<PAGE> 1
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 MARCH 31, 1999 Commission file number: 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 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: (727) 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, 1999, the Registrant had 228,067,865 Ordinary Shares
outstanding, including 181,058,875 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, 1999 was $281,255,051 based
on the average bid and asked prices of ADSs as quoted on the NASDAQ National
Market.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be
filed not later than 120 days after the close of the fiscal year covered by this
report on Form 10-K.
<PAGE> 2
DANKA BUSINESS SYSTEMS PLC
ANNUAL REPORT ON FORM 10-K
MARCH 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
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 12
PART II
Item 5. Market Price for the Registrant's Common Equity and Related Shareholder
Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
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 13
Item 11. Executive Compensation 13
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 14
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
INTRODUCTION
Danka Business Systems PLC together with its Subsidiaries ("Danka" or
the "Company") is one of the world's largest independent suppliers of
photocopiers, facsimiles and other related office imaging equipment. The Company
primarily markets these products and related services, parts and supplies on a
direct basis to retail customers. The Company principally distributes Canon,
Kodak, Ricoh and Toshiba products. It also distributes Konica and Minolta
products in certain markets. In addition, the Company markets private label
photocopiers and facsimiles and related supplies on a direct basis under the
Company's Infotec trademark. The Company also markets photocopiers and related
parts and supplies on a wholesale basis to independent dealers through its
international operations. The Company closed its U.S. wholesale operations
effective March 31, 1999. The closure was related to the Company's restructuring
of its operations and focus on core, higher margin businesses.
The Company's operations are segmented into three divisions including
Danka Americas, Danka International and Danka Services International ("DSI").
Danka Americas, which represented 58% of the Company's total revenue in fiscal
1999, distributes photocopiers, facsimiles and other related office imaging
equipment together with the related parts, supplies and services on a direct
basis to retail customers. The geographical areas covered by Danka Americas
include the United States, Canada and Latin America. The Company's Omnifax
division, which distributes private-label facsimiles and related parts, supplies
and services throughout the United States, is also included in the Danka
Americas segment. See - "Restructuring of Operations" for discussion of the sale
of Omnifax. Danka International, which represented 32% of the Company's total
revenue in fiscal 1999, also distributes photocopiers, facsimiles and other
related office imaging equipment. These products, together with the related
services, parts and supplies, are marketed primarily on a direct basis to retail
customers. Danka International also provides photocopiers, facsimiles and
related office imaging equipment on a wholesale basis to independent dealers.
Danka International has an extensive sales and service network throughout Europe
and additional operations in Australasia. DSI is the Company's worldwide
document outsourcing business and represented 10% of the Company's total revenue
in fiscal 1999. DSI provides a wide range of document management solutions,
including the management of central reprographics departments, the placement and
maintenance of convenience copiers, print-on-demand operations and document
archiving and retrieval services and document management consulting. See Note 7
"Segment Reporting" to the consolidated financial statements in the Company's
Annual Report to Shareholders for the Year Ended March 31, 1999 incorporated
herein by reference for additional financial information by segment and
geographic area (Exhibit 13 to this Report).
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. Also, as mentioned above, the Company
provides a wide range of outsourcing services through DSI. See - "Services."
The Company has completed over 140 acquisitions throughout its history.
The acquisition of Eastman Kodak Company's ("Kodak") Office Imaging and
outsourcing businesses in December 1996 was the Company's largest to date,
nearly doubling the size of the Company. Technological developments increasing
the complexity of new products, combined with the higher costs of product
support, has driven the consolidation of the industry 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 Company has operations in 30 countries.
3
<PAGE> 4
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 office of
the Company is located at Masters House, 107 Hammersmith Road, London W14 0QH
England, and its telephone number is 011-44-171-603-1515. The Company's
operational and executive headquarters are located at 11201 Danka Circle North,
St. Petersburg, Florida 33716, and its telephone number is 727-576-6003.
RESTRUCTURING OF OPERATIONS
The Company implemented a number of initiatives during the second half
of fiscal 1999 related to its restructuring program including (i) a worldwide
cost reduction program designed with the goal of materially reducing selling,
general and administrative expenses, (ii) more effectively managing working
capital, including materially reducing inventory, (iii) entering into an
agreement to divest the Company's Omnifax business, (iv) a restructuring of the
Company's long-term relationship with Kodak, (v) negotiating to maintain sources
of financing for the Company's leasing business, and (vi) other elements of
restructuring of Danka's business.
The Company began initiatives related to its restructuring program
during the third quarter of fiscal 1999 including the elimination of various
marketing programs and non-essential information technology projects. The
Company also announced in late January 1999 the reduction of 450 positions at
its Rochester, NY facilities. Restructuring charges incurred in the third
quarter of fiscal 1999 were comprised of $17.6 million for severance and other
employee termination benefits, $19.4 million for facility closures and $3.1
million for the write-down of certain assets to net realizable value. The
Company incurred an additional $2.6 million in restructuring charges in the
fourth quarter of fiscal 1999 primarily for severance and other employee
termination benefits. The costs related to severance represent the elimination
of approximately 1,400 positions worldwide, over 900 of which were eliminated
as of March 31, 1999, including the reductions in Rochester. The remaining
eliminations were completed by the end of the first quarter of fiscal 2000.
Through the full implementation of the Company's worldwide cost reduction
program, the Company expects to generate over $100 million in annualized cost
savings. See - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to the Consolidated Financial Statements" in
the Company's Annual Report to Shareholders for the Year Ended March 31, 1999
incorporated herein by reference (Exhibit 13 to this Report).
The Company also appointed Wasserstein Perella & Co. ("Wasserstein") as
financial advisor to the Company in October 1998 to evaluate its strategic and
financial options and advise the Company concerning a restructuring of its
operations. During the third quarter of fiscal 1999, Wasserstein was authorized
to market certain of the Company's divisions and operating units to pay down
debt and raise funds for the operation of the remaining businesses.
On May 20, 1999, the Company announced that it signed an agreement to
sell a 90% interest in DSI to a newly formed company controlled by Schroder
Ventures, an international private equity group. On June30, 1999, the agreement
to sell DSI to Schroder Ventures was terminated. The Company was informed by
IBM, a customer of DSI, that there was a distinct possibility IBM might choose
to exercise its right to terminate its agreement as a customer with DSI, and
that this action could occur at any time. As a result of this notice, and after
discussions with IBM, Schroder Ventures informed the Company that Schroder
Ventures and its lenders declined to close the transaction.
The Company also announced on June 18, 1999 that it signed a definitive
agreement to sell its facsimile business, Omnifax, to Xerox Corporation for a
cash consideration of $45.0 million. The Company expects to complete the sale of
Omnifax during the second quarter of fiscal 2000.
4
<PAGE> 5
PRODUCTS
The Company's primary products are photocopiers, facsimile equipment,
other office imaging equipment, and related parts and supplies. The photocopier
industry is informally divided into six segments. Segments one and two contain
the least sophisticated photocopiers and can produce up to 30 copies per minute;
segments three and four contain faster and more sophisticated mid-range
photocopiers producing 31 to 69 copies per minute; and segments five and six
contain the most sophisticated and fastest photocopiers in the industry which
run 70 to 90+ copies per minute. The principal manufacturers in segments one
through four are Canon, Konica, Minolta, Ricoh, Sharp and Toshiba. The
acquisition of Kodak's Office Imaging sales and service operations in December
1996 provided Danka with access to the high-end copier market, which
includes segments five and six. Kodak and Xerox have historically dominated
segments five and six. Effective May 10, 1999, Kodak sold its equipment, toner
and developer manufacturing operations to a subsidiary of Heidelberger
Druckmaschnen AG ("Heidelberg"), a global market leader in printing systems.
Advances in technology and changing market demands have also led to the
emergence of color, digital and multifunctional equipment, all of which the
Company currently distributes. The Company will continue to expand its product
offerings to encompass new equipment as it is made available by its vendors and
through strategic alliances. See - "Vendors."
The Company also distributes a range of facsimile equipment,
concentrating 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 the facsimile
machines the Company has historically sold are private label products under the
Company's dex and Omnifax trademarks. On June 18, 1999, the Company announced
a definitive agreement to sell its facsimile division, Omnifax, to Xerox
Corporation. See - "Restructuring of Operations."
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 products have the ability to communicate with other
office imaging 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 imaging 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. The use of digital equipment is playing an important
role in the industry as companies transition from an analog to a digital office
environment. The Company has seen a considerable acceleration in the shift from
analog to digital products and took several steps during fiscal 1999 to
strengthen its digital product portfolio. In January 1999, the Company received
authorization from Canon to offer a full line of digital black and white copiers
throughout the U.S. Furthermore, the Company introduced its first digital
high-volume machine, the DigiSource 9110, in March 1999 and launched worldwide
distribution of the product in July. The Company is currently negotiating a
long-term supply agreement with Heidelberg for the DigiSource 9110. The
DigiSource 9110 was developed by Kodak and is designed and assembled through a
joint venture by Heidelberg Digital and Nexpress Solutions.
Color photocopiers also represent a growing segment of the office
imaging market. The Company continues to expand its color markets through its
principal relationship with Canon and Ricoh. 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. In September 1998, the Company announced a new strategic alliance with
Canon, strengthening its color product portfolio. The alliance allows the
Company to offer the complete line of Canon color copiers to all of its
customers throughout North America, Europe and select Latin American countries.
5
<PAGE> 6
As a percentage of copier equipment sales, digital and color products
sold by the Company in the U.S. represented approximately 23% of equipment sales
in fiscal 1999, increasing from 15% in fiscal 1998. On a worldwide basis,
digital and color products sold by the Company in fiscal 1999, represented
approximately 26% of equipment sales in the U.S. and international markets on a
combined basis.
SERVICES
In fiscal 1999, retail service, supplies and rentals represend 66%
of the Company's total revenue. This revenue is primarily derived fromits
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 significantly
following the acquisition of Kodak's Office Imaging and outsourcing businesses,
in which a significantly higher portion of revenue is generated from retail
service, supplies and rentals. This is due to the higher levels of recurring
revenue associated with high-end copiers and printers and the contractual nature
of the Company's outsourcing business as discussed below.
DSI, the Company's document management outsourcing operations, is also
included in the Company's retail service, supplies and rentals revenue stream.
DSI 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. DSI also provides strategic consulting services, advising customers on
how to manage their document systems and how to add efficiencies--including the
shift from a stand alone analog copier to a networked digital copier/printer
system, the storage of data, and the flow of information throughout the
business. Generally, the Company's outsourcing contracts are based on a
five-year term.
MARKETING, CUSTOMERS AND SALES ORGANIZATION
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 wholesale business extends across Europe. Effective
March 31, 1999, the Company closed its U.S. wholesale operations in connection
with its restructuring initiatives.
The Company's retail operations target a broad range of customer
groups, including small businesses to large multinational companies,
professional firms, and governmental and educational institutions. Additionally,
the Company markets Infotec private label copiers and facsimiles on a wholesale
basis to a network of authorized independent dealers.
Sales personnel turnover is common in the industry and the Company
makes a considerable effort to retain qualified sales personnel. The Company's
U.S. sales force declined below its target levels during fiscal 1999 primarily
due to the negative press surrounding the Company's financial situation. The
Company implemented several initiatives during the second half of fiscal 1999
related to the restructuring of its operations. See "Restructuring of
Operations" for discussion. As a result of the Company's progress on its
restructuring initiatives, the Company's bank lenders approved an amendment to
its Credit Agreement in July 1999, which extended its waiver through July 31,
2000. See - "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, 1999 incorporated herein by reference (Exhibit 13 to this
Report). It is the Company's goal to stabilize and strengthen Danka's sales
force, specifically in the U.S., expanding its coverage evenly among
6
<PAGE> 7
1,300 territories. At March 31, 1999, the Company's international sales force
was at levels consistent with the prior year.
The Company's compensation plan is designed to provide a career path
for the Company's sales representatives and the opportunity to move up from
selling lower segment machines and service to more complex systems. By
increasing training and providing a career path, it is the Company's goal to
reduce current attrition levels. The compensation is comprised of a base salary
and a selling commission, which is based on several variables. These variables
include revenue as a percent of quota, service pricing levels, gross profit and
the net installed equipment base or population.
The Company currently utilizes a range of advertising and promotional
activities, including radio, billboard and print media advertising campaigns,
distribution of descriptive brochures and direct mail pieces, and informational
seminars and presentations. The Company's marketing efforts are enhanced by
manufacturers' national advertising campaigns and co-op arrangements where
appropriate and applicable. The Company also utilizes its website at
www.danka.com as a marketing tool.
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 1999, the Company's sales of Canon, Konica, Minolta, Ricoh,
Sharp and Toshiba photocopiers, facsimile equipment and related accessories
represented approximately 60% of its total equipment revenue, excluding the U.S.
wholesale division which the Company closed effective March 31, 1999. The sale
of Kodak branded equipment and accessories represented approximately 24% of
total equipment revenue, excluding the Company's U.S. wholesale division. The
Company also relies on its equipment 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 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. During fiscal 1999, the Company
entered into certain alliances that expanded its product availability beyond
specific authorized territories. As mentioned above, in September 1998, Danka
announced a new strategic alliance with Canon allowing the Company to offer the
complete line of Canon color copiers to all of its customers throughout North
America, Europe and select Latin American countries. In January, the Company
received authorization from Canon to offer a full line of digital black and
white copiers throughout the U.S. The Company has similar distribution rights
regarding Toshiba digital black and white products. The Company's international
wholesale operations have agreements with Ricoh and Toshiba, and contain terms,
which are substantially similar to those of the Company's retail operations. In
connection with the acquisition of Kodak's Office Imaging and outsourcing
businesses in December 1996, the Company also entered into various supply
agreements with Kodak. These agreements were terminated effective December 15,
1998. The terms of these agreements varied from the Company's traditional
Authorized Manufacturing Agreements. See - "Kodak Agreements" below. As
mentioned above, effective May 10, 1999, Kodak sold its equipment, toner and
developer manufacturing operations to a subsidiary of Heidelberg, a global
market leader in printing systems. The Company and Heidelberg are engaged in
negotiations with respect to a long-term supply agreement for the Kodak
equipment, parts and supplies the Company already sold at the time of
Heidleberg's acquisition, as well as an additional agreement with respect
to the new digital high-volume machine, the DigiSource 9110.
LEASING
The Company has historically financed a substantial portion of its leasing
business using various funding sources. The Company believes that the ability of
its sales force to offer customers the option to lease equipment
7
<PAGE> 8
leads to additional sales. One of the largest programs to obtain such funding is
one under which General Electric Capital Corporation ("GE Capital") provides
funding used by a Master Trust to acquire customer leases from a subsidiary of
the Company. On November 12, 1998, GE Capital served a notice making certain
assertions and demanding various actions and assurances in connection with this
program, including confirmation from the Company's bank lenders that assets
transferred to the Master Trust were and would be free and clear of the lenders'
liens. The Company has been able to satisfy various requirements imposed by GE
Capital, including confirmation by the bank lenders as to the lien status of
assets transferred to the Master Trust.
As a result of the Company's ability to meet these various requirements of
GE Capital, the Company has continued to finance the majority of its leasing
business through GE Capital, including utilizing the Master Trust Agreement
noted above. The Company is presently negotiating with GE Capital a lease
financing arrangement outside of the Master Trust, which would substantially
replicate the economic benefits to the Company of leases funded under the Master
Trust. Additionally, the Company continues to obtain financing from other
funding sources of leases not financed by GE Capital.
Leasing arrangements also 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.
TRAINING
A key element of the Company's operating philosophy is the training of
its employees in order to assist in the uniform application of the Company's
established operating procedures throughout the sales network. As described
above, the Company has introduced a new compensation plan designed to provide a
career path for its sales representatives. Upon employment, Company sales
representatives participate in an intensive information and skills training
program with areas of focus including company overview, competitive marketplace,
selling skills, customer satisfaction, product knowledge as well as finance and
business skills. After the initial training has been successfully completed, the
Company continues to develop the skills and knowledge of its sales
representatives with new product training, self-study computer based courses and
on-going sales skills development.
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.
KODAK AGREEMENTS
In connection with the acquisition of Kodak's Office Imaging and
outsourcing businesses in December 1996, the Company entered into certain supply
agreements, which required the Company to make minimum equipment purchases from
Kodak. To the extent the Company exceeded or failed to purchase these amounts,
the Company was to either receive a refund or make additional payments to Kodak.
For the year ended March 31, 1998, the Company recorded a provision of $10.0
million for the anticipated shortfall in equipment purchases relating to various
supply agreements. The Company 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 activities. Effective December
15, 1998, these agreements were terminated. During the fourth quarter of fiscal
1999, the Company and Kodak reached a new research and development agreement
relating to the completed development of a digital high-volume copier, the
DigiSource 9110, under which the Company agreed to pay approximately $23.0
million. The new machine was introduced in March 1999 at CeBit, an international
trade fair in Hanover, Germany. On June 24, 1999, Kodak and the Company reached
an agreement
8
<PAGE> 9
providing for mutual release of claims and obligations related to certain
agreements previously entered into by Kodak and the Company. In connection with
this agreement, liabilities of $10.0 million for the anticipated shortfall in
Kodak equipment purchases recorded during the third quarter of fiscal 1998 and
$13.5 million relating to research and development and other accrued costs
recorded during the third quarter of fiscal 1999 were reversed during the fourth
quarter of fiscal 1999. See - "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Notes to the Consolidated Financial
Statements" in the Company's Annual Report to Shareholders for the Year Ended
March 31, 1999 incorporated herein by reference (Exhibit 13 to this Report).
