<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 JUNE 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 0-20828
DANKA BUSINESS SYSTEMS PLC
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ENGLAND 98-0052869
------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11201 DANKA CIRCLE NORTH
ST. PETERSBURG, FLORIDA 33716
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 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 235,630,192 Ordinary Shares outstanding as of June 30, 2000
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Statements of Operations for the three months ended
June 30, 2000 and 1999 (Unaudited) 3
Condensed Consolidated Balance Sheets as of June 30, 2000
(Unaudited) and March 31, 1999 (Audited) 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 2000 and 1999 (Unaudited) 5
Consolidated Statement of Shareholders' Equity for the three months
ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 17
Item 3 - Defaults upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of Security Holders 18
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
Signature 20
</TABLE>
2
<PAGE> 3
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
----------------------------------
JUNE 30, JUNE 30,
2000 1999
------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE:
Retail equipment sales $ 155,311 $ 165,152
Retail service, supplies and rentals 358,640 450,721
Wholesale 26,260 29,836
------------ -----------
Total revenue 540,211 645,709
------------ -----------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 105,856 117,712
Retail service, supplies and rental costs 224,541 262,576
Wholesale costs of revenue 22,040 23,350
Selling, general and administrative expenses 167,805 199,455
Amortization of intangible assets 3,556 3,581
Restructuring charges (credits) (8,158) --
------------ -----------
Total costs and operating expenses 515,640 606,674
------------ -----------
EARNINGS FROM OPERATIONS 24,571 39,035
Interest expense and other, net 26,343 22,031
------------ -----------
EARNINGS (LOSS) BEFORE INCOME TAXES (1,772) 17,004
Provision (benefit) for income taxes (532) 4,761
------------ -----------
NET EARNINGS (LOSS) $ (1,240) $ 12,243
============ ===========
BASIC EARNINGS (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
PER ADS:
Net earnings (loss) per ADS $ (0.09) $ 0.21
Weighted average ADSs 58,908 57,017
DILUTED EARNINGS (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
PER ADS:
Net earnings (loss) per ADS $ (0.09) $ 0.21
Weighted average ADSs 58,908 57,306
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3
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DANKA BUSINESS SYSTEMS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
2000 2000
----------- -----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 53,908 $ 64,861
Accounts receivable, net 502,385 527,793
Inventories 316,684 328,290
Prepaid expenses, deferred income taxes
and other current assets 85,310 81,837
----------- -----------
TOTAL CURRENT ASSETS 958,287 1,002,781
Equipment on operating leases, net 180,022 199,551
Property and equipment, net 93,011 92,614
Intangible assets, net 300,580 306,906
Other assets 68,535 65,845
----------- -----------
TOTAL ASSETS $ 1,600,435 $ 1,667,697
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and notes payable $ 106,270 $ 86,776
Accounts payable 155,989 178,870
Accrued expenses and other current liabilities 189,222 229,472
Deferred revenue 37,334 40,045
----------- -----------
TOTAL CURRENT LIABILITIES 488,815 535,163
Convertible subordinated notes 200,000 200,000
Long-term debt and notes payable, less current maturities 497,736 515,406
Deferred income taxes and other long-term liabilities 33,274 32,536
----------- -----------
TOTAL LIABILITIES 1,219,825 1,283,105
----------- -----------
6.50% CONVERTIBLE PARTICIPATING SHARES-REDEEMABLE:
$1.00 stated value, 500,000 authorized: 223,899 issued
and outstanding 211,748 207,878
----------- -----------
SHAREHOLDERS' EQUITY:
Ordinary shares, 1.25 pence stated value; 500,000,000
authorized; 235,630,192 issued and outstanding 4,932 4,892
Additional paid-in capital 319,706 317,056
Retained earnings (deficit) (71,336) (66,226)
Accumulated other comprehensive income (loss) (84,440) (79,008)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 168,862 176,714
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,600,435 $ 1,667,697
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4
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DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) $ (1,240) $ 12,243
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 40,763 40,833
Loss on sale of property and equipment and
equipment on operating leases 4,584 2,418
Proceeds from sale of equipment on operating leases 1,603 1,685
Restructuring charges (credits) (8,158) --
Changes in assets and liabilities, net of effects from
assets and liabilities of business held for sale:
Accounts receivable 18,743 7,925
Inventories 12,752 2,869
Prepaid expenses, deferred income taxes
and other current assets (1,945) (1,206)
Other noncurrent assets (2,832) 6,747
Accounts payable (18,854) 21,795
Accrued expenses (34,071) (81,421)
Deferred revenue (2,460) (983)
Deferred income taxes and other long-term liabilities 802 (305)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,687 12,600
----------- -----------
INVESTING ACTIVITIES
Capital expenditures (25,163) (34,182)
Proceeds from sale of property and equipment 415 853
Payment for purchase of subsidiaries -- (232)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (24,748) (33,561)
----------- -----------
FINANCING ACTIVITIES
Net borrowings (payments) under line of credit agreements 3,512 (640)
Principal payments on debt 89 (2,709)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,601 (3,349)
----------- -----------
EFFECT OF EXCHANGE RATES 507 (3,870)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (10,953) (28,180)
Cash and cash equivalents, beginning of period 64,861 66,095
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 53,908 $ 37,915
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENT OF
SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JUNE 30,
2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL RETAINED OTHER
ORDINARY PAID-IN EARNINGS COMPREHENSIVE
SHARES CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 2000 $ 4,892 $ 317,056 $ (66,226) $ (79,008) $ 176,714
Net loss (1,240) (1,240)
Currency translation adjustment (5,432) (5,432)
----------
Comprehensive income (loss) (6,672)
Dividends and accretion of participating shares (3,870) (3,870)
Shares issued under employee purchase plans 40 2,650 2,690
----------- ----------- ---------- ------------ ----------
BALANCES AT JUNE 30, 2000 $ 4,932 $ 319,706 $ (71,336) $ (84,440) $ 168,862
=========== =========== ========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL RETAINED OTHER
ORDINARY PAID-IN EARNINGS COMPREHENSIVE
SHARES CAPITAL (DEFICIT) INCOME (LOSS) TOTAL
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1999 $ 4,758 $ 304,436 $ (72,815) $ (65,215) $ 171,164
Net earnings 12,243 12,243
Currency translation adjustment (6,143) (6,143)
-----------
Comprehensive income 6,100
----------- ----------- ---------- ------------ -----------
BALANCES AT JUNE 30, 1999 $ 4,758 $ 304,436 $ (60,572) $ (71,358) $ 177,264
=========== =========== ========== ============ ===========
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
DANKA BUSINESS SYSTEMS PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of June 30,
2000, the consolidated statements of operations for the three months ended June
30, 2000 and 1999, the consolidated statements of cash flows for the three
months ended June 30, 2000 and 1999, and the consolidated statement of
shareholders' equity for the three months ended June 30, 2000 and 1999, are
unaudited. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results of
operations for the interim periods presented have been reflected herein. The
results of operations for the interim periods are not necessarily indicative of
the results which may be expected for the entire fiscal year. 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, 2000.
NOTE 2. RESTRUCTURING CHARGES (CREDITS)
FISCAL 1999 CHARGE:
The Company recorded pre-tax restructuring charges totaling $42.7
million for the third and fourth quarters of fiscal 1999. The restructuring
charges were related to the Company's worldwide cost reduction program initiated
in the third quarter of fiscal 1999 with the goal of reducing selling, general
and administrative expenses and improving profitability. The restructuring
charges were for headcount reductions, the elimination of excess facilities and
the write-down of assets. The Company has completed the planned reduction of
1,400 positions. Generally, severance is paid out to individuals over a period
of time rather than one lump sum payment. The lease obligations relate to the
closure of 60 facilities, some of which are expected to continue beyond the year
2001. Unutilized accruals of $1.9 million relating to fiscal 1998 and 1997
restructuring charges were adjusted during the third quarter of fiscal 1999,
resulting in a net charge of $40.8 million for the twelve months ended March 31,
1999. For the first quarter ended June 30, 2000 the Company reversed $8.2
million of reserves for future lease obligations due to favorable lease
settlements and revised estimates of amounts required to settle remaining lease
obligations. The following table summarizes the restructuring charge and related
cash outlays:
1999 RESTRUCTURING CHARGE:
<TABLE>
<CAPTION>
TOTAL FIRST QTR.
FISCAL RESERVE AT FIRST QTR. OTHER NON- RESERVE AT
1999 MARCH 31, CASH CASH JUNE 30,
(in 000's) EXPENSE 2000 OUTLAYS CHANGES 2000
------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Severance $19,820 $ 1,623 $(1,109) -- $ 514
Future lease obligations on facility
closures 19,790 11,802 (385) -- 3,259
Write-off of leasehold improvements
on facility closures 3,084 -- -- $(8,158) --
------- ------- ------- ------- ------
Total restructuring charge $42,694 $13,425 $(1,494) $(8,158) $3,773
======= ======= ======= ======= ======
</TABLE>
7
<PAGE> 8
NOTE 3. EARNINGS PER SHARE
The following table reconciles the numerator and denominator of the
basic and diluted earnings (loss) available to common shareholders per ADS
computations for the three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
-------------------------------------- ----------------------------------------
(In 000's except per share amounts) EARNINGS EARNINGS
(LOSS) SHARES PER-SHARE (LOSS) SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $(1,240) $12,243
BASIC EARNINGS (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS PER ADS:
Dividends and accretion on
participating shares (3,890) --
------- -------
Earnings (loss) (5,130) 58,908 $(0.09) 12,243 57,017 $0.21
====== =====
EFFECT OF DILUTIVE SECURITIES:
Stock options -- 289
------ ------
DILUTED EARNINGS (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS PER ADS:
Earnings (loss) $(5,130) 58,908 $(0.09) $12,243 57,306 $0.21
======= ====== ====== ======= ====== =====
</TABLE>
The effect of the Company's $200.0 million of 6.75% Convertible
Subordinated Notes are not included in the computation of diluted earnings per
share for the three months ended June 30, 2000 and 1999 because they are not
dilutive.
The effect of the Company's 6.5% Convertible Participating Shares and
the effect of stock options are not included in the computation of diluted
earnings per share for the three months ended June 30, 2000 because they are
not dilutive.
NOTE 4. SEGMENT REPORTING
The Company's reportable segments include Danka Americas, Danka
International and Danka Services International (DSI). Danka Americas distributes
photocopiers, facsimiles and other related office imaging equipment together
with related parts, supplies and services on a direct basis to retail customers.
The geographical areas covered by Danka Americas include the United States,
Canada and Latin America. The Company's Omnifax division, which distributes
private-label facsimiles and related parts, supplies and services throughout the
United States and Canada, is also included in the Danka Americas segment for the
three months ended June 30, 1999. Revenue and earnings from operations for
Omnifax for this period were $27.4 million and $2.7 million, respectively.
Effective July 30, 1999, the Company sold its Omnifax business to Xerox
Corporation for $45.0 million in cash. Danka International distributes
photocopiers, facsimiles and other related office imaging equipment. These
products, together with related services, parts and supplies, are marketed
primarily on a direct basis to retail customers. Danka International also
provides photocopiers, facsimiles and other related office imaging equipment and
supplies on a wholesale basis to independent dealers. Danka International has an
extensive sales and service network throughout Europe and additional operations
in Australia. DSI is the Company's worldwide document outsourcing business,
which provides a wide range of document management solutions, including the
management of central reprographics departments, the placement and maintenance
of convenience copiers, print-on-demand operations, document archiving and
retrieval services and document management consulting. The Company measures
segment performance as earnings from operations, which is defined as earnings
before restructuring charges (credits), interest expense and other, net and
income taxes, as
8
<PAGE> 9
shown on the Company's consolidated statements of operations. Other items are
shown for purposes of reconciling to the Company's total consolidated amounts as
shown in the following tables for the three months ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
DANKA
DANKA DANKA SERVICES CONSOLIDATED
AMERICAS INTERNATIONAL INTERNATIONAL OTHER TOTAL
THREE MONTHS ENDED JUNE 30 $000 $000 $000 $000 $000
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Total revenue 300,037 170,568 69,606 540,211
Earnings (loss) from operations 8,633 4,782 7,888 (4,890) 16,413
Restructuring charges (credits) (8,158) (8,158)
Interest expense and other, net 26,343 26,343
Provisions (benefit) for income taxes (532) (532)
Net earnings (loss) (1,240)
1999
Total revenue 368,364 207,239 70,106 645,709
Earnings (loss) from operations 33,337 6,388 6,548 (7,238) 39,035
Interest expense and other, net 22,031 22,031
Provisions for income taxes 4,761 4,761
Net earnings 12,243
</TABLE>
NOTE 5. 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, 2000. Statement No. 133 as amended
establishes accounting and reporting requirements for derivative instruments and
hedging activities, and modifies disclosures previously required under other
accounting standards. The Company does not expect the adoption of Statement No.
