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Danka Business Systems 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
(Mark One)
For the fiscal year ended March 31, 2008.
For the transition period from to . 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) 456-1263 in the United States 011-44-207-605-0150 in the United Kingdom
Securities registered pursuant to Section 12(g) of the Act: Ordinary Shares 1.25 p each
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by a check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. ¨ Yes x No The aggregate market value of voting shares held by non-affiliates of the registrant as of September 30, 2007 was $45,996,240 based on the average bid and asked prices of American Depositary Shares or ADSs, as quoted on the NASDAQ SmallCap Market. As of June 30, 2008, the registrant had 259,148,748 ordinary shares outstanding, including 230,529,281 represented by ADSs. Each ADS represents four ordinary shares. The ADSs are evidenced by American depositary receipts. DOCUMENTS INCORPORATED BY REFERENCE Not Applicable
Table of ContentsAnnual Report on Form 10-K for March 31, 2008 TABLE OF CONTENTS
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Table of ContentsSPECIAL 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 our plans or objectives, forecasts of market trends and other matters, are forward-looking statements, and contain information relating to us that is based on our beliefs as well as assumptions, made by, and information currently available to us. The words “goal”, “anticipate”, “expect”, “believe”, “could”, “should”, “intend” and similar expressions as they relate to us are intended to identify forward-looking statements, although not all forward looking statements contain such identifying words. No assurance can be given that the results in any forward-looking statement will be achieved. For the forward-looking statements, we claim the protection of the safe harbor for forward-looking statements provided for in the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such actual results to differ materially from those reflected in any forward-looking statements include, but are not limited to, the following: (i) the evaluation of various alternatives following the sale of our remaining operations, including, without limitation, a members voluntary liquidation; (ii) any inability to successfully implement such alternative(s); (iii) any material adverse change in financial markets, the economy or in our financial position; (iv) any inability to record and process key data due to ineffective implementation of business processes and policies; (v) any negative impact from the loss of any of our senior or key management personnel; (vi) any incurrence of tax or other liabilities or tax or other payments beyond our current expectations, which could adversely affect our liquidity; (vii) any negative impact of the accreted value of our outstanding preferred stock or its continued accretion; (viii) any negative impact of our continued organization as an England and Wales registered Company following the sale of our U.S. operating business; (ix) actions of governmental entities, including regulatory requirements; (x) actions by shareholders in connection with the distribution of the net proceeds from sale of Danka Office Imaging Company; (xi) the outcome of legal proceedings to which we are or may become a party; and (xii) other risks including those risks identified in any of our filings with the Securities and Exchange Commission. 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. Except as required by applicable law, 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.
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Table of ContentsADDITIONAL 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, free of charge, from our website: http://www.dankabusinesssystemsplc.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our recent press releases are also available to be viewed or downloaded electronically at http://www.dankabusinesssystemsplc.com. 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 Annual Report on Form 10-K.
