<PAGE> 1
Exhibit 13
SELECTED Consolidated Financial Data
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
$000 $000 $000 $000 $000
For the years ended March 31 (Except per ADS data)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Retail 2,378,871 2,676,306 3,054,167 1,851,766 1,069,593
Wholesale 116,751 220,914 268,569 240,531 170,711
---------------------------------------------------------------------------------------------------------------------------
2,495,622 2,897,220 3,322,736 2,092,297 1,240,304
---------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT:
Retail 847,115 903,500 1,130,701 735,457 446,909
Special charges, retail
gross profit -- (57,853) (10,000) -- --
Wholesale 23,298 31,653 50,644 44,061 30,116
Special charges, wholesale
gross profit -- (514) -- -- --
---------------------------------------------------------------------------------------------------------------------------
870,413 876,786 1,171,345 779,518 477,025
Selling, general and administrative
expenses 738,319 919,897 941,707 610,770 358,783
Special charges, general and
administrative expenses -- 16,805 -- -- --
Amortization of intangible assets 14,258 19,714 21,232 19,386 13,587
Write-off of goodwill and other
long-lived assets -- 109,474 -- -- --
Commitment to Kodak under R&D agreements -- 53,434 50,000 12,500 --
Restructuring charges (credits) (4,148) 40,818 11,000 35,000 8,500
---------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS 121,984 (283,356) 147,406 101,862 96,155
Interest expense and other, net 107,631 74,197 64,214 33,985 21,566
---------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 14,353 (357,553) 83,192 67,877 74,589
Provision (benefit) for income taxes 4,019 (62,773) 30,958 25,522 28,241
---------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEM 10,334 (294,780) 52,234 42,355 46,348
Extraordinary loss on early extinguishment
of debt, net of tax -- -- -- 578 1,133
---------------------------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 10,334 (294,780) 52,234 41,777 45,215
---------------------------------------------------------------------------------------------------------------------------
PER ADS DATA:
Basic income available to common
shareholders per ADS $ 0.10 $ (5.18) $ 0.92 $ 0.74 $ 0.91
Diluted income available to common
shareholders per ADS $ 0.10 $ (5.18) $ 0.90 $ 0.72 $ 0.88
Dividends per ADS -- -- $ 0.20 $ 0.16 $ 0.13
BALANCE SHEET DATA:
Total assets 1,667,697 1,905,142 2,178,941 2,352,704 1,091,556
Long-term debt, less current maturities 715,406 1,052,415 858,892 1,059,823 318,262
Redeemable convertible participating
shares 207,878 -- -- -- --
Shareholders' equity 176,714 171,164 480,307 465,731 441,843
</TABLE>
Note: Certain prior year amounts have been reclassified to conform with the
current year presentation.
Page 14
<PAGE> 2
MANAGEMENT'S Discussion and Analysis of Financial Condition and Results of
Operations
THE COMPANY
Danka Business Systems PLC and its 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 closed its U.S. wholesale operations effective March 31,
1999. In addition, the Company sold its facsimile business, Omnifax, effective
July 30, 1999 to Xerox Corporation for $45.0 million in cash.
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.
For fiscal 2000 the Company reported net earnings of $10.3 million, or $0.10 per
American Depositary Share ("ADS"), versus a loss of $5.18 per ADS for fiscal
1999. The Company realized improvements in its combined gross profit margin and
significant reductions in selling, general and administrative expenses during
fiscal 2000 primarily related to its restructuring initiatives and worldwide
cost reduction program implemented during the third quarter of fiscal 1999.
In July 1999, Danka launched worldwide distribution of its first high-volume
digital printing system, the DigiSource 9110, renamed the Digimaster 9110 in
March 2000. The Digimaster 9110 was developed by Kodak and is designed and
manufactured through a joint venture by Heidelberg Digital ("Heidelberg") and
Nexpress Solutions. In October 1999 the Company signed a five-year agreement
with Heidelberg to distribute worldwide black and white electrophotographic
equipment manufactured by Heidelberg, including the Digimaster 9110 Network
Imaging System.
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated the dollar amounts and
percentage of total revenue represented by certain items in the Company's
Consolidated Statements of Operations before and after restructuring and other
special charges:
AFTER RESTRUCTURING AND OTHER SPECIAL CHARGES:
<TABLE>
<CAPTION>
Years ended March 31
----------------------------------------------------------------------------------
(In millions) 2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Retail equipment sales $ 733.8 $ 755.5 $ 985.3
Retail service, supplies and rentals 1,645.1 1,920.8 2,068.9
Wholesale 116.7 220.9 268.5
----------------------------------------------------------------------------------
TOTAL REVENUE 2,495.6 2,897.2 3,322.7
Cost of revenue 1,625.2 2,020.4 2,151.4
----------------------------------------------------------------------------------
GROSS PROFIT 870.4 876.8 1,171.3
Selling, general and
administrative expenses 738.3 936.7 941.7
Amortization of intangible assets 14.3 19.7 21.2
Write-off of goodwill and other
long-lived assets -- 109.5 --
Commitment to Kodak under
R&D agreements -- 53.4 50.0
Restructuring charges (4.1) 40.8 11.0
----------------------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS 121.9 (283.3) 147.4
Interest expense and other, net 107.6 74.2 64.2
----------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE
INCOME TAXES 14.3 (357.5) 83.2
Provision (benefit) for income taxes 4.0 (62.7) 31.0
----------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 10.3 $ (294.8) $ 52.2
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31
----------------------------------------------------------------------------------
(Percentage of total revenue) 2000 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Retail equipment sales 29.4% 26.1% 29.6%
Retail service, supplies and rentals 65.9 66.3 62.3
Wholesale 4.7 7.6 8.1
----------------------------------------------------------------------------------
TOTAL REVENUE 100.0 100.0 100.0
Cost of revenue 65.1 69.7 64.8
----------------------------------------------------------------------------------
GROSS PROFIT 34.9 30.3 35.2
Selling, general and
administrative expenses 29.6 32.4 28.3
Amortization of intangible assets 0.6 0.7 0.6
Write-off of goodwill and other
long-lived assets -- 3.8 --
Commitment to Kodak under
R&D agreements -- 1.8 1.5
Restructuring charges (0.2) 1.4 0.4
----------------------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS 4.9 (9.8) 4.4
Interest expense and other, net 4.3 2.5 1.9
----------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE
INCOME TAXES 0.6 (12.3) 2.5
Provision (benefit) for income taxes 0.2 (2.1) 0.9
----------------------------------------------------------------------------------
NET EARNINGS (LOSS) 0.4 (10.2) 1.6
----------------------------------------------------------------------------------
</TABLE>
Page 15
<PAGE> 3
MANAGEMENT'S Discussion and Analysis of Financial Condition and Results of
Operations (continued)
BEFORE RESTRUCTURING AND OTHER SPECIAL CHARGES:
<TABLE>
<CAPTION>
Years ended March 31
-----------------------------------------------------------------------------------------------
(In millions) 2000 1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Retail equipment sales $ 733.8 $ 755.5 $ 985.3
Retail service, supplies and rentals 1,645.1 1,920.8 2,068.9
Wholesale 116.7 220.9 268.5
-----------------------------------------------------------------------------------------------
TOTAL REVENUE 2,495.6 2,897.2 3,322.7
Cost of revenue 1,625.2 1,962.1 2,141.4
-----------------------------------------------------------------------------------------------
GROSS PROFIT 870.4 935.1 1,181.3
Selling, general and
administrative expenses 738.3 919.9 941.7
Amortization of
intangible assets 14.3 19.7 21.2
Write-off of goodwill and other
long-lived assets -- -- --
Commitment to Kodak under
R&D agreements -- 53.4 50.0
Restructuring charges -- -- --
-----------------------------------------------------------------------------------------------
EARNINGS (LOSS)
FROM OPERATIONS 117.8 (57.9) 168.4
Interest expense and other, net 107.6 74.2 64.2
-----------------------------------------------------------------------------------------------
EARNINGS (LOSS)
BEFORE INCOME TAXES 10.2 (132.1) 104.2
Provision (benefit) for income taxes 2.9 (13.2) 38.8
-----------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 7.3 $ (118.9) $ 65.4
-----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years ended March 31
-----------------------------------------------------------------------------------------
(Percentage of total revenue) 2000 1999 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Retail equipment sales 29.4% 26.1% 29.6%
Retail service, supplies and rentals 65.9 66.3 62.3
Wholesale 4.7 7.6 8.1
-----------------------------------------------------------------------------------------
TOTAL REVENUE 100.0 100.0 100.0
Cost of revenue 65.1 67.7 64.5
-----------------------------------------------------------------------------------------
GROSS PROFIT 34.9 32.3 35.5
Selling, general and
administrative expenses 29.6 31.8 28.3
Amortization of
intangible assets 0.6 0.7 0.6
Write-off of goodwill and other
long-lived assets -- -- --
Commitment to Kodak under
R&D agreements -- 1.8 1.5
Restructuring charges -- -- --
-----------------------------------------------------------------------------------------
EARNINGS (LOSS)
FROM OPERATIONS 4.7 (2.0) 5.1
Interest expense and other, net 4.3 2.5 1.9
-----------------------------------------------------------------------------------------
EARNINGS (LOSS)
BEFORE INCOME TAXES 0.4 (4.5) 3.2
Provision (benefit) for income taxes 0.1 (0.4) 1.2
-----------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 0.3 (4.1) 2.0
-----------------------------------------------------------------------------------------
</TABLE>
Note: Certain prior year amounts have been reclassified to conform with the
current year presentation.
Page 16
<PAGE> 4
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:
Years ended March 31
----------------------------------------------------------------------------
(In millions) 2000 1999 1998
----------------------------------------------------------------------------
GROSS PROFIT:
Retail equipment sales $ 214.3 $ 140.3 $ 310.5
Retail service, supplies and rentals 632.8 705.4 810.2
Wholesale 23.3 31.1 50.6
Years ended March 31
----------------------------------------------------------------------------
(As percentage of each revenue
classification) 2000 1999 1998
----------------------------------------------------------------------------
GROSS PROFIT:
Retail equipment sales 29.2% 18.6% 31.5%
Retail service, supplies and rentals 38.5 36.7 39.2
Wholesale 20.0 14.1 18.9
BEFORE RESTRUCTURING AND OTHER SPECIAL CHARGES:
Years ended March 31
----------------------------------------------------------------------------
(In millions) 2000 1999 1998
----------------------------------------------------------------------------
GROSS PROFIT:
Retail equipment sales $ 214.3 $ 171.0 $ 320.5
Retail service, supplies and rentals 632.8 732.5 810.2
Wholesale 23.3 31.6 50.6
Years ended March 31
----------------------------------------------------------------------------
(As percentage of each revenue
classification) 2000 1999 1998
----------------------------------------------------------------------------
GROSS PROFIT:
Retail equipment sales 29.2% 22.6% 32.5%
Retail service, supplies and rentals 38.5 38.1 39.2
Wholesale 20.0 14.3 18.9
THE FOLLOWING COMPARISON ANALYSIS FOR THE THREE YEARS ENDED MARCH 31, 2000 IS
BASED ON THE COMPANY'S RESULTS BEFORE THE EFFECT OF ALL RESTRUCTURING AND OTHER
SPECIAL CHARGES, WHICH OCCURRED DURING THE FISCAL 1999 AND 1998 YEARS. IN FISCAL
2000, THE COMPANY REVERSED $4.1 MILLION IN UNUTILIZED RESERVES ASSOCIATED WITH
ITS FISCAL 1999 AND 1997 RESTRUCTURING CHARGES. TO REVIEW THE EFFECTS OF SUCH
CHARGES ON THE COMPANY'S OPERATIONS, REFER TO THE COMPARATIVE TABLES ON PAGES
15-17 OF THIS ANNUAL REPORT.
REVENUE: Fiscal 2000 revenue declined 14% to $ 2.5 billion compared to $2.9
billion in fiscal 1999. Revenue for fiscal 2000 was affected by the sale of the
Company's Omnifax business effective July 30, 1999 and the closure of its U.S.
Wholesale division effective March 31, 1999. Results for fiscal 2000 included
$35.7 million of revenue from the Omnifax business compared to $111.0 million
for fiscal 1999. In addition, the U.S. wholesale operations reported revenue of
$96.7 million in fiscal 1999.
