<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________ TO
_______________
Commission file number: 0-20828
DANKA BUSINESS SYSTEMS PLC
________________________________________________________________________________
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ENGLAND 98-0052869
_______________________________________ ______________________________________
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11201 DANKA CIRCLE NORTH
ST. PETERSBURG, FLORIDA 33716
________________________________________ _____________________________________
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 813-576-6003
NOT APPLICABLE
________________________________________________________________________________
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The registrant had 227,428,365 Ordinary Shares outstanding as of December 31,
1997.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL
INFORMATION Page
----
<S> <C>
Item 1 - Consolidated Financial Statements
Consolidated Statements of Earnings for the three months ended
December 31,1997 and 1996 (Unaudited) 3
Consolidated Statements of Earnings for the nine months ended
December 31, 1997 and 1996 (Unaudited) 4
Condensed Consolidated Balance Sheets as of December 31, 1997
(Unaudited) and March 31, 1997 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended December 31, 1997 and 1996 (Unaudited) 6
Consolidated Statement of Shareholders' Equity for the nine months
ended December 31, 1997 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited)
8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities 20
Item 3 - Defaults upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 21
Signature 23
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER AMERICAN DEPOSITARY SHARE ("ADS") AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-----------------------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
- -------------------------------------------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE:
Retail equipment sales $ 247,320 $ 159,313
Retail service, supplies and rentals 523,864 217,177
Wholesale 71,792 64,656
- -------------------------------------------------------- ------------------- -------------------
Total revenue 842,976 441,146
- -------------------------------------------------------- ------------------- -------------------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 169,804 99,360
Retail service, supplies and rental costs 308,416 115,835
Wholesale costs of revenue 58,648 53,129
Selling, general and administrative expenses 261,242 134,233
Amortization of intangible assets 6,791 5,165
Research and development costs 12,501 --
Restructuring charges 11,000 35,000
- -------------------------------------------------------- ------------------- -------------------
Total costs and operating expenses 828,402 442,722
- -------------------------------------------------------- ------------------- -------------------
EARNINGS (LOSS) FROM OPERATIONS 14,574 (1,576)
Interest expense and other, net 15,168 6,978
- -------------------------------------------------------- ------------------- -------------------
LOSS BEFORE INCOME TAXES (594) (8,554)
Provision for income taxes (221) (3,216)
- -------------------------------------------------------- ------------------- -------------------
LOSS BEFORE EXTRAORDINARY ITEM (373) (5,338)
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit (1996: $349) -- 578
- -------------------------------------------------------- ------------------- -------------------
NET LOSS $ (373) $ (5,916)
- -------------------------------------------------------- =================== ===================
BASIC LOSS PER ADS:
Loss before extraordinary item $ (0.01) $ (0.09)
Extraordinary item -- (0.01)
- -------------------------------------------------------- ------------------- -------------------
Net loss per ADS $ (0.01) $ (0.10)
- -------------------------------------------------------- ------------------- -------------------
Weighted average ADSs 56,847 56,555
DILUTED LOSS PER ADS:
Loss before extraordinary item $ (0.01) $ (0.09)
Extraordinary item -- (0.01)
- -------------------------------------------------------- ------------------- -------------------
Net loss per ADS $ (0.01) $ (0.10)
- -------------------------------------------------------- ------------------- -------------------
Weighted average ADSs 56,847 56,555
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER AMERICAN DEPOSITARY SHARE ("ADS") AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-----------------------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
- -------------------------------------------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE:
Retail equipment sales $ 732,774 $ 464,555
Retail service, supplies and rentals 1,579,327 622,450
Wholesale 197,226 176,624
- -------------------------------------------------------- ------------------- -------------------
Total revenue 2,509,327 1,263,629
- -------------------------------------------------------- ------------------- -------------------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 484,328 287,332
Retail service, supplies and rental costs 933,418 331,067
Wholesale costs of revenue 159,783 145,291
Selling, general and administrative expenses 759,921 393,849
Amortization of intangible assets 16,143 14,466
Research and development costs 37,503 --
Restructuring charges 11,000 35,000
- -------------------------------------------------------- ------------------- -------------------
Total costs and operating expenses 2,402,096 1,207,005
- -------------------------------------------------------- ------------------- -------------------
EARNINGS FROM OPERATIONS 107,231 56,624
Interest expense and other, net 47,011 18,843
- -------------------------------------------------------- ------------------- -------------------
EARNINGS BEFORE INCOME TAXES 60,220 37,781
Provision for income taxes 22,402 14,391
- -------------------------------------------------------- ------------------- -------------------
EARNINGS BEFORE EXTRAORDINARY ITEM 37,818 23,390
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit (1996: $349) -- 578
- -------------------------------------------------------- ------------------- -------------------
NET EARNINGS $ 37,818 $ 22,812
======================================================== =================== ===================
BASIC EARNINGS PER ADS:
Earnings before extraordinary item $ 0.67 $ 0.42
Extraordinary item -- (0.01)
- -------------------------------------------------------- ------------------- -------------------
Net earnings per ADS $ 0.67 $ 0.41
- -------------------------------------------------------- ------------------- -------------------
Weighted average ADSs 56,777 56,144
DILUTED EARNINGS PER ADS:
Earnings before extraordinary item $ 0.65 $ 0.41
Extraordinary item -- (0.01)
- -------------------------------------------------------- ------------------- -------------------
Net earnings per ADS $ 0.65 $ 0.40
- -------------------------------------------------------- ------------------- -------------------
Weighted average ADSs 57,897 57,706
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
DANKA BUSINESS SYSTEMS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
- ---------------------------------------------------------------------- -------------------- --------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 49,860 $ 73,875
Accounts receivable, net 650,524 758,903
Inventories 563,804 488,931
Prepaid expenses and other current assets 41,737 39,534
- ---------------------------------------------------------------------- -------------------- --------------------
TOTAL CURRENT ASSETS 1,305,925 1,361,243
Equipment on operating leases, net 280,612 311,069
Property and equipment, net 95,722 87,768
Intangible assets, net 490,373 467,362
Other assets 110,849 125,262
- ---------------------------------------------------------------------- -------------------- --------------------
TOTAL ASSETS $ 2,283,481 $ 2,352,704
- ---------------------------------------------------------------------- ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and notes payable $ 105,192 $ 41,385
Accounts payable 358,650 358,257
Accrued expenses and other current liabilities 309,159 305,296
Deferred revenue 64,395 69,149
- ---------------------------------------------------------------------- -------------------- --------------------
TOTAL CURRENT LIABILITIES 837,396 774,087
Convertible subordinated notes 200,000 200,000
Other long-term debt 703,981 859,823
Deferred income taxes and other long-term liabilities 59,343 53,063
- ---------------------------------------------------------------------- -------------------- --------------------
TOTAL LIABILITIES 1,800,720 1,886,973
- ---------------------------------------------------------------------- ==================== ====================
SHAREHOLDERS' EQUITY:
Ordinary shares, 1.25 pence stated value; 500,000,000
authorized; 227,428,365 and 226,827,049 issued
and outstanding 4,744 4,734
Additional paid-in capital 304,152 301,623
Retained earnings 213,501 186,306
Currency translation adjustment (39,636) (26,932)
- ---------------------------------------------------------------------- -------------------- --------------------
TOTAL SHAREHOLDERS' EQUITY 482,761 465,731
- ---------------------------------------------------------------------- -------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,283,481 $ 2,352,704
- ---------------------------------------------------------------------- ==================== ====================
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