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. 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 Company
closed its U.S. wholesale operations effective March 31, 1999. The closure
related to the Company's restructuring of its operations and focus on core,
higher margin businesses. The Company's remaining wholesale operations extend
across Europe. The continued ability of the Company to offer competitive office
imaging equipment in all segment areas is important in both retail and wholesale
operations. See - "Products." As a result of acquiring Kodak's Office Imaging
business in December 1996, the Company significantly increased its presence in
the high-volume photocopier market currently dominated by Xerox Corporation.
EMPLOYEES
As of March 31, 1999, the Company employed approximately 18,000
persons, of which approximately 7,600 were service engineers and approximately
2,600 were devoted to generating sales. The remaining employees were devoted to
training, management, and other administrative and support positions in the
field and corporate locations. Support positions in the field include warehouse
and delivery functions, dispatch, meter readings, renewal of customer
maintenance agreements, accounts receivable collection and billing functions.
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 are comparable with 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 is 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 office imaging and document management industry
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
9
<PAGE> 10
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 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, 1999 and March 31, 1998 were not
material.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, or otherwise made by
officers of the Company, including statements related to the Company's ability
to meet challenges it faces, the Company's future performance and the Company's
outlook for its businesses and respective markets, projections, statements of
management's plans or objectives, forecasts of market trends and other matters,
are forward-looking statements, 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", "anticipate",
"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. No assurance can be given that the results in any
forward-looking statement will be achieved. For the forward-looking statements,
the Company claims the protection of the safe harbor for forward-looking
statements provided for in the Private Securities Litigation Act of 1995.
Factors that might cause such differences include, but are not limited to (i)
failure to obtain one or more waivers or longer term financing beyond the July
31, 2000 waiver period to meet the Company's liquidity needs, whether through
failure to perform as described in business plans provided to the Company's
lenders or otherwise, (ii) increased competition resulting from other
high-volume and digital copier distributors and the discounting of such copiers
by competitors, (iii) any inability by the Company to manage and reduce its
outstanding debt, meet its working capital needs or otherwise adequately address
its liquidity challenges, (iv) any inability by the Company to procure or any
inability by the Company to continue to gain access to and successfully
distribute new, products, including digital products and high-volume copiers, or
to continue to bring current products to the marketplace at competitive costs
and prices, (v) any inability by the Company to finalize a long-term supply
agreement with Heidelberg, (vi) any inability by the Company to achieve
projected cost savings, (vii) the refusal by any vendor to provide equipment,
parts and supplies as a result of the Company's financial condition, (viii) any
inability by the Company to successfully close facilities without negative
impact on the Company's operations, (ix) any inability by the Company to obtain
adequate funding for its leasing business, (x) any inability by the Company to
bring SG&A expenditures of the Company's U.S. division into line with
anticipated sales, (xi) business disruption resulting from year 2000 issues
including unidentified noncompliance of technology, delays or difficulties in
implementing new IT infrastructure, delays or difficulties in converting
remaining systems and applications, and untimely third party completion of year
2000 compliance, (xii) any inability by the Company to complete the sale of its
Omnifax business, (xiii) the ultimate outcome and impact of the pending class
action lawsuit or any other lawsuit, (xiv) any negative impact from the loss of
any key upper management personnel, (xv) any negative impact on the Company's
financial condition or results of operations caused by the Euro conversion,
(xvi) any significant assessment, pursuant to the review by the Internal Revenue
Service (xvii) fluctuations in foreign currencies and (xviii) other risks
including those risks identified in any of the Company's other 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 they are made. 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 such statements are made.
Furthermore, as a matter of policy, the Company does not generally make
10
<PAGE> 11
any specific projections as to future earnings nor does it endorse any
projections regarding future performance, which may be made by others outside
the Company.
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 approximately 500 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 it occupies are, in general,
suitable and adequate for the purposes for which they are utilized.
ITEM 3. LEGAL PROCEEDINGS
The Company, former directors and former officers are defendants in a
purported class action lawsuit. A consolidated class action complaint (the
"Complaint") was filed in the United States District Court for the Middle
District of Florida, Tampa Division on or about June 18, 1998. The Complaint
alleges, 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, engaged in improper accounting practices and that
certain former officers utilized insider information, 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 13, 1997 and December 15, 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 filed its motion to
dismiss the Complaint on or about July 29, 1998 and all briefs have been
submitted to the Court. The Company has not received a ruling from the court on
its motion. The case is 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 is vigorously defending the lawsuit.
As previously disclosed, the Company was a defendant in a purported
lawsuit brought by the Company's former Chief Executive and Director asserting
claims of breach of contract and fraud for the Company's refusal to pay certain
sums alleged due under his employment agreement. The settlement of this case,
which occurred during the first quarter of fiscal 2000, did not have a material
impact on the Company's operations.
In February 1999, the Company was served with a complaint alleging breach
of contract, breach of duty of good faith and fair dealing, conversion and
violation of the Uniform Commercial Code. More particularly, the plaintiffs
allege that in December 1997, they attempted to sell approximately one million
restricted American Depositary Shares at approximately $35.00 per share and that
the Company and its attorneys wrongfully refused and/or unreasonably delayed in
registering the transfer of the plaintiffs' restricted shares. The complaint
further states that the plaintiffs were unable to complete the sale of shares
and were later forced to sell the shares in
11
<PAGE> 12
February 1998 at approximately $17.00 per share. The plaintiffs are attempting
to recover the difference from the Company and its attorneys. The Company
recently filed its motion to dismiss the complaint. This case is in the early
stages and while the outcome of such litigation is impossible to predict,
management believes this litigation is without merit and intends to vigorously
defend the lawsuit.
The Company is subject to other legal proceedings and claims, which
arise in the ordinary course of its business. Management believes that the
resolution of the above matters will not have a material adverse effect upon the
Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 1999:
Quarter ended June 30, 1998 $23.75 $11.50 344p 189p
Quarter ended September 30, 1998 12.88 5.75 194 85
Quarter ended December 31, 1998 6.88 1.75 92 29
Quarter ended March 31, 1999 6.00 4.13 88 63
Fiscal Year 1998:
Quarter ended June 30, 1997 $43.63 $26.50 648p 425p
Quarter ended September 30, 1997 51.31 37.00 788 558
Quarter ended December 31, 1997 47.00 12.38 713 215
Quarter ended March 31, 1998 21.13 15.25 322 239
</TABLE>
As of March 31, 1999, 45,264,719 ADSs were held of record by 4,700 registered
holders and 47,008,990 Ordinary Shares were held of record by 4,361 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 most recently paid a dividend to shareholders on July 28, 1998. The
Company is not currently permitted to pay dividends under the Credit Agreement.
Any determination to pay cash dividends after the refinancing of the
indebtedness outstanding thereunder will be made by the Board of Directors in
light of the Company's earnings, financial position, capital requirements,
credit agreements and other such factors as the Board of Directors deems
relevant.
12
<PAGE> 13
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, 1999. 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, 1999. See Exhibit 13
to this Report.
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
Operations", "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, 1999. 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.
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 1999 Annual Meeting of Shareholders, to be filed
not later than 120 days after the close of the fiscal year covered by this
report on Form 10-K.
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 1999 Annual Meeting of Shareholders, to
be filed not later than 120 days after the close of the fiscal year covered by
this report on Form 10-K.
13
<PAGE> 14
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 1999 Annual Meeting of Shareholders, to be
filed not later than 120 days after the close of the fiscal year covered by this
report on Form 10-K.
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 1999 Annual Meeting of Shareholders, to be filed
not later than 120 days after the close of the fiscal year covered by this
report on Form 10-K.
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 Operations - Years ended March 31, 1999,
1998 and 1997
Consolidated Balance Sheets - March 31, 1999 and 1998
Consolidated Statements of Cash Flows - Years ended
March 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity - Years ended
March 31, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements - Years ended
March 31, 1999, 1998 and 1997
Independent Auditor's Report
2. The following Financial Statement Schedules of the Registrant are
included in Item 14(d):
Independent Auditor's 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.
14
<PAGE> 15
3. Exhibit index:
Exhibit
Number Description of Document
- ------- -----------------------
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.)
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. 7 adopted by shareholders at the 1997 annual general
meeting waiving pre-emptive rights of shareholders under certain
circumstances filed with the Company's 1997 Proxy Statement.
15
<PAGE> 16
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
dated December 16, 1996).
4.12* 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.
(Exhibit 4.9 to the Company's Form 10-Q dated February 12, 1998).
4.13* Second Amendment to Credit Agreement dated July 28, 1998 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.
(Exhibit 4.10 to the Company's Form 8-K July 28, 1998).
4.14* Waiver dated October 20, 1998, of certain financial covenants
contained in the Credit Agreement among Danka Business Systems PLC,
Dankalux Sarl & Co., SCA and Danka Holding Company, NationsBank,
N.A., each other Bank signatory to the Credit Agreement and
NationsBank, N.A., as agent. (Exhibit 4.11 to the Company's Form 8-K
October 21, 1998).
4.15* Waiver dated February 26, 1998, of certain financial covenants
contained in the Credit Agreement among Danka Business Systems PLC,
Dankalux Sarl & Co., SCA and Danka Holding Company, NationsBank,
N.A., each other Bank signatory to the Credit Agreement and
NationsBank, N.A., as agent. (Exhibit 4.12 to the Company's Form 8-K
March 5, 1999).
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.
16
<PAGE> 17
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).
10.18* 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).
10.20* The Danka 1996 Share Option Plan filed as Appendix 1 of the 1996
Annual Proxy Statement and approved by shareholders under Resolution
10.
10.22* Amendments to the Danka 1996 Share Option Plan filed as Appendix A
of the 1998 Annual Proxy Statement and approved by shareholders
under Resolution 9.
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, 1999. The portions of the Company's Annual Report to
Shareholders incorporated by reference into this Report are included
herein as exhibits.
21 List of Current Subsidiaries of the Company.
23 Consent of Independent Accountants
27 Financial Data Schedule (for SEC use only).
27.1 Financial Data Schedule Restated and Amended (March 31, 1998 Form
10-K).
27.2 Financial Data Schedule Restated and Amended (March 31, 1997 Form
10-K).
* 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 March 5, 1999, the Company filed a report on Form 8-K
announcing a 180-day extension for the waiver on its Credit Agreement granted by
its Lenders.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) to this Report are
filed with this Report.
(d) Financial Statement Schedules
Independent Auditor's Report
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.
17
<PAGE> 18
INDEPENDENT AUDITOR'S REPORT
To the Members of Danka Business Systems PLC:
Under date of July 14, 1999, we reported on the consolidated balance sheets of
Danka Business Systems PLC and subsidiaries as of March 31, 1999 and 1998 and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended March 31, 1999, as
contained in the 1999 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 1999. 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, presents
fairly, in all material respects, the information set forth therein.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
July 14, 1999 London, England
18
<PAGE> 19
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, 1997 $ 8,804 $21,062 $ 12,382 $(14,395) $27,853
======= ======= ======== ======== =======
Year ended March 31, 1998 $27,853 $29,928 $ 2,046 $(28,854) $30,973
======= ======= ======== ======== =======
Year ended March 31, 1999 $30,973 $38,619 $ 447 $ (8,774) $61,266
======= ======= ======== ======== =======
</TABLE>
(1) Represents beginning balances of acquired companies.
(2) Represents accounts written off during the year, net of recoveries.
19
<PAGE> 20
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: July 14, 1999 DANKA BUSINESS SYSTEMS PLC
--------------------------
(Registrant)
By: /s/ LARRY K. SWITZER
--------------------------------------------
Larry K. Switzer, Chief Executive Officer
(Chief Executive Officer)
By: /s/ F. MARK WOLFINGER
--------------------------------------------
F. Mark Wolfinger, Executive Vice
President and Chief Financial Officer
(Chief Financial 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 July 14, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ DAVID W. KENDALL Chairman and Director
- ---------------------------
David W. Kendall
/s/ LARRY K. SWITZER Chief Executive Officer and Director
- ---------------------------
Larry K. Switzer
/s/ BRIAN L. MERRIMAN President and Chief Operating Officer and Director
- ---------------------------
Brian L. Merriman
/s/ KEITH J. MERRIFIELD Director
- ---------------------------
Keith J. Merrifield
/s/ J. ERNEST RIDDLE Director
- ---------------------------
J. Ernest Riddle
/s/ JAMES F. WHITE, JR. Director
- ---------------------------
James F. White, Jr.
</TABLE>
20
<PAGE> 1
Exhibit 13
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
$000 $000 $000 $000 $000
For the years ended March 31 (Except per ADS data)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Retail 2,676,306 3,054,167 1,851,766 1,069,593 702,740
Wholesale 220,914 268,569 240,531 170,711 99,456
- ------------------------------------------------------------------------------------------------------------------
2,897,220 3,322,736 2,092,297 1,240,304 802,196
- ------------------------------------------------------------------------------------------------------------------
GROSS PROFIT:
Retail 962,611 1,168,375 766,592 466,533 306,202
Special charges, retail gross profit (57,853) (10,000) -- -- --
Wholesale 31,653 50,644 44,061 30,116 17,691
Special charges, wholesale gross profit (514) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
935,897 1,209,019 810,653 496,649 323,893
Selling, general and administrative expenses 979,008 979,381 641,905 378,407 245,525
Special charges, general and administrative expenses 16,805 -- -- -- --
Amortization of intangible assets 19,714 21,232 19,386 13,587 6,818
Write-off of goodwill and other long-lived assets 109,474 -- -- -- --
Commitment to Kodak under R&D agreements 53,434 50,000 12,500 -- --
Restructuring charges 40,818 11,000 35,000 8,500 --
- ------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS FROM OPERATIONS (283,356) 147,406 101,862 96,155 71,550
Interest expense and other, net 74,197 64,214 33,985 21,566 7,742
- ------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE INCOME TAXES (357,553) 83,192 67,877 74,589 63,808
Provision (benefit) for income taxes (62,773) 30,958 25,522 28,241 24,761
- ------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEM (294,780) 52,234 42,355 46,348 39,047
Extraordinary item* -- -- 578 1,133 --
- ------------------------------------------------------------------------------------------------------------------
NET (LOSS) EARNINGS (294,780) 52,234 41,777 45,215 39,047
- ------------------------------------------------------------------------------------------------------------------
PER ADS DATA:
Basic (loss) earnings per ADS $(5.18) $0.92 $0.74 $0.91 $0.83
Diluted (loss) earnings per ADS $(5.18) $0.90 $0.72 $0.88 $0.80
Dividends per ADS -- $0.20 $0.16 $0.13 $0.11
BALANCE SHEET DATA:
Total assets 1,905,142 2,178,941 2,352,704 1,091,556 635,314
Long-term debt, less current maturities 1,052,415 858,892 1,059,823 318,262 233,681
Shareholders' equity 171,164 480,307 465,731 441,843 206,408
</TABLE>
*Extraordinary item in fiscal 1997 and 1996 represents the loss on early
extinguishment of debt, net of the related income tax benefit.
Note: Certain prior year amounts have been reclassified to conform with the
current year presentation.
1
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE COMPANY
Danka Business Systems PLC together with its subsidiaries ("Danka" or the
"Company") is one of the world's largest independent suppliers of photocopiers,
facsimiles and other related office imaging equipment. The Company primarily
markets these products and related services, parts and supplies on a direct
basis to retail customers. The Company principally distributes Canon, Kodak,
Ricoh and Toshiba products. It also distributes Konica and Minolta products in
certain markets. In addition, the Company markets private label photocopiers and
facsimiles and related supplies on a direct basis under the Company's Infotec
trademark. The Company also markets photocopiers, facsimiles, and related parts
and supplies on a wholesale basis to independent dealers through its
international operations. The Company closed its U.S. wholesale operations
effective March 31, 1999. The closure was related to the Company's efforts to
restructure its operations and focus on core, higher margin businesses.
The Company also provides worldwide document services through its outsourcing
business, Danka Services International ("DSI") which was acquired in December
1996 from Kodak. Services provided by DSI range from on- and off-site document
services, including the management of central reprographics departments, the
placement and maintenance of convenience copiers, print-on-demand operations and
document archiving and retrieval services.
On October 16, 1998, the Company announced the appointment of Wasserstein
Perella & Co. ("Wasserstein") as financial advisor to the Company. In
conjunction with Wasserstein, the Company began an evaluation of its strategic
and financial options, including the possible sale of certain divisions. On May
20, 1999, the Company announced that it signed an agreement to sell DSI to a
newly formed company controlled by Schroder Ventures, an international private
equity group. On June 30, 1999, the agreement to sell DSI to Schroder Ventures
was terminated. The Company was informed by IBM, a customer of DSI, that there
was a distinct possibility IBM might choose to exercise its right to terminate
its agreement as a customer with DSI, and that this action could occur at any
time. As a result of this notice, and after discussions with IBM, Schroder
Ventures informed the Company that Schroder Ventures and its lenders declined to
close the transaction.
The Company also announced on June 18, 1999, that it signed a definitive
agreement to sell its facsimile division, Omnifax, to Xerox Corporation for
$45.0 million in cash. Through its Omnifax division, the Company markets private
label facsimiles and related parts and supplies on a direct basis under its dex
and Omnifax trademarks. The Company expects to complete the sale of Omnifax in
the second quarter of fiscal 2000.
The Company's performance in fiscal 1999 was impacted by a number of factors
including reduced retail equipment sales, reduced retail service, supplies and
rentals revenue, lower retail equipment margins and higher SG&A expenses,
primarily in the U.S. See -- "Results of Operations" for full discussion.
The lower retail equipment sales were partially affected by the accelerated
shift in customer demand from analog to digital products. The Company took
several steps in fiscal 1999 to improve its digital product availability to meet
the accelerated shift in customer demand. In September 1998, Danka announced a
new strategic alliance with Canon that allows the Company to offer the complete
line of Canon color copiers to all of its customers throughout North America,
Europe and select Latin American countries. In January, the Company received
authorization from Canon to offer a full line of digital black and white copiers
throughout the U.S. The Company has similar distribution rights regarding
Toshiba digital black and white products. Furthermore, the Company introduced
its first high-volume digital machine, the DigiSource 9110, in March 1999 at
CeBit, an international trade fair in Hanover, Germany and launched worldwide
distribution of the product in July. The Company is currently negotiating a
long-term supply agreement with Heidelberg for the DigiSource 9110. The
DigiSource 9110 was developed by Kodak and is designed and assembled through a
joint venture by Heidelberg Digital and Nexpress Solutions.
The Company announced in the third quarter of fiscal 1999 its worldwide cost
reduction program with the goal of reducing SG&A and improving profitability. A
key element of the cost reduction program is to bring SG&A expenditures of the
Company's U.S. division in line with anticipated revenue. The Company took
several initiatives during the second half of fiscal 1999 including the
elimination of various advertising programs and non-essential IT projects,
headcount reductions and the closure of facilities. In January, the Company
announced the closure of its Rochester, NY facilities, which resulted in the
reduction of 450 positions. The Company announced a total elimination of 1,400
positions related to the worldwide cost reduction program. As of March 31, 1999,
over 900 of these positions were eliminated; the remaining eliminations were
completed by the end of the first quarter of fiscal 2000. Essential functions
including the Company's U.S. National Service Dispatch Call Center and regional
sales and service operations were not affected. The Company expects to generate
approximately $100.0 million in annualized savings after full implementation of
its worldwide cost reduction program.
In December 1998, the Company completed the IT separation from Kodak's computer
infrastructure worldwide. The separation from Kodak's systems involved several
business processes including financial reporting, invoicing, voice mail and
electronic mail support for the Office Imaging business acquired from Kodak in
December 1996.
2
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated the dollar amounts and
percentage of total revenue represented by certain items in the Company's
Consolidated Statements of Operations before and after restructuring and other
special charges:
AFTER RESTRUCTURING AND OTHER SPECIAL CHARGES:
<TABLE>
<CAPTION>
Years ended March 31
(In millions) 1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Retail equipment sales $ 755.5 $ 985.3 $ 699.0
Retail service, supplies and rentals 1,920.8 2,068.9 1,152.8
Wholesale 220.9 268.5 240.5
- ----------------------------------------------------------------------------------
TOTAL REVENUE 2,897.2 3,322.7 2,092.3
Cost of revenue 1,961.3 2,113.7 1,281.6
- ----------------------------------------------------------------------------------
GROSS PROFIT 935.9 1,209.0 810.7
Selling, general and administrative expenses 995.8 979.4 641.9
Amortization of intangible assets 19.7 21.2 19.4
Write-off of goodwill and other long-lived assets 109.5 -- --
Commitment to Kodak under R&D agreements 53.4 50.0 12.5
Restructuring charges 40.8 11.0 35.0
- ----------------------------------------------------------------------------------
(LOSS) EARNINGS FROM OPERATIONS (283.3) 147.4 101.9
Interest expense and other, net 74.2 64.2 34.0
- ----------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE INCOME TAXES (357.5) 83.2 67.9
Provision (benefit) for income taxes (62.7) 31.0 25.5
- ----------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEM (294.8) 52.2 42.4
Extraordinary item -- -- 0.6
- ----------------------------------------------------------------------------------
NET (LOSS) EARNINGS $ (294.8) $ 52.2 $ 41.8
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31
(Percentage of total revenue) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Retail equipment sales 26.1% 29.6% 33.4%
Retail service, supplies and rentals 66.3 62.3 55.1
Wholesale 7.6 8.1 11.5
- --------------------------------------------------------------------------------
TOTAL REVENUE 100.0 100.0 100.0
Cost of revenue 67.7 63.6 61.3
- --------------------------------------------------------------------------------
GROSS PROFIT 32.3 36.4 38.7
Selling, general and administrative expenses 34.4 29.5 30.7
Amortization of intangible assets 0.7 0.6 0.9
Write-off of goodwill and other long-lived assets 3.8 -- --
Commitment to Kodak under R&D agreements 1.8 1.5 0.6
Restructuring charges 1.4 0.4 1.6
- --------------------------------------------------------------------------------
(LOSS) EARNINGS FROM OPERATIONS (9.8) 4.4 4.9
Interest expense and other, net 2.5 1.9 1.7
- --------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE INCOME TAXES (12.3) 2.5 3.2
Provision (benefit) for income taxes (2.1) 0.9 1.2
- --------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEM (10.2) 1.6 2.0
Extraordinary item -- -- --
- --------------------------------------------------------------------------------
NET (LOSS) EARNINGS (10.2) 1.6 2.0
- --------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 4
BEFORE RESTRUCTURING AND OTHER SPECIAL CHARGES:
<TABLE>
<CAPTION>
Years ended March 31
(In millions) 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Retail equipment sales $ 755.5 $ 985.3 $ 699.0
Retail service, supplies and rentals 1,920.8 2,068.9 1,152.8
Wholesale 220.9 268.5 240.5
- -------------------------------------------------------------------------------------
TOTAL REVENUE 2,897.2 3,322.7 2,092.3
Cost of revenue 1,903.0 2,103.7 1,281.6
- -------------------------------------------------------------------------------------
GROSS PROFIT 994.2 1,219.0 810.7
Selling, general and administrative expenses 979.0 979.4 641.9
Amortization of intangible assets 19.7 21.2 19.4
Write-off of goodwill and other long-lived assets -- -- --
Commitment to Kodak under R&D agreements 53.4 50.0 12.5
Restructuring charges -- -- --
- -------------------------------------------------------------------------------------
(LOSS) EARNINGS FROM OPERATIONS (57.9) 168.4 136.9
Interest expense and other, net 74.2 64.2 34.0
- -------------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE INCOME TAXES (132.1) 104.2 102.9
Provision (benefit) for income taxes (13.2) 38.8 38.7
- -------------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEM (118.9) 65.4 64.2
Extraordinary item -- -- --
- -------------------------------------------------------------------------------------
NET (LOSS) EARNINGS $ (118.9) $ 65.4 $ 64.2
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31
(Percentage of total revenue) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Retail equipment sales 26.1% 29.6% 33.4%
Retail service, supplies and rentals 66.3 62.3 55.1
Wholesale 7.6 8.1 11.5
- --------------------------------------------------------------------------------
TOTAL REVENUE 100.0 100.0 100.0
Cost of revenue 65.7 63.3 61.3
- --------------------------------------------------------------------------------
GROSS PROFIT 34.3 36.7 38.7
Selling, general and administrative expenses 33.8 29.5 30.7
Amortization of intangible assets 0.7 0.6 0.9
Write-off of goodwill and other long-lived assets -- -- --
Commitment to Kodak under R&D agreements 1.8 1.5 0.6
Restructuring charges -- -- --
- --------------------------------------------------------------------------------
(LOSS) EARNINGS FROM OPERATIONS (2.0) 5.1 6.5
Interest expense and other, net 2.5 1.9 1.6
- --------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE INCOME TAXES (4.5) 3.2 4.9
Provision (benefit) for income taxes (0.4) 1.2 1.8
- --------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEM (4.1) 2.0 3.1
Extraordinary item -- -- --
- --------------------------------------------------------------------------------
NET (LOSS) EARNINGS (4.1) 2.0 3.1
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following tables set forth for the periods indicated the dollar gross profit
margin and the percentage for each of the Company's revenue classifications
before and after restructuring and other special charges:
AFTER RESTRUCTURING AND OTHER SPECIAL CHARGES:
<TABLE>
<CAPTION>
Years ended March 31
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GROSS PROFIT:
Retail equipment sales $166.4 $327.5 $261.6
Retail service, supplies and rentals 738.4 830.9 505.0
Wholesale 31.1 50.6 44.1
</TABLE>
<TABLE>
<CAPTION>
(As percentage of each Years ended March 31
revenue classification) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GROSS PROFIT:
Retail equipment sales 22.0% 33.2% 37.4%
Retail service, supplies and rentals 38.4 40.2 43.8
Wholesale 14.1 18.9 18.3
</TABLE>
BEFORE RESTRUCTURING AND OTHER SPECIAL CHARGES:
<TABLE>
<CAPTION>
Years ended March 31
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GROSS PROFIT:
Retail equipment sales $197.1 $337.5 $261.6
Retail service, supplies and rentals 765.5 830.9 505.0
Wholesale 31.6 50.6 44.1
</TABLE>
<TABLE>
<CAPTION>
(As percentage of each Years ended March 31
revenue classification) 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
GROSS PROFIT:
Retail equipment sales 26.1% 34.2% 37.4%
Retail service, supplies and rentals 39.9 40.2 43.8
Wholesale 14.3 18.9 18.3
</TABLE>
THE FOLLOWING COMPARISON ANALYSIS FOR THE THREE YEARS ENDED MARCH 31, 1999 IS
BASED ON THE COMPANY'S RESULTS BEFORE THE EFFECT OF RESTRUCTURING AND OTHER
SPECIAL CHARGES. TO REVIEW THE EFFECTS OF SUCH CHARGES ON THE COMPANY'S
OPERATIONS, REFER TO THE COMPARATIVE TABLES ON PAGES 8 - 10 OF THIS ANNUAL
REPORT.
REVENUE: Fiscal 1999 revenue declined 13% to $2.9 billion from $3.3 billion in
fiscal 1998, due to lower revenue in all of the Company's segments, retail
equipment sales, retail service, supplies and rentals and wholesale revenue.
Retail equipment sales and retail service, supplies and rentals revenue were
lower in both the U.S. and international markets while the decline in wholesale
revenue was primarily due to declining sales in the Company's U.S. wholesale
operations. The Company closed its U.S. wholesale operations effective March 31,
1999.
The Company believes the shortfall in retail equipment sales, which declined 23%
to $755.5 million, was related to a number of factors. First, equipment sales in
the U.S. and international markets were affected in the third and fourth
quarters by the negative press regarding the Company's financial situation,
which led to some price discounting. Second, the Company's product availability
was constrained due to stricter credit terms with suppliers primarily during the
third quarter. Similarly, the Company lacked the digital product availability
necessary to compete in marketplaces experiencing the accelerated shift to
digital products primarily in the U.S. and Australasia. During the second half
of the fiscal year, the Company also experienced difficulties in receiving lease
financing, resulting in delays and loss of sales in both the North American and
international markets. See -- "Liquidity and Capital Resources" for discussion
on GE Capital agreement and the Company's ability to meet necessary requirements
imposed by GE Capital. The International division's equipment sales, primarily
in the U.K. and Australasia, were also impacted as a result of competitive
pressures from Japanese manufacturers selling directly to customers. The Company
took several steps in fiscal 1999 to improve its digital portfolio to meet the
accelerated shift in customer demand. In September 1998, the Company entered
into an alliance with Canon, allowing the Company to offer the complete line of
Canon color copiers to all of its customers throughout North America, Europe and
select Latin American countries. In January 1999, the Company received
authorization from Canon to offer a full line of digital black and white copiers
throughout the U.S. The Company has similar distribution rights regarding
Toshiba digital black and white products. Furthermore, the Company introduced
its first high-volume digital machine, the DigiSource 9110, in March 1999 and
launched worldwide distribution of the product in July.
The Company's retail service, supplies and rentals revenue declined 7% to $1.9
billion in fiscal 1999 from $2.1 billion in fiscal 1998. The decline was
primarily due to two factors. First, the continued erosion of the U.S. installed
machine base, specifically within the Company's named accounts, resulted in a
decline in service and supply revenue. Second, supply sales in the Company's
International division weakened due to the competitive pressures from Japanese
manufacturers selling directly to customers.
Wholesale revenue declined 18% to $220.9 million in fiscal 1999 from $268.6
million in fiscal 1998. The decline was primarily due to lower sales in the U.S.
in both equipment and supplies as result of the Company focusing its efforts on
higher profit margin sales. The Company closed its U.S. wholesale division
effective March 31, 1999.
Fiscal 1998 revenue increased 59% to $3.3 billion from $2.1 billion in fiscal
1997. The increase primarily resulted from significant contributions from
acquisitions, principally the acquisition of Kodak's Office Imaging and
outsourcing businesses in December 1996.
5
<PAGE> 6
The acquisition of Kodak's Office Imaging and outsourcing businesses
significantly changed the Company's revenue mix due to the higher percentage of
retail service, supplies and rentals generated by the businesses. As a
percentage of total revenue, retail equipment and wholesale sales declined as
retail service, supplies and rentals increased. Retail service, supplies and
rentals revenue increased 79% to $2.1 billion in fiscal 1998 from $1.1 billion
in fiscal 1997. The increase was primarily due to the acquisition of Kodak's
Office Imaging and outsourcing businesses. Wholesale revenue increased 12% to
$268.6 million in fiscal 1998 from $240.5 million in fiscal 1997. The increase
was primarily due to stronger supply sales in the U.S.
Approximately 40% of the Company's revenue is generated in countries outside of
the United States. As a result of foreign currency fluctuations, the Company's
revenue for the fiscal years 1999, 1998 and 1997 was negatively impacted by
$16.8 million, $100.0 million and $23.0 million, respectively
GROSS PROFIT: Gross profit declined 18% to $994.2 million in fiscal 1999 from
$1.2 billion in fiscal 1998. The gross profit margin as a percentage of total
revenue decreased to 34.3% in fiscal 1999 from 36.7% in fiscal 1998. The decline
in the Company's combined gross profit margin, before special charges, was
primarily due to a lower retail equipment margin. Including the effect of
special charges to cost of retail equipment sales, retail service, supplies and
rental costs, and wholesale costs of revenue during fiscal 1999 and the $10.0
million provision for the anticipated shortfall in equipment purchases recorded
in the third quarter of fiscal 1998, gross profit was $935.9 million in fiscal
1999 compared to $1.2 billion in fiscal 1998. See Note 6 to the consolidated
financial statements for discussion.
Gross profit as a percentage of retail equipment sales decreased to 26.1% in
fiscal 1999 compared to 34.2% in fiscal 1998. The decline in the retail
equipment margin was attributable to several factors, including the write-down
of certain of the Company's non-Kodak branded inventory to estimated market
value during the third quarter and the Company's efforts to reduce used machine
and out-of-the-box inventories during the fiscal year. The net impact of these
factors was approximately $25.0 million. See Note 6 to the consolidated
financial statements for discussion on other special inventory write-downs
affecting Kodak branded equipment. Other factors that affected the Company's
retail equipment margin were primarily external market pressures. First, the
negative press regarding the Company's financial situation led to price
discounting to customers. Second, the impact of competitive pressures on
equipment sales has increased in the U.S. and international markets as a result
of the accelerated shift to digital products and the direct selling by Japanese
manufacturers, the latter occurring more so in the international market. The
Company believes that these competitive pressures in the U.S. and International
markets will continue. Including the effect of special charges, gross profit as
a percentage of retail equipment sales declined to 22.0% for fiscal 1999. See
Note 6 to the consolidated financial statements for discussion.
As a percentage of revenue, the gross profit margin on retail service, supplies
and rentals, declined 30 basis points to 39.9% in fiscal 1999 compared to 40.2%
in fiscal 1998. Excluding DSI, the Company's outsourcing business, which has a
lower gross profit margin compared to the Company's core copier business, the
retail service, supplies and rentals margin increased to 43.0% in fiscal 1999
compared to 42.4% in fiscal 1998. Including special charges to retail service,
supplies and rental costs, the Company reported a gross profit margin of 38.4%
in fiscal 1999. See Note 6 to the consolidated financial statements for
discussion.
As a percentage of revenue, the gross profit margin on wholesale sales declined
to 14.3% in fiscal 1999 from 18.9% in fiscal 1998. The decline is primarily due
to competitive pressures in the international and U.S. markets as well as a
write-down of the Company's U.S. wholesale inventory to estimated market value.