The Company's fiscal 2000 retail equipment sales declined 3% to $733.8 million
from $755.5 million in fiscal 1999. In fiscal 1999, the Company entered into
several key strategic vendor alliances and expanded its worldwide product
portfolio to add new products in color, digital and high-volume as discussed
below in the fiscal 1999 review. Related to this strategic focus, the Company
took actions to aggressively move away from the sale of low segment analog
machines during fiscal 2000. Although not evident in the fiscal year-over-year
comparison, the Company reported sequential quarterly growth in its retail
equipment sales during the second and fourth quarters of fiscal 2000, while the
third quarter remained relatively flat. Further, strengthened by the Company's
expanded product portfolio, fiscal 2000 sales of black and white digital and
color equipment represented 42% of retail equipment sales compared to 25% in
fiscal 1999.
Retail service, supplies and rentals revenue declined 14% to $1.6 billion in
fiscal 2000 from $1.9 billion in fiscal 1999. The decline was due to the sale of
non-core operations, including the Company's Omnifax business in July 1999, as
well as declines in the Company's analog machine base due to shifts in the
industry and product mix to mid- and high-volume digital and color equipment. As
discussed above, the Company took actions to aggressively move away from the
sale of low segment analog machines, which impacted service and supply revenue.
Fiscal 2000 wholesale revenue declined 47% to $116.7 million from $220.9 million
in fiscal 1999 primarily due to the closure of the Company's U.S. wholesale
division effective March 31, 1999. As mentioned above, the U.S. wholesale
division reported revenue of $96.7 million in fiscal 1999. The decision to close
the Company's U.S. wholesale operations was in-line with its strategy to focus
on higher margin businesses.
Fiscal 1999 revenue declined 13% to $2.9 billion from $3.3 billion in fiscal
1998, due to lower revenue in all of the Company's segments, retail equipment
sales, retail service, supplies and rentals and wholesale revenue. Retail
equipment sales and retail service, supplies and rentals revenue were lower in
both the U.S. and international markets while the decline in wholesale revenue
was primarily due to declining sales in the Company's U.S. wholesale operations.
The Company closed its U.S. wholesale operations effective March 31, 1999.
The Company believes the shortfall in fiscal 1999 retail equipment sales, which
declined 23% to $755.5 million, was related to a number of factors. First,
equipment sales in the U.S. and international markets were affected in the third
and fourth quarters by negative press regarding the Company's financial
situation at that time, which led to some price discounting. Second, the
Company's product availability was constrained due to stricter credit terms with
suppliers primarily during the third quarter. Similarly, the Company lacked the
digital product availability necessary to compete in marketplaces experiencing
the accelerated shift to digital products primarily in the U.S. and Australasia.
During the second half of the fiscal year, the Company also
Page 17
<PAGE> 5
MANAGEMENT'S Discussion and Analysis of Financial Condition and Results of
Operations (continued)
experienced difficulties in receiving lease financing, resulting in delays and
loss of sales in both the North American and international markets.
See--"Liquidity and Capital Resources" for discussion on GE Capital agreement
and the Company's ability to meet necessary requirements imposed by GE Capital.
The International division's equipment sales, primarily in the U.K. and
Australasia, were also impacted as a result of competitive pressures from
Japanese manufacturers selling directly to customers. The Company took several
steps in fiscal 1999 to improve its digital portfolio to meet the accelerated
shift in customer demand. In September 1998, the Company entered into an
alliance with Canon, allowing the Company to offer the complete line of Canon
color copiers to all of its customers throughout North America, Europe and
select Latin American countries. In January 1999, the Company received
authorization from Canon to offer a full line of digital black and white copiers
throughout the U.S. The Company has similar distribution rights regarding
Toshiba digital black and white products. Furthermore, the Company introduced
distribution of its first high-volume digital machine, the Digimaster 9110,
manufactured by Heidelberg, in March 1999 and launched worldwide distribution of
the product in July.
The Company's retail service, supplies and rentals revenue declined 7% to $1.9
billion in fiscal 1999 from $2.1 billion in fiscal 1998. The decline was
primarily due to two factors. First, the erosion of the U.S. installed machine
base, specifically within the Company's larger named accounts, resulted in a
decline in service and supply revenue. Second, supply sales in the Company's
International division weakened due to the competitive pressures from Japanese
manufacturers selling directly to customers.
Wholesale revenue declined 18% to $220.9 million in fiscal 1999 from $268.6
million in fiscal 1998. The decline was primarily due to lower sales in the U.S.
in both equipment and supplies as a result of the Company focusing its efforts
on higher profit margin sales. The Company closed its U.S. wholesale division
effective March 31, 1999.
Approximately 40% of the Company's revenue is generated in countries outside of
the United States. As a result of foreign currency fluctuations, the Company's
revenue for the fiscal years 2000, 1999 and 1998 was negatively impacted by
approximately $67.1 million, $16.8 million and $100.0 million, respectively.
GROSS PROFIT: Fiscal 2000 gross profit declined 7% to $870.4 million from $935.1
million in fiscal 1999. The gross profit as a percentage of total revenue
increased to 34.9% in fiscal 2000 from 32.3%, before special charges, in fiscal
1999. The increase in the Company's combined gross profit margin was
attributable to improvements in each of the Company's revenue categories.
Gross profit as a percentage of retail equipment sales increased to 29.2% in
fiscal 2000 from 22.6%, before special charges, in fiscal 1999. Changes in the
current product mix resulting from new, higher margin products in color, digital
and high-volume, positively affected the fiscal 2000 retail equipment margin.
The higher retail equipment margin was partially offset by a reduced margin in
the fourth quarter related to the Company's decision to sell off end of life
Kodak analog equipment at significantly reduced margins. Also affecting the
retail equipment margin were manufacturer price increases on digital equipment,
which were not fully recovered in pricing actions set by the Company during the
fourth quarter. The margin for fiscal 1999 also reflected the impact of the
write-down of certain non-Kodak branded inventory to estimated market value and
the Company's efforts to reduce out-of-box inventories during the third quarter.
The gross profit margin on retail service, supplies and rentals increased to
38.5% in fiscal 2000 compared to 38.1%, before special charges, in fiscal 1999.
The increase was primarily due to improvements in U.S. service productivity. The
improvement in the service margin for fiscal 2000 was partially offset by a
lower margin in the fourth quarter which was impacted by higher parts costs
specifically related to parts used in the servicing of the Company's Kodak
analog installed machine base. The service margin was also affected by lower
service revenue in the fourth quarter, which has resulted from the decline in
the Company's installed analog machine base.
The gross profit margin on wholesale sales increased to 20.0% in fiscal 2000
compared to 14.3%, before special charges, in fiscal 1999 primarily due to the
closure of the Company's U.S. wholesale operations effective March 31, 1999. The
U.S. wholesale operations generated a lower gross profit margin than the
Company's international wholesale business.
Gross profit declined 18% to $935.1 million in fiscal 1999 from $1.2 billion in
fiscal 1998. The total gross profit margin decreased to 32.3% in fiscal 1999
from 35.5% in fiscal 1998. The decline in the Company's total gross profit
margin, before special charges, was primarily due to a lower retail equipment
margin. Including the effect of special charges to cost of retail equipment
sales, retail service, supplies and rental costs, and wholesale costs of revenue
during fiscal 1999 and the $10.0 million provision for the anticipated shortfall
in equipment purchases recorded in the third quarter of fiscal 1998, gross
profit was $876.8 million in fiscal 1999 compared to $1.2 billion in fiscal
1998. See Note 7 to the consolidated financial statements for discussion.
Gross profit as a percentage of retail equipment sales decreased to 22.6% in
fiscal 1999 compared to 32.5% in fiscal 1998, before special charges. The
decline in the retail equipment margin was attributable to several factors,
including the write-down of certain of the Company's non-Kodak branded inventory
to estimated market value during the third quarter and the Company's efforts to
reduce used machine and out-of-box inventories during the fiscal year. The net
impact of these factors was approximately $25.0 million. Other factors that
affected the Company's retail equipment margin were primarily external market
pressures. First, the negative press regarding the Company's financial situation
led to price discounting to customers. Second, the impact of competitive
pressures on equipment sales has increased in the U.S. and international markets
as a result of the accelerated shift to digital products and the direct selling
by Japanese manufacturers, the latter occurring more so in the international
market.
Page 18
<PAGE> 6
Including the effect of special charges, gross profit as a percentage of retail
equipment sales declined to 18.6% for fiscal 1999.
The gross profit margin on retail service, supplies and rentals, declined to
38.1% in fiscal 1999 compared to 39.2% in fiscal 1998, before special charges.
Including special charges to retail service, supplies and rental costs, the
Company reported a gross profit margin of 36.7% in fiscal 1999.
The gross profit margin on wholesale sales declined to 14.3% in fiscal 1999 from
18.9% in fiscal 1998. The decline is primarily due to competitive pressures in
the international and U.S. markets as well as a write-down of the Company's U.S.
wholesale inventory to estimated market value. The Company closed its U.S.
wholesale operations effective March 31, 1999. In addition, the comparable
wholesale margin in fiscal 1998 was particularly strong due to solid private
label sales. Including special charges to wholesale costs of revenue for the
write-down of inventory, the Company reported a gross profit margin of 14.1% in
fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses ("SG&A") declined 20% to $738.3 million in fiscal 2000
from $919.9 million in fiscal 1999 before special charges. As a percentage of
revenue, SG&A expenses decreased to 29.6% for fiscal 2000 compared to 31.8% in
fiscal 1999. The decrease was due to cost savings achieved through the Company's
restructuring initiatives and worldwide cost reduction program implemented in
December 1998 as well as the closure of the Company's U.S. wholesale division in
March 1999 and the sale of its Omnifax business in July 1999.
SG&A expenses declined 2% to $919.9 million in fiscal 1999 from $941.7 million
in fiscal 1998, respectively. A decline in selling expenses primarily due to
lower retail equipment sales was partially offset by higher general and
administrative expenses, the majority of which occurred during the second half
of fiscal 1999. Primary factors of the increase in general and administrative
expenses included increased bad debt expenses, professional fees related to the
Company's restructuring efforts and costs associated with the IT separation from
Kodak in December. The net impact of these factors was approximately $15.0
million. During the third quarter of fiscal 1999, the Company implemented a
worldwide cost reduction program with the goal of reducing SG&A levels. As a
percentage of revenue, total SG&A expenses increased to 31.8% in fiscal 1999
from 28.3% in fiscal 1998. The increase was primarily due to the decline in
total revenue. Including the effect of special charges during fiscal 1999, the
Company reported total SG&A expenses of $936.7 million.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets totaled
$14.3 million, $19.7 million and $21.2 million for fiscal 2000, 1999 and 1998.
The decrease in fiscal 2000 was principally related to the write-off of goodwill
in fiscal 1999. The Company's total goodwill was also reduced in fiscal 2000
related to the sale of the Omnifax business. The Company continually evaluates
its goodwill and other long-lived assets for recoverability. In fiscal 1999, the
Company determined that based on changes in the business environment and an
analysis of projected cash flows, the carrying amount of certain goodwill and
other long-lived assets in the U.S. and Canada would not be recoverable.
Accordingly, the resulting analysis necessitated a write-down of $107.9 million
during the third quarter, comprised of $89.5 million in the U.S. and $18.4
million in Canada. In the fourth quarter of fiscal 1999, the Company closed its
U.S. wholesale operations and wrote-off $1.6 million of goodwill.
COMMITMENT TO KODAK UNDER RESEARCH AND DEVELOPMENT AGREEMENTS: In connection
with the acquisition of the Office Imaging and outsourcing businesses in
December 1996, the Company was providing funding to Kodak for ongoing research
and development for new electrophotographic equipment under a Research and
Development agreement. The Company was to pay Kodak a sum of $175.0 million over
the period April 1, 1997 through December 31, 2002 (plus an additional $30.0
million if certain milestones were met). Effective December 15, 1998 the
Research and Development agreement was terminated. Following the termination of
this agreement, the Company and Kodak reached a new agreement under which Kodak
was required to finish the development of a digital high-volume copier, the
Digimaster 9110, and the Company agreed to pay Kodak $23.0 million. The Company
recorded commitments to Kodak under research and development agreements of $53.4
million and $50.0 million in fiscal 1999 and 1998, respectively. The Company had
no further commitments to Kodak for research and development in fiscal 2000.
RESTRUCTURING CHARGES: The Company recorded a $42.7 million pre-tax
restructuring charge during fiscal 1999, primarily related to the Company's
worldwide cost reduction program announced during the third quarter. The fiscal
1999 restructuring charge was reduced by $1.9 million for remaining liabilities
unused from prior restructuring charges in fiscal 1998 and fiscal 1997 resulting
in a net charge of $40.8 million. The Company also reversed $4.1 million in
fiscal 2000 which is included as a credit to restructuring charges. Of the total
amount, $3.1 million related to lease obligations originally provided for in the
1997 restructuring plan which were not utilized as a result of favorable lease
settlements on certain facilities. The remaining $1.0 million reversal related
to estimated severance provided for in the 1999 restructuring plan which was not
fully utilized. In fiscal 1998, the Company recorded an $11.0 million pre-tax
restructuring charge principally related to the integration of the Office
Imaging business. The charge consisted of severance and other employee
termination benefits.
EARNINGS (LOSS) FROM OPERATIONS: Earnings from operations increased to $117.8
million in fiscal 2000 compared to an operating loss of $57.9 million in fiscal
1999, before restructuring and other special charges. Earnings from operations
were positively impacted by the higher combined gross profit, lower SG&A
expenses, lower amortization expense and the elimination of research and
development commitments to Kodak.
Page 19
<PAGE> 7
MANAGEMENT'S Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The operating loss of $57.9 million in fiscal 1999 compared to earnings from
operations of $168.4 million in fiscal 1998. Fiscal 1999 earnings from
operations were primarily impacted by the decline in revenue, lower combined
gross profit and higher SG&A expenses. Including restructuring and other special
charges, the Company reported an operating loss of $283.3 million in fiscal
1999.
INTEREST EXPENSE AND OTHER, NET: Interest expense and other, net increased to
$107.6 million in fiscal 2000 compared to $74.2 million in fiscal 1999 and $64.2
million in fiscal 1998. The increase in fiscal 2000 is related to several
factors, including a $4.3 million litigation settlement, a loss of $2.1 million
related to the sale of the Company's Omnifax business in July 1999 and foreign
exchange losses of $0.6 million. On March 3, 2000, Wasserstein Perella, Inc., a
former financial advisor to the Company, filed a suit alleging the Company
failed to pay Wasserstein certain fees. The complaint sought damages of not less
than $16.0 million. On May 15, 2000, the Company settled the lawsuit for $4.3
million. Excluding these losses, interest expense totaled $100.6 million for
fiscal 2000.
The interest expense increase was primarily due to a higher interest rate as
well as covenant waiver fees of $16.9 million incurred by the Company, relating
to amendments to the Company's Credit Agreement effective June 15, July 9 and
December 1, 1999. See--"Liquidity and Capital Resources." The increase in fiscal
1999 related to higher levels of borrowings, a higher interest rate and waiver
fees paid by the Company. The interest rate increase and waiver fees were
related to amendments to the Company's Credit Agreement effective June 30, 1998
and waivers dated October 18, 1998 and February 26, 1999.
INCOME TAXES: Income taxes increased to $4.0 million for fiscal 2000 compared to
a tax benefit of $62.8 million for fiscal 1999 after restructuring and other
special charges. The increase was primarily due to a higher level of earnings.
The combined effective income tax rate was 28.0% for fiscal 2000 compared to a
17.6% tax benefit in fiscal 1999 due to the loss before income taxes. The
reduction from the statutory U.K. tax rate of 30.0% in fiscal 2000 was due to
utilization of tax loss carry-forwards. For fiscal 1998, the Company reported
income taxes of $31.0 million, based on an effective income tax rate of 37.2%.
The reduction in the fiscal 1999 effective tax rate was the result of non-tax
deductible items, primarily the write-off of goodwill and other long-lived
assets, valuation allowances established as a result of uncertainties about the
ability to utilize net operating loss carry-forwards in certain jurisdictions,
principally in the U.K. and Canada, and the pre-tax loss. Excluding the effect
of restructuring and other special charges, the Company's effective tax benefit
for fiscal 1999 was 10.0%.
NET EARNINGS (LOSS): The Company reported net earnings of $7.3 million in fiscal
2000, excluding the $4.1 million restructuring credit, compared to a net loss of
$118.9 million in fiscal 1999, before restructuring and other special charges.
The increase was attributable to higher combined gross profit, lower SG&A
expenses, lower amortization expense and the elimination of research and
development commitments to Kodak. The Company reported net earnings of $65.4
million in fiscal 1998. Including the effect of restructuring and other special
charges, the Company reported net earnings of $10.3 million in fiscal 2000
compared to a net loss of $294.8 million in fiscal 1999 and net earnings of
$52.2 million in fiscal 1998.
EXCHANGE RATES
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's primary cash requirements are for working capital, servicing its
indebtedness and funding capital expenditures. The Company believes cash flow
from internally generated funds and the availability under the amended credit
agreement will be sufficient to support its operations during the next twelve
months.
OPERATING ACTIVITIES: The Company's net cash flow provided by operating
activities was $180.6 million, $36.6 million and $171.4 million in fiscal 2000,
1999 and 1998, respectively. The increase in fiscal 2000 operating cash flow was
favorably impacted by the increase in net earnings as well as increases in
accounts payable, which were partially offset by decreases in accrued expenses.
Accounts payable increased primarily due to the availability of better credit
terms with the Company's vendors as compared to the same period last year. In
addition, the Company continued to make improvements in its inventory levels,
reducing total inventory by $27.8 million in fiscal 2000. The Company's net loss
and significant reduction in accounts payable of $135.2 million impacted fiscal
1999 operating cash flow. Inventory levels were also reduced by nearly $88.0
million during fiscal 1999, excluding special charges.
In April 2000, General Electric Capital Corporation ("GE Capital") and the
Company entered into an agreement to provide a framework for ongoing customer
lease financing through March 2003.
INVESTING ACTIVITIES: The Company's net cash flow used in investing activities
was $78.8 million, $190.3 million and $75.3 million for fiscal 2000, 1999 and
1998, respectively. The decrease in fiscal 2000 investing activities was
primarily
Page 20
<PAGE> 8
due to the Company's reduction in capital expenditures and the $45.0 million in
cash proceeds received from the sale of the Omnifax business during the second
quarter. The lower level of investing activities in fiscal 1998 was primarily
due to a refund of approximately $100.0 million the Company received from Kodak
during the second quarter related to the purchase price adjustment provision in
the purchase agreement between Kodak and the Company.
FINANCING ACTIVITIES: Cash (used in) provided by financing activities was
($106.1) million, $185.7 million and ($135.2) million for fiscal 2000, 1999 and
1998. The increase in cash used in fiscal 2000 financing activities was
primarily attributable to changes in the level of borrowings, particularly
payments made towards outstanding amounts under the credit agreement. The
Company paid down total outstanding debt by $340.0 million during fiscal 2000.
The increase in cash provided by financing activities from fiscal 1998 to 1999
was primarily due to increases in the Company's bank borrowings.
CAPITAL STRUCTURE AND RESOURCES: The Company has a credit agreement with a
consortium of international bank lenders (the "Credit Agreement"). As amended on
December 1, 1999, the Credit Agreement requires 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 March 31, 2000. Recent
amendments continue waiver of compliance with the requirements imposed under
certain other financial covenants, which were waived by the bank lenders
pursuant to waivers granted to the Company in October 1998 and February 1999
after a prior amendment of the covenants effective June 30, 1998. 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.
Terms of the most recent amendment include an aggregate commitment by the
lenders of $690.0 million. The amendment required the Company to use
approximately 85% of the net proceeds from a new issue of participating shares
to repay indebtedness outstanding under the Credit Agreement. As described on
page 22, approximately $174.0 million (85%) of the net proceeds of subscriptions
for the new participating shares was used to pay outstanding indebtedness under
the Credit Agreement on December 17, 1999. The amendment to the Credit Agreement
also amended the minimum net worth covenant contained in the Credit Agreement,
among other things, to make the covenant less restrictive during the period from
July 31, 2000 to June 30, 2001 and provides that the indebtedness under the
Credit Agreement matures on March 31, 2002. The amendment also removed any
obligation of the Company to use its best efforts to sell the Company's
outsourcing division, Danka Services International, and provided that a $10.0
million payment to its bank lenders, which would have been due upon such sale,
became due upon the completion of the new issue of participating shares to
equity funds managed by affiliates of The Cypress Group LLC and to The
Prudential Assurance Company Limited. The $10.0 million payment was made on
December 17, 1999. The Company also paid waiver fees of $2.4 million and $3.7
million on October 31, 1999 and December 31, 1999, respectively, related to
amounts committed under the Credit Agreement. A fee totaling $6.9 million was
paid in April 2000 for amounts committed under the Credit Agreement on March 31,
2000. With respect to the period from July 1, 1999 through September 30, 1999,
the Company was required to pay a leverage fee of $0.6 million (equating to
0.25% annual interest on the average outstanding loans under the Credit
Agreement). Further, during the period from October 1, 1999 through December 31,
1999, the Company was required to pay a leverage fee of $1.6 million (equating
to 0.75% annual interest on the average outstanding loans under the Credit
Agreement). During the period from January 1, 2000 through March 31, 2000 the
Company was required to pay a fee of $2.1 million (equating to 1.25% annual
interest on the average outstanding loans under the Credit Agreement). Finally,
for the period from April 1, 2000 through March 31, 2002, this fee will equate
to 1.50% annual interest if the average outstanding loans exceed $650.0 million
and 0.75% 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, 2.0% per annum plus either
(i) the applicable Interbank Rate periods of one, two, three or six months for
the respective currency borrowed 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 March 31, 2000, the Credit Agreement had an outstanding balance of $480.4
million under the revolving component and $115.0 million under the term loan and
was incurring interest at a weighted average rate of 9.2% and 7.1% per annum,
respectively, including the additional leverage fees as outlined above.
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 January 18, 2000, the Company announced that it entered into a commitment
with Bank of America, N.A. and Banc of America Securities LLC, as agents, who
would fully underwrite a new five-year $800.0 million senior credit facility.
The Company later announced on March 13, 2000 that it would remain with its
current Credit Agreement which provides financing through March 31, 2002 rather
than proceed with the new credit facility. The Company continues to evaluate the
timing and form of refinancing the outstanding debt ($595.4 million as of March
31, 2000) under the Credit Agreement.
Page 21
<PAGE> 9
MANAGEMENT'S Discussion and Analysis of Financial Condition and Results of
Operations (continued)
On December 17, 1999, the Company issued an aggregate 218,000 new 6.50% senior
convertible participating shares of Danka Business Systems PLC for $218.0
million. Equity funds managed by affiliates of The Cypress Group LLC ("Cypress")
invested $200.0 million in 200,000 new convertible participating shares of the
Company. In addition, The Prudential Assurance Company Limited ("Prudential"), a
subsidiary of Prudential Corporation plc, invested $18.0 million for an
additional 18,000 new shares of the same issue.
The net proceeds to the Company for the share subscriptions by Cypress and
Prudential totaled approximately $204.6 million, after deducting transaction
expenses. Eighty-five percent (85%) of the net proceeds, or approximately $174.0
million, of the share subscription was used to make a required repayment of
Danka's existing bank indebtedness under the Credit Agreement and the remainder
was used for general corporate purposes.
The new 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 will be 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 shareholders. The newly issued participating shares
(218,000) have voting rights, on an as converted basis, initially corresponding
to approximately 23% of the total voting power of the Company's capital stock.
In addition, the Company has issued an aggregate of 5,899 additional
participating shares as of May 31, 2000 in satisfaction of the payment-in-kind
dividend. The terms of the participating shares are set out in full in the
articles of association of the Company, which were adopted at the extraordinary
general meeting of its shareholders on December 17, 1999. Details of the terms
of the shares are also included in the circular sent to Danka's shareholders and
the proxy statement sent to Danka's U.S. shareholders and American Depositary
shareholders on November 24, 1999.
The Company's last dividend to shareholders was paid on July 28, 1998. 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
that the payment of a dividend on an Ordinary Share will be reinstated upon
refinancing the indebtedness outstanding thereunder.
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 disagrees with these adjustments and
will be filing a protest and requesting a conference with the Appellate Division
of the Internal Revenue Service. 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 the merits. The Company believes 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, the Company has been notified of the commencement
of an audit by fiscal authorities in the Netherlands. The Company does not
believe that this audit will have a materially adverse impact on its
consolidated results of operations, liquidity or financial position.
MARKET RISK MANAGEMENT
INTEREST RATE RISK: The Company's exposure to interest rate risk primarily
relates to its long-term debt. As outlined above in "Liquidity and Capital
Resources," the Company's Credit Agreement at March 31, 2000 had an outstanding
balance of $480.4 million under the revolving component and $115.0 million under
the term loan, incurring interest at a weighted average rate of 9.2% and 7.1%
per annum, respectively, including additional leverage fees. Further, the
Company has various notes payable bearing interest from prime to 12.0%, maturing
principally over the next five years, with an outstanding balance of $6.8
million at March 31, 2000. Based on the outstanding balance under the Credit
Agreement, a change of 1% in the average interest rate, with all other variables
remaining constant, would cause an increase/decrease in interest expense of
approximately $5.6 million on an annual basis, not considering the offset of the
interest rate swap agreements discussed below.
The Company offsets its interest rate risk by holding both fixed and variable
debt as well as interest rate swap agreements. Under its Credit Agreement, the
Company is required to enter into arrangements that provide protection from the
volatility of variable interest rates for a portion of the outstanding principal
balance on the Credit Agreement. At March 31, 2000, the Company had interest
rate swap agreements with four financial institutions, effectively converting
variable rate principal balances to fixed rates for periods of two to three
years. At March 31, 2000, the company maintained interest rate swaps on notional
amounts of DEM65.1 million ($31.9 million), NLG93.6 million ($40.7 million),
FRF166.9 million ($24.4 million), and U.S.$100.0 million, with weighted average
fixed rates of approximately 5.3%. Based on the U.S. dollar balances maintained
on the swap agreements, a 1% change in the interest rate, with all other
variables remaining constant, would result in gains/ losses on these derivatives
of approximately $2.0 million.
In March 1995, the Company issued $200.0 million of fixed rate 6.75% Convertible
Subordinated Notes at par, due April 2002. The estimated fair value of the Notes
at March 31, 2000 was approximately $145.5 million, based on the quoted market
price of the Notes.
Page 22
<PAGE> 10
After adjusting for the above interest rate swaps, and including the Company's
Convertible Subordinated Notes, approximately 50% of the Company's total debt is
fixed rate.
CURRENCY EXCHANGE RISK: As a multinational corporation, foreign exchange risk
arises as a normal course of conducting business. The Company minimizes this
risk by transacting its international business in local currencies. In this
manner, assets and liabilities are matched in the local currency, thereby
reducing the need for U.S. dollar conversion. In addition, at March 31, 2000,
approximately 28% of the Company's long-term debt was non-U.S. dollar
denominated. Any foreign currency impact on translating assets and liabilities
into U.S. dollars is included as a component of shareholders' equity.
The Company occasionally enters into forward and option contracts with major
banks to manage its exposure to foreign currency fluctuations. At March 31,
2000, there were no outstanding forward contracts or option contracts to buy or
sell foreign currency. For the three years ended March 31, 2000, gains and
losses included in the Company's consolidated statements of operations on
forward contracts and option contracts were not material.
YEAR 2000
Many computer systems, including several used by the Company, could experience
problems processing information beyond the Year 1999. As a result, certain
computer systems, including the hardware, software and embedded technologies
needed to be modified prior to the Year 2000 in order to remain functional. The
Company has a Year 2000 Worldwide Program office that 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. Costs related to the Year 2000 program totaled
$6.3 million of which $2.0 million was used for capital equipment. Through the
date of this report, the Company has not experienced any significant problems
arising from the effects of the Year 2000 issue.
SEASONALITY
The Company has experienced some seasonality in its business. The Company's
European and Canadian operations have historically experienced lower revenue for
the three month period ended September 30 due to increased vacation time by
Europeans and Canadians during July and August. This has resulted in reduced
sales activity and reduced usage of photocopiers, facsimiles and other office
imaging equipment during such period.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report, 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 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) any inability to maintain achieved 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, (x) the reversals by the Appellate Court of
the dismissals granted to the Company as referenced in Note 13 to the
consolidated financial statements, and (xi) other risks including those risks
identified in any of the Company's filings with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date 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.
Page 23
<PAGE> 11
CONSOLIDATED Statements of Operations
<TABLE>
<CAPTION>
2000 1999 1998
$000 $000 $000
For the years ended March 31 Note (Except per ADS data)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUE:
Retail equipment sales 733,817 755,485 985,303
Retail service, supplies and rentals 1,645,054 1,920,821 2,068,864
Wholesale 116,751 220,914 268,569
------------------------------------------------------------------------------------------------------
Total revenue 2,495,622 2,897,220 3,322,736
------------------------------------------------------------------------------------------------------
COSTS AND OPERATING EXPENSES:
Cost of retail equipment sales 519,556 584,479 664,778
Special charges, cost of retail
equipment sales 7 -- 30,709 10,000
Retail service, supplies and
rental costs 1,012,200 1,188,327 1,258,688
Special charges retail service,
supplies and rental costs 7 -- 27,144 --
Wholesale costs of revenue 93,453 189,261 217,925
Special charges, wholesale costs
of revenue 7 -- 514 --
Selling, general and administrative
expenses 738,319 919,897 941,707
Special charges, general and
administrative expenses 7 -- 16,805 --
Amortization of intangible assets 14,258 19,714 21,232
Write-off of goodwill and other
long-lived assets 7 -- 109,474 --
Commitment to Kodak under R&D
agreements -- 53,434 50,000
Restructuring charges 7 (4,148) 40,818 11,000
------------------------------------------------------------------------------------------------------
Total costs and operating expenses 2,373,638 3,180,576 3,175,330
------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) FROM OPERATIONS 121,984 (283,356) 147,406
Interest expense and other, net 5 107,631 74,197 64,214
------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES 14,353 (357,553) 83,192
Provision (benefit) for income taxes 9 4,019 (62,773) 30,958
------------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) 10,334 (294,780) 52,234
======================================================================================================
BASIC EARNINGS (LOSS) PER ADS: 11
Income available to common shareholders
per ADS $0.10 $(5.18) $0.92
Weighted average ADSs 57,624 56,915 56,799
------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER ADS: 11
Income available to common
shareholders per ADS $0.10 $(5.18) $0.90
Weighted average ADSs 58,525 56,915 57,841
------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 24
<PAGE> 12
CONSOLIDATED Balance Sheets
2000 1999
$000 $000
At March 31 Note
-------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 64,861 66,095
Accounts receivable, net of allowance
for doubtful accounts of $42,188
(1999--$61,266) 527,793 571,470
Inventories 328,290 356,139
Prepaid expenses, deferred income
taxes and other current assets 81,837 56,951
Assets of business held for sale 2 -- 62,791
-------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,002,781 1,113,446
Equipment on operating leases, net 3 199,551 264,625
Property and equipment, net 4 92,614 92,963
Intangible assets:
Goodwill, net of accumulated amortization
of $63,404 (1999--$52,697) 7 305,043 334,964
Noncompete agreements, net of accumulated
amortization of $9,264 (1999--$8,650) 1,863 2,477
Deferred income taxes and other assets 9 65,845 96,667
-------------------------------------------------------------------------------
TOTAL ASSETS 1,667,697 1,905,142
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt
and notes payable 5 86,776 89,732
Accounts payable 178,870 162,294
Accrued expenses and other current
liabilities 229,472 333,446
Deferred revenue 40,045 51,818
Liabilities of business held for sale 2 -- 17,240
-------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 535,163 654,530
6.75% convertible subordinated notes 5 200,000 200,000
Long-term debt and notes payable, less
current maturities 5 515,406 852,415
Deferred income taxes and other
long-term liabilities 9 32,536 27,033
-------------------------------------------------------------------------------
TOTAL LIABILITIES 1,283,105 1,733,978
-------------------------------------------------------------------------------
6.50% CONVERTIBLE PARTICIPATING
SHARES--REDEEMABLE:
$1.00 stated value; 500,000 authorized;
220,320 issued and outstanding 207,878 --
-------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Ordinary Shares 1.25 pence stated value;
500,000,000 authorized; 234,573,862
issued and outstanding
(1999--228,067,865) 12 4,892 4,758
Additional paid-in capital 317,056 304,436
Accumulated deficit (66,226) (72,815)
Accumulated other comprehensive
(loss) income (79,008) (65,215)
-------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 176,714 171,164
-------------------------------------------------------------------------------
Commitments and contingencies 13
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 1,667,697 1,905,142
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Page 25
<PAGE> 13
CONSOLIDATED Statements of Cash Flows
<TABLE>
<CAPTION>
2000 1999 1998
For the years ended March 31 $000 $000 $000
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss) 10,334 (294,780) 52,234
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 160,292 163,321 171,273
Loss on sale of property and equipment
and equipment on operating leases 17,524 13,968 2,306
Proceeds from sale of equipment on
operating leases 16,921 33,289 35,087
Restructuring and other special charges (4,148) 225,464 21,000
Loss on sale of Omnifax business 2,061 -- --
Changes in assets and liabilities, net of
effects from the purchase of
subsidiaries and the assets and
liabilities of business held for sale:
Accounts receivable 23,828 27,672 (4,153)
Inventories 14,693 94,943 4,706
Prepaid expenses, deferred income taxes
and other current assets (29,348) (44,051) 2,992
Deferred income taxes and other
noncurrent assets 35,955 7,718 (5,544)
Accounts payable 38,313 (136,702) (28,521)
Accrued expenses and other current
liabilities (99,095) (12,783) (114,185)
Deferred revenue (11,165) (7,847) 2,149
Deferred income taxes and other
long-term liabilities 4,394 (33,648) 32,047
-----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 180,559 36,564 171,391
-----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (126,879) (191,054) (189,133)
Proceeds from sale of property and equipment 3,960 2,913 10,034
Proceeds from sale of Omnifax 45,000 -- --
Purchase of subsidiaries, net and proceeds
from $100.0 million settlement in fiscal 1998
related to fiscal 1997 acquisition (733) (1,919) 106,558
Payment for purchase of noncompete agreements (178) (280) (2,758)
-----------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (78,830) (190,340) (75,299)
-----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (payments) borrowings under line of
credit agreements (307,383) 196,433 (120,512)
Principal payments on other long-term debt (4,004) (4,983) (6,650)
Proceeds from stock options exercised 87 251 2,586
Capital contributions from the issuance of
participating shares 205,223 -- --
Dividends -- (5,952) (10,623)
-----------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (106,077) 185,749 (135,199)
-----------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES 3,114 (531) (115)
-----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,234) 31,442 (39,222)
-----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 66,095 34,653 73,875
-----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 64,861 66,095 34,653
===============================================================================================
SUPPLEMENTAL DISCLOSURES
Cash flow information:
Interest paid 99,635 76,288 58,992
Income taxes paid 9,151 10,902 13,064
-----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 26
<PAGE> 14
CONSOLIDATED Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Retained
Additional earnings Accumulated other
Ordinary paid-in (accumulated comprehensive
shares capital deficit) (loss) income Total
$000 $000 $000 $000 $000
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT MARCH 31, 1997 4,734 301,623 186,306 (26,932) 465,731
Net earnings -- -- 52,234 -- 52,234
Currency translation adjustment -- -- -- (29,621) (29,621)
--------
Comprehensive income 22,613
Dividends -- -- (10,623) -- (10,623)
Shares issued under employee option plans 12 2,574 -- -- 2,586
-------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1998 4,746 304,197 227,917 (56,553) 480,307
Net loss -- -- (294,780) -- (294,780)
Currency translation adjustment -- -- -- (8,662) (8,662)
--------
Comprehensive loss (303,442)
Dividends -- -- (5,952) -- (5,952)
Shares issued under employee option plans 12 239 -- -- 251
-------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1999 4,758 304,436 (72,815) (65,215) 171,164
Net earnings -- -- 10,334 -- 10,334
Currency translation adjustment -- -- -- (13,793) (13,793)
--------
Comprehensive loss (3,459)
Shares issued under employee stock and
option plans 134 11,531 -- -- 11,665
Dividends, accretion and beneficial
conversion of participating shares -- 1,089 (3,745) -- (2,656)
-------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 2000 4,892 317,056 (66,226) (79,008) 176,714
=========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 27
<PAGE> 15
NOTES to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PREPARATION: The financial statements have been prepared in
accordance with United States Generally Accepted Accounting Principles. The
principal accounting policies are set forth below.