DANKA BUSINESS SYSTEMS PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
- -------------------------------------------------------------------------- ------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 37,818 $ 22,812
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 139,942 57,513
Loss (gain) on sale of property and equipment 1,293 (1,372)
Proceeds from sale of rental equipment 13,403 8,948
Extraordinary item -- 927
Changes in assets and liabilities, net of effects from the purchase of
subsidiaries:
Accounts receivable (21,509) (11,483)
Inventories (81,775) (46,004)
Prepaid expenses and other current assets (2,982) (2,670)
Other noncurrent assets 15,390 (12,653)
Accounts payable 4,305 (19,868)
Accrued expenses (43,407) 17,660
Deferred revenue (2,455) (9,511)
Deferred income taxes and other long-term liabilities (3,126) 4,090
- -------------------------------------------------------------------------- ------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 56,897 8,389
- -------------------------------------------------------------------------- ------------------ ------------------
INVESTING ACTIVITIES
Capital expenditures (129,694) (58,621)
Proceeds from sale of property and equipment 7,999 3,859
Proceeds from settlement of prior year acquisition,
net of (payments) for purchases of subsidiaries 104,024 (795,230)
- -------------------------------------------------------------------------- ------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (17,671) (849,992)
- -------------------------------------------------------------------------- ------------------ ------------------
FINANCING ACTIVITIES
Net (payments) borrowings under line of credit agreements (65,761) 908,261
Principal payments on debt (2,478) (18,040)
Proceeds from stock options exercised 2,539 285
Dividends (4,847) (4,075)
- -------------------------------------------------------------------------- ------------------ ------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (70,547) 886,431
- -------------------------------------------------------------------------- ------------------ ------------------
EFFECT OF EXCHANGE RATES 7,306 (9,044)
- -------------------------------------------------------------------------- ------------------ ------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (24,015) 35,784
Cash and cash equivalents, beginning of period 73,875 38,217
- -------------------------------------------------------------------------- ------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 49,860 $ 74,001
- -------------------------------------------------------------------------- ================== ==================
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL CURRENCY
ORDINARY PAID-IN RETAINED TRANSLATION
SHARES CAPITAL EARNINGS ADJUSTMENT TOTAL
- ------------------------------------ ------------ ------------- -------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1997 $ 4,734 $ 301,623 $ 186,306 $ (26,932) $ 465,731
Net earnings 37,818 37,818
Dividends (10,623) (10,623)
Shares issued under employee
option plan 10 2,529 2,539
Currency translation adjustment (12,704) (12,704)
- ------------------------------------ ------------ ------------- -------------- --------------- ---------------
BALANCES AT DECEMBER 31, 1997 $ 4,744 $ 304,152 $ 213,501 $ (39,636) $ 482,761
- ------------------------------------ ============ ============= ============== =============== ===============
</TABLE>
7
<PAGE> 8
DANKA BUSINESS SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of December 31, 1997,
consolidated statements of earnings for the three months and nine months ended
December 31, 1997 and 1996, the consolidated statement of shareholders' equity
for the nine months ended December 31, 1997, and the consolidated statements of
cash flows for the nine months ended December 31, 1997 and 1996 are unaudited.
In the opinion of management, all adjustments, consisting of normal recurring
accruals, necessary for a fair presentation of the results of operations for the
interim periods presented have been reflected herein. The results of operations
for the interim periods are not necessarily indicative of the results which may
be expected for the entire fiscal year. Certain amounts in the condensed
consolidated balance sheet as of March 31, 1997 have been reclassified to
conform to the current year presentation. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in Danka Business Systems PLC's Annual Report for the
year ended March 31, 1997.
NOTE 2. RESTRUCTURING CHARGES
FISCAL 1998 RESTRUCTURING CHARGE:
In December 1997, the Company recorded an $11.0 million pre-tax restructuring
charge, related to the integration of the Office Imaging division acquired from
Eastman Kodak Company ("Kodak") with Danka's existing sales and service network.
The restructuring charge principally consists of severance and other employee
termination benefits, and will result in the separation of over 1,000 employees
worldwide. These reductions are principally coming from sales support,
administration and management, and are expected to be completed on a worldwide
basis by December 1998.
FISCAL 1997 RESTRUCTURING CHARGE:
In December 1996, the Company recorded a $35.0 million pre-tax restructuring
charge, related to the integration of the Office Imaging division acquired from
Kodak and the related transition to the Company's Market Based Approach in North
America. As of December 31, 1997, approximately $14.4 million remained in
accrued liabilities, primarily for the closing of duplicate facilities. The
closure of these facilities is expected to continue through calendar year 1998.
NOTE 3. PENDING LITIGATION
Following the Company's December 16, 1997 announcement regarding the expected
shortfall in revenue and earnings for the third fiscal quarter and 1998 fiscal
year, purported class action lawsuits were filed in federal court in Florida
against the Company and certain of its directors and officers, alleging
violations of the federal securities laws. The cases are in the early stages and
while it is impossible to predict the outcome or impact of such litigation,
management believes this litigation is without merit and intends to vigorously
defend the lawsuits.
NOTE 4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is effective for annual and interim periods
ending after December 15, 1997. Statement No. 128 requires the dual presentation
of basic and diluted earnings per share ("EPS") for complex capital structures
on the Consolidated Statement of Earnings. Basic EPS is computed by dividing net
earnings by the weighted average number of shares outstanding for the period.
Diluted EPS reflects the potential dilution from the
8
<PAGE> 9
exercise of stock options or the conversion of securities into stock. The
Company has implemented Statement No. 128 for the three months and the nine
months ended December 31, 1997 and December 31, 1996.
The following tables reconcile the numerators and denominators of the basic and
diluted EPS computations:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1997
--------------------------------------------------
(In thousands except per share amounts) INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------------ -------------
<S> <C> <C> <C>
Net loss $ (373)
BASIC LOSS PER ADS:
Income available to shareholders $ (373) 56,847 $ (0.01)
============== ================== =============
</TABLE>
Note: Basic loss per ADS equals diluted loss per ADS due to the net loss
incurred by the Company for the three months ended December 31, 1997.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
DECEMBER 31, 1997
---------------------------------------------------
(In thousands except per share INCOME SHARES PER-SHARE
amounts) (NUMERATOR) (DENOMINATOR) AMOUNT
--------------- ---------------- --------------
<S> <C> <C> <C>
Net earnings $ 37,818
BASIC EARNINGS PER ADS:
Income available to shareholders 37,818 56,777 $ 0.67
==============
EFFECT OF DILUTIVE SECURITIES:
Stock options 1,120
---------------
DILUTED EARNINGS PER ADS:
Income available to shareholders
plus assumed conversion $ 37,818 57,897 $ 0.65
=============== ================ ==============
</TABLE>
The effect of the Company's $200.0 million of Convertible Subordinated Notes are
not included in the computation of diluted EPS for the three months and the nine
months ended December 31, 1997 because they are anti-dilutive.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Danka Business Systems PLC and its Subsidiaries (the "Company") is one
of the world's largest independent suppliers of photocopiers, facsimiles
and other related automated office equipment. The Company primarily markets
these products and related services, parts and supplies on a direct basis
to retail customers. The Company also markets photocopiers, facsimiles, and
related parts and supplies on a wholesale basis to independent dealers. The
Company principally distributes the products of Canon, Kodak, Konica,
Minolta, Ricoh, Sharp and Toshiba. In addition, the Company markets private
label photocopiers and facsimiles and related supplies on a direct basis
under the Company's Infotec trademark, and facsimile equipment under its
dex and Omnifax trademarks. The Company became the exclusive distributor of
Kodak branded photocopiers and printers in December 1996, after completing
the acquisition of the sales, marketing, and equipment service operations
of Kodak's Office Imaging division and outsourcing business. The businesses
are now known as Danka Office Imaging and Danka Services International
(formerly Danka Imaging Services).
