<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported): December 31, 1996
---------------------
DANKA BUSINESS SYSTEMS PLC
------------------------------------------------------
(Exact name of registrant as specified in its charter)
UNITED KINGDOM 33-68278 98-0052869
- ---------------------- -------------------- ----------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
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
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective December 31, 1996 (the "Closing Date") and pursuant to an
Asset Purchase Agreement dated as of September 6, 1996, as amended by Amendment
No. 1 to Asset Purchase Agreement dated December 20, 1996 (the "Purchase
Agreement") between Danka Business Systems PLC (together with its subsidiaries
the "Company") and Eastman Kodak Company and its subsidiaries ("Kodak") the
Company and certain of its subsidiaries purchased (i) the assets of Kodak
primarily related to the marketing, sale, distribution, maintenance, service and
repair of electrophotographic systems for office imaging and reprographics and
the marketing, sale and distribution of related parts, supplies and consumables
and (ii) the assets primarily related to and the issued and outstanding stock of
certain subsidiaries of Kodak which are engaged in the facilities management
services business known as Kodak Imaging Services (collectively, the "Sales and
Services Business"), for a net cash purchase price of $688 Million which is
subject to post-closing adjustment.
The source of funds used by the Company in this transaction was the
Company's $1.275 billion credit facility described in the Company's 8-K filed
on December 16, 1996.
In connection with the Purchase Agreement, Kodak and certain
affiliates of the Company entered into a number of agreements effective
December 31, 1996 relating to the purchase, sale and service of
electrophotographic equipment and related software, supplies, accessories and
spare parts manufactured or re-manufactured by Kodak (the "Supply Agreements").
Pursuant to the Supply Agreements, Kodak has granted to the Company
the exclusive right to distribute 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 ("Current Products") with limited exceptions for certain
applications, market segments and geographic areas. The Company will also
receive the right of first refusal to exclusively distribute in such territories
each of Kodak's proposed new electrophotographic products for office imaging and
reprographics other than electrophotographic equipment capable of producing full
color images ("New Products"). Until the earlier of (i) the termination of the
Company's exclusivity rights described below and (ii) five years from the date
of the Supply Agreements, the Company shall have the nonexclusive right to
distribute in such territories certain electrophotographic equipment capable of
producing full color images and related software, supplies, accessories and
spare parts developed and manufactured by Kodak.
Certain exclusivity rights with respect to certain Current Products
for limited markets shall terminate upon the earlier of (i) the Company's
failure to purchase the
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<PAGE> 3
minimums required under the Supply Agreements and (ii) the Company's failure to
pay any contributions to research and development required by the Research and
Development Agreement dated effective December 31, 1996 between Kodak and the
Company (the "R & D Agreement"). Kodak may terminate the Company's exclusivity
rights with respect to any New Product if the Company fails to meet the
minimum purchase requirements for such product.
Kodak may not assign any of its rights under the Supply Agreements to
an unaffiliated party or sell its manufacturing division during the first 30
months of the Supply Agreements. Thereafter, the Company shall have the right
of first offer to purchase Kodak's 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 Supply Agreements, until such time that the Company's
exclusivity rights with respect to Current Products terminate.
The Company has agreed to contribute a total of $190.0 million (plus
an additional $30.0 million if certain research milestones are met) to Kodak's
ongoing research and development for new electrophotographic products over a
six-year period. 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.
The Supply Agreements and the R & D Agreement 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 Supply Agreements and the R & D
Agreement may be terminated (i) by mutual agreement of the parties; (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 it 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 Supply Agreements and the R & D Agreement will be
terminated.
Copies of the Purchase Agreement (excluding schedules and similar
attachments) are filed with this Report and any description of the Purchase
Agreement set forth in this report is qualified in its entirety by reference to
the terms and conditions contained in the Purchase Agreement.