(b) BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Danka Business Systems PLC and its wholly owned subsidiaries (the
"Company"). The Company's principal operating subsidiaries are located in North
America, Europe, Australia, and Latin America, and are principally engaged in
the distribution and service of photocopiers and related office imaging
equipment and outsourcing of document management solutions. All significant
intercompany balances and transactions have been eliminated in consolidation.
(c) USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year end and the reported
amounts of revenues and expenses during the reporting period. Certain
significant estimates are disclosed throughout this report. Actual results could
differ from these estimates.
(d) REVENUE RECOGNITION: Equipment sales are recognized at the time of customer
acceptance, or in the case of equipment sales financed by third party leasing
companies, at the time of acceptance by the leasing company and the customer.
Supply sales to customers are recognized at the time of shipment, or in the case
of service contracts which include supplies, upon usage by the customer.
Operating lease income is recognized as earned over the lease term, and
maintenance contract service revenues are recognized ratably over the term of
the underlying maintenance contract. Revenue from outsourcing contracts is
recognized as earned over the contract term. Deferred revenue consists of
unearned maintenance contract revenue that is recognized using the straight-line
method over the life of the related contract, generally twelve months.
(e) PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Depreciation and amortization is provided using the straight-line method over
the assets' estimated economic lives. Expenditures for additions, major renewals
or betterments are capitalized and expenditures for repairs and maintenance are
charged to earnings as incurred. When property and equipment are retired or
otherwise disposed of, the cost thereof and the applicable accumulated
depreciation are removed from the respective accounts and the resulting gain or
loss is reflected in earnings.
The Company expenses software costs incurred in preliminary project stages and,
thereafter, capitalizes any costs incurred in the developing or obtaining of
internal use software. Capitalized costs are amortized over a period of three to
five years. Costs related to maintenance and training are expensed as incurred.
(f) INVENTORIES: Inventories consist of photocopiers, facsimile equipment, other
automated office equipment, and related parts and supplies, and are stated at
the lower of cost (specific cost for equipment and average cost for supplies and
parts) or market.
(g) LONG-LIVED ASSETS: The carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets is evaluated for
recoverability whenever adverse effects or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairments are recognized if
future undiscounted cash flows and earnings from operations are not expected to
be sufficient to recover goodwill and other long-lived assets. The carrying
amounts are then reduced by the estimated shortfall of the discounted cash
flows. For the year ended March 31, 1999, the Company wrote-off $109.5 million
of goodwill and other long-lived assets primarily due to impairment (See Note
7). Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized over thirty years on a straight-line basis.
Noncompete agreements are amortized over the lives of the agreements, generally
three to seven years on a straight-line basis.
Deferred financing costs incurred in connection with the issuance of the
Convertible Subordinated Notes and other financings are charged ratably to
interest expense over the term of the related debt, and are included in other
noncurrent assets.
(h) FOREIGN CURRENCIES: The functional currency for most foreign operations is
the local currency. Foreign currency transactions are converted at the rate of
exchange on the date of the transaction or translated at the year end rate in
the case of transactions not then finalized. Gains and losses resulting from
foreign currency transactions which are included in interest and other, net on
the accompanying statements of operation, were not material for the three years
ended March 31, 2000, 1999 and 1998.
Assets and liabilities in currencies other than U.S. dollars are translated into
U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues
and expenses are translated using the average rate of exchange for the period.
The resulting translation adjustments are recorded as a separate component of
shareholders' equity.
(i) CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of cash on hand
and commercial paper with original maturities of three months or less.
(j) INCOME TAXES: Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Page 28
<PAGE> 16
(k) EARNINGS PER SHARE: Basic EPS is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution from the exercise of stock
options or the conversion of securities into stock. Earnings per American
Depositary Share ("ADS") are based on the current ratio of four Ordinary Shares
to one ADS.
(l) CONCENTRATIONS OF RISK: Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables. The Company's cash and cash equivalents are
placed with high credit quality financial institutions, and are invested in
short-term maturity, highly rated corporate and government debt securities.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base, and
their dispersion across many different industries and geographical areas. As of
March 31, 2000, the Company had no significant concentrations of credit risk.
The Company's business is dependent upon close relationships with its vendors
and its ability to purchase photocopiers and related office imaging equipment
from these vendors on competitive terms. The Company primarily purchases
products from several key vendors including Canon, Heidelberg, Ricoh and
Toshiba, each of which represented more than 10% of equipment purchases for the
year ended March 31, 2000.
(m) FINANCIAL INSTRUMENTS: The Company enters into foreign exchange forward and
option contracts to manage its exposure to fluctuations in foreign currency
exchange rates. Gains and losses that hedge specific currency commitments are
deferred and recognized in net earnings in the period in which the transaction
is consummated. Premiums paid on option contracts that hedge specific currency
commitments are amortized over the term of the option.
The Company uses interest rate swap agreements to manage interest costs and the
risks associated with changing interest rates. The interest differential to be
paid or received is included in interest expense for the period.
(n) RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
(o) ADVERTISING COSTS: The Company expenses advertising costs as incurred,
except production costs which are expensed the first time the advertising takes
place.
(p) NEW ACCOUNTING STANDARDS: In 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is effective for the first
quarter of the fiscal years beginning after June 15, 2000. Statement No. 133
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.
2. SALE OF ASSETS
On July 30, 1999, the Company sold its Omnifax business, a supplier of
facsimiles and related services, parts and supplies, to Xerox Corporation for a
cash consideration of $45.0 million. The Company recorded a $2.1 million loss on
the sale of Omnifax which is reflected in interest expense and other, net on the
accompanying consolidated statement of operations for the twelve months ended
March 31, 2000. The assets and liabilities of Omnifax at July 30, 1999 totaled
$63.8 million and $18.0 million, respectively, and consisted primarily of
property and equipment, accounts receivable, inventories, accounts payable and
accrued expenses. The revenue, costs and operating expenses of Omnifax for the
four months ended July 31, 1999 and the years ended March 31, 1999 and 1998 are
as follows:
2000 1999 1998
$000 $000 $000
----------------------------------------------------------------------------
Total revenue 35,705 111,008 126,299
----------------------------------------------------------------------------
Costs of revenue 22,426 62,206 71,741
Selling, general and
administrative expenses 9,797 34,301 37,539
Amortization of intangible assets 222 664 934
----------------------------------------------------------------------------
Total costs and operating expenses 32,445 97,171 110,214
----------------------------------------------------------------------------
Earnings from operations 3,260 13,837 16,085
----------------------------------------------------------------------------
3. EQUIPMENT ON OPERATING LEASES, NET
Included in equipment on operating leases is equipment used to generate rental
revenue in the Company's core office imaging business and service revenue in the
Company's outsourcing business. Substantially all of the Company's operating
leases are cancelable. Equipment on operating leases is depreciated over three
to five years assuming a salvage value ranging from zero to ten percent and
consists of the following at March 31, 2000 and 1999:
2000 1999
$000 $000
-----------------------------------------------------------------------------
Equipment on operating leases 338,405 401,008
Equipment used in outsourcing business 118,474 110,413
Less accumulated depreciation (257,328) (246,796)
-----------------------------------------------------------------------------
Equipment on operating leases, net 199,551 264,625
-----------------------------------------------------------------------------
Depreciation expense for the years ended March 31, 2000, 1999 and 1998
approximated $112,879,000, $112,426,000, and $109,896,000, respectively.
Page 29
<PAGE> 17
NOTES to Consolidated Financial Statements (continued)
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, along with their useful lives, consist of the following
at March 31, 2000 and 1999:
Average
2000 1999 useful life
$000 $000 in years
-----------------------------------------------------------------------------
Buildings 2,872 3,504 31
Office furniture, equipment
and leasehold improvements 177,812 152,340 3-10
Software 26,859 16,677 3-5
Transportation equipment 5,685 10,547 5-15
Land 820 1,635 --
-----------------------------------------------------------------------------
Total cost 214,048 184,703
Less accumulated depreciation
and amortization (121,434) (91,740)
-----------------------------------------------------------------------------
Property and equipment, net 92,614 92,963
-----------------------------------------------------------------------------
Depreciation expense for the years ended March 31, 2000, 1999 and 1998
approximated $33,155,000, $31,181,000 and $40,145,000, respectively.
5. DEBT
Debt consists of the following at March 31, 2000 and 1999:
2000 1999
$000 $000
------------------------------------------------------------------------------
Revolving line of credit (limited to $560.0
million) interest at IBOR plus an applicable
margin or the agent bank's reference rate
(currently averaging 9.2%, including additional
leverage fees), matures March 2002 480,383 488,612
Term loan (limited to $130.0 million) interest at
IBOR plus an applicable margin or the agent
bank's reference rate (currently averaging
7.1%, including additional leverage fees),
matures March 2002 115,027 437,932
6.75% Convertible Subordinated Notes due April 2002 200,000 200,000
Various notes payable bearing interest from prime
to 12.0%, maturing principally over the next 5
years 6,772 15,603
------------------------------------------------------------------------------
Total long-term debt and notes payable 802,182 1,142,147
Less current maturities of long-term debt and
notes payable (86,776) (89,732)
------------------------------------------------------------------------------
Long-term debt and notes payable, less
current maturities 715,406 1,052,415
------------------------------------------------------------------------------
The Company has a credit agreement with a consortium of international bank
lenders, which consists of a term loan and a revolving line of credit (the
"Credit Agreement"). The Credit Agreement as amended, which is secured by
substantially all of the Company's U.S. assets, matures in March 2002 and
requires scheduled payments of interest throughout the term of the loan. The
Credit Agreement contains negative and affirmative covenants which place
restrictions on the Company regarding the disposition of assets, capital
expenditures, additional indebtedness and permitted liens, prohibit the payment
of dividends (other than dividends on the Company's participating shares) and
require the Company to maintain certain financial ratios. As amended on December
1, 1999, the Credit Agreement requires 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. Recent amendments
continue waiver of compliance with the requirements imposed under certain other
financial covenants, which were previously waived. 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.
Terms of the most recent amendment include an aggregate commitment by the
lenders of $690.0 million. The amendment required the Company to use
approximately 85% of the net proceeds from a new issue of participating shares
to repay indebtedness outstanding under the Credit Agreement. As described in
Note 6, approximately $174.0 million (85%) of the net proceeds of subscriptions
for new participating shares was used to pay outstanding indebtedness under the
Credit Agreement on December 17, 1999. The amendment to the Credit Agreement
also amended the minimum net worth covenant contained in the Credit Agreement,
among other things, to make the covenant less restrictive during the period from
July 31, 2000 to June 30, 2001. The amendment also removed any obligation of the
Company to use its best efforts to sell the Company's outsourcing division,
Danka Services International, and provided that a $10.0 million payment to its
bank lenders, which would have been due upon such sale, became due upon the
completion of the new issue of participating shares to equity funds managed by
affiliates of The Cypress Group LLC and The Prudential Assurance Company
Limited. The $10.0 million payment was made on December 17, 1999. The Company
also paid waiver fees of $2.4 million and $3.7 million related to amounts
committed under the Credit Agreement on October 31, 1999 and December 31, 1999,
respectively. A fee totaling $6.9 million was paid in April 2000 for amounts
committed under the Credit Agreement on March 31, 2000. With respect to the
period from July 1, 1999 through September 30, 1999, the Company was required to
pay a leverage fee of $0.6 million based on the average outstanding loans.
During the period October 1, 1999 through December 31, 1999, the Company was
required to pay a fee of $1.6 million. Further, during the period from January
1, 2000 through March 31, 2000 the Company was required to pay a fee of $2.1
million. During the period April 1, 2000 through March 31, 2002 the Company is
required to pay fees equal to 1.50% annual interest if the average outstanding
loans exceed $650.0 million and 0.75% if they are below $650.0 million. The
Company is also required to apply 90% of any net proceeds received for any asset
dispositions outside the ordinary course of business to repay outstanding
indebtedness. The lenders' commitment under the Credit Agreement will be reduced
by the amount of such repayments.