The Company closed its U.S. wholesale operations effective March 31, 1999. In
addition, the comparable wholesale margin in fiscal 1998 was particularly strong
due to solid private label sales. Including special charges to wholesale costs
of revenue for the write-down of inventory, the Company reported a gross profit
margin of 14.1% in fiscal 1999. See Note 6 to the consolidated financial
statements for discussion.
Fiscal 1998 gross profit increased 50% to $1.2 billion from $810.7 million in
fiscal 1997. As a percentage of total revenue, fiscal 1998 gross profit declined
to 36.7% from 38.7% in fiscal 1997. 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 core operations at that time,
as well as the Company's push to reduce inventory levels at year-end which
impacted the retail equipment margin. The retail equipment margin declined to
34.2% in fiscal 1998 from 37.4% in fiscal 1997. As a percentage of revenue, the
gross profit margin on retail service, supplies and rentals, decreased to 40.2%
in fiscal 1998 from 43.8% in fiscal 1997 primarily due to the acquisition of the
Office Imaging and outsourcing businesses which have lower individual gross
profit margins. Excluding DSI, the retail service, supplies and rentals gross
profit margin was 42.4% and 45.0% in fiscal 1998 and 1997, respectively. Gross
profit as a percentage of wholesale revenue increased 60 basis points to 18.9%
in fiscal 1998 from 18.3% in fiscal 1997. The increase was primarily due to
stronger margins on the Company's private label sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative ("SG&A") expenses remained relatively constant at $979.0 million
and $979.4 million in fiscal 1999 and 1998, respectively. A decline in selling
expenses primarily due to lower retail equipment sales was offset by higher
general and administrative expenses, the majority of which occurred during the
second half of fiscal 1999. Primary factors of the increase in general and
administrative expenses included increased bad debt expenses, professional
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
fees related to the Company's restructuring efforts and costs associated with
the IT separation from Kodak in December. The net impact of these factors was
approximately $15.0 million. During the third quarter of fiscal 1999, the
Company implemented a worldwide cost reduction program with the goal of reducing
SG&A levels. As a percentage of revenue, total SG&A expenses increased to 33.8%
in fiscal 1999 from 29.5% in fiscal 1998. The increase was primarily due to the
decline in total revenue. Including the effect of special charges during fiscal
1999, the Company reported total SG&A expenses of $995.8 million. See Note 6 to
the consolidated financial statements for discussion.
Fiscal 1998 selling, general and administrative expenses increased 53% to $979.4
million from $641.9 million in fiscal 1997. The increase was primarily related
to acquisitions, principally the acquisition of the Office Imaging and
outsourcing businesses. As a percentage of total revenue, selling, general and
administrative expenses decreased to 29.5% in fiscal 1998 compared to 30.7% in
fiscal 1997. The decrease primarily related to 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 the Company's core operations
in North America.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets decreased
to $19.7 million for fiscal 1999 compared to $21.2 million for fiscal 1998. In
connection with the Company's analysis of operations and restructuring plan
announced during the third quarter of fiscal 1999, the Company evaluated its
goodwill and other long-lived assets for recoverability. The Company determined
that based on changes in the business environment and an analysis of projected
cash flows, the carrying amount of certain goodwill and other long-lived assets
in the U.S. and Canada would not be recoverable. Accordingly, the resulting
analysis necessitated a write-down of $107.9 million during the third quarter,
comprised of $89.5 million in the U.S. and $18.4 million in Canada. The
estimated fair values of the Company's goodwill and other long-lived assets have
been determined by calculating the present value of estimated expected future
cash flows using an appropriate discount rate. In the fourth quarter, the
Company decided to close its U.S. wholesale division and wrote-off $1.6 million
of goodwill. See Note 6 to the consolidated financial statements. In fiscal
1998, amortization of intangible assets increased to $21.2 million from $19.4
million in fiscal 1997. The increase related to acquisitions.
COMMITMENT TO KODAK UNDER RESEARCH AND DEVELOPMENT AGREEMENTS: In connection
with the acquisition of the Office Imaging and outsourcing businesses in
December 1996, the Company was providing funding to Kodak for ongoing research
and development for new electrophotographic equipment. Under the Research and
Development agreement, the Company was to pay Kodak a sum of $175.0 million over
the period April 1, 1997 through December 31, 2002 (plus an additional $30.0
million if certain milestones were met). Effective December 15, 1998 the
Research and Development agreement was terminated. Following the termination of
this agreement, the Company and Kodak reached a new agreement under which Kodak
was required to finish the development of a digital high-volume copier, the
DigiSource 9110. Under this agreement, the Company agreed to pay Kodak amounts
totaling approximately $23.0 million. See --"Liquidity and Capital Resources"
and Note 12 to the consolidated financial statements. The Company recorded
commitments to Kodak under research and development agreements of $53.4 million,
$50.0 million and $12.5 million in fiscal 1999, 1998 and 1997, respectively.
RESTRUCTURING CHARGES: The Company recorded a $42.7 million pre-tax
restructuring charge during fiscal 1999, primarily related to the Company's
worldwide cost reduction program announced during the third quarter. Through
several key initiatives, it is the Company's goal to reduce SG&A and improve
profitability. See Note 6 to the consolidated financial statements. The fiscal
1999 restructuring charge was reduced by $1.9 million for remaining liabilities
unused from prior restructuring charges in fiscal 1998 and fiscal 1997 resulting
in a net charge of $40.8 million. In fiscal 1998, the Company recorded an $11.0
million pre-tax restructuring charge principally related to the integration of
the Office Imaging business. The charge consisted of severance and other
employee termination benefits. The Company also recorded a $35.0 million pre-tax
restructuring charge in fiscal 1997 related to the acquisition of the Office
Imaging business and the transition to the Company's Market Based Approach in
North America. The charge consisted of severance and other employee termination
benefits, lease settlement costs and the write-off of certain leasehold
improvements and other fixed assets.
EARNINGS (LOSS) FROM OPERATIONS: The Company reported an operating loss of $57.9
million in fiscal 1999 compared to earnings from operations of $168.4 million in
fiscal 1998. Earnings from operations were primarily impacted by the decline in
revenue, lower combined gross profit and higher SG&A expenses. Including
restructuring and other special charges, the Company reported an operating loss
of $283.3 million in fiscal 1999 compared to earnings from operations of $147.4
million in fiscal 1998. See Note 6 to the consolidated financial statements for
discussion. Fiscal 1998 earnings from operations were 23% higher than fiscal
1997 earnings from operations of $136.9 million, primarily due to an increase in
revenue. As a percentage of revenue, fiscal 1998 earnings from operations before
restructuring and special charges declined to 5.1% from 6.3% in fiscal 1997. The
decline was primarily due to a lower combined gross profit margin and the $50.0
million research and development commitments to Kodak. Including restructuring
and other special charges, the Company reported earnings from operations of
$147.4 in fiscal 1998 and $101.9 million in fiscal 1997. See Note 6 to the
consolidated financial statements.
INTEREST EXPENSE AND OTHER, NET: Interest expense and other, net increased to
$74.2 million in fiscal 1999 compared to $64.2 million
7
<PAGE> 8
in fiscal 1998 and $34.0 million in fiscal 1997. The increase in fiscal 1999
primarily related to higher levels of borrowings and a higher interest rate
during the year. The interest rate increase was due to the amendments to the
Company's Credit Agreement effective June 30, 1998 and the waiver fee paid by
the Company to its lenders. See --"Liquidity and Capital Resources." The
increase in fiscal 1998 was primarily due the borrowings used to fund the
acquisition of the Office Imaging and outsourcing businesses.
INCOME TAXES: Including restructuring and other special charges, the Company
recorded a tax benefit of $62.7 million in fiscal 1999 compared to income taxes
of $31.0 million in fiscal 1998. The tax benefit was due to the loss before
income taxes, which resulted from the factors previously discussed. The combined
effective income tax rate declined from 37.2% in fiscal 1998 to a tax benefit of
17.6% in fiscal 1999. The reduction in the effective tax rate is the result of
non-tax deductible items, primarily the write-off of goodwill and other
long-lived assets, valuation allowances established as a result of uncertainties
about the ability to utilize net operating loss carry-forwards in certain
jurisdictions, principally in the U.K. and Canada, and the pre-tax loss.
Excluding the effect of restructuring and other special charges, the Company's
effective tax benefit for fiscal 1999 was 10.0%. In fiscal 1997 the Company
reported income taxes of $25.5 million and an effective tax rate of 37.6%.
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 an 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.
NET (LOSS) EARNINGS: As a result of the above factors, the Company reported a
net loss, before restructuring and other special charges, of $118.9 million in
fiscal 1999 compared to net earnings of $65.4 million in fiscal 1998. Including
the effect of restructuring and other special charges, the Company reported a
net loss of $294.8 million in fiscal 1999 compared to net earnings of $52.2
million in fiscal 1998. See Note 6 to the consolidated financial statements for
discussion. Fiscal 1998 net earnings increased 2% from fiscal 1997 net earnings
of $64.2 million, before restructuring and other special charges. As a
percentage of revenue, net earnings decreased to 2.0% in fiscal 1998 from 3.1%
in fiscal 1997 primarily due to the lower gross profit margin, the $50.0 million
research and development commitments to Kodak and the higher interest expense.
EXCHANGE RATES
Fluctuations in the exchange rate between the pound sterling and the U.S. dollar
affect the dollar equivalent of the pound sterling of the Ordinary Shares of the
Company on the London Stock Exchange and, as a result, are likely to affect the
market price of the ADSs. 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
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for working capital, servicing its
indebtedness and funding capital expenditures. The Company expects to satisfy
these requirements with cash generated from operations and borrowings under its
credit agreement. The Company also expects to generate cash from the sale of its
Omnifax business, which is expected to close in the second quarter of fiscal
2000.
Effective June 15 and July 9, 1999, the Company and its bank lenders entered
into amendments to the Company's credit agreement with a consortium of
international bank lenders (the "Credit Agreement"). The Credit Agreement has
been amended to require minimum levels of adjusted consolidated net worth,
cumulative consolidated EBITDA and a ratio of consolidated EBITDA to interest
expense, each as defined in the Credit Agreement. The amendments continue the
waiver of compliance with the requirements imposed under certain other financial
covenants, which were waived by the bank lenders pursuant to waivers granted to
the Company in October 1998 and February 1999 after a prior amendment of the
covenants effective June 30, 1998. The terms of the prior waivers and the 1998
amendment have been described in the Company's filings with the Securities and
Exchange Commission.
Terms of the most recent amendment include an aggregate commitment by the
lenders of $995.6 million, effective July 9, 1999. The availability outstanding
under the Credit Agreement at July 12, 1999 was approximately $29.0 million. The
Company paid a fee of $2.0 million related to the execution of the first
amendment to the Credit Agreement and an additional payment equal to $10.0
million is to be paid pursuant to the second amendment on the earliest to occur
of: (i) July 31, 2000, (ii) repayment of all amounts due under the Credit
Agreement, and (iii) sale of the Company's outsourcing subsidiary, Danka
Services International. Payments of approximately $2.4 million, $4.7 million and
$9.3 million become due on October 31, 1999, December 31, 1999 and March 31,
2000, respectively, if any amounts remain outstanding under the Credit Agreement
at those dates. With respect to the period from July 1, 1999 through September
30, 1999, the Company will be required to pay a fee equating to 0.25% annual
interest on the average outstanding loans under the Credit Agreement if the
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
average outstanding loans exceed $650.0 million. During the period from October
1, 1999 through December 31, 1999 this fee will be increased to equate to 0.75%
interest if the average outstanding loans in that period exceed $650.0 million
and 0.25% if they do not. Those rates will increase to 1.25% and 0.50%,
respectively, during the period from January 1, 2000 to March 31, 2000 and to
1.50% and 0.75%, respectively, during the period from April 1, 2000 through July
31, 2000.
Indebtedness under the Credit Agreement is secured by substantially all of the
Company's U.S. assets and the Credit Agreement contains negative and affirmative
covenants which place restrictions on Danka regarding the disposition of assets,
capital expenditures, additional indebtedness and permitted liens, prohibit the
payment of dividends and require the Company to maintain certain financial
ratios. The adjustable interest rate on indebtedness under the Credit Agreement
is at the option of the Company, 2.0% per annum plus either (i) the applicable
Interbank Rate plus a tiered margin based on leverage for 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%. The Company
is not permitted to make any acquisitions of businesses, except with the
approval of the bank lenders and the Company is required to apply 60% of the
first $200.0 million of net proceeds of any asset dispositions prior to October
31, 1999 to repayment of amounts due under the Credit Agreement, to so apply 80%
of the next $200.0 million of such net proceeds and to so apply 90% of any
additional net proceeds to the extent any amounts are outstanding under the
Credit Agreement. The Company is required to make such repayments with 80% of
such net proceeds received after October 31, 1999 up to the excess of $400.0
million over the aggregate net proceeds received on or before October 31, 1999
and 90% of any additional net proceeds received after October 31, 1999. The
lenders commitments under the Credit Agreement will be reduced by the amount of
all such repayments.
While the Company is generally prohibited from incurring new indebtedness other
than under the Credit Agreement, the Company is permitted to borrow up to $40.0
million at any one time to finance the purchase of high-volume digital copiers
and to secure such loans with liens upon the financed equipment.
The lease pursuant to which certain real property used by the Company is leased
incorporates covenants from the Credit Agreement and contains certain additional
covenants and agreements.
Danka intends to refinance its indebtedness under the Credit Agreement as soon
as practical. Danka is currently in discussions with potential sources of
refinancing. However, there can be no assurance that such refinancing will be
available or be available on terms reasonably satisfactory to the Company.
Since last Autumn, Danka has implemented a number of initiatives, including (i)
materially reducing selling, general and administrative expenses, (ii) more
effectively managing working capital, including materially reducing inventory,
(iii) entering into an agreement to divest the Omnifax business, (iv)
restructuring the Company's long-term relationship with Kodak, (v) negotiating
to maintain sources of financing for the Company's leasing business, and (vi)
other elements of restructuring of Danka's business.
The Company began initiatives related to its restructuring program during the
third quarter including the elimination of various marketing programs and
non-essential information technology projects. The Company also announced in
late January the reduction of 450 positions at its Rochester, NY facilities.
Pre-tax restructuring charges incurred in the fiscal third quarter comprise
$17.6 million for severance and other employee termination benefits, $19.4
million for facility closures and $3.1 million for the write-down of certain
assets to net realizable value. The Company incurred an additional $2.6 million
in pre-tax restructuring charges in the fourth quarter. The costs related to
severance represent the elimination of approximately 1,400 positions worldwide,
over 900 of which were eliminated as of March 31, 1999, including the reductions
in Rochester. The remaining eliminations were completed by the end of the first
quarter of fiscal 2000. See Note 6 to the consolidated financial statements.
Through the full implementation of the Company's worldwide cost reduction
program, the Company expects to generate over $100.0 million in annualized cost
savings.
As previously announced, on December 17, 1998, certain supply and other
agreements that required the Company to make minimum purchases from Kodak in
future years and to fund research and development activities were terminated.
The Company estimates that the termination of these agreements reduced payment
obligations to Kodak during the next three to four years (after taking into
account certain other payments that Kodak will no longer make to the Company) by
more than $150.0 million. The Company was able to reduce inventory by nearly
$88.0 million, before special charges, during fiscal 1999 by minimizing
purchases of new equipment and selling existing inventory.
In February 1999, the Company and Kodak entered into an agreement related to the
completion of the DigiSource 9110 under which the Company agreed to pay Kodak
amounts totaling approximately $23.0 million. The DigiSource 9110 was introduced
in March 1999 at CeBit, an international trade fair in Hanover, Germany.
On June 24, 1999, Kodak and the Company reached an agreement providing for
mutual release of claims and obligations related to certain agreements
previously entered into between Kodak and the Company. In connection with this
agreement, liabilities of $10.0 million for the anticipated shortfall in Kodak
equipment purchases recorded during the third quarter of fiscal 1998 and
9
<PAGE> 10
$13.5 million relating to research and development and other accrued costs
recorded during the third quarter of fiscal 1999, were reversed during the
fourth quarter of fiscal 1999.
Effective May 10, 1999 Kodak sold its equipment, toner and developer
manufacturing operations to a subsidiary of Heidelberger Druckmaschnen AG
("Heidelberg"), a German global market leader in printing systems. The Company
and Heidelberg are engaged in negotiations with respect to a long-term supply
agreement for the Kodak equipment, parts and supplies the Company is currently
distributing, as well as an additional agreement with respect to the new
high-volume digital machine, the DigiSource 9110. The DigiSource 9110 was
developed by Kodak and is designed and assembled through a joint venture by
Heidelberg Digital and NexPress Solutions.
The Company has historically financed a substantial portion of its leasing
business using various funding sources. One of the largest programs to obtain
such funding is one under which General Electric Capital Corporation ("GE
Capital") provides funding used by a Master Trust to acquire customer leases
from a subsidiary of the Company. On November 12, 1998, GE Capital served a
notice making certain assertions and demanding various actions and assurances in
connection with this program, including confirmation from the Company's bank
lenders that assets transferred to the Master Trust were and would be free and
clear of the lenders' liens. The Company has been able to satisfy various
requirements imposed by GE Capital, including confirmation by the bank lenders
as to the lien status of assets transferred to the Master Trust.
