-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S2ozmo6USjBrEhDOxZCrJMIm2ElnNSqyKjAxz8+eFvfxt4jbiwyQ+iW/zBJYCxSE bl6+hHLh8SyJupO+KPh0/w== 0000950144-96-004791.txt : 19960805 0000950144-96-004791.hdr.sgml : 19960805 ACCESSION NUMBER: 0000950144-96-004791 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960802 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DANKA BUSINESS SYSTEMS PLC CENTRAL INDEX KEY: 0000894010 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PROFESSIONAL & COMMERCIAL EQUIPMENT & SUPPLIES [5040] IRS NUMBER: 980052869 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20828 FILM NUMBER: 96603150 BUSINESS ADDRESS: STREET 1: 11201 DANKA CIRCLE N CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 8135766003 MAIL ADDRESS: STREET 1: 11201 DANKA CIRCLE NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33716 10-Q 1 DANKA BUSINESS SYSTEMS FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO --------- ---------- Commission file number: 0-20828 DANKA BUSINESS SYSTEMS PLC - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) ENGLAND 98-0052869 - --------------------------------- ------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 11201 Danka Circle North St. Petersburg, Florida 33716 - --------------------------------- ------------------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: 813-576-6003 NOT APPLICABLE - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The registrant had 225,972,247 Ordinary Shares outstanding as of June 30, 1996. 2 INDEX
Page PART I - FINANCIAL INFORMATION ---- Item 1 - Consolidated Financial Statements Consolidated Statements of Earnings for the three months ended June 30,1996 and 1995 (Unaudited) 3 Condensed Consolidated Balance Sheets as of June 30, 1996 (Unaudited) and March 31, 1996 (Audited) 4 Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 1996 and 1995 (Unaudited) 5 Consolidated Statement of Shareholders' Equity for the three months ended June 30, 1996 (Unaudited) 6 Notes to Consolidated Financial Statements (Unaudited) 7 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION Item 1 - Legal Proceedings 13 Item 2 - Changes in Securities 13 Item 3 - Default upon Senior Securities 13 Item 4 - Submission of Matters to a Vote of Security Holders 13 Item 5 - Other Information 13 Item 6 - Exhibits and Reports on Form 8-K 13 Signature 15
2 3
PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements DANKA BUSINESS SYSTEMS PLC CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per American Depositary Share ("ADS") amounts) For the three months ended ---------------------------------- June 30, June 30, 1996 1995 - ---------------------------------------------------- ------------ ------------ (Unaudited) (Unaudited) Revenue: Retail equipment sales $ 149,917 $ 98,470 Retail service, supplies and rentals 194,952 120,721 Wholesale 57,086 29,823 - ---------------------------------------------------- ------------- ------------- Total revenue 401,955 249,014 - ---------------------------------------------------- ------------- ------------- Costs and operating expenses: Cost of retail equipment sales 92,764 61,039 Retail service, supplies and rental costs 103,222 63,479 Wholesale costs of revenue 46,890 24,678 Selling, general and administrative expenses 126,496 76,627 Amortization of intangible assets 4,419 2,356 - ---------------------------------------------------- ------------- ------------- Total costs and operating expenses 373,791 228,179 - ---------------------------------------------------- ------------- ------------- Earnings from operations 28,164 20,835 Interest expense and other, net 5,033 3,278 - ---------------------------------------------------- ------------- ------------- Earnings before income taxes 23,131 17,557 Provision for income taxes 8,800 6,700 - ---------------------------------------------------- ------------- ------------- Net earnings $ 14,331 $ 10,857 ==================================================== ============= ============= Net earnings per ADS $ 0.25 $ 0.22 ==================================================== ============= ============= Weighted average ADSs 57,787 49,213
See accompanying notes to the consolidated financial statements 3 4
DANKA BUSINESS SYSTEMS PLC CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) June 30, March 31, 1996 1996 - --------------------------------------------------- ------------ ------------ (Unaudited) (Audited) Assets Current assets: Cash and cash equivalents $ 44,764 $ 38,217 Accounts receivable, net 279,727 247,479 Inventories 243,443 214,519 Prepaid expenses and other current assets 11,196 9,534 - ---------------------------------------------------- ------------- ------------- TOTAL CURRENT ASSETS 579,130 509,749 Equipment on operating leases, net 84,253 73,303 Property and equipment, net 46,732 42,795 Intangible assets, net 439,671 435,844 Other assets 32,192 29,865 - ---------------------------------------------------- ------------- ------------- TOTAL ASSETS $ 1,181,978 $ 1,091,556 ==================================================== ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt and notes payable $ 29,143 $ 30,414 Accounts payable and accrued expenses 197,811 197,438 Deferred revenue 71,364 64,223 - ---------------------------------------------------- ------------- ------------- TOTAL CURRENT LIABILITIES 298,318 292,075 Convertible subordinated notes 200,000 200,000 Other long-term debt 179,513 118,262 Deferred income taxes and other long-term liabilities 42,808 39,376 - ---------------------------------------------------- ------------- ------------- TOTAL LIABILITIES 720,639 649,713 ==================================================== ============= ============= SHAREHOLDERS' EQUITY: Ordinary Shares, 1.25 pence stated value; 400,000,000 authorized; 225,972,247 and 219,112,247 issued and outstanding 4,718 4,585 Additional paid-in capital 298,694 297,378 Retained earnings 167,875 148,501 Currency translation adjustment (9,948) (8,621) - ---------------------------------------------------- ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 461,339 441,843 - ---------------------------------------------------- ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,181,978 $ 1,091,556 ==================================================== ============= =============
See accompanying notes to the consolidated financial statements. 4 5
DANKA BUSINESS SYSTEMS PLC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) For the three months ended ---------------------------------- June 30, June 30, 1996 1995 - ---------------------------------------------------- ------------ ------------ (Unaudited) (Unaudited) OPERATING ACTIVITIES Net earnings $ 14,331 $ 10,857 Adjustments to reconcile net earnings to net cash used in operating activities: Depreciation and amortization 18,055 9,140 Gain on sale of property and equipment (208) (454) Proceeds from sale of rental equipment 2,406 1,378 Changes in assets and liabilities, net of effects from the purchase of subsidiaries: Accounts receivable (15,867) (3,722) Inventories (20,550) (12,685) Prepaid expenses and other current assets (503) (380) Other noncurrent assets (1,259) (203) Accounts payable and accrued expenses (16,157) (27,942) Deferred revenue (2,683) (1,133) Deferred income taxes 4,943 2,546 - ---------------------------------------------------- ------------- ------------- NET CASH USED IN OPERATING ACTIVITIES (17,492) (22,598) ==================================================== ============= ============= INVESTING ACTIVITIES Capital expenditures (18,822) (7,562) Proceeds from sale of property and equipment 578 218 Net proceeds from sale of investments --- 10,854 Payment for purchase of subsidiaries, net of cash acquired (8,559) (34,287) Payment for purchase of noncompete agreements (381) (224) - ---------------------------------------------------- ------------- ------------- NET CASH USED IN INVESTING ACTIVITIES (27,184) (31,001) ==================================================== ============= ============= FINANCING ACTIVITIES Net borrowings under line of credit agreements 67,503 8,384 Principal payments on debt (18,319) (2,961) Proceeds from stock options exercised 141 306 - ---------------------------------------------------- ------------- ------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 49,325 5,729 - ---------------------------------------------------- ------------- ------------- EFFECT OF EXCHANGE RATES 1,898 (1,550) - ---------------------------------------------------- ------------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,547 (49,420) Cash and cash equivalents, beginning of period 38,217 86,848 - ---------------------------------------------------- ------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 44,764 $ 37,428 ==================================================== ============= =============
See accompanying notes to the consolidated financial statements. 5 6 DANKA BUSINESS SYSTEMS PLC CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS) ADDITIONAL CURRENCY ORDINARY PAID-IN RETAINED TRANSLATION SHARES CAPITAL EARNINGS ADJUSTMENT TOTAL ----------- ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Balances at March 31, 1996 $ 4,585 $ 297,378 $ 148,501 $ (8,621) $ 441,843 Net earnings 14,331 14,331 Shares issued under employee option plans 1 140 141 Distributions to former shareholders of pooled company (324) (324) Shares issued for acquisitions 132 1,176 5,367 6,675 Currency translation adjustment (1,327) (1,327) - ------------------------- ------------- ------------ ------------ ----------- ----------- Balances at June 30, 1996 $ 4,718 $ 298,694 $ 167,875 $ (9,948) $ 461,339 - ------------------------- ============= ============ ============ =========== ============