133 to have a material impact on its results of operations.
NOTE 6. PENDING LITIGATION
On March 22, 2000, the United States District Court for the Middle
District of Florida, Tampa Division entered an order dismissing a consolidated
class action complaint brought against the Company and certain former Directors
and former officers on or about June 18, 1998. The complaint had alleged,
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.
9
<PAGE> 10
On March 15, 2000 the United States District Court, Southern District
of New York entered an order dismissing a complaint brought against the Company
and its outside law firm in February 1999. The complaint had alleged claims of
breach of contract, breach of duty of good faith and fair dealing, conversion
and violation of the Uniform Commercial Code. More particularly, the plaintiffs
had alleged that in December 1997, they attempted to sell approximately one
million restricted American Depositary Shares at approximately $35.00 per share
and that the Company and its attorneys had wrongfully refused and/or
unreasonably delayed in registering the transfer of the plaintiffs' restricted
shares. The complaint further alleged that the plaintiffs were unable to
complete the sale of shares and were later forced to sell the shares in February
1998 at approximately $17.00 per share. The plaintiffs were attempting to
recover the difference from the Company and its outside law firm.
Although both dismissals have been appealed, the Company believes that
the orders of dismissal will be upheld.
The Company is subject to legal proceedings and claims which arise in
the ordinary course of its business that are not expected to have a material
adverse effect upon the Company's financial position, results of operations or
liquidity.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Danka Business Systems PLC together with subsidiaries ("Danka" or the
"Company") is one of the world's largest independent suppliers of photocopiers
and related office imaging equipment solutions. Danka primarily markets these
products and related services, parts and supplies on a direct basis to retail
customers throughout 29 countries. The Company principally distributes the
products of Canon, Heidelberg, Ricoh and Toshiba. Throughout Europe, the Company
also markets private label photocopiers and facsimile machines and related
supplies on a direct basis under the Company's Infotec trademark. In addition to
its direct retail customers, the Company markets photocopiers and related parts
and supplies on a wholesale basis to independent dealers through its
international operations.
The Company also provides worldwide document management services
through its outsourcing business, Danka Services International ("DSI"). Services
provided by DSI range from on- and off-site document management 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 following table sets forth for the periods indicated the percentage
of total revenue represented by certain items in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
----------------------------
2000 1999
-------- ---------
<S> <C> <C>
Revenue:
Retail equipment sales ................... 28.8 % 25.6 %
Retail service, supplies and rentals ..... 66.4 69.8
Wholesale ................................ 4.8 4.6
----- -----
Total revenue ........................ 100.0 100.0
Cost of revenue ............................ 65.2 62.5
----- -----
Gross profit ............................... 34.8 37.5
Selling, general and administrative expenses 31.1 30.9
Amortization of intangible assets .......... 0.7 0.6
Restructuring charges (credit) ............. (1.5) --
----- -----
Earnings from operations ............. 4.5 6.0
Interest expense and other, net ............ 4.8 3.4
----- -----
(Loss) earnings before income taxes .. (0.3) 2.6
Provision (benefit)for income taxes ........ (0.1) 0.7
----- -----
Net (loss) earnings .................. (0.2) 1.9
===== =====
</TABLE>
The following table sets forth for the periods indicated the gross
profit margin percentage for each of the Company's revenue classifications:
THREE MONTHS ENDED JUNE 30,
----------------------------
2000 1999
-------- ---------
Retail equipment sales 31.8% 28.7%
Retail service, supplies and rentals 37.4 41.7
Wholesale 16.1 21.7
11
<PAGE> 12
QUARTER ENDED JUNE 30, 2000 COMPARED TO QUARTER ENDED JUNE 30, 1999:
Revenue
Total revenue for the first quarter of fiscal 2001 fell by
approximately 16% to $540.2 million from $645.7 million in the prior year
comparable quarter. Excluding the Omnifax business sold in July 1999, total
revenue was down 12%. The Company's revenues in the current year first quarter
were negatively impacted by foreign currency movements which reduced revenue by
approximately $17.7 million. Including a negative impact of approximately $6.9
million due to foreign currency movements, retail equipment sales declined by
$9.8 million, primarily due to shortfalls in sales of higher end digital and
analog products. Retail service, supplies and rentals revenue declined by $92.1
million due to the negative impact of foreign currency ($10.8 million),
declining prices, and a significant decrease in the number of units being
serviced.
Gross Profit
The Company's gross profit margin decreased from 37.5% in the prior
year first quarter to 34.8% in the current year first quarter. The decrease in
margin in the current year compared to the prior year first quarter was
primarily due to lower service margins in the U.S. and Europe, resulting from
higher service costs associated with declining service revenues. U.S. service
and rental costs in the first quarter of this year included a $2.5 million
charge for severance costs associated with the reduction in the U.S. field
service headcount and a $5.5 million charge for the write-off of certain rental
equipment.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") declined by
$31.7 million to $167.8 million from $199.5 million in the comparable quarter
in the prior year while as a percentage of total revenue SG&A expenses
increased from 30.9% to 31.1%. Lower expense amounts were primarily
attributable to lower employment costs, which reflect savings from the 1999
restructuring program, lower sales commissions due to lower revenues, and a
lower provision for bad debts.
Earnings from Operations
For the three months ended June 30, 2000, earnings from operations
decreased to $24.6 million, compared to $39.0 million in the prior year
comparable quarter, due to lower gross profit margins. The current year fiscal
quarter included a $8.2 million credit for the reversal of fiscal year 1999
restructuring reserves for future lease obligations due to favorable lease
settlements and revised estimates of amounts required to settle remaining lease
obligations.
Interest Expense and Other, Net
Interest expense and other, net increased by $4.3 million to $26.3
million from $22.0 million in the comparable quarter of the prior fiscal year.
The increase was due to the expensing of an additional $7.4 million in bank
waiver fees related to the Company's current credit facility, partially offset
by lower interest expense as a result of lower debt outstanding in the current
year. The Company has paid $22.9 million in waiver fees over the past five
quarters as required by amendments to the Company's bank credit agreement. Of
this amount, $20.3 million was expensed prior to June 30, 2000 and the
remaining $2.6 million will be expensed in the second quarter of the current
fiscal year.
12
<PAGE> 13
Income Taxes
The Company recorded an income tax benefit of $.5 million for the
first quarter of fiscal 2001 compared to a $4.8 million provision in the first
quarter of fiscal 2000. The decrease was primarily due to a loss in the current
quarter. The combined effective income tax rate increased to 30.0% for the
first quarter of fiscal 2001 as compared to 28.0% for the first quarter of
fiscal 2000. The increase in the tax rate is primarily due to a shift in income
from lower to higher tax jurisdictions and changes in the classification of
income taxed at various rates within these jurisdictions.
Net Earnings (Loss)
For the three months ended June 30, 2000, the Company incurred a net
loss of $1.2 million compared to net income of $12.2 million in the prior year
comparable quarter. Excluding the bank waiver fees, the Company would have
reported a net profit of $4.2 million in the current year first quarter. After
allowing for preferred dividends, the Company incurred a net loss of $0.09 per
American Depository Share ("ADS") in the current year first quarter compared to
net earnings of $0.21 per ADS in the prior year comparable quarter. Excluding
the bank waiver fees the Company would have reported a net profit of $0.01 per
ADS in the current year first quarter.
Sequentially, the net loss of $1.2 million for the current quarter
compares to a net loss of $18.6 million in the fourth quarter of last year, or
$0.39 per ADS. SG&A savings, restructuring credits, and improved gross margins,
account for the reduced loss. The fourth quarter of last year also included a
$4.3 million charge for a legal settlement.