As a result of the Company's ability to meet these various requirements of GE
Capital, the Company has continued to finance the majority of its leasing
business through GE Capital, including utilizing the Master Trust Agreement
noted above. The Company is presently negotiating with GE Capital a lease
financing arrangement outside of the Master Trust, which would substantially
replicate the economic benefits to the Company of leases funded under the Master
Trust. Additionally, the Company continues to obtain financing for leases from
other funding sources of leases.
The Company's net cash flow provided by operating activities was $36.6 million,
$171.4 million and $192.7 million in fiscal 1999, 1998 and 1997, respectively.
Fiscal 1999 operating cash flow was affected by the various factors described
above. As mentioned above, excluding special charges, the Company reduced its
inventory by nearly $88.0 million during the fiscal year 1999 due to its
continued efforts to reduce inventory levels as well as a reduction in the
Company's purchasing levels. Operating cash flow was also affected by the
Company's reduction in accounts payable, which declined by $135.2 million. In
fiscal 1998, operating cash flow was affected by higher inventory levels as a
result of the requirements to purchase various levels of equipment pursuant to
supply agreements with Kodak which were terminated effective December 15, 1998.
Cash flow used in investing activities was $190.3 million and $75.3 million and
$871.6 million for fiscal 1999, 1998 and 1997, respectively. The Company's
capital expenditures increased during fiscal 1999, primarily due to the higher
levels of spending in the first quarter of the fiscal year. The higher level of
investing activity in fiscal 1997 was primarily due to the Company's acquisition
of Kodak's Office Imaging and outsourcing businesses in December 1996. The lower
level of investing activities in fiscal 1999 was primarily due to the refund of
approximately $100.0 million the Company received from Kodak during the second
quarter of fiscal 1998 related to the purchase price adjustment provision in the
purchase agreement between Kodak and the Company.
Net cash provided by (used in) financing activities was $185.7 million, ($135.2)
million and $707.5 million in fiscal 1999, 1998 and 1997, respectively. The
increase in cash provided by financing activities in fiscal 1999 was primarily
due to the increase in the Company's bank borrowings. The use of cash in fiscal
1998 for financing activities was due to the pay down of total outstanding debt
by over $150.0 million. The higher levels of financing activities in fiscal 1997
were primarily due to the acquisition of Kodak's Office Imaging and outsourcing
businesses, which was funded with advances under the Credit Agreement.
As of March 31, 1999, the Credit Agreement had an outstanding balance of $488.6
million under the revolving component and $437.9 million under the term loan,
incurring interest at a weighted average rate of 7.1% and 6.1% per annum,
respectively.
The Company most recently paid a dividend to shareholders on July 28, 1998. The
Company is not currently permitted to pay dividends under the Credit Agreement.
Any determination to pay cash dividends after the refinancing of the
indebtedness outstanding thereunder will be made by the Board of Directors in
light of the Company's earnings, financial position, capital requirements,
credit agreements and other such factors that the Board of Directors deems
relevant.
The Company believes cash flow from internally generated funds, the availability
under the most recent amendment to the Credit Agreement and the anticipated
proceeds from the sale of Omnifax will be sufficient to support its operations
during the next twelve months.
The Internal Revenue Service is conducting an examination of the Company's
federal income tax returns for the fiscal years ended March 31, 1996 and 1995.
The Company has received various notices of proposed adjustments; the principal
adjustment relates to the timing of certain deductions associated with leased
equipment financing. While the ultimate result can not be determined with
certainty, the Company intends to vigorously contest the proposed adjustments
and believes that the ultimate resolution will not have a material adverse
impact upon the Company's consolidated results of operations, liquidity or
financial position.
10
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YEAR 2000
Many computer systems, including several used by the Company, could experience
problems processing information beyond the Year 1999. As a result, certain
computer systems, including the hardware, software and embedded technologies,
need to be modified prior to the Year 2000, in order to remain functional. The
Company has a Year 2000 Worldwide Program office that has developed an overall
Year 2000 plan to address the possible impact of Year 2000 on the processing of
date sensitive information by computer systems. The Company's Year 2000
Worldwide Program office is comprised of senior executives, legal counsel,
outside advisers, and program managers. The progress of the overall Year 2000
program plan is being monitored and reported to a Worldwide Steering Committee,
an Executive Committee and to the Board of Directors on a regular basis.
The Company's Year 2000 plan is addressing its most critical internal systems
first and has categorized as "priority" those systems whose failure could cause
an extended shutdown of all or part of a business unit, could cause personal
injury, or could have a sustained and significant financial impact. These
activities encompass identification and assessment of operational systems,
including without limitation, business applications, infrastructure hardware and
software applications. To prepare for the Year 2000, where appropriate, the
Company is performing testing, remediation, and validation of operational
systems, and is also testing customer and supplier interfaces with its internal
systems as appropriate. At this time, the Company believes its Year 2000
criteria and guidelines outline the processes necessary to ensure comprehensive
assessment, remediation, contingency planning and quality control. The Company
will also perform comprehensive integration testing and validation of its major
operational systems during the last phases of the Year 2000 program.
The Company's Year 2000 program plans for its North American, Latin American and
worldwide outsourcing operations contain program administration and a six-phased
remediation approach for the Company's Applications and Infrastructure areas.
The Company is approximately 55% and 64% complete with the Applications and
Infrastructure areas, respectively. The six phases are: 1) Inventory --
prioritize comprehensive lists of hardware, software, business processes and
embedded technologies with assigned compliance status; 2) Assessment and
Analysis -- remediation solutions and options are researched, selected and
detailed plans with target completion dates are developed by Information Systems
("IS") in conjunction with the affected business units; 3) Remediation
Development -- includes hardware and software upgrades, vendor and supplier
certification and other related changes; 4) Test and Validate -- testing,
conversion and integration of business applications and systems, including
compliance demonstration and user acceptance performed by the affected business
units; 5) Deployment -- implementation of solutions into the operating
environment; and 6) Contingency Planning and Post-Year 2000 Support -- the
further development and analysis of alternative actions that were initiated in
phase one to limit any adverse impact on the Company's operations. The Company's
Year 2000 worldwide program office meets regularly to review plan progress,
issues and issues resolution. The Company anticipates completion of phases one
through five by October 1, 1999 and the completion of phase six contingency
plans no later than November 30, 1999. In instances where completion within
estimated time frames is not assured, appropriate contingency plans are being
developed or are in place.
The Company's International operations Year 2000 program plan contains program
administration and a five-phased remediation approach for 19 countries. The five
phases are: 1) Inventory -- prioritized comprehensive lists of hardware,
software, business processes and embedded technologies with assigned compliance
status; 2) Assessment and Analysis -- remediation solutions and options are
researched, selected and detailed plans with target completion dates are
developed; 3) Correction -- includes hardware and software upgrades, vendor and
supplier certification and other related changes; 4) Test and Validate --
testing, conversion and integration of business applications and systems,
including compliance demonstration, user acceptance, and implementation; and 5)
Contingency Planning and Post-Year 2000 Support -- the further development and
analysis of alternative actions to limit any adverse impact on the Company's
operations. The Company's International operations anticipates completion of
phases one through four by October 1, 1999 and the completion of phase five
contingency plans no later than November 30, 1999. In instances where completion
within estimated time frames is not assured, appropriate contingency plans are
being developed or are in place.
The Company believes it is on schedule with the target dates and continues to
finalize assessment and select remediation options. The remediation options are
being developed and validated and, upon approval, are being placed into the
production operating environment.
In December 1998, the Company completed the implementation of a new
corporate-wide IT infrastructure thereby enabling it to operate independently
from Kodak's computer systems. In May 1999, the Company completed the Latin
American applications separation, thereby enabling it to operate independently
from Kodak's computer systems. The Company believes Canadian application
conversions will be complete by September 30, 1999, and the Company has
contingency plans in place to address any variations from the applications'
conversions schedule.
The Company's Year 2000 plans also include working with its suppliers, vendors
and customers to identify and assess any Year 2000 issues associated with
products, services or facilities (including non-IT/embedded systems). The
Company is currently evaluating
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
its supplier relationships and vendor manufacturing relationships to assess the
potential impact on operations if third parties are not successful in having
their systems Year 2000 compliant in a timely manner. Highest priority is being
placed on working with critical suppliers, defined by the Company as those
suppliers whose failure would have the greatest impact on business operations
within a short period of time. The Company has made inquiries of its major
suppliers and has received satisfactory responses from all of its critical
suppliers. The Company continues to contact secondary suppliers. A worst-case
scenario involving a critical supplier of products or services would be the
complete shutdown of the supplier and the supplier's resulting inability to
provide products or services to the Company in a timely fashion. The Company
does not maintain the ability to produce or manufacture third-party products. If
the Company believes that a supplier will not be able to continue to provide an
adequate level of service, the Company intends to take appropriate actions to
minimize the impact of the Year 2000 changeover on its operations.
The Company is also assessing the readiness of its customers to deal with Year
2000 issues that may affect its customers' operations and their ability to order
and pay for products. The Company is surveying its major direct customers about
their Year 2000 readiness in critical areas of their operations. The results may
identify areas that need to be addressed by the customers. The Company's
customer base is sufficiently diverse that the Company does not expect that the
Year 2000 issues of a few customers will have a significant effect on the
Company's business. The Company is also communicating information about its own
readiness and the processes used in the Company's Year 2000 program to
customers.
The Company is also compiling information about the Year 2000 capability of
products to assist customers in identifying and evaluating their Year 2000
issues. The Company continues to obtain product "Year 2000 Readiness Information
and/or Statements" from primary suppliers and vendor manufacturers. The
Company's Year 2000 website contains links to the Year 2000 websites of the
manufacturers of the products. The manufacturers' websites generally contain the
manufacturers' analysis of the capability of their products to handle the Year
2000. Where applicable, the Company is developing strategies to support customer
migration to a Year 2000 solution. The Company is providing customer support and
customer satisfaction services regarding Year 2000 issues, and it is expected
that these expenditures will continue through calendar 1999.
The Company is making inquiries of its leased and owned facilities to assess the
extent to which facilities are Year 2000 capable. Follow-up activities include
additional inquiries for incomplete or nonresponsive replies. Each location
relies on local private and governmental suppliers for electricity, water, sewer
and other needed services and supplies. Failure of an electricity grid or an
uneven supply of power would be a worst-case scenario that would completely shut
down the affected facilities. Electrical failure could also shut down airports
and other transportation facilities. Since many of the Company's offices engage
in similar activities and tasks, certain operations can be expanded to partially
make up for capacity unavailable elsewhere during an electrical failure.
Although overall capacity would be reduced, it is not expected that the entire
business operations would shut down due to the unavailability of one or two
facilities.
In January of 1999, an external consulting corporation reviewed the Company's
Year 2000 program and the Company continues to review and implement the
applicable recommendations. The Company's Year 2000 program assumes the
utilization of both internal and external resources and have been undertaken
largely with existing personnel. In some instances, consultants have been
engaged to provide specific assessment, remediation or other services.
The Company estimates that costs related to the Year 2000 program will
approximate $14.3 million. Out of the total program costs the Company estimates
that approximately $7.1 million will be allocated to its North American and
Latin American operations, approximately $5.2 million to its International
operations, and approximately $2.0 million to its worldwide outsourcing business
(DSI). The Company estimates that external costs incurred to date are
approximately $0.9 million.
The Company believes it is taking reasonable steps to avoid interruption in the
business, which may be caused by the Year 2000 changeover. However, program
estimates relating to both costs and completion dates are based on current
knowledge combined with numerous future assumptions that bear associated risks
caused by the Year 2000 changeover, which may potentially position the Company
at risk. The Company cannot guarantee that estimates will be achieved and actual
results could differ materially from those anticipated. The worst case risks
include, but are not limited to, inability to perform financial operations,
failure of delivery from leading manufacturers or vendor services, inability to
recover from a catastrophic disaster and the possible inability to retain
appropriate qualified personnel. These events may result in increased costs
caused by the implementation of manual operations, decreased sales related to
the inability to deliver products or provide quality products, or the inability
to complete the program no later than the estimated date of completion.
EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Monetary Union ("EMU") established fixed conversion rates between their existing
currencies and one common currency -- the Euro. The Euro trades on currency
exchanges and may be used in business transactions. Countries in which the
Company operates that are converted to the Euro include Austria, Belgium,
France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and
Spain. The Company's operating subsidiaries affected
12
<PAGE> 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
by the Euro conversion established plans before the conversion to address the
systems and business issues raised by the Euro currency conversion including
information technology systems, the processes of preparing accounting records,
financial instruments and the continuity of contracts. Where necessary, systems
are being updated to allow "dual currency" functionality to enable the Company
to invoice and be invoiced in either local currencies or the Euro. The
conversion to the Euro is also expected to eliminate exchange risks among the
EMU countries and reduce the need for forward contracts. Those countries that
have not converted to the Euro (e.g., the U.K.) are beginning to prepare for the
conversion as well, to enable a switch to the Euro, should the local governments
of these countries decide to convert at some later date. All contracts prior to
the conversion are still legally enforceable despite the Euro conversion. While
there can be no assurances that external factors associated with the conversion
will not impact the Company, based upon steps taken to date, the Company
anticipates that the Euro conversion will not have a material impact on its
financial condition, results of operations or its ability to continue to operate
in countries affected by the Euro.
SEASONALITY
The Company has experienced some seasonality in its business. 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 office
imaging equipment during such period.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report 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
Company's ability to meet challenges it faces, the Company's future performance
and the Company's outlook for its businesses and respective markets,
projections, statements of management's plans or objectives, forecasts of market
trends and other matters, are forward-looking statements, 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," "anticipate," "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. No
assurance can be given that the results in any forward-looking statement will be
achieved. For the forward-looking statements, the Company claims the protection
of the safe harbor for forward-looking statements provided for in the Private
Securities Litigation Act of 1995. Factors that might cause such differences
include, but are not limited to (i) failure to obtain one or more waivers or
longer term financing beyond the July 31, 2000 waiver period to meet the
Company's liquidity needs, whether through failure to perform as described in
business plans provided to the Company's lenders or otherwise, (ii) increased
competition resulting from other high-volume and digital copier distributors and
the discounting of such copiers by competitors, (iii) any inability by the
Company to manage and reduce its outstanding debt, meet its working capital
needs or otherwise adequately address its liquidity challenges, (iv) any
inability by the Company to procure or any inability by the Company to continue
to gain access to and successfully distribute new, products, including digital
products and high-volume copiers, or to continue to bring current products to
the marketplace at competitive costs and prices, (v) any inability by the
Company to finalize a long-term supply agreement with Heidelberg, (vi) any
inability by the Company to achieve projected cost savings, (vii) the refusal by
any vendor to provide equipment, parts and supplies as a result of the Company's
financial condition, (viii) any inability by the Company to successfully close
facilities without negative impact on the Company's operations, (ix) any
inability by the Company to obtain adequate funding for its leasing business,
(x) any inability by the Company to bring SG&A expenditures of the Company's
U.S. division into line with anticipated sales, (xi) business disruption
resulting from Year 2000 issues including unidentified noncompliance of
technology, delays or difficulties in implementing new IT infrastructure, delays
or difficulties in converting remaining systems and applications, and untimely
third party completion of Year 2000 compliance, (xii) any inability by the
Company to complete the sale of its Omnifax business, (xiii) the ultimate
outcome and impact of the pending class action lawsuit or any other lawsuit,
(xiv) any negative impact from the loss of any key upper management personnel,
(xv) any negative impact on the Company's financial condition or results of
operations caused by the Euro conversion, (xvi) any significant assessment,
pursuant to the review by the Internal Revenue Service, (xvii) fluctuations in
foreign currencies and (xviii) other risks including those risks identified in
any of the Company's other 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 they are
made. 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 such statements are made. Furthermore, as a matter of policy, the
Company does not generally make any specific projections as to future earnings
nor does it endorse any projections regarding future performance, which may be
made by others outside the Company.