See accompanying notes to the consolidated financial statements. 6 7 DANKA BUSINESS SYSTEMS PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying condensed consolidated balance sheet as of June 30, 1996, consolidated statements of earnings for the three months ended June 30, 1996 and 1995, consolidated statement of shareholders' equity for the three months ended June 30, 1996, and the condensed consolidated statements of cash flows for the three months ended June 30, 1996 and 1995 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 three months ended June 30, 1996 are not necessarily indicative of the results which may be expected for the entire fiscal year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Danka Business Systems PLC's Annual Report for the year ended March 31, 1996. NOTE 2 - BUSINESS COMBINATIONS During the three months ended June 30, 1996 the Company acquired the outstanding stock or assets of various unrelated businesses. These acquisitions were accounted for as purchases with consideration totaling approximately $8.6 million. In addition, the Company entered into noncompete agreements with certain key owners and key employees of these businesses. The results of the acquired companies are included in the accompanying consolidated statements of earnings since the effective date of each acquisition. In addition, the Company issued 6,800,000 Ordinary Shares (1,700,000 ADS equivalents) for one separate acquisition which was accounted for as a pooling of interests. The financial statements have not been restated as the impact would have been immaterial. NOTE 3 - RESTRUCTURING CHARGE During the third quarter of fiscal 1996, the Company recorded a restructuring charge of $8.5 million, related to the restructuring of its international operations. At June 30, 1996, approximately $0.7 million remained in accrued liabilities, comprised of $0.1 million for the remaining reduction of the workforce, $0.4 million for the closing of duplicate facilities, and $0.2 million for the write-off of leasehold improvements. Management anticipates that the remaining restructuring actions will be completed by the third quarter of fiscal 1997. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Danka Business Systems PLC and its Subsidiaries (the "Company") is one of the largest independent suppliers of photocopiers, facsimiles and other related office equipment in North America, Europe and Australia. The Company primarily markets these products and related service, parts and supplies on a direct basis to retail customers. The Company also markets photocopiers, facsimiles, and related parts and supplies on a wholesale basis to dealers. In addition, the Company markets private label photocopiers and facsimiles and related supplies on a direct and wholesale basis under the Company's Infotec trademark, and facsimile equipment under its dex and Omnifax trademarks. Earnings during the first quarter were affected by expenses associated with the expansion of the Company's salesforce, support personnel and infrastructure in North America which had not yet yielded the expected productivity, and by costs incurred, which were higher than anticipated to regionally centralize certain management and administrative functions. The Company has been aggressively hiring and training new field sales representatives and support staff for its core operations. The Company is also making significant investments in the required infrastructure necessary to support this enlarged group of professionals and the incremental expenses associated with such investments has negatively impacted profitability in the first quarter. During the last nine months, Danka expanded its efforts to market digital color products and high-volume copiers across North America. The Company has more than doubled the number of locations selling digital color products and, since January 1996, has opened three new digital support centers to support this growth. To direct and assist the Company's sales representatives and service engineers, Danka has doubled the number of Certified Network Engineers on its staff. The Company also recently completed its initial roll-out of the Kodak high-volume copiers to 35 major markets throughout North America. The Company has not achieved the level of digital color sales that it had anticipated, and has decided to slow its expansion of the number of new markets selling digital color products as well as the growth in the number of digital color sales representatives, until the Company's existing representatives reach a higher level of productivity. Over the last six months, Danka has made significant investments in the required infrastructure necessary to support the planned growth in digital color products, and the lack of digital color equipment, service and supply sales is impacting earnings. The Company will continue to support this expanded infrastructure as it believes that digital color products are a key element of its future growth strategy, and the investments in its infrastructure are necessary to support the Company's long-term growth plans. The Company believes that these investments will continue to impact earnings over the balance of the year. The Company has refocused its sales management on growing the size of its commercial salesforce to gain increased market penetration in existing markets. To accomplish this goal, the Company has added a significant number of new sales representatives and has promoted a number of selling sales managers to market area managers. These new representatives will take time to reach