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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended March 31, 2002.
[_] Transition report pursuant to section 13 or 15(d) of the Securities Act
of 1934 for the transition period from to .
Commission file number: 0-20828
DANKA BUSINESS SYSTEMS PLC
(Exact name of registrant as specified in its charter)
98-0052869
England and Wales (I.R.S. employer identification no.)
(State or other jurisdiction of incorporation or organization)
Masters House 11201 Danka Circle North
107 Hammersmith Road St. Petersburg, Florida 33716
London W14 0QH England
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:
011 44 207 603 1515 in the United Kingdom
(727) 576-6003 in the United States
Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares
1.25 p each
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or an amendment to this
Form 10-K. [ ]
As of May 15, 2002, the registrant had 248,084,622 ordinary shares outstanding,
including 54,918,259 represented by American depositary shares ("ADS"). Each ADS
represents four ordinary shares. The ADSs are evidenced by American depositary
receipts. The aggregate market value of voting shares held by non-affiliates of
the registrant as of May 15, 2001 was $276,614,354 based on the average bid and
asked prices of ADSs as quoted on the NASDAQ SmallCap Market.
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1
DANKA BUSINESS SYSTEMS PLC
Annual Report on Form 10-K for March 31, 2002
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS ................................................................................... 3
RISK FACTORS ................................................................................................. 3
PART I ....................................................................................................... 6
ITEM 1. BUSINESS .......................................................................................... 6
ITEM 2. PROPERTIES ........................................................................................ 9
ITEM 3. LEGAL PROCEEDINGS ................................................................................. 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............................................... 9
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT ............................................................. 9
PART II ...................................................................................................... 10
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS ....................... 10
ITEM 6. SELECTED FINANCIAL DATA ........................................................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............. 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................................... 10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................................................... 11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .............. 11
PART III ..................................................................................................... 11
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ............................................... 11
ITEM 11. EXECUTIVE COMPENSATION ........................................................................... 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ................................... 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ................................................... 22
PART IV ...................................................................................................... 22
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ................................. 22
INDEPENDENT AUDITORS' REPORT .............................................................................. 28
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS ............................................................ 29
SIGNATURES ................................................................................................ 30
SELECTED CONSOLIDATED FINANCIAL DATA ......................................................................... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................ 32
CONSOLIDATED STATEMENTS OF OPERATIONS ........................................................................ 44
CONSOLIDATED BALANCE SHEETS .................................................................................. 45
CONSOLIDATED STATEMENTS OF CASH FLOWS ........................................................................ 46
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) .................................................... 47
2
FORWARD LOOKING STATEMENTS
Certain statements contained herein, or otherwise made by our officers,
including statements related to our future performance and our outlook for our
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 us that is based on the beliefs
of our management as well as assumptions, made by, and information currently
available to, our management. The words "goal", "anticipate", "expect",
"believe" and similar expressions as they relate to us or our 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, we claim the protection of the safe harbor for forward
looking statements provided for in the Private Securities Litigation Reform Act
of 1995. Such statements reflect our current views 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, the following (some of which are explained in greater detail below):
(i) any material adverse change in financial markets or in our own position,
(ii) any inability to achieve or maintain cost savings, (iii) increased
competition from other high-volume and digital copier distributors and the
discounting of such copiers by our competitors, (iv) any inability by us to
procure, or any inability by us 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 of our key upper
management personnel, (vi) fluctuations in foreign currencies and (vii) any
change in economic conditions in domestic or international markets where we
operate or have material investments which may affect demand for our services.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect our analysis only as of the date they are made. We
undertake no obligation, and do not intend to update these forward looking
statements to reflect events or circumstances that arise after the date they are
made. Furthermore, as a matter of policy, we do not generally make any specific
projections as to future earnings nor do we endorse any projections regarding
future performance, which may be made by others outside our company.
RISK FACTORS
Profitability - We incurred a loss from continuing operations of $9.9 million
and generated net earnings of $137.6 million during fiscal year 2002, which
ended March 31, 2002. This included income from discontinued operations of
$119.5 million from the sale of Danka Service International ("DSI") and an
extraordinary gain on the early retirement of debt of $27.9 million. We incurred
a loss from continuing operations of $233.5 million and a net loss of $220.6
million during fiscal year 2001, which ended March 31, 2001. This included
income from discontinued operations of $13.0 million. If we incur losses in the
future, it could limit our growth potential and our ability to execute our
business strategy may be limited. In addition, our ability to service our
indebtedness may be impaired because we may not generate sufficient cash flow
from operations to pay principal or interest when due. We believe that our
results for fiscal years 2002 and 2001 were impacted in large part by
competitive pressures, the transition in our industry from analog to digital
products, our decision to substantially exit the analog business, our efforts to
position ourselves as a preeminent provider of digital equipment, services and
solutions and our efforts to develop and grow areas of our business that do not
rely on the sale and servicing of office imaging equipment.
Competition - Our industry is highly competitive. We have competitors in all
markets in which we operate and our competitors include a number of companies
worldwide with significant technological, distribution and financial resources.
Competition in our industry is based largely upon technology, performance,
pricing, quality, reliability, distribution, customer service and support. In
addition, our suppliers continue to establish themselves as direct competitors
in many of the areas in which we do business. Besides competition from within
the office imaging industry, we are also experiencing competition from other
sources as a result of the development of document processing, retention and
duplication technologies. We may not be able to keep, and we may even lose our
market share because of the high level of competition in our industry. The
intense competition in our industry may result in pressure on the prices that we
can obtain for our products and may affect our ability to retain customers, both
of which could negatively affect our operating results.
Technological Changes - The office imaging industry is changing rapidly from
analog to digital photocopiers. Some of our digital products replace or compete
with our analog products. Digital photocopiers are more efficient than analog
photocopiers, meaning that our customers require fewer of them to provide the
same level of output. Digital photocopiers are increasingly more reliable than
analog photocopiers and require less maintenance. This has contributed, in part,
to a decline in our service contract revenue, which has traditionally formed a
significant portion of our revenues. In addition, color printing and copying
represents an important and growing part of our industry. We must improve our
execution of color sales and meet the demand for color products if we are to
maintain and improve our operating performance and our ability to compete.
Development of technologies in our industry, including digital and color
products, may impair our future operating performance and our ability to
compete. For example, we may not be able to procure or gain access to products
and bring them to the marketplace, or to make the investments necessary for us
to maintain a technologically competitive workforce. We launched two major
initiatives in fiscal year 2002, which are designed to reduce the impact of
these technological changes on our service revenue. First, we launched our Danka
@
3
the Desktop initiative, which is a complete solution tailored to each customer's
specific needs. It improves document workflow and printing processes, increases
productivity, and lowers overall document production costs. Typical components
include workflow analysis, integrated software that enhances control and
accountability, imaging system additions and upgrades, implementation services
and printer network optimization, user training, ongoing monitoring and
technical support. We have also introduced our multi-vendor services initiative
to leverage our existing Technical Services group and expand the types of
technical services and maintenance we provide for our customers to include other
types of digitally connected devices and equipment installed by other vendors.
The success of these initiatives may not be achieved if they are not accepted by
our customers, do not generate additional service revenue, or we are unable to
provide the software, hardware, solutions or services necessary to successfully
implement these initiatives.
Vendor Relationships - We have relationships with Canon, Ricoh, Toshiba,
Heidelberg/Nexpress, and Konica. These companies manufacture equipment, parts,
supplies and software for resale by us in all of our markets. We also rely on
our equipment suppliers for related parts and supplies. An inability to obtain
parts or supplies from our major vendors, or the loss of any major vendor, may
seriously harm our business because we may not be able to supply those vendors'
products to our customers on a timely basis in sufficient quantities or at all.
There is no guarantee that these vendors or any of our other vendors will
continue to sell their products and services to us, or that they will do so at
competitive prices. Other factors, including reduced access to credit by the
vendors resulting from economic conditions, may impair our vendors' ability to
provide products on a timely manner or at competitive prices.
Indebtedness - We have significant outstanding indebtedness. At March 31, 2002
we had consolidated bank and long-term indebtedness, including current
maturities of long-term debt, of approximately $304.5 million. As of March 31,
2002, we owed $170 million under our senior credit facility. The facility
requires repayment of principal in installments of $16.0 million in fiscal year
2003 ($4 million at the end of each quarter), and $154.0 million in fiscal year
2004 ($8 million at the end of each of the first three quarters, with payment
due in full on March 31, 2004). We also are required to make additional
repayments of our indebtedness under the credit facility in amounts equal to 50%
of our excess cash flow (as defined in the credit facility) for each of our
fiscal years. In addition, we have $47.6 million in principal amount of zero
coupon senior subordinated notes due April 1, 2004 and $64.5 million in
principal amount of 10% subordinated notes due April 1, 2008.
Our significant level of indebtedness may require us to dedicate a substantial
portion of our operating cash flows to payments of interest and principal. The
payment obligations and covenants under our indebtedness may also limit our
ability to make investments that are necessary for us to keep pace with the
technological changes currently affecting our industry. Some of our borrowings
bear interest at a variable rate. Accordingly, increases in interest rates could
increase our interest expense and adversely affect our cashflow, reducing the
amounts available to make payments on our indebtedness.
Bank and Other Covenants - Our senior credit facility imposes significant
operating restrictions on us, because it contains financial and non- financial
covenants which restrict our business operations. If we were to fail to comply
with the financial covenants and did not obtain a waiver or amendment from our
senior bank lenders, we would be in default under the senior credit facility and
lenders owning a majority of our senior bank debt would be permitted to demand
immediate repayment. If we were to fail to repay our senior bank debt when it
becomes due, our lenders could proceed against certain of our and our
subsidiaries' assets and capital stock which we have pledged to them as security
for the repayment of our senior bank debt. In addition, we lease a number of
properties under tax retention operating leases. The tax retention operating
leases incorporate the financial covenants included in the senior credit
facility. If we were to breach the financial covenants or other restrictions in
the tax retention operating leases, then the banks that have financed the
properties leased under those leases may terminate the leases. In that case, we
may be required to purchase the properties that are subject to the tax retention
operating leases or they may be sold to third parties. In addition, we may be
required to make payments to the banks under guarantees that we have given
regarding the value of the properties. Our maximum contingent liability under
the leases is approximately $24.4 million as of March 31, 2002.
Third Party Financing Arrangements - We have an agreement with General Electric
Capital Corporation ("GECC") under which GECC agrees to provide financing to our
customers to purchase equipment from us. Although we have other financing
arrangements, GECC finances a significant part of our business. If we were to
breach the covenants or other restrictions in our agreement with GECC, then GECC
may refuse to provide financing to our customers. If GECC were to fail to
provide financing to our customers, those customers may be unable to purchase
equipment from us if we were unable to provide comparable alternative financing
arrangements on similar terms. If we were unable to provide financing, we may
lose sales, which could negatively affect our operating results. If we fail to
provide a minimum level of customer leases under the agreement, we are required
to pay penalty payments to GECC.
4
Achieving and Sustaining Profits - In order to be profitable, we must maintain
efficient and cost-effective operations. We are continuing to focus on exploring
and exploiting new market opportunities, pursuing productivity initiatives and
streamlining our infrastructure. These initiatives are aimed at making us more
profitable and competitive in the long-term. Our ability to sustain and improve
our profit margins through these initiatives may be affected by factors outside
our control.
Restructuring Plan - In December 2000, we announced that we would be eliminating
approximately 1,200 positions, or approximately 8% of our worldwide workforce,
and that we would be closing and consolidating several of our facilities in
order to lower our costs to meet our current revenue and margin expectations. We
modified our restructuring plan during fiscal year 2002 and implemented a new
restructuring plan for fiscal year 2002. If we do not implement our
restructuring plans within our projected time frames, our ability to achieve our
anticipated savings and lower costs may be harmed, which may reduce our
profitability. We anticipate that the workforce reductions will be substantially
completed by June 30, 2002 and that the remaining lease obligations related to
the facility closures will be substantially completed by March 2003.
Information System - If we fail to successfully implement our program to enhance
and unify our United States management information system, it may become
increasingly difficult for us to obtain information that we need to manage our
business, price our products, invoice and collect from our customers, and
process and pay our creditors on a timely basis and without additional expense.
We currently operate a number of different management information systems in the
United States, our biggest market. In the past, we have encountered some
difficulties with coordinating those systems. We are in the process of
implementing an approximately $20 million program to enhance and unify our
United States management information systems. We anticipate that the program
will be completed during the third quarter of fiscal year 2003. The success of
our program depends on our ability to develop a system, which adequately
fulfills our management information needs and we may be negatively impacted if
we fail to do so.
Currency Fluctuations - As a multinational company, changes in currency exchange
rates affect our revenues, cost of sales and operating expenses. In addition,
fluctuations in exchange rates between the United States dollar and the
currencies in each of the countries in which we operate affect the results of
our non-United States operations when reported in United States dollars in our
U.S. financial statements, and the value of the net assets of our non-United
States operations when reported in United States dollars in our U.S. financial
statements. Approximately 44% of our revenue was generated outside the United
States in fiscal year 2002, with the majority of this revenue generated in
countries that have adopted the euro as their currency and the United Kingdom.
During fiscal year 2002, the euro weakened approximately 2.5% against the United
States dollar and the United Kingdom pound weakened approximately 3.1% against
the United States dollar. We pay for some high-volume copiers, parts and
supplies in euro countries in United States dollars, but we generally invoice
our customers in euro countries in euro. Because of the weakening of the euro
against the United States dollar, our operating margins and cash flow have been,
and may continue to be, negatively impacted when we receive payment in euro but
we pay our suppliers in United States dollars. In addition, our results of
operations and financial condition have been, and may continue to be, negatively
impacted by the effect of currency fluctuations on the translation of the
financial statements of our non-United States subsidiaries, including our
European and Latin American subsidiaries, from local currencies to the United
States dollar for inclusion in our U.S financial statements. We do not hedge our
exposure to changes in foreign currency.
Share Price - The market price of our ordinary shares and American depositary
shares could be subject to significant fluctuations as a result of many factors.
In addition, global stock markets have from time to time experienced significant
price and volume fluctuations, which may lead to a drop in the market price of
our ordinary shares and American depositary shares. Factors which may add to the
volatility of the price of our ordinary shares and American depositary shares
include many of the factors set out above, and may also include changes in
liquidity in our ordinary shares and American depositary shares, sales of our
ordinary shares and American depositary shares, investor sentiment towards the
business sector in which we operate and conditions in the capital markets
generally. Many of these factors are beyond our control. These factors may
decrease the market price of our ordinary shares and American depositary shares,
regardless of our operating performance.
Dividends - We have not paid any cash or other dividends on our ordinary shares
since 1998 and we do not expect to do so for the foreseeable future. We are an
English company and under English law, we are allowed to pay dividends to
shareholders only if:
. we have accumulated, realized profits that have not been previously
distributed or capitalized, in excess of our accumulated, realized
losses that have not previously been written off in a reduction or
reorganization of capital; and
. our net assets are not less than the aggregate of our share capital
and our non-distributable reserves, either before or as a result of
the dividend.
As of the date of filing of this Form 10-K, we have insufficient profits to pay
dividends on our ordinary shares. In addition, our senior credit facility
prohibits us from paying dividends on our ordinary shares without our lenders'
consent. We may also only pay dividends on our ordinary shares if we have paid
the dividends due on our 6.50% senior convertible participating shares.
5
PART I
ITEM 1. BUSINESS
Introduction
We are one of the world's leading providers of office imaging equipment,
solutions and related services and supplies. We primarily market office imaging
equipment and related services, parts and supplies directly to customers in 27
countries. Canon, Heidelberg/Nexpress, Ricoh and Toshiba manufacture most of the
products that we distribute. Throughout Europe, we also market private label
office imaging equipment and related supplies directly to customers under our
Infotec trademark and on a wholesale basis to independent dealers.
We provide a wide range of customer-related support services, maintenance
contracts, supply contracts and leasing arrangements relating to the sale of our
office imaging equipment. Our service business is contractual. Our service
contract renewals provide a significant source of recurring revenue for us.
Our operations are conducted through three reporting segments: Danka United
States, Danka Europe and Danka International which represented 55.8%, 34.9% and
9.3%, respectively of our total revenue in fiscal year 2002. Additional
financial information regarding our reporting segments can be found in Note 13
to the consolidated financial statements. All three segments provide office
imaging equipment, solutions, services, parts and supplies to retail customers.
Danka United States, operates throughout the United States, Danka Europe
operates throughout Europe and Danka International operates in Canada, Latin
America and Australia. Danka Europe also provides office imaging equipment on a
wholesale basis to over 750 independent dealers.
We sold DSI to Pitney Bowes for $290 million in cash, subject to adjustment
depending on the value of DSI's net assets on closing. The consideration has
been preliminarily adjusted downward by $2.8 million, which is the amount that
the value of DSI's net assets at closing of the sale were less than the
estimated valuation of $82.4 million. We anticipate that the adjustment will be
finalized in the first quarter of fiscal year 2003. We used the net proceeds of
DSI to repay part of our senior bank debt, to finance cash payable under an
exchange offer for our 6.75% convertible subordinated notes due 2002, to finance
the cost of the exchange offer and to finance costs associated with the
refinancing of our senior bank debt.
We are a public limited company organized under the laws of England and Wales.
We were incorporated on March 13, 1973.
Our principal operating subsidiaries are located in North America, Europe,
Australia and Latin America. Our registered office is located at Masters House,
107 Hammersmith Road, London W14 0QH England, and our telephone number is 011-
44-207-603-1515. The headquarters of our United States operations are located at
11201 Danka Circle North, St. Petersburg, Florida 33716, and our telephone
number is 727-576-6003.
Equipment Suppliers
Our business relies on close relationships with equipment suppliers and our
ability to purchase products from these suppliers on competitive terms. See
"Equipment and Software Products" below. We have relationships with Canon,
Ricoh, Toshiba, Heidelberg/Nexpress, and Konica to manufacture equipment, parts,
supplies and software for resale by us in the United States, Canada, Latin
America, Europe and Australia. We also rely on our equipment suppliers for
related parts and supplies.
Equipment and Solutions
Our primary products include state-of-the-art digital and color multi-function
devices that photocopy, print, scan and fax information, high-volume printing
systems, solutions, and parts and supplies. Our solutions include equipment,
professional services and software for copying and printing systems. The office
imaging industry is generally represented by the following six "segments":
6
Segment CPM/(1)/ Principal Manufacturers
----------------------------------------------------------------------------
1 *20 Xerox, Canon, Sharp, Mita, Ricoh
2 21 - 30 Xerox, Canon, Sharp, Mita, Ricoh
3 31 - 40 Canon, Xerox, Ricoh, Konica, Sharp
4 41 - 69 Canon, Xerox, Ricoh, Minolta, Konica
5 70 - 90 Canon, Oce, Xerox, Sharp
6 **91 Xerox, Heidelberg, Oce, Canon, IBM
* means less than
** means greater than
(1) Copies per minute
Source: International Data Corporation and Lehman Brothers research (April 2002)
We operate in all six segments but our current worldwide focus is on segments
4-6.
In April 2002, we introduced our Danka @ the Desktop program, which is designed
to assist customers with their document workflow and printing processes so they
can increase productivity and lower overall document production costs. We have
created relationships with numerous third party software and hardware providers
in connection with Danka @ the Desktop, including: NPS, ESI, Alto Imaging and
Canon. We install and customize software obtained from these providers to suit
particular customers' needs. We also sell hardware and software products
manufactured by these providers which are designed to enhance our customers'
document management process. We have also introduced our multi-vendor services
initiatives to leverage our existing Technical Services group and expand the
types of technical services and maintenance we provide for our customers to
include other types of digitally connected devices and equipment installed by
other vendors.
Services
Retail service, supplies and rentals represented 60.3% of our total revenue in
fiscal year 2002, 59.9% in fiscal year 2001 and 61.7% in fiscal year 2000. This
revenue is primarily derived from our equipment, maintenance and supply
contracts. Generally, our contracts are for a minimum one-year term and are
based upon a monthly minimum payment and a per image charge on all images above
the minimum.
Marketing, Customers and Sales Organization
Our retail operation targets a broad range of customer groups, including:
. small to mid size businesses;
. large multinational companies;
. professional firms;
. governmental institutions; and
. educational institutions.
Additionally, we market office imaging equipment on a wholesale basis to a
network of authorized independent dealers in Europe.
We believe that our retail customers primarily base their purchasing decisions
on:
. quality and reliability of post-sales service and solution support;
. product performance and capabilities;
. price; and
. availability of financing.
We use a range of advertising and promotional activities, including:
. print media advertising campaigns;
. distribution of descriptive brochures and direct mail pieces; and
. informational seminars and presentations.
Our marketing efforts are also enhanced by national advertising campaigns by the
manufacturers of the equipment that we sell and co-operation arrangements
between those manufacturers and us. The co-operation arrangements with our
vendors are support
7
programs provided by the manufacturers to assist us with costs associated with
promoting their products. In addition, we use our website to market our products
and services.
Our compensation plan for our sales representatives is designed to provide a
positive career path and to minimize sales personnel turnover. Compensation for
our sales representatives consists of a base salary and a selling commission
that is aligned to our strategic objectives which include, but are not limited
to, increased gross margins and value added sales solutions.
Leasing
We have historically provided financing for most of our customers' purchases of
equipment with leases using various funding sources. General Electric Capital
Corporation ("GECC") funds our largest customer leasing program. We have an
agreement with GECC to provide customer lease financing in the United States
through March 2006. We also obtain customer lease financing from other funding
sources, including for our business outside the United States. External lease
financing arrangements permit us to use our capital for other business
activities.
Training
We train our employees so that there is a uniform application of our operating
procedures throughout the sales network. Upon employment, our sales
representatives participate in an intensive information and skills training
program. After the initial training is completed, we continue to develop the
skills and knowledge of our sales representatives by providing new product
training, self-study computer based courses and ongoing sales skill development.
Field engineers and service technicians who are new to Danka are immediately
trained and certified. Our service personnel are continuously trained on new
technology developed by our equipment manufacturers. Our service training
centers are certified at authorized service facilities by many of our equipment
manufacturers. In addition, each field engineer carries state-of-the- art
service tools, including a laptop computer loaded with technical information and
diagnostic software.
At our Digital Support Center, our network and system support engineers receive
ongoing training on industry standard certifications for office imaging
equipment, as well as application software support from some of the leading
technology companies, including Microsoft, Adobe Systems, Novell and Sun
Microsystems.
Competition
Our business is highly competitive. We have competitors in all markets in which
we operate and our competitors include a number of companies worldwide with
significant technological, distribution and financial resources. Competition in
our industry is based largely upon technology, performance, pricing, quality,
reliability, distribution, customer service and support. In addition, our
suppliers continue to establish themselves as direct competitors in each of the
areas in which we do business. Besides competition from within the office
imaging industry, we are also experiencing competition from other sources as a
result of the development of document processing, retention and duplication
technologies. Our retail operations are in direct competition with local and
regional equipment suppliers and dealers, manufacturers, mass merchandisers, and
wholesale clubs.
Employees
As of March 31, 2002, we employed approximately 9,500 persons.
Some of our non-United States employees are subject to labor agreements that,
among other things, establish rates of pay and working hours. We consider our
employee relations to be good. We believe that we provide working conditions and
wages that are comparable to those of our competitors.
Trademarks and Service Marks
We believe that our trademarks and service marks have gained recognition in the
office imaging and document management industry and are important to our
marketing efforts. We have registered various trademarks and service marks. In
particular, we believe that the trademarks "Danka" and "Infotec" are important
our ongoing business. Our policy is to continue to pursue registration of our
marks whenever possible and to oppose vigorously any infringement of our
proprietary rights. Depending on the jurisdiction, trademarks and service marks
are valid as long as they are in use and/or their registrations are properly
maintained, and they have not been found to become generic. Registrations of
trademarks and service marks in the United States can generally be renewed
indefinitely as long as the trademarks and service marks are in use.
8
Backlog
Backlogs are not material to our business.
ITEM 2. PROPERTIES
Our general policy is to lease, rather than own, our business locations. We
lease numerous properties for administration, sales and service, and
distribution functions and for our retail and wholesale operations. The terms
vary under the leases. Some of our leases contain a right of first refusal or an
option to purchase the underlying real property and improvements. In general,
our lease agreements require us to pay our proportionate share of taxes, common
area expenses, insurance, and related costs of the rental properties.
During fiscal year 2002, we announced that we would be closing and consolidating
some of our facilities. In 2002, we identified a total of 39 facilities to be
closed, partially closed and/or consolidated with our other facilities. The
remaining lease obligations relating to these facility closures will be
terminated or the facilities will be subleased during fiscal year 2003. We
incurred a restructuring charge of $6.1 million in fiscal year 2002 in
connection with facility closures.
The facilities identified for closure, partial closure or consolidation in
fiscal year 2002 are in addition to the 40 facilities that we identified in
fiscal year 2001 to be closed, partially closed and/or consolidated with our
other facilities. The remaining lease obligations relating to the facility
closures that we identified in fiscal year 2001 will be terminated or the
facilities will be subleased during fiscal year 2003. We incurred a
restructuring charge of $4.3 million in fiscal year 2001 in connection with the
closures, of which $3.0 million was reversed in fiscal year 2002 due to changing
business conditions and changes in our business strategy.
We own several smaller business locations, none of which are necessary to the
success of our business. In the future, we may dispose of some of the properties
that we own and replace them with leased properties that we believe may be more
desirable or more conveniently located.
Danka Holding Company ("DHC"), one of our subsidiaries, is party to tax
retention operating leases ("TROL") which expire on March 31, 2004. The TROL
provides for DHC to lease certain real property in the United States. The TROL
generally requires DHC to pay property taxes, maintenance, insurance, and
certain other operating costs of the leased properties. DHC has purchase renewal
options over the leased properties at fair market value and has the right to
exercise purchase options for each property at the end of the lease term.
Alternatively, the properties can be sold to third parties. At March 31, 2002,
the properties were being offered for sale.
Our management believes that the properties we occupy are, in general, suitable
and adequate for the purposes for which they are used.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings and claims, which arise, in the ordinary
course of our business. We do not expect these legal proceedings to have a
material effect upon our financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An extraordinary general meeting of the shareholders of Danka Business Systems
PLC was held on March 28, 2002 to approve the Danka Section 423 Employee Stock
Purchase Plan. The voting on the resolution was as follows:
----------------------------
FOR 78,615,401
----------------------------
AGAINST 2,453,366
----------------------------
ABSTAIN -
----------------------------
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our executive officers is contained in part III, item 10
of this Form 10-K.
9
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The following table sets forth the high and low sale price for our ADSs, as
reported by the Nasdaq National Market up to and including December 6, 2000 and
by the Nasdaq SmallCap Market from December 7, 2000, and the high and low middle
market quotations, which represent an average of bid and offered prices in
pence, for the ordinary shares as reported on the Official List of the London
Stock Exchange. Each ADS represents four ordinary shares.
U.S. Dollars per ADS Pence per Ordinary Share
---------------------------- ------------------------------
High Low High Low
---- --- ---- ---
Fiscal Year 2002:
Quarter ended June 30, 2001 $1.25 $0.63 19.75p 10.50p
Quarter ended September 30, 2001 1.12 0.49 18.00 9.75
Quarter ended December 31, 2001 1.13 0.50 17.50 9.25
Quarter ended March 31, 2002 4.15 0.97 67.50 15.75
Fiscal Year 2001:
Quarter ended June 30, 2000 $6.13 $3.50 91.00p 63.75p
Quarter ended September 30, 2000 4.13 1.41 66.5 29.50
Quarter ended December 31, 2000 1.66 0.28 29.50 7.50
Quarter ended March 31, 2001 1.00 0.31 16.25 8.0
As of March 31, 2002, 54,647,859 ADSs were held of record by 2,543 registered
holders and 248,084,622 ordinary shares were held of record by 3,578 registered
holders. Since some of the ADSs and ordinary shares are held by nominees, the
number of holders may not be representative of the number of beneficial owners.