13
<PAGE> 14
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1999 1998 1997
$000 $000 $000
For the years ended March 31 Note (Except per ADS data)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Retail equipment sales 755,485 985,303 698,996
Retail service, supplies and rentals 1,920,821 2,068,864 1,152,770
Wholesale 220,914 268,569 240,531
- ------------------------------------------------------------------------------------------------------------------
Total revenue 2,897,220 3,322,736 2,092,297
- ------------------------------------------------------------------------------------------------------------------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 558,370 647,839 437,387
Special charges, cost of retail equipment sales 6 30,709 10,000 --
Retail service, supplies and rental costs 1,155,325 1,237,953 647,787
Special charges retail service, supplies and rental costs 6 27,144 -- --
Wholesale costs of revenue 189,261 217,925 196,470
Special charges, wholesale costs of revenue 6 514 -- --
Selling, general and administrative expenses 979,008 979,381 641,905
Special charges, general and administrative expenses 6 16,805 -- --
Amortization of intangible assets 19,714 21,232 19,386
Write-off of goodwill and other long-lived assets 6 109,474 -- --
Commitment to Kodak under R&D agreements 53,434 50,000 12,500
Restructuring charges 6 40,818 11,000 35,000
- ------------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 3,180,576 3,175,330 1,990,435
- ------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS FROM OPERATIONS (283,356) 147,406 101,862
Interest expense and other, net 5 74,197 64,214 33,985
- ------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE INCOME TAXES (357,553) 83,192 67,877
Provision (benefit) for income taxes 8 (62,773) 30,958 25,522
- ------------------------------------------------------------------------------------------------------------------
(LOSS) EARNINGS BEFORE EXTRAORDINARY ITEM (294,780) 52,234 42,355
Extraordinary item -- loss on early extinguishment
of debt, net of income tax benefit -- -- 578
- ------------------------------------------------------------------------------------------------------------------
NET (LOSS) EARNINGS (294,780) 52,234 41,777
==================================================================================================================
BASIC (LOSS) EARNINGS PER ADS:
(Loss) earnings before extraordinary item $(5.18) $0.92 $ 0.75
Extraordinary item -- -- (0.01)
- ------------------------------------------------------------------------------------------------------------------
Net (loss) earnings per ADS $(5.18) $0.92 $ 0.74
==================================================================================================================
Weighted average ADSs 56,915 56,799 56,268
- ------------------------------------------------------------------------------------------------------------------
DILUTED (LOSS) EARNINGS PER ADS:
(Loss) earnings before extraordinary item $(5.18) $0.90 $ 0.73
Extraordinary item -- -- (0.01)
- ------------------------------------------------------------------------------------------------------------------
Net (loss) earnings per ADS $(5.18) $0.90 $ 0.72
==================================================================================================================
Weighted average ADSs 56,915 57,841 57,725
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE> 15
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
At March 31 Note $000 $000
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 66,095 34,653
Accounts receivable, net of allowance for doubtful
accounts of $61,266 (1998 -- $30,973) 571,470 628,052
Inventories 356,139 482,656
Prepaid expenses, deferred income taxes and other current assets 56,951 35,414
Assets of business held for sale 2 62,791 --
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,113,446 1,180,775
Equipment on operating leases, net 3 264,625 294,348
Property and equipment, net 4 92,963 87,916
Intangible assets:
Goodwill, net of accumulated amortization of $56,259 (1998 -- $57,028) 6 334,964 478,247
Noncompete agreements, net of accumulated
amortization of $8,735 (1998 -- $11,389) 2,477 6,785
Deferred income taxes and other assets 8 96,667 130,870
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 1,905,142 2,178,941
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and notes payable 5 89,732 84,490
Accounts payable 162,294 297,464
Accrued expenses and other current liabilities 333,446 338,237
Deferred revenue 51,818 70,476
Liabilities of business held for sale 2 17,240 --
- -----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 654,530 790,667
Convertible subordinated notes 5 200,000 200,000
Long-term debt and notes payable, less current maturities 5 852,415 658,892
Deferred income taxes and other long-term liabilities 8 27,033 49,075
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,733,978 1,698,634
- -----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Ordinary Shares 1.25 pence stated value; 500,000,000 authorized;
228,067,865 issued and outstanding (1998 -- 227,495,865) 11 4,758 4,746
Additional paid-in capital 304,436 304,197
Retained earnings (deficit) (72,815) 227,917
Accumulated other comprehensive (loss) income (65,215) (56,553)
- -----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 171,164 480,307
- -----------------------------------------------------------------------------------------------------------------
Commitments and contingencies 12
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,905,142 2,178,941
=================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
For the years ended March 31 $000 $000 $000
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) earnings (294,780) 52,234 41,777
Adjustments to reconcile net (loss) earnings to net
cash provided by operating activities:
Depreciation and amortization 163,321 171,273 96,414
Loss on sale of property and equipment and equipment
on operating leases 13,968 2,306 1,039
Proceeds from sale of equipment on operating leases 33,289 35,087 12,505
Restructuring and other special charges 225,464 21,000 35,000
Extraordinary item -- -- 927
Changes in assets and liabilities, net of effects from the purchase of
subsidiaries and the assets and liabilities of business held for sale:
Accounts receivable 27,672 (4,153) 50,806
Inventories 94,943 4,706 (65,204)
Prepaid expenses, deferred income taxes and
other current assets (44,051) 2,992 (16,215)
Deferred income taxes and other noncurrent assets 7,718 (5,544) (5,837)
Accounts payable (136,702) (28,521) 77,093
Accrued expenses and other current liabilities (12,783) (114,185) (25,544)
Deferred revenue (7,847) 2,149 (11,160)
Deferred income taxes and other long-term liabilities (33,648) 32,047 1,053
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,564 171,391 192,654
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (191,054) (189,133) (92,747)
Proceeds from sale of property and equipment 2,913 10,034 16,890
Purchase of subsidiaries, net and proceeds from
settlement of fiscal year 1997 acquisition (1,919) 106,558 (794,672)
Payment for purchase of noncompete agreements (280) (2,758) (1,058)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (190,340) (75,299) (871,587)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (payments) borrowings under line of credit agreements 196,433 (120,512) 734,057
Principal payments on debt (4,983) (6,650) (19,670)
Proceeds from stock options exercised 251 2,586 2,131
Dividends (5,952) (10,623) (9,015)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 185,749 (135,199) 707,503
- ---------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES (531) (115) 7,088
- ---------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 31,442 (39,222) 35,658
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 34,653 73,875 38,217
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 66,095 34,653 73,875
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES
Cash flow information:
Interest paid 76,288 58,992 26,739
Income taxes paid 10,902 13,064 13,980
Non-cash flow information:
Notes payable issued for purchase of subsidiaries -- -- 288
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained Accumulated other
Ordinary paid-in earnings comprehensive
shares capital (deficit) (loss) income Total
$000 $000 $000 $000 $000
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1996 4,585 297,378 148,501 (8,621) 441,843
Net earnings -- -- 41,777 -- 41,777
Currency translation adjustment -- -- -- (18,311) (18,311)
-------
Comprehensive income 23,466
Dividends -- -- (9,015) -- (9,015)
Distributions to former shareholders
of pooled companies -- -- (324) -- (324)
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
Net earnings -- -- 52,234 -- 52,234
Currency translation adjustment -- -- -- (29,621) (29,621)
-------
Comprehensive income 22,613
Dividends -- -- (10,623) -- (10,623)
Shares issued under employee option plans 12 2,574 -- -- 2,586
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1998 4,746 304,197 227,917 (56,553) 480,307
Net loss -- -- (294,780) -- (294,780)
Currency translation adjustment -- -- -- (8,662) (8,662)
-------
Comprehensive loss (303,442)
Dividends -- -- (5,952) -- (5,952)
Shares issued under employee option plans 12 239 -- -- 251
- ----------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1999 4,758 304,436 (72,815) (65,215) 171,164
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 18
NOTES TO 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 wholly owned 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 over the lease term, 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.
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 stated at
the lower of cost (specific cost for equipment and first-in, first-out method
for supplies and parts) or market.
(g) LONG-LIVED ASSETS: The carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets is evaluated for
recoverability whenever adverse effects or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairments are recognized if
future undiscounted cash flows and earnings from operations are not expected to
be sufficient to recover goodwill and other long-lived assets. The carrying
amounts are then reduced by the estimated shortfall of the discounted cash
flows. For the year ended March 31, 1999, the Company wrote-off $109.5 million
of goodwill and other long-lived assets primarily due to impairment (See Note
6). Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized over thirty years on a straight-line basis.
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.
(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 accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(k) EARNINGS PER SHARE: In 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share." Statements 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 (loss) by the weighted average number of
shares outstanding for the period. Diluted EPS reflects the potential dilution
from the exercise of stock options or the conversion of securities into stock.
Earnings per American Depositary Share ("ADS") are based on the current ratio
of four Ordinary Shares to one ADS.
(l) CONCENTRATIONS OF RISK: Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables. The
18
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1999, the Company
had no significant concentrations of credit risk. A substantial portion of the
Company's revenue is derived from the sale of photocopiers and facsimile
equipment. The Company's business is dependent upon close relationships with its
vendors and its ability to purchase products from these vendors on competitive
terms. The Company purchases products from a number of different vendors. For
the year ended March 31, 1999, the Company's purchases of Kodak branded
equipment represented the highest of any vendor and approximated 27% of total
equipment purchases. Effective December 15, 1998, certain supply agreements that
required the Company to make minimum purchases from Kodak were terminated.
Effective May 10, 1999, Kodak sold its equipment, toner and developer
manufacturing operations to Heidelberger Druckmaschnen AG (Heidelberg), a German
global market leader in printing systems. The Company and Heidelberg are engaged
in negotiations with respect to a long-term supply agreement for the Kodak
equipment, parts and supplies the Company is currently distributing, as well as
an additional agreement with respect to the new high-volume digital machine, the
DigiSource 9110.
(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.
(p) NEW ACCOUNTING STANDARDS: In 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for the first
quarter of the fiscal years beginning after June 15, 1999. Statement No. 133
establishes accounting and reporting requirements for derivative instruments and
hedging activities, and modifies disclosures previously required under other
accounting standards. Implementation of Statement No. 133 may be complex. The
Company does not expect the adoption of Statement No. 133 to have a material
impact on its results of operations.
2. BUSINESS HELD FOR SALE
On October 16, 1998, the Company engaged the investment banking firm of
Wasserstein, Perella & Co. ("Wasserstein") to aid in the examination of its
businesses and advise the Company concerning a restructuring of its operations.
During the third quarter of fiscal 1999, Wasserstein was authorized to market
certain of the Company's divisions and operating units to pay down debt and
raise funds for operation of the remaining businesses.
The Company announced on June 18, 1999 that it signed a definitive agreement to
sells its facsimile division, Omnifax, to Xerox Corporation for a cash
consideration of $45.0 million, which approximates the value of the business'
net assets. The Company does not expect to record a material gain or loss on the
sale of Omnifax. The Company expects to complete the sale of Omnifax during the
second quarter of fiscal 2000. The assets and liabilities of Omnifax at March
31, 1999 totaled $62.8 million and $17.2 million, respectively, and consisted
primarily of property and equipment, accounts receivable, inventories, accounts
payable and accrued expenses. These amounts are included in the accompanying
consolidated balance sheet as assets and liabilities of business held for sale
as of March 31, 1999. The revenue, costs and operating expenses of Omnifax for
the years ended March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$000 $000 $000
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue 111,008 126,299 118,287
- ------------------------------------------------------------------------------------------------------------
Costs of revenue 62,206 71,741 70,967
Selling, general and administrative expenses 34,301 37,539 37,073
Amortization of intangible assets 664 934 606
- ------------------------------------------------------------------------------------------------------------
Total costs and operating expenses 97,171 110,214 108,646
- ------------------------------------------------------------------------------------------------------------
Earnings from operations 13,837 16,085 9,641
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The Company also announced on May 20, 1999, that it signed an agreement to sell
a 90% interest in its outsourcing business, Danka Services International ("DSI")
to a newly formed company controlled by Schroder Ventures, an international
private equity group. On June 30, 1999, the agreement to sell DSI to Schroder
Ventures was terminated. The Company was informed by IBM, a customer of DSI,
that there was a distinct possibility IBM might choose to exercise its right to
terminate its agreement as a customer with DSI, and that this action could occur
at any time. As a result of this notice, and after discussions with IBM,
Schroder Ventures informed the Company that Schroder Ventures and its lenders
declined to close the transaction.
3. EQUIPMENT ON OPERATING LEASES, NET
Included in equipment on operating leases is equipment used to generate rental
revenue in the Company's core business and service revenue in the Company's
outsourcing business. 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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
$000 $000
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Equipment on operating leases 401,008 441,906
Equipment used in outsourcing business 110,413 71,770
Less accumulated depreciation (246,796) (219,328)
- ---------------------------------------------------------------------------------------
Equipment on operating leases, net 264,625 294,348
- ---------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
Depreciation expense for the years ended March 31, 1999, 1998 and 1997
approximated $112,426,000, $109,896,000, and $59,985,000, respectively.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, along with their useful lives, consist of the following
at March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Average
1999 1998 useful life
$000 $000 in years
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Buildings 3,504 4,460 31
Office furniture, equipment
and leasehold improvements 169,017 137,193 3-10
Transportation equipment 10,547 13,925 5-15
Land 1,635 1,644 --
- ---------------------------------------------------------------------------------------------------------
Total cost 184,703 157,222
Less accumulated depreciation
and amortization (91,740) (69,306)
- ---------------------------------------------------------------------------------------------------------
Property and equipment, net 92,963 87,916
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense for the years ended March 31, 1999, 1998 and 1997
approximated $31,181,000, $40,145,000, and $17,043,000, respectively.
5. DEBT
Debt consists of the following at March 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
$000 $000
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit (limited to $560.0 million)
interest at IBOR plus an applicable margin or the
agent bank's reference rate (currently averaging
7.1%), matures December 2002 488,612 231,521
Term loan (limited to $475.0 million) interest at
IBOR plus an applicable margin or the agent bank's
reference rate (currently averaging
6.1%), matures December 2002 437,932 479,902
6.75% Convertible Subordinated Notes due April 2002 200,000 200,000
Various notes payable bearing interest from prime to
12.0%, maturing principally over the next 5 years 15,603 31,959
- -----------------------------------------------------------------------------------------------------------
Total long-term debt and notes payable 1,142,147 943,382
Less current maturities of long-term debt and notes
payable (89,732) (84,490)
- -----------------------------------------------------------------------------------------------------------
Long-term debt and notes payable, less
current maturities 1,052,415 858,892
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The Company has a multicurrency credit agreement (totaling $1.035 billion as of
March 31, 1999), which consists of a term loan and revolving line of credit (the
"Credit Agreement"), with a consortium of international banks. The Credit
Agreement, which is secured by substantially all of the Company's U.S. assets,
matures in December 2002, requires scheduled payments of interest throughout the
term of the loan, and the maintenance of certain financial ratios. Additionally,
the term loan requires quarterly principal payments. On October 20, 1998 the
Company obtained a waiver of its obligations to comply with certain financial
covenants and the consequences of failing to comply with such covenants under
its Credit Agreement for a period from September 30, 1998 through February 28,
1999. On February 26, 1999, the Company obtained an extension on the waiver
through August 27, 1999. Effective June 15 and July 9, 1999, the Company and its
bank lenders entered into amendments to its Credit Agreement. Terms of the most
recent amendment include an aggregate commitment by the bank lenders of $995.6
million. The Credit Agreement has been amended to require minimum levels of
adjusted consolidated net worth, cumulative consolidated EBITDA and a ratio of
consolidated EBITDA to interest expense. Compliance with certain other financial
covenants has been waived until July 31, 2000. The Company paid a fee of $2.0
million related to the execution of the first amendment to the Credit Agreement
and an additional payment equal to $10.0 million is to be paid pursuant to the
second amendment on the earliest to occur of (i) July 31, 2000, (ii) repayment
of all amounts due under the Credit Agreement, and (iii) sale of the Company's
outsourcing subsidiary, Danka Services International. Payments of approximately
$2.4 million, $4.7 million and $9.3 million become due on October 31, 1999,
December 31, 1999 and March 31, 2000, respectively, if any amounts remain
outstanding under the Credit Agreement at those dates. The Company is not
permitted to make any acquisitions of businesses, except with the approval of
the bank lenders and the Company is required to apply 60% of the first $200.0
million of net proceeds of any asset dispositions prior to October 31, 1999 to
repayment of amounts due under the Credit Agreement, to so apply 80% of the next
$200.0 million of such net proceeds and to so apply 90% of any additional net
proceeds to the extent any amounts are outstanding under the Credit Agreement.
The Company is required to make such repayments with 80% of such net proceeds
received after October 31, 1999 up to the excess of $400.0 million over the
aggregate net proceeds received on or before October 31, 1999 and 90% of any
additional net proceeds received after October 31, 1999. The lenders'
commitments under the Credit Agreement will be reduced by the amount of all such
repayments. The Company believes cash flow from internally generated funds, the
availability under the most recent amendment to the Credit Agreement and the
anticipated proceeds from the sale of Omnifax will be sufficient to support its
operations during the next twelve months.
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.
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate annual maturities of debt at March 31, 1999, are as follows:
<TABLE>
<CAPTION>
Year ending March 31 $000
- -----------------------------------------------------------------------
<S> <C>
2000 89,732
2001 102,647
2002 151,448
2003 797,568
2004 257
Thereafter 495
- -----------------------------------------------------------------------
1,142,147
- -----------------------------------------------------------------------
</TABLE>
6. RESTRUCTURING AND OTHER SPECIAL CHARGES
FISCAL 1999: The Company recorded certain restructuring and other special
charges during the third and fourth quarters of the fiscal year ended March 31,
1999. The restructuring charges were for headcount reductions, the elimination
of excess facilities, the write-off of goodwill and other long-lived assets, as
well as the write-down of assets which have been impacted as a result of the
termination of certain agreements between the Company and Kodak. The Company
also initiated its worldwide cost reduction program during the third quarter of
fiscal 1999.