Page 30
<PAGE> 18
At March 31, 2000, the Company was in compliance with all covenants as amended.
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.
In March 1995, the Company issued $200.0 million of 6.75% Convertible
Subordinated Notes (the "Notes") at par, in a private placement offering, due
April 2002. The Notes are currently convertible into the Company's ADSs at a
conversion rate of $29.125 per ADS, or into the Company's Ordinary Shares at a
conversion rate of $7.281 per Ordinary Share (equivalent to approximately 34.335
ADSs or 137.339 Ordinary Shares for each $1,000 principal amount of Notes).
Interest is payable semi-annually on April 1 and October 1. The Notes are not
subject to sinking fund provisions.
Aggregate annual maturities of debt at March 31, 2000, are as follows:
Year ending March 31 $000
-------------------------------------------------------------------------------
2001 86,776
2002 514,450
2003 200,224
2004 209
2005 199
Thereafter 324
-------------------------------------------------------------------------------
802,182
-------------------------------------------------------------------------------
6. 6.50% CONVERTIBLE PARTICIPATING SHARES
On December 17, 1999, the Company issued an aggregate 218,000 new 6.50% senior
convertible participating shares of Danka Business Systems PLC for $218.0
million. The net proceeds to the Company for the share subscription totaled
approximately $204.6 million, after deducting transaction expenses. Eighty-five
percent (85%) of the net proceeds, or approximately $174.0 million, of the share
subscription was used to make a required repayment of Danka's existing bank
indebtedness and the remainder was used for general corporate purposes.
The new 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 will be 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 shareholders. The new issued participating shares
(218,000) have voting rights on an as converted basis, initially corresponding
to approximately 23% of the total voting power of the Company's capital stock.
In addition, the Company has issued an aggregate of 5,899 additional
participating shares in satisfaction of the payment-in-kind dividend as of
May 31, 2000.
On or after December 17, 2003, and prior to December 17, 2010, the Company has
the option to redeem the participating shares, in whole but not in part and
subject to compliance with applicable laws, for cash at the greater of (a) the
redemption price per share as set out in the table below (based on the
liquidation return per participating share described below) and (b) the then
market value of the ordinary shares into which the participating shares are
convertible, in each case plus accumulated and unpaid dividends from the most
recent dividend payment date. Instead of redemption in cash at the price set out
in (b) above, the Company may decide to convert the participating shares into
the number of Ordinary Shares into which they are convertible.
Percentage of
Year liquidation return
--------------------------------------------------------------------------------
2003-2004 103.250%
2004-2005 102.167%
2005-2006 101.083%
2006 and thereafter 100.000%
================================================================================
In the event of liquidation of the Company, participating shareholders shall be
entitled to receive a distribution equal to the greater of (a) the liquidation
return per share (initially $1,000 and subject to upward adjustment on certain
default events by the Company) plus any accumulated and unpaid dividends
accumulating from the most recent dividend date, and (b) the amount that would
have been payable on each participating share if it had been converted into
Ordinary Shares.
If by December 17, 2010, the participating shares have not been converted or
otherwise redeemed by the Company, the Company is required, subject to
compliance with applicable laws, to redeem the participating shares for cash at
the greater of (a) the then liquidation value and (b) the then market value of
the Ordinary Shares into which the participating shares are convertible, in each
case plus accumulated and unpaid dividends from the most recent dividend payment
date. Instead of redemption in cash at the price set out in (b) above, the
Company may decide to convert the participating shares into the number of
Ordinary Shares into which they are convertible.
Page 31
<PAGE> 19
NOTES to Consolidated Financial Statements (continued)
7. RESTRUCTURING AND OTHER SPECIAL CHARGES
FISCAL 1999: The Company recorded certain restructuring and other non-cash
special charges during the third and fourth quarters of the fiscal year ended
March 31, 1999. The restructuring and special charges were for headcount
reductions, the elimination of excess facilities, the write-off of goodwill and
other long-lived assets, as well as the write-down of assets which were impacted
as a result of the termination of certain agreements between the Company and
Kodak. Fiscal 1999 restructuring charges of $40.8 million included the reversal
of unutilized prior year accruals of $1.9 million.
A summary of the restructuring and other special pre-tax charges is as follows:
PRE-TAX RESTRUCTURING CHARGE(1):
<TABLE>
<CAPTION>
Fiscal 1999 Reserve at Cash Other non-cash Reserve at
Expense March 31, 1999 outlays changes March 31, 2000(7)
$000 $000 $000 $000 $000
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Severance 19,820 14,119 (11,496) (1,000) 1,623
Future lease obligations on facility
closures 19,790 17,719 (5,917) -- 11,802
Write-off of leasehold improvements
on facility closures 3,084 -- -- -- --
----------------------------------------------------------------------------------------------------------------------
Total restructuring charges 42,694 31,838 (17,413) (1,000) 13,425
======================================================================================================================
</TABLE>
OTHER SPECIAL PRE-TAX CHARGES:
Fiscal 1999
Expense
$000
--------------------------------------------------------------------------------
Special charges to cost of retail equipment(2):
Kodak equipment valuations 39,559
Adjustment to the accrued shortfall in Kodak equipment purchases (10,000)
Write-off of other assets 1,150
--------------------------------------------------------------------------------
Total 30,709
Special charges to cost of retail service, supplies and rentals(3):
Write-off of terminated Kodak agreements 23,991
Write-off of other assets 3,153
--------------------------------------------------------------------------------
Total 27,144
Special charges to wholesale costs of revenue(4):
Inventory write-off related to closure of U.S. wholesale operations 514
--------------------------------------------------------------------------------
Special charges to selling, general and administrative expenses(5):
Write-off of terminated Kodak agreements 13,750
Write-off of other assets 3,055
--------------------------------------------------------------------------------
Total 16,805
--------------------------------------------------------------------------------
FAS 121 impairment of long-lived assets(6) 109,474
--------------------------------------------------------------------------------
TOTAL OTHER SPECIAL CHARGES 184,646
================================================================================
(1) The Company initiated a worldwide cost reduction program during the third
quarter of fiscal 1999 with the goal of reducing SG&A and improving
profitability. In connection with this program, the Company recorded pre-tax
restructuring charges of $40.1 million and $2.6 million during the third and
fourth quarters of fiscal 1999, respectively. The restructuring charges
included $19.8 million in costs related to severance, representing the
reduction of approximately 1,400 positions worldwide during fiscal 2000.
Cash outlays related to the workforce reductions during fiscal 1999 and 2000
totaled $5.7 million and $11.5 million, respectively. In fiscal 2000, the
Company reversed $1.0 million in accrued liabilities for unutilized
severance originally estimated under the 1999 restructuring plan. This
amount is included as a credit to restructuring charges in the accompanying
statement of operations for the twelve months ended March 31, 2000. The
restructuring charges were also comprised of $19.8 million for future lease
obligations on 60 facility closures. Cash outlays related to the lease
obligations on these closed facilities during fiscal 1999 and 2000 totaled
$2.1 million and $5.9 million, respectively. The remaining lease obligations
are expected to continue beyond the year 2001. In addition, the
restructuring charges included $3.1 million for the write-off of leasehold
improvements on the aforementioned facility closures.
(2) Special charges to cost of retail equipment sales primarily consisted of
$39.6 million to reflect the decline in the estimated market value of the
Company's Kodak branded inventory as well as additional amounts related to
the termination of certain agreements between the Company and Kodak. See (3)
below for the note on termination of agreements. This charge was reduced by
an adjustment of the $10.0 million provision recorded in December 1997 for
the anticipated shortfall in Kodak equipment purchases.
(3) Special charges to cost of retail service, supplies and rentals primarily
consisted of $24.0 million for the write-off of terminated Supply Agreements
between the Company and Kodak. See Note 12. On December 17, 1998, the
Company announced the termination of its Research and Development Agreement
with Kodak, as well as the termination of certain Supply and other
agreements that required the Company to make minimum purchases of equipment
from Kodak.
(4) Special charges to wholesale costs of revenue consisted of $0.5 million for
the write-off of inventory related to the closure of the Company's U.S.
wholesale operations effective March 31, 1999.
Page 32
<PAGE> 20
(5) Special charges to general and administrative expenses primarily consisted
of $13.7 million related to the write-off of certain terminated agreements
between the Company and Kodak.
(6) In connection with the Company's analysis of operations and restructuring
plan, the Company evaluated its goodwill and other long-lived assets for
recoverability. The Company determined that based on changes in the business
environment and an analysis of projected cash flows, the carrying amount of
certain goodwill and other long-lived assets in the U.S. and Canada, would
not be recoverable. Accordingly, the resulting analysis necessitated a
write-down of $107.9 million during the third quarter of fiscal 1999, which
was comprised of $89.5 million in the U.S. and $18.4 million in Canada. The
Company also wrote-off an additional $1.6 million of goodwill during the
fourth quarter of fiscal 1999 related to the closure of the Company's U.S.
wholesale division.
(7) The remaining reserves at March 31, 2000 are included in accrued expenses
and other liabilities on the accompanying consolidated balance sheet.
FISCAL 1998: In December 1997, the Company recorded an $11.0 million pre-tax
restructuring charge, related to the integration of the Office Imaging division
acquired from Kodak with Danka's existing sales and service network. The
restructuring charge principally consisted of severance and other employee
termination benefits and resulted in the separation of over 1,000 employees
worldwide. At December 31, 1998, approximately $0.6 million remained in accrued
liabilities for these separations which was reversed in the third quarter of
fiscal 1999 and is included in the net $40.8 million restructuring charge in the
accompanying statement of operations for the twelve months ended March 31, 1999.
The Company also recorded a $10.0 million special charge to the cost of retail
equipment sales for the anticipated shortfall in equipment purchases related to
the Supply agreements between Kodak and the Company. Refer to item (3) above for
discussion on Kodak Supply agreements. This charge was reversed in the fourth
quarter of fiscal 1999 and included in the net $30.7 million special charge to
the cost of retail equipment sales.
FISCAL 1997: In December 1996, the Company recorded a $35.0 million pre-tax
restructuring charge, related to the integration of the Office Imaging division
acquired from Kodak and the related transition to the Company's Market Based
Approach in North America. In the third quarter of fiscal 1999, $1.3 million in
accrued liabilities was adjusted and included in the net $40.8 million
restructuring charge in the accompanying statement of operations for the twelve
months ended March 31, 1999. In fiscal 2000, the Company utilized $1.5 million
in accrued liabilities for lease obligations related to the closure of
duplicative facilities. Of the remaining $3.3 million in accrued liabilities,
the Company expects to utilize an additional $0.2 million for such lease
obligations. The remaining $3.1 million was reversed and included as a credit to
restructuring charges in the accompanying statement of operations for the twelve
months ended March 31, 2000. The total amount of lease obligations originally
provided for in the 1997 restructuring plan was not utilized as a result of
favorable lease settlements on certain facilities.
8. SEGMENT REPORTING
Operating segments are defined as components of an enterprise in which separate
financial information is available and evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance. The Company identifies such segments based on both management
responsibility and geographical location.
The Company's reportable operating segments include Danka Americas, Danka
International and Danka Services International ("DSI"). Danka Americas
distributes photocopiers and other related office imaging equipment together
with the related parts, supplies and services on a direct basis to retail
customers. The geographical areas covered by Danka Americas include the United
States, Canada and Latin America. Danka International distributes photocopiers,
facsimiles and other related office imaging equipment. These products, together
with the related services, parts and supplies, are marketed primarily on a
direct basis to retail customers. Danka International also provides
photocopiers, facsimiles and related office imaging equipment on a wholesale
basis to independent dealers. Danka International has an extensive sales and
service network throughout Europe and additional operations in 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 and document archiving and retrieval services and
document management consulting.