We most recently paid a dividend to shareholders on July 28, 1998. We are an
English company and we currently have insufficient profits, as determined under
English law, to pay dividends on our ordinary shares. In addition, we are not
currently permitted to pay dividends, other than payment-in-kind dividends on
our participating shares, under our senior credit facility. We do not expect to
pay dividends on our ordinary shares for the foreseeable future and any decision
to do so will be made by our board of directors in light of our earnings,
financial position, capital requirements, credit agreements, legal requirements
and other such factors as our board of directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to the
information under the heading "Selected Consolidated Financial Data" in our
annual report to shareholders for the year ended March 31, 2002. See Exhibit 13
to this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated herein by reference to the
information under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our annual report to shareholders for
the year ended March 31, 2002. See Exhibit 13 to this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is incorporated herein by reference to the
information under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our annual report to shareholders for
the year ended March 31, 2002. See Exhibit 13 to this report.
10
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to the
information under the headings "Consolidated Statements of Operations",
"Consolidated Balance Sheets", "Consolidated Statements of Cash Flows",
"Consolidated Statements of Shareholders' Equity" and "Notes to the Consolidated
Financial Statements" in our annual report to shareholders for the year ended
March 31, 2002. See Exhibit 13 to this report. As is the case with any company,
prior financial condition and results of operations are not necessarily
indicative of future results.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
The table below contains information regarding our current directors and
executive officers and the current directors and executive officers of our
primary operating subsidiaries. The executive officers serve at the pleasure of
the respective boards of directors.
Director's
Name Age Position(s) Nominations Audit Compensation Rotation
- ---------------------- ------- ------------------------------------ ------------ ------------ ------------ -----------
P. Lang Lowrey, III 48 Chief Executive Officer and Chairman X - - 2004
Kevin C. Daly 58 Director - - - 2002
Michael B. Gifford 66 Director X X - 2004
Richard M. Haddrill 49 Director - X - 2002
Christopher B. Harned 39 Director - X - 2002
Richard F. Levy 71 Director - X - 2002
W. Andrew McKenna 56 Director - X - 2002
J. Ernest Riddle 60 Director - X X 2003
James L. Singleton 46 Director X - X 2003
C. Anthony Wainwright 68 Director X - X 2002
Brian L. Merriman 65 President, Chief Operating
Officer and Director - - - 2002
F. Mark Wolfinger 47 Executive Vice President and
Chief Financial Officer - - - -
Todd L. Mavis 41 President and Chief Operating Officer,
Danka United States
Peter Williams 49 President and Chief Operating Officer,
Danka Europe
David P. Berg 41 President and Chief Operating Officer,
Danka International
J. Michael Hawkins 55 President, Technical Service
Business Unit - - - -
Keith J. Nelsen 38 Senior Vice President
and General Counsel - - - -
Paul Dumond 47 Secretary - - - -
Ricardo A. Davis 55 Senior Vice President and
Chief Administrative Officer - - - -
Donald W. Thurman 56 Senior Vice President Growth
and Marketing - - - -
Michel Amblard 55 Senior Vice President of Finance,
Danka Europe - - - -
Sanjay Sood 37 Senior Vice President of Finance,
and Accounting - - - -
P. Lang Lowrey III. Mr. Lowrey was appointed our chief executive officer and
director effective March 1, 2001 and was appointed chairman of our board of
directors effective January 13, 2002. From 2000 to February 2001, Mr. Lowrey
served as chief executive officer of eMag Solutions, LLC, a worldwide data
storage solutions and services company and as chairman of eMag since 1999. From
1995 to 1997, Mr. Lowrey served as chairman and chief executive officer of
Anacomp, Inc., an imaging solutions and services company. From 1997 to 1998, Mr.
Lowrey was chairman emeritus of Anacomp. Since 1997, Mr. Lowrey has been the
managing partner of Buckhead Angels, an e-commerce venture capital group.
11
Kevin C. Daly. Mr. Daly was appointed to our board of directors in January 2002.
Since October 2001, Mr. Daly has been chief technical officer of Storage
Solutions Group, a leading supplier of data protection devices for computer
networks from 1991 to 2001. Mr. Daly served as chief executive officer and
president of Quantum ATL which was merged into Storage Solutions Group in 2001
by Quantum Corporation.
Michael B. Gifford. Mr. Gifford was appointed to our board of directors in
September 1999. He was chairman of our board of directors from March 1, 2001 to
January 13, 2002. Mr. Gifford was our interim chief executive officer from
October 2000 to February 2001. From 1983 through 1996, Mr. Gifford was group
chief executive of the Rank Organization Plc, a London based leisure and
entertainment conglomerate and the joint venture partner for Xerox operations
outside the Americas. During that period, he served as the Rank representative
on the Rank Xerox board. He was also a director of Fuji Xerox, whose operations
covered the Eastern Hemisphere. Mr. Gifford also served on the board of
directors of English China Clays Plc from 1992 to 1999. He is currently a
director of The Gillette Company, a New York Stock Exchange listed global
consumer products company.
Richard M. Haddrill. Mr. Haddrill was appointed as a director in February 2002.
Since 1999, Mr. Haddrill has been president and chief executive officer of
Manhattan Associates, a Nasdaq National Market listed company, which provides
supply chain execution and collaborative commerce solutions. From 1994 to 1999,
Mr. Haddrill served as president and chief executive officer of Powerhouse
Technologies, Inc., a company that provides technology to the gaming industry.
Mr. Haddrill also spent 16 years with Ernst & Young with the last 6 years as a
partner.
Christopher B. Harned. Mr. Harned was appointed as a director in March 2002. Mr.
Harned has been a managing director of The Cypress Group L.L.C., a private
equity fund, since November 2001. From 1985 to 2001, Mr. Harned was with Lehman
Brothers, most recently as head of the Global Consumer Products Merger and
Acquisitions division. Mr. Harned also served as a member of Lehman Brothers'
Investment Banking Business Development Committee. Mr. Harned was designated by
the owners of the participating shares as their nominee to serve on the board of
directors.
Richard F. Levy. Mr. Levy was appointed as a director in February 2000. Since
March 2002, Mr. Levy has been a partner at Jenner & Block, a law firm based in
Chicago, Illinois. Mr. Levy was a partner at Altheimer & Gray, from May 1996 to
March 2002 and prior to that a partner with Kirkland & Ellis, both of which are
international law firms based in Chicago, Illinois. Mr. Levy also serves as vice
chairman and a director of Amalgamated Investments Company, a bank holding
company. Mr. Levy is also a director of Matria Healthcare, Inc., an
international healthcare company and First Oak Brook Bancshares, Inc., a bank
holding company, both of whose shares are traded on the Nasdaq National Market.
Before 1998, he was a director of Ambassador Apartments, a real estate
investment trust.
W. Andrew McKenna. Mr. McKenna was appointed as a director in February 2002. Mr.
McKenna was the president and director of SciQuest.com, a Nasdaq National Market
listed company, from December 1999 to December 2000. Mr. McKenna served from
1990 to 1999 in a variety of roles for Home Depot, most recently as senior vice
president, strategic business development and import/logistics. Mr. McKenna also
spent 16 years with Deloitte & Touche, with the last 10 years as a partner. Mr.
McKenna also serves on the board of directors of Auto Zone, Inc., a New York
Stock Exchange listed company.
J. Ernest Riddle. Mr. Riddle was appointed as a director in January 1998. From
March 1997 to July 1999, Mr. Riddle was president and chief operating officer of
Norrell Services, Inc., an outsourcing information technology and staffing
services company based in Atlanta, Georgia. Before joining Norrell, Mr. Riddle
spent four years with Ryder System, Inc., a logistics and transportation group,
primarily in marketing and sales. He was president of Ryder International from
October 1995 to December 1996. Mr. Riddle also has considerable experience in
the photocopier industry, having worked for Xerox Corporation from 1966 to 1992
where he held several executive positions including vice president marketing and
vice president operations for the United States group, and vice president
worldwide marketing operations and vice president marketing/sales director for
Rank Xerox in London. Mr. Riddle serves on the board of directors of AirNet
Systems, Inc, a provider of time-sensitive small package delivery services. He
also serves as a trustee of Brevard College and is on the board of visitors of
the University of North Carolina. Mr. Riddle has previously served on the board
of directors of Norrell and Enterasys.
James L. Singleton. Mr. Singleton was appointed as a director in December 1999.
In 1994 Mr. Singleton formed The Cypress Group LLC, a private equity firm, and
currently serves as president. Previously, Mr. Singleton was a managing director
in Lehman Brothers' Merchant Banking Group. Mr. Singleton serves on the board of
directors of Cinemark USA Inc., William Scotsman Inc., WESCO International Inc.,
ClubCorp Inc., HomeRuns.Com. Inc. and L.P. Thibault Company. Mr. Singleton was
designated by the owners of the participating shares as their nominee to serve
on the board of directors.
C. Anthony Wainwright. Mr. Wainwright was appointed as a director in September
1999. Since 1997, Mr. Wainwright has served as vice chairman of McKinney &
Silver, a North Carolina advertising agency and wholly-owned division of Havas
Advertising. From 1995 to 1997 Mr. Wainwright was the chairman of Harris Drury
Cohen, a Ft. Lauderdale advertising agency. Before serving as chairman of Harris
Drury Cohen, Mr. Wainwright was the chairman of Compton Partners, Saatchi &
Saatchi,
12
an international advertising agency which is a subsidiary of Cordiant PLC. Mr.
Wainwright also serves as a director of six public companies including: Advanced
Polymer Systems, Inc., America Woodmark Corporation, Caribiner International,
Del Webb Corporation and Marketing Services Group Inc. In addition, Mr.
Wainwright serves on various other private and charitable boards.
Brian L. Merriman. Mr. Merriman joined us in July 1998 and was appointed to our
board of directors in July 1999. Mr. Merriman was also appointed in July 1999 to
serve as our president and chief operating officer worldwide. Mr. Merriman plans
to retire as an executive officer effective July 1, 2002. Before his appointment
to the board of directors in July 1999, Mr. Merriman served as president and
chief operating officer of Danka Americas, including the United States, Canada
and Latin America regions. From 1994 to 1998 Mr. Merriman served as senior vice
president of the Electronic Imaging Division of Toshiba America Information
Systems, Inc. Mr. Merriman has also held several senior level positions with
Savin Corporation and Konica Business Machines USA, Inc.
F. Mark Wolfinger. Mr. Wolfinger joined us in August 1998 and currently serves
as our executive vice president and chief financial officer. Before his
appointment to chief financial officer in December 1998, Mr. Wolfinger served as
the president of our specialty markets divisions, including Canada, Latin
America and Omnifax. Mr. Wolfinger served as executive vice president and chief
financial officer for Hollywood Entertainment Corporation from 1997 to 1998.
Todd L. Mavis. Mr. Mavis joined us in 2001 and currently serves as president of
our U.S. business unit. From 1997 to 2001, Mr. Mavis was executive vice
president of Mitchell International, a leading information provider and software
developer for insurance and related industries. From 1996 to 1997, Mr. Mavis was
senior vice president - worldwide sales and marketing of Checkmate Electronics,
Inc, a NASDAQ traded company. For the last 16 years, Mr. Mavis has been involved
in the information technology industry and has been heavily involved in the
re-engineering of several companies, including Attachmate and Memorex Telex.
Peter Williams. Dr. Williams joined us in 2001 and currently serves as chief
operating officer of our European operations. Dr. Williams served from 1986 to
2001 in a variety of roles for Anacomp, Inc., most recently as executive vice
president in charge of the International Document Solutions divsion. Anacomp is
an imaging solutions and services company.
David P. Berg. Mr. Berg joined us in 2001 and currently serves as chief
operating officer of our International region. Mr. Berg served as executive vice
president, general counsel of Danka from June 1997 to June 2000. Mr. Berg served
as senior vice president with Comdial, Inc. of Sarasota, Florida from March 2001
to July 2001 and as president, chief operating officer of Ipool, a privately
held e-commerce company in Minneapolis, Minnesota from July 2000 to February
2001. From 1994 to June 1997, he served as senior vice president, general
counsel and secretary of Nordic Track, Inc., a manufacturer and distributor of
fitness equipment.
J. Michael Hawkins. Mr. Hawkins joined us in 1996 and since May 2001 has served
as president of our U.S. technical services, strategic business unit. Mr.
Hawkins served as senior vice president, customer services from 1998 to 2001.
Mr. Hawkins served as vice president of customer service from 1996 to 1998.
Before joining us, Mr. Hawkins worked at Xerox Corporation for twenty-three
years, most recently as national service agent manager and as a district manager
of customer service.
Keith J. Nelsen. Mr. Nelsen was appointed as our senior vice president and
general counsel in June 2000. From 1997 to June 2000, Mr. Nelsen served as our
associate general counsel. From 1995 to 1997, Mr. Nelsen served as vice
president and associate general counsel at Nordic Track, Inc., a manufacturer
and distributor of fitness equipment.
Paul G. Dumond. Mr. Dumond has been our company secretary since March 1986. He
is a chartered accountant. Mr. Dumond is also the owner and director of Nautilus
Management Limited, a management services company. In addition, he is a
non-executive director of two publicly owned United Kingdom companies, Redbus
Interhouse PLC, which provides internet web server co-location facilities, and
Mid-States PLC, a listed cash shell, which formerly distributed auto parts in
the United States. Mr. Dumond was previously with Thomson McLintock, Chartered
Accountants, now part of KPMG, following which he held the positions of finance
manager, and later finance director, in the oil and gas industry.
Donald W. Thurman. Mr. Thurman joined Danka in January 2002 and currently serves
as executive vice president and chief growth and marketing officer. From July
2001 to January 2002, Mr. Thurman was chief executive officer of eMag Solutions
LLC, a privately-owned international data storage solutions company. Mr. Thurman
also served from 1995 to 2000 in a variety of roles with Anacomp, most recently
as executive vice president and chief operating officer.
Ricardo A. Davis. Mr. Davis was appointed as our senior vice president and chief
administrative officer effective May 16, 200l. From March 1998 to May 2001, Mr.
Davis served as our senior vice president, human resources. From September 1996
to March 1998, Mr. Davis was our director of human resources, North America.
From August 1996 to September 1996, Mr. Davis served as our director of human
resources, southeast division. From 1986 to 1996, Mr. Davis served as human
resources director and in
13
various other capacities for Electric Fuels Corporation and Florida Power
Corporation, wholly owned subsidiaries of Florida Progress Corporation.
Michel Amblard. Mr. Amblard was appointed as our senior vice president and chief
financial officer for Danka Europe effective June 1, 2001. From 1998 to June 1,
2001, Mr. Amblard served as our senior vice president and corporate controller.
From September 1997 to 1998, Mr. Amblard served as our senior vice president
human resources worldwide. From May 1997 to September 1997, Mr. Amblard served
as project manager for our Uniting Danka project. From 1996 to 1997, Mr. Amblard
served as the chief financial officer of Danka International. Mr. Amblard plans
to resign by July 1, 2002.
Sanjay Sood. Mr. Sood was appointed as our senior vice president of finance and
accounting effective June 1, 2001. From May 2000 to June 1, 2001, Mr. Sood
served as our senior vice president planning and analysis. From 1997 to 2000,
Mr. Sood served as vice president and corporate controller, senior vice
president asset management of Hollywood Entertainment Corporation. From 1987 to
1997, Mr. Sood served in various financial positions at Dairy Mart Convenience
Stores, most recently as corporate controller.
Our articles of association set the size of our board of directors at not less
than two persons. Our board of directors currently consists of eleven members
who serve pursuant to our articles of association.
Two directors are elected by the owners of the participating shares: currently
these are Mr. Singleton and Mr. Harned. The directors elected by the owners of
the participating shares are elected by the affirmative vote of a majority of
the votes cast at a class meeting of the owners of those shares. The quorum for
the class meeting is two persons holding or representing by proxy at least
one-third in nominal value of the participating shares in issue. Our articles of
association provide that, subject to the following exception, the owners of the
participating shares are entitled to appoint two directors so long as they hold,
in aggregate, voting shares (including participating shares) that represent at
least ten percent of the total voting rights. The owners of participating shares
are entitled to appoint one participating share director if they own, in
aggregate, voting shares representing less than ten percent but more than five
percent of the total voting rights.
The owners of the participating shares are entitled to appoint a maximum of one
participating share director if:
. the Cypress Group LLC or its affiliates transfer participating shares to
a person who is not an affiliate of them without the consent of our board
of directors (which consent is not to be unreasonably withheld); and
. as a result the Cypress Group LLC and its affiliates hold in aggregate
less than 50.01 percent of the participating shares in issue.
Each committee of the board of directors must include at least one director
appointed by the owners of the participating shares, except as prohibited by
applicable law or regulation. The right of the owners of the participating
shares to elect the participating share directors is in addition to their right
to vote with other shareholders on the appointment of directors generally.
Each director is required to retire from office at the third annual general
meeting after his appointment or, if earlier, the annual general meeting which
falls in the third calendar meeting after his appointment. In addition,
directors may be appointed by the board of directors. Directors appointed by the
board of directors will hold office only until the next following annual general
meeting of shareholders, when they are eligible for re-election. Any director
must retire at the first annual general meeting which takes place after the
director reaches the age of 70 and annually thereafter.
There is no understanding regarding any of our executive officers or directors
or any other person pursuant to which any executive officer or director was, or
is, to be elected or appointed to such position except for the directors
appointed by the owners of the participating shares.
No executive officer or director is related to any other executive officer or
director.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely on our review of Forms 3, 4, and 5 furnished to Danka or written
representations from certain persons that no Forms 5 were required for those
persons, we believe that during our 2002 fiscal year, all filing requirements
under Section 16(a) of the Securities Exchange Act of 1934 applicable to our
directors, officers and 10% beneficial owners were timely satisfied, save for
the following exception. Kevin Dean failed to file Forms 4 to reflect the sale
of 11,500 ADSs on March 31, 2001 (which transaction included the sale of 10,000
ADSs purchased by Mr. Dean on December 23, 2000) and the subsequent purchase of
5,000 ADSs on May 7, 2001. [Mr. Dean paid us $3,400 in respect of the profit
made by Mr. Dean on the sale on March 31, 2001 of the 10,000 ADSs that were
purchased on December 23, 2000.]
14
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers and Directors
The table below contains information about the annual and long-term compensation
for services rendered in all capacities for the last three (3) fiscal years for
our chief executive officer and our other four most highly compensated executive
officers.
Summary Compensation Table
- -------------------------------------------------------------------------------------------------------------------------------
Number
Name and Principal Fiscal Other Annual Restricted Of Options/ All Other
Position Year Salary Bonus Compensation Stock SARs (1) Compensation
- ---------------------------- ------- ---------- ------------ ------------- -------------- ------------ --------------
P. Lang Lowrey III (2) 2002 $ 500,000 $1,486,135 - - - $34,056 (4)
Chief Executive Officer 2001 32,692 250,000 (5) - - 1,000,000/- -
Brian L. Merriman 2002 630,788 1,344,172 - - - 846,346 (7)
President and Chief 2001 650,000 89,375 $ 10,151 (3) $1,466,255(6) - 444,100 (7)
Operating Officer 2000 650,000 949,000 12,083 (3) - - 50,245 (8)
F. Mark Wolfinger 2002 488,781 892,081 - - 75,000/- -
Executive Vice President 2001 450,000 101,875 - - - -
and Chief Financial 2000 450,000 657,000 - - - 3,995 (9)
Officer
Todd L. Mavis (10) 2002 242,308 329,916 (11) - - 425,000/- 387,398 (12)
President and Chief 2001 - - - - - -
Operating Officer, 2000 - - - - - -
Danka United States
David P. Berg (13) 2002 157,692 209,977 - - 225,000/- 50,000 (14)
President and Chief 2001 71,539 135,416 - - - -
Operating Officer, 2000 325,000 524,500 - - - 14,135 (15)
Danka International
(1) The stock options granted are to acquire American depositary shares. Each
American depositary share represents four ordinary shares. All numbers
shown in the above table represent American depositary shares. All
options were granted at the fair market value of the American depositary
shares on the date of the grant.
(2) P. Lang Lowrey III began serving as our chief executive officer
effective March 1, 2001 and as chairman of the board of directors
effective January 13, 2002.
(3) The amounts listed represents sums received as director's fees.
(4) The amounts listed represent temporary living expenses and relocation
reimbursements.
(5) This amount represents payment of a signing bonus to Mr. Lowrey upon
commencement of his employment.
(6) This amount represents the dollar value of the restricted stock award of
385,542 American depositary shares to Mr. Merriman as of the date of
approval of the award by shareholders at our 2000 annual general meeting
based on the closing price of an American depositary share on the Nasdaq
National Market on that date. Mr. Merriman's shares are issuable in three
equal installments in 2001, 2002 and 2003, subject to acceleration on the
occurrence of certain events. The value of the restricted stock as of
March 31, 2002 was $1,480,481 based on the closing price of an American
depositary share on the Nasdaq SmallCap Market. Dividends (if any) will
be paid on the restricted stock.
(7) This amount includes an insurance premium with a dollar value of benefit
to Mr. Merriman of $846,346 and $444,100 for 2002 and 2001, respectively,
paid by Danka Office Imaging Company as advances under a split-dollar
term life insurance agreement on behalf of Mr. Merriman for the benefit
of beneficiaries designated by Mr. Merriman. The advances are secured by
an interest in the policy, which has been assigned to Danka Office
Imaging Company.
(8) This amount includes relocation reimbursements of $44,995 for fiscal year
2000. Fiscal year 2000 also includes a matching contribution to our
401(k) plan of $5,250.
(9) This amount represents a matching contribution to our 401(k) plan.
(10) Mr. Mavis began serving as an executive officer in August 2001.
(11) The amounts listed include a $50,000 signing bonus.
(12) The amounts listed include a $75,000 relocation bonus, a $202,000
housing bonus that was grossed up to $286,322 for tax purposes and
$26,076 of temporary living expenses and relocation reimbursements.
(13) Mr. Berg began serving as an executive officer in fiscal year 1999. He
resigned effective June 2, 2000 and was reappointed as an executive
officer effective August 7, 2001.
(14) The amounts listed represents a $50,000 housing bonus.
15
(15) The amounts listed represent matching contributions to our 401(k) plan.
Share Option Plans
We have options outstanding under our share option plans. The options granted
are for the right to acquire ordinary shares or American depositary shares. The
table below provides information concerning options issued under our share
option plans to our named executive officers who received a grant of options
during fiscal year 2002. We did not grant any stock appreciation rights during
fiscal years 2002, 2001, and 2000.
Option Grants in Fiscal 2002 - Individual Grants
- -------------------------------------------------------------------------------------------------------------------------------
% of Total Potential Realizable Value
Options At Assumed Annual Rates
Number of Granted to Exercise or Of Share Price Appreciation
Options Employees in Base Price Expiration For Option Term (2)
Name Granted (1) Fiscal 2002 ($/Share) Date 5% 10%
- ---------------------- -------------- ------------- ------------ ------------ ----------------- ----------------
F. Mark Wolfinger 50,000 (3) 3.6% $1.88 02/08/12 $ 59,116 $149,812
25,000 (4) 1.88 02/08/12 29,558 74,906
Todd L. Mavis 400,000 (3) 20.6% 0.88 08/09/11 221,371 560,997
25,000 (4) 1.88 02/08/12 29,558 74,906
David P. Berg 200,000 (3) 10.9% 0.88 08/09/11 110,685 280,499
25,000 (4) 1.88 02/08/12 29,558 74,906
(1) The options granted are for American depositary shares.
(2) The United States dollar amounts under these columns are the result of
calculations at 5% and 10% which reflect rates of potential appreciation
set by the SEC. Therefore these calculations are not intended to forecast
possible future appreciation, if any, of our ordinary share or ADS price.
Our stock options are granted with a pence per ordinary share or United
States dollar per ADS exercise price.
(3) Options vest in three equal annual installments beginning after the first
anniversary date.
(4) The options vest in 5 years beginning after the first anniversary date but
may become fully vested by the achievement of certain predetermined goals.
The table below provides detailed information concerning aggregate share
option/stock appreciation rights values at the end of fiscal year 2002 for
unexercised share options/SARs held by each of our named executive officers. No
share options/SARs were exercised by any named executive officer in fiscal year
2002.
Aggregate Options/SARs Exercised In Fiscal Year 2002
And Fiscal Year-End Option/SAR Values
- ----------------------------------------------------------------------------------------------------------------------------
Number of Value of Unexercised
Number of Unexercised In-the-Money
American Depositary Options/SARs Options/SARs
Shares Acquired on Value At Fiscal Year-End At Fiscal Year-End
Name Exercise (1) Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ----------------------- --------------------- ------------ --------------------------- ---------------------------
P. Lang Lowrey III - - 333,333/666,667 $ 1,279,999/ $ 2,560,001
0/0 (2) 0/0
Brian L. Merriman - - 750,000/0 /0
750,000/0 (2) 0/0
F. Mark Wolfinger - - 570,000/75,000 0/288,000
500,000/0 (2) 0/0
Todd L. Mavis - - 25,000/400,000 96,0000/1,536,000
0/0 (2) 0/0
David P. Berg - - 50,000/175,000 192,000/672,000
0/0 (2) 0/0
(1) The options granted are for American depositary shares. The options were
granted at the fair market value of the American
16
depositary shares on the date of the grant. Each American depositary shares
represents four ordinary shares.
(2) These amounts represent stock appreciation rights in respect of American
depositary shares granted during fiscal year 1999.
Compensation of Directors
Each director serving as an executive officer received the equivalent of
(Pounds) 25,000 in directors' fees for fiscal year 2002.
Michael B. Gifford served as our chairman from March 1, 2001 to January 13,
2002. While chairman, Mr. Gifford received an annual base salary equivalent to
$200,000 per annum, medical insurance coverage for himself and his spouse and
reimbursement of business expenses.
Compensation payable to the non-employee directors is determined by the board
and is reviewed annually. Compensation consists of the following:
. An annual sum of (Pounds) 25,000.
. If a chairman of a committee of the board of directors, an additional
annual sum of (Pounds) 3,500.
. (Pounds) 1,200 for each board of directors or committee meeting
attended and reimbursement for expenses in connection with such
attendance
James L. Singleton and Mr. Christopher B. Harned, the directors appointed by
holders of the participating shares, have waived their entitlements to receive
emoluments.
Human Resources Committee Interlocks and Insider Participation
None of the members of our human resources committee have at any time been an
executive officer. There were no human resources committee interlocks or insider
participation in compensation decisions in fiscal year 2002.
Change of Control Agreements
Each of P. Lang Lowrey, Brian L. Merriman, F. Mark Wolfinger, Todd L. Mavis and
David P. Berg has a change of control agreement with Danka Business Systems PLC
and Danka Office Imaging Company.