A summary of the restructuring and other special pre-tax charges is as follows:
PRE-TAX RESTRUCTURING CHARGE (1):
<TABLE>
<CAPTION>
Other Reserve at
Cash non-cash March 31,
Expense outlays changes 1999(7)
$000 $000 $000 $000
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance 19,820 (5,701) -- 14,119
Future lease obligations on
facility closures 19,790 (2,071) -- 17,719
Write-off of leasehold
improvements on facility closures 3,084 -- (3,084) --
- ------------------------------------------------------------------------------------------------------------------
Total restructuring charges 42,694 (7,772) (3,084) 31,838
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
As noted below under fiscal 1998 and 1997 restructuring charges, unutilized
accruals of $ 1.9 million were adjusted during the third quarter of fiscal 1999
and reflected in the current year pre-tax restructuring charge of $42.7 million,
resulting in a net charge of $40.8 million.
OTHER SPECIAL PRE-TAX CHARGES:
<TABLE>
<CAPTION>
Other Reserve at
Cash non-cash March 31,
Expense outlays changes 1999(7)
$000 $000 $000 $000
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Special charges to cost of retail equipment (2):
Kodak equipment valuations 39,559 -- (39,559) --
Adjustment to the accrued shortfall
in Kodak equipment purchases (10,000) -- 10,000 --
Write-off of other assets 1,150 -- (1,150) --
- ----------------------------------------------------------------------------------------------------------------------------
Total 30,709 -- (30,709) --
Special charges to cost of retail
service, supplies and rentals (3):
Write-off of terminated Kodak agreements 23,991 -- (23,991) --
Write-off of other assets 3,153 -- (3,153) --
- ----------------------------------------------------------------------------------------------------------------------------
Total 27,144 -- (27,144) --
Special charges to wholesale costs of revenue (4):
Inventory write-off related to closure
of U.S. wholesale operations 514 -- 514 --
- ----------------------------------------------------------------------------------------------------------------------------
Special charges to selling, general and
administrative expenses (5):
Write-off of terminated Kodak agreements 13,750 -- (13,750) --
Write-off of other assets 3,055 -- (3,055) --
- ----------------------------------------------------------------------------------------------------------------------------
Total 16,805 -- (16,805) --
FAS 121 impairment of long-lived
assets (6) 109,474 -- (109,474) --
Total other special charges 184,646 -- (184,646) --
- ----------------------------------------------------------------------------------------------------------------------------
RESTRUCTURING AND OTHER SPECIAL CHARGES 227,340 (7,772) (187,730) 31,838
- ----------------------------------------------------------------------------------------------------------------------------
Less unutilized reserves from prior
charges (1,876) -- -- (1,876)
RESTRUCTURING AND OTHER SPECIAL
CHARGES, NET 225,464 (7,772) (187,730) 29,962
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 22
(1) The Company's worldwide cost reduction program was initiated during the
third quarter of fiscal 1999 with the goal of reducing SG&A and improving
profitability. In connection with this program, the Company recorded
pre-tax restructuring charges of $40.1 million and $2.6 million during the
third and fourth quarters of fiscal 1999, respectively. The restructuring
charges included $19.8 million in costs related to severance, representing
the reduction of approximately 1,400 positions worldwide. As of March 31,
1999, the Company had eliminated over 900 of these positions. The remaining
eliminations were completed by the end of the first quarter of fiscal 2000.
Cash outlays related to the workforce reductions during fiscal 1999 totaled
$5.7 million. Generally, severance is paid out to individuals over a period
of time rather than one lump sum payment. The restructuring charges were
also comprised of $19.8 million for future lease obligations on 60 facility
closures. Cash outlays related to the lease obligations on these closed
facilities during fiscal 1999 totaled $2.1 million. The remaining lease
obligations are expected to continue beyond the year 2001. In addition, the
restructuring charges included $3.1 million for the write-off of leasehold
improvements on the aforementioned facility closures.
(2) Special charges to cost of retail equipment sales primarily consisted of
$39.6 million to reflect the decline in the estimated market value of the
Company's Kodak branded inventory as well as additional amounts related to
the termination of certain agreements between the Company and Kodak. See
(3) below for the note on termination of agreements. This charge was
reduced by an adjustment of the $10.0 million provision recorded in
December 1997 for the anticipated shortfall in Kodak equipment purchases.
See Note 12 and fiscal 1998 discussion below.
(3) Special charges to cost of retail service, supplies and rentals primarily
consisted of $24.0 million for the write-off of terminated Supply
Agreements between the Company and Kodak. See Note 12. On December 17,
1998, the Company announced the termination of its Research and Development
Agreement with Kodak, as well as the termination of certain Supply and
other agreements that required the Company to make minimum purchases of
equipment from Kodak.
(4) Special charges to wholesale costs of revenue consisted of $0.5 million for
the write-off of inventory related to the closure of the Company's U.S.
wholesale operations effective March 31, 1999.
(5) Special charges to general and administrative expenses primarily consisted
of $13.7 million related to the write-off of certain terminated agreements
between the Company and Kodak.
(6) In connection with the Company's analysis of operations and restructuring
plan, the Company evaluated its goodwill and other long-lived assets for
recoverability. The Company determined that based on changes in the
business environment and an analysis of projected cash flows, the carrying
amount of certain goodwill and other long-lived assets in the U.S. and
Canada, would not be recoverable. Accordingly, the resulting analysis
necessitated a write-down of $107.9 million during the third quarter of
fiscal 1999, which was comprised of $89.5 million in the U.S. and $18.4
million in Canada. The Company also wrote-off an additional $1.6 million of
goodwill during the fourth quarter of fiscal 1999 related to the closure of
the Company's U.S. wholesale division.
(7) The remaining reserves at March 31, 1999 are included in accrued expenses
and other liabilities on the accompanying consolidated balance sheet as of
March 31, 1999.
FISCAL 1998: 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 Kodak with Danka's existing sales and service network. The
restructuring charge principally consisted of severance and other employee
termination benefits and resulted in the separation of over 1,000 employees
worldwide. At December 31, 1998, approximately $0.6 million remained in accrued
liabilities for these separations which was reversed in the third quarter of
fiscal 1999 and is included in the net $40.8 million restructuring charge in the
accompanying statement of operations for the twelve months ended March 31, 1999.
The Company also recorded a $10.0 million special charge to the cost of retail
equipment sales for the anticipated shortfall in equipment purchases related to
the Supply agreements between Kodak and the Company. Refer to item (3) above for
discussion on Kodak Supply agreements. This charge was reversed in the fourth
quarter of fiscal 1999 and included in the net $30.7 million special charge to
the cost of retail equipment sales.
FISCAL 1997: 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. At December 31, 1998, approximately $6.3 million
remained in accrued liabilities, primarily for the closure of duplicate
facilities. Of this balance, $5.0 million will be utilized for the remaining
lease obligations related to such closures. The remaining $1.3 million in
accrued liabilities was adjusted in the third quarter of fiscal 1999 and
included in the net $40.8 million restructuring charge in the accompanying
statement of operations for the twelve months ended March 31, 1999. As of March
31, 1999, the remaining reserve related to these lease obligations totaled $4.8
million.
7. SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company adopted SFAS No. 131 in its fiscal year 1999. Operating segments are
defined as components of an enterprise in which separate financial information
is available and evaluated regularly by the chief operating decision-maker in
deciding how to allocate resources and in assessing performance. The Company
identified such segments based on both management responsibility and
geographical location.
The Company's reportable operating segments include Danka Americas, Danka
International and Danka Services International (DSI). Danka Americas distributes
photocopiers, facsimiles and other related office imaging equipment together
with the related parts, supplies and services on a direct basis to retail
customers. The geographical areas covered by Danka Americas include the United
States, Canada and Latin America. The Company's Omnifax business, which
distributes private-label facsimiles and related parts, supplies and services
throughout the United States is also included in the Danka Americas segment. See
Note 2 for discussion on sale of the Omnifax business. Danka International also
distributes photocopiers, facsimiles and other related office imaging equipment.
These products, together with the related services, parts and supplies, are
marketed primarily on a direct basis to retail customers. Danka International
also provides photocopiers, facsimiles and related office imaging equipment on a
wholesale basis to independent dealers. Danka International has an extensive
sales and service network throughout Europe and additional operations in
Australasia. DSI is the Company's worldwide document outsourcing business, which
provides a wide range of document management solutions, including the management
of central reprographics departments, the placement and maintenance of
convenience copiers, print-on-demand operations and document archiving and
retrieval services and document management consulting.
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company measures segment performance as earnings from operations, which is
defined as earnings before interest expense and other, net, income taxes and
extraordinary items as shown on the Company's consolidated statements of
operations. Other items are shown for purposes of reconciling to the Company's
total consolidated amounts as shown in the following table for the three years
ended March 31, 1999:
<TABLE>
<CAPTION>
Danka
Danka Danka Services Consolidated
Americas International International Other Total
Year ending March 31 $000 $000 $000 $000 $000
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Total revenue 1,680,925 938,233 278,062 -- 2,897,720
Depreciation and amortization 81,001 47,403 31,432 3,485 163,321
(Loss) earnings from operations before
restructuring and other special charges (37,129) 21,093 24,805 (66,661) (57,892)
Restructuring and other special charges 225,464 225,464
Interest expense & other, net 74,197 74,197
Provision (benefit) for income taxes (62,773) (62,773)
Net (loss) earnings (294,780)
Total assets 933,883 696,654 134,013 140,592 1,905,142
Capital expenditures 102,189 49,312 38,643 910 191,054
- ----------------------------------------------------------------------------------------------------------------------------------
1998
Total revenue 2,029,449 1,043,327 249,960 -- 3,322,736
Depreciation and amortization 100,949 43,264 23,366 3,694 171,273
(Loss) earnings from operations before
restructuring and other special charges 115,044 94,904 27,322 (68,864) 168,406
Restructuring and other special charges 21,000 21,000
Interest expense & other, net 64,214 64,214
Provision for income taxes 30,958 30,958
Net (loss) earnings 52,234
Total assets 1,237,149 776,400 128,715 36,677 2,178,941
Capital expenditures 108,702 50,055 29,666 710 189,133
- ----------------------------------------------------------------------------------------------------------------------------------
1997
Total revenue 1,424,033 612,163 56,101 -- 2,092,297
Depreciation and amortization 61,233 25,612 5,042 4,527 96,414
(Loss) earnings from operations before
restructuring and other special charges 108,992 41,633 4,388 (18,151) 136,862
Restructuring and other special charges 35,000 35,000
Interest expense & other, net 33,985 33,985
Provision for income taxes 25,522 25,522
Net (loss) earnings before extraordinary
item 42,355
Total assets 1,394,519 824,401 117,794 15,990 2,352,704
Capital expenditures 65,848 17,891 7,416 1,592 92,747
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 24
The following table indicates the relative amounts of revenue for the three
years ended March 31, 1999 and the long-lived assets at the respective year ends
of the Company by geographic area:
<TABLE>
<CAPTION>
1999 1998 1997
LONG-LIVED Long-lived Long-lived
REVENUE assets(1)(2) Revenue assets(1) Revenue(3) assets(1)
$000 $000 $000 $000 $000 $000
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States 1,719,066 380,956 2,019,403 486,258 1,368,351 443,172
Europe
Germany 159,231 53,860 158,196 63,010 98,046 53,763
Netherlands 166,332 45,004 182,301 61,978 108,531 55,491
United Kingdom 256,934 98,725 309,350 78,520 137,913 67,352
Other 363,291 82,344 375,848 82,831 211,065 148,541
- -------------------------------------------------------------------------------------------------------------------------------
Total Europe 945,788 279,932 1,025,695 286,339 555,555 325,147
Other foreign countries 232,366 69,080 277,638 94,700 168,391 99,880
- -------------------------------------------------------------------------------------------------------------------------------
Total 2,897,220 729,969 3,322,736 867,297 2,092,297 868,199
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Long-lived assets are defined as equipment on operating leases, property
and equipment, goodwill and noncompete agreements, all of which are net of
the related depreciation and amortization.
(2) Fiscal 1999 includes long-lived assets of business held for sale which
total $30.2 million.
(3) The acquisition of Kodak's Office Imaging and outsourcing businesses was
completed in December 1996. Therefore, fiscal 1997 revenue only includes
three months of the acquired businesses.
8. INCOME TAXES
The provision for income taxes for the three years ended March 31, 1999 was
allocated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$000 $000 $000
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Benefit) provision for income taxes before
extraordinary item (62,773) 30,958 25,522
Tax benefit from extraordinary loss on early
extinguishment of debt -- -- (349)
- --------------------------------------------------------------------------------------------------------
Total (benefit) provision for income taxes (62,773) 30,958 25,173
- --------------------------------------------------------------------------------------------------------
</TABLE>
The (benefit) provision for income taxes before the extraordinary item for the
three years ended March 31, 1999 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$000 $000 $000
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. INCOME TAX
Current (923) 6,785 (4,848)
Deferred (62,433) 2,192 7,438
- -----------------------------------------------------------------------------------------------------
Total U.S. tax (benefit) provision (63,356) 8,977 2,590
- -----------------------------------------------------------------------------------------------------
EUROPE INCOME TAX
Current 7,874 24,180 20,298
Deferred (8,120) (5,086) 40
- -----------------------------------------------------------------------------------------------------
Total Europe tax (benefit) provision (246) 19,094 20,338
- -----------------------------------------------------------------------------------------------------
OTHER INTERNATIONAL INCOME TAX
Current 3,380 4,912 3,059
Deferred (2,551) (2,025) (465)
- -----------------------------------------------------------------------------------------------------
Total other international tax provision 829 2,887 2,594
- -----------------------------------------------------------------------------------------------------
TOTAL (BENEFIT) PROVISION FOR INCOME TAXES
BEFORE EXTRAORDINARY ITEM (62,773) 30,958 25,522
- -----------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the U.K. statutory corporate rate to the effective rate is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
$000 $000 $000
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax (benefit) charge at standard U.K. rate (110,841) 25,798 22,399
(Losses) profits taxed at other than
standard U.K. rate and changes in valuation
allowances 49,559 1,567 (2,962)
Permanent differences (1,491) 3,593 6,085
- -----------------------------------------------------------------------------------------------------------
(Benefit) provision for income taxes before
extraordinary item (62,773) 30,958 25,522
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The tax at standard U.K. rate was 31% in fiscal 1999 and 1998 and 33% in fiscal
1997.
The tax effects of temporary differences that comprise the elements of deferred
tax at March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
$000 $000
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Accrued expenses not deducted for tax purposes 5,160 5,679
Reserves for inventory and accounts receivable not
deducted for tax purposes 17,120 21,458
Restructuring charges not deducted for tax purposes 35,798 1,461
Inventory costs capitalized for tax purposes 4,522 6,330
Tax loss carryforwards 171,324 40,807
Tax credit carryforwards 6,733 9,859
Depreciation 6,134 --
Other -- 317
- ---------------------------------------------------------------------------------------------
Total gross deferred tax assets 246,791 85,911
Valuation allowance (85,266) (14,744)
- ---------------------------------------------------------------------------------------------
Net deferred tax assets 161,525 71,167
- ---------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Leases (113,455) (78,196)
Depreciation -- (18,920)
Other (914) --
- ---------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (114,369) (97,116)
- ---------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSET (LIABILITY) 47,156 (25,949)
- ---------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1999, the Company has net operating loss carryforwards relating to
U.S. operations of approximately $327,547,000 of which $45,402,000 will expire
if not used by March 31, 2012, $107,232,000 if not used by March 31, 2013 and
$174,913,000 if not used by March 31, 2019. The Company also has a research and
development credit of $2,588,000, relating to U.S. operations, which will expire
if not used by March 31, 2013. The Company has an alternative minimum tax credit
carryforward of $4,145,000, also relating to U.S. operations, which is available
indefinitely. The Company has foreign net operating loss carryforwards of
approximately $245,701,000 with varying expiration dates. Significant amounts of
these losses are offset by valuation allowances reflecting the lack of certainty
as to realization. The net change in the total valuation allowance for the years
ended March 31, 1999, 1998 and 1997 was $70,522,000, $4,085,000 and
($1,306,000), respectively.
9. EMPLOYEE BENEFITS
Substantially all of the U.S. employees are entitled to participate in the
Company's 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 90 days of employment. 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.
Effective February 1, 1999, the Company suspended its matching contribution to
the Plan in an action to conserve cash. The expenses related to contributions to
the Plan for the years ended March 31, 1999, 1998 and 1997 were approximately
$12,650,000, $15,116,000, and $3,968,000, respectively.
Most non-U.S. employees participate in defined contribution plans with varying
vesting and contribution provisions. The expenses related to these contributions
for the years ended March 31, 1999 and 1998 were approximately $6,553,000 and
$6,032,000, respectively.
In connection with the acquisition of the Office Imaging and outsourcing
businesses, the Company acquired certain pension obligations of non-U.S.
employees from Kodak. At March 31, 1999 the recorded liability for these pension
obligations was $9.7 million.
The Company has a Supplemental Executive Retirement Plan ("SERP") which provides
additional income for certain of its U.S. executives upon retirement.
Contributions to the SERP are at the discretion of the Company, and were
$333,700, $177,500 and $435,500, respectively, for the years ended March 31,
1999, 1998 and 1997.