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<PAGE> 4
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements. The audited historical financial
statements of the Office Imaging Sales and Services Business
of Eastman Kodak Company ("Kodak"), the notes related thereto,
and the report of independent accountants of Kodak are set
forth below as follows:
OFFICE IMAGING SALES AND SERVICES BUSINESS
1. Report of Independent Accountants, Price Waterhouse
LLP;
2. Combined Statement of Operations for the Nine Months
Ended September 30, 1996 and the Years Ended December
31, 1995 and 1994;
3. Combined Statement of Financial Position as of
September 30, 1996 and December 31, 1995 and 1994;
4. Combined Statement of Cash Flows for the Nine Months
Ended September 30, 1996 and the Years Ended December
31, 1995 and 1994; and
5. Notes to Combined Financial Statements.
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<PAGE> 5
PRICE WATERHOUSE LLP
REPORT OF INDEPENDENT ACCOUNTANTS
February 26, 1997
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 September 30, 1996 and December 31, 1995,
and the results of their operations and their cash flows for the nine months
ended September 30, 1996 and for each of the two years in the period ended
December 31, 1995, 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.
/S/ PRICE WATERHOUSE LLP
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<PAGE> 6
OFFICE IMAGING SALES AND SERVICES BUSINESS
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the nine
months ended For the year ended
September 30, December 31,
1996 1995 1994
----------- --------- ---------
(in millions)
<S> <C> <C> <C>
REVENUES AND INCOME
Rental and service revenues . . . . . . . . . . . . . $ 820 $ 1,152 $ 1,093
Equipment and supplies sales . . . . . . . . . . . . 469 671 644
Other income . . . . . . . . . . . . . . . . . . . . 6 13 8
------------ --------- ---------
TOTAL REVENUES AND INCOME . . . . . . . . . 1,295 1,836 1,745
------------ --------- ---------
COSTS
Cost of goods sold:
Rental and service . . . . . . . . . . . . . . . 584 863 762
Equipment and supplies . . . . . . . . . . . . . 317 520 534
Selling, general and administrative expenses . . . . 317 426 406
Other costs . . . . . . . . . . . . . . . . . . . . . 5 2 7
------------ --------- ---------
TOTAL COSTS . . . . . . . . . . . . . . . . 1,223 1,811 1,709
------------ --------- ---------
Earnings before income taxes . . . . . . . . . . . . 72 25 36
Provision for income taxes . . . . . . . . . . . . . 38 19 33
------------ --------- ---------
NET EARNINGS . . . . . . . . . . . . . . . . $ 34 $ 6 $ 3
=========== ========= =========
</TABLE>
THE NOTES ARE AN INTEGRAL PART OF THESE COMBINED FINANCIAL STATEMENTS.
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<PAGE> 7
OFFICE IMAGING SALES AND SERVICES BUSINESS
COMBINED STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- -------------
(in millions)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 2 $ --
Receivables (net of allowances of $22 and $24) . . . . . . . . . . . . 329 396
Net investment in direct finance and sales-type leases . . . . . . . . 50 41
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 273
Deferred income tax charges . . . . . . . . . . . . . . . . . . . . . 15 20
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7
------------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . 629 737
------------- ------------
PROPERTIES
Equipment on operating leases, net . . . . . . . . . . . . . . . . . . 290 295
Buildings and equipment, net . . . . . . . . . . . . . . . . . . . . . 45 52
------------- ------------
Total properties . . . . . . . . . . . . . . . . . . . . . . . 335 347
------------- ------------
OTHER ASSETS
Long-term receivables and other noncurrent assets . . . . . . . . . . 21 29
Net investment in direct finance and sales-type leases . . . . . . . . 87 82
Deferred income tax charges . . . . . . . . . . . . . . . . . . . . . 44 54
------------- ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,116 $ 1,249
============= ============
LIABILITIES AND DIVISION EQUITY
CURRENT LIABILITIES
Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 173 $ 202
Accrued other taxes . . . . . . . . . . . . . . . . . . . . . . . . . 18 30
------------- ------------
Total current liabilities . . . . . . . . . . . . . . . . . . 191 232
OTHER LIABILITIES
Pension and other post employment liabilities . . . . . . . . . . . . 156 156
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . 17 20
------------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 364 408
------------- ------------
DIVISION EQUITY
Common stock (owned by Kodak) . . . . . . . . . . . . . . . . . . . . 6 6
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . 1 1
Division equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 715 796
Accumulated translation adjustment . . . . . . . . . . . . . . . . . . 30 38
------------- ------------
Total division equity . . . . . . . . . . . . . . . . . . . . 752 841
------------- ------------
TOTAL LIABILITIES AND DIVISION EQUITY . . . . . . . . . . . . $ 1,116 $ 1,249
============= ============
</TABLE>
THE NOTES ARE AN INTEGRAL PART OF THESE COMBINED FINANCIAL STATEMENTS.
