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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number:
MARCH 31, 1997 0-20828
DANKA BUSINESS SYSTEMS PLC
(Exact name of registrant as specified in its charter)
ENGLAND 98-0052869
(State of 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
Securities registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES
1.25 p each
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or an amendment to this
Form 10-K. [ ]
As of March 31, 1997, the Registrant had 226,827,049 Ordinary Shares
outstanding, including 171,566,107 represented by American Depositary Shares
("ADS"). Each ADS represents four Ordinary Shares. The ADSs are evidenced by
American Depositary Receipts. The aggregate market value of voting shares held
by non-affiliates of the Registrant as of March 31, 1997 was $1,718,205,396
based on the average bid and asked prices of ADSs as quoted on the NASDAQ
National Market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year ended
March 31, 1997, are incorporated by reference in Part I and Part II of this
Form 10-K.
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held
July 25, 1997, which has been filed with the Securities and Exchange
Commission.
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DANKA BUSINESS SYSTEMS PLC
ANNUAL REPORT ON FORM 10-K
MARCH 31, 1997
TABLE OF CONTENTS
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PART I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market Price for the Registrant's Common Equity and Related Shareholder
Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 13
PART III
Item 10. Directors and Executive Officers of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15
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PART I
ITEM 1. BUSINESS
INTRODUCTION
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 dealers. The Company principally
distributes the products of Canon, Kodak, Konica, Minolta, Ricoh, Sharp and
Toshiba. The Company became the exclusive distributor of Kodak branded
photocopiers and printers in December 1996 after completing the acquisition of
Eastman Kodak Company's Office Imaging division and facilities management
business. See -- "Acquisition of Eastman Kodak's Office Imaging Division".
The Company provides a wide range of customer-related support
services, maintenance and supply contracts, training and technical support, and
leasing arrangements. The Company's focus on customer service and the
contractual nature of its service business, combined with its service contract
renewals, provide a significant source of recurring revenue. In addition, the
Company provides outsourcing services including traditional facilities
management and strategic consulting services, advising customers on the
management of document systems and how to add efficiencies. The acquisition of
Eastman Kodak's facilities management business in December 1996 significantly
increased the scope of the Company's outsourcing operations. See --
"Acquisition of Eastman Kodak's Office Imaging Division".
The Company's principal business strategy is to increase its presence
as one of the leading independent suppliers of automated office equipment and
related services, parts and supplies in existing and new strategic geographic
markets worldwide. The Company's internal expansion has resulted from
increased product offerings, aggressive marketing to new customers and an
emphasis on providing service and supplies. The Company has expanded
externally as a result of the acquisition of selected suppliers of automated
office equipment, and throughout its history, has completed over 140
acquisitions in the industry. See -- "Acquisition Strategy". The Company
seeks to improve the profitability of the businesses it acquires by integrating
them into the Company's sales and service network and standardizing their
operations with the Company's. The Company's operating philosophy is to
support its sales and service network through training in technical, marketing
and administrative support procedures, advertising and promotion campaigns, and
volume purchasing and uniform operating procedures.
Danka Business Systems PLC is a corporation organized under the laws
of England and Wales. The Company's principal operating subsidiaries are
located in North America, Europe, Australasia and Latin America. The
registered and principal executive office of the Company is located at 33
Cavendish Square, London W1M 0DE England, and its telephone number is
011-44171-399-3000. The Company's North American headquarters are located at
11201 Danka Circle North, St. Petersburg, Florida 33716, and its telephone
number is 813-576-6003.
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ACQUISITION STRATEGY
The Company expands its business through internal growth by increasing
its penetration in existing markets, and by entering new geographic areas
primarily through the acquisition of existing businesses. The Company's
acquisition strategy is focused on acquiring businesses in current territories
to increase penetration in those markets and on acquiring businesses in new
territories. The Company seeks to acquire companies that generally have (i) an
established customer base, (ii) a product line that compliments or is
comparable with the Company's current and anticipated products and services;
(iii) necessary manufacturer authorizations, and (iv) the potential to benefit
from the Company's centralized purchasing power as well as from other potential
synergies including increasing productivity and streamlining operations.
Acquired companies are integrated into the Company through the
implementation of the Company's operating procedures, which (i) establishes
financial controls, common information systems and reporting requirements, (ii)
introduces the Company's service, marketing and sales programs and compensation
plans, (iii) evaluates, transfers and retrains personnel as necessary, and (iv)
in many cases, expands the acquiree's product mix to incorporate new products
and services which are sold by the Company. This integration generally results
in a replication of the Company's service, sales, marketing and other business
programs in the short-term. In most business acquisitions, the acquired
businesses' owners and management are contractually bound by executive
non-compete and trade secret protection agreements.
As a result of the Company's acquisitions, it has grown to a network
in excess of 700 locations in over 30 countries. Technological developments
increasing the complexity of new products, combined with the higher costs of
product support, has driven the consolidation within the North American and
European markets. This trend has caused smaller independent distributors to
consider selling their dealerships to larger marketing and service
organizations such as the Company. Through such acquisitions, the Company
entered the United Kingdom in 1993, the Canadian market in 1994, Continental
Europe in 1995 and Australasia in 1996. The acquisition of certain assets of
Eastman Kodak's Office Imaging division in December 1996, which added over $1.5
billion in annualized revenue and 19 new countries of operations, is the
largest by the Company to date.
The Company believes that select acquisition opportunities continue to
exist in the fragmented automated office equipment industry in certain
geographic areas. The Company's acquisition activity will be limited over the
next twelve to eighteen months as the Company concentrates on integrating the
acquired operations of Eastman Kodak's Office Imaging and facilities management
businesses. The Company's goal is to generate cost savings and margin
improvements with respect to the combined organization through increasing sales
and service productivity, streamlining operations and capitalizing on the new
purchasing power.
The Company's continued success in future acquisitions will be
dependent on a variety of factors, including the timing and size of an
acquisition; the success or failure to integrate any significant acquisition
and minimize integration costs related thereto; the Company's ability to
successfully grow its infrastructure to sustain, manage, operate and continue
significant expansion; and the Company's ability to maintain, manage and
operate its core business. Although the Company is currently engaged in
preliminary discussions and consideration of various possible acquisition
candidates, it does not have any agreement, arrangement or understanding with
respect to any acquisition candidate that are, individually or in the
aggregate, material to the Company.
ACQUISITION OF EASTMAN KODAK'S OFFICE IMAGING DIVISION
Effective December 31, 1996, the Company acquired from Eastman Kodak
Company ("Kodak") (i) the net assets relating to the sales, marketing,
distribution and services business of Kodak's Office Imaging and Customer
Equipment Services business units and (ii) all of the issued and outstanding
stock of certain subsidiaries of Kodak which constitute the facilities
management services business known as Kodak Imaging Services (collectively, the
"Kodak Sales and Services Business"). The Company paid net cash of $688.0
million
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for the Kodak Sales and Services Business, subject to post-closing adjustments.
The purchase price was funded exclusively by a new six-year multicurrency $1.275
billion credit agreement. As of December 31, 1995, the net assets of the Kodak
Sales and Services Business were approximately $800.0 million, and for such
year, generated revenue of $1.8 billion and net earnings before income taxes of
$25.0 million. For the nine months ended September 30, 1996, the Kodak Sales
and Services Business generated revenue of $1.3 billion and net earnings before
income taxes of $72.0 million. Based on the December 31, 1996 audited balance
sheet provided by Kodak, the Company will receive a refund under the price
adjustment provision of the asset purchase agreement totaling approximately
$86.0 million.
The Kodak Sales and Services Business is engaged worldwide in the
direct sale and marketing of Kodak manufactured and branded black and white and
accent color high-volume photocopiers, duplicators and printers, as well as
Kodak branded mid-volume black and white and color photocopiers manufactured by
Canon, Inc., and in some cases, remanufactured by Kodak. The Kodak Sales and
Services Business also provides on-site repair and technical and field
engineering support for equipment sold, leased and rented to others by the
Kodak Sales and Services Business and by other photocopier distributors. In
addition, the Kodak Sales and Services Business provides customers with
facilities management services, including the management of central
reprographics departments, the placement and maintenance of convenience
copiers, fleet management of customer equipment, the operation of mail centers,
the processing of statements, print-on-demand operations and document archiving
and retrieval services. The acquisition of the Kodak Sales and Services
Business greatly enhances the Company's product line and significantly
increases the scope of its outsourcing business.
In connection with the acquisition of the Kodak Sales and Services
Business, the Company and Kodak 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 remanufactured by Kodak (the "Supply Agreements").
Pursuant to the Supply Agreements, the Company is required to purchase from
Kodak various levels of Kodak manufactured or remanufactured
electrophotographic equipment and accessories, spare parts, supplies and toner.
The Company's pricing for purchases of Kodak branded products is based on the
Company purchasing certain agreed upon levels. To the extent the Company
exceeds or fails to purchase these amounts, the Company may either receive a
refund or be required to make additional payments. Currently, the Company
believes that it will meet its required purchasing levels. Subject to certain
limitations, the Company has the worldwide exclusive right to distribute
Kodak's currently existing line of electrophotographic equipment for office
imaging and reprographics manufactured or remanufactured by Kodak, and the
related software, supplies, accessories and spare parts and a right of first
refusal to exclusively distribute worldwide certain future electrophotographic
products manufactured by Kodak for office imaging and reprographics. The
Company has also agreed to contribute a total of $175.0 million (plus an
additional $30.0 million if certain research milestones are met) to Kodak's
ongoing research and development for new electrophotographic products to be
funded over the period April 1, 1997 through December 31, 2002. The Company
and Kodak have appointed three representatives to serve as members of an
advisory committee which meet on a regular basis to discuss overall research
and development progress.
Currently, 63% of the Kodak Sales and Services Business is conducted
in North America and 34% is conducted in Europe. Approximately 90% of the
Kodak Sales and Services Business is operated in countries in which the Company
was already conducting its business prior to the acquisition. Kodak has agreed
to fund the Company $30.0 million per year over three years, to promote the
sale of Kodak branded products in Europe, Asia and Latin America. (Reference
is made to Note 6 of the "Notes to the Consolidated Financial Statements"
entitled "Foreign Operations" contained in the Company's Annual Report to
Shareholders for the year ended March 31, 1997 which is incorporated by
reference.) In accordance with the "Acquisition Strategy" discussed above, the
Company's goal is to increase the net margins of the Kodak Sales and Services
Business through certain cost efficiencies and synergies it expects to achieve
by operating the businesses. A number of factors will be important in the
Company's goal of successfully integrating the acquired business into the
Company including increasing sales and service productivity, streamlining
operations and capitalizing on the new purchasing power. There can be no
assurances regarding the ultimate impact of the Kodak Sales and Services
Business on the Company and its future business and operations.
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PRODUCTS
The Company's primary products are photocopiers, facsimile equipment,
other automated office equipment, and related parts and supplies. The
photocopier industry is informally divided into six segments. Segments one and
two contain the least sophisticated photocopiers; segments three and four
contain faster and more sophisticated mid-range photocopiers; and segments five
and six contain the most sophisticated and fastest photocopiers in the industry.
The principal manufacturers in segments one through four are Canon, Konica,
Minolta, Ricoh, Sharp and Toshiba. The Company offers products from each of
these manufacturers. Advances in technology and changing market demands have
also led to the emergence of color, digital and multifunctional equipment as
well as high speed printers, all of which the Company currently distributes. As
a result of the acquisition of the Kodak Sales and Services Business, the
Company is now the exclusive distributor of Kodak branded photocopiers and
printers worldwide. The sales, marketing, distribution and services operations
of the acquired Kodak Sales and Services Business is now known as Danka Office
Imaging. The Company sells photocopiers in segments one through six through its
retail operations. In addition, the Company principally sells segment one
equipment through its wholesale operations. The Company will continue to expand
its product offerings to encompass new equipment as it is made available by its
vendors.
The Company distributes a range of facsimile equipment, with a
concentration in the more sophisticated plain paper and multifunctional models.
The plain paper and multifunctional models use toner and other supplies and
require maintenance similar to photocopiers. A majority of these facsimile
machines are private label products of the Company.
TECHNOLOGY
The Company believes that the black and white photocopier and
facsimile equipment markets will continue to change with the increasing
acceptance of digital technology. Digital photocopiers have the ability to
communicate with other automated office equipment. This innovation is
resulting in a blurring of the distinction between traditional photocopiers,
facsimile equipment and printers, with the emergence of a range of
multifunctional office equipment that prints, copies, scans and faxes all from
one machine.
Many of the Company's existing vendors have expended considerable
resources in the research, development, and creation of digital products and
have introduced several digital black and white and color photocopiers and
printers. The Company has developed and acquired certain of the expertise
necessary to support the transition to digital technology and provides training
and support to its sales professionals and service technicians for new vendor
digital product offerings. In acquiring the Kodak Sales and Services Business,
the Company gained additional digital expertise and products including Kodak's
LionHeart products that enable digital devices to be connected to a computer.
