Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Commission file number: 0-20828

DANKA BUSINESS SYSTEMS PLC

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:

(727) 576-6003 in the United States

011-44-207-605-0150 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  ¨

        The registrant had 249,262,074 Ordinary Shares outstanding as of February 1, 2003

Table of Contents

INDEX

2

Table of Contents

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 incurred losses from continuing operations of $9.9 million during fiscal year 2002 and $233.5 million during fiscal year 2001. We generated earnings from continuing operations and net earnings of $10.8 million during the first nine months of fiscal year 2003, which fiscal year will end March 31, 2003. 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 nine months of fiscal year 2003 and 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 by positioning ourselves as a preeminent provider of digital equipment, services and solutions, the costs associated with the disposal of certain under-performing business units and the use of our resources to develop and grow areas of our business that do not rely on the sale and servicing of office imaging equipment.

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.

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 maintain, and we may even suffer a reduction of, 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.

3

Table of Contents

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, 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 and printing and multi-function technology from outside the traditional office imaging industry, 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 technological changes on our revenues: (1) our Danka @ the Desktop initiative, which is intended to improve print management processes, increase productivity, and lower overall document production costs for our customers, (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, and (3) our professional services group which provides consultive services to our customers and supports our digital initiatives. 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 in the volumes required and at competitive prices 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 December 31, 2002 we had consolidated bank and long-term indebtedness, including current maturities of long-term debt, of approximately $240.4 million which includes $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. A discussion of the terms and maturity dates of our indebtedness is included in the Liquidity and Capital Resources section in this Quarterly Report on Form 10-Q. Our level of indebtedness requires us to dedicate a significant 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 assets 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 might refuse to provide financing to our customers. If GECC were to fail to provide financing to our customers, those customers might 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. The minimum level of customer leases is equal to a specified percentage of U.S. hardware revenues. For the year ended March 31, 2002 we were obligated for penalty payments of approximately $0.2 million to GE Capital.

4

Table of Contents

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, managing 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 $45 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 first quarter of fiscal year 2004, although we cannot give any assurance that this will be the case. If we are not able to successfully implement our Vision 21 program, then we will continue to incur substantial costs using manual procedures to process information in an accurate and timely manner in addition to the write-off of capitalized costs associated with the program.

For the same reasons, we are evaluating what information system investments we should make for the countries within our European and International operations. We are installing new software in some of these countries and may require more effective software in other countries. We are evaluating the costs to implement such software and are analyzing the software requirements of the business model in those countries. Any implementation of new or improved information systems in such countries may take considerable time and could require a substantial investment.

In conjunction with the management information system initiatives outlined above, we are in the process of improving our internal financial disclosure 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 to supplement our existing internal audit department and are developing a compliance auditing function as well as implementing new policy controls, quality standards and corporate governance initiatives.

Business Process Compliance—Our rapid expansion through acquisitions, past financial difficulties and a historical lack of focus and investment in our information systems have impeded our management’s ability to implement business processes consistently and enforce policies effectively, which has impaired our progress in areas such as billing and accounts receivable. These issues have adversely affected our profitability and liquidity in the past and may continue to do so in future periods.

Partly as a result of our efforts to improve our management information systems and controls described above, we have identified instances where our business processes and policies have not been properly implemented and or followed in the past, which have resulted in, among other things, instances of poor billing practices, excessive and undisciplined issuance of customer credits, inaccurate customer data, inconsistent customer contract terms and conditions, and inadequate document retention. These system and process issues have impaired our ability, in some cases, to issue accurate and timely customer invoices, which has resulted in some customers refusing or delaying payments. These deficiencies have adversely affected our profitability in past periods and, although we are taking steps in conjunction with the upgrade of our management information systems to improve our business processes and policies, deficiencies may continue to adversely affect our profitability and liquidity in future periods for some time to come.

Disclosure Controls and Procedures and Internal Controls—We maintain disclosure controls and procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. We also maintain internal controls that are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the

5

Table of Contents

company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Further, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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. These fluctuations may negatively impact our results of operations and financial condition or, in some circumstances, may positively impact our results of operations disproportionately to underlying levels of actual growth or improvement in our businesses.

Approximately 46.2% of our revenues were generated outside the United States during the first nine 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 nine months of fiscal year 2003, the euro strengthened approximately 9.0% against the United States dollar and the United Kingdom pound strengthened approximately 6.4% against the United States dollar with relative positive effects on our revenue and income.

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 euros. 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 in the future 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.

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. These fluctuations 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 the market for 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 on Ordinary Shares—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 determined by reference to our financial statements prepared in accordance with UK GAAP:

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 only pay dividends on our ordinary shares if we have paid all dividends due on our 6.50% senior convertible participating shares.

6

Table of Contents

Additional Information Available on Company Web-site

Our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports 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.

7

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Danka Business Systems PLC

Consolidated Statements of Operations for the three and nine months ended December 31, 2002 and 2001

(In thousands, except per American Depositary Share (“ADS”) amounts)

(Unaudited)

See accompanying notes to the consolidated financial statements

8

Table of Contents

Danka Business Systems PLC

Condensed Consolidated Balance Sheets as of December 31, 2002 and March 31, 2002

(In Thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements

9

Table of Contents

Danka Business Systems PLC

Consolidated Statements of Cash Flows for the nine months ended December 31, 2002 and 2001

(In Thousands)

(Unaudited)

See accompanying notes to the consolidated financial statement

10

Table of Contents

Danka Business Systems PLC

Consolidated Statements of Shareholders’ Equity and Accumulated Other Comprehensive Losses for the nine months ended December 31, 2002 and 2001

(In Thousands)

(Unaudited)

See accompanying notes to the consolidated financial statements

11

Table of Contents

Danka Business Systems PLC

Notes to Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2002, the consolidated statements of operations for the three and nine months ended December 31, 2002 and 2001, the consolidated statements of cash flows for the nine months ended December 31, 2002 and 2001, and the consolidated statement of shareholders’ equity and accumulated other comprehensive losses for the nine months ended December 31, 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 nine months ended December 31, 2002 and December 31, 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 been delivered 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. Intangible Assets

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 be 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):

12

Table of Contents

As of December 31, 2002, goodwill amounted to $255.4 million. Changes to goodwill for the nine months ended December 31, 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 $0.8 million, which included $2.9 million of accumulated amortization.

Aggregate amortization expense of non-compete agreements for the first nine 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 December 31, 2002 (in thousands):

Note 3. Recent Accounting Pronouncements

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 no later than the first quarter of our fiscal year 2004. Upon adoption, the 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.

4. Restructuring and Other Special Charges

Fiscal Year 2002 Charge: Our fiscal year 2002 restructuring charge included $4.9 million related to severance for 355 employees in the U.S., Canada and Europe. Cash outlays for the reductions during the first nine months of fiscal year 2003 totaled $0.7 million. We expect substantially all of these reductions to be completed by March 31, 2003. The restructuring charge 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 nine months of fiscal year 2003 totaled $2.8 million. The following table summarizes the fiscal year 2002 restructuring charge:

2002 Restructuring Charge:

13

Table of Contents

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. Cash outlays related to these reductions during the first nine months of fiscal year 2003 totaled $0.2 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. Cash outlays for facilities during the first nine months of fiscal year 2003 totaled $0.02 million. 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:

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 which left a remaining balance as of December 31, 2002 of $0.2 million.

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.

The sale of DSI resulted in a gain in the first nine months of fiscal year 2002 of $104.8 million after income taxes of $67.9 million. During the three months ended December 31, 2001, we incurred an additional $2.9 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:

14

Table of Contents

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 nine months ended December 31, 2002 and 2001: