<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
TO _______________
Commission file number: 0-20828
DANKA BUSINESS SYSTEMS PLC
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
ENGLAND 98-0052869
- -------------------------------------------------------------- --------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
11201 DANKA CIRCLE NORTH
ST. PETERSBURG, FLORIDA 33716
- -------------------------------------------------------------- --------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 727-576-6003
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The registrant had 228,067,865 Ordinary shares outstanding as of December 31,
1998.
<PAGE> 2
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Statements of Operations for the three months ended
December 31, 1998 and 1997 (Unaudited) 3
Consolidated Statements of Operations for the nine months ended
December 31, 1998 and 1997 (Unaudited) 4
Condensed Consolidated Balance Sheets as of December 31, 1998
(Unaudited) and March 31, 1998 (Audited) 5
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1998 and 1997 (Unaudited) 6
Consolidated Statements of Shareholders' Equity for the nine
months ended December 31, 1998 and 1997 (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 37
Item 2 - Changes in Securities 37
Item 3 - Defaults upon Senior Securities 37
Item 4 - Submission of Matters to a Vote of Security Holders 37
Item 5 - Other Information 38
Item 6 - Exhibits and Reports on Form 8-K 38
Signature 41
</TABLE>
2
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per American Depositary Share ("ADS") amounts)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
- --------------------------------------------------------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE:
Retail equipment sales $ 188,426 $ 247,320
Retail service, supplies and rentals 479,960 515,114
Wholesale 55,488 71,792
- --------------------------------------------------------------- ----------- ---------
Total revenue 723,874 834,226
- --------------------------------------------------------------- ----------- ---------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 164,220 159,804
Special charges, cost of retail equipment sales 47,191 10,000
Retail service, supplies and rental costs 292,795 308,416
Special charges, retail service, supplies and rental costs 25,991 --
Wholesale costs of revenue 47,993 58,648
Selling, general and administrative expenses 263,956 252,492
Special charges, general and administrative expenses 17,000 --
Amortization of intangible assets 5,131 6,791
Write-off of goodwill and other long-lived assets 107,858 --
Commitment to Kodak under R&D agreements 12,500 12,501
Restructuring charges 38,174 11,000
- --------------------------------------------------------------- ----------- ---------
Total costs and operating expenses 1,022,809 819,652
- --------------------------------------------------------------- ----------- ---------
(LOSS) EARNINGS FROM OPERATIONS (298,935) 14,574
Interest expense and other, net 21,923 15,168
- --------------------------------------------------------------- ----------- ---------
(LOSS) EARNINGS BEFORE INCOME TAXES (320,858) (594)
Provision (benefit) for income taxes (46,849) (221)
- --------------------------------------------------------------- ----------- ---------
NET (LOSS) EARNINGS $ (274,009) $ (373)
=============================================================== =========== =========
BASIC (LOSS) EARNINGS PER ADS:
Net (loss) earnings per ADS $ (4.82) $ (0.01)
Weighted average ADSs 56,896 56,847
DILUTED (LOSS) EARNINGS PER ADS:
Net (loss) earnings per ADS $ (4.82) $ (0.01)
Weighted average ADSs 56,896 56,847
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
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DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER AMERICAN DEPOSITARY SHARE ("ADS") AMOUNTS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
- ---------------------------------------------------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE:
Retail equipment sales $ 587,091 $ 732,774
Retail service, supplies and rentals 1,458,825 1,553,077
Wholesale 177,201 197,226
- ---------------------------------------------------------- ----------- ----------
Total revenue 2,223,117 2,483,077
- ---------------------------------------------------------- ----------- ----------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 442,725 474,328
Special charges, cost of retail equipment sales 47,191 10,000
Retail service, supplies and rental costs 883,071 933,418
Special charges, retail service, supplies and rental costs 25,991 --
Wholesale costs of revenue 149,662 159,783
Selling, general and administrative expenses 736,714 733,671
Special charges, general and administrative expenses 17,000 --
Amortization of intangible assets 15,510 16,143
Write-off of goodwill and other long-lived assets 107,858 --
Commitment to Kodak under R&D agreements 37,500 37,503
Restructuring charges 38,174 11,000
- ---------------------------------------------------------- ----------- ----------
Total costs and operating expenses 2,501,396 2,375,846
- ---------------------------------------------------------- ----------- ----------
(LOSS) EARNINGS FROM OPERATIONS (278,279) 107,231
Interest expense and other, net 55,867 47,011
- ---------------------------------------------------------- ----------- ----------
(LOSS) EARNINGS BEFORE INCOME TAXES (334,146) 60,220
Provision (benefit) for income taxes (51,793) 22,402
- ---------------------------------------------------------- ----------- ----------
NET (LOSS) EARNINGS $ (282,353) $ 37,818
========================================================== =========== ==========
BASIC (LOSS) EARNINGS PER ADS:
Net (loss) earnings per ADS $ (4.96) $ 0.67
Weighted average ADSs 56,881 56,777
DILUTED (LOSS) EARNINGS PER ADS:
Net (loss) earnings per ADS $ (4.96) $ 0.65
Weighted average ADSs 56,881 57,897
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
DANKA BUSINESS SYSTEMS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
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<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
- ---------------------------------------------------------------------------- ------------ -----------
(UNAUDITED) (AUDITED)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 46,654 $ 34,653
Accounts receivable, net 593,575 628,052
Inventories 435,800 482,656
Prepaid expenses and other current assets 26,467 35,414
- ---------------------------------------------------------------------------- ----------- -----------
TOTAL CURRENT ASSETS 1,102,496 1,180,775
Equipment on operating leases, net 286,637 294,348
Property and equipment, net 101,920 87,916
Intangible assets, net 381,106 485,032
Deferred income taxes and other assets 106,239 130,870
----------- -----------
TOTAL ASSETS $ 1,978,398 $ 2,178,941
============================================================================ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and notes payable $ 101,338 $ 84,490
Accounts payable 185,587 297,464
Accrued expenses and other current liabilities 334,995 338,237
Deferred revenue 66,586 70,476
----------- -----------
TOTAL CURRENT LIABILITIES 688,506 790,667
Convertible subordinated notes 200,000 200,000
Other long-term debt 873,678 658,892
Deferred income taxes and other long-term liabilities 23,143 49,075
- ---------------------------------------------------------------------------- ----------- -----------
TOTAL LIABILITIES 1,785,327 1,698,634
- ---------------------------------------------------------------------------- ----------- -----------
SHAREHOLDERS' EQUITY:
Ordinary shares, 1.25 pence stated value; 500,000,000
authorized; 228,067,865 issued and outstanding 4,758 4,746
Additional paid-in capital 304,436 304,197
Retained earnings (60,388) 227,917
Accumulated other comprehensive income (55,735) (56,553)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 193,071 480,307
- ---------------------------------------------------------------------------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,978,398 $ 2,178,941
============================================================================ =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
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DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
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<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
- ---------------------------------------------------------------------------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) earnings $(282,353) $ 37,818
Adjustments to reconcile net (loss) earnings to net cash
provided by operating activities:
Depreciation and amortization 129,130 139,942
Loss on sale of property and equipment 4,776 1,293
Proceeds from sale of rental equipment 26,162 13,403
Restructuring and other special charges 236,214 --
Changes in assets and liabilities, net of effects from the purchase of
subsidiaries:
Accounts receivable 38,476 (21,509)
Inventories 47,470 (81,775)
Prepaid expenses and other current assets 8,984 (2,982)
Deferred income taxes and other noncurrent assets 19,958 15,390
Accounts payable (120,796) 4,305
Accrued expenses (56,441) (43,407)
Deferred revenue (4,599) (2,455)
Deferred income taxes and other long-term liabilities (73,239) (3,126)
- ---------------------------------------------------------------------------------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (26,258) 56,897
- ---------------------------------------------------------------------------------- --------- ---------
INVESTING ACTIVITIES
Capital expenditures (156,635) (129,694)
Proceeds from sale of property and equipment 2,955 7,999
Purchase of subsidiaries, net and proceeds
from settlement of fiscal year 1997 acquisition (1,534) 104,024
- ---------------------------------------------------------------------------------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (155,214) (17,671)
- ---------------------------------------------------------------------------------- --------- ---------
FINANCING ACTIVITIES
Net borrowings (payments) under line of credit agreements 201,415 (65,761)
Principal payments on debt (2,726) (2,478)
Proceeds from stock options exercised 251 2,539
Dividends (5,952) (4,847)
- ---------------------------------------------------------------------------------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 192,988 (70,547)
- ---------------------------------------------------------------------------------- --------- ---------
EFFECT OF EXCHANGE RATES 485 7,306
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,001 (24,015)
Cash and cash equivalents, beginning of period 34,653 73,875
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 46,654 $ 49,860
================================================================================== ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
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<CAPTION>
ADDITIONAL CURRENCY
ORDINARY PAID-IN RETAINED TRANSLATION
SHARES CAPITAL EARNINGS ADJUSTMENT TOTAL
- --------------------------------- ----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1998 $ 4,746 $ 304,197 $ 227,917 $ (56,553) $ 480,307
Net loss (282,353) (282,353)
Dividends (5,952) (5,952)
Shares issued under employee
options plans 12 239 251
Currency translation adjustment 818 818
- --------------------------------- --------- --------- --------- --------- ---------
Balances at December 31, 1998 $ 4,758 $ 304,436 $ (60,388) $ (55,735) $ 193,071
================================= ========= ========= ========= ========= =========
<CAPTION>
ADDITIONAL CURRENCY
ORDINARY PAID-IN RETAINED TRANSLATION
SHARES CAPITAL EARNINGS ADJUSTMENT TOTAL
- --------------------------------- ----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1997 $ 4,734 $ 301,623 $ 186,306 $ (26,932) $ 465,731
Net earnings 37,818 37,818
Dividends (10,623) (10,623)
Shares issued under employee
options plans 10 2,529 2,539
Currency translation adjustment (12,704) (12,704)
- --------------------------------- --------- --------- --------- --------- ---------
Balances at December 31, 1997 $ 4,744 $ 304,152 $ 213,501 $ (39,636) $ 482,761
================================= ========= ========= ========= ========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7
<PAGE> 8
DANKA BUSINESS SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of December
31, 1998, consolidated statements of operations for the three months and nine
months ended December 31, 1998 and 1997, the consolidated statements of
shareholders' equity for the nine months ended December 31, 1998 and 1997, and
the consolidated statements of cash flows for the nine months ended December 31,
1998 and 1997 are unaudited. In the opinion of management, all adjustments,
consisting of normal recurring accruals, including restructuring and other
special charges, necessary for a fair presentation of the results of operations
for the interim periods presented, have been reflected herein. The results of
operations for the interim periods are not necessarily indicative of the results
which may be expected for the entire fiscal year. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and the notes thereto included in Danka Business Systems PLC's (the
"Company") Annual Report for the year ended March 31, 1998. Certain prior year
amounts have been reclassified to conform to the current year presentation.
NOTE 2. RESTRUCTURING AND OTHER SPECIAL CHARGES
FISCAL 1999 CHARGES:
The Company recorded certain restructuring and other special charges
during the third quarter of fiscal 1999, as outlined below, with the
anticipation that the Company's future operating performance will improve as a
result of the elimination of excess facilities costs, a reduction in selling,
general and administrative expenses (the "worldwide cost reduction program"),
the write-off of goodwill and 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 Eastman Kodak ("Kodak").
PRE-TAX RESTRUCTURING CHARGE (1):
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OTHER
(in thousands) CASH NON-CASH RESERVE AT DEC.
EXPENSE OUTLAYS CHANGES 31, 1998 (6)
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<S> <C> <C> <C> <C>
Severance $17,591 $ (641) -- $16,950
Future lease obligations on facility 19,375 -- -- 19,375
closures
Write-off of leasehold improvements on
facility closures 3,084 -- $ (3,084) --
------- -------- -------- -------
Total $40,050 $ (641) $ (3,084) $36,325
======= ======== ======== =======
</TABLE>
As noted below under fiscal 1998 and 1997 restructuring charges, unutilized
accruals of $1.9 million were reversed during the third quarter of fiscal
1999 and included as a credit to the current year pre-tax restructuring
charge of $40.1 million, resulting in a net charge of $38.2 million.
8
<PAGE> 9
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OTHER SPECIAL CHARGES (PRE-TAX):
------------------------------------------------------
OTHER RESERVE AT
(in thousands) CASH NON-CASH DECEMBER 31,
EXPENSE OUTLAYS CHANGES 1998 (6)
------------------------------------------------------
<S> <C> <C> <C> <C>
Special charges to cost of retail equipment (2):
Kodak equipment valuations $ 46,059 -- $ 39,559 $ 6,500
Write-off of other assets 1,132 -- 1,132 --
--------- ---- -------- --------
Total 47,191 -- 40,691 6,500
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 2,000 -- 2,000 --
--------- ---- -------- --------
Total 25,991 -- 25,991 --
Special charges to selling, general and
administrative expenses (4):
Write-off of terminated Kodak agreements 15,000 -- 15,000 --
Write-off of other assets 2,000 -- 2,000 --
--------- ---- -------- --------
Total 17,000 -- 17,000 --
FAS 121 impairment of long-lived assets (5) 107,858 -- 107,858 --
Total other special charges 198,040 -- 191,540 6,500
--------- ---- -------- --------
RESTRUCTURING AND OTHER SPECIAL CHARGES $ 238,090 $641 $194,624 $ 42,825
========= ==== ======== ========
Less unutilized reserves from prior charges (1,876) -- -- (1,876)
RESTRUCTURING AND OTHER SPECIAL CHARGES, NET $ 236,214 $641 $194,624 $ 40,949
========= ==== ======== ========
</TABLE>
(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 the Company's worldwide
cost reduction program, the Company recorded a $40.1 million pre-tax
restructuring charge during the third quarter of fiscal 1999. The
restructuring charge included $17.6 million in costs related to
severance, which represents the reduction of approximately 1,400
positions worldwide. Cash outlays related to these reductions during
the third quarter totaled $0.6 million. The Company expects to
substantially complete these workforce reductions by the first quarter
of fiscal 2000.