Under each change of control agreement, if the relevant executive's employment
is terminated without cause, other than due to death, disability, or retirement,
or the executive terminates his employment for good reason, in either case
within two years after a change of control, the relevant executive will be
entitled to receive the severance benefits described below. "Good reason"
includes an adverse change in the relevant executive's status or position,
decrease in base salary, relocation, or our failure to continue in effect any
compensation or benefit plan.
The severance benefit entitlements under the change of control agreement
include:
. a lump-sum cash payment, in an amount equal to three times base salary
for Mr. Merriman and two times base salary for Mr. Lowrey, Mr.
Wolfinger, Mr. Mavis and Mr. Berg. "Base salary" is the salary being
earned either at the time of the change of control, or at the time of
the termination of the relevant executive's employment, whichever is
greater;
. a pro rata annual bonus for the fiscal year of termination calculated
as if our financial performance targets for that fiscal year were
deemed to be satisfied at the level equal to the performance achieved
through the date of termination or, if greater, the pro rata amount of
any performance bonus that the relevant executive is guaranteed to
receive for the fiscal year;
. an amount equal to three times, in the case of Mr. Merriman and two
times, in the case of Mr. Lowrey, Mr. Wolfinger, Mr. Mavis and Mr.
Berg, the relevant executive's annual bonus for the fiscal year of
termination, calculated as if our financial performance targets for
that fiscal year were deemed to be satisfied at a level equal to the
performance achieved through the date of termination or, if greater,
any performance bonus that the relevant executive is guaranteed to
receive for that fiscal year;
. continued coverage under our welfare plans for up to 24 months in the
case of Mr. Merriman and Mr. Wolfinger and 12 months in the case of
Mr. Lowrey, Mr. Mavis and Mr. Berg; and
. the immediate vesting and exercisability of the respective executive's
stock options for three years following termination of the executive's
employment.
Each change of control agreement provides that the relevant executive will be
reimbursed for any federal excise taxes imposed on payments that constitute
excess "golden parachute payments."
17
A "change of control" occurs for the purposes of the change of control
agreements if:
. any person or group unaffiliated with us acquires securities
representing more than 30 percent of our shareholder voting power;
. a merger or consolidation involving us is consummated and results in
less than 50 percent of the outstanding voting securities of the
surviving or resulting entity being owned by our then existing
stockholders;
. we sell substantially all of our assets, or substantially all of the
assets of Danka Holding Company, to a person or entity which is not
our wholly-owned subsidiary or any of our affiliates; and
. during any period of two consecutive years, individuals who, at the
beginning of such period, constituted our board of directors cease to
constitute at least a majority of our board of directors, unless the
election or nomination for election for each new director was approved
by the vote of at least two-thirds of the directors then still in
office who were directors at the beginning of such two-year period.
Each change of control agreement will remain in effect until the time that the
relevant executive is terminated in circumstances, which do not entitle the
executive to severance payments under his agreement. The change of control
agreements will not expire earlier than two years after the effective date of
any change of control.
Employment Agreements
P. Lang Lowrey III
Mr. Lowrey has an employment agreement with Danka Office Imaging Company, Danka
Business Systems PLC and Danka Holding Company. The employment agreement, which
is effective from March 1, 2001, provides for
. an annual base salary of not less than $500,000;
. an annual target bonus based on individual and corporate performance
of up to 100% of base salary; o an additional bonus based on specified
corporate objectives of up to 100% of base salary; o a signing bonus
of $250,000; o stock option grants consistent with Mr. Lowrey's
position; o relocation benefits under our standard relocation plan
and, in addition, up to $8,000 per month on an after-tax basis for
. twelve months from March 1, 2001 for temporary living and travel
expenses associated with relocation; and payment of other vested
benefits due to Mr. Lowrey under the terms of any deferred
compensation, retirement, incentive or other benefit plan.
Mr. Lowrey's employment is terminable by either party upon 30 days' written
notice, if without cause. In the event that Mr. Lowrey's employment is
terminated other than by reason of his death or by us for cause, we will be
required to provide Mr. Lowrey with:
. a termination payment of $1,000,000 payable in installments over a
twelve month period;
. a proportionate amount of any performance bonus that would have been
payable to Mr. Lowrey for the fiscal year in which termination occurs;
. medical, hospitalization, life and other insurance benefits for Mr.
Lowrey and his family for up to two years after the termination date;
. immediate vesting of stock options with a two year exercise period;
and
. other vested benefits payable to Mr. Lowrey under the terms of any
deferred compensation, retirement, incentive or other benefit plan.
Mr. Lowrey is required to comply with worldwide non-compete and confidentiality
provisions for two years following termination of employment.
Brian L. Merriman, F. Mark Wolfinger, Todd L. Mavis and David P. Berg
Each of Mr. Merriman, Mr. Wolfinger, Mr. Mavis and Mr. Berg have employment
agreements with Danka Office Imaging Company and, in the case of Mr. Merriman,
Mr. Mavis and Mr. Berg, Danka Business Systems PLC and Danka Holding Company.
Each agreement provides for:
. a minimum annual base salary;
18
. an annual target bonus of up to 100% of base salary ($250,000 for Mr.
Mavis and $167,000 for Mr. Berg) based on individual and corporate
performance and eligibility for additional bonuses based on our
performance bonus plan;
. stock option grants consistent with the relevant executive's position;
and
. payment of other vested benefits due to the executive under the terms
of any deferred compensation, retirement, incentive or other benefit
plan.
Mr. Merriman's amended employment agreement is dated November 6, 2001 and
provides for an annual base salary of not less than $500,000. Mr. Merriman's
employment agreement also provides for the following:
. additional allowances of $85,000 for temporary living expenses;
. the forfeiture of options for 85,000 American depositary shares
granted on or about September 9, 1998 which have an exercise price of
$6.875 in exchange for the transfer to Mr. Merriman of the title to
his company car;
. four split dollar life insurance premium payments of $683,806, payable
on November 15, 2001, January 1, 2002, 2003 and 2004 respectively; and
. the issuance to Mr. Merriman of 385,542 American depositary shares in
three equal installments in 2001, 2002 and 2003, subject to
acceleration on death or permanent disability, termination of
employment by Mr. Merriman for good reason or by us other than for
cause, or on a change of control event affecting us. Issuance of each
installment is conditional upon Mr. Merriman remaining employed on the
relevant issue date. Our human resources committee may determine that
Mr. Merriman receives up to 40% of any installment in cash instead of
American depositary shares, the cash amount being calculated by
reference to the closing market price of our American depositary
shares on the dealing day last preceding the relevant issuance date.
The number of American depositary shares issuable to Mr. Merriman are
subject to adjustment to protect against dilution in certain
circumstances.
Mr. Wolfinger's employment agreement is dated August 15, 2000 and provides for
an annual base salary of not less than $450,000.
Mr. Mavis's employment agreement is dated July 26, 2001, and was amended on
March 18, 2002, and provides for an annual base salary of not less than
$375,000. In addition to the above, Mr. Mavis's employment agreement also
provides for the payment to Mr. Mavis of:
... a signing bonus of $50,000;
... a bonus of $75,000 upon the permanent relocation of Mr. Mavis's family to
the St. Petersburg area;
... a bonus of $100,000 on the first anniversary of Mr. Mavis's employment so
long as he remains employed on that date;
... relocation benefits under our standard relocation plan and, in addition, up
to $3,000 per month on an after-tax basis for five months from August 1,
2001 for temporary living and travel expenses associated with relocation;
and
... a bonus of $202,000, subject to tax gross-up, upon the sale of Mr. Mavis's
existing home and purchase by Mr. Mavis of a new home in the St. Petersburg
area.
Mr. Berg's employment agreement is dated July 26, 2001 and provides for an
annual base salary of not less than $250,000. In addition to the above, Mr.
Berg's employment agreement also provides for the payment to Mr. Berg of:
... a signing bonus of $50,000; and
... relocation benefits under our standard relocation plan.
Mr. Merriman's, Mr. Mavis's and Mr. Berg's employment agreements are terminable
by either party, without cause, upon 60 days' written notice. Mr. Wolfinger's
employment agreement expires on August 15, 2003 and is otherwise terminable by
either party, without cause, on 30 days' written notice.
In the event that any of Mr. Merriman's, Mr. Wolfinger's, Mr. Mavis's or Mr.
Berg's employment agreement is terminated other than by us for cause or by
reason of the relevant executive's death, we must provide the relevant executive
with:
. a termination payment, in an amount equal to twice the executive's
base salary, payable in installments over a twelve month period
(except that if Mr. Mavis's or Mr. Berg's employment is terminated
within the first year of his employment, we must pay them a sum equal
to their base salary);
. a proportionate amount of any performance bonus that would have been
payable to the relevant executive for the fiscal year in which
termination occurs;
. medical, hospitalization, life and other insurance benefits for the
relevant executive and his family for up to two years after the
termination date;
. immediate vesting of stock options with a two year exercise period
(or, in the case of Mr. Wolfinger, a three year
19
exercise period); and
. other vested benefits payable to the relevant executive under the
terms of any deferred compensation, retirement, incentive or other
benefit plan.
Mr. Merriman has advised us that he plans to retire from his position as an
executive of Danka by July 1, 2002. Mr. Merriman's employment agreement provides
that in the event that he gives us notice that he will terminate his employment
on July 1, 2002, he will be entitled to the termination benefits described
above.
Each of Mr. Merriman's, Mr. Berg's, Mr. Mavis's and Mr. Wolfinger's employment
agreements require the relevant executive to comply with worldwide non-compete
and confidentiality provisions for two years following termination of
employment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table provides a summary of all equity compensation plans and
individual compensation arrangements (whether with employees or non-employees,
such as directors, consultants, advisors, vendors, customers, suppliers and
lenders), in effect as of March 31, 2002.
(c)
Number of securities
remaining available for
(a) (b) future issuance under
Number of securities to be Weighted average exercise equity compensation plans
issued upon exercise of price of outstanding (excluding securities
outstanding options, options, warrants and rights reflected in column (a)
Plan category warrants and rights
-----------------------------------------------------------------------------------------
Equity compensation plans 7,230,219 $ 5.77 11,526,809
approved by security holders
Equity compensation plans not __ __ __
approved by security holders
Total 7,230,219 $ 5.77 11,526,809
Note: All figures for numbers of securities in the table are for American
depositary shares.
Security Ownership of Management and Others
The following table sets forth, as of May 15, 2002, information as to the
beneficial ownership of our ordinary shares by:
. each person known to us as having beneficial ownership of more than
five percent (5%) of our equity securities;
. each director;
. each "named executive officer" as defined in Item 402(a)(3) of
Regulation S-K under the Securities Exchange Act of 1934; and
. all of our directors and executive officers as a group.
20
Shares Beneficially Owned as of May 15, 2002 (2)
---------------------------------------------------------
Number of ADS
Name of Beneficial Owner (1) Ordinary Shares (8) Equivalent Percent (8)
- ---------------------------------------------------------- ---------------------- -------------------- ------------
Holdings of greater than 5 percent
Cypress Associates II LLC (3) 75,140,416 18,785,104 23.2%
Holdings by Directors, Named Executive Officers and
all Directors and Executive Officers as a Group
Kevin C. Daly - - *
Michael B. Gifford 16,000 4,000 *
Richard M. Haddrill - - *
Christopher B. Harned - - *
Richard F. Levy 80,000 20,000
W. Andrew McKenna - - *
J. Ernest Riddle 20,000 5,000 *
James L. Singleton (4) 75,180,416 18,795,104 23.3%
C. Anthony Wainwright 4,375 17,500 *
P. Lang Lowrey III (5) 1,402,933 350,733 *
Brian L. Merriman (6) 3,629,388 907,347 1.4%
F. Mark Wolfinger (7) 2,339,943 584,986 *
Todd L. Mavis 40,000 10,000 *
David P. Berg 9,155 36,620 *
All directors and executive officers
as a group (22 persons) 83,753,012 20,938,253 25.3%
(*) Represents less than one percent (1%) of the share capital.
(1) Except for Messrs. Wolfinger, Mavis, and Berg, all of the listed
individuals are currently directors. Messrs. Lowrey, Merriman, Wolfinger,
Mavis and Berg are executive officers.
(2) Except as otherwise indicated, all ordinary shares of American depositary
shares are held of record with sole voting and investment power.
(3) Consists of:
. 222,103 convertible participating shares which are convertible into
71,415,664 ordinary shares, beneficially owned by Cypress Merchant
Banking Partners II L.P.;
. 9,442 convertible participating shares which are convertible into
3,036,008 ordinary shares, beneficially owned by Cypress Merchant
Banking II C.V.; and
. 2,142 convertible participating shares which are convertible into
688,744 ordinary shares, beneficially owned by 55th Street Partners II
L.P.
Cypress Associates II LLC, as well as James A. Stern, Jeffrey P. Hughes,
James L. Singleton and David P. Spalding (each a "Managing Member" of
Cypress Associates II LLC), may be deemed to beneficially own these shares.
However, Cypress Associates II LLC and each Managing Member disclaims
beneficial ownership. The share and percentage ownership figures are
calculated at the conversion rate as of May 15, 2002 of 321.543 ordinary
shares for each convertible participating share. The principal business and
office address of Cypress Associates II LLC and the Managing Members is 65
East 55th Street, New York, NY 10022.
(4) Includes 75,140,416 ordinary shares beneficially owned by affiliates of
Cypress Associates II LLC. Mr. Singleton is Vice Chairman of The Cypress
Group LLC. See note 3 above. Mr. Singleton disclaims beneficial ownership
of such shares.
(5) Includes options held by Mr. Lowrey to purchase 333,333 American depositary
shares, equivalent to 1,333,332 ordinary shares, all of which are currently
exercisable.
(6) Includes options held by Mr. Merriman to purchase 750,000 American
depositary shares, equivalent to 3,000,000 ordinary shares, all of which
are currently exercisable. Also includes an entitlement to receive 128,514
American depositary shares, equivalent to 514,056 ordinary shares, on May
8, 2002. These securities had not been issued to Mr. Merriman as of May 15,
2002, due to United Kingdom regulatory reasons.
(7) Includes options held by Mr. Wolfinger to purchase 570,000 American
depositary shares, equivalent to 2,280,000 ordinary shares, all of which
are currently exercisable.
(8) At May 15, 2002 a total of 248,084,622 ordinary shares were outstanding.
Pursuant to the rules of the Securities and Exchange Commission, ordinary
shares or American depositary shares that a person has a right to acquire
within 60 days of the date hereof pursuant to the exercise of stock options
or the conversion of our convertible participating shares are deemed
21
to be outstanding for the purpose of computing the percentage ownership of
such person but are not deemed to be outstanding for the purpose of
computing the percentage ownership of any other person.
On May 15, 2002, The Bank of New York, as depositary for our American depositary
share program, held 219,673,036 ordinary shares representing approximately 88.5%
of the ordinary shares in issue.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information briefly describes certain relationships and
transactions between affiliated parties and us. Our management believes that
these relationships and transactions have been established on terms no less
favorable to us than the terms that could have been obtained from unaffiliated
parties. These relationships and transactions have been approved by a majority
of our independent outside directors and, since its creation, our audit
committee.
Future relationships and transactions, if any, with affiliated parties will be
approved by a majority of our independent outside directors and our audit
committee and will be on terms no less favorable to us than those that could be
obtained from unaffiliated parties.
Richard F. Levy, a member of the board of directors, was a partner at the
international law firm of Altheimer & Gray from May 1996 to March 2002.
Altheimer & Gray has served as one of our outside counsel during fiscal years
1998 through 2003.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following financial statements of the registrant included in Part
II, item 8, of this report are incorporated herein by reference as described
in item 8:
Exhibit No. Description
- ----------- -----------
13
Consolidated Statements of Operations--years ended March 31,
2002, 2001 and 2000
Consolidated Balance Sheets--March 31, 2002
and 2001 Consolidated Statements of Cash
Flows--years ended March 31,
2002, 2001 and 2000
Consolidated Statements of Shareholders'
Equity (Deficit)-- years ended March 31,
2002, 2001 and 2000
Notes to the Consolidated Financial Statements--years ended
March 31, 2002, 2001 and 2000
Independent Auditors' Report
22
2. The following financial statement schedules of the registrant are included in
item 14(d):
Exhibit No. Description
- ----------- -----------
23
Independent Auditors' Report
II--Valuation and Qualifying Accounts
All other schedules are omitted because the
required information is not present in
amounts sufficient to require submission of
the schedule, the information required is
included in the financial statements and
notes thereto or the schedule is not
required or inapplicable under the related
instructions.
3. Exhibit index:
Exhibit
Number Description of Document
------- -----------------------
2.1* Asset Purchase Agreement dated April 9, 2001 among Danka Business
Systems PLC and Pitney Bowes, Inc. (incorporated by reference to
Exhibit 10.33 to the Company's Current Report on Form 8-K filed on May
1, 2001).
3.1* Memorandum of Association of the Company. (Exhibit 3.1 of Company's
Registration Statement on Form 20-F, No. 0-20828, filed on November
10, 1992.)
3.2* Articles of Association of the Company. (Exhibit 4.2 to the Company's
Form 10-Q September 30, 200, filed on November 14, 2001.)
4.1* Memorandum of Association of the Company, including paragraphs 5 and
6. (Exhibit 2.1 to the 1992 Registration Statement on Form 20-F, No.
0-020828, filed November 10, 1992.)
4.2* Articles of Association of the Company, including sections relating to
Shares, Variation of Rights and Votes of Members. (Exhibit 4.2 to the
Company's Form 10-Q September 30, 2001, filed on November 14, 2001.)
4.3* Form of Ordinary Share certificate. (Exhibit 4.3 of Company's
Registration Statement on Form S-1, No. 33-68278, filed on October 8,
1993.)
4.4* Form of American Depositary Receipt. (Exhibit 4.4 to the Registration
Statement on Form S-1, No. 33-68278, filed on October 8, 1993.)
4.5* Deposit Agreement dated June 25, 1992, Amendment No. 1 dated February
26, 1993 and Amendment No. 2 dated July 2, 1993 (Exhibit 4.9 to the
Registration Statement on Form S-1, No. 33-68278, filed on October 8,
1993) and Amendment No. 3 dated August 16, 1994 between The Bank of
New York, Company and Owners and Holders of American Depositary
Receipts.
4.6* Credit Agreement dated December 5, 1996, by and among Danka Business
Systems PLC, Dankalux Sarl & Co. SCA, Danka Holding Company, the
several financial institutions from time to time a party and
NationsBank, N.A., as agent. (Exhibit 4 to the Company's Form 8-K
dated December 16, 1996.)
4.7* First Amendment to Credit Agreement dated December 5, 1997 among Danka
Business Systems PLC, Dankalux Sarl & Co., SCA, and Danka Holding
Company, Nationsbank, National Association, each other Bank signatory
thereto and Nationsbank, National Association, as agent. (Exhibit 4.9
to the Company's Form 10-Q dated February 12, 1998.)
4.8* Second Amendment to Credit Agreement dated July 28, 1998 among Danka
Business Systems PLC, Dankalux Sarl & Co., SCA, and Danka Holding
Company, Nationsbank, National Association, each other Bank signatory
thereto and Nationsbank, National Association, as agent. (Exhibit 4.10
to the Company's Form 8-K dated July 28, 1998.)
23
Exhibit
Number Description of Document
------- -----------------------
4.9* Waiver dated October 20, 1998, of certain financial covenants
contained in the Credit Agreement among Danka Business Systems
PLC, Dankalux Sarl & Co., SCA and Danka Holding Company,
NationsBank, N.A., each other Bank signatory to the Credit
Agreement and NationsBank, N.A., as agent. (Exhibit 4.11 to the
Company's Form 8-K dated October 21, 1998.)
4.10* Waiver dated February 26, 1998, of certain financial covenants
contained in the Credit Agreement among Danka Business Systems
PLC, Dankalux Sarl & Co., SCA and Danka Holding Company,
NationsBank, N.A., each other Bank signatory to the Credit
Agreement and NationsBank, N.A., as agent. (Exhibit 4.12 to the
Company's Form 8-K dated March 5, 1999.)
4.11* Fifth Amendment to Credit Agreement dated June 15, 1999 among
Danka Business Systems PLC, Dankalux Sarl & Co., SCA, and Danka
Holding Company, NationsBank, National Association, each other
Bank signatory thereto and NationsBank, National Association, as
agent. (Exhibit 4.16 to the Company's Form 8-K dated July 15,
1999.)
4.12* Sixth Amendment to Credit Agreement dated July 9, 1999 among Danka
Business Systems PLC, Dankalux Sarl & Co., SCA, and Danka Holding
Company, NationsBank, National Association, each other Bank
signatory thereto and NationsBank, National Association, as agent.
(Exhibit 4.17 to the Company's Form 8-K dated July 15, 1999.)
4.13* Seventh Amendment to Credit Agreement dated December 1, 1999 among
Danka Business Systems PLC, Dankalux Sarl & Co., SCA, and Danka
Holding Company, NationsBank, National Association, each other
Bank signatory thereto and NationsBank, National Association, as
agent. (Exhibit 4.18 to the Company's Form 10-Q for the quarter
ended December 31, 1999 and filed February 11, 2000.)
4.14* Registration Rights Agreement dated December 17, 1999, among Danka
Business Systems PLC, Cypress Merchant Banking Partners II L.P., a
Delaware limited partnership, Cypress Merchant Banking II C.V., a
limited partnership organized and existing under the laws of The
Netherlands, and 55th Street Partners II L.P., a Delaware limited
partnership. (Exhibit 99.3 to the Company's Form 8-K dated
December 17, 1999.)
4.15* Eighth Amendment to Credit Agreement dated March 24, 2000 among
Danka Business Systems PLC, Dankalux Sarl & Co., SCA, and Danka
Holding Company, NationsBank, National Association, each other
Bank signatory thereto and NationsBank, National Association, as
agent. (Exhibit 4.22 to Company's Form 10-K dated June 6, 2000.)
4.16* Ninth Amendment to Credit Agreement dated October 31, 2000 among
Danka Business Systems PLC, Dankalux Sarl & Co., SCA and Danka
Holding Company, Bank of America, N.A., each other Bank signatory
to the Credit Agreement and Bank of America, N.A., as agent.
(Exhibit 4.23 to Company's Form 10-Q for the quarter ended
September 30, 2000.)
4.17* Tenth Amendment to Credit Agreement dated December 15, 2000 among
Danka Business Systems PLC, Dankalux Sarl & Co., SCA and Danka
Holding Company, Bank of America, N.A., each other Bank signatory
to the Credit Agreement and Bank of America, N.A., as agent.
(Exhibit 4.25 to Company's Form 8-K dated January 12, 2001.)
4.18* Eleventh Amendment to Credit Agreement dated March 28, 2001 among
Danka Business Systems PLC, Dankalux Sarl & Co., SCA and Danka
Holding Company, Bank of America, N.A., each other Bank signatory
to the Credit Agreement and Bank of America, N.A., as agent.
(Exhibit 4.26 to Company's Form 8-K dated April 9, 2001.)
4.19* Twelfth Amendment to Credit Agreement dated June 6, 2001 among
Danka Business Systems PLC, Dankalux Sarl & Co., SCA and Danka
Holding Company, Bank of America, N.A., each other Bank signatory
to the Credit Agreement and Bank of America, N.A., as agent.
(Exhibit 4.25 to Company's Form 8-K dated June 11, 2001.)
4.20* Indenture between Danka Business Systems PLC and HSBC Bank USA for
the zero coupon senior subordinated notes due April 1, 2004.
(Exhibit 4.24 to Amendment No. 6 to the Company's Registration
Statement on Form S-4 filed June 27, 2001.)
24
Exhibit
Number Description of Document
------- -----------------------
4.21* Indenture between Danka Business Systems PLC and HSBC Bank USA for
the 10% subordinated notes due April 1, 2008. (Exhibit 4.25 to
Amendment No. 6 to the Company's Registration Statement on Form
S-4 filed June 27, 2001.)
4.22* Note Depositary Agreement between Danka Business Systems PLC and
HSBC Bank USA regarding the zero coupon senior subordinated notes
due April 1, 2004. (Exhibit 4.27 to Amendment No. 5 to the
4.23* Company's Registration Statement on Form S-4 filed June 22, 2001.)
Note Depositary Agreement between Danka Business Systems PLC and
HSBC Bank USA regarding the 10% subordinated notes due April 1,
2008. (Exhibit 4.28 to Amendment No. 5 to the Company's
Registration Statement on Form S-4 filed June 22, 2001.)
4.24* Amended and Restated Credit Agreement dated June 29, 2001, by and
among Danka Business Systems PLC, Dankalux Sarl & Co. SCA, Danka
Holding Company, the secured financial institutions from time to
time a party and Bank of America, N.A., as agent (Exhibit 4.26 to
the Company's Form 8-K dated July 16, 2001).
4.25* First Amendment to Amended and Restated Credit Agreement dated
March 29, 2002 by and among Danka Business Systems PLC, Dankalux
Sarl & Co. SCA, Danka Holding Company, the secured financial
institutions from time to time a party and Bank of America, N.A.,
or agent.
10.1* Office Building Lease dated May 1, 1992 between Daniel M. Doyle
and Francis J. McPeak, Jr., and Gulf Coast Business Machines.
(Exhibit 3.5 to the 1993 Form 20-F.)
10.2* Office Building Lease dated April 1, 1990 between Daniel M. Doyle
and Francis J. McPeak, Jr., and Danka. (Exhibit 3.6 to the 1993
Form 20-F.)
10.3* Lease Agreement dated December 22, 1986, and Addendum Lease
Agreement dated March 1, 1987, between Daniel M. Doyle and Francis
J. McPeak and Danka. (Exhibit 3.7 to the 1993 Form 20-F.)
10.4* U.K. Executive Share Option Scheme. (Exhibit 3.11 to the 1993 Form
20-F.)
10.5* U.S. Executive Incentive Stock Option Plan. (Exhibit 3.12 to the
1993 Form 20-F.)
10.6* Form of Stock Option Agreement. (Exhibit 3.13 to the 1993 Form
20-F.)
10.7* Addendum to Lease Agreement dated September 1, 1992, between
Mid-County Investments, Inc. and Danka. (Exhibit 3.38 to the 1993
Form 20-F.)
10.8* Lease Agreement dated November 12, 1992 and Lease Commencement
Agreement dated April 7, 1993 between PARD, Inc. and Danka.
(Exhibit 10.41 to the 1993 Form 20-F.)
10.9* Danka Business Systems PLC 1994 Executive Performance Plan.
(Exhibit 10.52 to the 1994 Form 10-K.)
10.10* The Danka 1996 Share Option Plan filed as Appendix 1 of the 1996
Annual Proxy Statement and approved by shareholders under
Resolution 10.
10.11* Amendments to the Danka 1996 Share Option Plan filed as Appendix A
of the 1998 Annual Proxy Statement and approved by shareholders
under Resolution 9.
10.12* The Danka 1999 Share Option Plan filed as Appendix B of the 1999
Annual Proxy Statement and approved by shareholders under
Resolution 12.
10.13* Employment Agreement dated March 1, 2001 between Danka and P. Lang
Lowrey III. (Exhibit 10.16 to Amendment No. 2 to the Company's
Registration Statement on Form S-4 filed May 16, 2001.)
25
Exhibit
Number Description of Document
- ------ -----------------------
10.14* Change of Control Agreement dated March 1, 2001 between Danka and P.
Lang Lowrey III. (Exhibit 10.17 to Amendment No. 2 to the Company's
Registration Statement on Form S-4 filed May 16, 2001.)
10.15* Agreement dated November 20, 2000 between Danka and Michael Gifford.