Currently, color photocopiers represent a growing segment of the
photocopier market and are an increasing component of the Company's retail
copier sales. The Company continues to expand its color markets through its
relationship with Ricoh and Canon. With a color server, color photocopiers can
be converted into networkable color printers that will accept digital output
from a computer as well as hard copy inputs which can be reproduced or scanned
into the computer, thus increasing the functionality of the unit.
SERVICES
In fiscal 1997, retail service, supplies and rentals represented 55%
of the Company's total revenue. This revenue is primarily derived from its
equipment, maintenance and supply contracts ("EMS Contracts") and other
maintenance contracts. Generally, EMS Contracts are for a one-year term and
are automatically renewable. Although the Company has various payment
arrangements, most maintenance contracts are based upon a per copy charge.
These arrangements provide the customer with scheduled payments that can be
conveniently budgeted and provide the Company with a steady source of revenue.
As a percentage of total revenue, retail service, supplies and rentals
increased in fiscal 1997 due to the acquisition of the Kodak Sales
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and Services Business, where a significantly higher portion of the revenue
generated from the Kodak Sales and Services Business was from retail service,
supplies and rentals as compared to the Company's core operations.
The Company has a stated mission of repairing a machine on the first
service call, and has full time service trainers who teach classes to the
Company's technicians. The Company also maintains an emergency toll-free number
to assist its own service technicians and service technicians of independent
dealers who are customers of its wholesale operations. The Company maintains a
database of common service problems and related solutions to assist technicians
in the field.
The Company's outsourcing operations are also included in retail
service, supplies and rentals. The acquisition of the Kodak Sales and Services
Business significantly increased the scope of the Company's outsourcing
business. The Company's outsourcing business combined with the facilities
management business acquired from Kodak is now known as Danka Imaging Services,
and provides services including the management of central reprographics
departments, placement of convenience copiers, fleet management of customer
equipment, print-on-demand operations, and document archiving and retrieval
services. Danka Imaging Services also provides strategic consulting services,
advising customers on the management of their document systems and how to add
efficiencies -- including the shift from a stand alone analog copier to a
networked digital printer/copier system, the storage of data, and the flow of
information throughout the business.
MARKETING AND CUSTOMERS
The Company believes that, in addition to price and product
performance and capabilities, its retail customers primarily base their
purchasing decisions on the quality of post-sales service and support, speed of
service, and the availability of financing and rental programs. The Company
believes that its wholesale customers primarily base their purchasing decisions
on price, speed of delivery, dealer support, product performance and
capabilities, and availability of financing.
The Company's retail operations target a broad range of customer
groups which include small businesses to large multinational companies,
professional firms, and governmental and educational institutions. Customers
of the Company's wholesale operations consist generally of independent dealers
who are not authorized dealers for major manufacturers. Additionally, the
Company markets Infotec private label copiers and facsimiles as well as its dex
private label facsimile equipment and related supplies on a wholesale basis to
a network of authorized independent dealers. No customer represents more than
one percent of the Company's total revenue, and the loss of any one customer
would not materially affect the Company.
As of March 31, 1997, there were approximately 4,400 Company employees
devoted to sales which represents a substantial increase from March 31, 1996,
primarily due the acquisition of the Kodak Sales and Services Business. Sales
personnel turnover is common in the industry and the Company makes a
considerable effort to retain qualified sales personnel. The Company's sales
teams are highly specialized, with each office dedicated to marketing the
products of one or two particular manufacturers. Individual team members will
concentrate on particular product groups, focusing on lower segment machines
during their first year and graduating to more complex equipment as their
knowledge and experience increases. With its sales force, the Company
emphasizes product knowledge, commitment and professionalism. Each sales
person negotiates a method of payment - lease, outright sale or rental - to
suit the individual customer. Their compensation is comprised of a base salary
and a selling commission, based on achievement of unit placements and gross
profit dollars. The Company has instituted a standard compensation plan for
the sales personnel that joined the Company through the acquisition of the
Kodak Sales and Services Business, which is more in line with that of the
Company's existing sales force.
The Company utilizes a wide range of advertising and promotional
activities, including television, radio, and billboard advertising campaigns,
sponsorship of major sporting events and teams, distribution of descriptive
brochures and direct mail pieces, and informational seminars and presentations.
The Company's
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marketing efforts are enhanced by manufacturers' national advertising campaigns
and co-op arrangements where appropriate and applicable.
MARKET BASED APPROACH
To further the Company's goal of providing better support for its
sales and service force as well as its customers, the Company began moving away
from its traditional branch management concept to a more centralized, market
oriented, support concept of administration in North America during fiscal 1997
(the "Market Based Approach"). Under the Market Based Approach, most of the
administrative and management functions which were performed at the branch level
are centralized on a regional basis. Such functions include managerial support,
service dispatch, billing and collections, supply sales and equipment setup and
delivery. The Company's goal is for the transition to be fully implemented,
excluding the Kodak Sales and Services Business, by the first half of fiscal
1998 and once complete, the Company's North American operations will consist of
approximately 22 regions with numerous markets within each region. The Company
believes that this Market Based Approach will provide for a higher quality of
customer support, increased productivity and reduced administrative costs. The
Company is also in the process of rolling out a new computer system for the
North American operations which is expected to be complete by the third quarter
of fiscal 1998. The completion of these two initiatives are intended to help
facilitate additional future efficiencies in the Company's North American
operations.
LEASING
Leasing plays a significant role in the Company's sale of equipment.
The Company believes that the ability of its sales force to offer customers the
option to lease equipment leads to additional sales. In substantially all of
its lease transactions, the Company initiates the lease, then one of a number
of available third-party leasing companies approves the customer's credit and
the Company immediately finances the lease in return for a single payment. The
Company has significantly reduced the credit risks normally associated with
leasing arrangements, while improving its cash flow and profit margins. The
Company has also established relationships with certain leasing companies
through which the Company participates in a portion of the leasing company's
profits in exchange for the Company targeting certain leasing volumes.
The Company believes customers are less resistant to a small increase
in monthly lease payments as opposed to an increase in the outright cash sales
price of such equipment. As a result, in most of these leasing arrangements,
the Company is able to achieve a higher sale price, and a higher profit margin
than that which would have been obtained by a cash sale of such equipment.
Finally, these leasing arrangements permit the Company to utilize its capital
for other business activities. The Company has similar arrangements for leases
which are offered to customers outside the U.S.
Through various acquisitions, the Company has acquired certain lease
arrangements and installment receivables that have not been sold to third-party
leasing companies. Over time, the Company will seek to convert these
acquisition leasing programs to arrangements similar to those described above.
TRAINING
A key element of the Company's operating philosophy is the training of
its sales, service and administrative employees in order to assist in uniform
application of the Company's established operating procedures throughout the
sales network. Upon employment, Company salespersons begin a sales program
developed and conducted by the Company. Training continues throughout their
careers in sales and sales management with certifications awarded upon
completion of various courses. The training sessions, coupled with weekly
sales meetings, assist the Company's staff in enhancing and maintaining their
marketing and sales management skills.
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Service technicians new to the Company are immediately trained and
certified in accordance with the Company's methods, procedures, and standards.
The Company's technical personnel are continuously updated and retrained as new
technology is developed. The Company's service training centers are certified
as manufacturers' authorized service facilities. The Company monitors service
technicians' continued educational experience and fulfillment of requirements
in order to evaluate the competence of its service technicians. All the
Company's service technicians receive service bulletins, service technician
tips and continued training seminars throughout their careers with the Company.
Similar to the Company, the Kodak Sales and Services Business places great
emphasis on training sales and service personnel and has a strong reputation for
high customer satisfaction.
VENDORS
The Company's business is dependent upon close relationships with its
vendors and its ability to purchase products from these vendors on competitive
terms. During fiscal 1997, the Company's sales of Canon, Konica, Minolta,
Ricoh, Sharp and Toshiba photocopiers and facsimile equipment represented
approximately 73% of its total equipment revenue, excluding its dex and Omnifax
private label facsimiles and the acquired Kodak Sales and Services Business.
The Company's dex and Omnifax private labels are imported from various Japanese
and Korean manufacturers. The majority of the Company's Kodak branded
equipment sales were generated from the acquired Kodak Sales and Services
Business. In addition, the Company relies on its photocopier and facsimile
vendors for parts and supplies.
The Company conducts its business in reliance upon its continuing
ability to purchase equipment, supplies, and parts from its current
manufacturers pursuant to authorized retail dealer and wholesale agreements
("Authorized Manufacturer Agreements"). The Company's retail operations'
primary Authorized Manufacturer Agreements are with Canon, Konica, Minolta,
Ricoh, Sharp and Toshiba. Such agreements are generally for one-year terms,
cover only specific products, have specific territorial boundaries, and may be
terminated with cause, and in some instances, without cause. Although
Authorized Manufacturer Agreements are non-exclusive, they are generally
limited to one or two authorized dealers within specific territorial
boundaries. The Company also has exclusive Supply Agreements with Kodak, the
terms of which vary from the Company's traditional Authorized Manufacturing
Agreements. See -- "Acquisition of Eastman Kodak's Office Imaging Division"
above. The Company's wholesale operations' primary Authorized Manufacturer
Agreements are with Copystar, Konica, Minolta, Ricoh, Sharp and Toshiba, and
contain terms which are substantially similar to those of the Company's retail
operations. Private label facsimile products are provided under purchase
agreements with various manufacturers, and the terms of these agreements are
similar to the agreements with certain of the Company's photocopier vendors.
COMPETITION
The Company's business is highly competitive with a number of
competitors in most geographic markets. The Company's retail operations are in
direct competition with local and regional equipment suppliers and dealers,
manufacturers, mass merchandisers, and wholesale clubs. Depending upon the
customer, principal areas of competition may include: quality and speed of
post-sales service support; availability of competitive products, parts and
supplies; speed of delivery; product capability and performance; financing
terms; and the availability of financing, leasing, or rental programs. The
Company's wholesale operations are in direct competition with local, regional,
and national distributors and manufacturers. Principal areas of competition
for wholesale operations are availability of competitive products, price, speed
of delivery, dealer support, centralized volume buying, product performance,
and the availability of financing programs. The continued ability of the
Company to offer competitive photocopiers in all segment areas is important in
both retail and wholesale operations. See -- "Products". As a result of
acquiring the Kodak Sales and Services Business, the Company substantially
increased its presence in the high-volume photocopier market currently
dominated by Xerox Corporation. In addition, the Kodak Sales and Services
Business significantly increased the scope of the Company's outsourcing
business. Competition in the outsourcing industry is based primarily on the
technical solutions devised, the breadth of services offered and pricing. The
Company also competes
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with other large competitors for acquisitions, particularly its principal
competitor Ikon Office Solutions, Inc., and in some instances such competition
can raise the price of an acquisition.
EMPLOYEES
As of March 31, 1997, the Company employed approximately 21,800
persons, of which approximately 11,600 employees were devoted to service, and
approximately 4,400 persons in the Company were devoted to sales. The
remaining employees were devoted to training, management, and various
administrative and support positions at the regional and corporate locations.
Support positions include receiving customer service calls and dispatching
service technicians, contacting customers to obtain meter readings, renewing
customer maintenance agreements, collecting accounts receivable, controlling
inventory, and performing certain billing functions. The Company's total
employees doubled in size from March 31, 1996 primarily due to the acquisition
of the Kodak Sales and Services Business. The ratio of service employees
increased more so due to the higher percentage of service personnel at the Kodak
Sales and Services Business.
Some of the Company's non-U.S. employees are subject to labor
agreements that establish rates of pay, working hours, procedures for orderly
settlement of disputes and other terms and conditions of employment. The
Company considers its employee relations to be good, and believes that it
provides working conditions and wages which compare favorably to those of its
competitors.
The Company relies heavily on its senior management, and the loss of
certain Executive Officers could have an adverse effect on the Company.
Additionally, the Company's ability to successfully grow and maintain its
management and employee base, as well as to successfully integrate acquired
company employees during periods of expansion, are extremely important to the
Company's continued success.
TRADEMARKS AND SERVICE MARKS
The Company believes that its trademarks and service marks have gained
significant recognition in the automated office equipment market and are
important to its marketing efforts. The Company has registered various
trademarks and service marks in certain markets. The trademarks "Danka",
"dex", "Omnifax" and "Infotec" are among those registered marks which are
viewed as important to the Company's ongoing business. The Company's policy is
to continue to pursue registration of its marks whenever possible and to oppose
vigorously any infringement of its proprietary rights. Depending on the
jurisdiction, trademarks and service marks are valid as long as they are in use
and/or their registrations are properly maintained, and they have not been
found to have become generic. Registrations of trademarks and service marks in
the United States can generally be renewed indefinitely as long as the
trademarks and service marks are in use.
BACKLOG
The backlog of orders at March 31, 1997 and March 31, 1996 were not
material.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained throughout this Form 10-K such as
statements concerning the anticipated effect of the acquisition of the Kodak
Sales and Services Business (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 Kodak Sales and Services Business, (ii) the
demands that the Acquisition and integration of the Kodak Sales and Services
Business will place, and the
10
<PAGE> 11
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 Kodak Sales and Services Business
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 Kodak Sales and Services Business
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 Market Based Approach and new computer system
will result in additional efficiencies. 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.
