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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

OR

Commission file number: 0-20828

DANKA BUSINESS SYSTEMS PLC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(727) 576-6003 in the United States
011-44-207-603-1515 in the United Kingdom

NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

The registrant had 248,113,094 Ordinary Shares outstanding as of November 1, 2002

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INDEX

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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 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 generated earnings from continuing operations of $7.5 million and generated net earnings of $7.5 million during the first six months of fiscal year 2003, which fiscal year will end March 31, 2003. We incurred losses from continuing operations of $15.0 million and generated net earnings of $123.3 million during the first six months of fiscal year 2002, which fiscal year ended March 31, 2002. This included income from discontinued operations of $111.8 million from the sale of Danka Services International (“DSI”) and an extraordinary gain on the early retirement of debt of $26.5 million. We incurred losses from continuing operations of $9.9 million during fiscal year 2002 and $233.5 million during fiscal year 2001. An analysis of factors that affected earnings for both the three month and six month periods that ended September 30, 2002 and September 30, 2003 are discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operation section of this document. These factors include, but are not limited to changes in the accounting for goodwill amortization, the impact of foreign currency gains and losses and changes in reserve estimates. If we incur losses in the future, 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 the first six months of fiscal year 2002 and for fiscal years 2001 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, certain under-performing business units 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, and leasing and rental financing. 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 technology convergence, including the development of document management processing, retention and digital printing 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 continues to change from analog to digital photocopiers. Most of our digital products replace or compete with 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,

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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 three major initiatives in fiscal year 2002, which are designed to address the impact of these technological changes on our service revenue: (1) our Danka @ the Desktop initiative, which is intended to improve print management processes, increase productivity, and lower overall document production costs, (2) our multi-vendor services initiative, which is intended to leverage our existing Technical Services group and expand the types of technical services and maintenance that we provide for our customers to include other types of digitally connected devices and equipment installed by other vendors, (3) and our professional services group. The success of these initiatives may not be achieved if they are not accepted by our customers, do not generate additional 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 our 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 September 30, 2002 we had consolidated bank and long-term indebtedness, including current maturities of long-term debt, of approximately $237.7 million. As of September 30, 2002, we owed $121.0 million under our 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), $32 million in fiscal years 2004 and 2005 ($8 million at the end of each quarter), $24 million in fiscal year 2006 ($8 million at the end of each quarter), with the balance due March 31, 2006. 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 requires 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 liquidity and our ability to make investments that are necessary for us to keep pace with the technological and other changes currently affecting our industry. The majority of our borrowings bear interest at a variable rate. Accordingly, increases in interest rates could increase our interest expense and adversely affect our cash flow, reducing the amounts available to make payments on our indebtedness.

Bank and Other Covenants - Our 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 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.

Third Party Financing Arrangements - We have an agreement with General Electric Capital Corporation (“GECC”) under which GECC agrees to provide financing to our United States 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 alternative financing arrangements on similar terms. In addition, 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. We paid a penalty of approximately $0.2 million to GECC in fiscal year 2002. We presently anticipate that we will be obligated to pay GECC a penalty of approximately $1.5 million at November 30, 2002.

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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 March 31, 2003 and that the remaining lease obligations related to the facility closures will be substantially completed by March 31, 2003.

Information Systems and Financial Controls. Our management information systems run on numerous disparate legacy IT systems that are outdated and incompatible in certain regards. This is primarily the result of our rapid expansion through many acquisitions, followed by a period of financial difficulties that caused a lack of focus on, and investment in, these systems.

The operation and coordination of our management information systems is labor-intensive and expensive. We must manually collect, compile and consolidate certain information due to system limitations. We utilize manual internal control reviews to provide assurance of the accuracy of such information. These manual procedures are more difficult to supervise, more time-consuming and more costly than automated processes. As a result of these issues, we are limited in our ability to obtain, manage and access important information, such as customer and contract data, in an effective and timely manner. We also incur substantial effort and expense with respect to billing, collections, contract data and inventory accounting. Our ability to manage, account for and control our business efficiently and effectively can be adversely affected when important information and knowledge cannot be accessed timely or accurately.