The restructuring charge was also comprised of $19.4 million for future
lease obligations on facility closures. The Company has identified over
60 facilities that will be closed. The remaining lease obligations
related to these facility closures are expected to continue beyond the
year 2001.
In addition, the restructuring charge included $3.1 million for the
write-off of leasehold improvements on the aforementioned facility
closures.
9
<PAGE> 10
(2) Special charges to the cost of retail equipment sales primarily
consisted of $46.1 million for a 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.
(3) Special charges to the 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. 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. See Note 4 - "Credit Agreement Bank Waiver and
Other Contingencies" for discussion on termination of agreements.
(4) Special charges to selling, general and administrative expenses
primarily consisted of $15.0 million for the write-off of certain
terminated agreements between the Company and Kodak. See (3) above for
the note on termination of agreements. See Note 4 - "Credit Agreement
Bank Waiver and Other Contingencies" for discussion on termination of
agreements.
(5) In connection with the Company's restructuring plan, the Company
reviewed its investment in goodwill and other long-lived assets for
impairment. The Company determined that based on changes in the
business environment and an analysis of anticipated cash flows, the
carrying amount of goodwill and other long-lived assets, primarily in
the U.S. and Canada, may not be recoverable. The resulting impairment
necessitated a write-down of $107.9 million, which is 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.
(6) The reserves at December 31, 1998 are included in accrued expenses and
other liabilities on the accompanying consolidated balance sheet as of
December 31, 1998.
ANTICIPATED FOURTH QUARTER CHARGES:
The Company also expects to incur approximately $8.0 million in
restructuring and other special charges during the fourth quarter of fiscal 1999
primarily for the closure/relocation of additional facilities and the costs and
severance related to such closures. These decisions by management to close these
facilities were made during the fourth quarter.
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 Eastman Kodak Company ("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 and is included
as a credit to arrive at the net $38.2 million restructuring charges in the
accompanying statement of operations for the three and nine months ended
December 31, 1998.
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
10
<PAGE> 11
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 reversed and is included as a credit to arrive at the
net $38.2 million restructuring charges in the accompanying statement of
operations for the three and nine months ended December 31, 1998.
NOTE 3. INCOME TAXES (BENEFIT)
The effective income tax rate used to calculate the Company's net loss
before and after the restructuring and other special charges for the nine months
ended December 31, 1998 were a tax benefit of 9.9% and 15.5%, respectively. The
variance in the effective tax rates before and after the third quarter
restructuring and other special charges is primarily due to the following:
- - The inclusion of non-tax deductible items in the special charges,
primarily the write-off of goodwill and other long-lived assets;
- - An increase in valuation allowances established as a result of
uncertainties about the ability to utilize net operating loss
carry-forwards in certain jurisdictions, principally the UK and Canada;
- - The variation in the magnitudes of the Company's pre-tax losses before
and after the restructuring and other special charges.
NOTE 4. CREDIT AGREEMENT BANK WAIVER AND OTHER CONTINGENCIES
As previously disclosed (in a Form 8-K filed by the Company) on October
20, 1998 the Company obtained a waiver of its obligation to comply with certain
financial covenants of its credit agreement with a consortium of international
bank lenders ("Credit Agreement") and any adverse effect resulting from such
non-compliance for a period from September 30, 1998 through February 28, 1999.
Terms of the waiver included a 70-basis point increase in the interest rate on
certain borrowings under the Credit Agreement during the waiver period, the
granting of security interests in substantially all of the Company's U.S.
subsidiaries' assets to secure up to $225.0 million of the borrowings under the
Credit Agreement and a $50.0 million reduction in the total commitment by the
lenders. The Company also agreed to use its best efforts to maintain, during the
waiver period, at least $30 million of lines of credit outside the U.S.
Furthermore, the Company agreed that it shall not incur additional Indebtedness
(as defined in the Credit Agreement) except Indebtedness under the Credit
Agreement and indebtedness under the lines required to be maintained outside the
U.S. During the term of the waiver, the Company may not pay dividends and the
lenders' consent is required for any acquisition or investments by the Company.
Pursuant to that waiver, the banks agreed to provide the Company with
up to $75.0 million in new loans upon satisfaction of certain conditions,
including a requirement that the Company present to the banks a business plan
demonstrating a process for reducing outstanding indebtedness and achieving
results of operations necessary to permit performance and satisfactory
compliance with the Credit Agreement, review by the lenders' consultant and the
lenders of the business plan and the Company's providing cash flow projections
demonstrating the need for the additional loans. On December 8, 1998, the
Company presented its business plan and other information to the banks at which
time the banks approved the plan and advanced the full $75.0 million in new
loans to the Company.
11
<PAGE> 12
Pursuant to its business plan, the Company is in the process of
implementing a number of initiatives, including (i) reducing SG&A costs, (ii)
improving management of working capital, (iii) a divestiture program, (iv)
completion of negotiations addressing the Company's long term relationship with
Kodak, (v) completion of negotiations with GE Capital Corporation ("GE Capital")
and other providers of financing for the Company's leasing business, and (vi)
other elements of restructuring of its business.
The Company believes that it has made significant progress in
implementing these initiatives and that its fundamental businesses are sound.
Nevertheless the Company faces significant challenges and risks as outlined
below.
To permit sufficient time to continue the processes and initiatives
described above, the Company has requested its bank lenders to extend the waiver
for an additional 180 days and to agree to provide an additional $30.0 million
in new loans to the Company if needed. The Company has agreed, if the waiver is
granted, that the existing U.S. collateral will secure all of its indebtedness
under the Credit Agreement, the Company will agree to apply substantial portions
of the proceeds from its asset divestitures to outstanding indebtedness under
the Credit Agreement, that the $30.0 million in new loans, if drawn, will bear
interest at 1.5% in excess of the regular interest rate, and that it will pay
the banks a fee of approximately $1 million for such waiver.
The Company has reached agreement with a steering committee of lenders
holding approximately 31% of the commitments under the Credit Agreement to grant
such a waiver. Under the terms of the Credit Agreement, approval by 51% in
interest of the lenders (Majority Approval) is required to effect such a waiver.
While the Company anticipates, based on its prior relationship with the lenders,
that such Majority Approval will be obtained, there can be no assurance that
such approval will in fact be obtained prior to the expiration of the current
waiver on February 28, 1999. In the absence of such Majority Approval, the
Company would be in default under the Credit Agreement shortly after termination
of the existing waiver and, if that should occur, the lenders, by Majority
Approval, could accelerate the maturity of the Company's indebtedness under the
Credit Agreement.
The last dividend paid to shareholders by the Company was July 28,
1998. As stated above, the Company may not pay dividends during the term of the
bank waiver. Additionally, the Company does not anticipate that the payment of a
dividend will be reinstated upon expiration of the waiver.
The Company announced during its third quarter a 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 the SG&A expenditures of
the Company's U.S. division in line with anticipated revenue. The Company began
certain initiatives related to the program during the third quarter including
the elimination of various advertising programs and non-essential IT projects,
and headcount reductions. The Company previously announced the reduction of 450
positions at its Rochester, NY facilities. In connection with the worldwide cost
reduction program, the Company recorded a gross pre-tax restructuring charge of
$40.1 million in December 1998. The costs related to severance represent the
reduction of approximately 1,400 positions worldwide. The Company expects to
substantially complete these workforce reductions by the first quarter of fiscal
2000. The Company's National Service Dispatch Call Center, DSI division,
regional sales and service operations, and certain other essential functions
will not be affected.
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 will reduce
payment obligations to Kodak during the next three to four years (after taking
12
<PAGE> 13
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,
before special charges, by $83.1 million during the third quarter of fiscal 1999
by minimizing purchases of new equipment and selling existing inventory, using
price concessions where necessary.
The Company and Kodak have reached an agreement under which Kodak is
required to finish development of a digital high-volume copier. The Company will
pay to Kodak a series of equal monthly payments, beginning in February and
ending in July, totaling $23.0 million. In addition, the Company has agreed to
apply 10% of the proceeds of certain asset sales to its remaining outstanding
obligations to Kodak. Kodak agreed to manufacture this product for at least
three years, so long as it remains in the copier business, and to deliver a
commercially saleable unit by June 30, 1999.
The Company has entered into a series of interim agreements with Kodak
under which Kodak has agreed to provide parts and supplies to the Company in
both its International and Americas divisions on a cash basis through February
28, 1999. Under these agreements, the Company must make payments of 125% of the
purchase price with the excess to be applied to outstanding invoices from Kodak
for parts and supplies previously shipped. In the absence of further extensions,
the Company believes that Kodak is obligated under contract and antitrust law to
ship parts and supplies to the Company so long as the Company pays cash on
order. Kodak has acknowledged an obligation that survives termination of the
Supply Agreements to continue to make copier supplies and spare parts available
to the Company, on a basis substantially similar to that available to the
general market, until the earlier of five years or until Kodak is no longer a
provider of such supplies and spare parts. Given the limited sale by Kodak of
spare parts and supplies to others than the Company, it is uncertain what the
market price and terms of sale to the Company would be in the event that the
interim agreement is not extended.
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. The Company is
continuing to work with GE Capital to address concerns raised by GE Capital in
its November 12 letter. In addition, the Company and GE are currently working
together under a program outside of the Master Trust while discussions continue
in efforts to establish a more extensive lease financing relationship. The
Company expects to enter into a satisfactory agreement with GE Capital in this
regard. However, there can be no assurance the Company will be able to reach
such an agreement.
As previously disclosed, the Company engaged the investment banking
firm of Wasserstein, Perella & Co. to aid it in an examination of its businesses
and advise the Company concerning a restructuring. During the third quarter,
Wasserstein, Perella & Co. 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, and is currently engaged in that effort. Bids have
been received and discussions and negotiations are under way. The Company
anticipates a satisfactory completion of the divestiture process.
The Company believes that in the event the extension of its waiver
under its Credit Agreement is approved and it is able to obtain a satisfactory
conclusion to the asset sale process, then anticipated cash
13
<PAGE> 14
flows will be sufficient for its operations through the extended waiver period.
As noted above, the Company anticipates that it will be able to obtain extension
of the waiver and a satisfactory conclusion to the asset sale process.
The Internal Revenue Service is conducting an examination of the
Company's federal income tax returns for the fiscal years ended March 31, 1995
and 1996. 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 materially impact the
Company's consolidated results of operations or financial position.
NOTE 5. (LOSS) EARNINGS PER SHARE
The following table reconciles the numerator and denominator of the basic and
diluted earnings per ADS computations:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, 1998 DECEMBER 31, 1998
-------------------------------------- ----------------------------------------
(In 000's except per share amounts) INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(274,009) $(282,353)
BASIC LOSS PER ADS (1):
Income available to shareholders $(274,009) 56,896 $(4.82) $(282,353) 56,881 $(4.96)
====== ======
</TABLE>
(1) Basic loss per ADS equals diluted loss per ADS due to the net loss incurred
by the Company for the three and nine months ended December 31, 1998.
NOTE 6. COMPREHENSIVE (LOSS) INCOME
The following table presents comprehensive (loss) income for the three and nine
months ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------------------- -----------------------
<S> <C> <C> <C> <C>
Net (loss) earnings $(274,009) $(373) $(282,353) $37,818
Foreign currency translation, net of tax (3,410) (609) 691 (7,976)
--------- ----- --------- -------
Total comprehensive (loss) income $(277,419) $(982) $(281,662) $29,842
========= ===== ========= =======
</TABLE>
14
<PAGE> 15
NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
In June 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 year 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.
NOTE 8. PENDING LITIGATION
The Company, various directors, former officers and a former director
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 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.
The Company is a defendant in a purported lawsuit brought by the
Company's former Chief Executive and Director. The former Chief Executive and
Director has asserted claims of breach of contract and fraud for Danka's refusal
to pay certain sums alleged due under his employment agreement. The Company
recently filed its motion to dismiss the complaint. This case is currently 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 effect upon the
Company's financial position or results of operations or liquidity.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Danka Business Systems PLC and 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 also markets photocopiers, facsimiles,
and related parts and supplies on a wholesale basis to independent dealers. The
Company principally distributes the products of Canon, Kodak, Konica, Minolta,
Ricoh, Sharp and Toshiba. In addition, the Company markets private label
photocopiers and facsimiles and related supplies on a direct basis under the
Company's Infotec trademark, and facsimile equipment under its dex and Omnifax
trademarks.
The Company also provides worldwide document services through its
outsourcing business, Danka Services International ("DSI"). DSI provides a wide
range of 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.
The Company has experienced a decline in revenue and earnings during
the nine months ended December 31, 1998. Revenue declined 10% to $2.2 billion
for the nine months ended December 31, 1998, while earnings, before
restructuring and other special charges, declined to a net loss of $88.2
million. Including the effect of the restructuring and other special charges,
the Company reported a net loss of $282.4 million for the nine months ended
December 31, 1998. See Note 3 "Income Taxes" for the different effective tax
rates before and after restructuring and other special charges. The performance
of the Company has been 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 -
"Quarter and Nine Month Comparisons for the period ended December 31, 1998" for
full discussion.
The Company continues to take steps 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 under the Danka brand
to all of its customers throughout North America, Europe and select Latin
American countries. In January, the Company finalized an additional agreement
with Canon allowing the Company to offer a full line of digital black and white
copiers throughout the U.S. Further, the Company remains in discussions with
other manufacturers regarding similar nationwide digital product distribution.
In addition, the Company and Kodak have reached an agreement under
which Kodak is required to finish development of a digital high-volume copier.
The Company will pay to Kodak a series of equal monthly payments, beginning in
February and ending in July, totaling $23.0 million. In addition, the Company
has agreed to apply 10% of the proceeds of certain asset sales to its remaining
outstanding obligations to Kodak. Kodak agreed to manufacture this product for
at least three years, so long as it remains in the copier business, and to
deliver a commercially saleable unit by June 30, 1999.
On October 16, 1998, the Company announced the appointment of
Wasserstein Perella & Co. as financial advisor to the Company. In conjunction
with Wasserstein, the Company is evaluating its strategic and financial options,
including the sale of certain divisions. The Company is currently involved in
active negotiations with respect to the sale of certain divisions.
16
<PAGE> 17
The Company announced in the third quarter 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 began
certain initiatives related to the program during the third quarter including
the elimination of various advertising programs and non-essential IT projects,
and headcount reductions. The Company previously announced the reduction of 450
positions at its Rochester, NY facilities. The Company anticipates that the
elimination of positions related to the worldwide cost reduction program will be
substantially completed by the end of the first quarter of fiscal 2000. The
Company's National Service Dispatch Call Center, DSI division, regional sales
and service operations, and certain other essential functions will not be
affected.
The Company expects to generate approximately $100.0 million in
annualized savings after full implementation of its worldwide cost reduction
program. Key initiatives of the program include the following:
- - Closure and consolidation of facilities;
- - Headcount reductions through the streamlining of functions and the
elimination of non-core and duplicative positions;
- - Other cost cutting initiatives, including reductions in advertising
programs and discretionary spending, rationalization of distribution
systems and the elimination of non-essential IT projects.
In December, 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.
17
<PAGE> 18
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>
THREE MONTHS ENDED NINE MONTHS ENDED
DOLLAR AMOUNTS IN MILLIONS DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Retail equipment sales ...................... $ 188.4 $ 247.3 $ 587.1 $ 732.8
Retail service, supplies and rentals ........ 480.0 515.1 1,458.8 1,553.0
Wholesale ................................... 55.5 71.8 177.2 197.2
-------- -------- ---------- ----------
Total revenue ........................... 723.9 834.2 2,223.1 2,483.0
Cost of revenue ............................... 578.2 536.8 1,548.6 1,577.5
-------- -------- ---------- ----------
Gross profit .................................. 145.7 297.4 674.5 905.5
Selling, general and administrative expenses... 280.9 252.5 753.7 733.7
Amortization of intangible assets ............. 5.1 6.8 15.5 16.1
Write-off of goodwill and long-lived assets.... 107.9 -- 107.9 --
Commitment to Kodak under R&D
agreements............................... 12.5 12.5 37.5 37.5
Restructuring charges ......................... 38.2 11.0 38.2 11.0
-------- -------- ---------- ----------
(Loss) earnings from operations ......... (298.9) 14.6 (278.3) 107.2
Interest expense and other, net ............... 21.9 15.2 55.8 47.0
-------- -------- ---------- ----------
(Loss) earnings before income taxes ..... (320.8) (0.6) (334.1) 60.2
Provision (benefit) for income taxes .......... (46.8) (0.2) (51.8) 22.4
-------- -------- ---------- ----------
Net (loss) earnings ..................... $ (274.0) $ (0.4) $ (282.3) $ 37.8
======== ======== ========== ==========
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
PERCENTAGE OF TOTAL REVENUE DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Retail equipment sales....................... 26.0% 29.7% 26.4% 29.5%
Retail service, supplies and rentals......... 66.3 61.7 65.6 62.6
Wholesale.................................... 7.7 8.6 8.0 7.9
----- ----- ----- -----
Total revenue............................ 100.0 100.0 100.0 100.0
Cost of revenue................................ 79.9 64.4 69.7 63.5
----- ----- ----- -----
Gross profit................................... 20.1 35.6 30.3 36.5
Selling, general and administrative expenses... 38.8 30.3 33.9 29.5
Amortization of intangible assets.............. 0.7 0.8 0.7 0.8
Write-off of goodwill and long-lived assets.... 14.9 -- 4.9 --
Commitment to Kodak under R&D agreements.......
1.7 1.5 1.7 1.5
Restructuring charges.......................... 5.3 1.3 1.6 0.4
----- ----- ----- -----
(Loss) earnings from operations.......... (41.3) 1.7 (12.5) 4.3
Interest expense and other, net................ 3.0 1.8 2.5 1.9
----- ----- ----- -----
(Loss) earnings before income taxes...... (44.3) (0.1) (15.0) 2.4
Provision (benefit) for income taxes........... (6.4) -- (2.3) 0.9
----- ----- ----- -----
Net (loss) earnings...................... (37.9)% (0.1)% (12.7)% 1.5%
===== ===== ===== =====
</TABLE>
18
<PAGE> 19
BEFORE RESTRUCTURING AND OTHER SPECIAL CHARGES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DOLLAR AMOUNTS IN MILLIONS DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Retail equipment sales ...................... $ 188.4 $ 247.3 $ 587.1 $ 732.8
Retail service, supplies and rentals ........ 480.0 515.1 1,458.8 1,553.0
Wholesale ................................... 55.5 71.8 177.2 197.2
-------- -------- ---------- ----------
Total revenue ........................... 723.9 834.2 2,223.1 2,483.0
Cost of revenue ............................... 505.0 526.8 1,475.5 1,567.5
-------- -------- ---------- ----------
Gross profit .................................. 218.9 307.4 747.6 915.5
Selling, general and administrative expenses... 264.0 252.5 736.7 733.7
Amortization of intangible assets ............. 5.1 6.8 15.5 16.1
Commitment to Kodak under R&D
agreements .............................. 12.5 12.5 37.5 37.5
Restructuring charges ......................... -- -- -- --
-------- -------- ---------- ----------
(Loss) earnings from operations ......... (62.7) 35.6 (42.1) 128.2
Interest expense and other, net ............... 21.9 15.2 55.8 47.0
-------- -------- ---------- ----------
(Loss) earnings before income taxes ..... (84.6) 20.4 (97.9) 81.2
Provision (benefit) for income taxes .......... (4.7) 7.6 (9.7) 30.2
-------- -------- ---------- ----------
Net (loss) earnings ..................... $ (79.9) $ 12.8 $ (88.2) $ 51.0
======== ======== ========== ==========
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
PERCENTAGE OF TOTAL REVENUE DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Retail equipment sales ...................... 26.0% 29.7% 26.4% 29.5%
Retail service, supplies and rentals ........ 66.3 61.7 65.6 62.6
Wholesale ................................... 7.7 8.6 8.0 7.9
----- ----- ----- -----
Total revenue ........................... 100.0 100.0 100.0 100.0
Cost of revenue ............................... 69.8 63.2 66.4 63.1
----- ----- ----- -----
Gross profit .................................. 30.2 36.8 33.6 36.9
Selling, general and administrative expenses... 36.5 30.3 33.1 29.5
Amortization of intangible assets ............. 0.7 0.7 0.7 0.7
Commitment to Kodak under R&D
agreements............................... 1.7 1.5 1.7 1.5
Restructuring charges ......................... -- -- -- --
----- ----- ----- -----
(Loss) earnings from operations ......... (8.7) 4.3 (1.9) 5.2
Interest expense and other, net ............... 3.0 1.9 2.5 1.9
----- ----- ----- -----
(Loss) earnings before income taxes ..... (11.7) 2.4 (4.4) 3.3
Provision (benefit) for income taxes .......... (0.7) 0.9 (0.4) 1.2
----- ----- ----- -----
Net (loss) earnings ..................... (11.0)% 1.5% (4.0)% 2.1%
===== ===== ===== =====
</TABLE>
19
<PAGE> 20
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>
THREE MONTHS ENDED NINE MONTHS ENDED
DOLLAR AMOUNTS IN MILLIONS DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retail equipment sales......................... $(23.0) $ 77.5 $ 97.2 $248.4
Retail service, supplies and rentals........... 161.2 206.7 549.8 619.7
Wholesale...................................... 7.5 13.2 27.5 37.4
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AS PERCENTAGE OF EACH REVENUE CLASSIFICATION DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retail equipment sales......................... (12.2)% 31.3% 16.6% 33.9%
Retail service, supplies and rentals........... 33.6 40.1 37.7 39.9
Wholesale...................................... 13.5 18.3 15.5 19.0
</TABLE>
BEFORE RESTRUCTURING AND OTHER SPECIAL CHARGES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DOLLAR AMOUNTS IN MILLIONS DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retail equipment sales......................... 24.2 87.5 144.4 258.5
Retail service, supplies and rentals........... 187.2 206.7 575.7 619.7
Wholesale...................................... 7.5 13.2 27.5 37.4
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AS PERCENTAGE OF EACH REVENUE CLASSIFICATION DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retail equipment sales......................... 12.8% 35.4% 24.6% 35.3%
Retail service, supplies and rentals........... 39.0 40.1 39.5 39.9
Wholesale...................................... 13.5 18.3 15.5 19.0
</TABLE>
20
<PAGE> 21
THE FOLLOWING COMPARISON ANALYSIS FOR THE QUARTER AND NINE MONTHS ENDED
DECEMBER 31, 1998 IS BASED ON THE COMPANY'S RESULTS BEFORE THE EFFECT OF
RESTRUCTURING AND OTHER SPECIAL CHARGES, WHICH OCCURRED DURING THE QUARTER
ENDING DECEMBER 31, 1998. TO REVIEW THE EFFECTS OF SUCH CHARGES ON THE COMPANY'S
OPERATIONS, PLEASE REFER TO NOTE 2 ON PAGE 8 AND THE COMPARATIVE TABLES ON PAGES
18-20.
QUARTER ENDED DECEMBER 31, 1998 COMPARED TO QUARTER ENDED DECEMBER 31, 1997:
Revenue
Revenue declined 13% to $723.9 million for the three months ended
December 31, 1998 ("third quarter of fiscal 1999") compared to $834.2 million
for the three months ended December 31, 1997 ("third quarter of fiscal 1998"),
primarily due to lower equipment sales and reduced retail service, supplies and
rentals revenue in both the U.S. and international markets. The Company believes
the shortfall in equipment sales is related to a number of factors. First,
equipment sales were affected by the recent negative press regarding the
Company's financial situation, which has led to price discounting for customers.
Second, the Company's product availability has been constrained due to stricter
credit terms with suppliers. Similarly, the Company has been lacking the digital
product availability necessary to compete with the accelerated shift to digital
products in the U.S. and Australasia. The Company is currently taking steps to
improve its digital product availability to meet the accelerated shift in
customer demand. In January, the Company finalized an agreement with Canon
allowing the Company to offer a full line of digital black and white copiers
throughout the U.S. In addition, as previously announced in September, the
Company began an alliance with Canon, allowing the Company to offer the complete
line of Canon color copiers under the Danka brand to all of its customers
throughout North America, Europe and select Latin American countries. During the
third quarter, the Company also experienced difficulties in receiving lease
financing and this resulted in a delay or loss of sales in both the North
American and International markets. The International division's equipment
sales, primarily in the UK and Australasia, were also impacted as a result of
competitive pressures from Japanese manufacturers selling directly to customers.
The Company's retail service, supplies and rentals revenue declined 7%
to $480.0 million in the third quarter of fiscal 1999 from $515.1 million in the
third quarter of fiscal 1998. The decline is primarily due to two factors.
First, the continued erosion of the U.S. installed machine base, specifically
within its named accounts, has resulted in a decline in service and supply
revenue. Second, supply sales in the Company's International division have
weakened due to competitive pressures from Japanese manufacturers selling
directly to customers.
Wholesale sales declined 23% to $55.5 million in the third quarter of
fiscal 1999 from $71.8 million in the third quarter of fiscal 1998 primarily due
to lower sales in the U.S. in both equipment and supplies. The revenue decline
is primarily due to the Company focusing its efforts on higher profit margin
sales.
Approximately 40% of the Company's revenue is generated in countries
outside of the United States. In prior periods, foreign exchange rate
fluctuations have impacted the Company's comparable financial results. Foreign
currency fluctuations did not have a material effect on the Company's operations
for the third quarter of fiscal 1999.
21
<PAGE> 22
Gross Profit
Gross profit declined 29% to $218.9 million for the third quarter of
fiscal 1999 from $307.4 million for the third quarter of fiscal 1998. The gross
profit margin as a percentage of total revenue decreased to 30.2% for the third
quarter of fiscal 1999 from 36.8% for the third quarter of fiscal 1998. The
decline in the Company's combined gross profit margin was primarily due to a
lower retail equipment and wholesale margin.
Including the effect of special charges to cost of equipment sales and cost of
service, supplies and rentals during the third quarter and the $10.0 million
provision for the anticipated shortfall in equipment purchases recorded in the
third quarter of fiscal 1998, gross profit was $145.7 million for the third
quarter of fiscal 1999 versus $297.4 million for the third quarter of fiscal
1998. See Note 2 - "Restructuring and Other Special Charges" for discussion.
Gross profit as a percentage of retail equipment sales declined to
12.8% for the third quarter of fiscal 1999 from 35.4% for the third quarter of
fiscal 1998. The decline in the retail equipment margin is attributable to
several factors, including the write-down of certain of the Company's non-Kodak
branded inventory to estimated market value and the Company's continued efforts
to reduce used machine and out-of-the-box inventories. The net impact of these
factors was approximately $25.0 million. See Note 2 - "Restructuring and Other
Special Charges" for discussion on other inventory write-downs affecting Kodak
branded inventory during the third quarter. Other factors that affected the
Company's retail equipment gross profit margin were primarily due to external
market pressures. First, the recent negative press regarding the Company's
financial situation has 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 a loss of 12.2% for the third quarter of
fiscal 1999. See Note 2 - "Restructuring and Other Special Charges" for
discussion.
As a percentage of revenue, the gross profit margin on retail service,
supplies and rentals declined to 39.0% for the third quarter of fiscal 1999 from
40.1% for the third quarter of fiscal 1998. Excluding the Company's outsourcing
business (DSI), the retail service, supplies and rentals margin, was 41.7%
compared to 42.5% for the third quarter of fiscal 1998. DSI has a lower gross
profit margin due to the nature of the business. Although DSI has a lower gross
profit margin than the Company's core copier business, its operating profit
margin exceeded 10% of revenue for the third quarter of fiscal 1999.
With effect of the special charges to retail service, supplies and
rental costs, the Company reported a gross profit margin of 33.6% for the third
quarter. See Note 2 - "Restructuring and Other Special Charges" for discussion.
As a percentage of revenue, the gross profit margin on wholesale sales
declined to 13.5% for the third quarter of fiscal 1999 from 18.3% for the third
quarter of 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. In addition, the comparable
wholesale margin for the third quarter of fiscal 1998 was particularly strong
last year due to solid private label sales.
22
<PAGE> 23
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") increased to
$264.0 million for the third quarter of fiscal 1999 from $252.5 million for the
third quarter of fiscal 1998. The increase is primarily related to higher
general and administrative expenses in the U.S. Factors of the increase included
increased bad debt expenses, professional fees related to the Company's
restructuring efforts, costs associated with the IT separation from Kodak in
December and other miscellaneous expenses. The net impact of these factors was
approximately $15.0 million in the third quarter. During the third quarter, the
Company implemented a worldwide cost reduction program with the goal of reducing
SG&A levels. As a percentage of revenue, SG&A expenses increased to 36.5% for
the third quarter of fiscal 1999 from 30.3% for the third quarter of fiscal
1998. The increase was due to the lower revenue and higher general and
administrative expenses in the U.S.
Including the effect of special charges, the Company reported total
SG&A expenses of $280.9 million. See Note 2 - "Restructuring and Other Special
Charges" for discussion.
Amortization of Intangible Assets
Amortization of intangible assets decreased to $5.1 million for the
third quarter of fiscal 1999 from $6.8 million for the third quarter of fiscal
1998.
In connection with the Company's restructuring plan, the Company
reviewed its investment in goodwill and other long-lived assets for impairment.
The Company determined that based on changes in the business environment and an
analysis of anticipated cash flows, the carrying amount of goodwill and other
long-lived assets, primarily in the U.S. and Canada, may not be recoverable. The
resulting impairment necessitated a write-down of $107.9 million, which is
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. See Note 2 "Restructuring and
Other Special Charges."
Commitment to Kodak under R&D 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 the third quarter of fiscal
1999, research and development costs totaled $12.5 million. Effective December
17, 1998 this agreement was terminated and the Company is no longer providing
research and development funding to Kodak under the prior agreement. See Note 4
- - "Credit Agreement Bank Waiver and Other Contingencies" for discussion on
current agreement.
Restructuring Charges
The Company recorded a $40.1 million pre-tax restructuring charge
during the third quarter of fiscal 1999 primarily related to the Company's
worldwide cost reduction program. Through several key initiatives, it is the
Company's goal to reduce SG&A and improve profitability. See - "Note 2
Restructuring and Other Special Charges" on page 8 for complete details on the
charge. The fiscal 1999 restructuring charge was reduced by $1.9 million for
remaining liabilities unused from prior restructuring charges in fiscal 1998 and
1997.
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Earnings (loss) from Operations
The Company reported an operating loss of $62.7 million for the third
quarter of fiscal 1999 compared to earnings from operations of $35.6 million for
the third quarter of 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 $298.9 million for the third quarter of fiscal 1999. See
Note 2 - "Restructuring and Other Special Charges" for discussion.
Interest Expense and Other, Net
Interest expense and other, net increased to $21.9 million for the
third quarter of fiscal 1999 compared to $15.2 million for the third quarter of
fiscal 1998. The increase primarily related to higher levels of borrowings
versus last year and a higher interest rate during the third quarter of fiscal
1999. 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."
Income Taxes
The Company recorded a tax benefit of $4.7 million for the third
quarter of fiscal 1999 compared to income taxes of $7.6 million for the third
quarter of fiscal 1998. The tax benefit for the third quarter of fiscal 1999 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% for the
third quarter of fiscal 1998 to a tax benefit of 5.6% for the third quarter of
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 the UK and Canada, and the magnitude of the loss.
Including the effect of restructuring and other special charges, the
Company's effective tax rate increases to 14.6% for the third quarter of fiscal
1999. See - "Note 3 Income Taxes."
Net (Loss) Earnings
As a result of the above factors, the Company reported a net loss,
before restructuring and other special factors, of $79.9 million for the third
quarter of fiscal 1999 compared to net earnings of $12.8 million for the third
quarter of fiscal 1998.
With effect of restructuring and other special charges, the Company
reported a net loss of $274.0 million for the third quarter of fiscal 1999
compared to a net loss of $0.4 million for the third quarter of fiscal 1998.
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NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1997:
Revenue
Revenue declined 10% to $2.2 billion for the nine months ended December
31, 1998 compared to $2.5 billion for the nine months ended December 31, 1997,
primarily due to lower equipment sales and reduced retail service, supplies and
rentals revenue in both the U.S. and international markets. The Company believes
the shortfall in equipment sales is related to a number of factors. First,
equipment sales were affected in the third quarter by the recent negative press
regarding the Company's financial situation. This has led to price discounting
for customers. Second, the Company's product availability has been constrained
due to stricter credit terms with suppliers. Similarly, the Company has been
lacking the digital product availability necessary to compete with the
accelerated shift to digital products primarily in the U.S. and Australasia. The
Company is currently taking steps to improve its digital portfolio to meet the
accelerated shift in customer demand. In January, the Company finalized an
agreement with Canon allowing the Company to offer a full line of digital black
and white copiers throughout the U.S. In addition, as previously announced in
September, the Company began an alliance with Canon, allowing the Company to
offer the complete line of Canon color copiers under the Danka brand to all of
its customers throughout North America, Europe and select Latin American
countries. During the third quarter, the Company also experienced difficulties
in receiving lease financing and this resulted in a delay or loss of sales in
both the North American and International markets. The International division's
equipment sales, primarily in the UK and Australasia, were also impacted as a
result of competitive pressures from Japanese manufacturers selling directly to
customers.
The Company's retail service, supplies and rentals revenue declined 6%
to $1.46 billion for the nine months ended December 31, 1998 from $1.55 billion
for the nine months ended December 31, 1997. The decline is primarily due to two
factors. First, the continued erosion of the U.S. installed machine base,
specifically within the Company's named accounts, has resulted in a decline in
service and supply revenue. Second, supply sales in the Company's International
division have weakened due to the competitive pressures from Japanese
manufacturers selling directly to customers.
Wholesale revenue declined 10% to $177.2 million from $197.2 million
for the nine months ended December 31, 1998 and 1997, respectively. The decline
is primarily due to lower sales in the U.S. in both equipment and supplies. The
revenue decline is primarily due to the Company focusing its efforts on higher
profit margin sales.
Approximately 40% of the Company's revenue is generated in countries
outside of the United States. As in prior periods, foreign exchange rate
fluctuations have negatively impacted the Company's comparable financial
results. Excluding the effect of foreign currency fluctuations, total revenue
would have been approximately $17.7 million higher during the nine months ended
December 31, 1998.
Gross Profit
Gross profit declined 18% to $747.6 million for the nine months ended
December 31, 1998 from $915.5 million for the nine months ended December 31,
1997. The gross profit margin as a percentage of total revenue decreased to
33.6% for the nine months ended December 31, 1998 from 36.9% for the nine months
ended December 31, 1997. The decline in the Company's combined gross profit
margin, before special charges, was primarily due to a lower retail equipment
margin.
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Including the effect of special charges to cost of equipment sales and
cost of service, supplies and rentals during the third quarter and the $10.0
million provision for the anticipated shortfall in equipment purchases recorded
in the third quarter of fiscal 1998, gross profit was $674.5 million for the
nine months ended December 31, 1998 versus $905.5 million for the nine months
ended December 31, 1997. See Note 2 - "Restructuring and Other Special Charges"
for discussion.
Gross profit as a percentage of retail equipment sales decreased to
24.6% for the nine months ended December 31, 1998 from 35.3% for the nine months
ended December 31, 1997. The decline in the retail equipment margin is
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 continued efforts to reduce used machine and
out-of-the-box inventories. The net impact of these factors was approximately
$25.0 million. See Note 2 - "Restructuring and Other Special Charges" for
discussion on other inventory write-downs affecting Kodak branded inventory
during the third quarter. Other factors that affected the Company's retail
equipment gross profit margin were primarily due to external market pressures.
First, the recent negative press regarding the Company's financial situation has
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 16.6% for the nine months ended December
31, 1998. See Note 2 - "Restructuring and Other Special Charges" for discussion.
As a percentage of revenue, the gross profit margin on retail service,
supplies and rentals, declined 40 basis points to 39.5% for the nine months
ended December 31, 1998 from 39.9% for the nine months ended December 31, 1997.
Excluding the Company's outsourcing business (DSI), the retail service, supplies
and rentals margin declined to 42.2% compared to 43.3% for the nine months ended
December 31, 1998 and 1997, respectively.
Including special charges to retail service, supplies and rental costs,
the Company reported a gross profit margin of 37.7% for the nine months ended
December 31, 1998. See Note 2 - "Restructuring and Other Special Charges" for
discussion.
As a percentage of revenue, the gross profit margin on wholesale sales
declined to 15.5% for the nine months ended December 31, 1998 compared to 19.0%
for the nine months ended December 31, 1997. 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.
In addition, the comparable wholesale margin for the third quarter of fiscal
1998 was particularly strong last year due to solid private label sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses remained relatively flat
at $736.7 million and $733.7 million for the nine months ended December 31, 1998
and 1997, respectively. A decrease in selling expenses due to the lower
equipment sales was offset by higher general and administrative expenses in the
U.S. during the nine months ended December 31, 1998, the majority of which
occurred during the
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<PAGE> 27
third quarter. Factors of the increase included increased bad debt expenses,
professional fees related to the Company's restructuring efforts, costs
associated with the IT separation from Kodak in December and other miscellaneous
expenses. The net impact of these factors was approximately $15.0 million in the
third quarter. During the third quarter, the Company implemented a worldwide
cost reduction program with the goal of reducing SG&A levels. SG&A was also
affected for the nine months by a $4.2 million advertising campaign in the U.S.
which ran during the second quarter. As a percentage of revenue, SG&A expenses
increased to 33.1% for the nine months ended December 31, 1998 from 29.5% for
the nine months ended December 31, 1997. The increase was due to the lower
revenue and higher general and administrative expenses.
Including the effect of special charges, the Company reported total
SG&A expenses of $753.7 million for the nine months ended December 31, 1998. See
Note 2 - "Restructuring and Other Special Charges" for discussion.
Amortization of Intangible Assets
Amortization of intangible assets decreased to $15.5 million for the
nine months ended December 31, 1998 from $16.1 million for the nine months ended
December 31, 1997.
In connection with the Company's restructuring plan, the Company
reviewed its investment in goodwill and other long-lived assets for impairment.
The Company determined that based on changes in the business environment and an
analysis of anticipated cash flows, the carrying amount of goodwill and other
long-lived assets, primarily in the U.S. and Canada, may not be recoverable. The
resulting impairment necessitated a write-down of $107.9 million, which is
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. See Note 2 - "Restructuring and
Other Special Charges."
Commitment to Kodak under R&D 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 the nine months ended December
31, 1998, research and development costs totaled $37.5 million. Effective
December 17, 1998 the Research and Development agreement was terminated and the
Company is no longer providing research and development funding to Kodak under
the prior agreement. See Note 4 - "Credit Agreement Bank Waiver and Other
Contingencies" for discussion on current agreement
Restructuring Charges
The Company recorded a $40.1 million pre-tax restructuring charge
during the third quarter of fiscal 1999 primarily for the Company's worldwide
cost reduction program. Through several key initiatives, it is the Company's
goal to reduce SG&A and improve profitability. See - "Note 2 Restructuring and
Other Special Charges" on page 8 for complete details on the charge. The fiscal
1999 restructuring charge was reduced by $1.9 million for remaining liabilities
unused from prior restructuring charges in fiscal 1998 and 1997.
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Earnings (loss) from Operations
The Company reported an operating loss of $42.1 million for the nine
months ended December 31, 1998 compared to earnings from operations of $128.2
million for the nine months ended December 31, 1997. 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 $278.3 million for the nine months ended December 31, 1998.
See Note 2 - "Restructuring and Other Special Charges" for discussion.