The Company's goal is to increase its net margins through certain cost
efficiencies and synergies it expects to achieve by integrating Danka
Office Imaging with the Company's core operations, currently known as Danka
Office Products ("OP"). In September 1997, the Company announced its global
integration project (the "Uniting Danka Project"), with a goal of
accelerating the unification of Danka Office Imaging with Danka Office
Products. The Company chose to accelerate the integration process after
careful consideration of the responses by customers and employees.
Management having received advice from independent consultants, based their
decision to immediately combine the two organizations upon their belief
that an accelerated integration plan was in the long-term best interest of
the Company.
During the second quarter, the Company completed the realignment of its
geographical reporting responsibilities. The organization was split into
two regions: Danka Americas and Danka International. Danka Americas
includes the United States, Canada and Latin America. Danka International
includes Europe, Asia/Pacific and Australia. These geographic regions are
supported by the Company's areas of specialization which operate worldwide,
including Finance & Planning and Markets & Strategy. Management of the
Company was realigned to conform with the organizational changes.
On December 16, 1997 the Company announced that the Uniting Danka
Project was progressing slower than anticipated and that the Company's
accelerated integration plan was impacting its operations and financial
results, and therefore resulting in a shortfall in expected revenue and
earnings. Although the benefits of the combined organization are being
realized slower than initially expected in September 1997, and while there
can be no assurances that such benefits will ultimately be achieved to the
extent that the Company strives to attain them, the Company remains
committed to the complete integration of the two organizations.
The Company is implementing several key projects which are designed with
the goal of maximizing the future benefits of the integration. The first is
the development and transition to a common, global information technology
("IT") system. The Company has been making significant investments in its
information technology and operations infrastructures, including the use of
various independent computer and process improvement consulting groups. The
Company believes that these investments are an important element in its
efforts to successfully integrate the businesses and to provide a solid
foundation for future growth. The Company's goal is to link the sales,
service, billing and finance efforts electronically, with the goal of
providing better service to its customers as well as improving
communication to and support of its employees. As previously announced, the
Company expects to incur an additional $4-5 million during the fourth
quarter related to the acceleration of its move to a single IT system. The
final stages of the transition of Danka OP to the Foresight system was
completed in December 1997, and the transition of the Office Imaging
business is expected to be complete by the end of calendar 1998. The second
project is the consolidation of real estate. The Company expects to
generate savings through the closure of duplicate
10
<PAGE> 11
facilities and is currently in the process of consolidating and
centralizing its U.S. dispatch call centers. The closure of real estate
throughout the Company is expected to be completed by the end of calendar
1998. Finally, as announced in December 1997, the Company estimates it will
eliminate more than 1,000 positions to improve efficiencies and maximize
productivity. By the end of January 1998, the Company had reduced the
workforce by approximately one third of these positions, and expects the
balance of the 1,000 plus reductions to be completed by December 1998. The
reductions in the workforce are principally coming from sales support,
administration and management. The Company believes these projects are
essential to the future success of the Company's integration plan and
remains confident that the Company can successfully meet the challenges
currently facing it.
Following the Company's December 16, 1997 announcement regarding the
expected shortfall in revenue and earnings for the third quarter and 1998
fiscal year, purported class action lawsuits were filed in federal court
against the Company and certain of its directors and officers, alleging
violations of the federal securities laws. The cases are in the early
stages and while it is impossible to predict the outcome and impact of such
litigation, management believes this litigation is without merit and
intends to vigorously defend the lawsuits.
The Company has completed numerous acquisitions throughout its history.
The acquisition of the Office Imaging business and Danka Services
International, which is expected to add over $1.5 billion in annual
revenue, was the Company's largest to date. The acquisition was completed
on December 31, 1996 and added over 300 new locations in more than 15 new
countries, and approximately 10,000 employees. The Company's historical
level of acquisition activity is expected to be limited in the near future
as the Company concentrates on the integration of Danka Office Imaging with
Danka OP.
11
<PAGE> 12
The following table sets forth for the periods indicated the
percentage of total revenue represented by certain items in the Company's
Consolidated Statements of Earnings:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, DECEMBER 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Retail equipment sales.............. 29.4% 36.1% 29.2% 36.8%
Retail service, supplies and rentals 62.1 49.2 62.9 49.2
Wholesale........................... 8.5 14.7 7.9 14.0
---- ---- --- ---
Total revenue................... 100.0 100.0 100.0 100.0
Cost of revenue....................... 63.7 60.8 62.9 60.4
---- ---- --- ---
Gross profit.......................... 36.3 39.2 37.1 39.6
Selling, general and administrative
expenses............................ 31.0 30.4 30.3 31.2
Amortization of intangible assets..... 0.8 1.2 0.6 1.1
Research and development costs........ 1.5 -- 1.5 --
Restructuring charges................. 1.3 7.9 0.4 2.8
---- ---- --- ---
Earnings (loss) from operations. 1.7 (0.3) 4.3 4.5
Interest expense and other, net....... 1.8 1.6 1.9 1.5
---- ---- --- ---
Earnings (loss) before income
taxes......................... (0.1) (1.9) 2.4 3.0
Provision for income taxes............ -- (0.7) 0.9 1.2
---- ---- --- ---
Earnings (loss) before
extraordinary item............ (0.1) (1.2) 1.5 1.8
Extraordinary item - loss on early
extinguishment of debt, net of
tax benefit................... -- 0.1 -- --
---- ---- --- ---
Net earnings (loss).............. (0.1)% (1.3)% 1.5% 1.8%
===== ===== === ===
</TABLE>
The following table sets forth for the periods indicated the gross
profit margin percentage for each of the Company's revenue classifications:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
DECEMBER 31, DECEMBER 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retail equipment sales............... 31.3% 37.6% 33.9% 38.1%
Retail service, supplies and rentals. 41.1 46.7 40.9 46.8
Wholesale............................ 18.3 17.8 19.0 17.7
</TABLE>
QUARTER ENDED DECEMBER 31, 1997 COMPARED TO QUARTER ENDED DECEMBER 31,
1996:
Revenue
Revenue increased 91% to $843.0 million for the three months ended
December 31, 1997 ("third quarter of fiscal 1998") compared to $441.1
million for the three months ended December 31, 1996 ("third quarter of
fiscal 1997"). The increase resulted from significant contributions from
acquisitions, principally the Office Imaging and outsourcing businesses. In
addition, the Company's revenue mix has significantly changed due to the
acquisition of the Office Imaging and outsourcing businesses. The acquired
businesses generate a higher percentage of revenue from service, supplies
and rentals compared to the Company's core operations. As a percentage of
total revenue, retail equipment and wholesale sales declined, as retail
service, supplies and rentals have increased. The Company's current revenue
mix is expected to continue in the future.