the desired productivity, and the cost of these new representatives, coupled with the impact of promoting the selling sales managers to nonselling management positions, has impacted both sales and earnings. The Company believes that the commercial business is a critical element of its growth plans, and that its focus on increasing the size of its commercial salesforce and the number of managers supporting this enlarged salesforce is an important element of its future growth plans. To better support the Company's sales efforts in digital color and high-volume products, major markets and its core business, Danka is moving away from its traditional branch management concept to a more centralized, market oriented, support concept of administration ("Market Based Approach"). Under a Market Based Approach, most of the administrative and management functions which were performed at the branch level are centralized on a regional basis. Such functions include managerial support, service dispatch, billing and collections, supply sales and equipment setup and delivery. This Market Based Approach is ultimately expected to provide for a higher quality of customer support, increased productivity and reduced administrative costs. Danka's implementation of the Market Based Approach is 8 9 resulting in a short-term duplication of certain administrative and management functions, which has increased selling, general and administrative costs. The following table sets forth for the periods indicated the percentage of total revenue represented by certain items in the Company's Consolidated Statements of Earnings:
THREE MONTHS ENDED JUNE 30, --------------------------- 1996 1995 ---- ---- Revenue: Retail equipment sales................... 37.3 % 39.5 % Retail service, supplies and rentals..... 48.5 48.5 Wholesale................................ 14.2 12.0 ----- ----- Total Revenue....................... 100.0 100.0 Cost of revenue............................ 60.4 59.9 ----- ----- Gross profit............................... 39.6 40.1 Selling, general and administrative........ 31.5 30.8 Amortization of intangible assets.......... 1.1 0.9 ----- ----- Earnings from operations............ 7.0 8.4 Interest expense and other, net............ 1.2 1.3 ----- ----- Earnings before income taxes........ 5.8 7.1 Provision for income taxes................. 2.2 2.7 ----- ----- Net earnings........................ 3.6 % 4.4 % ===== =====
The following table sets forth for the periods indicated the gross profit margin percentage for each of the Company's revenue classifications:
THREE MONTHS ENDED JUNE 30, --------------------------- 1996 1995 ---- ---- Retail equipment sales ................... 38.1 % 38.0 % Retail service, supplies and rentals...... 47.0 47.4 Wholesale................................. 17.9 17.3
QUARTER ENDED JUNE 30, 1996 COMPARED TO QUARTER ENDED JUNE 30, 1995: Revenue Revenue increased 61% to $402.0 million in the three months ended June 30, 1996 ("first quarter of fiscal 1997") compared to $249.0 million in the three months ended June 30, 1995 ("first quarter of fiscal 1996"). The increase resulted from growth in core operations and significant contributions from acquisitions. Excluding the impact of acquisitions, internal growth for the Company's retail copier operations for the first quarter of fiscal 1997 was 7%. Wholesale revenue as a percentage of total revenue increased primarily due to the acquisition of Infotec in November 1995, which wholesales the Infotec brand products to authorized independent dealers throughout Europe. Gross Profit Gross profit increased 59% to $159.1 million for the first quarter of fiscal 1997 from $99.8 million for the first quarter of fiscal 1996. Gross profit as a percentage of total revenue decreased to 39.6% for the first quarter of fiscal 1997 from 40.1% for the first quarter of fiscal 1996. This decrease was due to the change in the mix of the Company's revenue, and to lower margins on service, supplies and rental revenue. As a result of the Company's acquisition of Infotec in 9 10 November 1995, an increased percentage of the Company's total revenue is being derived from wholesale revenue which has substantially lower gross profit than retail revenue. Gross profit as a percentage of retail equipment sales remained relatively constant at 38.1% for the first quarter of fiscal 1997 and 38.0% for the first quarter of fiscal 1996. Gross profit as a percentage of retail service, supplies and rentals decreased to 47.0% for the first quarter of fiscal 1997 from 47.4% for the first quarter of fiscal 1996. This decrease was due to two factors. First, Infotec has lower retail service, supplies and rental gross profit margins than the Company's core operations. Second, in the first quarter of fiscal 1996, the Company was able to pass through vendor price increases to its customers. These increases were matched against parts and supplies which were acquired prior to the vendor price increases, thus resulting in higher margins in the first quarter of fiscal 1996. As a percentage of revenue, gross profit on wholesale revenue increased to 17.9% for the first quarter of fiscal 1997 from 17.3% for the first quarter of fiscal 1996. The increase was primarily due to the acquisition of Infotec, which has higher gross profit on its wholesale business. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 65% to $126.5 million for the first quarter of fiscal 1997 from $76.6 million for the first quarter of fiscal 1996. As a percentage of revenue, selling, general and administrative expenses increased to 31.5% for the first quarter of fiscal 1997 from 30.8% for the first quarter of fiscal 1996. These increases related to acquisitions made after June 30, 1995, and to the Company's aggressive hiring and training of new sales representatives and support personnel, along with the additional investments in the required infrastructure necessary to support the enlarged salesforce. Selling, general and administrative expenses were also impacted by the Company's restructuring of its traditional branch systems towards a Market Based Approach. Amortization of Intangible Assets Amortization of intangible assets increased to $4.4 million for the first quarter of fiscal 1997 from $2.4 million for the first quarter of fiscal 1996. The increase related to acquisitions made after June 30, 1995, primarily Infotec, for which additional intangible assets are being amortized. Earnings from Operations Earnings from operations increased 35% to $28.2 million for the first quarter of fiscal 1997 from $20.8 million for the first quarter of fiscal 1996. The increase primarily related to increased revenue. As a percentage of revenue, earnings from operations decreased to 7.0% from 8.4% primarily due to the lower combined gross margin percentage, and higher selling, general and administrative expenses discussed above. Interest Expense and Other, Net Interest expense increased to $5.0 million in the first quarter of fiscal 1997 from $3.3 million in the first quarter of fiscal 1996. Interest expense has increased due to higher levels of borrowings during the first quarter of fiscal 1997. Income Taxes Income taxes increased to $8.8 million for the first quarter of fiscal 1997 due to higher levels of earnings before tax. The combined effective income tax rate was relatively constant at 38.0% for the first quarter of fiscal 1997 versus 38.2% for the first quarter of fiscal 1996. Net Earnings Net earnings increased 32% to $14.3 million for the first quarter of fiscal 1997 from $10.9 million for the first quarter of fiscal 1996. As a percentage of revenue, net earnings decreased to 3.6% for the first quarter of fiscal 1997, primarily due to the lower combined gross margin percentage, and increased selling, general and administrative expenses. 10 11 TAXATION As part of the Company's acquisitions of businesses, the Company enters into noncompete and protection of trade secret agreements with certain key management personnel of the businesses acquired. The amount paid pursuant to these agreements is deductible for financial reporting purposes over the term of the agreements, normally three to seven years. For U.S. federal and state income tax purposes, agreements entered into prior to the enactment of the Omnibus Budget Reconciliation Act of 1933 (the "Act"), are amortized over the term of the agreement. Agreements entered into subsequent to the enactment of the Act are generally amortized over fifteen years. Further, goodwill, trademarks and other intangible assets purchased in asset acquisitions are deductible over fifteen years for U.S. federal and state income tax purposes. Prior to the enactment of the Act, goodwill on asset acquisitions was not deductible and amounts paid for other intangible assets were deductible only to the extent that such assets had identifiable useful lives. A significant portion of the Company's retail operation's photocopier and facsimile machine sales are effected through the use of leases. These transactions are recorded as sales for financial reporting purposes. However, for federal income tax purposes, the leases are accounted for as operating leases and the profit is recognized over the life of the lease. EXCHANGE RATES Fluctuations in the exchange rate between the pound sterling and the U.S. dollar affect the dollar equivalent of the pound sterling of the Ordinary Shares of the Company on the London Stock Exchange and, as a result, are likely to affect the market price of the ADSs. Additionally, the Company declares its dividends in pounds sterling. Fluctuations in exchange rates will affect dividend income measured in U.S. dollars because the Depositary is required to convert pounds sterling into U.S. dollars at the prevailing exchange rates at the time of making any dividend payments or other distributions. The Company has significant operations in each of the United States, Canada, Australia and various countries in Europe. Fluctuations in exchange rates between the U.S. dollar and each of the pound sterling, Canadian dollar, Australian dollar, and other European country currencies, will affect the results of the Company's international operations reported in U.S. dollars and the value of such