Interest Expense and Other, Net
Interest expense and other, net increased to $55.9 million for the nine
months ended December 31, 1998 compared to $47.0 million for the nine months
ended December 31, 1997. The increase primarily related to higher levels of
borrowings and a higher interest rate during the nine months ended December 31,
1998. 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."
Income Taxes
The Company recorded a tax benefit of $9.7 million for the nine months
ended December 31, 1998 compared to income taxes of $30.2 million for the nine
months ended December 31, 1997. 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% for the nine months ended December
31, 1997 to a tax benefit of 9.9% for the nine months ended December 31, 1998.
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 UK and Canada, and the pre-tax loss.
Including the effect restructuring and other special charges, the
Company's effective tax rate for the nine months ended December 31, 1998 is
higher at 15.5%. See - "Note 3 Income Taxes."
Net (Loss) Earnings
As a result of the above factors, the Company reported a net loss,
before restructuring and other special charges, of $88.2 million for the nine
months ended December 31, 1998 compared to net earnings of $51.0 million for the
nine months ended December 31, 1997.
Including the effect of restructuring and other special charges, the
Company reported a net loss of $282.3 million for the nine months ended December
31, 1998 compared to a net earnings of $37.8 million for the nine months ended
December 31, 1997. See Note 2 - "Restructuring and Other Special Charges" for
discussion.
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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
As previously disclosed (in a Form 8-K filed by the Company) on October
20, 1998 the Company obtained a waiver of its obligation to comply with certain
financial covenants of its credit agreement with a consortium of international
bank lenders ("Credit Agreement") and any adverse effect resulting from such
non-compliance for a period from September 30, 1998 through February 28, 1999.
Terms of the waiver included a 70-basis point increase in the interest rate on
certain borrowings under the Credit Agreement during the waiver period, the
granting of security interests in substantially all of the Company's U.S.
subsidiaries' assets to secure up to $225.0 million of the borrowings under the
Credit Agreement and a $50.0 million reduction in the total commitment by the
lenders. The Company also agreed to use its best efforts to maintain, during the
waiver period, at least $30 million of lines of credit outside the U.S.
Furthermore, the Company agreed that it shall not incur additional Indebtedness
(as defined in the Credit Agreement) except Indebtedness under the Credit
Agreement and indebtedness under the lines required to be maintained outside the
U.S. During the term of the waiver, the Company may not pay dividends and the
lenders' consent is required for any acquisition or investments by the Company.
Pursuant to that waiver, the banks agreed to provide the Company with
up to $75.0 million in new loans upon satisfaction of certain conditions,
including a requirement that the Company present to the banks a business plan
demonstrating a process for reducing outstanding indebtedness and achieving
results of operations necessary to permit performance and satisfactory
compliance with the Credit Agreement, review by the lenders' consultant and the
lenders of the business plan and the Company's providing cash flow projections
demonstrating the need for the additional loans. On December 8, 1998, the
Company presented its business plan and other information to the banks at which
time the banks approved the plan and advanced the full $75.0 million in new
loans to the Company.
Pursuant to its business plan, the Company is in the process of
implementing a number of initiatives, including (i) reducing SG&A costs, (ii)
improving management of working capital, (iii) a divestiture program, (iv)
completion of negotiations addressing the Company's long term relationship with
Kodak, (v) completion of negotiations with GE Capital Corporation ("GE Capital")
and other providers of financing for the Company's leasing business, and (vi)
other elements of restructuring of its business.
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The Company believes that it has made significant progress in
implementing these initiatives and that its fundamental businesses are sound.
Nevertheless the Company faces significant challenges and risks as outlined
below.
To permit sufficient time to continue the processes and initiatives
described above, the Company has requested its bank lenders to extend the waiver
for an additional 180 days and to agree to provide an additional $30.0 million
in new loans to the Company if needed. The Company has agreed, if the waiver is
granted, that the existing U.S. collateral will secure all of its indebtedness
under the Credit Agreement, the Company will agree to apply substantial portions
of the proceeds from its asset divestitures to outstanding indebtedness under
the Credit Agreement, that the $30.0 million in new loans, if drawn, will bear
interest at 1.5% in excess of the regular interest rate, and that it will pay
the banks a fee of approximately $1 million for such waiver.
The Company has reached agreement with a steering committee of lenders
holding approximately 31% of the commitments under the Credit Agreement to grant
such a waiver. Under the terms of the Credit Agreement, approval by 51% in
interest of the lenders (Majority Approval) is required to effect such a waiver.
While the Company anticipates, based on its prior relationship with the lenders,
that such Majority Approval will be obtained, there can be no assurance that
such approval will in fact be obtained prior to the expiration of the current
waiver on February 28, 1999. In the absence of such Majority Approval, the
Company would be in default under the Credit Agreement shortly after termination
of the existing waiver and, if that should occur, the lenders, by Majority
Approval, could accelerate the maturity of the Company's indebtedness under the
Credit Agreement.
The Company announced during its third quarter a 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 began
certain initiatives related to the program during the third quarter including
the elimination of various advertising programs and non-essential IT projects,
and headcount reductions. The Company previously announced the reduction of 450
positions at its Rochester, NY facilities. In connection with the worldwide cost
reduction program, the Company recorded a gross pre-tax restructuring charge of
$40.1 million in December 1998. The costs related to severance represent the
reduction of approximately 1,400 positions worldwide. The Company expects to
substantially complete these workforce reductions by the first quarter of fiscal
2000. The Company's National Service Dispatch Call Center, DSI division,
regional sales and service operations, and certain other essential functions
will not be affected.
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 will reduce
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,
before special charges, by $83.1 million during the third quarter of fiscal 1999
by minimizing purchases of new equipment and selling existing inventory, using
price concessions where necessary.
The Company and Kodak have reached an agreement under which Kodak is
required to finish development of a digital high-volume copier. The Company will
pay to Kodak a series of equal monthly payments, beginning in February and
ending in July, totaling $23.0 million. In addition, the Company has agreed to
apply 10% of the proceeds of certain asset sales to its remaining outstanding
obligations to
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Kodak. Kodak agreed to manufacture this product for at least three years, so
long as it remains in the copier business, and to deliver a commercially
saleable unit by June 30, 1999.
The Company has entered into a series of interim agreements with Kodak
under which Kodak has agreed to provide parts and supplies to the Company in
both its International and Americas divisions on a cash basis through February
28, 1999. Under these agreements, the Company must make payments of 125% of the
purchase price with the excess to be applied to outstanding invoices from Kodak
for parts and supplies previously shipped. In the absence of further extensions,
the Company believes that Kodak is obligated under contract and antitrust law to
ship parts and supplies to the Company so long as the Company pays cash on
order. Kodak has acknowledged an obligation that survives termination of the
Supply Agreements to continue to make copier supplies and spare parts available
to the Company, on a basis substantially similar to that available to the
general market, until the earlier of five years or until Kodak is no longer a
provider of such supplies and spare parts. Given the limited sale by Kodak of
spare parts and supplies to others than the Company, it is uncertain what the
market price and terms of sale to the Company would be in the event that the
interim agreement is not extended.
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. The Company is
continuing to work with GE Capital to address concerns raised by GE Capital in
its November 12 letter. In addition, the Company and GE are currently working
together under a program outside of the Master Trust while discussions continue
in efforts to establish a more extensive lease financing relationship. The
Company expects to enter into a satisfactory agreement with GE Capital in this
regard. However, there can be no assurance the Company will be able to reach
such an agreement.
As previously disclosed, the Company engaged the investment banking
firm of Wasserstein, Perella & Co. to aid it in an examination of its businesses
and advise the Company concerning a restructuring. During the third quarter,
Wasserstein, Perella & Co. 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, and is currently engaged in that effort. Bids have
been received and discussions and negotiations are under way. The Company
anticipates a satisfactory completion of the divestiture process.
In December 1998, the Company recorded a $40.1 million pre-tax
restructuring charge for the Company's worldwide cost reduction program with the
goal of reducing SG&A and improving profitability. The restructuring charge is
comprised of $17.6 million for severance, $19.4 million for future lease
obligations on facility closures and $3.1 million for the write-off of leasehold
improvements on facility closures.
The Company also recorded several other special charges during the
third quarter totaling $198.0 million. These charges primarily were comprised of
the following:
(1) Special charges to the cost of retail equipment sales primarily
consisted of $46.1 million for a decline in the estimated market value
of the Company's Kodak branded inventory as well as additional
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amounts related to the termination of certain agreements between the
Company and Kodak. See (2) below for the note on termination of
agreements.
(2) Special charges to the 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. 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. See Note 4 - "Credit Agreement Bank Waiver
and Other Contingencies" for discussion on termination of agreements.
(3) Special charges to selling, general and administrative expenses
primarily consisted of $15.0 million for the write-off of certain
terminated agreements between the Company and Kodak. See (2) above for
the note on termination of agreements. See Note 4 - "Credit Agreement
Bank Waiver and Other Contingencies" for discussion on termination of
agreements.
(4) In connection with the Company's restructuring plan, the Company
reviewed its investment in goodwill and other long-lived assets for
impairment. The Company determined that based on changes in the
business environment and an analysis of anticipated cash flows, the
carrying amount of goodwill and other long-lived assets, primarily in
the U.S. and Canada, may not be recoverable. The resulting impairment
necessitated a write-down of $107.9 million, which is 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.
As a result of all of the foregoing and certain matters discussed
below, the Company's net cash flow (used by) provided by operating activities
was ($26.3) million and $56.9 million for the nine months ended December 31,
1998 and 1997, respectively. Excluding special charges, the Company reduced its
inventory by $83.1 million during the third quarter of fiscal 1999 due to its
continued efforts to reduce inventory levels as well as a reduction in the
Company's purchasing levels. In addition, accounts payables were reduced by
$126.4 million during the third quarter. Cash flow used in investing activities
was $155.2 million and $17.7 million for the nine months ended December 31, 1998
and 1997, respectively. The decrease in cash from investing activities for the
nine months ended December 31, 1998 is 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 addition, the Company's
capital expenditures increased during the nine months ended December 31, 1998
due to higher spending in the first quarter of fiscal 1999 rather than in the
subsequent quarters. Net cash provided by (used in) financing activities was
$193.0 million and ($70.5) million for the nine months ended December 31, 1998
and 1997, respectively. Cash provided by financing activities was higher for the
nine months ended December 31, 1998 primarily due to the increase in the
Company's bank borrowings.
The last dividend paid to shareholders by the Company was July 28,
1998. As stated above, the Company may not pay dividends during the term of the
bank waiver. Additionally, the Company does not anticipate that the payment of a
dividend will be reinstated upon expiration of the waiver.
As a result of the amendments to the Credit Agreement effective June
30, 1998 and the terms of the waiver discussed above, the Company's tiered
margin spread has increased, and therefore, the Company has experienced and may
continue to experience increases in its interest expense depending on both the
level of borrowings and the applicable interest rate. As of December 31, 1998,
the Credit Agreement had an outstanding balance of approximately $483.7 million
under the revolving component and $470.0
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<PAGE> 33
million under the term loan, all of which was incurring interest at a weighted
average rate of 7.3% per annum.
The Company believes that in the event the extension of its waiver
under its Credit Agreement is approved and it is able to obtain a satisfactory
conclusion to the asset sale process that anticipated cash flows will be
sufficient for its operations through the extended waiver period. As noted
above, the Company anticipates that it will be able to obtain extension of the
waiver and a satisfactory conclusion to the asset sale process.
The Internal Revenue Service is conducting an examination of the
Company's federal income tax returns for the fiscal years ended March 31, 1995
and 1996. 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 materially impact the
Company's consolidated results of operations or financial position.
YEAR 2000 READINESS DISCLOSURE
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 and to the Board of Directors on a regular basis.
The Company's Year 2000 program plan contains program administration
and a six-phased remediation approach. The six phases are: 1) Inventory -
comprehensive lists of hardware, software 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) 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, 5) Deployment -
Implementation of solutions into the operating environment and 6) Contingency
Planning and Post-Year 2000 Support - the development of alternative actions 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 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 Year 2000 plans include 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. At this time, the Company believes its Year
2000 criteria and
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<PAGE> 34
guidelines outline the processes to ensure comprehensive assessment,
remediation, contingency planning and quality control and assurance. The Company
will also perform comprehensive integration testing and validation of its major
operational systems during the last phases of the Year 2000 program.
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. It is possible that the Year 2000 may have an
impact on the operations of the Company in the event certain remaining IT
systems, primarily related to the Latin American applications separation, and
Canadian application conversions are not implemented as planned.
The Company is currently evaluating its products and service offerings,
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. The Company's Year 2000
plans include working with its suppliers, vendors and customers to identify and
assess any Year 2000 issues associated with its products, services and
facilities (including non-IT/embedded systems). The Company continues to obtain
product "Year 2000 Readiness Information and / or Statements" from primary
suppliers and vendor manufacturers including Canon, Kodak, Konica, Minolta,
Ricoh, Sharp, and Toshiba. The Company is developing strategies to support
customer migration to a Year 2000 solution. 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 estimates that costs related to the Year 2000 program will
total $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 North American and International
outsourcing operations (DSI). The Year 2000 program assumes the utilization of
both internal and external resources.
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 can not 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. The Company believes that it is taking appropriate actions to
mitigate the scope of risk. An external consulting corporation has recently
reviewed the Company's Year 2000 program and the Company will review and
implement any applicable recommendations.