We believe that we must upgrade our management information systems so that we have an infrastructure that is appropriate for a business of our size, scope and complexity. We are in the process of implementing an approximately $35 to $40 million program, known as Vision 21, to enhance and unify our United States management information systems. This program has proved more expensive and time-consuming than we originally anticipated, in part because of the lack of prior investment in our IT infrastructure, systems performance issues and software deficiencies. It is possible that the costs of completing the project may still exceed our current expectations. We anticipate that the United States program will be completed by the end of the fourth quarter of fiscal year 2003, although we cannot give any assurance that this will be the case. We plan to implement a similar program for our International and European operations once our United States program is substantially complete. We expect the International and European Vision 21 program will take 12 to 24 months to implement from its start and will require a substantial investment.

In conjunction with the management information system initiatives outlined above, we are in the process of improving our internal financial and business control functions. We are working with outside consultants to strengthen and improve certain areas of identified weaknesses in our financial controls. We are developing a new European internal audit department and are developing a compliance auditing function, as well as implementing new policy controls, quality standards and corporate governance initiatives. Our ability to achieve our goal of reducing operating costs, improving operating effectiveness and ensuring the necessary improvement to our financial and business controls will depend upon the success of our Vision 21 initiative and programs that continue to enhance our internal financial and business control functions.

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 45.7% of our revenues were generated outside the United States during the first six months of fiscal year 2003, with the majority of these revenues generated in countries that have adopted the euro as their currency and the United Kingdom. During the first six months of fiscal year 2003, the euro strengthened approximately 7.7% against the United States dollar and the United Kingdom pound strengthened approximately 5.2% 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. If the euro weakens against the United States dollar, our operating margins and cash flow may 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 generally do not hedge our exposure to changes in foreign currency.

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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:

As of the date of filing of this Form 10-Q, we have insufficient, accumulated realized profits to pay dividends on our ordinary shares. In addition, our 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.

ADDITIONAL INFORMATION AVAILABLE ON COMPANY WEB-SITE

Our most recent annual report and current SEC filings may be viewed or downloaded electronically or as paper copies from our website: http://www.danka.com/FinancialReports.asp. Our recent press releases are also available to be viewed or downloaded electronically at http://www.danka.com/PressReleases.htm. We will also provide electronic or paper copies of our SEC filings free of charge on request. Any information on or linked from our website is not incorporated by reference into this Quarterly Report on Form 10-Q.

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PART I – FINANCIAL INFORMATION

Danka Business Systems PLC
Consolidated Statements of Operations for the three and six months ended September 30, 2002 and 2001
(In thousands, except per American Depositary Share (“ADS”) amounts)
(Unaudited)

See accompanying notes to the consolidated financial statements

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Danka Business Systems PLC
Condensed Consolidated Balance Sheets as of September 30, 2002 and March 31, 2002
(In Thousands)
(Unaudited)

See accompanying notes to the consolidated financial statements

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Danka Business Systems PLC
Consolidated Statements of Cash Flows for the six months ended September 30, 2002 and 2001
(In Thousands)
(Unaudited)

See accompanying notes to the consolidated financial statement

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Danka Business Systems PLC
Consolidated Statements of Shareholders’ Equity and Accumulated Other Comprehensive Losses for the six
months ended September 30, 2002 and 2001
(In Thousands)
(Unaudited)

See accompanying notes to the consolidated financial statements

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Danka Business Systems PLC
Notes to Consolidated Financial Statements
(Unaudited)

Note 1.      Basis of Presentation

The accompanying condensed consolidated balance sheet as of September 30, 2002, the consolidated statements of operations for the three and six months ended September 30, 2002 and 2001, the consolidated statements of cash flows for the six months ended September 30, 2002 and 2001, and the consolidated statement of shareholders’ equity (deficit) and accumulated other comprehensive losses for the six months ended September 30, 2002 and 2001 are unaudited. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results which may be expected for the entire fiscal year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report contained in Form 10-K for the year ended March 31, 2002. Certain prior year amounts have been reclassified to conform to current year presentations.

The financial statements contained herein for the three and six months ended September 30, 2002 and September 30, 2001 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 have beendelivered to the Registrar of Companies for England and Wales. The independent auditors’ report on those statutory accounts was unqualified and did not contain a statement under Section 237(2) or 237(3) of the United Kingdom Companies Act 1985.

Note 2.      Accounting Change

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 revises the standards of accounting for goodwill and indefinite-lived intangible assets by replacing the regular amortization of these assets with the requirement that they are reviewed annually for possible impairment or more frequently if impairment indicators arise. Separable intangible assets that have finite lives will continue to be amortized over their estimated useful lives. We adopted SFAS 142 effective April 1, 2002. During the first quarter of the fiscal year ending March 31, 2003, we finalized the required transitional impairment tests of goodwill and indefinite-lived intangible assets under the requirements of SFAS 142. Based on the results of the transitional impairment tests, no adjustments for impairment were necessary.

The following table reflects our unaudited pro forma results of operations giving effect to SFAS 142 as if it were adopted on April 1, 2001 (in thousands, except per share amounts):

As of September 30, 2002, goodwill amounted to $247.4 million. Changes to goodwill for the six months ended September 30, 2002 resulted primarily from fluctuations in foreign currency exchange rates and an adjustment related to a prior year acquisition. Non-compete agreements, net amounted to $0.9 million, which included $2.9 million of accumulated amortization.

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Aggregate amortization expense of non-compete agreements for the first six months of fiscal 2003 amounted to $0.2 million. Estimated amortization expense for the current fiscal year is $0.3 million and the succeeding five fiscal years is between $0.1 million and $0.2 million per year.

Goodwill by operating segment as of September 30, 2002 (in thousands):

Note 3.      Recent Accounting Pronouncements

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 contract or by legal construction of a contract under the doctrine of promissory estoppel. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We do not expect a material impact from this statement on our financial position and results of operations.

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 financial statements issued for fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. The impact of adoption of this statement on our financial position and results of operations were not material.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”) which is effective for fiscal years beginning after May 15, 2002. This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, as well as SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. As a result, the gains or losses from debt extinguishments will no longer be classified as extraordinary items unless they meet the requirements in APB 30 of being unusual and infrequently occurring. Additionally, this Statement amends SFAS No. 13, “Accounting for Leases”, to eliminate any inconsistency between the reporting requirements for sale-leaseback transactions and certain lease modifications that have similar economic effects. We will adopt the provisions of Statement 145 for the first quarter of our fiscal year 2004. Upon adoption, prior year’s gains from debt extinguishment will be reclassified to continuing operations.

SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

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4.   Restructuring and Other Special Charges

Fiscal Year 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 second quarter of fiscal year 2002, we made additional significant changes to our senior management team. 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 modified 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. Due to a change in estimate, we reversed $0.01 million of fiscal year 2002 charges in fiscal year 2003.

During fiscal year 2002, we incurred restructuring charges that 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 March 31, 2003. Cash outlays for the reductions during the first six months of fiscal year 2003 totaled $0.5 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 the first six months of fiscal year 2003 totaled $2.0 million. The following table summarizes the fiscal year 2002 restructuring charges:

2002 Restructuring Charge:

Fiscal Year 2001 Charge:

Our fiscal year 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 during fiscal year 2002 that $10.1 million of the original severance reserve would not be required. Cash outlays related to these reductions during the first six months of fiscal year 2003 totaled $0.1 million. We expect cash outlays for the workforce reductions to be completed by March 31, 2003.

The fiscal year 2001 restructuring charge also included $4.3 million for future lease obligations on facility closures and exit costs. As a result of the changes in senior management, we determined during fiscal year 2002 that $3.0 million of facility reserves would not be required. Cash outlays for facilities during the first six months of fiscal year 2003 totaled $0.03 million. We expect the remaining lease obligations related to these facility closures to be substantially completed by March 31, 2003. Due to a change in estimate, we reversed $0.3 million of fiscal year 2001 facility charges during fiscal year 2003. The following table summarizes the fiscal year 2001 restructuring charge:

2001 Restructuring Charge:

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Fiscal Year 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 Kodak and us. Due to a change in estimate, we reversed $0.2 million of fiscal year 1999 facility charges during fiscal year 2003. The following table summarizes the restructuring and other special pre-tax charges:

1999 Restructuring Charge:

Note 5.      Discontinued Operations

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 was set-aside at closing. The purchase price was subject to an adjustment depending on the value of DSI’s net assets as of the closing of the sale, which was estimated at $82.4 million. As of June 30, 2002, the value of DSI’s net assets as of the closing of the sale were determined to be $77.9 million. Therefore, the consideration has been adjusted downward by $4.5 million, which amount has been released from the escrow account to Pitney Bowes, Inc. while the remaining $0.5 million has been released to us.

The sale of DSI resulted in a gain in the first six months of fiscal year 2002 of $107.7 million after income taxes of $69.7 million. During the three months ended September 30, 2001, we incurred an additional $1.2 million of purchase price adjustments and expenses related to the sale of DSI. A summary of the operating results of discontinued operations are as follows:

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Note 6.      Earnings Per Share

The following table reconciles the numerator and denominator of the basic and diluted earnings (loss) from continuing operations available to common shareholders per ADS computations for the three and six months ended September 30, 2002 and 2001:

The effect of our 6.5% convertible participating shares are not included in the computation of diluted earnings per share for the three and six months ended September 30, 2002 and 2001 and the effect of our 6.75% convertible subordinated notes are not included in the computation of diluted earnings per share for the three and six months ended September 30, 2001 because they are not dilutive.

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Note 7.      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 United States, 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.

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Note 8.      Debt

Debt consisted of the following at September 30, 2002 and March 31, 2002:

We entered into an amended and restated credit facility on June 14, 2002 with our existing senior bank lenders to provide us with financing through March 31, 2004. Total commitments under the facility are $221.0 million consisting of a $70.0 million revolver commitment, a $121.0 million term loan and a $30 million letter of credit commitment. At September 30, 2002, we had an outstanding balance of $121.0 million under the credit facility, with no amount due under the revolver. On June 20, 2002, we paid a $4.1 million fee to our senior bank lenders for an option to extend the credit facility for an additional two years through March 31, 2006. We exercised that option by paying an additional fee of $2.8 million in September 2002. The term loan component of the facility, as extended, requires principal repayments in installments of $16.0 million in fiscal year 2003 ($4 million at the end of each quarter), $32 million in fiscal years 2004 and 2005 ($8 million at the end of each quarter), $24 million in fiscal year 2006 ($8 million at the end of each quarter), with the balance due March 31, 2006. The interest rate on the extended revolver and term loan components are at LIBOR plus 7.5% effective September 30, 2002, except that, if we do not receive a rating for the indebtedness under the extended credit facility from Moody’s of at least B2 during any interest period commencing on or after November 30, 2002, the interest rate for each such interest period will increase to LIBOR plus 8.25%

On March 18, 2002, we entered into an interest rate cap agreement with Bank of America. The interest rate cap will pay us the difference between the quarterly LIBOR and 3.99% on a notional amount of $80 million 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 September 30, 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 prohibits 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 annual capital expenditures, each as defined in the credit facility. We were in compliance with all of the applicable covenants at September 30, 2002.

We incurred $11.2 million in bank fees and $6.6 million in third party fees in the prior year relating to the fiscal year 2002 amended and restated facility. These fees are being amortized over the term of the facility. We are also required to pay fees of 1% of total commitments at December 31, 2002, March 31, 2003, December 31, 2003, March 31, 2004, December 31, 2004, March 31, 2005 and June 30, 2005, and fees of 2% of the total commitments at June 30, 2003 and June 30, 2004.

We have $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. 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 6.75% convertible subordinated notes were due April 2002 and were fully repaid at that time.

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Note 9.      Supplemental Consolidating Financial Data for Subsidiary Guarantors

On June 29, 2001, we completed an exchange offer for 92% of our 6.75% convertible subordinated notes due April 1, 2002. We issued zero coupon senior subordinated notes due April 1, 2004 as partial consideration. 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 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 the 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.

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