12
<PAGE> 13
An increasing amount of the Company's revenue is generated in
countries outside of the United States. Due to the strength of the U.S.
dollar against certain foreign currencies, the Company's revenue
comparisons were negatively impacted by approximately $32.0 million during
the third quarter of fiscal 1998.
Gross Profit
Gross profit increased 77% to $306.1 million for the third quarter
of fiscal 1998 from $172.8 million for the third quarter of fiscal 1997.
The gross profit margin as a percentage of total revenue decreased to 36.3%
for the third quarter of fiscal 1998 from 39.2% for the third quarter of
fiscal 1997. The decrease in the Company's gross profit margin was
primarily due to two factors. First, the decrease was related to the
acquisition of the Office Imaging and outsourcing businesses which have
lower individual gross profit margins than the Company's traditional
business. Second, the gross profit margin was affected by a $10.0 million
provision taken for the anticipated shortfall in equipment purchases under
the Kodak multi-year supply agreements. Gross profit as a percentage of
retail equipment sales decreased to 31.3% for the third quarter of fiscal
1998 from 37.6% for the third quarter of fiscal 1997. The decrease was due
to the factors discussed above and to the higher mix of high-volume
equipment being sold. The Company's high-volume equipment sales generate a
lower gross profit margin than the Company's other equipment sales. As a
percentage of revenue, the gross profit margin on retail service, supplies
and rentals decreased to 41.1% for the third quarter of fiscal 1998 from
46.7% for the third quarter of fiscal 1997 due to the acquisition of the
Office Imaging and outsourcing businesses which have lower individual gross
profit margins. Danka Services International, the Company's outsourcing
operations, has significantly lower gross profit margins due to the nature
of the business, and as it continues to grow, this business is expected to
impact the Company's overall gross profit margin. The Company's wholesale
gross profit margin increased to 18.3% for the third quarter of fiscal 1998
from 17.8% for the third quarter of fiscal 1997 primarily due to stronger
margins on the Company's private label sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 95% to $261.2
million for the third quarter of fiscal 1998. The increase is primarily
related to acquisitions made last year, principally the acquisition of the
Office Imaging and outsourcing businesses. As a percentage of revenue,
selling, general and administrative expenses increased to 31.0% for the
third quarter of fiscal 1998 from 30.4% for the third quarter of fiscal
1997. This increase is principally related to investments and costs
associated with the Company's Uniting Danka Project.
Amortization of Intangible Assets
Amortization of intangible assets increased to $6.8 million for the
third quarter of fiscal 1998 from $5.2 million for the third quarter of
fiscal 1997. The increase is principally related to goodwill associated
with the acquisition of the Office Imaging and outsourcing businesses.
Research and Development Costs
In connection with the acquisition of the Office Imaging and
outsourcing businesses, the Company is providing funding to Kodak for
ongoing research and development through December 31, 2002. For the third
quarter of fiscal 1998, research and development costs totaled $12.5
million.
Restructuring Charges
The Company recorded an $11.0 million pre-tax restructuring charge
during the third quarter of fiscal 1998, principally related to the
integration of the Office Imaging and outsourcing businesses. The
restructuring charge principally consists of severance and other employee
termination benefits. Similarly, in
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<PAGE> 14
the third quarter of fiscal 1997, the Company recorded a $35.0 million
pre-tax restructuring charge related to the integration of the Office
Imaging and outsourcing businesses and to the transition to the Company's
Market Based Approach in North America.
Earnings from Operations
Earnings from operations increased to $14.6 million for the third
quarter of fiscal 1998 from a $1.6 million operating loss for the third
quarter of fiscal 1997. Earnings from operations for the third quarter of
fiscal 1998 were impacted by the $11.0 million pre-tax restructuring
charge, the $10.0 million provision for the anticipated shortfall in
equipment purchases, the $12.5 million in research and development costs
and the higher levels of selling, general and administrative expenses. The
operating loss for the third quarter of fiscal 1997 was principally related
to the $35.0 million pre-tax restructuring charge related to the
integration of the Office Imaging and outsourcing businesses and to the
transition to the Company's Market Based Approach in North America. As a
percentage of revenue, earnings from operations for the third quarter of
fiscal 1998 were 1.7%.
Interest Expense and Other, Net
Interest expense increased to $15.2 million for the third quarter of
fiscal 1998 compared to $7.0 million for the third quarter of fiscal 1997.
The increase primarily related to higher levels of borrowings used to
finance the acquisition of the Office Imaging and outsourcing businesses.
Income Taxes
The Company recorded an income tax benefit of $0.2 million for the
third quarter of fiscal 1998 compared to a benefit of $3.2 million for the
third quarter of fiscal 1997. The combined effective income tax rate
decreased to 37.2% for the third quarter of fiscal 1998 as compared with an
effective income tax rate of 37.6% for the third quarter of fiscal 1997.
The rate has decreased due to higher earnings outside of the U.S. for which
the effective tax rates are lower.
Net Loss
As a result of the above factors, the Company incurred a net loss
for the third quarter of fiscal 1998 of $0.4 million compared to a net loss
of $5.9 million for the third quarter of fiscal 1997. The net loss for the
third quarter of fiscal 1998 principally resulted from the $11.0 million
pre-tax restructuring charge, the $10.0 million provision for the
anticipated shortfall in equipment purchases, the $12.5 million in research
and development costs and the higher levels of selling, general and
administrative expenses. The Company also experienced higher levels of
interest expense for the third quarter of fiscal 1998 compared to the third
quarter of fiscal 1997. The third quarter of fiscal 1997 was impacted by
the $35.0 million pre-tax restructuring charge and the extraordinary item.
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER
31, 1996:
Revenue
Revenue increased 99% to $2.509 billion for the nine months ended
December 31, 1997 compared to $1.264 billion for the nine months ended
December 31, 1996. The increase resulted from significant contributions
from acquisitions, principally the Office Imaging and outsourcing
businesses. In addition, the Company's revenue mix has significantly
changed due to the acquisition of the Office Imaging and outsourcing
businesses. The acquired businesses generate a higher percentage of revenue
from service, supplies and rentals compared to the Company's core
operations. As a percentage of total revenue, retail equipment and
wholesale sales declined, as retail service, supplies and rentals
increased. The Company's current revenue mix is expected to continue in the
future.
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<PAGE> 15
As discussed above, the Company's results have been impacted by the
strength of the U.S. dollar against certain foreign currencies. Had
exchange rates remained unchanged from a year ago, the Company's revenue
for the nine months ended December 31, 1997 would have been approximately
$79.0 million higher.