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<PAGE> 35
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 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 preparing 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 Form 10-Q, 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 the currently anticipated 180-day waiver of failure to comply
with covenants of the Credit Agreement, (ii) failure to obtain one or more
waivers or longer term financing beyond the 180-day 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, (iii) increased
competition resulting from other high-volume and digital
35
<PAGE> 36
copier distributors and the discounting of such copiers by competitors, (iv) any
inability by the Company to manage and reduce its outstanding debt, meet its
working capital needs or otherwise adequately address its liquidity challenges,
(v) any inability by the Company to sell one or more of its divisions or
operating units on reasonably satisfactory terms, (vi) 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, (vii) failure by Kodak to continue to operate
its copier business and supply spare parts and supplies for equipment
manufactured by Kodak (viii) any inability by the Company to achieve projected
cost savings, (ix) the refusal by any vendor to provide equipment, parts and
supplies as a result of the Company's financial condition, (x) any inability by
the Company to successfully close facilities without negative impact on the
Company's operations, (xi) any inability by the Company to obtain adequate
funding for its leasing business, (xii) any inability by the Company to bring
SG&A expenditures of the Company's U.S. division into line with anticipated
sales, (xiii) 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,
(xiv) the ultimate outcome and impact of the pending class action lawsuit or any
other lawsuit, (xv) any negative impact from the loss of any key upper
management personnel, (xvi) any negative impact on the Company's financial
condition or results of operations caused by the Euro conversion, (xvii) any
significant assessment, pursuant to the review by the Internal Revenue Service
(xviii) fluctuations in foreign currencies and (xix) 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 hereof. The Company undertakes no obligation and does not intend to update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. 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.
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<PAGE> 37
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company, various directors, former officers and a former director
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 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.
The Company is a defendant in a purported lawsuit brought by Daniel M.
Doyle, the Company's former Chief Executive and Director. Mr. Doyle has asserted
claims of breach of contract and fraud for Danka's refusal to pay certain sums
alleged due under his employment agreement. The Company recently filed its
motion to dismiss the complaint. This case is currently 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 effect upon the
Company's financial position or results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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<PAGE> 38
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER EXHIBIT
- ------- -------
2.1* Asset Purchase Agreement between Eastman Kodak Company and Danka
Business Systems PLC dated as of September 6, 1996, including
Exhibit 5.19 (a) which is the form of Amended and Restated Supply
Agreement by and between Eastman Kodak Company and
_______________________ dated as of ____________________, 1996.
(Exhibit 2.1 to the Company's Form 8-K dated November 14, 1996.)
2.2* Amendment No. 1 to Asset Purchase Agreement between Eastman Kodak
Company and Danka Business Systems PLC dated December 20, 1996
(Excluding schedules and similar attachments). (Exhibit 2.2 to the
Company's Form 8-K dated January 15, 1997).
4.1* Memorandum of Association of the Company, including paragraphs 5
and 6. (Exhibit 2.1 of the Company's Registration Statement on
Form 20-F, No. 0-20828, filed on November 10, 1992 (the "1992
Registration Statement").
4.2* Articles of Association of the Company, including sections
relating to Shares, Variation of Rights and Votes of Members.
(Exhibit 2.2 to the 1992 Registration Statement).
4.3* Deposit Agreement dated June 25, 1992, Amendment No. 1 dated
February 26, 1993 and Amendment No. 2 dated July 2, 1993 (Exhibit
4.9 of the Company's Form S-1 Registration Statement No. 33-68278
(the "1993 Form S-1")., and Amendment No. 3 dated August 16, 1994
between The Bank of New York, the Company and Owners and Holders
of American Depositary Receipts.
4.4* Indenture dated March 13, 1995 between the Company and The Bank of
New York as Depositary and the Company. (Exhibit 2 to the
Company's Form 8-K dated March 21, 1995).
4.5* Deposit and Custody Agreement dated March 13, 1995, between The
Bank of New York as Depositary and the Company. (Exhibit 3 to the
Company's Form 8-K dated March 21, 1995).
4.6* Registration Rights Agreement dated as of March 13, 1995 relating
to $175 million in Aggregate Principal Amount of 6.75% Convertible
Subordinated Notes Due 2002 by and among the Company and
Prudential Securities Incorporated and Smith Barney, Inc. and
Robert W. Baird & Co. and Raymond James & Associates, Inc.
(Exhibit 4.12 to the Company's Form 10-K dated June 16, 1995).
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<PAGE> 39
4.8* Credit Agreement dated December 5, 1996, by and among Danka
Business Systems PLC, Dankalux Sarl & Co. SCA, Danka Holding
Company, the several financial institutions from time to time a
party and NationsBank, N.A., as agent (Exhibit 4 to the Company's
Form 8-K December 16, 1996).
4.9* First Amendment to Credit Agreement dated December 5, 1997 among
Danka Business Systems PLC, Dankalux Sarl & Co., SCA, and Danka
Holding Company, Nationsbank, National Association, each other
Bank signatory thereto and Nationsbank, National Association, as
agent. (Exhibit 4.9 to the Company's Form 10-Q February 12, 1998).
4.10* 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).
4.11* 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).
No other instruments defining the rights of holders of long-term
debt of the Company and its subsidiary have been included as
exhibits because the total amount of obligations authorized under
any such agreement does not exceed 10% of the total assets of the
Company and its subsidiaries on a consolidated basis. The Company
hereby agrees to furnish supplementally a copy of any omitted
long-term debt instrument to the Commission upon request.
10.1* Employment Agreement dated August 28, 1998 among the Company,
Danka Business Systems PLC and Larry K. Switzer.
10.2* Employment Agreement dated August 1, 1998 among the Company, Danka
Business Systems PLC and Brian L. Merriman.
10.3 Amendments dated February 2, 1999 to the Employment Agreement
among the Company, Danka Business Systems PLC and Larry K. Switzer
(original agreement dated August 28, 1998).
10.4 Amendments dated February 2, 1999 to the Employment Agreement
among the Company, Danka Business Systems PLC and Brian L.
Merriman (original agreement dated August 1, 1998).
10.5 Employment Agreement dated August 1, 1998 among the Company, Danka
Business Systems PLC and F. Mark Wolfinger.
10.6 Amendments dated February 2, 1999 to the Employment Agreement
among Danka Office Imaging and F. Mark Wolfinger (original
agreement dated August 1, 1998).
27.1 Financial Data Schedule (for SEC purposes only)
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<PAGE> 40
27.2 Restated Financial Data Schedule (December 31, 1997 Form 10-Q)
(for SEC purposes only)
* Document has heretofore been filed with the Commission and is
incorporated by reference and made a part hereof.
(b) Reports on Form 8-K:
On October 21, 1998, the Company filed a report on Form 8-K announcing
the Company's waiver on its Credit Agreement granted by its Lenders.
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<PAGE> 41
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANKA BUSINESS SYSTEMS PLC
--------------------------
(Registrant)
Date: February 18, 1999 /s/ F. MARK WOLFINGER
----------------------- -----------------------------------------
F. Mark Wolfinger, Chief Financial Officer
(Chief Financial Officer, and Principal
Accounting Officer)
41
<PAGE> 1
February 2, 1999 Exhibit 10.3
Larry K. Switzer
Chief Executive Officer
Danka
11201 Danka Circle North
St. Petersburg, FL 33716
Dear Larry:
The Board of Directors of Danka Business Systems, PLC
("Company") has approved, effective January 1, 1999, certain changes to your
Employment Agreement dated as of 28 August 1998 ("Employment Agreement") and the
Committee under The Danka 1996 Share Option Plan (including amendments approved
by shareholders on 24 July 1998 and approved by the Board on 25 August 1998)
("Option Plan") has determined to grant you options as described herein. Except
as modified herein, all terms of your Employment Agreement remain in full force
and effect and nothing contained herein shall affect any Change in Control
Agreement provided to you.
1. Salary. Effective January 1, 1999, "$800,000" shall be substituted for
"$500,000" in Section 3.1 of the Employment Agreement in each place it
occurs. Further, "Chief Executive Officer" shall be substituted for
"Finance Director and Chief Financial Officer" in the Employment
Agreement in each place it occurs.
2. Bonus. For performance periods commencing on and after April 1, 1999,
Executive shall have a target bonus of up to 100% of Base Compensation
("Target Bonus") based upon achievement of strategic restructuring
goals as determined by the Board of Directors.
3. Special Cash Bonus. Executive shall be entitled to a special bonus
("Special Bonus") equal to the product of (i) 1,000,000 and (ii) the
lesser of (a) $2 and (b) the excess of the price of a Danka American
Depository Share (ADS) at the close of trading on NASDAQ immediately
following the expiration of the closed period over $4 5/16 which was
the closing price of a Danka ADS on NASDAQ on January 14, 1999. Such
Special Bonus shall be paid in installments in the same proportions as
the options described in item 5 of this letter are exercised. For
example, if options with respect to 50,000 shares from the options
described in item 5 are exercised, 50,000/1,000,000 or 5% of the
Special Bonus shall be paid at the time of such option exercise. As
another example, if options with respect to all 1,000,000 shares
described in item 5 of this letter are exercised at one time, 100% of
the Special Bonus shall be paid at such time of exercise. The Special
Bonus shall accrue no interest.
<PAGE> 2
4. Severance. The liquidated damages payment under either Section 5.3 or
5.4 of the Employment Agreement shall be paid in one lump sum and shall
not be less than the aggregate of Base Compensation for 12 months and
the Target Bonus.
5. Options. The Committee under the Option Plan has irrevocably determined
to grant to you Options with respect to 1,000,000 American Depository
Shares ("Option Shares") at the expiration of the closed period. Such
Options shall have a term or Exercise Period of ten years from the date
of grant and shall be fully exercisable on the third anniversary of the
date of grant. Options with respect to one-third of the Option Shares
shall become exercisable on the first anniversary of the date of grant
or at such earlier time that the price of a Danka ADS traded on NASDAQ
is at least $7.50. Options with respect to an additional one-third of
the Option Shares (for a total of two-thirds of the Option Shares)
shall become exercisable on the second anniversary of the date of grant
or at such earlier time after the first anniversary of the date of
grant that the price of a Danka ADS traded on NASDAQ is at least
$12.50. Options with respect to the remaining one third of the Option
Shares (for a total of all Option Shares) shall become exercisable on
the third anniversary of the date of such grant or at such earlier time
after the second anniversary of the date of grant that the price of a
Danka ADS traded on NASDAQ is at least $20.
If you agree to the changes in the Employment Agreement and the
granting of options by the Committee, please execute and return a copy of this
letter.
Sincerely,
Keith Merrifield
Chairman - Human Resources Committee of the
Board of Directors of Danka Business Systems PLC
Agreed to by:
- ------------------------------------
Larry K. Switzer
<PAGE> 1
Exhibit 10.4
February 2, 1999
Brian Merriman
Chief Operating Officer - Americas
Danka
11201 Danka Circle North
St. Petersburg, FL 33716
Dear Brian:
The Board of Directors of Danka Business Systems, PLC
("Company") has approved, effective January 1, 1999, certain changes to your
Employment Agreement dated as of 1 August 1998 ("Employment Agreement") and the
Committee under The Danka 1996 Share Option Plan (including amendments approved
by shareholders on 24 July 1998 and approved by the Board on 25 August 1998)
("Option Plan") has determined to grant you options as described herein. Except
as modified herein, all terms of your Employment Agreement remain in full force
and effect and nothing contained herein shall affect any Change in Control
Agreement provided to you.
1. Bonus. For performance periods commencing on and after April 1, 1999,
Executive shall have a target bonus of up to 100% of Base Compensation
("Target Bonus") based upon achievement of strategic restructuring
goals as determined by the Board of Directors.
2. Special Cash Bonus. Executive shall be entitled to a special bonus
("Special Bonus") equal to the product of (i) 700,000 and (ii) the
lesser of (a) $2 and (b) the excess of the price of a Danka American
Depository Share (ADS) at the close of trading on NASDAQ immediately
following the expiration of the closed period over $4 5/16 which was
the closing price of a Danka ADS on NASDAQ on January 14, 1999. Such
Special Bonus shall be paid in installments in the same proportions as
the options described in item 4 of this letter are exercised. For
example, if options with respect to 35,000 shares from the options
described in item 4 are exercised, 35,000/700,000 or 5% of the Special
Bonus shall be paid at the time of such option exercise. As another
example, if options with respect to all 700,000 shares described in
item 4 of this letter are exercised at one time, 100% of the Special
Bonus shall be paid at such time of exercise. The Special Bonus shall
accrue no interest.
3. Severance. The liquidated damages payment under Section 5.3 of the
Employment Agreement shall be paid in one lump sum and shall not be
less than the aggregate of Base Compensation for 12 months and the
Target Bonus.
<PAGE> 2
4. Options. The Committee under the Option Plan has irrevocably determined
to grant to you Options with respect to 700,000 American Depository
Shares ("Option Shares") at the expiration of the closed period. Such
Options shall have a term or Exercise Period of ten years from the date
of grant and shall be fully exercisable on the third anniversary of the
date of grant. Options with respect to one-third of the Option Shares
shall become exercisable on the first anniversary of the date of grant
or at such earlier time that the price of a Danka ADS traded on NASDAQ
is at least $7.50. Options with respect to an additional one-third of
the Option Shares (for a total of two-thirds of the Option Shares)
shall become exercisable on the second anniversary of the date of grant
or at such earlier time after the first anniversary of the date of
grant that the price of a Danka ADS traded on NASDAQ is at least
$12.50. Options with respect to the remaining one third of the Option
Shares (for a total of all Option Shares) shall become exercisable on
the third anniversary of the date of such grant or at such earlier time
after the second anniversary of the date of grant that the price of a
Danka ADS traded on NASDAQ is at least $20.