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Table of ContentsPART I
On June 27, 2008, Danka Business Systems PLC (“Danka” or the “Company”) completed the sale of its U.S. operating subsidiary, Danka Office Imaging Company (“DOIC”). Pursuant to a stock purchase agreement (as amended, the “Stock Purchase Agreement”), dated as of April 8, 2008, among Danka, Danka Holding Company and Konica Minolta Business Solutions U.S.A., Inc. (“Konica Minolta”), the Company sold its U.S. operations to Konica Minolta in a sale of all the outstanding capital stock of DOIC for a purchase price of U.S. $240 million in cash, subject to an upward or downward adjustment of U.S. $10 million. The purchase price adjustment cannot exceed $10 million. In addition, the sum of $10 million was held back by Konica Minolta from the amount paid at closing as security for the Company’s purchase price adjustment obligations. $25 million of the purchase price paid by Konica Minolta at closing will be held in escrow for a period of four years following closing to satisfy any and all claims by Konica Minolta which may be made under the Stock Purchase Agreement. After the repayment of the Company’s outstanding indebtedness, including repayment of approximately $146 million under the Company’s credit facilities provided by General Electric Capital Corporation (“GECC”), including additional borrowings of $15 million since March 31, 2008 and early termination fees and accrued and unpaid interest of approximately $6 million, the payment of certain change-of-control and severance obligations and the fees and expenses incurred in connection with the sale transaction and minus the holdback and escrow amounts set forth above, the net sale proceeds received by the Company were approximately $40 million. For further information regarding the GECC credit facilities and the sale of DOIC to Konica Minolta, see Note 11. “Debt” and Note 18. “Subsequent Events,” respectively, to the consolidated financial statements herein. The sale of DOIC to Konica Minolta constituted the sale of Danka’s remaining operations. Prior to the sale of DOIC, based on revenue, we were one of the largest independent providers of comprehensive document solutions including office imaging equipment, software, support, and related services and supplies in the United States. We offered a wide range of state of the art office imaging products, services, supplies and solutions that primarily included digital and color copiers, digital and color multifunction peripherals, (“MFPs”) printers, facsimile machines and software, contract services, including professional and consulting services, maintenance, supplies, leasing arrangements, technical support and training, collectively referred to as Danka Document Services. Our revenue was generated from two primary sources: (1) new retail equipment, supplies and related sales and (2) service contracts. We primarily sold Canon products but also sold other brands, including Konica Minolta, Kodak, Toshiba, and Hewlett-Packard. A significant portion of our retail equipment, supplies and related sales were made to existing customers, and nearly all were sold with a service or supply contract. These contracts typically had an initial term of one to three years and renewed on an annual basis thereafter. A large majority of our retail equipment, supplies and related sales were financed by third party finance or leasing companies. For fiscal year 2008, retail equipment, supplies and related sales accounted for approximately 45% of our total revenue. We had an installed machine base of analog and digital copiers and MFPs of approximately 120,000 units, which we refer to as machines in field (“MIF”), which generated monthly recurring revenues under our service contracts. Our service revenue generated from these contracts was closely correlated to the number, type and mix of analog, digital and digitally-connected machines in our MIF. In fiscal year 2008, our service revenue accounted for approximately 52% of our total revenue. We are a public limited company organized under the laws of England and Wales and we were incorporated on March 13, 1973. Employees As of March 31, 2008, we employed approximately 1,850 persons. Trademarks and Service Marks In connection with the sale of DOIC, we retained a license to certain trademarks and service marks from DOIC to use in connection with the business of, and winding up and dissolution of, Danka. Backlog Backlogs are not material to our business.
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None
Our general policy was to lease, rather than own, our business locations. We leased over 100 properties for administration, sales, service and distribution functions and for our retail operation in most major metropolitan areas throughout 31 states in the continental United States. These properties occupied a total of approximately 1.0 million square feet. As of March 31, 2008, our principal facilities included 0.2 million square feet of leased office space in St. Petersburg, Florida that we used for our Field Support Office. The terms varied under the leases. Many of our leases had options to renew at our option and required us to pay our proportionate share of taxes, common area expenses, insurance and related costs of the rental properties. Our management believes that the properties we occupied were, in general, suitable and adequate for the purposes for which they were used.
On June 27, 2008, DCML LLC (“DCML”), the beneficial owner of approximately 8.1% of the Company’s outstanding ordinary shares, filed a complaint in the U.S. District Court for the Southern District of New York against the Company, its board of directors, and one of the holders of the Company’s 6.50% senior convertible participating shares alleging that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 thereunder in connection with the proxy statement and supplement to proxy statement issued by the Company to solicit votes with respect to the sale of DOIC, a proposed members voluntary liquidation and related proposals, which were voted on by Danka shareholders at an extraordinary general meeting held on June 27, 2008. The complaint also alleges that the Company’s board of directors breached its fiduciary duties to ordinary shareholders by, among other things, recommending that Danka shareholders vote in favor of the sale of DOIC, the proposed members voluntary liquidation and related proposals. The complaint seeks, among other things, unspecified compensatory damages. On July 9, 2008, the plaintiff filed an amended complaint. The Company believes that such complaint is wholly without merit and was filed for an improper purpose, and intends to defend itself vigorously against these allegations. We are also subject to legal proceedings and claims which arose in the ordinary course of our business. We do not expect these legal proceedings to have a material effect upon our financial position, results of operations or liquidity.