Page 33
<PAGE> 21
NOTES to Consolidated Financial Statements (continued)
The Company measures segment performance as earnings from operations, which is
defined as earnings before interest expense and other, net and income taxes as
shown on the Company's consolidated statements of operations. Other items are
shown for purposes of reconciling to the Company's total consolidated amounts as
shown in the following table for the three years ended March 31, 2000:
<TABLE>
<CAPTION>
Danka
Danka Danka Services Consolidated
Americas International International Other Total
Year ending March 31 $000 $000 $000 $000 $000
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Total revenue 1,378,743 835,284 281,595 -- 2,495,622
Depreciation and amortization 84,931 41,774 31,405 2,182 160,292
Earnings (loss) from operations
before restructuring charges
(credits) 81,984 30,338 24,964 (19,450) 117,836
Restructuring charges (credits) (4,148) (4,148)
Interest expense & other, net 107,631 107,631
Provision for income taxes 4,019 4,019
Net earnings 10,334
Total assets 781,900 600,540 132,983 152,273 1,667,696
Capital expenditures 72,904 28,847 25,097 31 126,879
---------------------------------------------------------------------------------------------------------
1999
Total revenue 1,680,925 938,233 278,062 -- 2,897,720
Depreciation and amortization 81,001 47,403 31,432 3,485 163,321
(Loss) earnings from operations
before restructuring and
other special charges (37,129) 21,093 24,805 (66,661) (57,892)
Restructuring and other special charges 225,464 225,464
Interest expense & other, net 74,197 74,197
Provision (benefit) for income taxes (62,773) (62,773)
Net (loss) earnings (294,780)
Total assets 933,883 696,654 134,013 140,592 1,905,142
Capital expenditures 102,189 49,312 38,643 910 191,054
---------------------------------------------------------------------------------------------------------
1998
Total revenue 2,029,449 1,043,327 249,960 -- 3,322,736
Depreciation and amortization 100,949 43,264 23,366 3,694 171,273
Earnings (loss) from operations
before restructuring and
other special charges 115,044 94,904 27,322 (68,864) 168,406
Restructuring and other special charges 21,000 21,000
Interest expense & other, net 64,214 64,214
Provision for income taxes 30,958 30,958
Net earnings 52,234
Total assets 1,237,149 776,400 128,715 36,677 2,178,941
Capital expenditures 108,702 50,055 29,666 710 189,133
---------------------------------------------------------------------------------------------------------
</TABLE>
Page 34
<PAGE> 22
The following table indicates the relative amounts of revenue for the three
years ended March 31, 2000 and the long-lived assets at the respective year ends
of the Company by geographic area:
<TABLE>
<CAPTION>
2000 1999 1998
LONG-LIVED Long-lived Long-lived
REVENUE ASSETS(1) Revenue assets(1)(2) Revenue assets(1)
$000 $000 $000 $000 $000 $000
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States 1,384,582 285,533 1,719,066 380,956 2,019,403 486,258
Europe
Germany 152,833 43,089 159,231 53,860 158,196 63,010
Netherlands 161,620 60,570 166,332 45,004 182,301 61,978
United Kingdom 227,921 68,836 256,934 98,725 309,350 78,520
Other 332,077 68,490 363,291 82,344 375,848 82,831
------------------------------------------------------------------------------------------------------------------
Total Europe 874,451 240,985 945,788 279,932 1,025,695 286,339
Other foreign countries 236,589 72,553 232,366 69,080 277,638 94,700
------------------------------------------------------------------------------------------------------------------
Total 2,495,622 599,071 2,897,220 729,969 3,322,736 867,297
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Long-lived assets are defined as equipment on operating leases, property and
equipment, goodwill and noncompete agreements, all of which are net of their
related depreciation and amortization.
(2) Fiscal 1999 includes long-lived assets of business held for sale which
totaled $30.2 million.
9. INCOME TAXES
The provision (benefit) for income taxes for the three years ended March 31,
2000 was as follows:
2000 1999 1998
$000 $000 $000
---------------------------------------------------------------------------
U.S. INCOME TAX
Current 5,150 (923) 6,785
Deferred (11,328) (62,433) 2,192
---------------------------------------------------------------------------
Total U.S. tax provision (benefit) (6,178) (63,356) 8,977
---------------------------------------------------------------------------
EUROPE INCOME TAX
Current 8,218 7,874 24,180
Deferred 1,808 (8,120) (5,086)
---------------------------------------------------------------------------
Total Europe tax provision (benefit) 10,026 (246) 19,094
---------------------------------------------------------------------------
OTHER INTERNATIONAL INCOME TAX
Current 1,555 3,380 4,912
Deferred (1,384) (2,551) (2,025)
---------------------------------------------------------------------------
Total other international
tax provision 171 829 2,887
---------------------------------------------------------------------------
TOTAL PROVISION (BENEFIT)
FOR INCOME TAXES 4,019 (62,773) 30,958
---------------------------------------------------------------------------
A reconciliation of the U.K. statutory corporate rate to the effective rate is
as follows:
2000 1999 1998
$000 $000 $000
--------------------------------------------------------------------------------
Tax (benefit) charge at
standard U.K. rate 4,306 (110,841) 25,798
(Losses) profits taxed at other
than standard U.K. rate (29,451) (16,814) (7,278)
Changes in valuation allowances 27,289 70,522 4,085
State tax provision, net of federal
income tax provision 1,600 (4,149) 4,760
Permanent differences 275 (1,491) 3,593
--------------------------------------------------------------------------------
Provision (benefit) for
income taxes 4,019 (62,773) 30,958
--------------------------------------------------------------------------------
The tax at standard U.K. rate was 30% in fiscal 2000 and 31% in fiscal 1999 and
1998.
Page 35
<PAGE> 23
NOTES to Consolidated Financial Statements (continued)
The tax effects of temporary differences that comprise the elements of deferred
tax at March 31, 2000 and 1999 are as follows:
2000 1999
$000 $000
--------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Accrued expenses not deducted for
tax purposes 9,476 5,160
Reserves for inventory and accounts
receivable not deducted for tax purposes 23,511 17,120
Restructuring charges not deducted for
tax purposes 1,221 35,798
Tax loss carryforwards 185,956 171,324
Tax credit carryforwards 7,547 6,733
Depreciation and other 21,549 10,656
--------------------------------------------------------------------------
Total gross deferred tax assets 249,260 246,791
Valuation allowance (112,555) (85,266)
--------------------------------------------------------------------------
Net deferred tax assets 136,706 161,525
--------------------------------------------------------------------------
DEFERRED TAX LIABILITIES:
Leases (78,645) (113,455)
Other -- (914)
--------------------------------------------------------------------------
Total gross deferred tax liabilities (78,645) (114,369)
--------------------------------------------------------------------------
NET DEFERRED TAX ASSET (LIABILITY) 58,060 47,156
--------------------------------------------------------------------------
At March 31, 2000, the Company had net operating loss carryforwards relating to
U.S. operations of approximately $273,326,000 of which $11,221,000 will expire
if not used by March 31, 2012, $119,569,000 if not used by March 31, 2013 and
$142,536,000 if not used by March 31, 2019. The Company also has a research and
development credit of $3,402,000, relating to U.S. operations, which will expire
if not used by March 31, 2013. The Company has an alternative minimum tax credit
carryforward of $4,145,000, also relating to U.S. operations, which is available
indefinitely. The Company has foreign net operating loss carryforwards of
approximately $342,706,000 with varying expiration dates. Significant amounts of
these losses are offset by valuation allowances reflecting the lack of certainty
as to realization.
Undistributed earnings of the Company's foreign subsidiaries that are considered
to be reinvested indefinitely were approximately $374,000,000 at March 31, 2000.
10. EMPLOYEE BENEFITS
Substantially all of the U.S. employees are entitled to participate in the
Company's Profit Sharing Plan (the "Plan") established under Section 401(k) of
the U.S. Internal Revenue Code. Employees are eligible to contribute voluntarily
to the Plan after 90 days of employment. At its discretion, the Company may
contribute 100% of the first 3% and 50% of the next 3% of the employee
contribution. Employees are always vested in their contributed balance and
become fully vested in the Company's contributions after four years of service.
Effective February 1, 1999, the Company began matching employee contributions
with shares of the Company stock in an action to conserve cash. For the period
February 1, 1999 through March 31, 2000, the Company issued approximately 1.6
million ADSs to match employee contributions made to the Plan. The expenses
related to contributions to the Plan for the years ended March 31, 2000, 1999
and 1998 were approximately $11,579,000, $12,650,000, and $15,116,000,
respectively.
Most non-U.S. employees participate in defined contribution plans with varying
vesting and contribution provisions. The expenses related to these contributions
for the years ended March 31, 2000, 1999 and 1998 were approximately $7,289,000,
$6,553,000 and $6,032,000, respectively.
In connection with the acquisition of the Office Imaging and outsourcing
businesses, the Company acquired certain pension obligations of non-U.S.
employees from Kodak. At March 31, 2000 and 1999 the recorded liability for
these pension obligations was $10.3 million and $9.7 million, respectively.
The Company has a Supplemental Executive Retirement Plan ("SERP") which provides
additional income for certain of its U.S. executives upon retirement.
Contributions to the SERP are at the discretion of the Company, and were
$333,700 and $177,500, respectively, for the years ended March 31, 1999 and
1998. There were no contributions to the SERP for the year ended March 31, 2000.
Page 36
<PAGE> 24
11. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) per ADS computations follows:
<TABLE>
<CAPTION>
2000 1999 1998
INCOME SHARES PER-SHARE Income Shares Per-Share Income Shares Per-Share
(NUMERATOR) (DENOMINATOR) AMOUNT (numerator) (denominator) amount (numerator) (denominator) amount
(In thousands except per share amounts)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net earnings (loss) $10,334 $(294,780) $52,234
BASIC EARNINGS
(LOSS) PER ADS:
Dividends and
accretion on
participating
shares (4,482) -- --
------- --------- -------
Income available
to common
shareholders 5,852 57,624 $0.10 (294,780) 56,915 $(5.18) 52,234 56,799 $0.92
----- ------ -----
EFFECT OF DILUTIVE
SECURITIES:
Stock options 901 -- 1,042
------ ------ ------
Dilutive shares 58,525 -- 1,042
DILUTED EARNINGS
(LOSS) PER ADS:
Income available
to common
shareholders
plus assumed
conversion $ 5,852 58,525 $0.10 $(294,780) 56,915 $(5.18) $52,234 57,841 $0.90
===================================================================================================================================
</TABLE>
The effect of the Company's $200.0 million of Convertible Subordinated Notes is
not included in the computation of diluted earnings per ADS for the three years
ended March 31, 2000 since they are anti-dilutive. In addition, the effect of
the convertible participating shares on the computation of diluted earnings per
ADS is not included for the year ended March 31, 2000 since they are
anti-dilutive. For the year ended March 31, 1999, basic and diluted per share
amounts were equal due to the net loss incurred by the Company.
12. SHARE OPTION PLANS
The Company's current share option plan (1996 Share Option Plan) authorizes the
granting of both incentive and non-incentive share options for an aggregate of
22,000,000 Ordinary Shares (5,500,000 ADS equivalents). The option balance
outstanding at March 31, 2000 also includes options issued pursuant to a plan
that preceded the 1996 Share Option Plan. There are no shares available for
issue under this plan. Under both plans, options are and were granted at prices
not less than market value on the date of grant and the maximum term of an
option may not exceed ten years. Share options granted under the 1996 Share
Option Plan generally vest ratably in equal tranches over three years beginning
on the first anniversary of the date of grant. At March 31, 2000, a total of
6,402,791 options were vested under these plans, with exercise prices ranging
from 43.17 to 730.00 pence per share.
In October 1999, shareholders approved a 1999 Share Option Plan authorizing the
granting of both incentive and non-incentive share options for an aggregate of
12,000,000 Ordinary Shares (3,000,000 ADS equivalents). Share options granted
under the 1999 Share Option Plan have the same terms as those granted under the
1996 Share Option Plan.
As of March 31, 2000, there were no share option grants outstanding under the
1999 Share Option Plan.
As of March 31, 2000, 14,396,063 Ordinary Shares (3,599,015 ADS equivalents)
were available to grant under the Company's existing option plans.
The Company also established The Danka Employees' Trust Fund (the "Employees'
Trust") to be used in conjunction with The Danka 1996 Share Option Plan. The
Employees' Trust may subscribe for shares in the Company, which the Company has
granted in the form of share options, or it may purchase the shares on the open
market. The Employees' Trust will transfer shares to the employee upon exercise
of their options. No shares were acquired by the Company for the year ended
March 31, 2000, 1999 and 1998.