ITEM 2. PROPERTIES
The Company's general policy is to lease, rather than own, its
business locations. The Company leases numerous properties for administration,
sales and service, and distribution functions. The terms vary under the
respective leases and some contain a right of first refusal or an option to
purchase the underlying real property and improvements. In general, the
Company's lease agreements require it to pay its proportionate share of taxes,
common area expenses, insurance, and related costs of such rental properties.
In addition, the Company leases in excess of 700 properties for its retail and
wholesale operations.
The Company owns several smaller business locations, none of which are
necessary to the success of the particular location's business. Generally,
these properties were included among the assets obtained in certain
acquisitions. In the future, the Company may dispose of such properties and
enter into leases of properties which the Company believes may be more
desirable or more centrally located.
Management believes that the properties which it occupies are, in
general, suitable and adequate for the purposes for which they are utilized.
Additional space may be occupied as necessary upon future expansion of
operations.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party to
which the Company believes will have a material adverse effect on its results
of operations or its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
<PAGE> 12
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
The following table sets forth the high and low sale price per American
Depositary Share ("ADS") as reported by the Nasdaq National Market and the high
and low middle market quotations (which represent an average of bid and offered
prices in pence) for the Ordinary Shares as reported on the London Stock
Exchange Official List. Each ADS represents four Ordinary Shares.
<TABLE>
<CAPTION>
U.S. Dollars per Pence per
ADS Ordinary Share
High Low High Low
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year 1997:
Quarter ended June 30, 1996 $51.88 $26.50 848p 468p
Quarter ended September 30, 1996 45.25 22.25 700 403
Quarter ended December 31, 1996 45.13 35.13 663 533
Quarter ended March 31, 1997 46.25 30.25 683 472
Fiscal Year 1996:
Quarter ended June 30, 1995 $27.75 $22.50 420p 356p
Quarter ended September 30, 1995 37.38 24.13 590 384
Quarter ended December 31, 1995 38.50 29.75 595 489
Quarter ended March 31, 1996 44.50 34.63 714 560
</TABLE>
As of March 31, 1997, 42,891,527 ADSs were held of record by 3,692 registered
holders and 55,260,942 Ordinary Shares were held of record by 1,530 registered
holders. Since some of the ADSs and Ordinary Shares are held by nominees, the
number of holders may not be representative of the number of beneficial owners.
The Company currently expects to continue its policy of paying semi-annual cash
dividends, although there can be no assurance as to future dividends because
they are dependent upon future operating results, capital requirements and the
Company's financial condition.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by
reference to the information under the heading "Selected Consolidated Financial
Data" in the Company's Annual Report to Shareholders for the Year Ended March
31, 1997. See Exhibit 13 to this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by
reference to the information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report to Shareholders for the Year Ended March 31, 1997. See Exhibit
13 to this Report.
12
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to the information under the headings "Consolidated Statements of
Earnings", "Consolidated Balance Sheets", "Consolidated Statements of Cash
Flows", "Consolidated Statements of Shareholders' Equity" and "Notes to the
Consolidated Financial Statements" in the Company's Annual Report to
Shareholders for the Year Ended March 31, 1997. See Exhibit 13 to this Report.
As is the case with any company, prior financial condition and results of
operations are not necessarily indicative of future results.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference to the information under the headings "MANAGEMENT - Directors and
Executive Officers" in the Company's definitive Proxy Statement to be used in
connection with the Company's 1997 Annual Meeting of Shareholders, which has
been filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference to the information under the headings "MANAGEMENT - Compensation of
Executive Officers and Directors" in the Company's definitive Proxy Statement
to be used in connection with the Company's 1997 Annual Meeting of
Shareholders, which has been filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated herein by
reference to the information under the heading "MANAGEMENT - Security Ownership
of Management and Others" in the Company's definitive Proxy Statement to be
used in connection with the Company's 1997 Annual Meeting of Shareholders,
which has been filed with the Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by
reference to the information under the heading "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" in the Company's definitive Proxy Statement to be used in
connection with the Company's 1997 Annual Meeting of Shareholders, which has
been filed with the Commission.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. The following Financial Statements of the Registrant
included in Part II, Item 8, of this Report are
incorporated herein by reference as described in Item
8:
Consolidated Statements of Earnings - Years ended
March 31, 1997, 1996 and 1995
Consolidated Balance Sheets - March 31, 1997 and 1996
Consolidated Statements of Cash Flows - Years ended
March 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity -
Years ended March 31, 1997, 1996 and 1995
Notes to the Consolidated Financial Statements -
Years ended March 31, 1997, 1996 and 1995
Independent Auditors' Report
2. The following Financial Statement Schedules of the
Registrant are included in Item 14(d):
Independent Auditors' Report
II - Valuation and Qualifying Accounts
All other schedules are omitted because the required
information is not present in amounts sufficient to
require submission of the schedule, the information
required is included in the financial statements and
notes thereto or the schedule is not required or
inapplicable under the related instructions.
3. Exhibit index:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<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).
3.1* Memorandum of Association of the Company. (Exhibit 3.1 of Company's Registration
Statement on Form 20-F, No. 0-20828, filed on November 10, 1992 [the "1992 Registration
Statement"].)
3.2* Articles of Association of the Company. (Exhibit 3.2 to the 1992 Registration
Statement.)
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C>
4.1* Memorandum of Association of the Company, including paragraphs 5 and 6. (Exhibit 2.1
to 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* Form of Ordinary share certificate. (Exhibit 4.3 of Company's Registration Statement
on Form S-1, No. 33-68278, filed on October 8, 1993 [the "1993 Registration
Statement"]).
4.4* Form of American Depositary Receipt. (Exhibit 4.4 to the 1993 Registration Statement.)
4.5* Deposit Agreement dated June 25, 1992, Amendment No. 1 dated February 26, 1993 and
Amendment No. 2 dated July 2, 1993 (Exhibit 4.9 to the 1993 Registration Statement.)
and Amendment No. 3 dated August 16, 1994 between The Bank of New York, Company and
Owners and Holders of American Depositary Receipts.
4.6* Indenture dated March 13, 1995 between the Company and The Bank of New York, as
Trustee. (Exhibit 2 to the Company's Form 8-K dated March 21, 1995).
4.7* 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).
4.8* Registration Rights Agreement dated as of March 13, 1995 relating to $175,000,000 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 1995 Form 10-K).
4.9* Resolution No. 8 adopted by shareholders at the 1996 general meeting waiving pre-
emptive rights of shareholders under certain circumstances.
4.10* Credit Agreement dated March 19, 1996 among Danka Business Systems PLC, Danka Holding
Company, the several financial institutions from time to time a party to this
Agreement, Bank of America National Trust and Savings Association, Bank of America
International Limited, Nationsbank, N.A., and Southtrust National Bank of Alabama,
N.A., in an amount up to $400.0 million. (Exhibit 1 to the Company's Form 8-K dated
March 19, 1996).
4.11* 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
obligation 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.
10.1* Office Building Lease dated February 4, 1986 between Daniel M. Doyle and Francis J.
McPeak, Jr., and Copies, Inc. (Exhibit 3.4 to the 1993 Form 20-F).
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C>
10.2* Office Building Lease dated May 1, 1992 between Daniel M. Doyle and Francis J. McPeak,
Jr., and Gulf Coast Business Machines. (Exhibit 3.5 to the 1993 Form 20-F).
10.3* Office Building Lease dated April 1, 1990 between Daniel M. Doyle and Francis J.
McPeak, Jr., and Danka. (Exhibit 3.6 to the 1993 Form 20-F).
10.4* Lease Agreement dated December 22, 1986, and Addendum Lease Agreement dated March 1,
1987, between Daniel M. Doyle and Francis J. McPeak and Danka. (Exhibit 3.7 to the
1993 Form 20-F).
10.5* U.K. Executive Share Option Scheme. (Exhibit 3.11 to the 1993 Form 20-F).
10.6* U.S. Executive Incentive Stock Option Plan. (Exhibit 3.12 to the 1993 Form 20-F).
10.7* Form of Stock Option Agreement. (Exhibit 3.13 to the 1993 Form 20-F).
10.8* Addendum to Lease Agreement dated September 1, 1992, between Mid-County Investments,
Inc. and Danka. (Exhibit 3.38 to the 1993 Form 20-F).
10.9* Lease Agreement dated November 12, 1992 and Lease Commencement Agreement dated April 7,
1993 between PARD, Inc. and Danka. (Exhibit 10.41 to the 1993 Form 20-F).
10.10* Deposit Agreement dated June 25, 1992, Amendment No. 1 dated February 26, 1993 and
Amendment No. 2 dated July 2, 1993, between The Bank of New York, Company and Owners
and Holders of American Depositary Receipts, filed as Exhibit 4.5 and incorporated as
reference.
10.11* Employment Agreement dated April 1, 1994 among the Company, Danka Industries, Inc. and
Daniel M. Doyle. (Exhibit 10.49 to the 1994 Form 10-K).
10.12* Employment Agreement dated April 1, 1994 among the Company, Danka Industries, Inc. and
David C. Snell. (Exhibit 10.50 to the 1994 Form 10-K).
10.13* Employment Agreement dated April 1, 1994 among the Company, Danka Industries, Inc. and
Mark A. Vaughan-Lee. (Exhibit 10.51 to the 1994 Form 10-K).
10.14* Danka Business Systems PLC 1994 Executive Performance Plan. (Exhibit 10.52 to the 1994
Form 10-K).
10.15* Indenture dated March 13, 1995 between the Company and The Bank of New York, as
Trustee. (Exhibit 2 to the Company's Form 8-K dated March 21, 1995).
10.16* 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).
10.17* Registration Rights Agreement dated as of March 13, 1995 relating to $175,000,000 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 10.24 to the
Company's 1995 Form 10-K).
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C>
10.18* Purchase Agreement dated October 25, 1995 between ABN AMRO Bank N.V. and Credit
Lyonnais Bank Nederland N.V. and Danka Europe B.V. (Exhibit 2 to the Company's
Form 8-K dated November 3, 1995).
10.19* Credit Agreement dated March 19, 1996 among Danka Business Systems PLC, Danka Holding
Company, the several financial institutions from time to time a party to this
Agreement, Bank of America National Trust and Savings Association, Bank of America
International Limited, Nationsbank, N.A., and Southtrust National Bank of Alabama,
N.A., in an amount up to $400.0 million. (Exhibit 1 to the Company's Form 8-K dated
March 19, 1996).
10.20* The Danka 1996 Share Option Plan filed as Appendix 1 of the 1996 Annual Proxy Statement
and approved by shareholders under Resolution 10.
10.21* The Danka 1996 Non-Employee Directors Share Option Plan filed as Appendix 2 of the 1996
Annual Proxy Statement and approved by shareholders under Resolution 11.
13 Annual Report to Shareholders of the Company for the year ended March 31, 1997.
Portions of such Annual Report to Shareholders are incorporated by reference into this
Report.
21 List of Current Subsidiaries of the Company.
23 Independent Auditors Consent.
27 Financial Data Schedule
</TABLE>
* Document has heretofore been filed with the Commission and is
incorporated by reference and made a part hereof.
(b) Reports on Form 8-K
On June 26, 1996, the Company filed a report on Form 8-K announcing
expected results of operations for the first quarter of fiscal 1997 and the
effects to the Company resulting from its change to a market based management
approach, expansion of its sales division, and its increased commitment to the
sale of color and higher segment products.
On November 14, 1996, the Company filed a report on Form 8-K announcing
the Company's second quarter financial results, the agreement with Eastman
Kodak Company to acquire the sales, marketing and equipment service operations
of Kodak's Office Imaging Business, as well as Kodak's facilities management
business known as Kodak Imaging Services (collectively the "Kodak Sales and
Services Business"), and the promotion of David Snell to Chief Operating
Officer.
On December 16, 1996, the Company filed a report on Form 8-K announcing
the Company's New Credit Facility dated December 5, 1996 with NationsBank, N.A.
as agent and the approval by the Company's shareholders of the acquisition of
the Kodak Sales and Services Business.
On January 3, 1997, the Company filed a report on Form 8-K announcing
the Company's closing of the acquisition of the Kodak Sales and Services
Business and the Consent of Price Waterhouse LLP dated December 23, 1996.
18
<PAGE> 19
On January 15, 1997, the Company filed a report on Form 8-K reporting
the acquisition of the Kodak Sales and Services Business.
On March 13, 1997, the Company filed a report on Form 8-K/A reporting
the audited historical financial statements of the Kodak Sales and Services
Business for the nine months ended September 30, 1996 and the unaudited pro
forma consolidated statement of earnings for the combined operations of the
Company and the Kodak Sales and Serivces Business for the year ended March 31,
1996 and the nine months ended December 31, 1996.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) to this Report
are filed with this Report.
(d) Financial Statement Schedules
Report of Independent Auditors
II - Valuation and Qualifying Accounts
All other schedules are omitted since the required
information is not present or is not present in amounts sufficient to require
submission of the schedules.