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<PAGE> 8
OFFICE IMAGING SALES AND SERVICES BUSINESS
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the nine
months ended For the year ended
September 30, December 31,
------------- -------------------------
1996 1995 1994
------------- --------- ----------
(in millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . $ 34 $ 6 $ 3
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Depreciation and amortization . . . . . . . 88 121 112
Deferred provision/(benefit) for income
taxes . . . . . . . . . . . . . . . . . 15 5 (11)
Loss/(gain) on sale/retirement of properties 1 1 (2)
Decrease/(increase) in receivables . . . . . 65 (21) 46
Increase in direct finance and sales-type
leases . . . . . . . . . . . . . . . . . (14) (42) (27)
Increase in inventories and equipment on
operating leases . . . . . . . . . . . . (14) (75) (73)
(Decrease)/increase in liabilities . . . . . (41) (7) 71
Other items, net . . . . . . . . . . . . . . (8) 3 (3)
---------- ------- --------
Total adjustments . . . . . . . . . . . 92 (15) 113
---------- ------- --------
Net cash (used in)/provided by operating
activities . . . . . . . . . . . . . 126 (9) 116
---------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to buildings and equipment . . . . (11) (30) (21)
Proceeds from sale of properties . . . . . . 2 1 8
---------- ------- --------
Net cash used in investing activities . . . (9) (29) (13)
---------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net advances/(distributions)
from/(to) Kodak . . . . . . . . . . . (115) 38 (105)
---------- ------- --------
Net cash provided by/(used in) financing
activities . . . . . . . . . . . . . (115) 38 (105)
---------- ------- --------
Net increase/(decrease) in cash . . . . . . 2 -- (2)
Cash and cash equivalents, beginning of year -- -- 2
---------- ------- --------
Cash and cash equivalents, end of year . . . $ 2 $ -- $ --
========== ======= ========
</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 noncash transactions and, therefore, should not affect the
determination of cash flows from operating and investing activities of the
Historical Business. Net transfers of inventory to rental equipment
approximated $57 million for the nine months ended September 30, 1996 and were
approximately $100 million and $110 million during 1995 and 1994, respectively.
These amounts have been appropriately excluded from the Combined Statement of
Cash Flows.
THE NOTES ARE AN INTEGRAL PART OF THESE COMBINED FINANCIAL STATEMENTS.
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<PAGE> 9
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 mark-ups. 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 for the nine months ended September 30,
1996 were $67 million. 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 Cost of Goods Sold
is approximately $110 million of such allocated costs for the nine months ended
September 30, 1996 and $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
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<PAGE> 10
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
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.
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 translations are included in Other Costs.
CASH AND CASH EQUIVALENTS
Several legal subsidiaries of the Historical Business held cash balances at
September 30, 1996 and at December 31, 1995. Except for these cash accounts,
which approximated $2 million at September 30, 1996 and were immaterial in the
aggregate at December 31, 1995, the Historical Business has no other cash
accounts and utilizes Kodak's cash management systems for all receipts and
disbursements.
INVENTORIES
Inventories are valued at the lower of cost or net realizable value, cost
generally being determined on the basis of average cost 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
Buildings, 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 $12 million for the nine months ended
September 30, 1996, $13 million in 1995 and $12 million in 1994. Depreciation
expense on copier equipment was $70 million for the nine months ended September
30, 1996 and $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 the nine months ended
September 30, 1996 was $6 million and was $11 million in both 1995 and 1994.
