEIVABLES> 736,146
<ALLOWANCES> 29,536
<INVENTORY> 518,473
<CURRENT-ASSETS> 1,350,794
<PP&E> 560,320
<DEPRECIATION> 165,014
<TOTAL-ASSETS> 2,325,948
<CURRENT-LIABILITIES> 746,737
<BONDS> 1,044,041
0
0
<COMMON> 4,735
<OTHER-SE> 474,687
<TOTAL-LIABILITY-AND-EQUITY> 2,325,948
<SALES> 842,238
<TOTAL-REVENUES> 842,238
<CGS> 524,926
<TOTAL-COSTS> 524,926
<OTHER-EXPENSES> 271,787
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,759
<INCOME-PRETAX> 29,366
<INCOME-TAX> 10,900
<INCOME-CONTINUING> 18,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,466
<EPS-PRIMARY> .32
<EPS-DILUTED> 0
</TABLE>