19
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
To the Members of Danka Business Systems PLC:
Under date of May 12, 1997, we reported on the consolidated balance sheets of
Danka Business Systems PLC and subsidiaries as of March 31, 1997 and 1996 and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1997, as
contained in the 1997 annual report to shareholders. These consolidated
financial statements and our report thereon are incorporated by reference in
the annual report on Form 10-K for the year 1997. In connection with our
audits of the aforementioned financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
KPMG Audit Plc
Chartered Accountants
Registered Auditors
May 12, 1997 London, England
20
<PAGE> 21
DANKA BUSINESS SYSTEMS PLC
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ----------- ------------------------------ ------------- -----------
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End
Description Period Expenses Accounts (1) Deductions (2) of Period
----------- ----------- --------- ------------ -------------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended March 31, 1995 $5,290 $2,016 $1,213 $(2,485) $6,034
====== ======= ======= ======== =======
Year ended March 31, 1996 $6,034 $3,717 $8,009 $(8,956) $8,804
====== ======= ======= ======== =======
Year ended March 31, 1997 $8,804 $21,062 $12,382 $(14,395) $27,853
====== ======= ======= ======== =======
</TABLE>
(1) Represents beginning balances of acquired companies.
(2) Represents accounts written off during the year, net of
recoveries.
Note: Certain prior year amounts have been reclassified to conform to the
current year presentation.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 18, 1997 DANKA BUSINESS SYSTEMS PLC
(Registrant)
By: /s/ DANIEL M. DOYLE
-----------------------------
Daniel M. Doyle,
Chief Executive (The Chief
Executive Officer)
By: /s/ DAVID C. SNELL
-----------------------------
David C. Snell,
Finance Director (The Chief
Operating Officer and the
Principal Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the Company
and in the capacities indicated on June 18, 1997.
SIGNATURE TITLE
- --------- -----
/s/ MARK A. VAUGHAN-LEE Chairman and Director
- ----------------------------------
Mark A. Vaughan-Lee
/s/ DANIEL M. DOYLE Chief Executive and Director
- ----------------------------------
Daniel M. Doyle
/s/ DAVID C. SNELL Finance Director, Chief Operating
- ---------------------------------- Officer and Principal
David C. Snell Accounting Officer
/s/ DAVID S. HOOKER Director
- ----------------------------------
David S. Hooker
/s/ DAVID W. KENDALL Director
- ----------------------------------
David W. Kendall
/s/ JAMES F. WHITE, JR. Director
- ----------------------------------
James F. White, Jr.
/s/ PIERSON M. GRIEVE Director
- ----------------------------------
Pierson M. Grieve
/s/ KEITH J. MERRIFIELD Director
- ----------------------------------
Keith J. Merrifield
22
<PAGE> 1
EXHIBIT 13
FINANCIAL AND CORPORATE INFORMATION
Contents
Selected consolidated financial data 16
Management's discussion and analysis of
financial condition and results of operations 17
Consolidated statements of earnings 23
Consolidated balance sheets 24
Consolidated statements of cash flows 25
Consolidated statements of shareholders' equity 26
Notes to the consolidated financial statements 27
Independent auditors' report 35
Directors & officers 36
Corporate information Inside Back Cover
Market prices of ADSs and
Ordinary Shares Inside Back Cover
Note
The financial information in this section has been prepared under United States
Generally Accepted Accounting Principles in U.S. dollars. Financial information
prepared under United Kingdom Generally Accepted Accounting Principles in pounds
sterling may be obtained by contacting the Company's offices at the addresses
shown on the inside back cover.
15
<PAGE> 2
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
$000 $000 $000 $000 $000
For the years ended March 31 (Except per ADS data)
- ------------------------------------------------------------------------------------------------------
STATEMENTS OF EARNINGS DATA:
REVENUE:
<S> <C> <C> <C> <C> <C>
Retail 1,860,516 1,069,593 702,740 453,218 292,538
Wholesale 240,531 170,711 99,456 78,190 60,157
- ------------------------------------------------------------------------------------------------------
2,101,047 1,240,304 802,196 531,408 352,695
- ------------------------------------------------------------------------------------------------------
GROSS PROFIT:
Retail 775,342 466,533 306,202 199,080 129,683
Wholesale 44,061 30,116 17,691 14,688 10,164
- ------------------------------------------------------------------------------------------------------
819,403 496,649 323,893 213,768 139,847
Selling, general and administrative expenses 650,655 378,407 245,525 162,119 107,668
Amortization of intangible assets 19,386 13,587 6,818 3,765 1,821
Restructuring charges 35,000 8,500 -- -- --
Provision for committed research and
development costs 12,500 -- -- -- --
- ------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 101,862 96,155 71,550 47,884 30,358
Interest expense and other, net 33,985 21,566 7,742 3,667 2,751
- ------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 67,877 74,589 63,808 44,217 27,607
Provision for income taxes 25,522 28,241 24,761 17,751 6,395
- ------------------------------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM 42,355 46,348 39,047 26,466 21,212
Extraordinary item* 578 1,133 -- -- --
- ------------------------------------------------------------------------------------------------------
NET EARNINGS 41,777 45,215 39,047 26,466 21,212
- ------------------------------------------------------------------------------------------------------
PER ADS DATA:
Earnings before extraordinary item $ 0.73 $ 0.90 $ 0.80 $ 0.59 $ 0.51
Extraordinary item* (0.01) (0.02) -- -- --
- ------------------------------------------------------------------------------------------------------
Net earnings per ADS $ 0.72 $ 0.88 $ 0.80 $ 0.59 $ 0.51
- ------------------------------------------------------------------------------------------------------
Dividends per ADS $ 0.16 $ 0.13 $ 0.11 $ 0.09 $ 0.07
BALANCE SHEET DATA:
Total assets 2,459,359 1,091,556 635,314 356,804 164,504
Long-term debt, less current maturities 1,059,823 318,262 233,681 67,520 19,954
Shareholders' equity 465,731 441,843 206,408 169,925 62,154
</TABLE>
*Extraordinary item in fiscal 1997 and 1996 represents the loss on early
extinguishment of debt, net of the related income tax benefit.
16
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
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 service, 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 dealers. The Company principally distributes
the products of Canon, Kodak, Konica, Minolta, Ricoh, Sharp and Toshiba. The
Company became the exclusive distributor of Kodak branded photocopiers and
printers in December 1996 after completing the acquisition of Eastman Kodak
Company's Office Imaging division and facilities management business.
Effective December 31, 1996, the Company acquired from Eastman Kodak Company
("Kodak") (i) the net assets relating to the sales, marketing, distribution and
services business of Kodak's Office Imaging and Customer Equipment Services
business units and (ii) all of the issued and outstanding stock of certain
subsidiaries of Kodak which constitute the facilities management services
business known as Kodak Imaging Services (collectively, the "Kodak Sales and
Services Business"). The Company paid net cash of $688.0 million for the Kodak
Sales and Services Business, subject to post-closing adjustments. The purchase
price was funded exclusively by a new six-year multicurrency $1.275 billion
credit agreement. As of December 31, 1995, the net assets of the Kodak Sales and
Services Business were approximately $800.0 million, and for such year,
generated revenue of $1.8 billion and net earnings before income taxes of $25.0
million. For the nine months ended September 30, 1996, the Kodak Sales and
Services Business generated revenue of $1.3 billion and net earnings before
income taxes of $72.0 million.
The Kodak Sales and Services Business is engaged worldwide in the direct sale
and marketing of Kodak manufactured and branded black and white and accent color
high-volume photocopiers, duplicators and printers, as well as Kodak branded
mid-volume black and white and color photocopiers manufactured by Canon, Inc.,
and in some cases, remanufactured by Kodak. The Kodak Sales and Services
Business also provides on-site repair and technical and field engineering
support for equipment sold, leased and rented to others by the Kodak Sales and
Services Business and by other photocopier distributors. In addition, the Kodak
Sales and Services Business provides customers with facilities management
services, including the management of central reprographics departments, the
placement and maintenance of convenience copiers, the operation of mail centers,
the processing of statements, print-on-demand operations and document archiving
and retrieval services. The acquisition of the Kodak Sales and Services Business
greatly enhances the Company's product line and significantly increases the
scope of its outsourcing business.
In connection with the acquisition of the Kodak Sales and Services Business,
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 remanufactured by Kodak (the "Supply Agreements").
Pursuant to the Supply Agreements, the Company is required to purchase from
Kodak various levels of Kodak manufactured or remanufactured electrophotographic
equipment and accessories, spare parts, supplies and toner. The Company's
pricing for Kodak branded products is based on its purchases of agreed upon
levels. To the extent the Company exceeds or fails to purchase these amounts,
the Company may either receive a refund or be required to make additional
payments. Currently, the Company believes that it will meet its required
purchasing levels. Subject to certain limitations, the Company has the worldwide
exclusive right to distribute Kodak's currently existing line of
electrophotographic equipment for office imaging and reprographics manufactured
or remanufactured by Kodak, and the related software, supplies, accessories and
spare parts and a right of first refusal to exclusively distribute worldwide
certain future electrophotographic products manufactured by Kodak for office
imaging and reprographics. The Company has also agreed to contribute a total of
$175.0 million (plus an additional $30.0 million if certain research milestones
are met) to Kodak's ongoing research and development for new electrophotographic
products to be funded over the period April 1, 1997 through December 31, 2002.
The Company and Kodak have appointed three representatives to serve as members
of an advisory committee which meet on a regular basis to discuss overall
research and development progress. Additionally, Kodak has agreed to fund the
Company $30.0 million per year over three years, to promote the sale of Kodak
branded products in Europe, Asia and Latin America. For the year ended March 31,
1997, the Company recognized approximately $8.0 million of income under this
agreement.
Currently, 63% of the Kodak Sales and Services Business is conducted in North
America and 34% in Europe. Approximately 90% of the Kodak Sales and Services
Business is operated in countries in which the Company was already conducting
its business. The Company's goal is to increase the net margins of the Kodak
Sales and Services Business
17
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
through certain cost efficiencies and synergies it expects to achieve by
operating the businesses. A number of factors will be important in the Company's
goal of successfully integrating the acquired business into the Company. The
acquisition of the Kodak Sales and Services Business is the largest acquisition
by the Company to date. There can be no assurances regarding the ultimate impact
of the Kodak Sales and Services Business on the Company and its future business
and operations.
The Company recorded a $35.0 million pre-tax restructuring charge in the third
quarter of fiscal 1997 related to the integration of the Kodak Sales and
Services Business and the related transition to the Company's Market Based
Approach in North America. The restructuring charge included, among other
things, severance and other employee termination benefits, lease settlement
costs associated with the consolidation of duplicate facilities and the
write-off of certain fixed assets. Charges related to the integration of the
Kodak Sales and Services Business consist mainly of the costs associated with
the planned closure of certain of the Company's facilities which are duplicative
of some acquired facilities.
To further the Company's goal of providing better support for its sales and
service force as well as its customers, the Company began moving away from its
traditional branch management concept to a more centralized, market oriented
support concept of administration in North America (the "Market Based Approach")
during the first quarter of fiscal 1997. The Company's goal is for the
transition to be fully implemented, excluding the Kodak Sales and Services
Business, by the first half of fiscal 1998 and once complete, the Company's
North American operations will consist of approximately 22 regions with numerous
markets within each region. As a result of the transition to the Market Based
Approach, the Company experienced a short-term duplication of certain
administrative and management functions, which resulted in an increase in
selling, general and administrative expenses during the first half of fiscal
1997. The Company is also in the process of rolling out a new computer system
for the North American operations which is expected to be complete by the third
quarter of fiscal 1998. The completion of these two initiatives are intended to
help facilitate additional future efficiencies in the Company's North American
operations.
Results of Operations
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>
Year Ended March 31
1997 1996 1995
- ------------------------------------------------------------
REVENUE:
<S> <C> <C> <C>
Retail equipment sales 33.3% 38.2% 40.5%
Retail service, supplies
and rentals 55.3 48.0 47.1
Wholesale 11.4 13.8 12.4
- ------------------------------------------------------------
TOTAL REVENUE 100.0 100.0 100.0
Cost of revenue 61.0 60.0 59.6
- ------------------------------------------------------------
GROSS PROFIT 39.0 40.0 40.4
Selling, general and
administrative expenses 31.0 30.5 30.6
Amortization of intangible
assets 0.9 1.1 0.9
Restructuring charges 1.7 0.7 --
Provision for committed
research and develop-
ment costs 0.6 -- --
- ------------------------------------------------------------
EARNINGS FROM OPERATIONS 4.8 7.7 8.9
Interest expense and
other, net 1.6 1.7 0.9
- ------------------------------------------------------------
EARNINGS BEFORE
INCOME TAXES 3.2 6.0 8.0
Provision for income taxes 1.2 2.3 3.1
- ------------------------------------------------------------
EARNINGS BEFORE
EXTRAORDINARY ITEM 2.0 3.7 4.9
Extraordinary item -- 0.1 --
- ------------------------------------------------------------
NET EARNINGS 2.0% 3.6% 4.9%
- ------------------------------------------------------------
</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>
Year Ended March 31
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail equipment sales 37.4% 39.3% 39.4%
Retail service, supplies
and rentals 44.2 47.1 47.2
Wholesale 18.3 17.6 17.8
</TABLE>
Revenue: In fiscal 1997, the Company achieved record revenue of $2.1 billion
compared with revenue of $1.2 billion in fiscal 1996 and $802.2 million in
fiscal 1995. Revenue increased by 69% in fiscal 1997 and 55% in fiscal 1996.