operations' net assets reported in U.S. dollars. The Company has significantly increased it international business over the last few years. The results of operations, financial condition and competitive position of the Company's business may be affected by the relative strength of its currencies in countries where its products are sold. The Company's results of operations and financial condition may be adversely affected by fluctuations in foreign currencies and by translations of the financial statements of the Company's foreign subsidiaries from local currencies into U.S. dollars. The Company purchases most if its automated office equipment, related parts and supplies from Japanese manufacturers. The purchase price for most of these products is denominated in local currencies and therefore, short term fluctuations in the local currencies relative to the Japanese yen do not impact the Company's purchase price. However, if the yen were to strengthen significantly against the U.S. dollar, this would impact the yen amounts received by the Company's Japanese manufacturers as they converted the U.S. dollars received form the Company and other dealers into yen. As a result, these Japanese manufacturers could raise prices. The Company has historically been successful in passing price increases on to its customers. However, there can be no assurances that it can continue to do so in the future. Also, since most of the Company's service contracts are for one year periods, pricing for parts and supplies could not be adjusted until the contract was renewed. LIQUIDITY AND CAPITAL RESOURCES The Company's net cash flow used in operating activities was $17.5 million and $22.6 million for the three months ended June 30, 1996 and 1995, respectively. The Company experiences increases in certain balance sheet accounts which result primarily from acquisitions as well as from normal working capital needs. Additionally, high levels of accrued expenses at the end of fiscal year 1996 were paid during the first quarter of fiscal 1997. Cash flow used in investing activities was $27.2 million and $31.0 million for the three months ended June 30, 1996 and 1995, respectively. The decrease was primarily due to decreased acquisition activity in the first quarter of fiscal 1997. Net cash provided by 11 12 financing activities was $49.3 million and $5.7 million in the three months ended June 30, 1996 and 1995, respectively. The increase was primarily due to increased borrowings under the Company's Credit Facility Loan, described below. In March 1995, the Company issued $200 million of 6.75% Convertible Subordinated Notes due April 2002 (the "Notes") at par, in a private placement offering. The Notes are convertible into the Company's ADSs at a conversion rate of $29.125 per ADS, or into the Company's Ordinary Shares at a conversion rate of $7.281 per Ordinary Share (equivalent to approximately 34.335 ADSs or 137.339 Ordinary Shares for each $1,000 principal amount of Notes). Interest is payable semi-annually commencing October 1995. The Notes are not subject to sinking fund requirements. In March 1996, the Company entered into a $400 million multicurrency revolving line of credit ("Credit Facility Loan") with a consortium of banks. The Credit Facility Loan is unsecured and guaranteed by certain of the Company's subsidiaries. The Credit Facility Loan, which matures in March 2001, contains negative and affirmative covenants and agreements restricting the Company's disposition of assets, capital expenditures, acquisitions and operations, as well as requiring the maintenance of certain financial ratios. The adjustable rate of interest on the Credit Facility Loan is, at the option of the Company, either (i) the Interbank Offered Rate plus an applicable margin of between .375% to 1%, determined by certain financial ratios, for the periods of one, two, three or six months, or (ii) the lead bank's base rate. The Company is in material compliance with all the terms of the Credit Facility Loan. As of June 30, 1996, the Credit Facility Loan had an outstanding balance of approximately $168.8 million and was incurring interest at a weighted average rate of 3.6% per annum. Therefore, subject to availability under the covenants, $231.2 million was available for future borrowings. The Company has a number of other loans and credit facility arrangements with banks, financial institutions and certain individuals, which had an aggregate balance of $39.9 million at June 30, 1996. This balance is primarily comprised of various cash management lines of credit (the "Lines") in each of the countries in which the Company operates. The Lines provide for daily liquidity of local operations in each such country. These loans vary widely in terms and conditions. The Company is in material compliance with all the terms under these loans. At the present time, the Company's cash flow from operations together with funds from the Credit Facility Loan and its cash balances, should be adequate to meet its operating cash requirements, as well as its capital expenditures for the immediate future. While the Company