25
<PAGE> 26
10. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per ADS computations follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------- ---------------------------------------------
INCOME SHARES PER-SHARE Income Shares Per-Share
(NUMERATOR) (DENOMINATOR) AMOUNT (numerator) (denominator) amount
(In thousands except
per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net (loss) earnings $(294,780) $52,234
BASIC (LOSS)
EARNINGS
PER ADS:
Income available
to shareholders (294,780) 56,915 $(5.18) 52,234 56,799 $0.92
======= =====
EFFECT OF DILUTIVE
SECURITIES:
Stock options -- 1,042
------ ------
DILUTED (LOSS)
EARNINGS
PER ADS:
Income available to
shareholders plus
assumed conversion $(294,780) 56,915 $(5.18) $52,234 57,841 $0.90
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------
Income Shares Per-Share
(numerator) (denominator) amount
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) earnings $41,777
BASIC (LOSS)
EARNINGS
PER ADS:
Income available
to shareholders 41,777 56,268 $0.74
=====
EFFECT OF DILUTIVE
SECURITIES:
Stock options 1,457
------
DILUTED (LOSS)
EARNINGS
PER ADS:
Income available to
shareholders plus
assumed conversion $41,777 57,725 $0.72
- -------------------------------------------------------------------------
</TABLE>
The effect of the Company's $200.0 million of Convertible Subordinated Notes are
not included in the computation of diluted earnings per ADS for the three years
ended March 31, 1999 since they are anti-dilutive. For the year ended March 31,
1999, basic and diluted per share amounts are equal due to the net loss incurred
by the Company.
11. SHARE OPTION PLANS
The Company's current share option plan (1996 Share Option Plan) authorizes the
granting of both incentive and non-incentive share options for an aggregate of
22,500,000 Ordinary Shares (5,625,000 ADS equivalents). The option balance
outstanding at March 31, 1999 also includes options issued pursuant to a plan
that preceded the 1996 Share Option Plan. There are no shares available for
issue under this plan. Under both plans, options are and were 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 under the 1996 Share Option Plan
generally become vested in three equal tranches over three years beginning on
the first anniversary of the date of grant. At March 31, 1999, a total of
4,120,152 options were vested under these plans, with exercise prices ranging
from 43.17 to 592.00 pence per share.
The Company also established The Danka Employees' Trust Fund (the "Employees'
Trust") to be used in conjunction with The Danka 1996 Share Option Plan. The
Employees' Trust may subscribe for shares in the Company, which the Company has
granted in the form of share options, or it may purchase the shares on the open
market. The Employees' Trust will transfer shares to the employee upon exercise
of their options. No shares were acquired by the Company for the year ended
March 31, 1999 and 1998.
Transactions during the three years ended March 31, 1999 were as follows:
<TABLE>
<CAPTION>
Number of Exercise price
Ordinary Shares in pence
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
Granted 8,780,405 217.92-762.50
Exercised (668,816) 41.00-439.67
Canceled (872,600) 307.00-730.00
- --------------------------------------------------------------------------------------------------------------
Balance outstanding at March 31, 1998 16,669,085 26.13-780.00
Granted 14,014,417 80.75-301.00
Exercised (572,000) 26.13
Canceled (5,497,213) 101.50-780.00
- --------------------------------------------------------------------------------------------------------------
BALANCE OUTSTANDING
AT MARCH 31, 1999 24,614,289 43.17-762.50
- --------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information with respect to share options outstanding at March 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Price range Number of Weighted average
in pence Ordinary Shares contractual life
- ------------------------------------------------------------------------------
<S> <C> <C>
43.17-74.25 2,822,400 3.3 years
80.75-127.50 12,801,000 9.7 years
215.66-378.67 6,017,648 8.4 years
445.00-762.50 2,973,241 7.8 years
- ------------------------------------------------------------------------------
24,614,289
- ------------------------------------------------------------------------------
</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>
1999 1998 1997
$000 $000 $000
(Except per ADS data)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net (loss) earnings
As reported (294,780) 52,234 41,777
Pro forma (299,105) 36,869 34,903
Basic net (loss) earnings per ADS
As reported $(5.18) $0.92 $0.74
Pro forma $(5.26) $0.65 $0.62
Diluted net (loss) earnings per ADS
As reported $(5.18) $0.90 $0.72
Pro forma $(5.26) $0.64 $0.60
- -------------------------------------------------------------------------------------------------------------
</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 for each of the fiscal years ended March 31:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% .51% .42%
Expected volatility 164.0% 139.0% 113.7%
Risk-free interest rate 4.6%-5.7% 5.8%-6.7% 5.3%-7.0%
Expected life 5 years 5 years 5 years
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The effects of applying Statement No. 123 in this pro forma disclosure are not
indicative of future amounts.
12. 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, 1999, are as follows:
<TABLE>
<CAPTION>
Year ending March 31 $000
- ----------------------------------------------------------------------
<S> <C>
2000 113,772
2001 59,571
2002 43,575
2003 29,897
2004 18,948
Thereafter 41,072
- ----------------------------------------------------------------------
</TABLE>
Rental expense for fiscal years ended March 31, 1999, 1998 and 1997 was
approximately $109,582,000, $84,482,000, and $53,509,000, respectively.
KODAK COMMITMENTS: In connection with the acquisition of the Office Imaging and
outsourcing businesses, Kodak and the Company entered into certain supply and
other agreements which required the Company to make minimum equipment purchases
from Kodak in future years and to fund research and development activities. For
the year ended March 31, 1998 the Company recorded a provision of $10.0 million
for the anticipated shortfall in equipment purchases relating to various supply
agreements. In addition, the research and development agreement required the
Company to contribute a total of $175.0 million (plus an additional $30.0
million upon the achievement of identified milestones) to Kodak for the
development of new electrophotographic products. Effective December 15, 1998,
the Company and Kodak terminated these agreements. During the fourth quarter of
fiscal 1999, the Company and Kodak reached a new research and development
agreement relating to the completed development of a digital high-volume copier,
under which the Company agreed to pay approximately $23.0 million. The new
machine was introduced in March 1999 at CeBit, an international trade fair in
Hanover, Germany. On June 24, 1999, Kodak and the Company reached an agreement
providing for mutual release of claims and obligations related to certain
agreements previously entered into between Kodak and the Company. In connection
with this agreement, liabilities of $10.0 million for the anticipated shortfall
in Kodak equipment purchases recorded during the third quarter of fiscal 1998
and $13.5 million relating to research and development and other accrued costs
recorded during the third quarter of fiscal 1999 were reversed during the fourth
quarter of fiscal 1999.
27
<PAGE> 28
LEASE COMMITMENTS: Danka Holding Company ("DHC"), a U.S. subsidiary of the
Company, entered into an operating lease agreement (the "Agreement"), which
expires on 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 was approximately
$42.6 million at March 31, 1999.
RELATED PARTY TRANSACTIONS: The Company remains contingently liable for the
repayment of $485,000 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 former 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 former Chief Executive
has a significant interest. For the years ended March 31, 1999, 1998 and 1997,
Danka was charged $721,000, $756,000, and $748,000, respectively, for rent due
under these leases. The leases expire at various dates, with the last lease
expiring in December 2003. In addition, for the year ended March 31, 1999, the
Company paid approximately $2.1 million to a real estate services company whose
former president is related to the former Chief Executive.
LITIGATION: Following the Company's December 16, 1997 announcement regarding the
expected shortfall in revenue and earnings for the third fiscal quarter of 1998
and the 1998 fiscal year, purported class action lawsuits were filed in federal
court in Florida against the Company, former directors and former officers,
alleging violations of the federal securities laws. The lawsuits were
consolidated and a consolidated class action complaint was filed in June 1998.
The Company filed its motion to dismiss the complaint on or about July 29, 1998
and all briefs have been submitted to the court. The Company has not received a
ruling from the court on its motion. The case is 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.
As previously disclosed, the Company was a defendant in a purported lawsuit
brought by the Company's former Chief Executive and Director asserting claims of
breach of contract and fraud for Danka's refusal to pay certain sums alleged due
under his employment agreement. The settlement of this case, which occurred
during the first quarter of fiscal 2000, did not have a material impact on the
Company's operations.
In February 1999, the Company was served with a complaint alleging that in
December 1997, the plaintiffs attempted to sell approximately 1,000,000
restricted ADSs at approximately $35.00 per share and that the Company and its
attorneys wrongfully refused and/or unreasonably delayed in registering the
transfer of the plaintiffs' restricted shares. The complaint further states that
the plaintiffs were unable to complete the sale of shares and were later forced
to sell the shares in February 1998 at approximately $17.00 per share. The
plaintiffs are attempting to recover the difference from the Company and its
attorneys. The Company recently filed its motion to dismiss the complaint. This
case is in the early stages and while the outcome of such litigation is
impossible to predict, management believes this litigation is without merit and
intends to vigorously defend the lawsuit.
The Company is subject to other legal proceedings and claims which arise in the
ordinary course of its business. Management believes that the resolution of the
above matters will not have a material adverse effect upon the Company's
financial position, results of operations or liquidity.
INTERNAL REVENUE SERVICE: The Internal Revenue Service is conducting an
examination of the Company's federal income tax returns for the fiscal years
ended March 31, 1996 and 1995. The Company has received various notices of
proposed adjustments; the principal adjustment relates to the timing of certain
deductions associated with leased equipment financing. While the ultimate result
can not be determined with certainty, the Company intends to vigorously contest
the proposed adjustments and believes that the ultimate resolution will not have
a material adverse effect upon the Company's consolidated results of operations,
liquidity or financial position.
13. ACQUISITIONS
Effective December 31, 1996, the Company acquired from Eastman Kodak Company
("Kodak"), the net assets of Kodak's Office Imaging division and the stock of
Kodak's outsourcing businesses. The acquisition was accounted for as a purchase
for which the Company paid cash of $688.0 million. In September 1997, the
Company received a cash refund of approximately $100.0 million from Kodak
related to the purchase price adjustment provision in the asset purchase
agreement. Based upon the final allocations of the purchase price, the Company
recorded approximately $53.0 million of goodwill.
The Company did not make any material acquisitions for the years ended March 31,
1999 and 1998.
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments: At March 31, 1999, 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,
1999 was approximately $103.0 million, based on the quoted market price of the
Notes. The estimated fair market value at March 31, 1999 of the Company's Credit
Agreement approximated the carrying amount of the debt, due to the short-term
maturities of the individual components of 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, 1999, there were no outstanding forward contracts or option contracts
to buy or sell foreign currency. For the year ended March 31, 1999, 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 principal 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 principal
balances outstanding under the Credit Agreement. At March 31, 1999, the Company
had interest rate swap agreements with four financial institutions, effectively
converting variable rate principal balances to fixed rates for periods of two to
three years. At March 31, 1999, the Company maintained interest rate swaps on
principal/notional amounts of DEM65.1 million ($36.0 million), NLG93.6 million
($45.9 million), FRF166.9 million ($27.5 million), and U.S.$100.0 million, with
weighted average fixed rates of approximately 5.2%.
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.
29
<PAGE> 30
15. 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 1999
Revenue 765,399 733,844 723,874 674,103
Gross profit 279,071 249,722 145,684(a) 261,420(c)
Net earnings (loss) 5,011 (13,355) (274,009)(b) (12,427)(d)
Net earnings (loss) per ADS (diluted) $0.09 $(0.23) $(4.82)(b) $(0.22)(d)
- --------------------------------------------------------------------------------------------------------------------------
Fiscal 1998
Revenue 834,088 814,763 834,226 839,659
Gross profit 309,162 299,028 297,358 303,471
Net earnings (loss) 18,466 19,725 (373)(e) 14,416
Net earnings (loss) per ADS (diluted) $0.32 $0.34 $(0.01)(e) $0.25
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes the effect of $73.2 million in special charges to the cost of
revenue.
(b) Includes the effect of $236.2 million in restructuring and other special
charges.
(c) Includes the net credit of $14.8 million in special charges and credits to
the cost of revenue.
(d) Includes the net credit of $10.7 million in restructuring and other
special charges and credits.
(f) Includes the effect of $21.0 million in restructuring and other special
charges.
30
<PAGE> 31
INDEPENDENT AUDITOR'S 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, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended March 31, 1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1999 in conformity with generally accepted accounting principles
in the United States.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England July 14, 1999
31
<PAGE> 1
EXHIBIT 21
DANKA BUSINESS SYSTEMS PLC
LIST OF SIGNIFICANT SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
STATE/COUNTRY OF
SUBSIDIARY NAME INCORPORATION
--------------- -----------------
<S> <C>
NCNR Oil and Gas Ltd. United Kingdom
Danka Holdings Sarl Luxembourg
Danka Luxembourg Sarl Luxembourg
Dankalux Sarl Luxembourg
Danka Business Finance Ltd. (NRO) Canada
Danka Canada Inc. Canada
Danka Holding Company Nevada
Danka Office Imaging Company Delaware
Danka Holdings Belgium NV/SA Belgium
Danka Belgium NV/SA Belgium
Danka Danmark Holding A/S Denmark
Danka Danmark A/S Denmark
Danka Holding France Sarl France
Danka France SA France
Danka Deutschland Holding GmbH Germany
Danka Deutschland GmbH Germany
Danka Office Imaging GmbH Germany
Danka SpA Italy
Danka Italia SpA Italy
Danka Europe B.V. The Netherlands
Danka Netherland B.V. The Netherlands
Danka Holdings Norway AS Norway
Danka Holdings Iberia SA Spain
Danka Office Imaging S.A. Spain
Danka Holdings Sweden AB Sweden
Danka Office Imaging AB Sweden
Danka Holdings S.A. Switzerland
Danka Office Imaging SA Switzerland
Danka Australasia Pty Ltd. Australia
Danka Australia Pty Ltd Australia
Danka Holdings New Zealand, Ltd. New Zealand
Danka New Zealand Limited New Zealand
Danka Philippines, Inc. Philippines
Danka Participacoes Ltda. Brazil
Danka do Brasil Limitada Brazil
Danka Holdings Mexico S. de R.L. de CV Mexico
Danka Mexicana S. de. R.L. de C.V. Mexico
Danka Holdings BV The Netherlands
Danka Group BV The Netherlands
Danka Europe Ltd. United Kingdom
Danka U.K. Holdings Ltd. Untied Kingdom
Danka U.K. PLC United Kingdom
Danka Office Imaging Limited United Kingdom
</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 July 14,
1999, relating to the consolidated balance sheets of Danka Business Systems PLC
and subsidiaries as of March 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended March 31, 1999, and related schedules,
which report appears in the March 31, 1999 annual report on Form 10-K of Danka
Business Systems PLC.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
July 14, 1999 London, England
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
1998 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-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 66,095
<SECURITIES> 0
<RECEIVABLES> 571,470
<ALLOWANCES> 61,266
<INVENTORY> 356,139
<CURRENT-ASSETS> 1,113,446
<PP&E> 696,124
<DEPRECIATION> 338,536
<TOTAL-ASSETS> 1,905,142
<CURRENT-LIABILITIES> 654,530
<BONDS> 0
0
0
<COMMON> 4,758
<OTHER-SE> 166,406
<TOTAL-LIABILITY-AND-EQUITY> 1,905,142
<SALES> 2,897,220
<TOTAL-REVENUES> 2,897,220
<CGS> 1,961,323<F1>
<TOTAL-COSTS> 1,961,323<F1>
<OTHER-EXPENSES> 1,219,253<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,197
<INCOME-PRETAX> (357,553)
<INCOME-TAX> (62,773)
<INCOME-CONTINUING> (294,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (294,780)
<EPS-BASIC> (5.18)
<EPS-DILUTED> (5.18)
<FN>
<F1>Includes $58.4 million in special charges to cost of revenue.
<F2>Includes $225.5 million in restructuring and other special charges.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
1998 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-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 34,653
<SECURITIES> 0
<RECEIVABLES> 628,052
<ALLOWANCES> 30,973
<INVENTORY> 482,656
<CURRENT-ASSETS> 1,180,775
<PP&E> 670,898
<DEPRECIATION> 288,634
<TOTAL-ASSETS> 2,178,941
<CURRENT-LIABILITIES> 790,667
<BONDS> 0
0
0
<COMMON> 4,746
<OTHER-SE> 475,561
<TOTAL-LIABILITY-AND-EQUITY> 2,178,941
<SALES> 3,322,736
<TOTAL-REVENUES> 3,322,736
<CGS> 2,113,717<F1>
<TOTAL-COSTS> 2,113,717<F1>
<OTHER-EXPENSES> 1,061,613<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,214
<INCOME-PRETAX> 83,192
<INCOME-TAX> 30,958
<INCOME-CONTINUING> 52,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52,234
<EPS-BASIC> 0.92
<EPS-DILUTED> 0.90
<FN>
<F1>Includes $10.0 million provision for the anticipated shortfall in equipment
purchases under the Kodak multi-year Supply Agreements.
<F2>Includes $11.0 pre-tax restructuring charge.
</FN>
</TABLE>
<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> 2,092,297
<TOTAL-REVENUES> 2,092,297
<CGS> 1,281,644
<TOTAL-COSTS> 1,281,644
<OTHER-EXPENSES> 708,791<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-BASIC> 0.74
<EPS-DILUTED> 0.72
<FN>
<F1>Includes $35,000 restructuring charge.
</FN>
</TABLE>