18
<PAGE> 5
The increase resulted from growth in core operations as well as significant
contributions from acquisitions. Growth in the Company's core operations was
principally a result of its focus on major accounts, its increased penetration
in segment 5 and its entry into segment 6 high-volume copiers, and increased
sales of digital color photocopiers. During the past four years, the Company has
made over 110 acquisitions adding approximately $2.8 billion of acquired
annualized revenue. The Company's two most significant acquisitions during this
period were the acquisition of Infotec Europe B.V. and its subsidiaries in
November 1995 and the acquisition of the Kodak Sales and Services Business in
December 1996. As a result of the acquisition of the Kodak Sales and Services
Business, the Company's revenue mix has changed. As a percentage of revenue,
retail service, supplies and rentals have increased, while retail equipment
sales and wholesale revenue have decreased.
Gross profit: Gross profit increased 65% to $819.4 million in fiscal 1997 from
$496.6 million in fiscal 1996, and 53% in fiscal 1996 from $323.9 million in
fiscal 1995. Gross profit as a percentage of total revenue decreased to 39.0% in
fiscal 1997 from 40.0% in fiscal 1996 and 40.4% in fiscal 1995. The decrease in
fiscal 1997 was due to the Company's acquisition of the Kodak Sales and Services
Business which has lower individual gross profit margins than the Company's core
operations, and to lower margins on retail equipment revenue. The decrease in
fiscal 1996 from fiscal 1995 related to a higher mix of wholesale revenue. Gross
profit as a percentage of retail equipment sales decreased to 37.4% in fiscal
1997 from 39.3% in fiscal 1996 due to the acquisition of the Kodak Sales and
Services Business which has lower retail equipment margins than the Company's
core operations, and to lower margins on retail equipment revenue. Retail
equipment margins were also impacted by the discounting of high-volume machines
during the second half of the year. Under the Supply Agreements, the Company is
purchasing Kodak branded equipment at significantly lower prices than prior to
the acquisition of the Kodak Sales and Services Business. In an effort to
increase the sales of remaining Kodak high-volume copiers, the Company
instituted lower pricing of the inventory on hand at the time of acquisition. In
fiscal 1996, this margin remained relatively constant at 39.3% compared to 39.4%
in fiscal 1995. As a percentage of revenue, gross profit on retail service,
supplies and rentals decreased in fiscal 1997 to 44.2% from 47.1% in fiscal
1996. This was primarily due to the Company's acquisition of the Kodak Sales and
Services Business which has lower individual gross profit margins than the
Company's core operations. This margin in fiscal 1996 and fiscal 1995 remained
relatively constant at 47.1% and 47.2%, respectively. Gross profit as a
percentage of wholesale revenue also remained relatively constant at 18.3%,
17.6% and 17.8% in fiscal 1997, 1996 and 1995, respectively.
Selling, general and administrative expenses: Selling, general and
administrative expenses increased 72% to $650.7 million in fiscal 1997 and 54%
in fiscal 1996. The increases were primarily related to acquisitions. As a
percentage of total revenue, selling, general and administrative expenses
increased to 31.0% in fiscal 1997 from 30.5% in fiscal 1996. The increase
related to the Company's aggressive hiring and training of new sales
representatives and support personnel during the first half of fiscal 1997 as
well as to costs incurred to regionally centralize certain management and
administrative functions in the transition to the Market Based Approach in North
America. As a percentage of revenue, selling, general and administrative
expenses in fiscal 1996 and 1995 remained relatively constant.
Amortization of intangible assets: Amortization of intangible assets increased
to $19.4 million in fiscal 1997 from $13.6 million in fiscal 1996 and $6.8
million in fiscal 1995. These increases related to acquisitions for which
additional intangible assets are being amortized.
Restructuring charges: The Company recorded a $35.0 million pre-tax
restructuring charge during the third quarter of fiscal 1997 related to the
integration of the Kodak Sales and Services Business and the related transition
to the Company's Market Based Approach in North America. The Company also
recorded an $8.5 million restructuring charge in the third quarter of fiscal
1996 principally related to the restructuring of its international operations.
The restructuring charges included, among other things, severance and other
employee termination benefits, lease settlement costs associated with the
consolidation of duplicate facilities, and the write-off of certain leasehold
improvements and other fixed assets.
Provision for committed research and development costs: In connection with the
acquisition of the Kodak Sales and Services Business, the Company will provide
funding to Kodak for ongoing research and development. For fiscal 1997, the
Company recorded a provision for committed research and development costs of
$12.5 million.
19
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Earnings from operations: Earnings from operations rose to $101.9 million in
fiscal 1997, a 6% increase over fiscal 1996 earnings from operations of $96.2
million. Fiscal 1996 earnings from operations were 34% higher than fiscal 1995
earnings from operations of $71.6 million. The increases primarily related to
increased total revenue. As a percentage of total revenue, earnings from
operations were 4.8%, 7.7% and 8.9% in fiscal 1997, 1996 and 1995, respectively.
The decrease in earnings from operations as a percentage of revenue during
fiscal 1997 was principally due to the $35.0 million restructuring charge, the
$12.5 million provision for committed research and development costs, and to a
lower combined gross profit margin. The decrease in fiscal 1996 was principally
due to the $8.5 million restructuring charge and higher levels of amortization
of intangible assets.
Interest expense and other, net: Interest expense increased to $34.0 million in
fiscal 1997 from $21.6 million in fiscal 1996 and $7.7 million in fiscal 1995.
Interest expense increased in fiscal 1997 primarily due to borrowings used to
fund the acquisition of the Kodak Sales and Services Business. The increase in
fiscal 1996 from fiscal 1995 primarily related to the Company's acquisition
program which was financed in part with the net proceeds from the issuance in
March 1995 of the Company's 6.75% Convertible Subordinated Notes due 2002, and
borrowings under its credit facilities.
Income taxes: Income taxes decreased to $25.5 million in fiscal 1997 from $28.2
million in fiscal 1996 and increased from $24.8 million in fiscal 1995. The
decrease in fiscal 1997 primarily related to the restructuring charge which
impacted earnings before income taxes. The effective tax rate was 37.6% for
fiscal 1997, 37.9% for fiscal 1996 and 38.8% for fiscal 1995. These rates have
decreased due to higher earnings outside of the U.S. for which the effective tax
rates are lower.
Extraordinary item: In the third quarter of fiscal 1997, the Company recorded an
extraordinary loss of $0.6 million related to the early extinguishment of debt,
net of the income tax benefit of $0.3 million. The extraordinary charge resulted
from the early retirement of the Company's $400.0 million credit facility and
consisted primarily of the write-off of unamortized deferred finance costs. The
Company recorded a similar charge in the fourth quarter of fiscal 1996 in the
amount of $1.1 million, net of the income tax benefit of $0.7 million.
Net earnings: As a result of the above factors, net earnings decreased 8% to
$41.8 million in fiscal 1997 and increased 16% to $45.2 million in fiscal 1996.
As a percentage of total revenue, net earnings were 2.0% in fiscal 1997, 3.6% in
fiscal 1996 and 4.9% in fiscal 1995. The decreases in fiscal 1997 and fiscal
1996 were primarily due to the respective restructuring charges as well as to
higher levels of interest expense. Fiscal 1997 was also impacted by the
provision for committed research and development costs.
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 Kodak Sales and Services Business, has added 19 additional
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 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
these products is generally 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
20
<PAGE> 7
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,
Japanese manufacturers could raise prices. The Company has historically been
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 provided by operating activities was $192.7 million,
$57.2 million and $52.0 million for fiscal 1997, 1996 and 1995, respectively.
Cash flow provided by operating activities was significantly impacted in fiscal
1997 by the acquisition of the Kodak Sales and Services Business. The net assets
acquired contained low levels of accounts payable, and the normal buildup of
trade payables positively impacted fiscal 1997 operating cash flow. Cash flow
used in investing activities was $871.6 million, $306.6 million and $126.6
million for fiscal 1997, 1996 and 1995, respectively. The increases were
primarily due to the Company's acquisition of the Kodak Sales and Services
Business in fiscal 1997 and of Infotec Europe B.V. and its subsidiaries in
fiscal 1996. Net cash provided by financing activities was $707.5 million,
$198.1 million and $145.9 million in fiscal 1997, 1996 and 1995, respectively.
The increase in fiscal 1997 was primarily due to higher levels of borrowings for
the purchase of the Kodak Sales and Services Business made available through the
$1.275 billion credit agreement discussed below.
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
Kodak Sales and Services Business, to repay the outstanding balance under the
Company's previous $400.0 million credit facility, as well as for ongoing
working capital and general corporate purposes. The Credit Agreement provides
the Company with a revolving component in 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%. Interest expense is expected to significantly rise in the near future
due to the use of proceeds from the Credit Agreement to acquire the Kodak Sales
and Services Business. As of March 31, 1997 the Credit Agreement had an
outstanding balance of approximately $329.6 million under the revolving
component and $532.2 million under the term loan, all of which was incurring
interest at a weighted average rate of 5.6% per annum. Therefore, subject to
availability under the covenants, $413.2 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 other individuals which had an
aggregate balance of $39.4 million at March 31, 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, and vary widely in terms and
conditions.
21
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the Kodak Sales and Services Business off of Kodak's computer
system. The Company's cash flow from operations together with 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.
Impacts of Inflation
The Company believes that inflation has not had a significant impact on its
operations.
Special Note Regarding Forward Looking Statements
Certain statements contained throughout this Annual Report such as statements
concerning the anticipated effect of the acquisition of the Kodak Sales and
Services Business (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 arising 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 Kodak Sales and Services Business, (ii) the
demands that the Acquisition and integration of the Kodak Sales and Services
Business will place, and the effect that such demands will have, on the
Company's resources, infrastructure and current operations, (iii) the Company's
ability to successfully operate in new international markets, (iv) the ability
of the Company to retain current management and other employees of the Kodak
Sales and Services Business 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 Kodak Sales and Services Business 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 Market
Based Approach and new computer system will result in additional efficiencies.
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.