If you agree to the changes in the Employment Agreement and the
granting of options by the Committee, please execute and return a copy of this
letter.
Sincerely,
Larry K. Switzer
Chief Executive Officer
Danka Business Systems PLC
Agreed to by:
- -----------------------------
Brian Merriman
<PAGE> 1
Exhibit 10.5
February 2, 1999
F. Mark Wolfinger
Chief Financial Officer
Danka
11201 Danka Circle North
St. Petersburg, FL 33716
Dear Mark:
The Board of Directors of Danka Business Systems, PLC
("Company") has approved, effective January 1, 1999, certain changes to your
Employment Agreement dated as of 1 August 1998 ("Employment Agreement") and the
Committee under The Danka 1996 Share Option Plan (including amendments approved
by shareholders on 24 July 1998 and approved by the Board on 25 August 1998)
("Option Plan") has determined to grant you options as described herein. Except
as modified herein, all terms of your Employment Agreement remain in full force
and effect and nothing contained herein shall affect any Change in Control
Agreement provided to you.
1. Salary. Effective January 1, 1999, "$450,000" shall be substituted for
"$360,000" in Section 3.1 of the Employment Agreement in each place it
occurs. Further, "Chief Financial Officer" shall be substituted for
"President - Latin America, Canada and Specialty Markets" in the
Employment Agreement in each place it occurs.
2. Bonus. For performance periods commencing on and after April 1, 1999,
Executive shall have a target bonus of up to 100% of Base Compensation
("Target Bonus") based upon achievement of strategic restructuring
goals as determined by the Board of Directors.
3. Special Cash Bonus. Executive shall be entitled to a special bonus
("Special Bonus") equal to the product of (i) 500,000 and (ii) the
lesser of (a) $2 and (b) the excess of the price of a Danka American
Depository Share (ADS) at the close of trading on NASDAQ immediately
following the expiration of the closed period over $4 5/16 which was
the closing price of a Danka ADS on NASDAQ on January 14, 1999. Such
Special Bonus shall be paid in installments in the same proportions as
the options described in item 5 of this letter are exercised. For
example, if options with respect to 50,000 shares from the options
described in item 5 are exercised, 50,000/500,000 or 10% of the Special
Bonus shall be paid at the time of such option exercise. As another
example, if options with respect to all 500,000 shares described in
item 5 of this letter are exercised at one time, 100% of the Special
Bonus shall be paid at such time of exercise. The Special Bonus shall
accrue no interest.
<PAGE> 2
4. Severance. The liquidated damages payment under Section 5.3 of the
Employment Agreement shall be paid in one lump sum and shall not be
less than the aggregate of Base Compensation for 12 months and the
Target Bonus.
5. Options. The Committee under the Option Plan has irrevocably determined
to grant to you Options with respect to 500,000 American Depository
Shares ("Option Shares") at the expiration of the closed period. Such
Options shall have a term or Exercise Period of ten years from the date
of grant and shall be fully exercisable on the third anniversary of the
date of grant. Options with respect to one-third of the Option Shares
shall become exercisable on the first anniversary of the date of grant
or at such earlier time that the price of a Danka ADS traded on NASDAQ
is at least $7.50. Options with respect to an additional one-third of
the Option Shares (for a total of two-thirds of the Option Shares)
shall become exercisable on the second anniversary of the date of grant
or at such earlier time after the first anniversary of the date of
grant that the price of a Danka ADS traded on NASDAQ is at least
$12.50. Options with respect to the remaining one third of the Option
Shares (for a total of all Option Shares) shall become exercisable on
the third anniversary of the date of such grant or at such earlier time
after the second anniversary of the date of grant that the price of a
Danka ADS traded on NASDAQ is at least $20.
If you agree to the changes in the Employment Agreement and the
granting of options by the Committee, please execute and return a copy of this
letter.
Sincerely,
Larry K. Switzer
Chief Executive Officer
Danka Business Systems PLC
Agreed to by:
- ----------------------------
F. Mark Wolfinger
<PAGE> 1
Exhibit 10.6
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of August 1, 1998, between Danka Office
Imaging (the "Company"), and Forrest Mark Wolfinger ("Executive").
WITNESSETH:
WHEREAS, the Company wishes to provide for the employment of Executive
as President - Latin America, Canada and Specialty Markets of the Company on the
terms and conditions herein set forth; and
WHEREAS, Executive wishes to serve in such capacity on the terms and
conditions herein set forth.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, the parties hereto agree as follows:
1. Employment, Powers, Duties and Acceptance.
1.1 The Company hereby employs Executive, for the Term
(as hereinafter defined), to render services to the
Company as President - Latin America, Canada and
Specialty Markets of the Company.
1.2 Executive hereby accepts the employment hereunder and
agrees to use his best efforts to carry out the
duties and responsibilities of President - Latin
America, Canada and Specialty Markets of the Company
and such additional assignments and duties (which may
include assignments and duties on behalf of the
Company's affiliates) as may be given to Executive by
the Chief Executive of the Company or his designee.
Executive shall report directly to the Chief
Executive of the Company. Executive agrees to
discharge his obligations hereunder and perform his
duties in accordance with the general policies
established by the Board of Directors of the Company.
1.3 Executive shall be a full-time employee of the
Company, and subject to customary paid holidays and
vacations, Executive agrees to devote his full
working time to the business of the Company.
1.4 The principal place of employment of Executive
hereunder shall be at the offices of the Company in
the City of St. Petersburg, Florida. Executive shall
travel as may be required to discharge his
obligations and perform his duties hereunder.
1.5 Executive shall be entitled to 4 weeks of vacation
with pay during each calendar year of the Term.
2. Term of Employment. The term of Executive's employment under
this Agreement (the "Term") shall commence on the date hereof
and shall end, unless such employment is sooner terminated
pursuant to Section 5 hereof, on August 1, 2001 (the
"Termination Date").
3. Compensation.
3.1 During the Term, the Company shall pay Executive, as
compensation for services to be rendered pursuant to
this Agreement, a salary, payable in accordance with
the Company's standard payroll practices, at the rate
of $360,000.00 per annum (the "Base Compensation").
Executive shall be eligible for annual increases at
the discretion of the Chief Executive.
<PAGE> 2
3.2 Executive shall have a target bonus of fifty percent
(50%) of his Base Compensation based upon achievement
of established corporate division and individual
objectives as approved by the Chief Executive.
Executive will also be eligible for an additional
"stretch" bonus of an additional fifty percent (50%)
of his Base Compensation based upon established
"stretch" objectives approved by the Chief Executive,
which will be upon the Company obtaining 103% of its
annual profit plan as approved by the Board of
Directors.
3.3 During the Company's Fiscal Year 1999 of this
Agreement, Company shall guarantee that Executive
receive a minimum bonus of not less than $112,500.00
payable after March 31, 1999.
3.3.1. Further, on or before October 15, 1998,
Company shall pay Executive $120,000.00,
which amount represents the bonus Executive
would have received from his prior employer.
3.3.2. In addition, on or before January 31, 1999,
Company shall pay Executive $160,000.00,
which amount represents the vested options
of Executive at his previous employer.
3.3.3. Company shall grant Executive 280,000
ordinary share stock options upon his
employment and grant an additional 120,000
ordinary share stock options on or before
March 31, 1999. Executive understands and
agrees that any granting of stock options is
subject to Board of Directors approval.
3.4 Executive shall be reimbursed for any reasonable
expenses incurred by Executive in his relocation to
the Tampa-St. Petersburg metropolitan area
(reasonable expenses as defined in the Company's
relocation plan). Such reasonable relocation expenses
shall be "grossed up" for tax and withholding
purposes. The Company shall increase Executive's
temporary living expenses to 9 months. Further,
Company shall pay the airfare for Executive to make
trips from Tampa to Portland every other week for a
period of six (6) months. In the event Executive
voluntarily leaves the employment of the Company
within 24 months of the initial date herein,
Executive agrees to pay a prorated amount of
Executive's total relocation cost based on
Executive's time with the Company.
3.4.1 Executive's basis in his current primary
residence is $825,000.00. To the extent
Executive's primary residence sells for less
than $825,000.00, the Company agrees to
make-up any difference in the actual selling
price of Executive's primary residence
between $775,000.00 and $825,000.00, up to a
maximum make-up difference of $50,000.00.
The Company reserves the right to consider
the most tax advantageous way to provide
such makeup payment.
3.4.2 Company shall assist Executive in obtaining
a bridge loan if necessary.
3.5 Executive shall receive all of the fringe benefits
and perquisites of office made available to the
officers of the Company, including the following:
- Airline Club expenses - up to $1,000.00
annually
- Car Allowance - Company shall
provide, at
Company's expense, a
Mercedes class
automobile for
Executive. Company
shall pay for
incidentals
associated with the
automobile including
paying for necessary
repairs due to wear
and tear.
<PAGE> 3
3.6 Subject to Executive's satisfying the eligibility
requirements thereof, Executive shall be entitled to
participate in and be covered by any Executive
Deferred Compensation Plan, Supplemental Executive
Retirement Plan, pension, life insurance, long term
disability insurance, health insurance,
hospitalization or other employee benefit plan
established and maintained by the Company on the same
basis as generally made available to executives of
the Company without limitation or restriction by
reason of this Agreement. Nothing herein shall be
deemed to require the Company to establish or
maintain any employee benefit plan whatsoever, and
Company shall have the right, in its sole and
absolute discretion, to alter, amend, modify,
discontinue or terminate at any time any and all
employee benefit plans maintained by the Company.
4. Expenses. In addition to the compensation provided to be paid
under Section 3 hereof, the Company shall reimburse Executive
for all reasonable out-of pocket expenses paid or incurred by
Executive in the performance of his duties hereunder upon
submission of signed itemized lists thereof on the forms used,
and in accordance with the procedures established from time to
time, by the Company for that purpose.
5. Termination. This Agreement may be terminated prior to the
Termination Date in accordance with the following:
5.1 If Executive shall die during the Term, this
Agreement shall terminate, except that Executive's
legal representatives or designated beneficiaries
shall be entitled to receive the compensation
provided for herein to the last day of the month in
which his death occurs.
5.2 The Company shall have the right (without any
liability to Executive hereunder other than the
payment of sum due through the date of termination)
to terminate the employment of Executive, to relieve
Executive of any and all functions as President -
Latin America, Canada and Specialty Markets of the
Company, and to terminate his right to the
compensation provided for herein for cause. As used
in this Section 5.2, the term "for cause" shall mean
and be limited to the following events:
5.2.1 Executive's material breach of any term or
condition of this Agreement, unless
Executive cures such breach within ten days
after the Company gives Executive notice of
the breach; or
5.2.2 Executive's commission of any crime that (i)
constitutes a felony in the jurisdiction
involved or (ii) involves loss or damage to
or destruction of property of the Company or
(iii) results in the incarceration of
Executive following his conviction for such
crime; or
5.2.3 Executive's willful and material violation
of any lawful directions of the Chief
Executive or Board of Directors of the
Company; or
5.2.4 Executive's failure or refusal to perform
his duties in accordance with Section 1
hereof; provided, however, that no discharge
"for cause" under this Section 5.2.4 shall
be deemed effective unless Executive shall
have first been given notice by the Company
advising Executive of the specific acts or
omissions alleged to constitute a failure to
perform his duties, and such failure
continues after Executive shall have had a
reasonable opportunity (which shall be
defined as a period of time consisting of at
least three days from the date Executive
receives said notice from the Company) to
correct the acts or omissions so complained
of.
<PAGE> 4
5.3 The Company shall have the right to terminate the
employment of Executive, to relieve Executive of any
or all functions as President - Latin America, Canada
and Specialty Markets and to terminate his right to
Base Compensation at any time prior to the
Termination Date upon notice to Executive. If the
Company shall terminate the employment of Executive
for any reason not specified in Section 5.1, or 5.2
hereof, the Executive's sole remedy shall be to
receive the following as and for liquidated damages:
a) If the Company terminates the Agreement on
or before August 1, 2000, Company shall pay
Executive his Base Compensation and continue
and/or pay Executive's benefits through the
term of the Agreement, or
b) If the Company terminates the Agreement
after August 1, 2000, Company shall pay
Executive his Base Compensation and continue
and/or pay Executive's benefits for the next
12 succeeding months following termination.
Executive agrees that in order to receive liquidated
damages described herein, Executive at the time of
termination, agrees to execute the General Release
and Waiver in, a form similar to Exhibit A.
Notwithstanding the foregoing, Executive shall not be
entitled to any liquidated damages hereunder if
termination occurs prior to the Termination Date and
Company or any of their respective affiliates agrees
to employ Executive in an executive capacity with
powers and duties similar to those assigned to
Executive hereunder for a period equal to or greater
than the balance of the Term and to provide Executive
during such period with compensation and benefits
equivalent to those which he would have received
hereunder had termination not occurred.