Accumulated amortization as of September 30,
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<PAGE> 11
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
1996 was $157 million and was $151 million at December 31, 1995. 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, 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 $9 million for the
nine months ended September 30, 1996 and $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. 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 cash, 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 6% of the Historical Business' worldwide
sales for the nine months ended September 30, 1996 and 10% in 1995 and 1994.
As of September 30, 1996, receivables from sales to
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<PAGE> 12
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
this leasing company were approximately $13 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 $41 million at
September 30, 1996 and $54 million at December 31, 1995. Proceeds remitted by
Kodak for the Historical Business to satisfy obligations under this credit
indemnification agreement were approximately $2 million for the nine months
ended September 30, 1996 and $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.
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>
September 30, December 31,
1996 1995
------------- --------------
(in millions)
<S> <C> <C>
Total minimum lease payments to be
received . . . . . . . . . . . . $ 166 $ 142
Allowance for receivable losses . . . (1) (3)
------------- --------------
Net minimum lease payments
receivable . . . . . . . . 165 139
------------- --------------
Estimated unguaranteed residual values 3 4
Initial direct costs - direct finance
leases . . . . . . . . . . . . . . . -- 1
Unearned income . . . . . . . . . . . . (31) (21)
------------- --------------
Total . . . . . . . . . . . . . $ 137 $ 123
============= ==============
</TABLE>
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<PAGE> 13
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
The scheduled maturities of minimum lease payments outstanding at September 30,
1996, for the fourth quarter of 1996 and the years thereafter are as follows:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Fourth Quarter 1996 . . . . . . . . . . . . $ 22
Year 1997 . . . . . . . . . . . . . 48
Year 1998 . . . . . . . . . . . . . 44
Year 1999 . . . . . . . . . . . . . 30
Year 2000 and thereafter . . . . . . 22
-----------
Total . . . . . . . . . . . . . . $ 166
===========
</TABLE>
NOTE 4: INVENTORIES
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(in millions)
<S> <C> <C>
Equipment to be remanufactured . . . . . . . . $ 39 $ 45
Finished goods . . . . . . . . . . . . . . . . 188 228
------------ ----------
Total . . . . . . . . . . . . . . . . $ 227 $ 273
============ ==========
</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>
September 30, December 31,
1996 1995
--------------- --------------
(in millions)
<S> <C> <C>
Equipment on lease to customers . . . . . . . . . $ 532 $ 542
Equipment on lease to Kodak . . . . . . . . . . . 36 33
Accumulated depreciation . . . . . . . . . . . . (278) (280)
----------- -----------
Total . . . . . . . . . . . . . . . . . $ 290 $ 295
=========== ==============
</TABLE>
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<PAGE> 14
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
Minimum future noncancelable rentals on operating leases were approximately
$143 million at September 30, 1996. The scheduled maturities of the minimum
future rentals at September 30, 1996 for the fourth quarter of 1996 and the
years thereafter are as follows:
<TABLE>
<CAPTION>
(in millions)
-------------
<S> <C>
Fourth Quarter 1996 . . . . . . . . . . . . . . . . . . $ 28
Year 1997 . . . . . . . . . . . . . . . . . . . 51
Year 1998 . . . . . . . . . . . . . . . . . . . 35
Year 1999 . . . . . . . . . . . . . . . . . . . 22
Year 2000 and thereafter . . . . . . . . . . . . 7
-----------
Total . . . . . . . . . . . . . . . . . . . . $ 143
===========
</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 $10 million at September 30, 1996 and
$9 million in 1995.
NOTE 6: BUILDINGS AND EQUIPMENT
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------------- ----------------
(in millions)
<S> <C> <C>
Buildings and building equipment . . . . . . . . . . . . . . . . . $ 16 $ 17
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . 90 92
-------------- --------------
106 109
Accumulated depreciation and amortization . . . . . . . . . . . . . (61) (57)
-------------- --------------
Net buildings and equipment . . . . . . . . . . . . . . . . . $ 45 $ 52
============== ==============
</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.