22
<PAGE> 9
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995
$000 $000 $000
For the years ended March 31 Note (Except per ADS data)
- ---------------------------------------------------------------------------------------------------------------------------
REVENUE:
<S> <C> <C> <C> <C>
Retail equipment sales 698,996 474,116 324,758
Retail service, supplies and rentals 1,161,520 595,477 377,982
Wholesale 240,531 170,711 99,456
- ---------------------------------------------------------------------------------------------------------------------------
Total revenue 2,101,047 1,240,304 802,196
- ---------------------------------------------------------------------------------------------------------------------------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 437,387 288,000 196,953
Retail service, supplies and rental costs 647,787 315,060 199,585
Wholesale costs of revenue 196,470 140,595 81,765
Selling, general and administrative expenses 650,655 378,407 245,525
Amortization of intangible assets 19,386 13,587 6,818
Restructuring charges 11 35,000 8,500 --
Provision for committed research and development costs 12,500 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 1,999,185 1,144,149 730,646
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 101,862 96,155 71,550
Interest expense and other, net 4 33,985 21,566 7,742
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 67,877 74,589 63,808
Provision for income taxes 7 25,522 28,241 24,761
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE EXTRAORDINARY ITEM 42,355 46,348 39,047
Extraordinary item--loss on early extinguishment of debt,
net of income tax benefit of $349 (1996--$691) 4 578 1,133 --
- ---------------------------------------------------------------------------------------------------------------------------
NET EARNINGS 41,777 45,215 39,047
===========================================================================================================================
EARNINGS PER ADS:
Earnings before extraordinary item $ 0.73 $ 0.90 $ 0.80
Extraordinary item (0.01) (0.02) --
- ---------------------------------------------------------------------------------------------------------------------------
NET EARNINGS PER ADS $ 0.72 $ 0.88 $ 0.80
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average ADSs outstanding 57,725 51,533 $ 48,735
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
At March 31 Note $000 $000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 73,875 38,217
Accounts receivable, net of allowance for doubtful
accounts of $27,853 (1996--$8,804) 847,258 247,479
Inventories 488,931 214,519
Prepaid expenses and other current assets 39,534 9,534
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,449,598 509,749
Equipment on operating leases, net 2 311,069 73,303
Property and equipment, net 3 87,768 42,795
Intangible assets:
Goodwill, net of accumulated amortization
of $39,235 (1996--$22,391) 5 460,262 427,354
Noncompete agreements, net of accumulated
amortization of $9,128 (1996--$6,944) 7,100 8,490
Other assets 143,562 29,865
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 2,459,359 1,091,556
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and notes payable 4 41,385 30,414
Accounts payable 446,612 88,817
Accrued expenses and other current liabilities 323,596 108,621
Deferred revenue 69,149 64,223
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 880,742 292,075
Convertible subordinated notes 4 200,000 200,000
Other long-term debt 4 859,823 118,262
Deferred income taxes and other long-term liabilities 7 53,063 39,376
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,993,628 649,713
- ---------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Ordinary shares 1.25 pence stated value; 500,000,000 authorized;
226,827,049 issued and outstanding (1996--219,112,247) 9 4,734 4,585
Additional paid-in capital 301,623 297,378
Retained earnings 186,306 148,501
Currency translation adjustment (26,932) (8,621)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 465,731 441,843
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies 10
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,459,359 1,091,556
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 11
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
For the years ended March 31 $000 $000 $000
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings 41,777 45,215 39,047
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization 96,414 52,136 32,400
Loss (gain) on sale of property and equipment 1,039 3,081 (2,730)
Proceeds from sale of rental equipment 12,505 9,018 9,459
Extraordinary item 927 494 --
Changes in assets and liabilities, net of effects
from the purchase of subsidiaries:
Accounts receivable (37,549) (32,806) (17,561)
Inventories (65,204) (16,721) (26,699)
Prepaid expenses and other current assets (8,688) (3,751) 1,789
Income tax refund receivable -- -- 4,492
Other noncurrent assets (24,137) (4,039) (4,444)
Accounts payable 165,448 3,687 5,841
Accrued expenses 20,229 843 4,181
Deferred revenue (11,160) (9,463) (1,889)
Deferred income taxes and other long-term liabilities 1,053 9,511 8,075
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 192,654 57,205 51,961
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (92,747) (45,212) (51,256)
Proceeds from sale of property and equipment 16,890 1,961 9,127
Payment for purchase of subsidiaries, net of cash acquired (794,672) (269,860) (70,752)
Payment for purchase of noncompete agreements (1,058) (4,312) (2,315)
Purchase of investments -- -- (11,451)
Net proceeds from sale of investments -- 10,854 --
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (871,587) (306,569) (126,647)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net borrowings (payments) under line of credit agreements 734,057 74,773 (35,431)
Principal payments on debt (19,670) (69,047) (13,659)
Net proceeds from issuance of Convertible Subordinated Notes -- -- 195,000
Net proceeds from issuance of other long-term debt -- 1,599 4,132
Net proceeds from ADS offering -- 195,985 --
Proceeds from stock options exercised 2,131 935 833
Dividends (9,015) (6,164) (4,970)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 707,503 198,081 145,905
- ---------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES 7,088 2,652 9
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,658 (48,631) 71,228
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 38,217 86,848 15,620
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 73,875 38,217 86,848
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash flow information:
Interest paid 26,739 21,958 7,871
Income taxes paid 13,980 15,008 11,634
Non-cash flow information:
Notes payable issued for noncompete agreements -- 3,030 1,745
Notes payable issued for purchase of subsidiaries 288 21,932 29,205
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 12
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Currency
Ordinary paid-in Retained translation
shares capital earnings adjustment Total
$000 $000 $000 $000 $000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1994 3,974 90,376 76,066 (491) 169,925
Net earnings -- -- 39,047 -- 39,047
Dividends -- -- (4,970) -- (4,970)
Currency translation adjustment -- -- -- (71) (71)
Shares issued under employee option plans 35 798 -- -- 833
Shares issued for acquisitions 41 1,603 -- -- 1,644
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1995 4,050 92,777 110,143 (562) 206,408
Net earnings -- -- 45,215 -- 45,215
Dividends -- -- (6,164) -- (6,164)
Distributions to former shareholders of
pooled companies -- -- (693) -- (693)
Currency translation adjustment -- -- -- (8,059) (8,059)
Shares issued under employee option plans 35 900 -- -- 935
Shares issued in public offering 380 195,605 -- -- 195,985
Shares issued for acquisitions 120 8,096 -- -- 8,216
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1996 4,585 297,378 148,501 (8,621) 441,843
Net earnings -- -- 41,777 -- 41,777
Dividends -- -- (9,015) -- (9,015)
Distributions to former shareholders of
pooled companies -- -- (324) -- (324)
Currency translation adjustment -- -- -- (18,311) (18,311)
Shares issued under employee option plans 14 2,117 -- -- 2,131
Shares issued for acquisitions 135 2,128 5,367 -- 7,630
- ---------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 4,734 301,623 186,306 (26,932) 465,731
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 13
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
(a) Basis of preparation: The financial statements have been prepared in
accordance with United States Generally Accepted Accounting Principles. The
principal accounting policies are set forth below.
(b) Basis of consolidation: The consolidated financial statements include the
accounts of Danka Business Systems PLC and its subsidiaries (the "Company"). The
Company's principal operating subsidiaries are located in North America, Europe,
Australasia, and Latin America, and are principally engaged in the retail and
wholesale distribution and service of photocopiers and facsimile equipment and
outsourcing of document imaging solutions. All significant intercompany balances
and transactions have been eliminated in consolidation.
(c) Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year end and the reported
amounts of revenues and expenses during the reporting period. Certain
significant estimates are disclosed throughout this report. Actual results could
differ from these estimates.
(d) Revenue recognition: Equipment sales are recognized at the time of customer
acceptance, or in the case of equipment sales financed by third party leasing
companies, at the time of acceptance by the leasing company and the customer.
Supply sales to customers are recognized at the time of shipment, or in the case
of service contracts which include supplies, upon usage by the customer.
Operating lease income is recognized as earned and maintenance contract service
revenues are recognized ratably over the term of the underlying maintenance
contract. Revenue from outsourcing contracts is recognized as earned over the
contract term. Deferred revenue consists of unearned maintenance contract
revenue that is recognized using the straight-line method over the life of the
related contract, generally twelve months.
(e) Property and equipment: Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization is
provided using the straight-line method over the assets' estimated economic
lives. Expenditures for additions, major renewals or betterments are capitalized
and expenditures for repairs and maintenance are charged to earnings as
incurred. When property and equipment are retired or otherwise disposed of, the
cost thereof and the applicable accumulated depreciation are removed from the
respective accounts and the resulting gain or loss is reflected in earnings.
(f) Inventories: Inventories consist of photocopiers, facsimile equipment, other
automated office equipment, and related parts and supplies, and are valued at
the lower of cost (specific cost for equipment and first-in, first-out method
for supplies and parts) or market value.
(g) Intangibles: Goodwill recognized in business combinations accounted for as
purchases is amortized over thirty years on a straight-line basis, and is
evaluated for recoverability whenever adverse effects or changes in
circumstances indicate that the carrying amount may not be recoverable.
Impairments would be recognized if future undiscounted cash flows and earnings
from operations were not sufficient to recover the goodwill and the carrying
amount of the goodwill would be reduced by the estimated shortfall of the
discounted cash flows. At March 31, 1997, the Company believes that there is no
impairment of goodwill. Noncompete agreements are amortized over the lives of
the agreements, generally three to seven years on a straight-line basis.
Deferred financing costs incurred in connection with the issuance of the
Convertible Subordinated Notes and other financings are charged as interest
expense over the term of the related debt, and are included in other noncurrent
assets.
(h) Foreign currencies: Foreign currency transactions are converted at the rate
of exchange on the date of the transaction or translated at the year end rate in
the case of transactions not then finalized. Assets and liabilities in
currencies other than U.S. dollars are translated into U.S. dollars at the
exchange rate in effect at the balance sheet date. Revenues and expenses are
translated using the average rate of exchange for the period. Exchange
differences arising in consolidation are recorded in shareholders' equity.
27
<PAGE> 14
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(i) Cash and cash equivalents: Cash and cash equivalents consist of cash on hand
and commercial paper with original maturities of three months or less.
(j) Income taxes: Income taxes are provided in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes." Under
Statement No. 109, full provision is made for all deferred tax liabilities.
Deferred tax assets are recognized for deductible temporary differences and net
operating losses, reduced by a valuation allowance if it is more likely than not
that some portion or all of the benefit will not be recognized.
(k) Earnings per share: Earnings per American Depositary Share ("ADS") are based
on net earnings and the weighted average number of ADSs outstanding during the
year, as adjusted for shares issuable upon exercise of share options. The
computation assumes the proceeds from the exercise of share options are used to
repurchase the Company's ADSs at the average market price of the ADSs during the
year. Earnings per ADS are based on the current ratio of four Ordinary Shares to
one ADS.
(l) Concentrations of credit risk: Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
and cash equivalents and trade receivables. The Company's cash and cash
equivalents are placed with high credit quality financial institutions, and are
invested in short-term maturity, highly rated corporate and government debt
securities. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base, and their dispersion across many different industries and geographical
areas. As of March 31, 1997, the Company had no significant concentrations of
credit risk.
(m) Financial instruments: The Company enters into foreign exchange forward and
option contracts to manage its exposure to fluctuations in foreign currency
exchange rates. Gains and losses that hedge specific currency commitments are
deferred and recognized in net earnings in the period in which the transaction
is consummated. Premiums paid on option contracts that hedge specific currency
commitments are amortized over the term of the option.
(n) Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year presentation.
(o) Advertising costs: The Company expenses advertising costs as incurred,
except production costs which are expensed the first time the advertising takes
place.
2. Equipment on Operating Leases, net
Substantially all of the Company's operating leases are cancelable. Equipment
on operating leases is depreciated over three to five years assuming a salvage
value ranging from zero to ten percent and consists of the following at
March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
$000 $000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equipment on operating leases 399,296 109,589
Less accumulated depreciation (88,227) (36,286)
- ---------------------------------------------------------------------------------------------------------------------------
Equipment on operating leases, net 311,069 73,303
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended March 31, 1997, 1996 and 1995
approximated $59,985,000, $28,691,000, and $18,457,000, respectively.
3. Property and Equipment, net
Property and equipment, along with their useful lives, consist of the following
at March 31, 1997 and 1996:
<TABLE>
<CAPTION>
Average
1997 1996 useful life
$000 $000 in years
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Buildings 5,955 5,201 31
Office furniture,
equipment and
leasehold
improvements 102,977 51,723 3-10
Transportation
equipment 12,827 6,803 5-15
Land 1,648 2,309 --
- ---------------------------------------------------------------------------------------------------------------------------
Total cost 123,407 66,036
Less accumulated
depreciation
and amortization (35,639) (23,241)
- ---------------------------------------------------------------------------------------------------------------------------
Property and
equipment, net 87,768 42,795
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended March 31, 1997, 1996 and 1995
approximated $17,043,000, $9,858,000, and $7,125,000, respectively.
28
<PAGE> 15
4. Debt
Debt consists of the following at March 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
$000 $000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
6.75% Convertible Subordinated
Notes due April, 2002 200,000 200,000
Revolving line of credit (limited
to $725.0 million) interest at
LIBOR plus an applicable margin or
the agent bank's reference rate
(currently averaging 6.2%), matures
December, 2002 329,565 --
Term loan (limited to $550.0
million) interest at LIBOR
plus an applicable margin or
the agent bank's reference rate
(currently averaging 5.3%),
matures December, 2002 532,200 --
Revolving line of credit (limited
to $400.0 million) interest at
IBOR plus an applicable
margin or the agent bank's
reference rate -- 109,887
Amounts payable to previous
owners of acquired businesses 6,546 10,632
Various notes payable bearing
interest from prime to 14.0%,
maturing principally over the
next 5 years 32,897 28,157
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term debt and
notes payable 1,101,208 348,676
Less current maturities of long-
term debt and notes payable (41,385) (30,414)
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current
maturities 1,059,823 318,262
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
In December 1996, the Company entered into a $1.275 billion multicurrency credit
agreement (the "Credit Agreement") with a group of banks. The Credit Agreement,
which is secured, has a term of six years, requires scheduled payments of
interest throughout the term of the loan, and the maintenance of certain
financial ratios. The Company was in compliance with all terms of the Credit
Agreement at March 31, 1997.
In December 1996, the Company used a portion of the Credit Agreement to repay
debt outstanding under its previous $400.0 million credit facility. As a result,
the Company recorded an extraordinary loss of approximately $578,000 ($0.01 per
ADS) relating to the early extinguishment of debt, net of the income tax benefit
of $349,000. The extraordinary loss consists of the write-off of unamortized
deferred finance costs.
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 currently 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 provisions.
Aggregate annual maturities of long-term debt and notes payable at March 31,
1997, are as follows:
<TABLE>
<CAPTION>
Year ending March 31 $000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
1998 41,385
1999 64,230
2000 76,520
2001 103,201
2002 150,122
Thereafter 665,750
- ---------------------------------------------------------------------------------------------------------------------------
$1,101,208
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
5. Acquisitions Effective December 31, 1996, the Company acquired from Eastman
Kodak Company ("Kodak") (i) the net assets related to the sales, marketing,
distribution and services business of Kodak's Office Imaging and Customer
Equipment Services business units and (ii) all of the issued and outstanding
stock of certain subsidiaries of Kodak which constitute the facilities
management services business known as Kodak Imaging Services (collectively, the
"Kodak Sales and Services Business"). This acquisition was accounted for as a
purchase for which the Company paid net cash of $688.0 million. The
consideration paid by the Company is subject to adjustment to the extent that
the net book value of the Kodak Sales and Services Business on December 31,
1996 differs from $802.0 million. At March 31, 1997, the Company recorded a
preliminary receivable from Kodak of approximately $86.0 million based on the
December 31, 1996 balance sheet.