Gross Profit
Gross profit increased 86% to $931.8 million for the nine months
ended December 31, 1997 from $500.0 million for the nine months ended
December 31, 1996. The gross profit margin as a percentage of total revenue
decreased to 37.1% for the nine months ended December 31, 1997 from 39.6%
for the nine months ended December 31, 1996. The decrease was primarily
related to the acquisition of the Office Imaging and outsourcing businesses
which have lower individual gross profit margins than the Company's
traditional business. The gross profit margin was also affected by a $10.0
million provision for the anticipated shortfall in equipment purchases
under the Kodak multi-year supply agreements recorded during the third
quarter of fiscal 1998. Gross profit as a percentage of retail equipment
sales decreased to 33.9% for the nine months ended December 31, 1997 from
38.1% for the nine months ended December 31, 1996. The decrease was due to
the factors discussed above and to the higher mix of high-volume equipment
being sold. The Company's high-volume equipment sales generate a lower
gross profit margin than the Company's other equipment sales. As a
percentage of revenue, the gross profit margin on retail service, supplies
and rentals decreased to 40.9% for the nine months ended December 31, 1997
from 46.8% for the nine months ended December 31, 1996 due to the
acquisition of the Office Imaging and outsourcing businesses which have
lower individual gross profit margins. Danka Services International, the
Company's outsourcing operations, has significantly lower gross profit
margins due to the nature of the business, and as it continues to grow,
this business is expected to impact the Company's overall gross profit
margin. The Company's wholesale gross profit margin increased to 19.0% for
the nine months ended December 31, 1997 from 17.7% for the nine months
ended December 31, 1996 primarily due to stronger margins on the Company's
private label sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased 93% to $760.0
million for the nine months ended December 31, 1997 from $393.8 million for
the nine months ended December 31, 1996. The increase is primarily related
to acquisitions made last year, principally the acquisition of the Office
Imaging and outsourcing businesses. As a percentage of total revenue,
selling, general and administrative expenses decreased to 30.3% for the
nine months ended December 31, 1997 from 31.2% for the nine months ended
December 31, 1996. The decrease is primarily related to the completion of
the Company's transition to the Market Based Approach during the first
quarter of fiscal 1998 which reduced certain duplicative administrative
costs through the centralization of various management and administrative
functions throughout North America.
Amortization of Intangible Assets
Amortization of intangible assets increased to $16.1 million for the
nine months ended December 31, 1997 from $14.5 million for the nine months
ended December 31, 1996. The increase is principally related to goodwill
associated with the acquisition of the Office Imaging and outsourcing
businesses.
Research and Development Costs
In connection with the acquisition of the Office Imaging and
outsourcing businesses, the Company is providing funding to Kodak for
ongoing research and development through December 31, 2002. For the nine
months ended December 31, 1997, research and development costs totaled
$37.5 million.
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<PAGE> 16
Restructuring Charges
The Company recorded an $11.0 million pre-tax restructuring charge
during the third quarter of fiscal 1998, principally related to the
integration of the Office Imaging and outsourcing businesses. The
restructuring charge principally consists of severance and other employee
termination benefits. Similarly, in the third quarter of fiscal 1997, the
Company recorded a $35.0 million pre-tax restructuring charge related to
the integration of the Office Imaging and outsourcing businesses and to the
transition to the Company's Market Based Approach in North America.
Earnings from Operations
Earnings from operations increased 89% to $107.2 million for the
nine months ended December 31, 1997 from $56.6 million for the nine months
ended December 31, 1996. As a percentage of total revenue, earnings from
operations decreased to 4.3% for the nine months ended December 31, 1997
from 4.5% for the nine months ended December 31, 1996. The Company's
earnings from operations for the nine months ended December 31, 1997 were
impacted by the $11.0 million pre-tax restructuring charge, the $10.0
million provision for the anticipated shortfall in equipment purchases and
the $37.5 million in research and development costs. The Company's earnings
from operations for the nine months ended December 31, 1996 were impacted
by the $35.0 million pre-tax restructuring charge taken during the third
quarter of fiscal 1997.
Interest Expense and Other, Net
Interest expense increased to $47.0 million for the nine months
ended December 31, 1997 from $18.8 million for the nine months ended
December 31, 1996. The increase primarily related to higher levels of
borrowings used to finance the acquisition of the Office Imaging and
outsourcing businesses.
Income Taxes
Income taxes increased to $22.4 million for the nine months ended
December 31, 1997 from $14.4 million for the nine months ended December 31,
1996 due to higher levels of earnings before taxes. The combined effective
income tax rate decreased to 37.2% for the nine months ended December 31,
1997 compared with a combined effective income tax rate of 38.1% for the
nine months ended December 31, 1996. The rate has decreased due to higher
levels of earnings outside of the U.S. for which the effective tax rates
are lower.
Net Earnings
Net earnings increased to $37.8 million for the nine months ended
December 31, 1997 from $22.8 million for the nine months ended December 31,
1996. As a percentage of total revenue, net earnings for the nine months
ended December 31, 1997 were 1.5% compared to 1.8% for the nine months
ended December 31, 1996. Net earnings for the nine months ended December
31, 1997 were principally impacted by the $11.0 million pre-tax
restructuring charge, the $10.0 million provision for the anticipated
shortfall in equipment purchases, the $37.5 million in research and
development costs and to higher levels of interest expense. Net earnings
for the nine months ended December 31, 1996 were impacted by the $35.0
million pre-tax restructuring charge and the extraordinary item.
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
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<PAGE> 17
in over 30 countries worldwide, and therefore, fluctuations in exchange
rates between the U.S. dollar and the currencies in each of the countries
in which the Company operates, will affect the results of the Company's
international operations reported in U.S. dollars and the value of such
operations' net assets reported in U.S. dollars. The Company has
significantly increased its international business over the last few years
and most recently, with the acquisition of the Office Imaging and
outsourcing businesses, the Company added 19 new countries. The results of
operations, financial condition and competitive position of the Company's
business are 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 can be adversely affected by
fluctuations in foreign currencies and by translations of the financial
statements of the Company's foreign subsidiaries from local currencies into
U.S. dollars.
The Company purchases a significant amount of its automated office
equipment, related parts and supplies from Japanese manufacturers. The
purchase price for most of these products is denominated in local
currencies and therefore, short term fluctuations in the local currencies
relative to the Japanese yen do not impact the Company's purchase price.