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 29 countries
worldwide, and therefore, fluctuations in exchange rates between the U.S.
dollar and the currencies in each of the countries in which the Company
operates, will affect the results of the Company's international operations
reported in U.S. dollars and the value of such operations' net assets reported
in U.S. dollars. The results of operations, financial condition and competitive
position of the Company's business are affected by the relative strength of its
currencies in countries where its products are currently sold. The Company's
results of operations and financial condition can be adversely affected by
fluctuations in foreign currencies and by translations of the financial
statements of the Company's foreign subsidiaries from local currencies into
U.S. dollars.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a credit agreement with a consortium of international
bank lenders through March 31, 2002 (the "Credit Agreement"). As amended on
December 1, 1999, the Credit Agreement requires that the Company maintain
minimum levels of adjusted consolidated net worth, cumulative consolidated
EBITDA and a ratio of consolidated EBITDA to interest expense, each as defined
in the Credit Agreement and all of which the Company was in compliance with at
June 30, 2000. Effective September 30, 2000, the Credit Agreement as amended
will also require compliance with a consolidated fixed charge coverage ratio
and a consolidated total leverage ratio.
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The consolidated amounts and ratios required by the amended Credit
Agreement for the first and second quarters of the current year and respective
actual amounts and ratios for the first quarter are as follows:
<TABLE>
<CAPTION>
Required Amounts and Actual Amounts and Ratios
Ratios for Quarter for Quarter Ended Ended
June 30, 2000 Sept. 30, 2000 June 30, 2000
------------- -------------- -------------------------
<S> <C> <C> <C>
Minimum Adjusted Consolidated Net Worth
( $ in Millions) $ 390.6 $ 407.8 $ 437.2
Minimum Cumulative Consolidated EBITDA
(latest 12 months) ( $ in Millions) $ 254.0 $ 254.0 $ 258.4
Minimum Ratio of Consolidated EBITDA to
Interest Expense (latest 12 months) 2.00 2.00 2.77
Minimum Consolidated Fixed Charge
Coverage Ratio (1) -- 1.50 1.56
Maximum Consolidated Total Leverage Ratio (2) -- 3.25 3.18
</TABLE>
(1) The minimum Consolidated Fixed Charge Coverage Ratio is defined as
Cumulative Consolidated EBITDA less the last 12 months of adjusted capital
expenditures divided by total interest expense.
(2) The maximum Consolidated Total Leverage Ratio is indebtedness divided by
Cumulative Consolidated EBITDA.
Terms of the most recent amendment to the Credit Agreement include an
aggregate commitment by the lenders of $690.0 million. Effective interest rates
under the Credit Agreement are LIBOR plus 3.50 percent if average outstanding
loans exceed $650.0 million and LIBOR plus 2.75 percent if they do not.
Indebtedness under the Credit Agreement is secured by substantially
all of the Company's U.S. assets and the Credit Agreement contains negative and
affirmative covenants which place restrictions on Danka regarding the
disposition of assets, capital expenditures, additional indebtedness and
permitted liens, prohibit the payment of dividends (other than payment-in-kind
dividends on the Company's participating shares) and require the Company to
maintain certain financial ratios as mentioned above. The adjustable interest
rate on indebtedness under the Credit Agreement is at the option of the
Company, 2.75% or 3.50% (per above) plus either (i) the applicable Interbank
Rate periods of one, two, three or six months or (ii) an alternative base rate,
consisting of the higher of the lead bank's prime rate or the Federal Funds
rate plus 0.5%. The Company is not permitted to make any acquisitions of
businesses, except with the approval of the bank lenders. The Company is
required to apply 90% of any net proceeds received for any asset dispositions
outside the ordinary course of business to repay outstanding indebtedness under
the Credit Agreement.
As of June 30, 2000, the Credit Agreement had an outstanding balance
of $498.2 million under the revolving component and $88.3 million under the
term loan and was incurring interest at a weighted average rate of 9.11% and
7.29% per annum, respectively. The Company continues to evaluate the timing and
form of refinancing the outstanding debt under the Credit Agreement.