(Exhibit 10.18 to Amendment No. 1 to the Company's Registration
Statement on Form S-4 filed April 17, 2001.)
10.16* Employment Agreement dated March 1, 2001 between Danka and Michael
Gifford. (Exhibit 10.19 to Amendment No. 2 to the Company's
Registration Statement on Form S-4 filed May 16, 2001.)
10.17* Amended and Restated Employment Agreement dated September, 1999
between Danka and Brian L. Merriman. (Exhibit 10.14 to Company's
Form 10-Q for the quarter ended September 30, 1999.)
10.18* Amendments dated May 30, 2000 to the Amended and Restated
Employment Agreement dated September 20, 1999 between Danka and
Brian L. Merriman. (Exhibit 10.37 to Company's Form 10-Q for the
quarter ended June 30, 2000.)
10.19* Change of Control Agreement dated November 6, 1998 between Danka and
Brian L. Merriman. (Exhibit 10.11 to Company's Form 10-Q for the
quarter ended June 30, 1999.)
10.20* Amended and Restated Employment Agreement dated July, 2000 between
Danka and F. Mark Wolfinger. (Exhibit 4.24 to Company's Form 10-Q
for the quarter ended September 30, 2000.)
10.21* Change of Control Agreement dated November 6, 1998 between Danka and
F. Mark Wolfinger. (Exhibit 10.12 to Company's Form 10-Q for the
quarter ended June 30, 1999.)
10.22* Amended and Restated Global Operating Agreement dated March 31, 2000
between Danka and General Electric Capital Corporation. (Exhibit
10.31 to Amendment No. 2 to the Company's Registration Statement on
Form S-4 filed May 16, 2001.)
10.23* First Amendment to Amended and Restated Global Operating Agreement
dated February 1, 2001 between Danka and General Electric Capital
Corporation. (Exhibit 10.32 to Amendment No. 1 to the Company's
Registration Statement on Form S-4 filed April 17, 2001.)
10.24* Purchase Agreement dated April 9, 2001 between Danka and Pitney
Bowes Inc. (Exhibit 10.33 to the Company's Form 8-K dated May 1,
2001.)
10.25* Change of Control Agreement dated February 13, 2001 between Danka
and Ernest R. Miller. (Exhibit 10.34 to the Company's Annual Report
on Form 10-K for the year ended March 31, 2001.)
10.26* Severance Agreement dated January 14, 2000 between Danka and Ernest
R. Miller. (Exhibit 10.35 to the Company's Annual Report on Form
10-K for the year ended March 31, 2001.)
10.27* Second Amendment to Amended and Restated Global Operating
Agreement dated October 9, 2001 between Danka and General Electric
Capital Corporation. (Exhibit 10.36 to the Company's Form 10-Q
September 30, 2001 dated November 14, 2001.)
10.28* Amended and Restated Employment Agreement dated November 6, 2001
between Danka Office Imaging Company, Danka Business Systems PLC,
Danka Holding Company and Brian L. Merriman (Exhibit 10.37 to the
Company's Form 10-Q December 31, 2001 dated February 13, 2001.)
10.29* Employment Agreement dated July 26, 2001 among Danka Office
Imaging Company, Danka Business Systems PLC, Danka Holding Company
and Todd L. Mavis (Exhibit 10.38 to the Company's Form 10-Q for
the quarter ended December 31, 2001 dated February 13, 2001.)
10.30* Employment Agreement dated July 23, 2001 among Danka Business
Systems PLC and Peter Williams (Exhibit 10.39 to the Company's Form
10-Q for the quarter ended December 31, 2001 dated February 13,
2001.)
26
Exhibit
Number Description of Document
- ------ -----------------------
10.31* Employment Agreement dated July 26, 2001 among Danka Office
Imaging Company, Danka Business Systems PLC, Danka Holding Company
and David P. Berg (Exhibit 10.40 to the Company's Form 10-Q
December 31, 2001 dated February 13, 2001.)
10.32* Amendments to the Danka 1999 Share Option Plan filed as Exhibit A to
the 2001 Annual Proxy Statement.
10.33* The Danka 2001 Long Term Incentive Plan filed as Exhibit B to the
2001 Annual Proxy Statement.
10.34* The Danka Employee Stock Purchase Plan filed as the Exhibit to the
Proxy Statement filed on February 27, 2002.
10.35 Third Amendment to Amended and Restated Global Operating Agreement
dated January 9, 2002 between Danka and General Electric Capital
Corporation.
10.36 Amendment to Employment Agreement dated March 18, 2002 between Danka
Office Imaging Company, Danka Business Systems PLC, Danka Holding
Company and Todd L. Mavis.
10.37 Change of Control Agreement dated November _, 2001 between Danka and
David P. Berg.
10.38 Change of Control Agreement dated November _, 2001 between Danka and
Todd L. Mavis.
13 Annual Report to Shareholders of the Company for the year ended
March 31, 2001. The portions of the Company's Annual Report to
Shareholders incorporated by reference into this Report are
included herein as exhibits.
21* List of Current Subsidiaries of the Company.
23 Consent of Independent Accountants.
* Document has heretofore been filed with the Commission and is incorporated by
reference and made a part hereof.
(b) Reports on Form 8-K:
Form 8-K filed: None
(c) Exhibits:
The exhibits listed in Item 14(a)(3) to this report are filed with this
report.
(d) Financial Statement Schedules:
Independent Auditors' Report
II--Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of
the schedules, the information required is included in the financial
statements and notes thereto or the schedule is not required or
inapplicable under the related instructions.
27
INDEPENDENT AUDITORS' REPORT
To the Members of Danka Business Systems PLC
Under date of June 17, 2002, we reported on the consolidated balance sheets of
Danka Business Systems PLC and subsidiaries as of March 31, 2002 and 2001 and
the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
March 31, 2002, which are included in the 2002 annual report to shareholders.
These consolidated financial statements and our report thereon are incorporated
by reference in the annual report on Form 10-K for the year 2002. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule as listed in the
accompanying index. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
June 17, 2002
28
DANKA BUSINESS SYSTEMS PLC
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ---------------------------- -------------- --------------- --------------- -------------- --------------
Allowance for doubtful
Accounts:
Year ended March 31,
2000 $ 60,510 $ 7,359 - $ (26,270) (1) $ 41,599
Year ended March 31,
2001 41,599 9,857 - (8,335) (1) 43,121
Year ended March 31,
2002 $ 43,121 $ 17,271 $ (18,111) (1) $ 42,281
(1) Represents accounts written off during the year, net of recoveries.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: June 21, 2002 DANKA BUSINESS SYSTEMS PLC
(Registrant)
By: /s/ P. Lang Lowrey III
----------------------------
P. Lang Lowrey III, Chief Executive
Officer and Chairman
(Chief Executive Officer and
Chairman)
By: /s/ F. Mark Wolfinger
----------------------------
F. Mark Wolfinger, Executive Vice
President and Chief Financial Officer
(Chief Financial Officer and the
Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Company and in the
capacities indicated on June 21, 2002.
Signature Title
--------- -----
/s/ P. Lang Lowrey III Chief Executive Officer,
P. Lang Lowrey III Chairman and Director
(Principal Executive Officer)
/s/ Brian L. Merriman President and Chief Operating
Brian L. Merriman Officer and Director
/s/ Kevin C. Daly Director
-----------------
Kevin C. Daly
/s/ Michael B. Gifford Director
----------------------
Michael B. Gifford
/s/ Richard M. Haddrill Director
-----------------------
Richard M. Haddrill
/s/ Christopher B. Harned Director
-------------------------
Christopher B. Harned
/s/ Richard F. Levy Director
-------------------
Richard F. Levy
/s/ W. Andrew McKenna Director
---------------------
W. Andrew McKenna
/s/ J. Ernest Riddle Director
--------------------
J. Ernest Riddle
/s/ James L. Singleton Director
----------------------
James L. Singleton
/s/ C. Anthony Wainwright Director
-------------------------
C. Anthony Wainwright
/s/ F. Mark Wolfinger Chief Financial Officer
---------------------
F. Mark Wolfinger (Principal Financial Officer)
(Principal Accounting Officer)
30
EXHIBIT
DANKA BUSINESS SYSTEMS PLC
SELECTED CONSOLIDATED FINANCIAL DATA
For the years ended March 31
------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -----------------
------------------- ------------------- -----------------
Revenue:
Retail equipment sales $ 538,439 $ 614,107 $ 742,084
Retail service, supplies and rentals 937,790 1,062,007 1,366,475
Wholesale 78,947 97,128 105,469
- ----------------------------------------------------------------------- ------------------- ------------------- -----------------
Total revenue 1,555,176 1,773,242 2,214,028
- ----------------------------------------------------------------------- ------------------- ------------------- -----------------
Total Gross Profit 549,882 513,857 809,928
Operating earnings (loss) from continuing operations 9,255 (191,368) 92,909
Interest expense (42,298) (82,648) (104,201)
Interest income 5,768 3,172 3,958
Loss on sale of business - - (2,061)
- ----------------------------------------------------------------------- ------------------- ------------------- -----------------
Loss from continuing operations before income taxes (27,275) (270,844) (9,395)
Provision (benefit) for income taxes (17,407) (37,328) (5,860)
- ----------------------------------------------------------------------- ------------------- ------------------- -----------------
Earnings (loss) from continuing operations before extraordinary items (9,868) (233,516) (3,535)
Discontinued operations, net of tax 119,490 12,956 13,869
Extraordinary gain on early retirement of debt, net of tax 27,933 - -
- ----------------------------------------------------------------------- ------------------- ------------------- -----------------
Net earnings (loss) $ 137,555 $ (220,560) $ 10,334
======================================================================= =================== =================== =================
Basic earnings (loss), continuing operations available to common
shareholders per ADS: $ (0.43) $ (4.13) $ (0.14)
Diluted earnings (loss), continuing operations available to common
shareholders per ADS: $ (0.43) $ (4.13) $ (0.14)
Dividends per ADS - - -
Retail equipment gross profit margin 26.8% 15.6% 29.4%
Retail service, supplies and rentals gross profit margin 41.7% 37.8% 41.9%
Total gross profit margin 35.4% 29.0% 36.6%
Balance Sheet Data:
Accounts receivable, net $ 292,350 $ 346,398 $ 478,496
Inventory, net 130,599 199,523 326,966
Total assets 925,687 1,282,943 1,667,696
Long-term debt, less current maturities 268,161 201,731 715,406
Current maturities of long-term debt and notes payable 36,293 517,447 86,776
Redeemable convertible participating shares 240,520 223,713 207,878
Shareholders' equity (deficit) 48,049 (65,642) 176,714
------------------------------------------
1999 1998
------------------- --------------------
------------------- --------------------
Revenue:
Retail equipment sales $ 764,598 $ 993,882
Retail service, supplies and rentals 1,646,430 1,821,852
Wholesale 208,130 257,042
- ----------------------------------------------------------------------- ------------------- --------------------
Total revenue 2,619,158 3,072,776
- ----------------------------------------------------------------------- ------------------- --------------------
Total Gross Profit 814,903 1,112,261
Operating earnings (loss) from continuing operations (306,274) 132,699
Interest expense (77,456) (68,241)
Interest income 2,254 3,143
Loss on sale of business - -
- ----------------------------------------------------------------------- ------------------- --------------------
Loss from continuing operations before income taxes (381,476) 67,601
Provision (benefit) for income taxes (71,798) 24,955
- ----------------------------------------------------------------------- ------------------- --------------------
Earnings (loss) from continuing operations before extraordinary items (309,678) 42,646
Discontinued operations, net of tax 14,898 9,588
Extraordinary gain on early retirement of debt, net of tax - -
- ----------------------------------------------------------------------- ------------------- --------------------
Net earnings (loss) $ (294,780) 52,234
======================================================================= =================== ====================
Basic earnings (loss), continuing operations available to common
shareholders per ADS: $ (5.44) $ 0.75
Diluted earnings (loss), continuing operations available to common
shareholders per ADS: $ (5.44) $ 0.73
Dividends per ADS $ - $ 0.20
Retail equipment gross profit margin 18.6% 31.3%
Retail service, supplies and rentals gross profit margin 39.1% 41.3%
Total gross profit margin 31.1% 36.2%
Balance Sheet Data:
Accounts receivable, net $ 523,223 $ 582,590
Inventory, net 355,135 481,688
Total assets 1,905,142 2,178,941
Long-term debt, less current maturities 1,052,415 858,892
Current maturities of long-term debt and notes payable 89,732 84,490
Redeemable convertible participating shares - -
Shareholders' equity (deficit) 171,164 480,307
Note: Certain prior year amounts have been reclassified to conform with the
current year presentation.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
Management's discussion and analysis of results of operations and financial
condition ("MD&A") is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of Danka
Business Systems PLC's ("Danka" or the "Company") financial condition, changes
in financial condition and results of operations. The MD&A is organized as
follows:
Overview. This section provides a general description of our business, as well
as recent significant transactions that have occurred during fiscal year 2002
that we believe are important in understanding our results of operations, as
well as to anticipate future trends in those operations.
Results of operations. This section provides an analysis of our results of
operations for all three years presented in the accompanying consolidated
statement of operations. This analysis is presented on a consolidated basis. In
addition, a brief description is provided of transactions and events that impact
the comparability of the results being analyzed.
Exchange rates. This section provides an analysis of where we operate and the
impact which foreign exchange has on our operations.
Financial condition, liquidity and capital resources. This section provides an
analysis of the our cash flows, as well as a discussion of our outstanding debt
and commitments, both firm and contingent, existing as of March 31, 2002.
Included in the discussion of outstanding debt, is a discussion of the amount of
financial capacity available to fund our future commitments, as well as a
discussion of other financial arrangements.
Market risk management. This section discusses how we manage exposure to
potential loss arising from adverse changes in interest rates, foreign currency
exchange rates and changes in the market value of investments.
Critical accounting policies and estimates. This section discusses those
accounting policies that both are considered important to our financial
condition and results, and require significant judgement and estimates on the
part of management in their application. In addition, all of our significant
accounting policies, including the critical accounting policies, are summarized
in Note 1 to the accompanying consolidated financial statements.
Special note regarding forward-looking statements. This section discusses how
certain forward-looking statements made by us throughout the MD&A are based on
management's present expectations about future events and are inherently
susceptible to uncertainly and changes in circumstances.
OVERVIEW
Description of Business
We are one of the world's leading providers of office imaging equipment,
solutions and related services and supplies. We primarily market office imaging
equipment, solutions and related services, parts and supplies directly to
customers in 27 countries. Canon, Heidelberg/Nexpress, Ricoh and Toshiba
manufacture most of the products that we distribute. Throughout Europe, we also
market private label office imaging equipment and related supplies directly to
customers under our Infotec trademark and on a wholesale basis to independent
dealers.
On June 29, 2001 we completed a three part financial restructuring plan that
reduced and refinanced our indebtedness. The three parts of the plan were:
. the sale of our Danka Services International ("DSI") business,
. an exchange offer for our 6.75% convertible subordinated notes due
April 1, 2002, and
. the refinancing of our senior bank debt.
We sold DSI to Pitney Bowes for $290 million in cash, subject to adjustment
depending on the value of DSI's net assets on closing. The consideration has
been preliminarily adjusted downward by $2.8 million, which is the amount that
the value of DSI's net assets at closing of the sale were less than the
estimated valuation of $82.4 million. We anticipate that the adjustment
32
will be finalized in the first quarter of fiscal year 2003. We used the net
proceeds of DSI to repay part of our senior bank debt, to finance cash payable
under an exchange offer for our 6.75% subordinated notes due 2002, to finance
the cost of the exchange offer and to finance costs associated with the
refinancing of our senior bank debt.
We accepted tenders from holders of a total of $184.0 million in aggregate
principal amount (92%) of the 6.75% convertible subordinated notes pursuant to
the exchange offer for $24.0 million in cash and approximately $112.1 million in
new subordinated notes with extended maturities. We refinanced the remaining
balance of our senior bank debt through an amended and restated credit facility
with our existing senior bank lenders. The amended and restated credit facility
originally consisted of a $100.0 million revolver commitment, a $190.0 million
term loan and $30.0 million of letters of credit commitments.
Results of Operations
The following table sets forth for the periods indicated the percentage of total
revenue represented by certain items in our Consolidated Statements of
Operations:
Year ended March 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Revenue:
Retail equipment sales 34.6 % 34.6 % 33.5 %
Retail service, supplies and rentals 60.3 59.9 61.7
Wholesale 5.1 5.5 4.8
- ----------------------------------------------------- -------------- -------------- --------------
Total revenue 100.0 100.0 100.0
- ----------------------------------------------------- -------------- -------------- --------------
Cost of revenue 64.6 71.0 63.4
Gross profit 35.4 29.0 36.6
Selling, general and administrative expenses 34.2 36.2 31.7
Amortization of intangible assets 0.7 0.7 0.6
Write-off of goodwill and other long-lived assets - 1.4 -
Restructuring charges (credits) (0.1) 0.9 (0.2)
Other (income) expense - 0.6 0.5
- ----------------------------------------------------- -------------- -------------- --------------
Operating earnings (loss) from continuing operations 0.6 (10.8) 4.0
Interest expense (2.7) (4.7) (4.7)
Interest income 0.4 0.2 0.2
- ----------------------------------------------------- -------------- -------------- --------------
Earnings (loss) from continuing operations
before income taxes (1.7) (15.3) (0.5)
Provision (benefit) for income taxes (1.1) (2.1) (0.3)
- ----------------------------------------------------- -------------- -------------- --------------
Earnings (loss) from continuing operations
before extraordinary items (0.6) (13.2) (0.2)
===================================================== ============== ============== ==============
Note: Certain prior year amounts have been reclassified to conform with the
current year presentation.
33
The following table sets forth for the periods indicated the gross profit margin
percentage for each of our revenue classifications:
Year ended March 31,
--------------------------------------
2002 2001 2000
------------ ------------ ------------
Retail equipment sales 26.8 % 15.6 % 29.4 %
Retail service, supplies and rentals 41.7 37.8 41.9
Wholesale 18.5 16.7 17.7
Revenue
In fiscal year 2002, our revenue from continuing operations decreased by 12.3%
to $1.6 billion from $1.8 billion in fiscal year 2001. Our revenue for fiscal
year 2002 was affected by the negative impact of foreign currency movements,
which reduced revenue by approximately $21.7 million. Excluding that impact, our
total revenue decreased 11% during fiscal year 2002.
Our fiscal year 2002 retail equipment sales declined by 12.3% to $538.4 million
from $614.1 million in fiscal year 2001. After excluding the negative impact of
foreign currency movements of approximately $7.6 million, our fiscal year 2002
retail equipment sales decreased by 11.1%. The decline in our retail equipment
sales is primarily due to several factors:
. A weakening of global economic conditions which resulted in reduced
capital spending by customers.
. A reduction in the number of worldwide sales representatives as part
of our strategic plan to improve sales productivity, a focus on
generating higher margins and the industry's transition from analog to
digital.
Our retail service, supplies and rentals revenue declined by 11.7% to $937.8
million in fiscal year 2002 from $1,062.0 million in fiscal year 2001. After
excluding the negative impact of foreign currency movements of approximately
$12.2 million, our fiscal year 2002 retail service, supplies and rentals revenue
declined by 10.5%. The decline in our retail service, supplies and rentals
revenue is primarily a result of our selling a reduced number of machines as we
transition away from analog office imaging machines to digital machines. Digital
photocopiers generally have greater capacity and are increasingly more reliable
than analog machines. Therefore, our overall installed machine base may likely
decline, resulting in a decline in our service revenues.
We believe that our retail equipment sales and retail service, supplies and
rentals revenue may continue to be negatively impacted in future financial
periods by our declining installed machine base and pricing pressures in our
industry. We have substantially exited the analog business and are working to
position ourselves as a preeminent provider of digital equipment, services and
solutions to our customers. We are also actively taking steps to develop and
grow other areas of our business. For example, in April 2002, we introduced our
Danka @ the Desktop program, which is designed to assist customers with their
document workflow and printing processes so they can increase productivity and
lower overall document production costs. We have created relationships with
numerous third party software and hardware providers in connection with Danka @
the Desktop, including: NPS, ESI, Alto Imaging and Canon. We install and
customize software obtained from these providers to suit particular customers'
needs. We also sell hardware and software products manufactured by these
providers which are designed to enhance our customers' document management
process. We have also introduced our multi-vendor services initiative to
leverage our existing Technical Services group and expand the types of technical
services and maintenance we provide for our customers to include other types of
digitally connected devices and equipment installed by other vendors.
Our fiscal year 2002 wholesale revenue declined 18.7% to $78.9 million from
$97.1 million in fiscal year 2001. This was primarily due to the competitive
market, the worldwide economic downturn and the negative impact of foreign
currency movements which reduced fiscal year 2002 wholesale revenue by
approximately $1.9 million.
In fiscal year 2001, our revenue from continuing operations decreased 19.9% to
$1.8 billion compared to $2.2 billion in fiscal year 2000. Our revenue from
continuing operations for fiscal year 2001 was affected by the negative impact
of foreign currency movements, which reduced revenue by approximately $77.2
million. Also, our results for fiscal year 2000 included $35.7 million of
revenue from our Omnifax business, which we sold effective July 30, 1999.
Excluding the above items, our total revenue from continuing operations declined
by 14.8% during fiscal year 2001.
Our fiscal year 2001 retail equipment sales declined 17.3% to $614.1 million
from $742.1 million in fiscal year 2000. After excluding the negative impact of
foreign currency movements of approximately $26.0 million, and the sale of our
Omnifax business which contributed $7.7 million to fiscal year 2000 retail
equipment sales, our fiscal year 2001 retail equipment sales were down 12.8%.
The decline is due to factors similar to those in fiscal 2002 described above.
34
Our retail service, supplies and rentals revenue declined 22.3% to $1.1 billion
in fiscal year 2001 from $1.4 billion in fiscal year 2000. After excluding the
negative impact of foreign currency movements of approximately $39.3 million,
our fiscal year 2001 retail service, supplies and rentals revenue declined
19.4%. The decline was primarily due to factors similar to those in fiscal 2002
described above.
Our fiscal year 2001 wholesale revenue declined 7.9% to $97.1 million from
$105.5 million in fiscal year 2000. This was primarily due to the negative
impact of foreign currency movements, which reduced fiscal year 2001 wholesale
revenue by approximately $11.8 million.
Approximately 44.0% and 42.5% of our revenues in fiscal years 2002 and 2001,
respectively were generated in countries outside of the United States. As a
result of foreign currency fluctuations, our revenue for the fiscal years 2002
and 2001 was negatively impacted by approximately $21.7 million and $77.2
million, respectively.
Gross profit
For fiscal year 2002 our gross profit increased 7.0% to $549.9 million from
$513.9 million in fiscal year 2001. Our gross profit as a percentage of total
revenue increased to 35.4% in fiscal year 2002 from 29.0% in fiscal year 2001.
The primary reason for the increase in our combined gross profit margin was an
$86.8 million write-off of excess, obsolete and non-recoverable equipment, parts
and accessories in fiscal year 2001, which was a result of the office imaging
industry's rapid transition to digital products. The write-off was included in
fiscal year 2001's cost of retail equipment sales ($62.6 million) and retail
service, supplies and rental costs ($24.2 million).
Retail equipment margins increased to 26.8% for fiscal year 2002 from 25.8% for
fiscal year 2001, excluding the $62.6 million charge discussed above. Retail
service, supplies and rental margins increased to 41.7% in fiscal year 2002 from
40.1% in fiscal year 2001, excluding the $24.2 million charge discussed above.
Wholesale margins increased to 18.5% in fiscal year 2002 from 16.7% in fiscal
year 2001.
For fiscal year 2001 our gross profit declined 36.6% to $513.9 million from
$809.9 million in fiscal year 2000. Our gross profit as a percentage of total
revenue decreased to 29.0% in fiscal year 2001 from 36.6% in fiscal year 2000.
This decrease was primary due to:
. Increased competition and pricing pressures in the United States and
Europe.
. The $86.8 million write-off of excess, obsolete and non-recoverable
equipment, parts and accessories caused by the photocopier industry's
rapid transition to digital products discussed above.
Our gross profit as a percentage of retail equipment sales decreased to 25.8%
for fiscal year 2001, excluding the $62.6 million charge discussed above, from
29.4% for fiscal year 2000 primarily due to the competitive pressures in our
industry. Certain of our major competitors experienced financial difficulties
similar to our own. They responded by reducing prices on some products to
increase market share or by disposing of surplus inventory. Consequently, we
were required to reduce prices on some of our products to remain competitive.
Our gross profit margin on retail service, supplies and rentals decreased to
40.1% in fiscal year 2001, excluding the $24.2 million charge discussed above,
from 41.9% in fiscal year 2000 and was primarily due to the transition from
analog to digital office imaging equipment.
Our gross profit margin on wholesale sales declined to 16.7% in fiscal year 2001
from 17.7% in fiscal year 2000. Excluding the Omnifax business sold in July
1999, the gross profit margin on wholesale sales for fiscal year 2001 was
relatively flat compared to fiscal year 2000.
Selling, general and administrative expenses
Our selling, general and administrative expenses declined 17.2% to $531.3
million in fiscal year 2002 from $641.5 million in fiscal year 2001, while as a
percentage of total revenue, SG&A expenses decreased to 34.2% from 36.2%.
Excluding a charge of $8.0 million related to the exit of certain facilities in
the current year and $28.6 million relating to charges for facilities and
receivables in the prior year, SG&A declined to 33.6% from 34.6% of total
revenue, respectively. The reduction was primarily attributable to lower selling
expenses resulting from reduced sales and a decrease in our work force partially
offset by an increase in our bad debt expense, software write-offs and executive
contract termination charges.
Our selling, general and administrative expenses declined 8.7% to $641.5 million
in fiscal year 2001 from $702.3 million in fiscal year 2000. This decrease was
due in part to lower employment costs achieved through our restructuring
initiatives implemented
35
in the third quarter of fiscal year 2001 and the sale of our Omnifax business in
July 1999. As a percentage of revenue, selling, general and administrative
expenses increased to 36.2% for fiscal year 2001 compared to 31.7% in fiscal
year 2000. The increase was primarily due to the decline in our total revenue
during fiscal year 2001 and the charges taken in fiscal 2001 for facilities and
receivables described above.
Amortization of intangible assets and write-off of goodwill and other long-
lived assets
Amortization of intangible assets totaled $11.2 million, $12.8 million and $14.0
million, respectively, for fiscal years 2002, 2001 and 2000. The continuing
decrease from fiscal year 2000 to fiscal year 2002 was principally related to
the write- off of goodwill in fiscal year 2001. We continually evaluate our
goodwill and other long-lived assets for recoverability. In the third quarter of
fiscal year 2001 we wrote off $18.7 million of goodwill attributable to our
Australian subsidiary. In the fourth quarter of fiscal year 2001, we wrote off
$6.9 million of goodwill related to one of our United States subsidiaries. These
write-offs of goodwill were necessary since our forecasted future cash flows
from these subsidiaries' operations were insufficient to recover the amount of
goodwill recorded.
Restructuring charges (credits)
We recorded a pre-tax restructuring charge of $11.0 million in fiscal year 2002,
which included a $4.9 million charge for severance and a $6.1 million charge for
the exit of facilities. The hiring of a new Chief Executive Officer in March of
2001 was the first in a series of changes to our senior management team. Upon
completion of the financial restructuring plan at the end of the first quarter
of fiscal year 2002, we made additional significant changes to our senior
management team, including the hiring of new Chief Operating Officers for Danka
Europe, Danka International and Danka U.S. Our new management team reviewed the
existing restructuring plan and as a result of changing business conditions in
the U.S. and Europe and revisions to our business strategies, we decided to
modify our 2001 and 2002 restructuring plans. Additionally, higher than
anticipated employee attrition reduced cash outlay requirements for severance.