In connection with this acquisition, the Company accrued approximately $33.0
million to cover anticipated costs of combining its existing business with the
acquired business. At March 31, 1997, approximately $31.2 million of accrued
29
<PAGE> 16
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
costs remained, comprised of $20.0 million of workforce reductions in the
acquired company (primarily sales and service personnel), $7.2 million for the
closing of dupli-cate acquired facilities, and $4.0 million for other
miscellaneous costs. The allocation of the purchase price has been recorded
based on preliminary estimates of fair value, and may be adjusted as a result of
the Company's continuing analysis of the December 31, 1996 balance sheet. Based
on the preliminary recording of the acquisition, all of the purchase price was
allocated to identifiable tangible assets. Management anticipates that the
integration of the Kodak Sales and Services Business will be complete by the end
of 1998.
In addition to the purchase of the Kodak Sales and Services Business, during the
year ended March 31, 1997, the Company acquired the outstanding stock or assets
of seven other unrelated businesses. These acquisitions were accounted for as
purchases with consideration totaling approximately $66.8 million, of which
approximately $10.7 million represented identifiable tangible assets, and the
balance of approximately $56.1 million represented goodwill. The results of the
acquired companies are included in the accompanying Consolidated Statement of
Earnings since the effective date of each acquisition. The Company also issued
6,800,000 Ordinary Shares (1,700,000 ADS equivalents), for one separate
acquisition which was accounted for as a pooling of interests. The accompanying
consolidated financial statements have not been restated because the effect of
this acquisition was not material. The issuance of the Ordinary Shares has been
treated as an addition in the Consolidated Statement of Shareholders' Equity,
and the results of the acquired company is included in the Consolidated
Statement of Earnings since the effective date of the acquisition.
The following unaudited pro forma summary presents the consolidated results of
operations as if the acquisitions had occurred at the beginning of the years
ended March 31, 1997 and 1996, after giving effect to certain adjustments,
including amortization of goodwill, interest expense on the debt incurred to
fund the acquisitions and the related income tax effects:
<TABLE>
<CAPTION>
1997 1996
$000 $000
(Except per ADS data)
- -----------------------------------------------------------------------------
<S> <C> <C>
Total revenue 3,352,091 3,496,613
- -----------------------------------------------------------------------------
Net earnings 49,477 45,087
- -----------------------------------------------------------------------------
Net earnings per ADS $0.86 $0.86
- -----------------------------------------------------------------------------
</TABLE>
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the acquisitions
been made as of those dates or of results which may occur in the future.
6. Foreign Operations
The following table indicates the relative amounts of revenue, earnings from
operations and identifiable assets of the Company by geographic area, during the
three years ended March 31, 1997:
<TABLE>
<CAPTION>
1997 1996 1995
$000 $000 $000
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
United States 1,377,101 938,622 702,565
Europe 555,555 246,145 65,917
Other international 168,391 55,537 33,714
- ----------------------------------------------------------------------------------
Consolidated revenue 2,101,047 1,240,304 802,196
- ----------------------------------------------------------------------------------
EARNINGS FROM
OPERATIONS:
United States 64,691 73,821 67,629
Europe 30,545 20,215 2,837
Other international 6,626 2,119 1,084
- ----------------------------------------------------------------------------------
Consolidated earnings
from operations 101,862 96,155 71,550
- ----------------------------------------------------------------------------------
IDENTIFIABLE ASSETS:
United States 1,461,218 612,428 535,104
Europe 817,089 434,122 61,682
Other international 180,783 44,371 27,748
- ----------------------------------------------------------------------------------
2,459,090 1,090,921 624,534
Corporate assets 269 635 10,780
- ----------------------------------------------------------------------------------
Consolidated assets 2,459,359 1,091,556 635,314
- ----------------------------------------------------------------------------------
</TABLE>
Other international includes Canada, Latin America and Australasia. Corporate
assets are those assets maintained for general purposes, principally cash and
cash equivalents and short-term investments.
7. Income Taxes
Earnings before income taxes for U.S. based and non-U.S. based operations for
the three years ended March 31, 1997 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$000 $000 $000
- --------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. based (4,713) 43,501 50,386
Non-U.S. based 72,590 31,088 13,422
- --------------------------------------------------------------------------
Total 67,877 74,589 63,808
- --------------------------------------------------------------------------
</TABLE>
30
<PAGE> 17
The provision for income taxes for the three years ended March 31, 1997 was
allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$000 $000 $000
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for income
taxes before extra-
ordinary item 25,522 28,241 24,761
Tax benefit from
extraordinary loss on
early extinguishment
of debt (349) (691) --
- -----------------------------------------------------------------------------------
Total provision for
income taxes 25,173 27,550 24,761
- -----------------------------------------------------------------------------------
</TABLE>
The provision for income taxes before the extraordinary item for the three years
ended March 31, 1997 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$000 $000 $000
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. INCOME TAX
Current (4,848) 13,345 10,841
Deferred 7,438 7,142 9,260
- -----------------------------------------------------------------------------------
Total U.S. tax provision 2,590 20,487 20,101
- -----------------------------------------------------------------------------------
EUROPE INCOME TAX
Current 20,298 6,831 4,600
Deferred 40 485 (180)
- -----------------------------------------------------------------------------------
Total Europe
tax provision 20,338 7,316 4,420
- -----------------------------------------------------------------------------------
OTHER INTERNATIONAL
INCOME TAX
Current 3,059 438 560
Deferred (465) -- (320)
- -----------------------------------------------------------------------------------
Total other international
tax provision 2,594 438 240
- -----------------------------------------------------------------------------------
TOTAL PROVISION FOR
INCOME TAXES
BEFORE EXTRA-
ORDINARY ITEM 25,522 28,241 24,761
- -----------------------------------------------------------------------------------
</TABLE>
A reconciliation of the U.K. statutory corporate rate to the effective rate is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
$000 $000 $000
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax charge at standard
U.K. rate 33% 22,399 24,614 21,057
Profits taxed at other
than standard U.K. rate (2,962) 3,142 2,645
Goodwill amortization
and other permanent
differences 6,085 485 1,059
- -----------------------------------------------------------------------------------
Provision for income taxes
before extraordinary item 25,522 28,241 24,761
- -----------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that comprise the elements of deferred
tax at March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
$000 $000
- -----------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accrued expenses not deducted
for tax purposes 14,063 2,678
Reserves for inventory and
accounts receivable not
deducted for tax purposes 7,160 5,760
Restructuring charges not
deducted for tax purposes 4,963 --
Inventory costs capitalized for
tax purposes 8,755 3,110
Tax loss carryforwards 10,659 11,965
Other 382 --
- -----------------------------------------------------------------------------------
Total gross deferred tax assets 45,982 23,513
Valuation allowance (10,659) (11,965)
- -----------------------------------------------------------------------------------
Net deferred tax assets 35,323 11,548
- -----------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Leases (65,970) (37,487)
Depreciation (221) (3,718)
- -----------------------------------------------------------------------------------
Total gross deferred tax liabilities (66,191) (41,205)
- -----------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY (30,868) (29,657)
- -----------------------------------------------------------------------------------
</TABLE>
The valuation allowance is primarily attributable to net operating losses and
deferred expenses in certain countries where tax losses presently exist.
U.S. deferred taxation is not provided in respect of liabilities which might
arise on the distribution of other unappropriated income of non-U.S.
subsidiaries because there are no non-U.S. subsidiaries owned by U.S. companies.
31
<PAGE> 18
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. Employee Benefits
Substantially all of the U.S. employees are entitled to participate in the
Profit Sharing Plan (the "Plan") established under Section 401(k) of the U.S.
Internal Revenue Code. Employees are eligible to contribute voluntarily to the
Plan after one year of continued service and attaining age 21. At its
discretion, the Company may contribute 100% of the first 3% and 50% of the next
3% of the employee contribution. Employees are always vested in their
contributed balance and become fully vested in the Company's contributions after
four years of service. The expenses related to contributions to the Plan for the
years ended March 31, 1997, 1996 and 1995 were approximately $3,968,000,
$2,362,000, and $2,035,000, respectively.
Certain non-U.S. employees participate in defined contribution plans with
varying vesting and contribution provisions. The expenses related to these
contributions for the year ended March 31, 1997 were approximately $2,100,000.
In connection with the acquisition of the Kodak Sales and Services Business,
the Company acquired the pension obligations of certain non-U.S. employees from
Kodak. The Company is currently remeasuring the acquired pension benefit
obligation and the fair value of the plan assets as of December 31, 1996 to
accurately record the pension obligation in the allocation of the purchase
price.
In fiscal 1997, the Company established a Supplemental Executive Retirement Plan
("SERP") to provide additional income for certain of its U.S. executives upon
retirement. Contributions to the SERP are at the discretion of the Company, and
were $435,500 for the year ended March 31, 1997.
9. Share Option Plans
In fiscal 1997, the Company established two new share option plans, The Danka
1996 Share Option Plan and The Danka 1996 Non-employee Directors Share Option
Plan (the "Plans"). The Plans authorize the granting of both incentive and
non-incentive share options for an aggregate of 22,500,000 Ordinary Shares
(5,625,000 ADS equivalents). Under all existing Plans, options are granted at
prices not less than market value on the date of grant, and the maximum term of
an option may not exceed ten years. Share options generally become vested after
a period of three years subsequent to the date of the grant. At March 31, 1997,
a total of 3,975,639 options were vested under the old and new plans.
Transactions during the three years ended March 31, 1997 were as follows:
<TABLE>
<CAPTION>
Number of Exercise price
Ordinary Shares in pence
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance outstanding at
March 31, 1994 8,212,331 12.50 - 335.00
Granted 834,500 271.66 - 377.66
Exercised (1,738,332) 12.50 - 46.17
Canceled (249,000) 217.92 - 299.66
- ---------------------------------------------------------------------------------------------------------------------------
Balance outstanding at
March 31, 1995 7,059,499 12.50 - 377.66
Granted 1,479,373 378.67 - 699.00
Exercised (1,850,268) 12.50 - 74.25
Canceled (90,500) 307.00 - 351.33
- ---------------------------------------------------------------------------------------------------------------------------
Balance outstanding at
March 31, 1996 6,598,104 12.50 - 699.00
Granted 3,868,294 359.67 - 780.00
Exercised (764,802) 12.50 - 439.67
Canceled (271,500) 286.00 - 459.00
- ---------------------------------------------------------------------------------------------------------------------------
Balance outstanding at
March 31, 1997 9,430,096 26.13 - 780.00
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company accounts for these Plans under APB Opinion No. 25, under which no
compensation cost has been recognized. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Had compensation cost for these
Plans been determined consistent with Statement No. 123, the Company's net
earnings and net earnings per ADS would have been reduced to the following
unaudited pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
$000 $000
(Except per ADS data)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net earnings--as reported 41,777 45,215
Net earnings--pro forma 34,903 43,585
Net earnings per ADS--as reported $ 0.72 $ 0.88
Net earnings per ADS--pro forma $ 0.60 $ 0.85
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated using the Black-Scholes option
pricing model. The following assumptions were used in determining the fair value
of each option grant: dividend yield of .42%; expected volatility of 113.7%;
expected option life of 5 years; and the five-year risk-free rate at the time of
each grant (5.3%-7.0%).
The effects of applying Statement No. 123 in this pro forma disclosure are not
indicative of future amounts.
32
<PAGE> 19
10. Commitments, Contingencies and Related
Party Transactions
Leases: The Company is obligated under various noncancelable operating leases
for its office facilities, office equipment and vehicles. Future noncancelable
lease commitments as of March 31, 1997, are as follows:
<TABLE>
<CAPTION>
Year ending March 31 $000
- ---------------------------------------------------------------------------------------------------------------------------
<C> <C>
1998 76,310
1999 48,424
2000 35,077
2001 22,765
2002 15,296
Thereafter 20,202
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rental expense for fiscal years ended March 31, 1997, 1996 and 1995 was
approximately $53,509,000, $22,993,000, and $14,237,000, respectively.
Kodak Commitments: In connection with the acquisition of the Kodak Sales and
Services Business, Kodak and 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 remanufactured by Kodak. The most significant of
these agreements require the Company to purchase from Kodak various levels of
equipment and related parts and supplies over the next five years. In addition,
the Company entered into an agreement to contribute a total of $175.0 million
(plus an additional $30.0 million upon the achievement of identified milestones)
to Kodak for their ongoing research and development for new electrophotographic
products through December 31, 2002.