While the Company is generally prohibited from incurring new
indebtedness other than under the Credit Agreement, the Company is permitted to
borrow up to $40.0 million at any one time outside of the Credit Agreement to
finance the purchase of high-volume digital copiers and to secure such loans
with liens upon the financed equipment.
On December 17, 1999, the Company issued 218,000 new 6.50% senior
convertible participating shares of Danka Business Systems PLC for $218.0
million. The participating shares are entitled to dividends equal to the
greater of 6.50% per annum or Ordinary Share dividends on an as converted
basis. Dividends are cumulative and are paid in the form of additional
participating shares for the first five years. The participating shares are
convertible into Ordinary Shares at a conversion price of $3.125 per Ordinary
Share (equal to $12.50 per ADS), subject to adjustment in certain circumstances
to avoid dilution of the interests of participating
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<PAGE> 15
shareholders. The participating shares have voting rights, on an as converted
basis, currently corresponding to approximately 23% of the total voting power
of the Company's capital stock. In addition, the Company has issued 5,899
additional participating shares as of May 31, 2000 in satisfaction of the
payment-in-kind dividend.
The Company is not permitted to pay dividends (other than
payment-in-kind dividends on its participating shares) under the Credit
Agreement and does not anticipate the payment of a dividend on Ordinary
Shares in the foreseeable future.
The Internal Revenue Service has completed an examination of the
Company's federal income tax returns for the fiscal years ended March 31, 1996
and 1995. The Company received a notice of proposed deficiency in November
1999. The principal adjustments relate to the timing of certain deductions
associated with leased equipment financing. The Company has filed a protest and
is meeting with the Appellate Division of the Internal Revenue Service to
resolve this issue. If the Internal Revenue Service were to prevail, net
operating losses available for carryback to these years would increase by
corresponding amounts. The Company believes, however, that it will prevail on
this issue on its merits. The Company believes, in any event, the resolution
will not have a material adverse impact upon the Company's consolidated results
of operations, liquidity or financial position.
In addition to the foregoing, an audit by fiscal authorities in the
Netherlands has commenced. The Company does not believe that this audit, or any
result thereof, will have a materially adverse impact on its consolidated
results of operations, liquidity or financial position.
The Company's net cash flow provided by operating activities was $9.7
million and $12.6 million for the three months ended June 30, 2000 and 1999,
respectively. Operating cash flow for the three months ended June 30, 2000 was
primarily affected by a decrease in cash provided by net earnings, as well as
changes in working capital accounts. Accounts receivable and inventory account
changes provided $31.5 million in cash but they were offset by decreases in
accounts payable and accrued expenses due to payments of trade payables,
employee commissions, and a legal settlement. Cash flow used in investing
activities was $24.7 million and $33.6 million for the three months ended June
30, 2000 and 1999, respectively. The decrease was primarily due to the
Company's reduction in capital expenditures for equipment on operating leases.
Net cash provided by (used in) financing activities was $3.6 million and ($3.3)
million for the three months ended June 30, 2000 and 1999, respectively. The
improvement in cash provided by financing activities was primarily due to net
borrowings under the line of credit agreements for the three months ended June
30, 2000.
Although the Company's recent amendments to its Credit Agreement will
increase the Company's tiered margin spread, the Company's total interest
expense is expected to decrease in future periods as much of the required fee
payments discussed above have already been charged to expense.
The Company believes cash flow from internally generated funds and the
availability under the most recent amendment to the Credit Agreement will be
sufficient to support its operations during the next twelve months.