However, if the yen were to strengthen significantly against the U.S.
dollar, this would impact the yen amounts received by the Company's
Japanese manufacturers as they converted the U.S. dollars received from the
Company and other dealers into yen. As a result, these Japanese
manufacturers could raise prices. The Company has historically been
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 are not adjusted until the
contract is renewed.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flow provided by operating activities was
$56.9 million and $8.4 million for the nine months ended December 31, 1997
and 1996, respectively. The Company experiences increases in certain
balance sheet accounts which result primarily from acquisitions as well as
from normal working capital needs. More specifically, the acquisition of
the Office Imaging and outsourcing businesses has impacted several of the
items within the Company's operating cash flow. The Company's inventory
levels increased as a result of requirements to purchase various levels of
equipment pursuant to the multi-year supply agreements ("Supply
Agreements") with Kodak. During the third quarter of fiscal 1998, the
Company recorded a $10.0 million provision for the anticipated shortfall in
equipment purchases under the Supply Agreements. The Company's goal is to
build its high-volume salesforce and to improve the productivity of its
salesforce in an effort to meet the purchasing requirements contained in
the Supply Agreements with Kodak. Cash flow used in investing activities
was $17.7 million and $850.0 million for the nine months ended December 31,
1997 and 1996, respectively. The cash flow from investing activities was
significantly higher for the nine months ended December 31, 1996 due to the
purchase of the Office Imaging and outsourcing businesses. Net cash (used
in) provided by financing activities was $(70.5) million and $886.4 million
for the nine months ended December 31, 1997 and 1996, respectively. The
cash flow provided by financing activities was significantly higher for the
nine months ended December 31, 1996 due to the purchase of the Office
Imaging and outsourcing businesses in which funds were received through the
Company's 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 Office Imaging and outsourcing businesses from
Kodak, to repay the outstanding balance under the Company's previous credit
facility, as well as for ongoing working capital and general corporate
purposes. The Credit Agreement provided the Company with a revolving
component in an aggregate amount of up to $725.0 million, and a term loan
component of $550.0 million. In December 1997, the revolving component was
reduced by $115.0 million to $610.0 million bringing the full capacity of
the Credit Agreement to $1.160 billion. The Company has not needed the full
capacity of the Credit Agreement. 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
17
<PAGE> 18
indebtedness, permitted liens and payment of dividends, as well as
requiring the maintenance of certain financial ratios. As of December 31,
1997 the Company was in compliance with the covenants of the Credit
Agreement. The adjustable interest rate on the Credit Agreement is, at the
option of the Company, either: (i) the applicable InterBank Offered Rate
plus a tiered margin based on leverage for the periods of one, two, three
or six months or (ii) an alternative base rate, consisting of the higher of
the lead bank's prime rate or the Federal Funds Rate plus 0.5%. As of
December 31, 1997 the Credit Agreement had an outstanding balance of
approximately $240.9 million under the revolving component and $516.2
million under the term loan, all of which was incurring interest at a
weighted average rate of 5.7% per annum. Subject to availability under the
covenants at December 31, 1997, the Company had $402.9 million 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 commencing
October 1995. The Notes are not subject to sinking fund requirements.
The Company has a number of other loans and credit facility
arrangements with banks, financial institutions and certain individuals,
which had an aggregate balance of $52.1 million at December 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.
These loans vary widely in terms and conditions.
While the Company does not have any other significant contractual
commitments other than for the purchase of products and 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 Office
Imaging and outsourcing businesses 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 has experienced some seasonality in its business. The
Company's revenue during the fourth quarter has historically been higher
than other quarters of its fiscal year. The Company believes that this has
been due to year-end sales contests and a focus on the finalization of
transactions before year end. There can be no assurance that fourth quarter
results will continue to be higher this fiscal year or in future years. The
Company's European and Canadian operations have historically experienced
lower revenue 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.
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<PAGE> 19
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements contained in this Form 10-Q under "Management's Discussion
and Analysis of Financial Condition and Results of Operations", or otherwise
made by officers of the Company, including statements related to the progress of
and anticipated benefits from the Uniting Danka Project, the Company's ability
to meet challenges it faces, and the Company's future performance, are
forward-looking, and contain information relating to the Company that is based
on the beliefs of management as well as assumptions, made by, and information
currently available to, management. The words "goal", "expect", "believe" and
similar expressions as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such differences include, but are not limited to (i)
the demands that the Office Imaging ("OI") acquisition (the "Acquisition") and
the unification thereof with Danka Office Products ("OP") will place on the
Company's resources, infrastructure, current operations and employees, (ii) the
Company's inability to achieve substantial operating cost reductions and
efficiencies in productivity from the Acquisition, the revised information
technology system, the revised management structure or other similar Company
wide initiatives associated with the unification, (iii) the potential for
unanticipated increases in expenditures for labor, equipment, materials and
supplies required to manage the increased size of the Company as a result of the
Acquisition, (iv) the Company's inability to effectively manage the increased
number of employees and retain current key management personnel and other key
employees added as a result of the Acquisition, who are accustomed to a
different corporate culture, compensation arrangements and benefits programs,
while the Company simultaneously reduces the overall size of its worldwide
workforce, (v) the potential increased costs resulting from technological
developments, revisions to existing information technology systems and the
integration of information technologies between OI and OP, (vi) increased
competition resulting from other high volume copier distributors and the
discounting of such copiers by competitors, (vii) the Company's ability to
manage and reduce its outstanding debt, meet its working capital needs and
maintain compliance with the covenants of its credit facility, (viii) the
inability 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, (ix) the ultimate amount of additional costs associated with
the accelerated unification and ultimate integration and the amount and timing
of the realization of the anticipated benefits from such unification and
complete integration, (x) the inability of the Company to effectively manage the
increased size of its inventory and product line, (xi) the Company's inability
to comply with the purchasing requirements under its supply agreements with its
vendors, including Kodak, and the impact thereof, (xii) the ultimate outcome and
impact of the pending class action lawsuits filed in December 1997 and January
1998, (xiii) fluctuations in foreign currencies and (xiv) other risks including
those risks identified in the Company's filings with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation and does not intend to update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. The Company disclaims any duty to update in the future
any of the forward looking statements contained in this Form 10-Q.
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<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Except as described below, the Company is not a party to any material
litigation and is not aware of any threatened material litigation:
The Company, certain of its executive officers who are also directors,
a former director, a former officer and a current officer are defendants in
several purported class action lawsuits filed in the United States District
Court for the Middle District of Florida, Tampa Division.1 The complaints
allege, principally, that the Company and the other defendants issued materially
false and misleading statements related to the progress of the Company's
integration of its acquisition of Kodak's Office Imaging and outsourcing
businesses, in violation of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder. The plaintiffs seek to
certify their complaints as class actions on behalf of all purchasers of the
Company's American Depositary Receipts in the period between May 12, 1997 and
December 16, 1997, and seek an award of an unspecified amount of monetary
damages (including punitive damages) to all of the members of the purported
class. The Company is in the process of preparing its responses to the
complaints. The cases are in the early stages and while it is impossible to
predict the outcome or impact of such litigation, management believes this
litigation is without merit and intends to vigorously defend the lawsuits.
- --------------------
1The purported class action lawsuits are as follows: (i) Amy L. Ollendorf and
Anne Marie Davis on Behalf of Themselves and All Others Similarly Situated
against Danka Business Systems PLC et al, (filed on January 15, 1998); (ii)
Peter Devree on Behalf of Himself and All Others Similarly Situated against
Danka Business Systems PLC et al, (filed on January 22, 1998); (iii) Real J.
Audet, Michael and Nancy Hagen, Joint Tenants on Behalf of Themselves and All
Others Similarly Situated v. Danka Business Systems PLC et al, (filed on January
28, 1998); (iv) Gary Hughes, on Behalf of Himself and All Others Similarly
Situated v. Danka Business Systems PLC et al, (filed on December 23, 1997); (v)
Frederick H. Modlin and Joseph McGeary, on Behalf of Themselves and All Others
Similarly Situated against Danka Business Systems PLC et al, (filed on December
23, 1997); (vi) Robert L. Wenz and David I. Wise, on Behalf of Themselves and
All Others Similarly Situated v. Danka Business Systems PLC et al, (filed on
January 13, 1998).