As a result of these actions and evaluations, we reversed $13.0 million of
fiscal year 2001 severance and facility restructuring reserves in fiscal year
2002
We recorded a $27.5 million pre-tax restructuring charge during the third
quarter of fiscal year 2001, which related principally to our plan to bring our
cost structure into line with our revenue and margin expectations. The fiscal
year 2001 restructuring charge was reduced by $11.8 million in reversals of
restructuring charges incurred in prior periods, resulting in a net charge of
$15.7 million. Of the total amount reversed, $10.4 million related to our fiscal
year 1999 restructuring plan and $1.4 million related to our fiscal year 2001
restructuring plan. The reversals resulted from favorable lease settlements and
revised estimates of amounts required to settle remaining lease obligations.
We reversed $4.1 million of 1999 restructuring charges in fiscal year 2000,
which is included as a credit to restructuring charges. Of the total amount
reversed, $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.
Other income and other expense
Other expense decreased to $0.1 million in fiscal year 2002 from $9.6 million in
fiscal year 2001. This change is due to a $3.0 million foreign exchange gain in
fiscal year 2002 versus a $9.6 million foreign exchange loss in fiscal year
2001, a $2.4 million charge in the current year associated with our decision to
exit from certain non-strategic businesses and $0.7 million of charges for the
impairment of certain assets.
Other expense increased to $9.6 million in fiscal year 2001 from $4.9 million in
fiscal year 2000. This increase was due to a $9.0 million increase in foreign
exchange losses because of the weakening of the Euro and the United Kingdom
pound against the dollar.
In fiscal year 2000 we settled a lawsuit brought against us by Wasserstein
Perella, our former financial advisers, for $4.3 million which is included in
other expense.
36
Operating earnings (loss) from continuing operations
Operating earnings from continuing operations increased to $9.3 million in
fiscal year 2002 compared to an operating loss from continuing operations of
$191.4 million in fiscal year 2001. Earnings in the current year included a $8.0
million charge associated with the consolidation and exiting of certain
facilities and a $2.0 million net credit for restructuring reserves. Earnings
for the comparable prior year included a $15.7 million restructuring charge, a
$86.8 million write-down for analog inventory and rental equipment and a $25.6
million write-off of goodwill.
Operating loss from continuing operations increased by $284.3 million to a loss
of $191.4 million in fiscal year 2001 compared to operating earnings from
continuing operations of $92.9 million in fiscal year 2000. This decline was
primarily due to the decline in revenue, lower gross profit, write-offs of
excess, obsolete and non-recoverable inventories, and the write-offs of goodwill
and restructuring charges recorded in fiscal year 2001.
Interest expense and interest income
Our interest expense decreased to $42.3 million in fiscal year 2002 compared to
$82.6 million in fiscal year 2001. This decrease was the result of reduced
outstanding debt, lower interest rates and reduced bank waiver fees. Interest
income increased by $2.6 million due to $3.6 million of interest received as the
result of a United States income tax refund.
Our interest expense decreased to $82.6 million in fiscal year 2001 compared to
$104.2 million in fiscal year 2000. This decrease was the result of reduced
outstanding debt, lower interest rates and a $3.0 million reduction in the
amount of bank waiver fees. We incurred bank waiver fees of $13.9 million in
connection with amendments to our credit agreement in fiscal year 2000. Interest
income decreased by $0.8 million due to lower cash balances.
Loss on sale of business
Fiscal year 2000 included a loss of $2.1 million related to the sale of our
Omnifax business in July 1999.
Income taxes
We recorded an income tax benefit of $17.4 million for fiscal year 2002 compared
to a tax benefit of $37.3 million for fiscal year 2001. The effective income tax
benefit rate was 63.8% for fiscal year 2002 compared to 13.8% for fiscal year
2001. The increase in the effective tax rate is primarily due to the recognition
of loss carryforwards in the United Kingdom.
We recorded an income tax benefit of $37.3 million for fiscal year 2001 compared
to a tax benefit of $5.9 million for fiscal year 2000. The combined effective
income tax benefit rate was 13.8% for fiscal year 2001 compared to 62.4% for
fiscal year 2000. The change from the statutory United Kingdom corporation tax
rate in fiscal year 2001 was due to the following:
. the write-off of goodwill with no associated tax benefit;
. the disallowance of carryforward losses and
. changes in the classification of income taxed at various rates within
these jurisdictions.
Net (loss) earnings from continuing operations, before extraordinary items
We reported a net loss from continuing operations before extraordinary items of
$9.9 million in fiscal year 2002, compared to a net loss from continuing
operations before extraordinary items of $233.5 million in fiscal year 2001.
After allowing for the dilutive effect of dividends on our participating shares,
we incurred a net loss from continuing operations before extraordinary items
available to common shareholders of $0.43 per ADS in fiscal year 2002 compared
to a net loss from continuing operations before extraordinary items available to
common shareholders of $4.13 per ADS in fiscal year 2001.
We reported a net loss from continuing operations before extraordinary items of
$233.5 million in fiscal year 2001 compared to a net loss from continuing
operations of $3.5 million in fiscal year 2000. After allowing for the dilutive
effect of dividends on our participating shares, we incurred a net loss from
continuing operations before extraordinary items available to common
shareholders of $4.13 per ADS in fiscal year 2001 compared to a net loss from
continuing operations before extraordinary items available to common
shareholders of $0.14 per ADS in fiscal year 2000.
37
Discontinued operations, net of tax
Discontinued operations, net of tax, include the operations of DSI that were
sold on June 29, 2001. For fiscal year 2002, earnings from discontinued
operations were $119.5 million, which included a $115.9 million gain on the sale
of DSI and $3.6 million for net earnings from discontinued operations. For
fiscal year 2001 and 2000, net earnings from discontinued operations were $13.0
million and $13.9 million respectively. Net earnings from discontinued
operations were $1.93 per ADS in fiscal year 2002, $0.22 per ADS in fiscal year
2001 and $0.24 per ADS in fiscal year 2000.
Extraordinary gain, net of tax
The $27.9 million extraordinary gain on the early retirement of debt, net of
tax, in fiscal year 2002 was the result of the debt forgiveness arising from the
exchange offer for our 6.75% convertible subordinated notes that were due in
2002. Net earnings from extraordinary items were $0.45 per ADS in fiscal year
2002.
Net (loss) earnings
We reported net earnings of $137.6 million in fiscal year 2002 compared to a net
loss of $220.6 million in fiscal year 2001 for the reasons discussed above.
After allowing for the dilutive effect of dividends on our participating shares,
we had net earnings available to common shareholders of $1.95 per ADS in fiscal
year 2002 compared to a net loss available to common shareholders of $3.91 per
ADS in fiscal year 2001.
We reported a net loss of $220.6 million in fiscal year 2001 compared to net
earnings of $10.3 million in fiscal year 2000 for the reasons discussed above.
After allowing for the dilutive effect of dividends on our participating shares,
we incurred a net loss available to common shareholders of $3.91 per ADS in
fiscal year 2001 compared to net earnings available to common shareholders of
$0.10 per ADS in fiscal year 2000.
Exchange rates
We operate in 27 countries worldwide. Fluctuations in exchange rates between the
dollar and the currencies in each of the countries in which we operate affect:
. the results of our international operations reported in dollars; and
. the value of the net assets of our international operations reported
in dollars.
The results of operations are affected by the relative strength of currencies in
the countries where our products are sold. Approximately 44%, 43% and 43% of our
revenue in fiscal year 2002, 2001 and 2000, respectively, was generated outside
the United States. In fiscal year 2002, approximately 27.7% of our revenue was
generated in Euro countries, 7.2% in the United Kingdom, and 9.1% in other
foreign locations. During fiscal year 2002, the Euro and the United Kingdom
pound weakened against the dollar by approximately 2.5% and 3.1%, respectively.
This negatively impacted revenue by approximately $21.7 million and was also the
primary reason for the $7.5 million increase in cumulative translation losses in
shareholders' equity for fiscal year 2002. Our results of operations and
financial condition have been, and may continue to be, adversely affected by the
fluctuations in foreign currencies and by translation of the financial
statements of our non-United States subsidiaries, including our European and
Latin American subsidiaries, from local currencies to the dollar. We do not
hedge our exposure to changes in foreign currency. Gains and losses included in
the consolidated statements of operations from foreign currency transactions
included a $3.0 million gain in fiscal 2002, a $9.6 million loss in fiscal 2001
and a $0.6 million loss in fiscal 2000.
Liquidity and Capital Resources
Current financial condition
We have a $300.0 million credit facility with a consortium of international
lenders through March 31, 2004. The facility consists of a $100.0 million
revolver commitment, a $170.0 million term loan and $30.0 million of letters of
credit commitments. During fiscal year 2002, we repaid $20.0 million of
principal under the term loan. The credit facility requires that we maintain
minimum levels of adjusted consolidated net worth and cumulative consolidated
EBITDA and a minimum ratio of consolidated EBITDA to interest expense and
contains limitations on the amounts of our capital expenditures. We were in
compliance with these covenants as of March 31, 2002.
As of March 31, 2002, we owed $170 million under the credit facility. The amount
we could borrow under the $100 million revolver commitment as of March 31, 2002
was $84.5 million. Borrowings under the revolver are governed by a borrowing
base (as defined in the credit facility) which was less than the total
commitment as of March 31, 2002. We incurred interest on our
38
indebtedness under the credit facility during the three months ended March 31,
2002 at a weighted average rate of approximately 7.18% per annum. Effective
interest rates under the credit facility are LIBOR, plus 5.5%. The interest rate
will increase by 0.5% on June 29, 2002 and by 0.5% quarterly thereafter. The
interest rate will decrease by 0.5% for every $25.0 million permanent reduction
in the total commitment. However, the interest rate cannot be reduced below
4.25%. As of May 28, 2002, we had a balance of $30.0 million under the $100.0
million revolver and had $132.7 million outstanding under the term loan, making
a total of $162.7 million outstanding under the credit facility.
On April 2, 2002, we were required to pay our banks a fee equal to 0.5% of the
total commitment under the credit facility. On June 30, 2002, we will be
required to pay a fee equal to 1.0% of the total commitment and on June 30, 2003
a fee equal to 4.0% of the total commitment. The term component of the facility
requires repayment of principal in installments of $16.0 million in fiscal year
2003 ($4 million at the end of each quarter), and $154.0 million in fiscal year
2004 ($8 million at the end of each of the first three quarters, with payment
due in full on March 31, 2004). In addition, we are required to make additional
repayments of our indebtedness under the credit facility in amounts equal to 50%
of our excess cash flow (as defined in the credit facility) for each of our
fiscal years.
Our indebtedness under the credit facility is secured by substantially all of
our assets in the United States, Canada, the United Kingdom, the Netherlands and
Germany. The credit facility contains negative and affirmative covenants which
restrict, among other things, our ability to incur additional indebtedness and
create liens beyond certain agreed limits, prohibit the payment of dividends,
other than payment-in-kind dividends on our participating shares, and require us
to maintain certain financial ratios as described above.
In June 2001, we issued approximately $47.6 million of zero coupon senior
subordinated notes due April 1, 2004 and approximately $64.5 million in
principal amount of 10% subordinated notes due April 1, 2008 as consideration
pursuant to an exchange offer for our 6.75% convertible subordinated notes due
April 1, 2002. The senior subordinated notes are guaranteed by Danka Holding
Company and Danka Office Imaging Company, which are both 100% owned U.S.
subsidiaries. The senior subordinated notes and the 10% notes include covenants
which restrict our ability to dispose of assets or merge without approval. The
senior subordinated notes also include covenants which restrict us from
incurring certain additional indebtedness or creating liens and limit the
payment of dividends, other than payment-in-kind dividends on our participating
shares. Danka was in compliance with these covenants as of March 31, 2002.
We currently are pursuing the refinancing of our indebtedness under the senior
credit facility and our zero coupon senior subordinated notes in advance of
their respective scheduled maturities. Our ability to refinance this debt will
depend upon our performance, our ability to access the capital markets and
economic conditions generally, and no assurances can be given as to our ability
to consummate the refinancing or the terms of the refinancing. In addition to
the proposed refinancing, we have also entered into an agreement with our senior
bank lenders under which we have the option to extend our senior credit facility
for an additional two years, through March 31, 2006. In June 2002, we paid a $4
million fee to obtain the option, which will expire on September 30, 2002. We
hope to complete the refinancing of the senior credit facility and zero coupon
notes prior to September 30, 2002, in which case we will not exercise the
option. If we were to exercise the option, the interest rates and fees under the
senior credit agreement would be modified upward.
In March 1995, we issued $200 million in principal amount of 6.75% convertible
subordinated notes. Following completion of the exchange offer referred to
above, approximately $16 million of the 6.75% notes were outstanding, which were
paid in full on April 1, 2002.
Cash flows
Our net cash flow provided by operating activities was $155.6 million, $126.9
million, and $154.1 million in fiscal years 2002, 2001 and 2000, respectively.
The increase in net cash provided by operating activities for fiscal year 2002
was primarily due to a significant improvement in earnings (loss), net of
extraordinary items, combined with the receipt of a $18.2 million U.S. income
tax refund (which included $3.6 million of associated interest income) that was
partially offset by a decline in changes in other balance sheet accounts. The
decrease in fiscal year 2001 operating cash flow was primarily due to a decline
in earnings, net of extraordinary items, partially offset by changes in other
balance sheet accounts. Reductions in our accounts receivable and inventory
balances were the primary source of operating cash for fiscal year 2001.
Our net cash flow provided by, used (in) investing activities was $224.3
million, ($62.8) million and ($53.1) million for fiscal years 2002, 2001 and
2000, respectively. The increase in fiscal year 2002 cash provided by investing
activities was due to the sale of DSI to Pitney Bowes. The increase in fiscal
year 2001 cash used in investing activities was primarily due to the proceeds
from the sale of Omnifax in fiscal year 2000, offset by the decrease in capital
expenditures for property and equipment.
Our net cash flow used in financing activities was $392.9 million, $67.6 million
and $106.1 million for fiscal years 2002, 2001
39
and 2000, respectively. The increase in net cash used in financing activities
for fiscal year 2002 was due to the repayment of debt primarily from proceeds
from the sale of DSI and from the cash flow from operations discussed above. The
decrease in fiscal year 2001 cash flow used in financing activities was
primarily due to the repayment of borrowings in fiscal year 2000 from cash
received as a result of the Omnifax sale in July 1999 and cash received from the
issuance of participating shares.
One June 29, 2001, we completed an exchange offer for our $200 million of 6.75%
convertible subordinated notes due April 1, 2002. We accepted tenders from
holders of a total of $184.0 million in aggregate principal amount (92%) of the
6.75% convertible subordinated notes. Of the notes tendered pursuant to the
exchange offer, $118.5 million in principal amount was tendered for a limited
cash option, $1.0 million in principal amount was tendered for a new zero coupon
senior subordinated note option and $64.5 million in principal amount was
tendered for a new 10% note option. In aggregate, we paid $24.0 million in cash
and issued $47.6 million in principal amount of new zero coupon senior
subordinated notes due April 1, 2004 and $64.5 million in principal amount of
10% subordinated notes due April 1, 2008 as consideration under the exchange
offer.
Outstanding debt
The following tables set forth information concerning our obligations and
commitments to make future payments under contracts, such as our debt and lease
agreements, and under contingent commitments.
Payments due in
----------------------------------------------------------------------------------------------------------------------------
Less than 1
Contractual Obligations Total year 1 - 3 years 4 - 5 years After 5 years
----------------------------------------------------------------------------------------------------------------------------
(in 000's)
Credit facility $ 170,000 $ 16,000 $ 154,000 $ - $ -
Local lines of credit 3,217 3,217 - - -
Notes payable 128,102 15,988 47,594 - 64,520
Capital leases 949 264 685 - -
Other long-term obligations 2,186 824 927 435 -
-----------------------------------------------------------------------------
Total contractual obligations $ 304,454 $ 36,293 $ 203,206 $ 435 $ 64,520
=============================================================================
Amount of commitment expiration per period
----------------------------------------------------------------------------------------------------------------------------
Less than 1
Other Commercial commitments Total year 1 - 3 years 4 - 5 years After 5 years
----------------------------------------------------------------------------------------------------------------------------
(in 000's)
Lease commitments $ 171,540 $ 58,274 $ 62,814 $ 21,690 $ 28,762
Letters of credit 30,000 30,000 - - -
-----------------------------------------------------------------------------
Total commercial commitments $ 201,540 $ 88,274 $ 62,814 $ 21,690 $ 28,762
=============================================================================
Other financing arrangements
Danka Holding Company ("DHC"), one of our subsidiaries, is party to a number of
tax retention operating leases ("TROL") which expire on March 31, 2004. The TROL
provides for DHC to lease certain real property in the United States. The TROL
generally requires DHC to pay property taxes, maintenance, insurance, and
certain other operating costs of the leased properties. DHC has given a residual
guarantee in respect of the fair market value of the properties at the
termination of the TROL. The residual guarantee has not been included in the
above table of our contractual obligations. DHC is obligated to pay the
difference between the maximum amount of the residual guarantee, which is equal
to 87% of the total cost of the properties and the fair market value of the
properties at the termination of the leases. DHC's maximum contingent liability
under the TROL was approximately $24.4 million as of March 31, 2002. DHC has
purchase renewal options over the leased properties at fair market value and has
the right to exercise purchase options for each property at the end of the lease
term. Alternatively, the properties can be sold to third parties. At March 31,
2002, the properties were being offered for sale. We currently have a $2.0
million reserve relating to DHC's expected liability under the residual
guarantee. We believe the reserve is adequate to cover any potential shortfall
between the sale price of the properties and DHC's liability under the residual
guarantee. We recognized a $6.0 million and a $11.4 million charge in fiscal
years 2002 and 2001, respectively, relating to DHC's expected liability under
the residual guarantee. The TROL incorporates the covenants from our credit
facility, including the financial covenants. We were in compliance with all of
the applicable covenants at March 31, 2002.
On December 17, 1999, we issued 218,000 6.50% senior convertible participating
shares for $218.0 million. The participating shares are entitled to dividends
equal to the greater of 6.50% per annum or ordinary share dividends on an as
converted basis.
40
Dividends are cumulative and are paid in the form of additional participating
shares for the first five years. The participating shares are currently
convertible into ordinary shares at a conversion price of $3.11 per ordinary
share (equal to $12.44 per American depositary share), subject to adjustment in
certain circumstances to avoid dilution of the interests of participating
shareholders. The participating shares have voting rights, on an as converted
basis, currently corresponding to approximately 24.8% of the total voting power
of our capital stock. As of March 31, 2002, we had issued an additional 32,644
participating shares in respect of payment-in-kind dividends.
We are not permitted to pay dividends (other than payment-in-kind dividends on
our participating shares) under our credit facility and we do not anticipate the
payment of a dividend on our ordinary shares in the foreseeable future.
We are an English company and, under English law, we are allowed to pay
dividends to shareholders only if:
. we have accumulated, realizedprofits that have not been previously
distributed or capitalized, in excess of our accumulated, realized
losses that have not previously been written off in a reduction or
reorganization of capital; and
. our net assets are not less than the aggregate of our share capital
and our non-distributable reserves, either before, or as a result of,
dividends or other distributions.
At this time, we have insufficient profits to pay dividends to shareholders.
Since December 2000, we have satisfied our obligation to make payment-in-kind
dividends on our participating shares by capitalizing part of our share premium
account, which is a reserve required by English company law and which consists
of premiums paid to us on the issuance of our shares.
We have an agreement with General Electric Capital Corporation ("GECC") under
which GECC agrees to provide financing to our customers to purchase equipment
until March 31, 2006. In connection with this agreement, we are obligated to
provide a minimum level of customer leases to GE Capital. The minimum level of
customer leases is equal to 63% of U.S. hardware sales. If we are unable to meet
the targeted volume commitments, we are obligated to make penalty payments equal
to 4.75% of the difference. For fiscal year 2003, the target is the lesser of
$176.6 million or a target calculated based on revenues. For the years ended
March 31, 2002 and 2001, we were obligated for penalty payments of approximately
$0.2 million and $1.9 million, respectively, to GE Capital because we did not
satisfy the minimum level requirements.
In addition, the GECC agreement requires us to maintain a specified minimum
consolidated net worth. If we breach that covenant, GECC can refuse to provide
financing to our new customers and terminate the agreement as to any future
financings. The net worth covenant is the same as the minimum net worth covenant
contained in our credit facility. We were in compliance with these covenants as
of March 31, 2002.
The Internal Revenue Service has completed its audits of our federal income tax
returns through fiscal years ended March 31, 1998. We have now resolved all
outstanding issues with the Internal Revenue Service arising out of those
examinations and as a result have received a $14.6 million income tax refund. We
have agreed to certain adjustments with the Internal Revenue Service to the tax
returns, primarily relating to the timing of deductions associated with leased
equipment financing and costs associated with our acquisition of Kodak's office
imaging division. This result did not have a material negative impact on our
financial position, results of operations or liquidity due to the availability
of losses that were carried back to the years affected by the adjustments.
Fiscal authorities in the Netherlands are engaged in an audit of our Dutch
operations. We do not believe that this audit, or any result thereof, will have
a material impact on our financial position, results of operations or liquidity.
MARKET RISK MANAGEMENT
Interest Rate Risk
Our exposure to interest rate risk primarily relates to our variable rate bank
debt. As outlined above in "Liquidity and Capital Resources," at March 31, 2002
we had an outstanding balance of $170.0 million under our credit facility. We
incurred interest on our credit facility at a weighted average rate of 7.18% and
7.61% per annum during the three and twelve months ended March 31, 2002.
Pursuant to our credit agreement, we entered into a $80 million notional
interest rate cap agreement with Bank of America. The interest rate cap will pay
us the difference between the quarterly LIBOR and 3.99% for the period March 18,
2002 to March 18, 2003.
Based on the outstanding balance under our credit facility, a change of 100
basis points in the average interest rate, with all other variables remaining
constant, would cause an increase/decrease in our interest expense of
approximately $1.7 million on an annual basis, subject to the interest rate cap
discussed above.
41
Currency exchange risk
We are a multinational corporation. Therefore, foreign exchange risk arises as a
normal part of our business. We reduce this risk by transacting our
international business in local currencies. In this manner, assets and
liabilities are matched in the local currency which reduces the need for dollar
conversion. In addition, at March 31, 2002, approximately 1.8% of our
indebtedness was non-dollar denominated. Any foreign currency impact on
translating assets and liabilities into dollars is included as a component of
shareholders' equity. Our recent results have been negatively impacted by
foreign currency movements, in particular the decline of the euro and the United
Kingdom pound against the dollar.
Generally, we do not enter into forward and option contracts to manage our
exposure to foreign currency fluctuations. At March 31, 2002, we had no
outstanding forward contracts or option contracts to buy or sell foreign
currency. For the three years ended March 31, 2002, there were no gains or
losses included in our consolidated statements of operations on forward
contracts and option contracts.
Seasonality
We have experienced some seasonality in our business. Our European and Canadian
operations have historically experienced lower revenue for the second quarter of
our fiscal year, which is the three month period ended September 30. This is 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 that period.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management strives to report the financial results of the Company in a clear
and understandable manner, even though in some cases accounting and disclosure
rules are complex and require technical terminology. We follow accounting
principles generally accepted in the U.S. in preparing our consolidated
financial statements contained herein, which require us to make certain
estimates and apply judgements that affect our financial position and results of
operations. Our management continually reviews our accounting policies, how they
are applied and how they are reported and disclosed in the financial statements.
Following is a summary of our critical accounting policies and how they are
applied in preparation of the financial statements.
Accounts Receivable
We provide allowances for doubtful accounts on our accounts receivable for
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of any of our customers were to
deteriorate, which may result in the impairment of their ability to make
payments, additional allowances may be required. Our estimates are influenced by
the following considerations: our large number of customers and their dispersion
across wide geographic areas, the fact that no single customer accounts for 10%
or more of our net sales, our continuing credit evaluation of our customers'
financial conditions, credit insurance coverage in certain countries and
collateral requirements from our customers in certain circumstances.
Inventories
Our inventory levels are based on our projections of future demand and market
conditions. Any sudden decline in demand and/or rapid product improvements or
technological changes may cause us to have excess and/or obsolete inventories.
On an ongoing basis, we review for estimated obsolete or unmarketable
inventories and write-down our inventories to their estimated net realizable
value based upon our forecasts of future demand and market conditions. If actual
market conditions are less favorable than our forecasts, additional inventory
write-downs may be required. Our estimates are influenced by the following
considerations: sudden decline in demand due to economic downturns, rapid
product improvements and technological changes and our ability to return to
vendors a certain percentage of our purchases.
Revenue Recognition
Equipment sales are recognized at the time of customer acceptance and, in the
case of equipment sales financed by third party leasing companies, at the time
of credit acceptance by the leasing company if later. Supply sales to customers
are recognized at the time of shipment. In the case of service contracts, which
include supplies, supply sales are recognized upon usage by the customer.
Operating lease income is recognized as earned over the lease term. Maintenance
contract service revenues are recognized ratably over the term of the underlying
maintenance contracts. 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.
We perform an annual review of the unguaranteed residual values of leased
equipment to verify that the recorded residual values does not exceed market
valuations. If the residual value is below the market value, a reserve is
charged to cost of goods sold. No
42
residual value is recorded for used equipment.
Income Taxes
As part of the process of preparing our consolidated financial statements, we
have to estimate our income taxes in each of the taxing jurisdictions in which
we operate. This process involves estimating our actual current tax expense
together with assessing any temporary differences resulting from the different
treatment of certain items, such as the timing for recognizing revenues and
expenses for tax and accounting purposes. These differences may result in
deferred tax assets and liabilities, which are included in our consolidated
balance sheet. We assess the likelihood that our deferred tax assets, which
include net operating loss carryforwards and temporary differences that are
expected to be deductible in future years, will be recoverable from future
taxable income or other tax planning strategies. If recovery is not likely, we
have to provide a valuation allowance based on our estimates of future taxable
income in the various taxing jurisdictions, and the amount of deferred taxes
that are ultimately realizable. The provision for current and deferred tax
liabilities involves evaluations and judgments of uncertainties in the
interpretation of complex tax regulations by various taxing authorities.
Long-lived assets
We review long-lived assets for impairment as described in note 1 to our
consolidated financial statements. In analyzing potential impairments, we use
projections of future cash flows from the asset. These projections are based on
our views of growth rates for the related business, anticipated future economic,
regulatory and political conditions, the assignment of discount rates relative
to risk and estimates of terminal values.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein, or otherwise made by our officers,
including statements related to our future performance and our outlook for our
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 us that is based on the beliefs
of our management as well as assumptions, made by, and information currently
available to, our management. The words "goal", "anticipate", "expect",
"believe" and similar expressions as they relate to us or our 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, we claim the protection of the safe harbor for forward
looking statements provided for in the Private Securities Litigation Reform Act
of 1995. Such statements reflect our current views 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, the following: (i) any material adverse change in financial markets
or in our own position, (ii) any inability to achieve or maintain cost savings,
(iii) increased competition from other high-volume and digital copier
distributors and the discounting of such copiers by our competitors, (iv) any
inability by us to procure, or any inability by us 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 of
our key upper management personnel, (vi) fluctuations in foreign currencies and
(vii) any change in economic conditions in domestic or international markets
where we operate or have material investments which may affect demand for our
services. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect our analysis only as of the date they
are made. We undertake no obligation, and do not intend, to update these forward
looking statements to reflect events or circumstances that arise after the date
they are made. Furthermore, as a matter of policy, we do not generally make any
specific projections as to future earnings nor do we endorse any projections
regarding future performance, which may be made by others outside our company.