Lease Commitments: Subsequent to March 31, 1997, Danka Holding Company ("DHC"),
a U.S. subsidiary of the Company, extended the operating lease agreement (the
"Agreement"), to December 2002. The Agreement provides for DHC to lease certain
real property in the U.S. The Agreement generally provides for DHC to pay
property taxes, maintenance, insurance, and certain other operating costs of
the leased properties. The leases covered by the Agreement provide for a
residual guarantee by DHC at the end of the initial lease term, which has not
been included in the table of future noncancelable lease commitments. The
Agreement also includes purchase and renewal options at fair market values. DHC
has the right to exercise a purchase option on the properties at the end of the
lease term, or the properties can be sold to third parties. DHC expects the
fair market value of the properties, subject to the purchase option or sale to
third parties, to substantially reduce or eliminate DHC's payment under the
residual value guarantee. DHC is obligated to pay the difference between the
maximum amount of the residual guarantee and the fair market value at the
termination of each lease under the Agreement. The maximum residual guarantee
relative to the properties covered by the Agreement is equal to the total cost
of the properties leased under the Agreement, which was approximately $26.9
million at March 31, 1997.
Related Party Transactions: The Company remains contingently liable for the
repayment of $958,000 of Industrial Revenue Bonds used to finance the
construction of its corporate office in St. Petersburg, Florida. The obligation
was assumed by a company controlled by the Chief Executive when it acquired the
corporate office building. The Company leases its corporate office and three
other offices owned by companies in which the Chief Executive has a significant
interest. The above arrangements were entered into prior to the acquisition
agreement dated December 1986 whereby Danka Business Systems PLC purchased Danka
Industries, Inc. ("Danka"). For the years ended March 31, 1997, 1996 and 1995,
Danka was charged $748,000, $689,000 and $768,000, respectively, for rent due
under these leases. The leases expire at various dates, with the last lease
expiring in December 2003.
Litigation: The Company is subject to legal proceedings and claims which arise
in the ordinary course of its business. Management believes that the resolution
of such matters will not have a material effect upon the Company's financial
position or future results of operations.
11. Restructuring Charges
In the third quarter of fiscal 1997, the Company finalized a plan to integrate
the acquisition of the Kodak Sales and Services Business and the Company's
related transition to the Market Based Approach in North America. The
restructuring consists of a series of planned actions, including a reduction in
the number of employees, consolidation of offices and facilities, and the
write-off of certain leasehold improvements and other fixed assets. Charges
related to the integration of the Kodak Sales and Service Business consist
mainly of costs associated with the planned closure of certain of the Company's
facilities which are duplicative of some acquired facilities. In connection
with these actions, the Company recorded a restructuring charge of $35,000,000
in the third quarter of fiscal 1997. These charges reduced net earnings by
approximately $21,840,000 or $0.38 per ADS.
33
<PAGE> 20
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The restructuring charge reflects $8,615,000 for severance and other termination
benefits, $18,858,000 for lease settlement costs associated with the
consolidation of duplicate facilities, and $7,527,000 for the write-off of
leasehold improvements and other fixed assets. Of the initial restructuring
charges, at March 31, 1997, $23,120,000 remained in accrued liabilities,
comprised of $4,193,000 for the remaining reduction of the workforce,
$17,235,000 for the closing of duplicate facilities, and $1,692,000 for the
write-off of leasehold improvements and other fixed assets. Management
anticipates that the remaining restructuring actions will be completed by the
third quarter of fiscal 1998.
For the year ended March 31, 1996, the Company recorded a similar charge of
$8,500,000 which was fully utilized.
12. Financial Instruments
Fair Value of Financial Instruments: At March 31, 1997, the carrying values of
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses, and other notes payable approximated fair value due to the short-term
maturities of these assets and liabilities. The estimated fair market value of
the Company's $200.0 million 6.75% Convertible Subordinated Notes at March 31,
1997 was approximately $242.0 million, based on the quoted market price of the
Notes. The estimated fair market value at March 31, 1997 of the Company's Credit
Agreement approximated the carrying amount of the debt, due to the short-term
maturities of the individual components of the debt.
Foreign Currency Instruments: From time to time, the Company enters into forward
and option contracts to manage its exposure to fluctuations in foreign currency
exchange rates on specific transactions. Foreign exchange forward contracts are
legal agreements between two parties to purchase and sell a foreign currency,
for a price specified at the contract date. The fair value of foreign exchange
forward contracts is estimated by obtaining quotes for futures contracts with
similar terms, adjusted where necessary for maturity differences. To hedge its
foreign currency exposure, the Company also purchases foreign exchange options
which permit, but do not require, the Company to exchange foreign currencies at
a future date with another party at a contracted exchange rate. The fair value
of foreign exchange options is estimated using active exchange quotations. At
March 31, 1997, there were no outstanding forward contracts or option contracts
to buy or sell foreign currency. For the year ended March 31, 1997, gains and
losses realized on forward contracts and option contracts were not material.
Under the Company's Credit Agreement, it is required to enter into arrangements
that provide protection from the volatility of variable interest rates for a
portion of the outstanding principle balance on the Credit Agreement. To fulfill
this obligation, the Company has utilized interest rate swap agreements to
eliminate the impact of interest rate changes on certain variable rate principle
balances outstanding under the Credit Agreement. The Company entered into
interest rate swap agreements with three financial institutions in March 1997,
effectively converting two variable rate principle balances to fixed rates for a
period of two years. Therefore, at March 31, 1997, the Company maintained
interest rate swaps on principal/notional amounts of DEM85.0 million ($51.0
million) and NLG95.3 million ($50.8 million), with weighted average fixed rates
of approximately 4.4%.
The Company's financial instruments involve, to varying degrees, elements of
exchange risk in excess of the amounts which would be recognized in the
Consolidated Balance Sheet. Exposure to foreign currency contracts results from
fluctuations in currency rates during the periods in which the contracts are
outstanding. Additionally, these contracts contain an element of credit risk to
the extent of nonperformance by the counterparties. The Company minimizes such
risk by limiting the counterparties to a group of major international banks, and
does not expect to record any losses as a result of nonperformance by these
counterparties.
34
<PAGE> 21
13. Quarterly Financial Data (unaudited)
The following table presents selected quarterly financial data for the periods
indicated:
<TABLE>
<CAPTION>
June 30 September 30 December 31 March 31
$000 $000 $000 $000
(Except per ADS data)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1997
Revenue 401,955 420,528 441,146 837,418
Gross profit 159,079 168,038 172,822 319,464
Net earnings (loss) 14,331 14,397 (5,916)(a)(b) 18,965
Net earnings (loss) per ADS $ 0.25 $ 0.25 $ (0.10)(a)(b) $ 0.33
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal 1996
Revenue 249,014 273,813 333,841 383,636
Gross profit 99,818 112,198 132,829 151,804
Net earnings 10,857 12,447 7,949(c) 13,962(d)
Net earnings per ADS $ 0.22 $ 0.25 $ 0.16(c) $ 0.26(d)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the effect of a restructuring charge of $35.0 million or $0.38
per ADS.
(b) Includes the effect of an extraordinary loss of $0.6 million or $0.01 per
ADS due to the early extinguishment of debt.
(c) Includes the effect of a restructuring charge of $8.5 million or $0.10 per
ADS.
(d) Includes the effect of an extraordinary loss of $1.1 million or $0.02 per
ADS due to the early extinguishment of debt.
INDEPENDENT AUDITORS' REPORT
To the Members of Danka Business Systems PLC
We have audited the consolidated balance sheets of Danka Business Systems PLC
and subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
years in the three-year period ended March 31, 1997. These consolidated
financial statements are the responsibility of the group's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom and the United States. Those standards 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. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly in all material respects the financial position of Danka Business Systems
PLC and subsidiaries as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1997 in conformity with generally accepted accounting principles
in the United States.
KPMG Audit Plc
Chartered Accountants
Registered Auditors
London, England May 12, 1997
35
<PAGE> 22
DIRECTORS & OFFICERS
Executive Directors
Mark A. Vaughan-Lee
Chairman
Dan M. Doyle
Chief Executive
David C. Snell
Chief Operating Officer and Finance Director
Non-Executive Directors
Pierson M. Grieve(2)(3)
Pierson Grieve was appointed a non-executive director in 1996. He previously
served as Chairman and Chief Executive Officer of Ecolab Inc. until December
1995. He also serves as a director of US West, Inc., Norwest Corporation, St.
Paul Companies, Inc., and Meredith Corporation.
David S. Hooker(1)(2)(3)
David Hooker was appointed a non-executive director in 1985. He is the Chairman
of Goshawk Insurance Holdings PLC and is also a non-executive director of
Oceaneering International, Inc. He was Managing Director of Aberdeen Petroleum
PLC until June 1993 and Chairman of Bakyrchik Gold PLC until December 1995.
David W. Kendall(1)(2)(3)
David Kendall was appointed a non-executive director in 1993. He is Chairman of
Whitecroft PLC, Ruberoid PLC, Blagden Industries PLC, Celtic Energy Ltd. and
Wagon Industrial Holdings PLC and a non-executive director of Gowrings PLC.
Keith J. Merrifield(1)(2)(3)
Keith Merrifield was appointed a non-executive director in January 1997. He
previously served as Group Marketing Director and Director of International
Operations at Wellcome plc until June 1995. He also currently serves as a
director of British Biotech plc and Coats Viyella plc.
James F. White, Jr.(1)(3)
James White was appointed a non-executive director in 1994. He serves as counsel
to the law firm of Shumaker, Loop & Kendrick, Toledo, Ohio and is currently a
director of Arbor Health Care Company and a non-executive director of numerous
private companies. He was previously an executive director of Checkers Drive-in
Restaurants, Inc.
Officers
Mark A. Vaughan-Lee
Chairman
Dan M. Doyle
Chief Executive
David C. Snell
Chief Operating Officer and Finance Director
Paul G. Dumond
Corporate Secretary
William T. Freeman
Chief Financial Officer
Paul T. Kattman
President, Wholesale Operations
Edward J. Marino
President, Danka Imaging Services
Peter G. Meier
President, Danka Office Imaging
Paul M. Natale
Vice President, Corporate Integration
Martin G. St. Quinton
Chief Executive, Danka International
R. Paul Umberg
President, North American Retail Operations
(1)Member of the Audit Committee
(2)Member of the Human Resources Committee
(3)Member of the Nominations Committee
36
<PAGE> 1
Exhibit 21
DANKA BUSINESS SYSTEMS PLC
LIST OF CURRENT SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
STATE/COUNTRY OF
SUBSIDIARY NAME INCORPORATION
--------------- -------------
<S> <C>
Newcourt Natural Resources Oil and Gas Company England
Dankalux Sarl Luxembourg
Danka Business Finance Ltd. Canada
Danka Holding Company Nevada
Danka Business Systems, Inc. Florida
Danka Corporation Nevada
Omnidex Corporation Nevada
Danka Wholesale Inc. Florida
Danka Office Imaging Company Delaware
KIS Imaging Services, Inc. Delaware
Danka Europe B.V. Holland
Danka SpA Italy
Danka France Holding Sarl France
Danka Benelux NV/SA Belgium
Danka Deutschland Holding GmbH Germany
Danka Denmark A/S Holding Denmark
Danka Holdings Sweden AB Sweden
Danka Holding Iberia SA Spain
Danka Holdings SA Switzerland
Danka Australasia Pty. Ltd. Australia
Danka Holdings Mexico S. de R.L. de C.V. Mexico
Danka Participacoes Ltda. Brazil
Danka Europe Ltd. England
Danka U.K. Holdings Ltd. England
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Members of Danka Business Systems PLC:
We consent to incorporation by reference in the registration statements (Nos.
33-75468, 33-75474 and 33-18615) on Form S-8, and (Nos. 33-95898, 33-94596 and
333-8455) on Form S-3 of Danka Business Systems PLC of our report dated May 12,
1997, relating to the consolidated balance sheets of Danka Business Systems PLC
and subsidiaries as of March 31, 1997 and 1996, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1997, and related schedules,
which report appears in the March 31, 1997 annual report on Form 10-K of Danka
Business Systems PLC.
KPMG Audit Plc
Chartered Accountants
Registered Auditors
May 12, 1997 London, England
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1997 FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 73,875
<SECURITIES> 0
<RECEIVABLES> 847,258
<ALLOWANCES> 27,853
<INVENTORY> 488,931
<CURRENT-ASSETS> 1,449,598
<PP&E> 522,703
<DEPRECIATION> 123,866
<TOTAL-ASSETS> 2,459,359
<CURRENT-LIABILITIES> 880,742
<BONDS> 1,059,823
0
0
<COMMON> 4,734
<OTHER-SE> 460,997
<TOTAL-LIABILITY-AND-EQUITY> 2,459,359
<SALES> 2,101,047
<TOTAL-REVENUES> 2,101,047
<CGS> 1,281,644
<TOTAL-COSTS> 1,281,644
<OTHER-EXPENSES> 717,541<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33,985
<INCOME-PRETAX> 67,877
<INCOME-TAX> 25,522
<INCOME-CONTINUING> 42,355
<DISCONTINUED> 0
<EXTRAORDINARY> 578
<CHANGES> 0
<NET-INCOME> 41,777
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0
<FN>
<F1>Includes $35,000 restructuring charge.
</FN>
</TABLE>