-14-
<PAGE> 15
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE 7: PAYABLES
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
-------------- --------------
(in millions)
<S> <C> <C>
Trade creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44 $ 45
Accrued payrolls . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 22
Accrued vacation . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 36
Wage dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 20
Restructuring liabilities . . . . . . . . . . . . . . . . . . . . . . . -- 8
Equipment maintenance reserves . . . . . . . . . . . . . . . . . . . . 11 23
Other employment related liabilities . . . . . . . . . . . . . . . . . 15 13
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 35
-------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 173 $ 202
============== =============
</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 $70 million of such
allocated items at September 30, 1996 and $95 million at December 31, 1995.
Substantially, all of the equipment and 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 nine months ended September 30, 1996 and the year ended December
31, 1995:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995 1994
-------------- -------------- ------------
(in millions)
<S> <C> <C> <C>
Division equity, beginning . . . . . . . . . . . . . $ 841 $ 782 $ 861
Net earnings . . . . . . . . . . . . . . . . . . . . 34 6 3
Net advances/distributions from/(to) Kodak . . . . . (115) 38 (105)
Change in cumulative translation adjustment . . . . . (8) 15 23
------------- -------------- -------------
Division equity, ending . . . . . . . . . . . . $ 752 $ 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
-15-
<PAGE> 16
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
effective upon the early termination of the agreement. These penalties and
guarantees could range up to $58 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 rentals for the Historical
Business approximated $30 million for the nine months ended September 30, 1996
and $40 million in both 1995 and 1994. Of these amounts, approximately $20
million for the nine months ended September 30, 1996 and $30 million in both
1995 and 1994 represented the cost of facilities leased by the Historical
Business as the sole or major tenant in these facilities. Facility usage
charges 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
approximated $8 million for the nine months ended September 30, 1996 and was
approximately $10 million in both 1995 and 1994. 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: $3 million in the fourth quarter of 1996, $11 million in 1997,
$7 million in 1998, $6 million in 1999, $5 million in 2000 and $7 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
-16-
<PAGE> 17
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
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 $550 million for the nine months ended
September 30, 1996 and $925 million in both 1995 and 1994. Included in the
Historical Business' cost of goods sold are aggregate mark-ups from the
manufacturing division of approximately $30 million for the nine months ended
September 30, 1996 and $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 $110
million for the nine months ended September 30, 1996 and $160 million and $110
million in 1995 and 1994, respectively.
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 of $23 million at September 30, 1996 and $14
million at December 31, 1995 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 $7 million for the nine months
ended September 30, 1996 and $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:
-17-
<PAGE> 18
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995 1994
---------------- --------- ----------
(in millions)
<S> <C> <C> <C>
Earnings/(loss) before income taxes:
U.S. . . . . . . . . . . . . . . . . . . . $ 57 $ 32 $ 77
Outside the U.S. . . . . . . . . . . . . . 15 (7) (41)
------------- ---------- -----------
Total . . . . . . . . . . . . . . . $ 72 $ 25 $ 36
============= ========== ===========
U.S. income taxes:
Current provision . . . . . . . . . . . . . $ 9 $ 10 $ 35
Deferred provision (benefit) . . . . . . . 9 2 (9)
Income taxes outside the U.S.:
Current provision . . . . . . . . . . . . . 10 2 2
Deferred provision (benefit) . . . . . . . 4 2 (1)
State and other income taxes:
Current provision . . . . . . . . . . . . . 4 2 7
Deferred provision (benefit) . . . . . . . 2 1 (1)
------------- ---------- -----------
Total . . . . . . . . . . . . . . . $ 38 $ 19 $ 33
============= ========== ===========
</TABLE>
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>
September 30, December 31,
1996 1995 1994
------------- ------- --------
(in millions)
<S> <C> <C> <C>
Amount computed using the statutory
rate . . . . . . . . . . . . . . . $ 26 $ 9 $ 13
Increase in taxes resulting from:
State and other income taxes . . . . 3 2 4
Operations outside the U.S. . . . . 9 9 14
Other, net . . . . . . . . . . . . . -- (1) 2