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
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<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER EXHIBIT
2.1* Asset Purchase Agreement between Eastman Kodak Company and Danka
Business Systems PLC dated as of September 6, 1996, including Exhibit
5.19 (a) which is the form of Amended and Restated Supply Agreement by
and between Eastman Kodak Company and _______________________ dated as
of ____________________, 1996. (Exhibit 2.1 to the Company's Form 8-K
dated November 14, 1996.)
2.2* Amendment No. 1 to Asset Purchase Agreement between Eastman Kodak
Company and Danka Business Systems PLC dated December 20, 1996
(Excluding schedules and similar attachments). (Exhibit 2.2 to the
Company's Form 8-K dated January 15, 1997).
4.1* Memorandum of Association of the Company, including paragraphs 5 and 6.
(Exhibit 2.1 of the Company's Registration Statement on Form 20-F, No.
0-20828, filed on November 10, 1992 (the "1992 Registration
Statement").
4.2* Articles of Association of the Company, including sections relating to
Shares, Variation of Rights and Votes of Members. (Exhibit 2.2 to the
1992 Registration Statement).
4.3* Deposit Agreement dated June 25, 1992, Amendment No. 1 dated February
26, 1993 and Amendment No. 2 dated July 2, 1993 (Exhibit 4.9 of the
Company's Form S-1 Registration Statement No. 33-68278 (the "1993 Form
S-1")., and Amendment No. 3 dated August 16, 1994 between The Bank of
New York, the Company and Owners and Holders of American Depositary
Receipts.
4.4* Indenture dated March 13, 1995 between the Company and The Bank of New
York as Depositary and the Company. (Exhibit 2 to the Company's Form
8-K dated March 21, 1995).
4.5* Deposit and Custody Agreement dated March 13, 1995, between The Bank of
New York as Depositary and the Company. (Exhibit 3 to the Company's
Form 8-K dated March 21, 1995).
4.6* Registration Rights Agreement dated as of March 13, 1995 relating to
$175 million in Aggregate Principal Amount of 6.75% Convertible
Subordinated Notes Due 2002 by and among the Company and Prudential
Securities Incorporated and Smith Barney, Inc. and Robert W. Baird &
Co. and Raymond James & Associates, Inc. (Exhibit 4.12 to the Company's
Form 10-K dated June 16, 1995).
4.8* Credit Agreement dated December 5, 1996, by and among Danka Business
Systems PLC, Dankalux Sarl & Co. SCA, Danka Holding Company, the
several financial institutions from time to time a party and
NationsBank, N.A., as agent (Exhibit 4 to the Company's Form 8-K
December 16, 1996).
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<PAGE> 22
4.9 First Amendment to Credit Agreement dated December 5, 1997 among Danka
Business Systems PLC, Dankalux Sarl & Co., SCA, and Danka Holding
Company, Nationsbank, National Association, each other Bank signatory
thereto and Nationsbank, National Association, as agent.
No other instruments defining the rights of holders of long-term debt
of the Company and its subsidiary have been included as exhibits
because the total amount of obligations authorized under any such
agreement does not exceed 10% of the total assets of the Company and
its subsidiaries on a consolidated basis. The Company hereby agrees to
furnish supplementally a copy of any omitted long-term debt instrument
to the Commission upon request.
27 Financial Data Schedule (for SEC purposes only)
* Document has heretofore been filed with the Commission and is
incorporated by reference and made a part hereof.
(b) Reports on Form 8-K:
On December 17, 1997, the Company filed a report on Form 8-K announcing its
estimated results for the third quarter of fiscal 1998.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANKA BUSINESS SYSTEMS PLC
(Registrant)
Date: February 12, 1998 /S/ DAVID C. SNELL, Finance Director
------------------------------- ------------------------------------
David C. Snell, Finance Director
(Executive Vice President and the
Principal Accounting Officer)
23
<PAGE> 1
EXHIBIT 4.9
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "First Amendment") is
made and entered into as this 5TH day of December, 1997 among DANKA BUSINESS
SYSTEMS PLC, a limited liability company incorporated in England and Wales
(Registered Number 1101386) ("Danka PLC"), DANKALUX SARL & CO. SCA, a Luxembourg
company ("Dankalux"), and DANKA HOLDING COMPANY, a Nevada corporation ("Danka
Holding") (Danka PLC, Dankalux and Danka Holding are herein each a "Company" and
collectively the "Companies"), NATIONSBANK, NATIONAL ASSOCIATION, a national
banking association formerly known as NationsBank, National Association
(Carolinas) each other Bank signatory hereto (each individually, a "Bank" and
collectively, the "Banks"), and NATIONSBANK, NATIONAL ASSOCIATION, in its
capacity as agent for the Banks (in such capacity, the "Agent");
W I T N E S S E T H:
WHEREAS, the Companies, the Banks and the Agent have entered into a
Credit Agreement as of December 5, 1996 (as amended hereby and as from time to
time further amended, supplemented or replaced, the "Credit Agreement"),
pursuant to which the Banks agreed to make certain revolving credit, term loan
and letter of credit facilities available to the Companies; and
WHEREAS, the Companies have requested that the Credit Agreement be
amended in the manner set forth herein and the Agent and the Banks are willing
to agree to such amendment;
NOW, THEREFORE, in consideration of the mutual covenants and the
fulfillment of the conditions set forth herein, the parties hereto do hereby
agree as follows:
1. Definitions. Any capitalized terms used herein without definition
shall have the meaning set forth in the Credit Agreement. The term "Credit
Agreement" as used herein and in the Loan Documents shall mean the Credit
Agreement as amended hereby and as from time to time further amended,
supplemented and replaced.
2. Amendment. Subject to the terms and conditions set forth herein,
(a) the definition of "Adjusted Consolidated Net Worth" in
Section 1.1 of the Credit Agreement is hereby amended in its entirety
so that as amended it shall read as follows:
"Adjusted Consolidated Net Worth" means the Consolidated Net
Worth of Danka PLC and its Subsidiaries, minus Investments
made by Danka PLC and its Subsidiaries after the Effective
Date in Excluded Country Subsidiaries.
<PAGE> 2
(b) the definition of "Consolidated Fixed Charge Coverage
Ratio" in Section 1.1 of the Credit Agreement is hereby amended by
replacing the words "dividends for such period, plus" appearing in
Subsection (ii)(B) of such definition with the words "dividends for
such period." and by deleting Subsection (ii)(C) in its entirety from
such definition.
(c) a new definition "Consolidated Net Worth" is hereby added
to Section 1.1 immediately following the definition "Consolidated Fixed
Charge Coverage Ratio" which definition shall read as follows:
"Consolidated Net Worth" means consolidated net worth of Danka
PLC and its Subsidiaries determined in accordance with GAAP
plus or minus, as the case may be, the positive or negative
amount of the balance in excess of $50,000,000 in the currency
translation adjustment account."