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 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. 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. 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
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<PAGE> 16
results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such actual results to differ materially
from those reflected in any forward looking statements include, but are not
limited to (i) any material adverse change in financial markets or Danka, (ii)
the continuing ability to achieve cost savings, (iii) increased competition
resulting from other high-volume and digital copier distributors and the
discounting of such copiers by competitors, (iv) any inability by the Company
to procure, or any inability by the Company to continue to gain access to and
successfully distribute new products, including digital products and
high-volume copiers, or to continue to bring current products to the
marketplace at competitive costs and prices, (v) any negative impact from the
loss of any key upper management personnel, (vi) the ultimate outcome and
impact of pending lawsuits, (vii) the ultimate outcome of the notice of
proposed deficiency, pursuant to the review by the Internal Revenue Service,
(viii) any inability to achieve minimum equipment leasing commitments, (ix)
fluctuations in foreign currencies and (x) the reversals by the Appellate Court
of the dismissals granted to the Company as referenced below in Part II, Item
1: Legal Proceedings, and (xi) the ability of the Company to meet its debt
covenants as amended in the bank credit agreement (xii) other risks including
those risks identified in any of the Company's other filings with the
Securities and Exchange Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date they are made. The Company undertakes no
obligation and does not intend to update these forward-looking statements to
reflect events or circumstances that arise after the date such statements are
made. Furthermore, as a matter of policy, the Company does not generally make
any specific projections as to future earnings nor does it endorse any
projections regarding future performance, which may be made by others outside
the Company.
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<PAGE> 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Reference is made to Part I, Item 1, Note 6 to Consolidated Financial
Statements for a description of pending litigation.
The Company is also subject to other legal proceedings and claims
which arise in the ordinary course of business that will not have a material
adverse effect upon the Company's financial position, results of operation or
liquidity.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
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<PAGE> 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual General Meeting of shareholders of Danka Business Systems
PLC was held on July 11, 2000. At the meeting, the following actions were taken
by the shareholders:
1. J. Ernest Riddle was re-elected to serve as a Director of the
Company, in accordance with the Company's Articles of Association. The voting
on the resolution was as follows:
FOR 143,831,332
AGAINST 1,209,621
ABSTAINED 0
2. Richard F. Levy, who was appointed during the course of the
year, was re-elected to serve as a Director of the Company, in accordance with
the Company's Articles of Association. The voting on the resolution was as
follows:
FOR 143,312,777
AGAINST 1,727,832
ABSTAINED 0
3. Sheli Z. Rosenberg, who was appointed during the course of
the year, was re-elected to serve as a Director of the Company, in accordance
with the Company's Articles of Association. The voting on the resolution was as
follows:
FOR 143,743,777
AGAINST 1,296,376
ABSTAINED 0
4. KPMG Audit Plc was appointed as the Company's auditors for
fiscal year 2001, and the Board of Directors was authorized to fix the
auditor's remuneration. The voting on the resolution was as follows:
FOR 144,131,479
AGAINST 911,494
ABSTAINED 0
5. The Board of Directors of the Company was granted the
authority to allot securities up to an aggregate nominal amount of
(pound)781,118. The voting on the resolution was as follows:
FOR 143,153,488
AGAINST 1,887,800
ABSTAINED 0
6. The Board of Directors of the Company was granted the
authority to allot equity securities up to an aggregate nominal amount of
(pound)589,800 without providing certain pre-emptive rights. The voting on the
resolution was as follows:
FOR 134,812,417
AGAINST 10,210,261
ABSTAINED 20,700
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<PAGE> 19
7. The Company was granted the authority to buy back up to 15%
of its outstanding share capital. The voting on the resolution was as follows:
FOR 144,655,757
AGAINST 369,796
ABSTAINED 20,700
8. Amendments to the employment agreements of each of Larry K.
Switzer and Brian L. Merriman to provide for the issuance of restricted ADS's
were approved. The voting on the resolution was as follows:
FOR 129,903,214
AGAINST 15,083,090
ABSTAINED 33,159
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
EXHIBIT
NUMBER EXHIBIT
10.36 Amendments dated May 30, 2000 to the Amended and Restated
Employment Agreement dated September 20, 1999 among the
Company, Danka Business Systems PLC and Larry K. Switzer.
10.37 Amendments dated May 30, 2000 to the Amended and Restated
Employment Agreement dated September 20, 1999 among the
Company, Danka Business Systems PLC and Brian L. Merriman.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended
June 30, 2000.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DANKA BUSINESS SYSTEMS PLC
--------------------------
(Registrant)
Date: August 11, 2000 /S/ F. Mark Wolfinger
------------------------ --------------------------------------
F. Mark Wolfinger, Executive Vice
President and Chief Financial Officer
(Chief Financial Officer and Principal
Accounting Officer)
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