------------- ------ -------
Provision for income taxes . . . . . . $ 38 $ 19 $ 33
============= ====== =======
</TABLE>
-18-
<PAGE> 19
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
The significant components of deferred tax assets and liabilities were as
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1995
-------------- -------------
(in millions)
<S> <C> <C>
Deferred tax assets:
Post-employment obligations . . . . . . . . . . . . . . . . . . . . $ 64 $ 60
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 13
Tax loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . 31 26
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 19
-------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 118
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . (31) (26)
-------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82 $ 92
============== =============
Deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 $ 3
Leasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 15
-------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23 $ 18
============== =============
</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 are
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>
September 30, December 31,
1996 1995 1994
------------- ------ ------
<S> <C> <C> <C>
Discount rate . . . . . . . . . . . . . . . . . . 7.25% 7.25% 8.50%
Salary increase rate . . . . . . . . . . . . . . 4.50% 4.50% 5.00%
Long-term rate of return on plan assets . . . . . 9.50% 9.50% 9.50%
</TABLE>
-19-
<PAGE> 20
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
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>
September 30, December 31,
------------- ------------
1996 1995 1994
-------- -------- ---------
(in millions)
<S> <C> <C> <C>
Service cost . . . . . . . . . . . . . . . $ 9 $ 10 $ 11
Interest cost . . . . . . . . . . . . . . . 26 37 34
Return on plan assets . . . . . . . . . . . (28) (36) (35)
Net amortization . . . . . . . . . . . . . (3) (5) (4)
-------- -------- ---------
Net periodic pension expense . . . . . . . 4 6 6
Non-U.S. plans . . . . . . . . . . . . . . 7 11 10
-------- -------- ---------
Total pension expense . . . . . . $ 11 $ 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.
-20-
<PAGE> 21
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
The funded status of the Historical Business' major U.S. plan relating to
active employees at September 30, 1996 and December 31, 1995 is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
(in millions)
<S> <C> <C>
Accumulated benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 155 $ 138
---------- ----------
Projected benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 249 $ 232
Market value of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 148
---------- ----------
Projected benefits in excess of plans assets . . . . . . . . . . . . . . . . 85 84
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28) (29)
Unrecognized net transition asset . . . . . . . . . . . . . . . . . . . . . . 13 16
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . (6) (6)
---------- ----------
Accrued pension expense . . . . . . . . . . . . . . . . . . . . . . $ 64 $ 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.
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 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:
-21-
<PAGE> 22
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995 1994
------------- ------- --------
(in millions)
<S> <C> <C> <C>
Service cost . . . . . . . . . . . . . . . . . . . . $ 3 $ 3 $ 4
Interest cost . . . . . . . . . . . . . . . . . . . . 13 17 21
Net amortization . . . . . . . . . . . . . . . . . . (3) (4) (4)
------- ------- --------
Net post retirement benefit cost . . . . . . . . . . $ 13 $ 16 $ 21
======= ======= ========
</TABLE>
The total obligation and amount recognized in the Historical Business'
consolidated statement of financial position, relating only to active employees
at September 30, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ -------------
(in millions)
<S> <C> <C>
Accumulated post retirement benefit obligation:
Fully eligible active plan participants . . . . . . . . . . . . $ 3 $ 3
Other active plan participants . . . . . . . . . . . . . . . . . 52 51
-------------- --------------
Total obligation . . . . . . . . . . . . . . . . . . . . 55 54
Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . -- --
Unrecognized negative plan amendment . . . . . . . . . . . . . . 17 17
-------------- --------------
Accrued post retirement benefit cost . . . . . . . . . . $ 72 $ 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.
To estimate the Historical Business' costs, health care costs were assumed to
increase 8% in 1997 with the rate of increase declining ratably to 5% by 2002
and thereafter. The discount rate utilized to measure the obligation at
September 30, 1996, and December 31, 1995 was 7.25%. 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 September 30, 1996, 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.