Transactions during the three years ended March 31, 2000 were as follows:
Number of Exercise price
Ordinary Shares in pence
----------------------------------------------------------------------------
Balance outstanding at March 31, 1997 9,430,096 26.13-780.00
Granted 8,780,405 217.92-762.50
Exercised (668,816) 41.00-439.67
Canceled (872,600) 307.00-730.00
----------------------------------------------------------------------------
Balance outstanding at March 31, 1998 16,669,085 26.13-780.00
Granted 14,014,417 80.75-301.00
Exercised (572,000) 26.13
Canceled (5,497,213) 101.50-780.00
----------------------------------------------------------------------------
Balance outstanding at March 31, 1999 24,614,289 43.17-762.50
Granted 3,554,320 72.00-246.00
Exercised (40,000) 136.00
Canceled (7,983,486) 72.00-762.50
----------------------------------------------------------------------------
BALANCE OUTSTANDING
AT MARCH 31, 2000 20,145,123 43.17-730.00
----------------------------------------------------------------------------
Page 37
<PAGE> 25
NOTES to Consolidated Financial Statements (continued)
Information with respect to share options outstanding at March 31, 2000 is as
follows:
Number of Weighted average
Price range in pence Ordinary Shares contractual life
-------------------------------------------------------------
43.17-113.85 12,973,720 8.7 years
127.00-215.66 2,664,000 9.1 years
246.00-378.67 2,534,718 7.3 years
445.00-730.00 1,972,685 6.8 years
-------------------------------------------------------------
20,145,123
-------------------------------------------------------------
The Company accounts for these Plans under APB Opinion No. 25, under which no
compensation cost has been recognized. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation." Had compensation cost for these
Plans been determined consistent with Statement No. 123, the Company's net
earnings and net earnings per ADS would have been reduced to the following
unaudited pro forma amounts:
2000 1999 1998
$000 $000 $000
(Except per ADS data)
--------------------------------------------------------------------------
Net earnings (loss)
As reported 10,334 (294,780) 52,234
Pro forma 11,132 (299,105) 36,869
Basic income available to
common shareholders per ADS
As reported $0.10 $(5.18) $0.92
Pro forma $0.12 $(5.26) $0.65
Diluted income available to
common shareholders per ADS
As reported $0.10 $(5.18) $0.90
Pro forma $0.11 $(5.26) $0.64
--------------------------------------------------------------------------
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model. The following assumptions were used in determining the
fair value of each option grant for each of the fiscal years ended March 31:
2000 1999 1998
-----------------------------------------------------------------------------
Dividend yield 0% 0% .51%
Expected volatility 172.0% 164.0% 139.0%
Risk-free interest rate 4.1%-6.7% 4.6%-5.7% 5.8%-6.7%
Expected life 5 years 5 years 5 years
-----------------------------------------------------------------------------
The effects of applying Statement No. 123 in this pro forma disclosure are not
indicative of future amounts.
13. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
LEASES: The Company is obligated under various noncancelable operating leases
for its office facilities, office equipment and vehicles. Future noncancelable
lease commitments as of March 31, 2000, are as follows:
Year ending March 31 $000
-------------------------------------------------------------------------------
2001 89,183
2002 46,270
2003 36,041
2004 21,972
2005 14,815
Thereafter 32,838
-------------------------------------------------------------------------------
Rental expense for fiscal years ended March 31, 2000, 1999 and 1998 was
approximately $96,139,000, $109,582,000 and $84,482,000, respectively.
EQUIPMENT LEASING COMMITMENT: In April 2000, General Electric Capital
Corporation ("GE Capital") and the Company entered into an agreement to provide
a framework for ongoing customer lease financing through March 2003. In
connection with this agreement, Danka is obligated to provide a minimum level of
customer leases to GE Capital. If the Company is unable to meet the targeted
volume commitments, it is obligated to make penalty payments up to a maximum of
$12.0 to $14.0 million a year. Based upon the current level of customer leases
available for financing under this agreement, the Company expects it will
achieve future volume commitments and not be obligated to make penalty payments
to GE Capital.
FACILITY LEASE COMMITMENTS: Danka Holding Company ("DHC"), a U.S. subsidiary of
the Company, entered into an operating lease agreement (the "Agreement"), which
expires in December 2002. The Agreement provides for DHC to lease certain real
property in the U.S. The Agreement generally provides for DHC to pay property
taxes, maintenance, insurance, and certain other operating costs of the leased
properties. The leases covered by the Agreement provide for a residual guarantee
by DHC at the end of the initial lease term, which has not been included in the
table of future noncancelable lease commitments. The Agreement also includes
purchase and renewal options at fair market values. DHC has the right to
exercise a purchase option on the properties at the end of the lease term, or
the properties can be sold to third parties. DHC expects the fair market value
of the
Page 38
<PAGE> 26
properties, subject to the purchase option or sale to third parties, to
substantially reduce or eliminate DHC's payment under the residual value
guarantee. DHC is obligated to pay the difference between the maximum amount of
the residual guarantee and the fair market value at the termination of each
lease under the Agreement. The maximum residual guarantee was approximately
$41.2 million at March 31, 2000.
RELATED PARTY TRANSACTIONS: The Company remains contingently liable for the
repayment of $318,000 of Industrial Revenue Bonds used to finance the
construction of its corporate office in St. Petersburg, Florida. The obligation
was assumed by a company controlled by the former Chief Executive when it
acquired the corporate office building. The Company leases its corporate office
and three other offices owned by companies in which the former Chief Executive
has a significant interest. For the years ended March 31, 1999 and 1998, Danka
was charged $721,000 and $756,000, respectively, for rent due under these
leases. The leases expire at various dates, with the last lease expiring in
December 2003. In addition, for the year ended March 31, 1999, the Company paid
approximately $2.1 million to a real estate services company whose former
president is related to the former Chief Executive.
LITIGATION: In March 2000, the Company was served with a complaint, filed in the
United States District Court, Southern District of New York, alleging claims of
breach of contract and declaratory judgment, more particularly, the plaintiff,
an investment banking and securities firm, alleged that the Company failed and
refused to pay certain fees alleged due and payable pursuant to various
restructuring and financing activities engaged in by the Company during fiscal
1999 and 2000. The complaint sought damages in the approximate amount of not
less than $16.0 million.
On May 15, 2000, the Company settled all claims for $4.3 million. This amount is
included in interest and other, net on the accompanying consolidated statement
of operations for the year ended March 31, 2000.
In March 2000, the respective courts as referred to below entered an order to
dismiss unrelated lawsuits previously disclosed by the Company seeking damages
of a material nature.
On March 22, 2000, the United States District Court for the Middle District of
Florida, Tampa Division entered an order dismissing the consolidated class
action complaint brought against the Company and certain former Directors and
executives on or about June 18, 1998. The complaint 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.
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
attorneys in February 1999. The complaint 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 allege that in
December 1997, they attempted to sell approximately one million restricted
American Depositary Shares at approximately $35.00 per share and that the
Company and its attorneys wrongfully refused and/or unreasonably delayed in
registering the transfer of the plaintiffs' restricted shares. The complaint
further stated 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 attorneys.
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.
Page 39
<PAGE> 27
NOTES to Consolidated Financial Statements (continued)
INTERNAL REVENUE SERVICE: 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
disagrees with these adjustments and will be filing a protest and requesting a
conference with the Appellate Division of the Internal Revenue Service. 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 the merits. The
Company believes the resolution will not have a material adverse impact upon
the Company's consolidated results of operations, liquidity or financial
position.
14. FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS: At March 31, 2000, the carrying values of
cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses, and other notes payable approximated fair value due to the short-term
maturities of these assets and liabilities. The estimated fair market value of
the Company's $200.0 million 6.75% Convertible Subordinated Notes at March 31,
2000 was approximately $145.5 million, based on the quoted market price of the
Notes. There are no quoted market prices for the 6.50% senior convertible
participating shares. The participating shares are convertible into Ordinary
Shares at a conversion price of $12.50 per ADS. Assuming all shares were
converted to ADSs at March 31, 2000, the resulting shares would have a market
value of $106.8 million at that date. The estimated fair market value at March
31, 2000 of the Company's Credit Agreement approximated the carrying amount of
the debt, due to the short-term maturities of the individual components of debt.
From time to time, the Company enters into forward and option contracts to
manage its exposure to fluctuations in foreign currency exchange rates on
specific transactions. Foreign exchange forward contracts are legal agreements
between two parties to purchase and sell a foreign currency, for a price
specified at the contract date. The fair value of foreign exchange forward
contracts is estimated by obtaining quotes for futures contracts with similar
terms, adjusted where necessary for maturity differences. To hedge its foreign
currency exposure, the Company also purchases foreign exchange options which
permit, but do not require, the Company to exchange foreign currencies at a
future date with another party at a contracted exchange rate. The fair value of
foreign exchange options is estimated using active exchange quotations. At
March 31, 2000, there were no outstanding forward contracts or option contracts
to buy or sell foreign currency. For the year ended March 31, 2000, gains and
losses realized on forward contracts and option contracts were not material.
Under the Company's Credit Agreement, it is required to enter into arrangements
that provide protection from the volatility of variable interest rates for a
portion of the outstanding principal balance on the Credit Agreement. To
fulfill this obligation, the Company has utilized interest rate swap agreements
to eliminate the impact of interest rate changes on certain variable rate
principal balances outstanding under the Credit Agreement. At March 31, 2000,
the Company had interest rate swap agreements with four financial institutions,
effectively converting variable rate principal balances to fixed rates for
periods of two to three years. At March 31, 2000, the Company maintained
interest rate swaps on principal/notional amounts of DEM65.1 million ($31.9
million), NLG93.6 million ($40.7 million), FRF166.9 million ($24.4 million),
and U.S.$100.0 million, with weighted average fixed rates of approximately
5.3%. If the Company were to have settled the commitments related to its
interest rate swaps on March 31, 2000, the amount due by the Company would have
been de minimis.
The Company's financial instruments involve, to varying degrees, elements of
exchange risk in excess of the amounts which would be recognized in the
consolidated balance sheet. Exposure to foreign currency contracts results from
fluctuations in currency rates during the periods in which the contracts are
outstanding. Additionally, these contracts contain an element of credit risk to
the extent of nonperformance by the counterparties. The Company minimizes such
risk by limiting the counterparties to a group of major international banks,
and does not expect to record any losses as a result of nonperformance by these
counterparties.
Page 40
<PAGE> 28
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the periods
indicated:
<TABLE>
<CAPTION>
June 30 September 30 December 31 March 31
$000 $000 $000 $000
(Except per ADS data)
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
Fiscal 2000
Revenue 645,709 620,279 614,485 615,149
Gross profit 242,071 219,241 217,249 191,852
Net earnings 12,243 6,759(a) 9,887 (18,555)(b)
Net earnings per ADS (diluted) $0.21 $0.12(a) $ 0.17 $ (0.39)(b)
------- ------- ------- -------
Fiscal 1999
Revenue 765,399 733,844 723,874 674,103
Gross profit 279,071 249,722 145,684 (c) 261,420 (e)
Net earnings (loss) 5,011 (13,355) (274,009)(d) (12,427)(f)
Net earnings (loss) per ADS (diluted) $0.09 $(0.23) $(4.82)(d) $(0.22)(f)
------- ------- ------- -------
</TABLE>
(a) Includes the effect of a $2.1 million loss related to the sale of the
Omnifax business July 30, 1999.
(b) Includes the effect of $4.1 million in restructuring credits and a $4.3
million charge for settlement of litigation.
(c) Includes the effect of $73.2 million in special charges to the cost of
revenue.
(d) Includes the effect of $236.2 million in restructuring and other special
charges.
(e) Includes the net credit of $14.8 million in special charges and credits to
the cost of revenue.
(f) Includes the net credit of $10.7 million in restructuring and other
special charges and credits.
Page 41
<PAGE> 29
INDEPENDENT Auditor's Report
To the Members of Danka Business Systems PLC
We have audited the consolidated balance sheets of Danka Business Systems PLC
and subsidiaries as of March 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended March 31, 2000. These consolidated
financial statements are the responsibility of the group's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United Kingdom and the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly in all material respects the financial position of Danka Business
Systems PLC and subsidiaries as of March 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2000 in conformity with generally accepted accounting
principles in the United States.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England May 26, 2000
Page 42