(d) the definition of "Included County" in Section 1.1 is
hereby amended to read in its entirety as follows:
"Included Country" means (i) any country within which Danka
PLC is doing business through one or more Subsidiaries
operating in such country as of the Effective Date and either
the combined assets of such Subsidiaries or the revenues of
such Subsidiaries for any fiscal year of Danka PLC equals or
exceeds three percent (3%) of total combined assets or total
revenues of Danka PLC and its Subsidiaries on a consolidated
basis, and (ii) any additional country from time to time
selected by the Companies, as an Included Country, provided,
however, that the Companies, in exercising such discretion,
shall be required to comply with the requirements of Section
7.8(i) hereof. The Included Countries as at the Closing Date
are listed on Schedule III to the Credit Agreement.
(e) Subsection 7.1(a) of the Credit Agreement is hereby
amended to read in its entirety as follows:
"As soon as available and in any event within 60 days after
the end of each of the first three fiscal quarters of each
fiscal year of Danka PLC, the consolidated balance sheets of
Danka PLC and its Subsidiaries, such balance sheets and
statements of earnings and cash flow, where required, in the
case of Danka PLC and its Subsidiaries, to be prepared in
accordance with GAAP in a manner consistent with past
practices of Danka PLC, certified by the chief financial
officer, treasurer or the secretary-controller of Danka PLC;"
(f) Subsection 7.1(b) of the Credit Agreement is hereby
amended to read in its entirety as follows:
"As soon as available and in any event within 120 days after
the end of each fiscal year of Danka PLC, a copy of the annual
audit report for such fiscal year for Danka PLC and its
Subsidiaries, including therein the consolidated balance sheet
2
<PAGE> 3
of Danka PLC and its Subsidiaries as of the end of such fiscal
year and consolidated statements of earnings and cash flow of
Danka PLC and its Subsidiaries for such fiscal year, certified
without any Impermissible Qualification by KPMG Audit PLC or
other internationally recognized independent public
accountants, together with a certificate from such accountants
to the effect that (I) the consolidated financial statements
have been prepared in accordance with GAAP consistently
applied and present fairly the financial condition and results
of operations of Danka PLC and its Subsidiaries and (ii) in
making the examination necessary for the signing of such
annual report by such accountants, they have not become aware
of any Default or Event of Default that has occurred and is
continuing, or, if they have become aware of such Default or
Event of Default, describing such Default or Event of Default
and the steps, if any, being taken to cure it;"
(g) Subsection 8.4(c) of the Credit Agreement is hereby
amended by deleting the figure "10%" appearing in the fifth line of
said Subsection (c) and replacing such figure with the following
figure: "25%".
3. Effectiveness. This First Amendment shall become effective as of the
date hereof upon receipt by the Agent of six (6) fully executed copies of this
First Amendment (which may be signed in counterparts) signed by the Companies
and the Majority Banks.
4. Representations and Warranties. In order to induce the Agent and the
Banks to enter into this First Amendment, the Companies represent and warrant to
the Agent and the Banks as follows:
(a) There has been no material adverse change in the
condition, financial or otherwise, of Danka PLC and its Subsidiaries,
taken as a whole, since the date of the most recent financial reports
of Danka PLC received by the Agent and the Banks under Section 7.1 of
the Credit Agreement;
(b) The business and properties of Danka PLC and its
Subsidiaries, taken as a whole, are not, and since the date of the most
recent financial report of Danka PLC and its Subsidiaries received by
the Agent and the Banks under Section 7.1 of the Credit Agreement, have
not been adversely affected in any substantial way as the result of any
fire, explosion, earthquake, accident, strike, lockout, combination of
workers, flood, embargo, riot, activities of armed forces, war or acts
of God or the public enemy, or cancellation or loss of any major
contracts; and
(c) No event has occurred and is continuing which constitutes,
and no condition exists which upon the consummation of the transaction
contemplated hereby would constitute, a Default or an Event of Default
under the Credit Agreement, either immediately or with the lapse of
time or the giving of notice, or both.
5. Guarantors. Each of the Companies being the direct, or indirect
owner of all or substantially all the Guarantors hereby consents to this
amendment on behalf of such Guarantors.
3
<PAGE> 4
6. Entire Agreement. This First Amendment sets forth the entire
understanding and agreement of the parties hereto in relation to the subject
matter hereof and supersedes any prior negotiations and agreements among the
parties relative to such subject matter.
7. Full Force and Effect of First Amendment. Except as hereby
specifically amended, modified or supplemented, the Credit Agreement and all
other Loan Documents are hereby confirmed and ratified in all respects and shall
remain in full force and effect according to their respective terms.
8. Counterparts. This First Amendment may be executed in any number of
counterparts, each of which shall be deemed an original as against any party
whose signature appears thereon, and all of which shall together constitute one
and the same instrument.
9. Governing Law. This First Amendment shall in all respects be
governed by the laws and judicial decisions of the State of Florida.
10. Enforceability. Should any one or more of the provisions of this
First Amendment be determined to be illegal or unenforceable as to one or more
of the parties hereto, all other provisions nevertheless shall remain effective
and binding on the parties hereto.
11. Credit Agreement. All references in any of the Loan Documents to
the Credit Agreement shall mean the Credit Agreement as amended hereby.
[Signature page follows]
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in Charlotte by their proper and duly authorized
officers as of the day and year first above written.
WITNESS: DANKA BUSINESS SYSTEMS PLC
By: /s/ David C. Snell
- --------------------------- -----------------------------------
Name: David C. Snell
Title: Finance Director
DANKA HOLDING COMPANY
By: /s/ Paul K. Suijk
- --------------------------- -----------------------------------
Name: Paul K. Suijk
Title: Sup. Corporate Treasurer
- ---------------------------
DANKALUX SARL & CO. SCA
BY: DANKALUX SARL, COMMANDITE
By: /s/ Jean-Pierre Leburton
- --------------------------- -----------------------------------
Name: Jean-Pierre Leburton
Title: Manager
- ---------------------------
NATIONSBANK, N.A., as Agent and
Issuing Bank
By: /s/ Reinhard Freimuth
-----------------------------------
Name: Reinhard Freimuth
Title: Vice President
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements of Danka Business Systems PLC and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 49,860
<SECURITIES> 0
<RECEIVABLES> 650,524
<ALLOWANCES> 32,445
<INVENTORY> 563,804
<CURRENT-ASSETS> 1,305,925
<PP&E> 593,895
<DEPRECIATION> 217,561
<TOTAL-ASSETS> 2,283,481
<CURRENT-LIABILITIES> 837,396
<BONDS> 903,981
0
0
<COMMON> 4,744
<OTHER-SE> 478,017
<TOTAL-LIABILITY-AND-EQUITY> 2,283,481
<SALES> 2,509,327
<TOTAL-REVENUES> 2,509,327
<CGS> 1,577,529
<TOTAL-COSTS> 1,577,529
<OTHER-EXPENSES> 824,567<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,011
<INCOME-PRETAX> 60,220
<INCOME-TAX> 22,402
<INCOME-CONTINUING> 37,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,818
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.65
<FN>
<F1>Includes an $11,000 pre-tax restructuring charge.
</FN>
</TABLE>