-22-
<PAGE> 23
OFFICE IMAGING SALES AND SERVICES BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
________________________________________________________________________________
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>
Canada Asia,
United and Latin Africa,
States America Europe Australia Eliminations Consolidated
------ --------- ------ --------- ------------ ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30, 1996
------------------
Total Sales . . . . . . . . . $ 771 $ 76 $ 432 $ 10 $ -- $ 1,289
Earnings/(loss) from
operations . . . . . . . . $ 73 $ (14) $ 15 $ (1) $ (2) $ 71
Identifiable assets . . . . . $ 591 $ 146 $ 374 $ 9 $ (4) $ 1,116
DECEMBER 31, 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
DECEMBER 31, 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). On December
31, 1996, these certain assets and liabilities were sold to DANKA. There are
no adjustments reflected in these combined financial statements related to the
sale to DANKA.
-23-
<PAGE> 24
(b) Pro Forma Financial Information. The Pro Forma financial
information of the Company is set forth below as follows:
1. Introduction to Unaudited Pro Forma Condensed Consolidated
Financial Statements;
2. Unaudited Pro Forma Condensed Consolidated Statement of
Earnings for the Nine Months Ended December 31, 1996; and
3. Unaudited Pro Forma Condensed Consolidated Statement of
Earnings for the Year Ended March 31, 1996.
-24-
<PAGE> 25
DANKA BUSINESS SYSTEMS PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Consolidated Statement of Earnings
for the nine months ended December 31, 1996 gives effect to the following as if
each had occurred on April 1, 1996: (i) the acquisition by the Company of the
Sales and Services Business (the "Acquisition") and (ii) the Company's other
acquisitions during fiscal 1997 (the "Fiscal 1997 Acquisitions"). The
unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31,
1996 is not presented, as the Company's Form 10-Q filed on February 14, 1997
and incorporated herein by reference provides a Consolidated Balance Sheet as
of December 31, 1996 which includes the Acquisition. 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 Company's acquisitions during fiscal 1996 (the "Fiscal 1996
Acquisitions"), and (iii) the Fiscal 1997 Acquisitions.
The unaudited Pro Forma Condensed Consolidated Statement of Earnings
are based on: (i) the Company's audited Consolidated Statement of Earnings for
the year ended March 31, 1996 and the Company's unaudited Consolidated
Statement of Earnings for the nine months ended December 31, 1996 and (ii) the
historical Office Imaging Sales and Services Business' audited Combined
Statement of Operations for the year ended December 31, 1995 and the audited
Combined Statement of Operations for the nine months ended September 30, 1996.
The Acquisition was accounted for under the purchase method of
accounting. The total purchase price for the Acquisition has been allocated to
tangible and identifiable intangible assets and liabilities based on
management's estimate of their fair values.
The unaudited Pro Forma Condensed Consolidated Statement of Earnings
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. The unaudited Pro Forma Condensed Consolidated Statement of
Earnings and respective related notes thereto should be read in conjunction
with the financial statements and related notes of the Company filed in the
Company's Form 10-Q and the combined financial statements of the historical
Office Imaging Sales and Services Business and related notes set forth herein.