currently has no agreement, arrangement or understanding with respect to any acquisitions that are, individually or in the aggregate, material to the Company, the Company expects to continue to pursue acquisitions, some of which could be material to the Company. It is anticipated that future operations and such acquisitions will be funded primarily through cash from operations, borrowings under the Credit Facility Loan, other credit sources, and where desirable, the use of other debt and equity securities. SEASONALITY The Company experiences some seasonality in its business. The Company's revenue and net earnings during the fourth quarter are generally higher than other quarters of its fiscal year. The Company believes that this is due to year-end sales contests and a focus on the finalization of transactions before year end. However, there can be no assurance that fourth quarter results will continue to be higher in future years. The Company's European and Canadian operations have historically experienced lower revenues and net earnings for the three month period ended September 30 due to increased vacation time by Europeans and Canadians during July and August. This has resulted in reduced sales activity and reduced usage of photocopiers, facsimiles and other automated office equipment during such period. 12 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not applicable. ITEM 2. CHANGES IN SECURITIES. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
EXHIBIT NUMBER EXHIBIT ------- ------- 4.1* Memorandum of Association of the Company, including paragraphs 5 and 6. (Exhibit 2.1 of the Company's Registration Statement on Form 20-F, No. 0-20828, filed on November 10, 1992 (the "1992 Registration Statement"). 4.2* Articles of Association of the Company, including sections relating to Shares, Variation of Rights and Votes of Members. (Exhibit 2.2 to the 1992 Registration Statement). 4.3* Deposit Agreement dated June 25, 1992, Amendment No. 1 dated February 26, 1993 and Amendment No. 2 dated July 2, 1993 (Exhibit 4.9 of the Company's Form S-1 Registration Statement No. 33-68278 (the "1993 Form S-1")., and Amendment No. 3 dated August 16, 1994 between The Bank of New York, the Company and Owners and Holders of American Depositary Receipts.
13 14 4.4* Indenture dated March 13, 1995 between the Company and The Bank of New York as Depositary and the Company. (Exhibit 2 to the Company's Form 8-K dated March 21, 1995). 4.5* Deposit and Custody Agreement dated March 13, 1995, between The Bank of New York as Depositary and the Company. (Exhibit 3 to the Company's Form 8-K dated March 21, 1995). 4.6* Registration Rights Agreement dated as of March 13, 1995 relating to $175 million in Aggregate Principal Amount of 6.75% Convertible Subordinated Notes Due 2002 by and among the Company and Prudential Securities Incorporated and Smith Barney, Inc. and Robert W. Baird & Co. and Raymond James & Associates, Inc. (Exhibit 4.12 to the Company's Form 10-K dated June 16, 1995). 4.7* Credit Agreement dated March 19, 1996 among Danka Business Systems PLC, Danka Holding Company, the several financial institutions from time to time a party to this Agreement, Bank of America National Trust and Savings Association, Bank of America International Limited, Nationsbank, N.A., and Southtrust National Bank of Alabama. N.A., in an amount up to $400.0 million. (Exhibit 1 to the Company's Form 8-K dated March 19, 1996). No other instruments defining the rights of holders of long-term debt of the Company and its subsidiary have been included as exhibits because the total amount of obligations authorized under any such agreement does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish supplementally a copy of any omitted long-term debt instrument to the Commission upon request. 27 Financial Data Schedule * Document has heretofore been filed with the Commission and is incorporated by reference and made a part hereof. (b) Reports on Form 8-K:
On June 26, 1996, the Company filed a report on Form 8-K announcing expected results of operations for the first quarter of fiscal 1997 and the effects to the Company resulting from its change to a market based management and administration approach, expansion and productivity of its sales division, and its commitment to the sale of color and higher segment products. 14 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DANKA BUSINESS SYSTEMS PLC -------------------------- (Registrant) Date: August 2, 1996 /S/ DAVID C. SNELL, Finance Director ------------------------- -------------------------------------- David C. Snell, Finance Director (The Chief Financial Officer, the Principal Accounting Officer and Duly Authorized Officer) 15 EX-27 2 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF DANKA BUSINESS SYSTEMS PLC AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS MAR-31-1997 JUN-30-1996 44,764 0 279,727 10,660 243,443 579,130 73,290 26,558 1,181,978 298,318 379,513 0 0 4,718 456,621 1,181,978 401,955 401,955 242,876 242,876 130,915 0 5,033 23,131 8,800 14,331 0 0 0 14,331 .25 0
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