6. Non-Competition and Confidentiality
6.1 As used in this Section 6, the term "Restricted Area"
shall mean: (i) during the Term, the entire world,
and (ii) during the twelve months following the
termination of Executive's employment hereunder for
any reason specified in Section 5.3 hereof, the area
within 50 miles of the location of any business
activity conducted by the Company, any constituent
partner of the Company or any of their respective
parents, subsidiaries or affiliates. During the Term
and for a period of twelve months following the
termination of Executive's employment hereunder for
any reason specified in Section 5.3 hereof, Executive
shall not, in the Restricted Area, directly or
indirectly, enter the employ of, or render any
services to, any person, firm or corporation engaged
in any business competitive with the businesses
engaged in by the Company, any constituent partners
of the Company or any of their respective parents,
subsidiaries or affiliates; he shall not engage in
such business on his own account in the Restricted
Area; and he shall not become interested in such
business, directly or indirectly, as an individual,
partner, shareholder, director, officer, principal,
agent, employee, trustee, consultant, or any other
relationship or capacity; provided, however, that
nothing contained in this Section 6 shall be deemed
to prohibit Executive from acquiring, solely as an
investment, a less than one percent interest in the
equity of any publicly traded corporation or limited
partnership.
6.2 Executive shall not, at any time hereafter, disclose
to any person, firm or corporation any confidential
information regarding the customers, suppliers,
market arrangements or methods of operations of the
Company, any constituent partner of the Company or
any of their respective parents, subsidiaries or
affiliates or any other information of the Company,
any constituent partner of the Company or any of
their respective parents, subsidiaries, affiliates.
Without limiting the generality of the foregoing, the
parties hereto acknowledge and agree that all
information not otherwise generally known to the
public relating to each of (i) this Agreement, (ii)
the Company, any constituent partner of the Company
or any of their respective parents, subsidiaries or
affiliates is confidential and
<PAGE> 5
proprietary and is not to be disclosed to any persons
or entities, except to the extent necessary to
conduce the business of the Company, or to comply
with law or the valid order of a governmental agency
or court of competent jurisdiction.
6.3 Any invention, improvement, design, development or
discovery conceived, developed, invented or made by
Executive, alone or with others, during his
employment hereunder and applicable to the business
of the Company, its parents, subsidiaries or
affiliates shall become the sole and exclusive
property of the Company. Executive shall (i) disclose
the same completely and promptly to the Company, (ii)
execute all documents requested by the Company in
order to vest in the Company the entire right, title
and interest, in and to the same, (iii) execute all
documents required by the Company for the filing, and
prosecuting of such applications for patents,
copyrights and/or trademarks, which the Company, in
its sole discretion, may desire to prosecute, and
(iv) provide to the Company all assistance it may
reasonably require including, without limitation, the
giving of testimony in any suit, action or
proceeding, in order to obtain, maintain and protect
the Company's rights therein and thereto.
6.4 Executive, except within the course of the
performance of his duties hereunder, shall not at any
time while he is in the employ of the Company, any
constituent partner of the Company or any of their
respective parents, subsidiaries, or affiliates and
for 12 months thereafter (i) employ any individual
who is then employed by the Company, any constituent
partner of the Company or any of their respective
parents, subsidiaries, affiliates, or (ii) in any way
cause, influence, or participate in the employment of
any individual which would be contrary to the
Company's best interests, as determined by the
Company in its sole discretion.
6.5 Executive's services are unique and any breach or
threatened breach by Executive of any provision of
this Section 6 shall cause the Company irreparable
harm which cannot be remedied solely by damages. In
the event of a breach or threatened breach by
Executive of any of the provisions of this Section 6,
the Company shall be entitled to injunctive relief
restraining Executive and any business, firm,
partnership, individual, corporation or entity
participating in such breach or threatened breach.
Nothing herein shall be construed as prohibiting the
Company from pursuing any other remedies available at
law or in equity for such breach or threatened
breach, including the recovery of damages and the
immediate termination of the employment of Executive
hereunder.
6.6 If any of the provisions of or covenants contained in
this Section 6 are hereafter construed to be invalid
or unenforceable in a particular jurisdiction, the
same shall not affect the remainder of the provisions
or the enforceability thereof in that jurisdiction,
which shall be given full effect, without regard to
the invalidity or unenforceability thereof in a
particular jurisdiction because of the duration
and/or scope of such provision or covenant in that
jurisdiction and, in its reduced form, said provision
or covenant shall be enforceable. In all other
jurisdictions this Section 6 shall at all times
remain in full force and effect.
7. Representations and Warranties. Executive hereby represents
and warrants to the Company as follows:
7.1 Executive is an individual residing at the address
set forth in Section 8.2 hereof.
7.2 Executive has full power and authority to enter into
this Agreement and the execution and delivery of this
Agreement by Executive will not conflict with or
result in the breach of or a default under any
agreement or other instrument to which Executive is a
party.
<PAGE> 6
7.3 Executive is not a party to any covenant
not-to-compete, non-disclosure agreement or other
similar obligation which is inconsistent with, or
which could impair the performance of, Executive's
duties hereunder.
8. Notices. All notices, requests, consents and other
communications, required or permitted to be given hereunder,
shall be in writing and shall be deemed to have been duly
given if delivered personally or sent by prepaid telegram, or
mailed first-class, postage prepaid, by registered or
certified mail (notices sent by telegram or mailed shall be
deemed to have been given on the date sent), as follows (or to
such other address as either party shall designate by notice
in writing to the other in accordance herewith):
8.1 If to the Company:
Danka Office Imaging Company
11201 Danka Circle North
St. Petersburg, FL 33716
Attention: General Counsel
8.2 If to Executive:
2780 S.W. Beacon Hill Drive
West Linn, OR 97068
Attention: Mark Wolfinger
9. General.
9.1 The section headings contained herein are for
reference purposes only and shall not in any way
affect the meaning or interpretation of this
Agreement.
9.2 This Agreement sets forth the entire agreement and
understanding of the parties relating to the subject
matter hereof, and supersedes all prior agreements,
arrangements and understandings written or oral,
relating to the subject matter hereof. No
representation, promise or inducement has been made
by either party that is not embodied in this
Agreement, and neither party shall be bound by or
liable for any alleged representation, promise or
inducement not so set forth.
9.3 This Agreement, and Executive's rights and
obligations hereunder, may not be assigned or
otherwise transferred by Executive. The Company may
assign its rights hereunder to any parent,
subsidiary, or affiliate and in connection with any
sale, transfer or other disposition of all or
substantially all of its businesses or assets. Upon
such assignment, the assignee thereunder shall be
required to assume the obligations of Executive
hereunder and, upon such assumption, the Company
shall be relieved of its obligations hereunder.
9.4 This Agreement constitutes the entire agreement
between the parties with respect to the transactions
contemplated hereby and may be amended, modified,
superseded, canceled, renewed or extended and the
terms or covenants hereof may be waived, only by a
written instrument executed by both of the parties
hereto, or in the case of a waiver, by the party
waiving compliance. The failure of either party at
any time or times to require performance of any
provision hereof shall in no manner affect the right
at a later time to enforce the same. No
<PAGE> 7
waiver by either party of the breach of any term or
covenant contained in this Agreement, whether by
conduct or otherwise, in any one or more instances,
shall be deemed to be, or construed as, a further or
continuing waiver of any such breach, or a waiver of
the breach of any other term or covenant contained in
this Agreement.
9.5 This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Florida
applicable to agreements entered into and wholly
performed therein.
9.6 Any controversy or claim arising out of or relating
to this Employment Agreement, other than a claim for
injunctive relief, shall be settled by arbitration in
accordance with the Commercial Arbitration Rules of
the American Arbitration Association (the "Rules") in
effect at the time demand for arbitration is made by
any party. One arbitrator shall be named by the
Company, a second by the Executive and the third
arbitrator shall be named by the two arbitrators so
chosen. In the even that the third arbitrator is not
agreed upon, he or she shall be named by the American
Arbitration Association. Arbitration shall occur in
St. Petersburg, Florida. The award made by all or a
majority of the panel of arbitrators shall be final
and binding, and judgment may be entered in any court
of law having competent jurisdiction. The prevailing
party shall be entitled to an award of reasonable
attorney's fees, costs and expenses incurred in
connection with the arbitration and any judicial
proceedings related thereto.
9.7 This Agreement may be executed in any number of
counterpart copies, each of which shall be deemed an
original, but which together shall constitute a
single instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
DANKA OFFICE IMAGING COMPANY
By:
----------------------------------
Title:
----------------------------------
Executive
By:
------------------------------
Witness:
- ----------------------------------
<PAGE> 8
EXHIBIT A
RELEASE OF CLAIMS
DEFINITIONS: I, Forrest Mark Wolfinger, ("Employee"), intend all words used in
this Release to have their plain meaning in ordinary English. Technical legal
words are not needed to describe what I mean. Specific terms I use in this
Release have the following meanings:
A. I, Me, and My include both me and anyone who has or obtains
any legal rights or claims through me.
B. Employer, as used herein, shall at all times mean Danka
Corporation or any parent company, subsidiaries, affiliated
companies or entities and their employees, officers,
directors, successors and assigns, its attorneys, consultants
and agents, whether in their individual or official
capacities.
C. My Claims means all of the rights I have to any relief of any
kind from Employer, whether or not I now know about those
rights, arising out of or in any way related to my employment
with Employer, any my termination of employment, or any
employee benefit plan, including, but not limited to, common
law, or equitable claims, claims for violation or breach of
any employment agreement or understanding; fraud or
misrepresentation; and any statutory claims including alleged
violations of the, the federal Age Discrimination in
Employment Act, the Americans with Disabilities Act, or any
other federal, state, or local civil rights laws or
ordinances, defamation; intentional or negligent infliction of
emotional distress; breach of the covenant of good faith and
fair dealing; promissory estoppel; negligence, wrongful
termination of employment, any any other claims.
AGREEMENT TO RELEASE MY CLAIMS. I am receiving a substantial amount of money,
among other things, from Employer as consideration for my Release of claims. I
agree to give up all My Claims against the Employer as defined above. I will not
bring any lawsuits, file any charges, complaints, or notices, or make any other
demands against the Employer or any of its employees or agents based on any
alleged claims. The money I am receiving is a full and fair payment for the
release of all My Claims.
ADDITIONAL AGREEMENTS AND UNDERSTANDINGS. Even though the Employer is paying me
to release My Claims, the Employer expressly denies that it is responsible or
legally obligated for My Claims or that is has engaged in any wrongdoing.
I understand that I may have twenty-one (21) calendar days from the day
that I receive this Release, not counting the day upon which I receive it, to
consider whether I wish to sign this Release. I further understand that the
Employer recommends that I consult with an attorney before executing this
Release. I agree that if I sign this Release before the end of the twenty-one
(21) day period, it is because I have decided that I have already had sufficient
time to decide whether to sign the Release.
I understand that I may rescind (that is, cancel) this Release within
seven (7) calendar days of signing it to reinstate federal civil rights claims
(if any). To be effective, my rescission must be in writing and delivered to the
Employer, Attention General Counsel,
<PAGE> 9
Danka, 11201 Danka Circle North, St. Petersburg, Florida, 33716, either by hand
or by mail within the required period. If sent by mail, the rescission must be:
1. Postmarked within the relevant period;
2. Properly addressed to the General Counsel; and
3. Sent by certified mail, return receipt requested.
I have read this Release carefully and understand all its terms. I have
had the opportunity to review this Release with my own attorney. In agreeing to
sign this Release, I have not relied on any statements or explanations made by
the Employer or its agents other than those set forth in the Release and
Employment Agreement.
I understand and agree that this Release and Employment Agreement to
which it is attached contain all the agreements between the Employer and me. We
have no other written or oral agreements.
Dated:
------------------------
- ------------------------------
Witness:
-----------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DANKA BUSINESS SYSTEMS PLC AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 46,654
<SECURITIES> 0
<RECEIVABLES> 593,575
<ALLOWANCES> 28,614
<INVENTORY> 435,800
<CURRENT-ASSETS> 1,102,496
<PP&E> 755,316
<DEPRECIATION> 352,383
<TOTAL-ASSETS> 1,978,398
<CURRENT-LIABILITIES> 688,506
<BONDS> 1,073,678
0
0
<COMMON> 4,758
<OTHER-SE> 188,313
<TOTAL-LIABILITY-AND-EQUITY> 1,978,398
<SALES> 2,223,117
<TOTAL-REVENUES> 2,223,117
<CGS> 1,548,640
<TOTAL-COSTS> 1,548,640
<OTHER-EXPENSES> 1,674,447
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,867
<INCOME-PRETAX> (334,146)
<INCOME-TAX> (51,793)
<INCOME-CONTINUING> (282,353)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (282,353)
<EPS-PRIMARY> (4.96)
<EPS-DILUTED> (4.96)
<FN>
RESULTS FOR THE NINE MONTHS INCLUDE $236,214 IN RESTRUCTURING AND OTHER SPECIAL
CHARGES.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF DANKA BUSINESS SYSTEMS PLC AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1997
<CASH> 49,860
<SECURITIES> 0
<RECEIVABLES> 650,524
<ALLOWANCES> 32,445
<INVENTORY> 563,804
<CURRENT-ASSETS> 1,305,925
<PP&E> 593,895
<DEPRECIATION> 217,561
<TOTAL-ASSETS> 2,283,481
<CURRENT-LIABILITIES> 837,396
<BONDS> 903,981
0
0
<COMMON> 4,744
<OTHER-SE> 478,017
<TOTAL-LIABILITY-AND-EQUITY> 2,283,481
<SALES> 2,483,077
<TOTAL-REVENUES> 2,483,077
<CGS> 1,577,529
<TOTAL-COSTS> 1,577,529
<OTHER-EXPENSES> 798,317<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,011
<INCOME-PRETAX> 60,220
<INCOME-TAX> 22,402
<INCOME-CONTINUING> 37,818
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,818
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.65
<FN>
<F1>INCLUDES AN $11,000 PRE-TAX RESTRUCTURING CHARGE.
</FN>
</TABLE>