43
For the year ended March 31
------------------------------------
Note 2002 2001 2000
---- ---------- ---------- ----------
Revenue:
Retail equipment sales $ 538,439 $ 614,107 $ 742,084
Retail service, supplies and rentals 937,790 1,062,007 1,366,475
Wholesale 78,947 97,128 105,469
- ----------------------------------------------------------------- ---------- ---------- ----------
Total revenue 1,555,176 1,773,242 2,214,028
- ----------------------------------------------------------------- ---------- ---------- ----------
Costs and operating expenses:
Cost of retail equipment sales 394,056 518,296 523,993
Retail service, supplies and rental costs 546,881 660,167 793,292
Wholesale costs of revenue 64,357 80,922 86,815
Selling, general and administrative expenses 531,331 641,480 702,318
Amortization of intangible assets 11,207 12,842 13,970
Write-off of goodwill and other long-lived assets 2 - 25,577 -
Restructuring charges (credits) 2 (1,992) 15,705 (4,148)
Other expense 3 81 9,621 4,879
- ----------------------------------------------------------------- ---------- ---------- ----------
Total costs and operating expenses 1,545,921 1,964,610 2,121,119
- ----------------------------------------------------------------- ---------- ---------- ----------
Operating earnings (loss) from continuing operations 9,255 (191,368) 92,909
Interest expense 8 (42,298) (82,648) (104,201)
Interest income 5,768 3,172 3,958
Loss on sale of business 4 - - (2,061)
- ----------------------------------------------------------------- ---------- ---------- ----------
Loss from continuing operations before income taxes (27,275) (270,844) (9,395)
Provision (benefit) for income taxes 5 (17,407) (37,328) (5,860)
- ----------------------------------------------------------------- ---------- ---------- ----------
Loss from continuing operations before extraordinary items (9,868) (233,516) (3,535)
Discontinued operations, net of tax 119,490 12,956 13,869
Extraordinary gain on early retirement of debt, net of tax 27,933 - -
- ----------------------------------------------------------------- ---------- ---------- ----------
Net earnings (loss) $ 137,555 $ (220,560) $ 10,334
================================================================= ========== ========== ==========
Basic earnings (loss) available to common shareholders per ADS: 10
Net loss per ADS, continuing operations $ (0.43) $ (4.13) $ (0.14)
Net earnings per ADS, discontinued operations 1,93 0.22 0.24
Net earnings per ADS, extraordinary item 0.45 - -
---------- ---------- -----------
Net earnings (loss) per ADS $ 1.95 $ (3.91) $ 0.10
========== ========== ==========
Weighted average ADSs 61,967 60,438 57,624
Diluted earnings (loss) available to common shareholders per ADS: 10
Net (loss) per ADS, continuing operations $ (0.43) $ (4.13) $ (0.14)
Net earnings per ADS, discontinued operations 1.93 0.22 0.24
Net earnings per ADS, extraordinary item 0.45 - -
---------- ---------- ----------
Net earnings (loss) per ADS $ 1.95 $ (3.91) $ 0.10
========== ========== ==========
Weighted average ADSs 61,967 60,438 58,525
The accompanying notes are an integral part of these consolidated financial
statements.
44
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED BALANCE SHEETS
(In thousands)
At March 31,
----------------------------------
Note 2002 2001
-------- -------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 59,470 $ 69,085
Accounts receivable, net of allowance for doubtful accounts of:
$42,281 (2001- $43,121) 292,350 346,398
Inventories 130,599 199,523
Prepaid expenses, deferred income taxes and other current assets 35,935 81,025
Assets of discontinued operations - 113,405
- -------------------------------------------------------------------------------- ------------ ------------
Total current assets 518,354 809,436
Equipment on operating leases, net 6 57,432 85,891
Property and equipment, net 7 60,549 74,664
Intangible assets:
Goodwill, net of accumulated amortization of:
$71,795 (2001 - $74,139) 2 231,908 242,727
Noncompete agreements, net of accumulated amortization of:
$3,084 (2001 - $3,645) 1,078 1,444
Deferred income taxes and other assets 5 56,366 68,781
- -------------------------------------------------------------------------------- ------------ ------------
Total assets $ 925,687 $ 1,282,943
================================================================================ ============ ============
Liabilities and shareholders' equity (deficit)
Current liabilities:
Current maturities of long-term debt and notes payable 8 $ 36,293 $ 517,447
Accounts payable 110,586 136,604
Accrued expenses and other current liabilities 109,219 143,088
Taxes payable 47,101 39,372
Deferred revenue 42,343 34,969
Liabilities of discontinued operations - 22,230
- -------------------------------------------------------------------------------- ------------ ------------
Total current liabilities 345,542 893,710
6.75% convertible subordinated notes 8 - 200,000
Long-term debt and notes payables, less current maturities 8 268,161 1,731
Deferred income taxes and other long-term liabilities 23,415 29,431
- -------------------------------------------------------------------------------- ------------ ------------
Total liabilities 637,118 1,124,872
- -------------------------------------------------------------------------------- ------------ ------------
6.5% convertible participating shares - redeemable:
$1.00 stated value; 500,000 authorized; 250,644 issued and outstanding
(2001 - 234,993) 9 240,520 223,713
- -------------------------------------------------------------------------------- ------------ ------------
Shareholders' equity (deficit):
Ordinary shares, 1.25 pence stated value
500,000,000 authorized; 248,084,622 issued and outstanding
(2001 - 247,570,566) 10 5,139 5,130
Additional paid-in capital 325,880 325,399
Accumulated deficit (181,872) (302,619)
Accumulated other comprehensive loss (101,098) (93,552)
- -------------------------------------------------------------------------------- ------------ ------------
Total shareholders' equity (deficit) 48,049 (65,642)
Commitments and contingencies 14
- -------------------------------------------------------------------------------- ------------ ------------
Total liabilities & shareholders' equity (deficit) $ 925,687 $ 1,282,943
================================================================================ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
45
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the years ended March 31,
------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
Operating activities:
Net earnings (loss) $ 137,555 $ (220,560) $ 10,334
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities of continuing operations:
Extraordinary gain on debt retirement (27,933) - -
Net earnings and gain from sale of discontinued operations (119,490) (12,956) (13,869)
Depreciation and amortization 92,347 140,969 128,887
Deferred income taxes (12,440) (32,801) (10,904)
Amortization of debt issuance costs 5,187 1,912 4,101
Loss on sale of property and equipment and equipment on operating leases 14,075 13,700 12,807
Proceeds from sale of equipment on operating leases 5,483 5,845 16,506
Restructuring and other special charges (credits) (1,992) 15,705 (3,570)
Loss on the 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
Changes in net assets of discontinued operations - 28,062 16,606
Accounts receivable 54,048 106,624 24,878
Inventories 68,924 124,201 15,013
Prepaid expenses and other current assets 7,520 (5,168) (4,702)
Other non-current assets (14,002) 30,670 24,492
Accounts payable (26,018) (24,233) 33,349
Accrued expenses and other current liabilities (29,054) (47,519) (89,977)
Deferred revenue 7,374 (3,863) (11,193)
Other long-term liabilities (6,018) 6,353 (699)
- ---------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash provided by operating activities 155,566 126,941 154,120
- ---------------------------------------------------------------------------- ----------------- ----------------- -----------------
Investing activities:
Capital expenditures (50,577) (68,881) (101,095)
Proceeds from the sale of property and equipment 928 6,108 3,960
Net proceeds from the sale of business 273,994 - 45,000
Purchase of subsidiaries, net - - (734)
Payment for purchase of noncompete agreements - - (178)
- ---------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash provided by (used in) investing activities 224,345 (62,773) (53,047)
- ---------------------------------------------------------------------------- ----------------- ----------------- -----------------
Financing activities:
Net payments under line of credit agreements (341,845) (67,810) (307,383)
Principal borrowings (payments) on other long-term debt (25,281) 170 (4,005)
Payment of debt issue costs (25,797) - -
Proceeds from stock options exercised - - 87
Capital contributions from the issuance of particpating shares - - 205,223
- ---------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net cash used in financing activities (392,923) (67,640) (106,078)
- ---------------------------------------------------------------------------- ----------------- ----------------- -----------------
Effect of exchange rates 3,397 7,696 3,771
- ---------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net increase (decrease) in cash and cash equivalents (9,615) 4,224 (1,234)
Cash and cash equivalents, beginning of period 69,085 64,861 66,095
- ---------------------------------------------------------------------------- ----------------- ----------------- -----------------
Cash and cash equivalents, end of period $ 59,470 $ 69,085 $ 64,861
============================================================================ ================= ================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
46
DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except per American Depositary Share ("ADS") amounts)
Number of
ordinary Accumulated
shares other
(4 ordinary Retained compre-
shares equal Additional earnings hensive
Ordinary paid-in (accumulated (loss)
1 ads) shares capital deficit) income Total
-------------------------------------------------------------------------------------------
Balances at March 31, 1999 228,068 $ 4,758 $ 304,436 $ (72,815) $ (65,216) $ 171,163
Net earnings -- -- -- 10,334 -- 10,334
Currency translation adjustment -- -- -- -- (13,793) (13,793)
-------------
comprehensive loss (3,459)
Dividends and accretion
on participating shares -- -- 1,089 (3,745) -- (2,656)
Shares issued under
employee stock plans 6,506 134 11,531 -- -- 11,665
------------ ----------- -------------- -------------- --------------- -------------
Balances at March 31, 2000 234,574 $ 4,892 $ 317,056 $ (66,226) $ (79,009) $ 176,713
Net loss -- -- -- (220,560) -- (220,560)
Currency translation adjustment -- -- -- -- (14,543) (14,543)
-------------
comprehensive loss (235,103)
Dividends and accretion
on participating shares -- -- -- (15,833) -- (15,833)
Shares issued under
employee stock plans 12,997 238 8,343 -- -- 8,581
------------ ----------- -------------- -------------- --------------- -------------
Balances at March 31, 2001 247,571 $ 5,130 $ 325,399 $ (302,619) $ (93,552) $ (65,642)
Net earnings -- -- -- 137,555 -- 137,555
Currency translation adjustment -- -- -- -- (7,546) (7,546)
------------
comprehensive income 130,009
Dividends and accretion
on participating shares -- -- -- (16,808) -- (16,808)
Shares issued under
employee stock plans 514 9 481 -- -- 490
------------ ----------- -------------- -------------- --------------- -------------
Balances at March 31, 2002 248,085 $ 5,139 $ 325,880 $ (181,872) $(101,098) $ 48,049
============ =========== ============== ============== =============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
47
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
(a) Basis of preparation: The financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America. The principal accounting policies are set forth below.
(b) Basis of consolidation: The consolidated financial statements include our
accounts and the accounts of our wholly owned subsidiaries. Our 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. All significant
inter-company balances and transactions have been eliminated in
consolidation. References herein to "we" or "our" refer to Danka Business
Systems PLC and consolidated subsidiaries unless the context specifically
requires otherwise.
(c) Use of estimates: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
our 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. Our actual results could differ from these
estimates.
(d) Cash and cash equivalents: Cash and cash equivalents consist of cash on
hand and all highly liquid investments or deposits with original maturities
of three months or less.
(e) Inventories: Inventories consist of photocopiers, facsimile equipment,
other automated office equipment which are stated at the lower of specific
cost or market of $62.2 million for fiscal 2002 and $109.7 million for
fiscal 2001. The related parts and supplies are valued at the lower of
average cost or market of $68.4 million for fiscal 2002 and $89.8 million
for fiscal 2001.
(f) 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 and the applicable
accumulated depreciation are removed from the respective accounts and the
resulting gain or loss is reflected in operations. We expense software
costs incurred in preliminary project stages and, thereafter, we capitalize
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.
(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 discounted cash flows and earnings from operations are
not expected to be sufficient to recover goodwill and other long-lived
assets. (see note 1(q) "New Accounting Standards"). The carrying amounts
are then reduced by the estimated shortfall of the discounted cash flows.
For the year ended March 31, 2001, we wrote-off $25.6 million of goodwill
(See Note 2). Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is generally 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 are charged ratably to interest expense over the
term of the related debt, and are included in other noncurrent assets.
(h) 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.
(i) Revenue recognition: Equipment sales are recognized at the time of customer
acceptance and in the case of equipment sales financed by third party
leasing companies, at the time of credit acceptance by the leasing company.
Supply sales to customers are recognized at the time of shipment. In the
case of service contracts which include supplies, supply sales are
recognized upon usage by the customer. For the year ended March 31, 2001,
our retail service, supplies, and rentals revenue was reduced because of a
change in our estimate of unbilled variable service revenue. After a
detailed review of assumptions used to determine the amount of unbilled
revenue, we determined that the estimate of variable usage used to
calculate the revenue accrual for fiscal year 2001 should be reduced by
$11.3 million.
48
Notes to Consolidated Financial Statements
Operating lease income is recognized as earned over the lease term.
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.
(j) Shipping and handling costs: Shipping and handling costs billed to our
customers are included in the same category as the related sale. The cost
of shipping and handling is included in cost of sales.
(k) Advertising costs: We expense advertising costs as incurred, except
production costs which are expensed the first time the advertising takes
place.
(l) 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.
Income available to common shareholders is determined by reducing net
earnings or (loss) by the dividends for the relevant fiscal year paid on
the 6.5% senior convertible participating shares. Earnings per American
depositary share are based on the current ratio of four ordinary shares to
one ADS.
(m) 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 are included in other income
or other expense on the accompanying statements of operation.
Assets and liabilities in currencies other than 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 (deficit).
(n) Concentrations of risk: Financial instruments, which potentially subject us
to concentrations of credit risk, consist principally of cash and cash
equivalents and trade receivables. Our cash and cash equivalents are placed
with high credit quality financial institutions, and are invested in
short-term maturity, highly rated securities. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising our customer base and their dispersion across many
different industries and geographical areas. As of March 31, 2002, we had
no significant concentrations of credit risk. Our business is dependent
upon close relationships with our vendors and our ability to purchase
photocopiers and related office imaging equipment from these vendors on
competitive terms. We primarily purchase products from several key vendors
including Canon, Ricoh and Toshiba, each of which represented more than 10%
of equipment purchases for the years ended March 31, 2002 and 2001.
(o) Financial instruments: From time to time, we use 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. We do not hold derivative
financial instruments for trading purposes. See Note 15 for discussion of
adoption of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities."
(p) Reclassifications: Certain prior year amounts have been reclassified to
conform to the current year presentation.
(q) New accounting standards: In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets", which will be effective for the first quarter
of our fiscal year 2003. Statement No. 142 establishes accounting and
reporting requirements for goodwill and other intangible assets, and
modifies disclosures previously required under other accounting standards.
We adopted the statement effective April 1, 2002. As a result of the
implementation of this standard, we will cease to amortize goodwill and
expect a pre-tax increase of earnings of approximately $11 million in
fiscal 2003. During 2003, we will perform the first of the required
impairment tests of goodwill as of April 1, 2002. We have not yet
determined what the effect of these tests will have on our earnings and
financial position. Any impairment resulting from our initial application
of the statements will be recorded as a cumulative effect of accounting
change as of April 1, 2002.
SFAS No. 143, "Accounting for Asset Retirement Obligations", requires
recognition of the fair value of liabilities associated with the retirement
of long-lived assets when a legal obligation to incur such costs arises as
a result of the acquisition, construction, development and/or the normal
operation of a long-lived asset. Upon recognition of the liability, a
corresponding asset is recorded and depreciated over the remaining life of
the long-lived asset. The statement defines a legal obligation as one that
a party is required to settle as a result of an existing or enacted law,
statute, ordinance, or written or oral
49
Notes to Consolidated Financial Statements
contract or by legal construction of a contract under the doctrine of
promissory estoppel. SFAS 143 is effective for fiscal years beginning after
December 15, 2002. We do not expect a material impact from this statement
on our consolidated financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" requires long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured at net realizable value or include
amounts for operating losses that have not yet occurred. Statement 144 also
broadens the reporting of discontinued operations to include all components
of an entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The provisions of Statement 144 are
effective for the first quarter of our fiscal year 2003 and, generally are
to be applied prospectively. We do not expect a material impact from this
statement on our consolidated financial statements.
SFAS No. 145, "Recission of FASB Statements No. 4, 44, 64, Amendment of
FASB Statement No. 13, and Technical Corrections" Statement 145 among other
items, rescinds Statement 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the
criteria in Opinion 30 will now be used to classify those gains and losses.
Statement 64 amended Statement 4, and is no longer necessary because
Statement 4 has been rescinded. We will adopt the provisions of Statement
145 for the first quarter of our fiscal year 2003. We will no longer
present our fiscal 2002 gain from debt extinguishment as an extraordinary
item. For fiscal 2003, we will reclassify the $27.9 million extraordinary
after-tax gain as a separate item in continuing operations.
(r) United Kingdom Companies Act 1985: The financial statements for the years
ended March 31, 2002, 2001 and 2000 do not comprise statutory accounts
within the meaning of section 240 of the United Kingdom Companies Act 1985.
Statutory accounts for the year ended March 31, 2002 will be delivered to
the Registrar of Companies for England and Wales following our 2002 annual
general meeting. The auditors' reports on those statutory accounts was
unqualified.
2. Restructuring and Other Special Charges
Fiscal 2002 Charge:
The hiring of a new Chief Executive Officer in March of 2001 was the first in a
series of changes to our senior management team. Upon the completion of the
financial restructuring plan at the end of the first quarter of fiscal year
2002, we made additional significant changes to our senior management team
including the hiring of new Chief Operating Officers for Danka Europe, Danka
International and Danka U.S. Our new management team reviewed the existing
restructuring plan and, as a result of changing business conditions in the U.S.
and Europe and revisions to our business strategies, we decided to modify our
2001 restructuring plan in the second, third and fourth quarters of fiscal year
2002 and implemented a new restructuring plan for fiscal year 2002.
Additionally, higher than anticipated employee attrition reduced cash outlay
requirements for severance. As a result of these actions and evaluations, we
reversed $13.0 million of fiscal year 2001 severance and facility restructuring
reserves in fiscal year 2002 while recording a pre-tax restructuring charge of
$11.0 million during fiscal year 2002.
The fiscal year 2002 restructuring charges included $4.9 million related to
severance for 355 employees in the U.S., Canada and Europe. We expect
substantially all of these reductions to be completed by the June 30, 2003. Cash
outlays for the reductions during fiscal year 2002 totaled $3.8 million. The
restructuring charges also included $6.1 million for future lease obligations on
39 facilities that were vacated by March 31, 2002. Cash outlays for the
facilities during fiscal 2002 totaled $2.6 million. The following table
summarizes the fiscal year 2002 restructuring charges:
2002 Restructuring Charge:
Total Fiscal Other Reserve at
2002 Cash Non-Cash March 31,
(in 000's) Expense Outlays Changes 2002
----------------------------------------------------------------
Severance $ 4,967 $ (3,757) -- $ 1,210
Future lease obligations on facility closures 6,074 (2,648) -- 3,426
----------------------------------------------------------------
Total $ 11,041 $ (6,405) -- $ 4,636
================================================================
50
Notes to Consolidated Financial Statements
Fiscal 2001 Charge:
Our fiscal 2001 restructuring charge included $21.8 million related to
severance, which represented the anticipated reduction of approximately 1,200
positions worldwide. However, as a result of the changes in senior management
and higher than anticipated employee attrition discussed above, we determined
that $10.1 million of the original severance reserve would not be required. Cash
outlays related to these reductions during fiscal year 2002 totaled $6.3 million
for the termination of employees. We expect cash outlays for the workforce
reductions to be completed by June 30, 2002.
The fiscal year 2001 restructuring charge also included $5.7 million for future
lease obligations on facility closures and exit costs. We identified 50
facilities to be closed and/or consolidated with other Danka facilities. In the
fourth quarter of fiscal year 2001 we determined that 10 of the facilities
previously identified for closure would remain open because of changes in our
business plan and accordingly reversed $1.4 million of reserves. As a result of
the changes in senior management, we determined during fiscal year 2002 that an
additional $3.0 million of facility reserves would not be required. Cash outlays
for facilities during fiscal year 2002 totaled $0.7 million. We expect the
remaining lease obligations related to these facility closures to be
substantially completed by March 31, 2003. The fiscal year 2001 restructuring
charge also included the reversal of unutilized prior year accruals of $10.4
million.
The following table summarizes the fiscal 2001 restructuring charge:
2001 Restructuring Charge:
Reserves at Other Reserve at
Fiscal 2001 March 31, Cash Non-Cash March 31,
(in 000's) Expense 2001 Outlays Changes 2002
--------------------------------------------------------------------------------
Severance $ 21,766 $ 16,743 $ (6,268) $ (10,061) $ 414
Future lease obligations on facility closures
and other exit costs 4,295 4,172 (725) (2,972) 475
--------------------------------------------------------------------------------
Total $ 26,061 $ 20,915 $ (6,993) $ (13,033) $ 889
===============================================================================
Fiscal 1999: We 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 charge included $19.8 million related to severance,
representing the reduction of approximately 1,400 positions worldwide and the
elimination of excess facilities. Special charges included 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 us
and Kodak. Fiscal year 1999 restructuring charges of $40.8 million included the
reversal of unutilized prior year accruals of $1.9 million. The following table
summarizes the restructuring and other special pre-tax charges:
1999 Restructuring Charge:
Reserves at Other Reserve at
Fiscal 1999 March 31, Cash Non-Cash March 31,
(in 000's) Expense 2001 Outlays Changes 2002
--------------------------------------------------------------------------------
Future lease obligations on facility closures
and other exit costs $ 19,820 $ 470 $ 45 -- $ 425
Severance 19,790 -- -- -- --
Write-off of leasehold improvements on
facility closures 3,084 -- -- -- --
--------------------------------------------------------------------------------
Total $ 42,694 $ 470 $ 45 -- $ 425
================================================================================
Other Special Charges - Fiscal 2001: We recorded certain non-cash charges during
fiscal year 2001. Non-cash special charges resulted from a $18.7 million
write-down of goodwill in Australia in the second quarter and a $6.9 million
write-down of goodwill in the U.S. in the fourth quarter. Goodwill write-downs
were determined based on changes in the business environment for certain of our
operations and an analysis of projected cash flows related to those operations.
51
Notes to Consolidated Financial Statements
3. Other Income and Expense
Other income and other expense include the following for the years ended March
31, 2002, 2001, and 2000:
(in 000's) 2002 2001 2000
-------------- ------------- -------------
Other income (expense):
Foreign exchange gains $ 3,000
Foreign exchange losses -- $ (9,621) $ (579)
Country exit costs and asset impairment costs (3,081) -- --
Settlement of litigation -- -- (4,300)
-------------- ------------- -------------
Total $ (81) $ (9,621) $ (4,879)
============== ============= =============
4. Sale of Assets
On June 29, 2001, we completed the sale of Danka Services International ("DSI")
to Pitney Bowes Inc. for $290 million in cash, pursuant to an asset purchase
agreement dated April 9, 2001. DSI was our facilities management and outsourcing
business. Our shareholders approved the sale at an extraordinary general meeting
on June 29, 2001. We also entered into agreements to provide services and
supplies to Pitney Bowes, Inc. on a worldwide basis for an initial term of two
years.
An escrow account of $5 million of the DSI purchase price has been set aside.
The purchase price is subject to an adjustment depending on the value of DSI's
net assets as of the closing of the sale. If the value of DSI's net assets as of
the closing date (as determined by reference to an audited balance sheet for
DSI) exceeds $82.4 million, Pitney Bowes, Inc. is required to pay us an amount
equal to the excess on a dollar-for-dollar basis and the $5 million in escrow
will be released to us. If the value of DSI's net assets as of the closing date
is less than $82.4 million, an amount equal to the shortfall is required to be
paid to Pitney Bowes, Inc. on a dollar-for-dollar basis from the escrow account
and, if the amount of the escrow account is insufficient to meet the shortfall,
we must pay the difference to Pitney Bowes, Inc. Any money remaining in the
escrow account following payment of any shortfall to Pitney Bowes, Inc. will be
released to us. As of March 31, 2002, we had preliminarily adjusted the purchase
price by $2.8 million and expect to finalize such adjustment in the first
quarter of fiscal 2003.
The sale of DSI resulted in a gain, subject to final post-closing adjustments,
for the fiscal year 2002 of $119.5 million after income taxes of $57.9 million.
Assets and liabilities of DSI at March 31, 2001, have been segregated in the
condensed consolidated balance sheets. A summary of the operating results of
discontinued operations are as follows:
(in 000's) 2002 2001 2000
------------- ------------- -------------
Revenue $ 74,234 $ 290,018 $ 281,594
Earnings before income taxes $ 5,425 $ 22,185 $ 23,748
Provision for income taxes 1,848 9,229 9,879
------------- ------------- -------------
Net earnings from discontinued operations 3,577 12,956 13,869
Gain from sale of discontinued operations after
income taxes of $57.9 million 115,913 -- --
------------- ------------- -------------
Discontinued operations, net of tax $ 119,490 $ 12,956 $ 13,869
============= ============= =============
On July 30, 1999, we sold our Omnifax business, a supplier of facsimiles and
related services, parts and supplies, to Xerox Corporation for a cash
consideration of $45.0 million. We recorded a $2.1 million loss on the sale of
Omnifax which is reflected in loss on sale of business 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 are as follows:
52
Notes to Consolidated Financial Statements
(in 000's) 2000
-------------
Revenue $ 35,705
Costs of revenue 22,426
Selling, general and administrative expenses 9,797
Amortization of intangible assets 222
-------------
Total costs and operating expenses 32,445
-------------
Earnings from operations $ 3,260
=============
5. Income Taxes
The provision (benefit) for income taxes attributable to continuing operations
for the three years ended March 31, 2002 was as follows:
(in 000's) 2002 2001 2000
--------------- --------------- --------------
U.S. income tax
Current $ (42) $ 760 $ 5,150
Deferred (5,010) (35,134) (17,747)
--------------- --------------- --------------
Total U.S. tax provision (benefit) (5,052) (34,374) (12,597)
U.K. income tax
Current - - -
Deferred (19,513) (8,044) (2,778)
--------------- --------------- --------------
Total U.K. tax provision (benefit) (19,513) (8,044) (2,778)
Other international income tax
Current 1,091 3,973 9,773
Deferred 6,067 1,117 (258)
--------------- --------------- --------------
Total other international tax provision (benefit) 7,158 5,090 9,515
--------------- --------------- --------------
Total provision (benefit) for income taxes $ (17,407) $ (37,328) $ (5,860)
=============== =============== ==============
A reconciliation of the United Kingdom statutory corporation tax rate to the
effective rate is as follows:
(in 000's) 2002 2001 2000
--------------- --------------- --------------
Tax (benefit) charge at standard United Kingdom rate $ (8,183) $ (81,254) $ (2,818)
Profits (losses) taxed at other than standard United Kingdom rate 21,331 14,129 (33,809)
Changes in valuation allowances (1,715) (146) 29,293
State tax provision, net of federal income tax provision (28) (5,888) 1,200
United Kingdom tax on intra-group profits (29,241) 29,241 -
Permanent differences 429 6,590 274
--------------- --------------- --------------
Provision (benefit) for income taxes $ (17,407) $ (37,328) $ (5,860)
=============== =============== ==============
The United Kingdom statutory corporation tax rate was 30% in fiscal year 2002,
2001 and 2000.
53
Notes to Consolidated Financial Statements
The tax effects of temporary differences that comprise the elements of deferred
tax at March 31, 2002 and 2001 are as follows:
(in 000's) 2002 2001
--------------- ---------------
Deferred tax assets:
Accrued expenses not deducted for tax purposes $ 5,962 $ 17,829
Reserves for inventory and accounts receivables
not deducted for tax purposes 14,215 22,711
Tax loss carryforwards 53,948 177,174
Tax credit carryforwards 4,493 4,510
Depreciation and other 1,363 14,256
--------------- ---------------
Total gross deferred tax assets 79,981 236,480
Valuation allowance (38,764) (111,121)
--------------- ---------------
Net deferred tax assets 41,217 125,359
Deferred tax liabilities:
Leases - (34,468)
--------------- ---------------
Total gross deferred tax liabilities - (34,468)
--------------- ---------------
Net deferred tax asset $ 41,217 $ 90,891
=============== ===============
At March 31, 2002, we had net operating losses and other carryforwards relating
to our U.S. operations of approximately $99.6 million of which $46.8 million
will expire if not used by March 31, 2020 and $52.8 million if not used by March
31, 2021. We have an alternative minimum tax credit carryforward of $4.5 million
relating to U.S. operations, which is available indefinitely. We have foreign
net operating loss carryforwards of approximately $139.4 million with varying
expiration dates. Significant amounts of these loss carryforwards are offset by
valuation allowances reflecting the lack of certainty as to realization.
The valuation allowance for deferred tax assets as of March 31, 2002 and 2001
was $38.8 and $111.1 million, respectively. The net change in the total
valuation allowance for the years ended March 31, 2002 and 2001 was a decrease
of $72.4 million and an increase of $1.4 million, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely than
not that we will realize the benefits of these deductible differences, net of
the existing valuation allowances at March 31, 2002. The amount of the deferred
tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carry-forward period are reduced.
The repatriation of the undistributed earnings of our non United Kingdom foreign
subsidiaries at March 31, 2002 would not result in an additional material amount
of tax.
6. Equipment on Operating Leases, net
Included in equipment on operating leases is equipment used to generate rental
revenue in our core office imaging business. Substantially all of our
governmental 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, 2002 and 2001:
(in 000's) 2002 2001
--------------- ---------------
Equipment on operating leases $ 230,098 $ 284,795
Less accumulated depreciation (172,666) (198,904)
--------------- ---------------
Equipment on operating leases, net $ 57,432 $ 85,891
=============== ===============
Depreciation expense for the years ended March 31, 2002, 2001 and 2000
approximated $44,199,000, $67,463,000 and $83,592,000, respectively.
54
Notes to Consolidated Financial Statements
7. Property and Equipment, net
Property and equipment, along with their useful lives, consists of the following
at March 31, 2002 and 2001:
Average
Useful life
(in 000's) 2002 2001 In years
--------------- --------------- ---------------
Buildings $ 1,438 $ 1,374 31
Office furniture, equipment and leasehold improvements 156,347 166,996 3 - 10
Software 27,556 45,172 3 - 5
Transportation equipment 1,751 3,196 5 - 15
Land 418 418 -
--------------- ---------------
Total Cost 187,510 217,156
Less accumulated depreciation and amortization (126,961) (142,492)
--------------- ---------------
Property and equipment, net $ 60,549 $ 74,664
=============== ===============
Depreciation expense for the years ended March 31, 2002, 2001 and 2000
approximated $36,836,000, $35,092,000 and $31,325,000, respectively.
8. Debt
Debt consists of the following at March 31, 2002 and 2001:
(in 000's) 2002 2001
--------------- ---------------
Credit facility (limited to $270.0 million) interest at LIBOR plus an
applicable margin (7.6% average interest rate for 2002)
due March 2004 - see below $ 170,000 -
Revolving line of credit (limited to $560.0 million) interest at IBOR
plus an applicable margin or the agent bank's reference rate
(7.6% average interest rate for 2002 and 8.9% for 2001,
including additional leverage fees) - see below - $ 514,967
10% subordinated notes due April 2008 64,520 -
Zero coupon senior subordinated notes due April 2004 47,593 -
6.75% convertible subordinated notes - see below 15,988 200,000
Various notes payable bearing interest from prime to 12.0%
maturing principally over the next 5 years 6,353 4,211
--------------- ---------------
Total long-term debt and notes payable 304,454 719,178
Less current maturities of long-term debt and notes payable 36,293 517,447
--------------- ---------------
Long-term debt and notes payable, less current maturities $ 268,161 $ 201,731
=============== ===============
On June 29, 2001, we completed an exchange offer for our 6.75% convertible
subordinated notes due April 1, 2002. We accepted tenders from holders of a
total of $184,012,000 in aggregate principal amount (92%) of the 6.75%
convertible subordinated notes. Of the notes tendered pursuant to the exchange
offer, $118,484,000 in principal amount was tendered for a limited cash option,
$1,008,000 in principal amount was tendered for a new zero coupon senior
subordinated note option and $64,520,000 in principal amount was tendered for a
new 10% note option. In aggregate, we paid $24,000,000 in cash and issued
$47,593,000 in principal amount of zero coupon senior subordinated notes due
April 1, 2004 and $64,520,000 in principal amount of 10% subordinated notes due
April 1, 2008 as consideration under the exchange offer. Noteholders who
accepted the exchange offer did not receive payment of the interest accruing on
the 6.75% convertible subordinated notes for the period from April 1, 2001 to
June 29, 2001. However, interest was deemed to accrue for the 10% subordinated
notes issued in the exchange offer from April 1, 2001. The senior subordinated
notes are guaranteed by Danka Holding Company and Danka Office Imaging Company,
which are both our 100% owned U.S. subsidiaries.
The exchange offer was accounted for as a troubled debt restructuring and
resulted in an extraordinary gain of $27.9 million after income taxes of $12.0
million.
In addition, on June 29, 2001, we entered into an amended and restated senior
credit facility with our existing senior bank lenders to provide us with
financing through March 31, 2004. The facility originally consisted of a $100
million revolver commitment, a
55
Notes to Consolidated Financial Statements
$190 million term loan and $30 million letters of credit commitments, in an
amendment and restatement of our previous credit agreement. The term component
of the facility requires principal installments aggregating $5.0 million in
fiscal year 2002, $16.0 million in fiscal year 2003 and $24.0 million in fiscal
year 2004, with payment due in full on March 31, 2004. Interest on the revolver
and term loan components of the facility are at LIBOR plus 5.5%. The interest
rate increased by 0.5% on December 29, 2001 and will increase by 0.5% on June
29, 2002 and quarterly thereafter. During fiscal year 2002, we repaid $20.0
million of principal under the term loan. The interest rate will decrease by
0.5% for every $25.0 million permanent reduction in the total commitment.
However, the interest rate cannot be reduced below 4.25%.
On March 18, 2002, we entered into $80 million notional interest rate cap
agreement with Bank of America. The interest rate cap will pay us the difference
between the quarterly LIBOR and 3.99% for the period March 18, 2002 to March 18,
2003. If we were to have settled the commitment related to our interest rate
swap on March 31, 2002, the amount due to us would have been de minimis.
Our indebtedness under the credit facility is secured by substantially all of
our assets in the United States, Canada, United Kingdom, Netherlands, and
Germany. The credit facility contains negative and affirmative covenants which
place restrictions on us regarding, among other things, the disposition of
assets, capital expenditures, additional indebtedness and permitted liens, and
prohibit the payment of dividends (other than payment-in-kind dividends on our
participating shares). The credit facility requires that we maintain minimum
levels of adjusted consolidated net worth and cumulative consolidated EBITDA, a
minimum ratio of consolidated EBITDA to interest expense and contains
limitations on the amounts of capital expenditures, each as defined in the
credit facility. We were in compliance with all of the applicable covenants at
March 31, 2002.
We incurred $11.2 million in bank fees and $4.8 million in third party fees
relating to the amended and restated facility. These fees will be amortized over
the term of the facility. We were also required to pay our banks a fee equal to
0.5% of the total commitments on April 2, 2002 (which was $1.5 million), and we
will pay a fee equal to 1.0% of the total commitments on June 29, 2002 and a fee
equal to 4.0% of the total commitments on June 29, 2003.
Aggregate annual maturities of debt at March 31, 2002, are as follows:
(in 000's)
--------------
Year Ending March 31,
2003 $ 36,293
2004 155,261
2005 47,817
2006 129
2007 131
Thereafter 64,823
--------------
$ 304,454
==============
9. 6.50% Senior Convertible Participating Shares
On December 17, 1999, we issued 218,000 new 6.50% senior convertible
participating shares of Danka Business Systems PLC for $218.0 million. The net
proceeds of 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 our existing bank indebtedness and the remainder was used
for general corporate purposes.
The participating shares are entitled to dividends equal to the greater of 6.50%
per annum or ordinary share dividends on an as converted basis. Dividends are
cumulative and will be paid in the form of additional participating shares for
the first five years and thereafter in cash if permitted under the then existing
credit agreement. The participating shares are currently convertible into
ordinary shares at a conversion price of $3.11 per ordinary share (equal to
$12.44 per ADS), subject to adjustment in certain circumstances to avoid
dilution of the interests of participating shareholders. The participating
shares have voting rights on an as converted basis, currently corresponding to
approximately 24.8% of the total voting power of our capital stock. In addition,
as of March 31, 2002 we had issued an aggregate of 32,644 additional
participating shares in satisfaction of the payment-in-kind dividends.
On or after December 17, 2003, and prior to December 17, 2010, we have 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) or (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, we may decide to convert the
56
Notes to Consolidated Financial Statements
participating shares into the number of ordinary shares into which they are
convertible if the market value of those shares exceed the redemption price set
out below.
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 Danka, 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 us) plus any accumulated and unpaid dividends accumulating
from the most recent dividend date or b) the amount that would have been payable
on each participating share if it had been converted into ordinary shares if the
market value of those shares exceed the liquidation value of the participating
shares.
If by December 17, 2010, we have not converted or otherwise redeemed the
participating shares, we are required, subject to compliance with applicable
laws, to redeem the participating shares for cash at the greater of (a) the then
liquidation value or (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, we may decide to convert
the participating shares into the number of ordinary shares into which they are
convertible.
10. Earnings per Share
A reconciliation of the numerators and denominators of the basic and diluted
earnings (loss) from continuing operations before extraordinary items per ADS
computations follows:
March 31, 2002 March 31, 2001 March 31, 2000
----------------------------------- ----------------------------------------------------------------------
Earnings Earnings Earnings
(loss) from (loss) from (loss) from
continuing continuing continuing
operations Shares Per-share operations Shares Per-share operations Shares Per-share
(In 000's except per (numerator) (denomin amount (numerator) (denomin amount (numerator) (denomin amount
share amounts) ator) ator) ator)
----------------------------------------------------------------------------------------------------------
Basic loss available to
common
shareholders per
ADS:
Net earnings (loss)
from continuing
operations before
extraordinary
Items $ (9,868) $(233,516) $(3,535)
Dividends and
accretion on
participating
shares (16,930) (15,953) (4,482)
-------- --------- -------
Loss (26,798) 61,967 $(0.43) (249,469) 60,438 $(4.13) (8,017) 57,624 $(0.14)
====== ====== ======
Effect of dilutive
securities:
Stock options -- -- -- -- -- --
-------- ------- --------- ------ ------- ------
Diluted loss available
to common shareholders
per ADS:
Loss $(26,798) 61,967 $(0.43) $(249,469) 60,438 $(4.13) $(8,017) 57,624 $(0.14)
======== ======= ====== ========= ====== ====== ======= ====== ======
57
Notes to Consolidated Statements
The effect of our convertible subordinated notes is not included in the
computation of diluted earnings per ADS for the three years ended March 31, 2002
because they are anti-dilutive. In addition, 548,000, 1,531,000 and 901,000 of
stock options for the years ended March 31, 2002, 2001 and 2000, respectively,
and the effect of the convertible participating shares on the computation of
diluted earnings per ADS for the three years ended March 31, 2002 are not
included because they are anti-dilutive. For the three years ended March 31,
2002, basic and diluted per share amounts were equal because of the losses from
continuing operations before extraordinary items we incurred in those years.
11. Employee Benefit Plans
Substantially all of our U.S. employees are entitled to participate in our
profit sharing 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 our discretion, we may also contribute to the plan.
Employees are always vested in their contributed balance and become fully vested
in our contributions after four years of service. Effective February 1, 1999, we
began matching employee contributions with our ADSs in an action to conserve
cash. In November 2000, we discontinued the match of employee contributions with
shares of our ADSs because we had issued substantially all of the ADSs that we
were authorized to issue for the matching contributions. For the period April 1,
2000 through October 31, 2000, we issued approximately 2.7 million ADSs to match
employee contributions made to the plan. For the period February 1, 1999 through
March 31, 2000, we issued approximately 1.6 million ADSs to match employee
contributions made to the plan. For the period April 1, 2001 thorough March 31,
2002, we re-instated the employee match by contributing $2,500,000 to the plan.
The expenses related to contributions to the plan for the years ended March 31,
2002, 2001 and 2000 were approximately $2,500,000, $4,801,000 and $10,504,000,
respectively.
Most non-U.S. employees participate in defined benefit and contribution plans
with varying vesting and contribution provisions. The expenses related to these
contributions for the years ended March 31, 2002, 2001 and 2000 were
approximately $4,749,000, $4,344,000 and $6,197,000, respectively.
In connection with our acquisition of Kodak's office imaging and outsourcing
businesses, we acquired certain pension obligations of non-U.S. employees from
Kodak. At March 31, 2002 and 2001 the recorded liability for these pension
obligations was $7.9 and $11.1 million, respectively.
We have a supplemental executive retirement plan, which provides additional
income for certain of our U.S. executives upon retirement. There were no
contributions to the plan for the years ended March 31, 2002, 2001 and 2000.
Under the Danka Section 423 Employee Stock Purchase Plan approved on March 28,
2002, we are authorized to issue up to 8,000,000 ordinary shares (2,000,000 ADS
equivalents) to eligible employees in Danka Office Imaging Company, our
principal U.S. operating subsidiary. Under the terms of the plan, employees can
choose to have a fixed dollar amount deducted from their biweekly compensation
to purchase the our common stock. The purchase price of the stock is 85% of the
market value on the lower of the first day of the purchase period and the
purchase date and employees are limited to a maximum purchase of $25,000 in fair
market value each calendar year. The plan is effective as of April 1, 2002. All
shares purchased under this plan must be retained for a period of six months.
12. Share Option Plans
Our 1996 share option plan authorizes the granting of both incentive and
non-incentive share options over an aggregate of 22,000,000 ordinary shares
(5,500,000 ADS equivalents). The option balance outstanding at March 31, 2002
also includes options issued pursuant to a plan that preceded the 1996 share
option plan. There are no shares available for issue under the earlier 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.
We established The Danka Employees' Trust Fund for use in conjunction with our
1996 share option plan. The employees' trust may subscribe for new ordinary
shares which we have granted in the form of share options, or it may purchase
our ordinary shares on the open market. The employees' trust will transfer
shares to employees upon exercise of their options. No shares were acquired by
the employees' trust for the years ended March 31, 2002, 2001, and 2000.
In October 1999, shareholders approved a 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). In October 2001,
shareholders approved the issuance of an additional 20,000,000 ordinary shares
(5,000,000 ADS equivalents) pursuant to the 1999 plan. Share options granted
under the 1999 share option plan have the same terms as those granted under the
1996 share option plan.
58
Notes to Consolidated Financial Statements
In October 2001, shareholders approved the Danka 2001 Long Term Incentive Plan,
under which we may make awards of a variety of equity-related incentives to our
executive directors, officers and employees. Awards under the 2001 plan may take
the form of restricted stock unit awards, stock appreciation rights and other
share-based awards. The 2001 plan is administered by our human resources
committee, which determines the persons to whom awards may be made, the form of
the awards, the terms and conditions of the awards, the number of shares subject
to each award and the dates of grant. The total number of ordinary shares in
respect of which awards may be made under the 2001 plan is 20,000,000 ordinary
shares (5,000,000 ADS equivalents). Awards may be made over ordinary shares or
ADSs. As of March 31, 2002, no awards had been made under the 2001 plan.
In July 2000, shareholders approved a restricted stock award for the issuance of
1,542,168 ordinary shares (385,542 ADS equivalent) to be issued in three equal
installments in 2001, 2002 and 2003 to Brian L. Merriman
As of March 31, 2002, 46,107,236 ordinary shares (11,526,809 ADS equivalents)
were available to grant under our existing equity compensation plans.
Transactions for the 1996 and 1999 share option plans during the three years
ended March 31, 2002 were as follows:
2002 2001 2000
-------------- -------------- --------------
Options outstanding at April 1 21,830,905 20,145,123 24,614,289
Granted 8,260,000 4,453,000 3,554,320
Exercised - - (40,000)
Cancelled 2,198,142 (2,767,218) (7,983,486)
-------------- -------------- --------------
Options outstanding at March 31 27,892,763 21,830,905 20,145,123
============== ============== ==============
Options exercisable at March 31 16,414,765 11,876,914 6,402,791
============== ============== ==============
Option price ranges per share in pence:
Granted 9.25 - 49.25 11.75 - 83.34 72.00 - 246.00
Exercised - - 136.00
Cancelled 80.75 - 730.00 65.15 - 730.00 72.00 - 762.50
Outstanding at March 31 9.25 - 730.00 11.75 - 730.00 43.17 - 730.00
Weighted average option price ranges per share in pence:
Granted 25.0 17.87 133.26
Exercised - - 136.00
Cancelled 187.4 176.59 219.49
Outstanding at March 31 90.4 126.47 162.64
Exercisable at March 31 133.25 176.71 179.98
Information with respect to share options outstanding at March 31, 2002 is as
follows:
Weighted
average Number of Weighted average
exercise price in outstanding remaining
Price range in pence pence shares contractual life
- ------------------------ ----------------- ----------------- --------------------
9.25 - 13.00 20.27 12,190,000 8.5 years
43.17 - 113.85 82.20 11,253,720 6.8 years
127.00 - 215.66 141.61 1,814,000 7.4 years
246.00 - 378.67 272.00 1,380,085 5.2 years
445.00 - 730.00 571.68 1,254,958 4.8 years
-----------------
27,892,763
=================
59
Notes to Consolidated Finanacial Statements
Information with respect to share options exercisable at March 31, 2002 is as
follows:
Weighted
average Number of Weighted average
excercise price in exercisable remaining
Price range in pence pence shares contractual life
- ---------------------------- ------------------ ------------------ ---------------------
9.25 - 13.00 12.36 1,636,666 8.5 years
43.17 - 113.85 82.57 10,933,720 6.8 years
127.00 - 215.66 141.61 1,209,336 7.4 years
246.00 - 378.67 272.00 1,380,085 5.2 years
445.00 - 730.00 571.68 1,254,958 4.8 years
-----------------
16,414,765
=================
We account for our share option plans under APB Opinion No. 25, under which no
compensation cost has been recognized. We have adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." Had compensation cost for the plans been
determined consistent with Statement No. 123, our net earnings and net earnings
per ADS would have been reduced to the following unaudited pro forma amounts:
($000 except per ADS data) 2002 2001 2000
-------------- -------------- ---------------
Net (loss) earnings
As reported $ 137,555 $ (220,560) $ 10,334
Pro forma 136,442 (226,099) 11,132
Basic (loss) income available to common
shareholders per ADS
As reported $ 1.95 $ (3.91) $ 0.10
Pro forma 1.93 (4.00) 0.12
Diluted (loss) income available to common
shareholders per ADS
As reported $ 1.95 $ (3.91) $ 0.10
Pro forma 1.93 (4.00) 0.11
The weighted average fair value of ordinary shares at grant date, in pence, as
of March 31, 2002, 2001 and 2000 was 24.96, 17.48 and 126.88, respectively. 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:
2002 2001 2000
-------------- -------------- ---------------
Dividend yield 0% 0% 0%
Expected volatility 310.70% 234.0% 172.0%
Risk-free interest rate 4.43% 4.82% 5.75%
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. Segment Reporting
Our reportable segments are Danka United States, Danka Europe and Danka
International. Our reportable segments do not include the discontinued
operations of DSI. Danka U.S., Danka Europe and Danka International provide
office imaging solutions together with related parts, supplies and services on a
direct basis to retail customers. The geographical areas covered by Danka
International include Canada, Latin America and Australia. Danka Europe also
provides office imaging equipment and supplies on a wholesale basis to
independent dealers. We measure segment performance as earnings from operations,
which is defined as earnings before interest expense and income taxes as shown
on our consolidated statements of operations. The following tables present
information about our segments.
60
Notes to Consolidated Financial Statements
Years ended March 31,
---------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------- ------------- ------------- ------------
Revenues
Danka United States $ 871,508 $ 1,019,019 $ 1,211,199
Danka Europe 542,427 602,877 769,240
Danka International 144,945 159,864 191,663
Other (1) 3,704 (8,518) 41,926
------------- ------------- ------------
Total Revenues $ 1,555,176 $ 1,773,242 $ 2,214,028
============= ============= ============
Operating earnings (loss) from continuing operations
Danka United States $ 17,201 $ (64,010) $ 74,964
Danka Europe 11,391 (25,475) 31,724
Danka International 4,959 (37,870) 4,436
Other (1) (24,296) (64,013) (18,215)
------------- ------------- ------------
Total operating earnings (loss) from continuing operations $ 9,255 $ (191,368) $ 92,909
============= ============= ============
Assets
Danka United States 334,067 $ 429,612 $ 639,887
Danka Europe 437,284 518,562 613,847
Danka International 78,131 91,358 147,012
Other (1) 76,205 243,411 266,950
------------- ------------- ------------
Total assets $ 925,687 $ 1,282,943 $ 1,667,696
============= ============= ============
Capital expenditures
Danka United States $ 32,721 $ 32,761 $ 59,173
Danka Europe 11,900 24,671 28,847
Danka International 5,236 10,069 9,810
Other (1) 720 1,380 3,265
------------- ------------- ------------
Total capital expenditures $ 50,577 $ 68,881 $ 101,095
============= ============= ============
Depreciation and amortization
Danka United States $ 53,666 $ 69,014 $ 67,065
Danka Europe 28,152 33,482 40,062
Danka International 9,615 32,561 16,333
Other (1) 914 5,912 5,427
------------- ------------- ------------
Total depreciation and amortization $ 92,347 $ 140,969 $ 128,887
============= ============= ============
(1) Other includes the elimination of inter-segment revenues, corporate
expenses, restructuring, foreign exchange gains/losses and assets of
discontinued operations.
61
Notes to Consolidated Financial Statements
The following table indicates the relative amounts of our revenue for the three
years ended March 31, 2002 and our long-lived assets at the respective year ends
by geographic area:
Revenues Long-lived assets (1)
-------------------------------------------------- --------------------------------------------
March-02 March-01 March-00 March-02 March-01 March-00
--------------- --------------- --------------- ------------- -------------- -------------
United States $ 867,803 $ 1,010,501 $ 1,253,125 $ 174,259 $ 199,265 $ 324,478
Europe
United Kingdom 111,814 133,212 165,905 41,123 45,414 55,465
Other 430,613 469,665 603,335 114,817 132,548 161,662
--------------- --------------- --------------- ------------- -------------- -------------
Total Europe 542,427 602,877 769,240 155,940 177,962 217,127
Other Foreign Countries 144,946 159,864 191,663 20,768 27,499 57,466
--------------- --------------- --------------- ------------- -------------- -------------
Total $ 1,555,176 $ 1,773,242 $ 2,214,028 $ 350,967 $ 404,726 $ 599,071
=============== =============== =============== ============= ============== =============
(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.
14. Commitments, Contingencies and Related Party Transactions
Leases: We are obligated under various noncancelable operating leases for our
office facilities, office equipment and vehicles. Future noncancelable lease
commitments as of March 31, 2002, are as follows:
(in 000's)
------------
Year Ending March 31,
2003 $ 58,274
2004 36,883
2005 25,931
2006 12,427
2007 9,263
Thereafter 28,762
Rental expense for fiscal years ended March 31, 2002, 2001 and 2000 was
approximately $70,385,000, $93,273,000 and $89,994,000, respectively.
Equipment Leasing Commitment: In October 2001 and in March 2002, we modified our
agreement with General Electric Capital Corporation ("GE Capital") to provide a
framework for ongoing customer lease financing through March 2006. In connection
with this agreement, we are obligated to provide a minimum level of customer
leases to GE Capital. The minimum level of customer leases is equal to 63% of
U.S. hardware sales. If we are unable to meet the targeted volume commitments,
we are obligated to make penalty payments equal to 4.75% of the difference. For
fiscal year 2003, the target is the lesser of $176.6 million or a target
calculated based on revenues. For the years ended March 31, 2002 and 2001, we
were obligated for penalty payments of approximately $0.2 million and $1.9
million, respectively, to GE Capital because we did not satisfy the minimum
level requirements.
Facility Lease Commitments: Danka Holding Company ("DHC"), one of our
subsidiaries, is party to a number of tax retention operating leases ("TROL")
which expire on March 31, 2004. The TROL provides for DHC to lease certain real
property in the United States. The TROL generally requires DHC to pay property
taxes, maintenance, insurance, and certain other operating costs of the leased
properties. DHC has given a residual guarantee in respect of the fair market
value of the properties at the termination of the TROL. DHC is obligated to pay
the difference between the maximum amount of the residual guarantee, which is
equal to 87% of the total cost of the properties, and the fair market value of
the properties at the termination of the leases. The residual guarantee has not
been included in the table of future noncancelable lease commitments. DHC's
maximum contingent liability under the TROL was approximately $24.5 million as
of March 31, 2002. DHC has purchase renewal options over the leased properties
at fair market value and has the right to exercise purchase options for the
property at the end of the lease term. Alternatively, the properties can be sold
to third parties. At March 31, 2002, the properties were being offered for sale.
We currently have a $2.0 million reserve relating to DHC's expected liability
under the residual guarantee. We recognized a $6.0 million and a $11.4 million
charge in fiscal years 2002 and 2001, respectively, relating to DHC's expected
liability under the residual guarantee. The TROL incorporates the covenants from
our credit facility, including the financial covenants. We were in compliance
with all of the applicable covenants at March 31, 2002.
62
Notes to Consolidated Financial Statements
Related Party Transactions: We remain contingently liable for the repayment of
$318,000 of Industrial Revenue Bonds used to finance the construction of our
corporate office in St. Petersburg, Florida. The obligation was assumed by a
company controlled by Daniel M. Doyle, our former chief executive officer, when
it acquired the corporate office building. We lease our corporate office and
three other offices owned by companies in which Mr. Doyle has a significant
interest. The leases expire at various dates, with the last lease expiring in
December 2003.
Litigation: We are subject to legal proceedings and claims, which arise in the
ordinary course of our business. We do not expect these legal proceedings to
have a material effect on our financial position, results of operations or
liquidity.