-25-
<PAGE> 26
DANKA BUSINESS SYSTEMS PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
For the Nine Months Ended December 31, 1996
(dollars in millions, except per ADS amounts)
<TABLE>
<CAPTION>
Office Pro Forma
Imaging Pro Forma Adjustments
Danka Sales and Adjustments Fiscal for
Business Services for the 1997 Fiscal 1997
Systems PLC Business(1) Acquisition Acquisitions(14) Acquisitions Pro Forma
------------ ----------- ----------- ---------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Total Revenue . . . . . . . . . . . . . $ 1,264 $ 1,289 $ (34) (2) $ 28 $ 2,535
3 (9)
(15) (12)
----------- ---------- --------- ---------- --------
Cost and operating expenses:
Cost of sales . . . . . . . . . . . . . 764 901 (23) (2) 19 1,642
(10) (5)
(9) (8)
Selling, general and administrative
expenses . . . . . . . . . . . . . 394 311 (7) (5) 7 718
37 (6)
(18) (7)
(6) (8)
Amortization of intangible assets . . . 14 6 (6) (10) 14
Restructuring charges . . . . . . . . . 35 35
----------- ---------- --------- ---------- ---------- --------
Total costs and operating
expenses . . . . . . . . $ 1,207 $ 1,218 $ (42) $ 26 $ $ 2,409
----------- ---------- --------- ---------- ---------- --------
Earnings from operations . . . . . . . 57 71 (4) 2 126
Interest expense & other, net . . . . . 19 (1) 36 (3) 1 1 (15) 58
1 (4)
1 (11)
----------- ---------- --------- ---------- ---------- --------
Earnings before income taxes . . . . . 38 72 (42) 1 (1) 68
Provision for income taxes . . . . . . 14 38 (16) (13) 0 (16) 36
----------- ---------- --------- ---------- ---------- --------
Earnings before extraordinary item . . 24 34 (26) 1 (1) 32
Loss on early extinguishment of debt,
net of income tax benefit . . . . 1 1
----------- ---------- --------- ---------- ---------- --------
Net earnings . . . . . . . . . $ 23 $ 34 $ (26) $ 1 $ (1) $ 31
=========== ========== ========= ========== ========== =========
Net earnings per ADS . . . . . . . . . $ 0.40 $ 0.54
Weighted average ADSs (in thousands) . 57,706 57,706
- ------------------------------
</TABLE>
(1) Information derived from the audited Combined Statement of Operations
of the historical Office Imaging Sales and Services Business for the
nine-months ended September 30, 1996. Certain amounts have been
reclassified to conform to the Company's presentation.
(2) Reflects the elimination of revenues and costs related to equipment
sales which the Company will not acquire.
(3) Reflects the interest expense on the debt incurred as a result of the
Acquisition, using an estimated interest rate of 7%.
(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 elimination of inter-company profit.
(13) 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%
(14) 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.
(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%).
-26-
<PAGE> 27
DANKA BUSINESS SYSTEMS PLC
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
For the Year Ended March 31, 1996
(dollars in millions, except per ADS amounts)
<TABLE>
<CAPTION> Pro Forma
Office Adjustments
Imaging Pro Forma for
Danka Sales and Adjustments Fiscal Fiscal Fiscal 1996
Business Services for the 1996 1997 and Fiscal 1997
Systems PLC Business(1)(2) Acquisition Acquisitions(13) Acquisitions(13) Acquisitions Pro Forma
----------- -------------- ----------- ---------------- ---------------- ------------ ---------
<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%.
(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.
-27-
<PAGE> 28
(c) Exhibits.
The Exhibits to this Report are listed in the Exhibit Index set forth elsewhere
herein.
-28-
<PAGE> 29
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 hereunto duly authorized.
DANKA BUSINESS SYSTEMS PLC
By: /s/ DAVID C. SNELL
---------------------------------
David C. Snell
Its: Chief Operating Officer
Dated: March 12, 1997
-29-
<PAGE> 30
INDEX TO 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
(previously filed as Exhibit 2 in the Company's Form 8-K filed
on November 14, 1996 and incorporated herein by reference).
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
previously filed with the Company's Form 8-K filed on January
15, 1997 and incorporated herein by reference).
23.1 Consent of Independent Accountants Price Waterhouse LLP
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-75468, No. 33-75474 and No. 333-18615) and the
Prospectus constituting part of the Registration Statement on Form S-3 (No.
33-95898, No. 33-94596 and No. 333-8455) of Danka Business Systems PLC of our
report dated February 26, 1997 relating to the combined financial statements of
the Office Imaging Sales and Services Business, appearing on page 5 of the
Current Report on Form 8-K/A of Danka Business Systems PLC dated March 12, 1997.
/S/ Price Waterhouse LLP
Price Waterhouse LLP
Rochester, New York
March 12, 1997