The Internal Revenue Service has completed its audits of our federal income tax
returns for the fiscal years ended March 31, 1995, 1996, 1997 and 1998. We have
now resolved all outstanding issues with the Internal Revenue Service arising
out of those examinations. We have agreed to certain adjustments with the
Internal Revenue Service to the tax returns, primarily relating to the timing of
deductions associated with leased equipment financing and costs associated with
our acquisition of Kodak's office imaging division. This result did not have a
material negative impact on our financial position, results of operations or
liquidity due to the availability of losses that were carried back to the years
affected by the adjustments
Fiscal authorities in the Netherlands are engaged in an audit of our Dutch
operations. We do not believe that this audit, or any result thereof, will have
a material impact on our financial position, results of operations or liquidity.
15. Financial Instruments
Fair Value of Financial Instruments: At March 31, 2002, 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
our $16.0 million in principal amount of 6.75% convertible subordinated notes
due 2002 at March 31, 2002 was approximately $16.0 million, based on maturity of
the notes. There are no quoted market prices for our 6.50% senior convertible
participating shares. The participating shares currently are convertible into
ordinary shares at a current conversion price of $12.44 per ADS. Assuming all
participating shares were converted to ADSs at March 31, 2002, the resulting
shares would have a market value of $78.0 million at that date. There are no
quoted market prices for the $47.6 million of zero coupon senior subordinated
notes and the $64.5 million in 10% subordinated notes. Therefore, their market
value at March 31, 2002 are assumed to be their par values. The estimated fair
market value at March 31, 2002 of our credit agreement of our senior bank debt
approximated the carrying amount of the debt.
Foreign Currency Hedging: Generally, we do not enter into forward and option
contracts to manage our exposure to foreign currency fluctuations. 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. We did not enter into any forward contracts or option
contracts to buy or sell foreign currency for fiscal years 2002 and 2001.
Interest Rate Hedging: Under our credit agreement for our senior bank debt, we
are 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, we have utilized
interest rate swap agreements to eliminate the impact of interest rate changes
on certain variable rate principal balances outstanding under the credit
agreement Pursuant to our credit agreement, we entered into a $80 million
notional interest rate cap agreement with Bank of America. The interest rate cap
will pay Danka the difference between the quarterly LIBOR and 3.99% for the
period March 18, 2002 to March 18, 2003. There is no value associated with the
interest rate hedge until the interest rate difference exceeds 3.99%.
Our 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. We minimize such risk by limiting the
counterparties to a group of major international banks, and do not expect to
record any losses as a result of nonperformance by these counterparties.
63
Notes to Consolidated Financial Statements
16. Quarterly Financial Data (unaudited)
The following table presents selected quarterly financial data for the periods
indicated:
06-30-01 09-30-01 12-31-01 03-31-02 Total Year
------------- ------------- ------------- ------------- -------------
(in thousands), expect per ADS data
Fiscal 2002
Revenue $ 401,668 $ 381,310 $ 400,554 $ 371,643 $ 1,555,176
Gross profit 139,879 129,551 140,810 139,642 549,882
Income before income taxes (16,360) (6,382) 1,429 (5,966) (27,275)
Income from continuing operations (13,156) (1,876) 560 4,601 (9,868)
Discontinued operations, net of tax 113,052 (1,291) (2,901) 10,630 119,490
Extraordinary gain on early retirement of
debt, net of tax 26,762 (241) 1,415 - 27,933
Net earnings (loss) 126,658 (3,408) (926) 15,231 137,555
Per ADS - diluted:
Income from continuing operations (0.28) (0.10) (0.06) - (0.43)
Discontinued operations 1.83 (0.02) (0.04) 0.17 1.93
Extraordinary gain 0.43 - 0.02 - 0.45
Net earnings (loss) 1.98 (0.12) (0.08) 0.17 1.95
Stock prices (high/low) per ADS $1.25 - $0.63 $1.12 - $0.49 $1.13 - $0.50 $4.15 - $0.97 $4.15 - $0.97
- -----------------------------------------------------------------------------------------------------------------------------------
Fiscal 2001
Revenue $ 470,804 $ 452,925 $ 425,003 $ 424,510 $ 1,773,242
Gross profit 172,397 118,810 142,259 80,391 513,857
Income before income taxes (9,582) (81,970) (55,104) (124,189) (270,844)
Income from continuing operations (6,168) (64,623) (34,949) (127,776) (233,516)
Discontinued operations, net of tax 4,928 4,445 3,192 392 12,956
Net earnings (loss) (1,240) (60,178) (31,757) (127,384) (220,560)
Per ADS - diluted:
Income from continuing operations (0.17) (1.15) (0.63) (2.13) (4.13)
Discontinued operations 0.08 0.07 0.05 0.01 0.22
Net earnings (loss) (0.09) (1.08) (0.58) (2.12) (3.91)
Stock prices (high/low) per ADS $ 6.13 - $3.5 $4.13 - $1.41 $1.66 - $0.28 $1.00 - $0.31 $1.00 - $0.31
- -----------------------------------------------------------------------------------------------------------------------------------
17. Supplemental Consolidating Financial Data for Subsidiary Guarantors
On June 29, 2001, we issued approximately $47.6 million in principal amount of
zero coupon senior subordinated notes due April 1, 2004. The zero coupon senior
subordinated notes are fully and unconditionally guaranteed on a joint and
several basis by our 100% owned subsidiaries, Danka Holding Company and Danka
Office Imaging company (collectively, the "Subsidiary Guarantors"). The
Subsidiary Guarantors represent substantially all of our operations conducted in
the United States of America.
The following supplemental consolidating financial data includes the combined
Subsidiary Guarantors. Management believes separate complete financial
statements of the respective Subsidiary Guarantors would not provide additional
material information that would be useful in assessing the financial composition
of the Subsidiary Guarantors. No single Subsidiary Guarantor has any significant
legal restriction on the ability of investors or creditors to obtain access to
its assets in the event of default on the guarantee other than subordination of
the guarantee to our senior indebtedness. The zero coupon senior subordinated
notes and the guarantees are subordinated to all our existing and future senior
indebtedness. The indenture governing the zero coupon senior subordinated notes
contains limitations on the amount of additional indebtedness, including senior
indebtedness, that we may incur.
We account for investment in subsidiaries on the equity method for purposes of
the supplemental consolidating presentation. Earnings of subsidiaries are
therefore reflected in Danka Business Systems PLC's ("Parent Company")
investment in subsidiaries. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions.
64
Notes to Consolidated Financial Statements
Supplemental Consolidating Statement of Operations
For the year ended March 31, 2002
---------------------------------
Subsidiary
Parent Subsidiary Non- Consolidated
Company /(1)/ Guarantors /(2)/ Guarantors /(3)/ Eliminations Total
------------- ----------------- ----------------- ------------ ------------
Revenue:
Retail equipment sales $ - $ 304,546 $ 233,893 $ - $ 538,439
Retail service, supplies and rentals - 560,745 377,045 - 937,790
Wholesale - - 78,947 - 78,947
- -------------------------------------------------------- ------------- ----------------- ----------------- ------------ ------------
Total revenue - 865,291 689,885 - 1,555,176
- -------------------------------------------------------- ------------- ----------------- ----------------- ------------ ------------
Costs and operating expenses
Cost of retail equipment sales - 232,724 161,332 - 394,056
Retail service, supplies and rental costs - 297,798 249,083 - 546,881
Wholesale costs of revenue - - 64,357 - 64,357
Selling, general and administrative expenses 4,245 335,174 191,912 - 531,331
Amortization of intangible assets - 3,776 7,431 - 11,207
Restructuring charges (credits) - (1,991) (1) - (1,992)
Equity (income) loss (106,570) - - 106,570 -
Other (income) expense 2,057 1 (1,945) (32) 81
- -------------------------------------------------------- ------------- ----------------- ----------------- ------------ ------------
Total costs and operating expenses (100,268) 867,482 672,169 106,538 1,545,921
- -------------------------------------------------------- ------------- ----------------- ----------------- ------------ ------------
Operating earnings (loss) from continuing operations 100,268 (2,191) 17,716 (106,538) 9,255
Interest expense (36,783) (68,429) (66,618) 129,532 (42,298)
Interest income 52,417 5,198 77,685 (129,532) 5,768
- -------------------------------------------------------- ------------- ----------------- ----------------- ------------ ------------
Earnings (loss) from continuing operations before income
taxes 115,902 (65,422) 28,783 (106,538) (27,275)
Provision (benefit) for income taxes 5,956 (41,753) 18,370 20 (17,407)
- -------------------------------------------------------- ------------- ----------------- ----------------- ------------ ------------
Earnings (loss) from continuing operations before
extraordinary items 109,946 (23,669) 10,413 (106,558) (9,868)
Discontinued operations, net of tax (324) 59,699 60,115 - 119,490
Extraordinary gain early retirement of debt, net of tax 27,933 - - - 27,933
- -------------------------------------------------------- ------------- ----------------- ----------------- ------------ ------------
Net (loss) earnings $ 137,555 $ 36,030 $ 70,528 $ (106,558) $ 137,555
======================================================== ============= ================= ================= ============ ============
(1) Danka Business Systems PLC
(2) Danka Holding Company and Danka Office Imaging Company
(3) Subsidiaries of Danka Business Systems PLC other than Danka Holding Company
and Danka Office Imaging Company
65
Notes to Consolidated Financial Statements
Supplemental Consolidating Statement of Operations
For the year ended March 31, 2001
---------------------------------
Subsidiary
Parent Subsidiary Non- Consolidated
Company/(1)/ Guarantors /(2)/ Guarantors Eliminations Total
/(3)/
------------- ---------------- ----------- ------------ ------------
Revenue:
Retail equipment sales $ - $ 351,917 $ 262,190 $ - $ 614,107
Retail service, supplies and rentals - 648,613 413,394 - 1,062,007
Wholesale - - 97,128 - 97,128
- -------------------------------------------------------- ----------- ---------------- ------------ ------------ --------------
Total revenue - 1,000,530 772,712 - 1,773,242
- -------------------------------------------------------- ----------- ---------------- ------------ ------------ --------------
Costs and operating expenses
Cost of retail equipment sales - 319,911 198,385 - 518,296
Retail service, supplies and rental costs - 378,721 281,446 - 660,167
Wholesale costs of revenue - - 80,922 - 80,922
Selling, general and administrative expenses 8,402 400,336 232,742 - 641,480
Amortization of intangible assets - 4,405 8,437 - 12,842
Write-off of goodwill and other
long-lived assets - - 25,577 - 25,577
Restructuring charges (credits) - 4,661 11,044 - 15,705
Equity (income) loss 211,674 - - (211,674) -
Other (income) expense (5,585) (330) 15,536 - 9,621
- -------------------------------------------------------- ----------- ---------------- ------------ ------------ --------------
Total costs and operating expenses 214,491 1,107,704 854,089 (211,674) 1,964,610
- -------------------------------------------------------- ----------- ---------------- ------------ ------------ --------------
Operating earnings (loss) from continuing operations (214,491) (107,174) (81,377) 211,674 (191,368)
Interest expense (91,824) (83,344) (89,904) 182,424 (82,648)
Interest income 84,335 2,049 99,212 (182,424) 3,172
- -------------------------------------------------------- ----------- ---------------- ------------ ------------ --------------
Earnings (loss) from continuing operations before income
taxes (221,980) (188,469) (72,069) 211,674 (270,844)
Provision (benefit) for income taxes (1,420) (25,975) (9,933) - (37,328)
- -------------------------------------------------------- ----------- ---------------- ------------ ------------ --------------
Earnings (loss) from continuing operations before
extraordinary items (220,560) (162,494) (62,136) 211,674 (233,516)
Discontinued operations, net of tax - 11,004 1,952 - 12,956
Extraordinary gain early retirement of debt, net of tax - - - - -
- -------------------------------------------------------- ----------- ---------------- ------------ ------------ --------------
Net (loss) earnings $ (220,560) $ (151,490) $ (60,184) $ 211,674 $ (220,560)
======================================================== =========== ================ ============ ============= ==============
(1) Danka Business Systems PLC
(2) Danka Holding Company and Danka Office Imaging Company
(3) Subsidiaries of Danka Business Systems PLC other than Danka Holding Company
and Danka Office Imaging Company
66
Notes to Consolidated Financial Statements
Supplemental Consolidating Statement of Operations
For the year ended March 31, 2000
---------------------------------
------------------------------------------------------------------------------------
Subsidiary
Parent Subsidiary Non- Consolidated
Company/(1)/ Guarantors/(2)/ Guarantors/(3)/ Eliminations Total
------------- ---------------- ----------------- --------------- ---------------
Revenue:
Retail equipment sales $ - $ 421,842 $ 320,242 $ - $ 742,084
Retail service, supplies and rentals - 824,764 541,711 - 1,366,475
Wholesale - - 105,469 - 105,469
- -------------------------------------------- ------------- ---------------- ----------------- --------------- ---------------
Total revenue - 1,246,606 967,422 - 2,214,028
- -------------------------------------------- ------------- ---------------- ----------------- --------------- ---------------
Costs and operating expenses
Cost of retail equipment sales - 303,345 220,648 - 523,993
Retail service, supplies and rental costs - 450,667 342,625 - 793,292
Wholesale costs of revenue - - 86,815 - 86,815
Selling, general and administrative expenses 4,679 424,024 273,615 - 702,318
Amortization of intangible assets - 4,494 9,476 - 13,970
Restructuring charges (credits) - 341 (4,489) - (4,148)
Equity (income) loss (25,251) - - 25,251 -
Other (income) expense - (108) 4,987 - 4,879
- -------------------------------------------- ------------- ---------------- ----------------- --------------- ---------------
Total costs and operating expenses (20,572) 1,182,763 933,677 25,251 2,121,119
- -------------------------------------------- ------------- ---------------- ----------------- --------------- ---------------
Operating earnings (loss) from continuing
operations 20,572 63,843 33,745 (25,251) 92,909
Interest expense (90,350) (91,128) (104,214) 181,491 (104,201)
Interest income 83,402 160 101,887 (181,491) 3,958
Loss on sale of business (2,061) (2,061)
- -------------------------------------------- ------------- ---------------- ----------------- --------------- ---------------
Earnings (loss) from continuing operations
before income taxes 11,563 (27,125) 31,418 (25,251) (9,395)
Provision (benefit) for income taxes 1,229 (3,767) (3,322) - (5,860)
- -------------------------------------------- ------------- ---------------- ----------------- --------------- ---------------
Earnings (loss) from continuing operations
before extraordinary items 10,334 (23,358) 34,740 (25,251) (3,535)
Discontinued operations, net of tax - 8,707 5,162 - 13,869
Extraordinary gain early retirement of debt,
net of tax - - - - -
- -------------------------------------------- ------------- ---------------- ----------------- --------------- ---------------
Net (loss) earnings $ 10,334 $ (14,651) $ 39,902 $ (25,251) $ 10,334
============================================ ============= ================ ================= =============== ===============
(1) Danka Business Systems PLC
(2) Danka Holding Company and Danka Office Imaging Company
(3) Subsidiaries of Danka Business Systems PLC other than Danka Holding Company
and Danka Office Imaging Company
67
Notes to Consolidated Financial Statements
Supplemental Consolidating Balance Sheet Information
March 31, 2002
--------------
Subsidiary
Parent Subsidiary Non- Consolidated
Company/(1)/ Guarantors/(2)/ Guarantors/(3)/ Eliminations Total
------------ --------------- --------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 8,420 $ 10,453 $ 40,597 $ - $ 59,470
Accounts receivable, net - 143,685 148,665 - 292,350
Inventories - 46,584 84,015 - 130,599
Prepaid expenses, deferred income taxes and other
current assets 5,060 21,470 9,405 - 35,935
Assets of discontinued operations - - - - -
- ------------------------------------------------- ------------ --------------- --------------- ------------ -------------
Total current assets 13,480 222,192 282,682 - 518,354
Equipment on operating leases, net - 29,408 28,024 - 57,432
Property and equipment, net - 49,250 11,299 - 60,549
Intangible assets, net - 94,619 138,367 - 232,986
Investment in subsidiaries 631,571 1,014 1 (632,586) -
Other assets 13,183 41,192 1,991 - 56,366
- ------------------------------------------------- ------------ --------------- --------------- ------------ -------------
Total assets $ 658,234 $ 437,675 $ 462,364 $ (632,586) $ 925,687
================================================= ============ =============== =============== ============ =============
Liabilities and shareholders' equity (deficit)
Current liabilities:
Current maturities of long-term debt and notes
payable $ 31,988 $ 161 $ 4,144 $ - $ 36,293
Accounts payable 5,822 69,535 35,229 - 110,586
Accrued expenses and other current liabilities 6,149 70,497 75,630 4,044 156,320
Deferred revenue - 19,951 22,392 - 42,343
Due to/(from) affiliate 59,591 134,180 (189,726) (4,045) -
Liabilities of discontinued operations - - - - -
- ------------------------------------------------- ------------ --------------- --------------- ------------ -------------
Total current liabilities 103,550 294,324 (52,331) (1) 345,542
Due to/(from) affiliates - long-term 200,000 (200,000) - -
Long-term debt and notes payables, less current
maturities 266,114 817 1,230 - 268,161
Deferred income taxes and other long-term
liabilities - 7,621 15,794 - 23,415
- ------------------------------------------------- ------------ --------------- --------------- ------------ -------------
Total liabilities 369,664 502,762 (235,307) (1) 637,118
- ------------------------------------------------- ------------ --------------- --------------- ------------ -------------
6.5% convertible participating shares 240,520 - - - 240,520
- ------------------------------------------------- ------------ --------------- --------------- ------------ -------------
Shareholders' equity (deficit):
Ordinary shares, 1.25 pence stated value 5,139 258 608,999 (609,257) 5,139
Additional paid-in capital 325,880 306,644 (96,703) (209,941) 325,880
Retained earnings (accumulated deficit) (181,871) (371,989) 449,170 (77,182) (181,872)
Accumulated other comprehensive (loss) income (101,098) - (263,795) 263,795 (101,098)
- ------------------------------------------------- ------------ --------------- --------------- ------------ -------------
Total shareholders' equity (deficit) 48,050 (65,087) 697,671 (632,585) 48,049
- ------------------------------------------------- ------------ --------------- --------------- ------------ -------------
Total liabilities & shareholders' equity
(deficit) $ 658,234 $ 437,675 $ 462,364 $ (632,586) $ 925,687
================================================= ============ =============== =============== ============ =============
(1) Danka Business Systems PLC
(2) Danka Holding Company and Danka Office Imaging Company
(3) Subsidiaries of Danka Business Systems PLC other than Danka Holding Company
and Danka Office Imaging Company
68
Notes to Consolidated Financial Statements
Supplemental Consolidating Balance Sheet Information
March 31, 2001
--------------
Subsidiary
Parent Subsidiary Non- Consolidated
Company/(1)/ Guarantors/(2)/ Guarantors/(3)/ Eliminations Total
------------ --------------- --------------- ------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 5,471 $ 27,723 $ 35,891 $ - $ 69,085
Accounts receivable, net - 171,429 174,969 - 346,398
Inventories - 88,287 111,236 - 199,523
Prepaid expenses, deferred income taxes and
other current assets 3,350 68,284 9,391 - 81,025
Assets of discontinued operations - 64,928 48,477 - 113,405
- ---------------------------------------------- ------------ --------------- --------------- ------------ ------------
Total current assets 8,821 420,651 379,964 - 809,436
Equipment on operating leases, net - 31,543 54,348 - 85,891
Property and equipment, net - 66,757 7,907 - 74,664
Intangible assets, net - 76,664 167,506 - 244,170
Investment in subsidiaries 483,410 1,014 - (484,424) -
Other assets 78 51,658 91,479 (74,433) 68,782
- ---------------------------------------------- ------------ --------------- --------------- ------------ ------------
Total assets $ 492,309 $ 648,287 $ 701,204 $ (558,857) $ 1,282,943
============================================== ============ =============== =============== ============ ============
Liabilities and shareholders' equity (deficit)
Current liabilities:
Current maturities of long-term debt and notes
payable $ 464,967 $ 44,199 $ 8,281 $ - $ 517,447
Accounts payable - 83,094 53,510 - 136,604
Accrued expenses and other current liabilities 8,793 68,061 105,606 - 182,460
Deferred revenue - 19,810 15,159 - 34,969
Due to/(from) affiliates (339,522) 518,928 (179,406) - -
Liabilities of discontinued assets - 10,088 12,142 - 22,230
- ---------------------------------------------- ------------ --------------- --------------- ------------ ------------
Total current liabilities 134,238 744,180 15,292 - 893,710
-
Due to/(from) affiliates - long-term - 200,000 (200,000) - -
Convertible subordinated notes 200,000 - - 200,000
Long-term debt and notes payables, less
current maturities - 780 951 - 1,731
Deferred income taxes and other long-term
liabilities - 4,445 48,043 (23,057) 29,431
- ---------------------------------------------- ------------ --------------- --------------- ------------ ------------
Total liabilities 334,238 949,405 (135,714) (23,057) 1,124,872
- ---------------------------------------------- ------------ --------------- --------------- ------------ ------------
6.5% convertible participating shares 223,713 - - - 223,713
- ---------------------------------------------- ------------ --------------- --------------- ------------ ------------
Shareholders' equity (deficit):
Ordinary shares, 1.25 pence stated value 5,130 258 565,480 (565,738) 5,130
Additional paid-in capital 325,399 106,644 103,297 (209,941) 325,399
Retained earnings (accumulated deficit) (302,619) (408,020) 378,644 29,376 (302,619)
Accumulated other comprehensive (loss) income (93,552) - (210,503) 210,503 (93,552)
- ---------------------------------------------- ------------ --------------- --------------- ------------ ------------
Total shareholders' equity (deficit) (65,642) (301,118) 836,918 (535,800) (65,642)
- ---------------------------------------------- ------------ --------------- --------------- ------------ ------------
Total liabilities & shareholders' equity
(deficit) $ 492,309 $ 648,287 $ 701,204 $ (558,857) $ 1,282,943
============================================== ============ =============== =============== ============ ============
(1) Danka Business Systems PLC
(2) Danka Holding Company and Danka Office Imaging Company
(3) Subsidiaries of Danka Business Systems PLC other than Danka Holding Company
and Danka Office Imaging Company
69
Notes to Consolidated Financial Statements
Supplemental Consolidating Statement of Cash Flows
For the year ended March 31, 2002
---------------------------------
Subsidiary
Parent Subsidiary Non- Consolidated
Company /(1)/ Guarantors /(2)/ Guarantors /(3)/ Eliminations Total
------------- ---------------- ---------------- ------------ -------------
Net cash provided by (used in) operating activities $ 347,997 $ (119,338) $ (73,093) $ - $ 155,566
Investing activities
Capital expenditures - (33,441) (17,136) - (50,577)
Proceeds from sale of property and equipment - 411 517 - 928
Proceeds from sale of business - 179,099 94,895 - 273,994
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Net cash provided by (used in) investing activities - 146,069 78,276 - 224,345
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Financing activities
Net (payment) borrowing of debt (319,267) (44,001) (3,858) - (367,126)
Payment of debt issue costs (25,797) - - - (25,797)
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Net cash provided by (used in) financing activities (345,064) (44,001) (3,858) - (392,923)
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Effect of exchange rates 16 - 3,381 - 3,397
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Net increase (decrease) in cash 2,949 (17,270) 4,706 - (9,615)
Cash and cash equivalents, beginning of period 5,471 27,723 35,891 - 69,085
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Cash and cash equivalents, end of period $ 8,420 $ 10,453 $ 40,597 $ - $ 59,470
===================================================== ============= ================ ================ ============ =============
Supplemental Consolidating Statement of Cash Flows
For the year ended March 31, 2001
---------------------------------
Subsidiary
Parent Subsidiary Non- Consolidated
Company /(1)/ Guarantors /(2)/ Guarantors /(3)/ Eliminations Total
------------- ---------------- ---------------- ------------ -------------
Net cash provided by (used in) operating activities $ 84,629 $ 34,282 $ 8,030 $ - $ 126,941
Investing activities
Capital expenditures - (38,813) (30,068) - (68,881)
Proceeds from sale of property and equipment - 164 5,944 - 6,108
Proceeds from sale of business - - - - -
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Net cash provided by (used in) investing activities - (38,649) (24,124) - (62,773)
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Financing activities
Net (payment) borrowing of debt (81,722) 518 13,564 - (67,640)
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Net cash provided by (used in) financing activities (81,722) 518 13,564 - (67,640)
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Effect of exchange rates (195) - 7,891 - 7,696
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Net increase (decrease) in cash 2,712 (3,849) 5,361 - 4,224
Cash and cash equivalents, beginning of period 2,759 31,572 30,530 - 64,861
- ----------------------------------------------------- ------------- ---------------- ---------------- ------------ -------------
Cash and cash equivalents, end of period $ 5,471 $ 27,723 $ 35,891 $ - $ 69,085
===================================================== ============= ================ ================ ============ =============
(1) Danka Business Systems PLC
(2) Danka Holding Company and Danka Office Imaging Company
(3) Subsidiaries of Danka Business Systems PLC other than Danka Holding Company
and Danka Office Imaging Company
70
Notes to Consolidated Financial Statements
Supplemental Consolidating Statement of Cash Flows
For the year ended March 31, 2000
---------------------------------
Subsidiary
Parent Subsidiary Non- Consolidated
Company /(1)/ Guarantors /(2)/ Guarantors /(3)/ Eliminations Total
------------- ---------------- ---------------- ------------ ------------
Net cash provided by (used in) operating activities (115,404) 247,185 22,339 - 154,120
Investing activities
Capital expenditures - (84,287) (16,808) - (101,095)
Proceeds from sale of property and equipment 31 3,016 913 - 3,960
Proceeds from sale of Omnifax - 45,000 - - 45,000
Other - - (912) - (912)
- --------------------------------------------------- ------------- ---------------- ---------------- ------------ ------------
Net cash provided by investing activities 31 (36,271) (16,807) - (53,047)
- ---------------------------------------------------
Financing activities
Net (payment) borrowing of debt (93,477) (209,465) (8,446) - (311,388)
Capital contributions from issuance of participating
shares 205,223 - - - 205,223
Proceeds from stock options exercised 87 - - - 87
- ---------------------------------------------------- ------------- ---------------- ---------------- ------------ ------------
Net cash provided by (used in) financing activities 111,833 (209,465) (8,446) - (106,078)
- --------------------------------------------------- ------------- ---------------- ---------------- ------------ -----------
Effect of exchange rates (44) - 3,815 - 3,771
- --------------------------------------------------- ------------- ---------------- ---------------- ------------ ------------
Net increase (decrease) in cash (3,584) 1,449 901 - (1,234)
Cash and cash equivalents, beginning of period 6,343 30,123 29,629 - 66,095
- --------------------------------------------------- ------------- ---------------- ---------------- ------------ ------------
Cash and cash equivalents, end of period 2,759 31,572 30,530 - 64,861
==================================================== ============= ================ ================ ============ ============
(1) Danka Business Systems PLC
(2) Danka Holding Company and Danka Office Imaging Company
(3) Subsidiaries of Danka Business Systems PLC other than Danka Holding Company
and Danka Office Imaging Company
71
INDEPENDENT AUDITORS' 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, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity (deficit) and cash flows for each
of the years in the three-year period ended March 31, 2002. These consolidated
financial statements are the responsibility of the Company'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 auditing standards generally accepted
in the United States of America. 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
KPMG Audit Plc
Chartered Accountants
Registered Auditor London,
England
June 17, 2002
72