None
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Table of ContentsPART II
The following table sets forth the high and low sale price for our ADSs, as reported by the NASDAQ SmallCap Market and the high and low middle market quotations, which represent an average of bid and offered prices in pence, for the ordinary shares as reported on the Official List of the London Stock Exchange. Each ADS represents four ordinary shares.
As of June 30, 2008, 57,529,281 ADSs were held of record by 1,848 registered holders and 259,148,748 ordinary shares were held of record by 2,528 registered holders. Since some of the ADSs and ordinary shares are held by nominees, the number of holders may not be representative of the number of beneficial owners. We most recently paid a dividend to shareholders on July 28, 1998. We are an English company and we currently have insufficient profits, as determined under English law, to pay dividends on our ordinary shares. We do not expect to pay dividends on our ordinary shares for the foreseeable future and any decision to do so will be made by our board of directors in light of our earnings, financial position, capital requirements, credit or other agreements, legal requirements and other such factors as our board of directors deems relevant.
Not Applicable
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On June 27, 2008, Danka Business Systems PLC completed the sale of its U.S. operating subsidiary, DOIC. Pursuant to the Stock Purchase Agreement, the Company sold its U.S. operations to Konica Minolta in a sale of all the outstanding capital stock of DOIC for a purchase price of U.S. $240 million in cash, subject to an upward or downward adjustment of U.S. $10 million. The purchase price adjustment cannot exceed $10 million. In addition, the sum of $10 million was held back by Konica Minolta from the amount paid at closing as security for the Company’s purchase price adjustment obligations. $25 million of the purchase price paid by Konica Minolta at closing will be held in escrow for a period of four years following closing to satisfy any and all claims by Konica Minolta which may be made under the Stock Purchase Agreement. After the repayment of the Company’s outstanding indebtedness, including repayment of approximately $146 million under the Company’s credit facilities provided by GECC, including additional borrowings of $15 million since March 31, 2008 and early termination fees and accrued and unpaid interest of approximately $6 million, the payment of certain change-of-control and severance obligations and the fees and expenses incurred in connection with the sale transaction and minus the holdback and escrow amounts set forth above, the net sale proceeds received by the Company were approximately $40 million. For further information regarding the GECC credit facilities and the sale of DOIC to Konica Minolta, see Note 11. “Debt” and Note 18. “Subsequent Events,” respectively, to the consolidated financial statements herein. Prior to the sale of DOIC,,Danka was one of the leading independent providers of print products and services in the United States. We provided comprehensive document solutions that included office imaging equipment, document related software, related services and supplies that assisted our customers with the management of their output requirements. These solutions were designed to improve business processes, reduce costs and increase productivity. We offered a broad selection of digital office imaging products including copiers, multi-function peripherals (“MFPs”), facsimile machines and printers that we integrate with an open architecture portfolio of software that has been carefully selected and rigorously tested for optimum performance. We also provided a wide range of contract services, including professional and consulting services, equipment maintenance, supplies, leasing arrangements, technical support and training primarily on the installed base of equipment created by our retail equipment, supplies and related sales. Danka’s mission was to deliver value to clients by using our expert sales, technical and professional services and products to implement effective document information solutions and services. Our product portfolio was designed to provide our customers with choice, convenience, custom cost management and continuity. Our vision was to empower our customers to benefit fully from the convergence of image and document technologies in a connected environment. This approach strengthened our client relationships and expanded Danka’s strategic value. Our strategy to accomplish our mission was to:
All tables presented herein are in thousands unless otherwise noted. Critical Accounting Policies and Estimates In preparing our consolidated financial statements and accounting for the underlying transactions and balances, we apply various accounting policies. We consider the policies discussed below as critical to understanding our consolidated financial statements, as their application places the most significant demands on management’s judgment, since financial reporting results rely on estimates of the effects of matters that are inherently uncertain. Specific risks associated with these critical accounting policies are discussed throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) where such policies affect our reported and expected financial results. Allowance for doubtful accounts: The Company provides allowances for doubtful accounts and allowances for billing disputes and inaccuracies on its accounts receivable as follows:
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Changes to these estimates in the range of 15% or less would not have a material adverse or positive effect on the Company’s financial position and results of operations. The difference between actual write-offs and estimated allowances has not been material. The following table summarizes the Company’s net accounts receivable:
Inventories: The Company acquires inventory based on its projections of future demand and market conditions. Inventories consist of photocopiers, facsimile equipment and other automated office equipment which are stated at the lower of specific cost or market of $12.0 million at March 31, 2008 and $14.8 million at March 31, 2007. The related parts and supplies are valued at the lower of average cost or market of $15.2 million at March 31, 2008 and $16.9 million at March 31, 2007. Inventories are stated at the lower of cost or market using a method that approximates FIFO and consist of finished goods available for sale. The Company acquires inventory based on its projections of future demand and market conditions. Any unexpected decline in demand and/or rapid product improvements or technological changes may cause the Company to have excess and/or obsolete inventories. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those anticipated, inventory adjustments may be required. On an ongoing basis, the Company reviews for estimated obsolete or unmarketable inventories and writes-down its inventories to their estimated net realizable value based upon forecasts of future demand and market conditions using historical trends and analysis. If actual market conditions are less favorable than the Company’s forecasts, due in part to a greater acceleration within the industry to digital color office imaging equipment, additional inventory write-downs may be required. The Company’s estimates are influenced by a number of considerations including, but not limited to, the following: decline in demand due to economic downturns, rapid product improvements and technological changes, and its ability to return to vendors a certain percentage of our purchases. The difference between actual write-offs and estimated write-offs has not been material. Revenue recognition: The Company generally has agreements to provide product maintenance services for the equipment that it sells or leases to customers. The Company follows the guidance in the Emerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), as modified for the impact of higher level accounting literature, to allocate revenue received between the two deliverables in the arrangement—the equipment and the product maintenance services. For arrangements in which the product maintenance services meet the definition in the Financial Accounting Standards Board (“FASB”) Technical Bulletin (“TB”) No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts” (“TB 90-1”), of a separately priced product maintenance contract, revenue equal to the amount paid by the customer to obtain the product maintenance services is allocated to the separately priced maintenance agreement, with the remainder of the revenue allocated to the equipment (or operating lease payments for use of the equipment). For arrangements in which the product maintenance services do not meet the definition in TB 90-1 of a separately priced product maintenance contract, but the revenue recognized related to the equipment is governed by FASB Statement No. 13, “Accounting for Leases” (“SFAS 13”), revenue is allocated between the equipment (or operating lease payments for use of the equipment) and product maintenance services on a relative fair value basis using our best estimate of fair value of the equipment (or operating lease payments for use of the equipment) and of the product maintenance services. Revenue from retail equipment, supplies and related sales, including revenue allocated to equipment sales as discussed above, is recognized upon proof of delivery to the customer. In the case of equipment sales financed by third party
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Table of Contentsfinance/leasing companies, revenue is recognized at the later of proof of delivery to the customer or credit acceptance by the finance/leasing company. In addition, for the sale of certain digital equipment that requires a comprehensive setup by us before it can be used by a customer, revenue is recognized upon the customer’s written confirmation of delivery and installation. Supply sales to customers are recognized at the time of shipment unless supply sales are included in a service contract, in which case supply sales are recognized upon equipment usage by the customer. The Company sells equipment with embedded software to its customers. The embedded software is not sold separately, is not a significant focus of the marketing effort, and the Company does not provide post contract customer support specific to the software or incur significant costs that are within the scope of FASB Statement No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS 86”). Additionally, the functionality that the software provides is marketed as part of the overall product. The software embedded in the equipment is incidental to the equipment as a whole such that FASB Statement of Position No. 97-2, “Software Revenue Recognition” (“SFAS 97-2”), is not applicable. Revenue from sales of equipment subject to operating and sales-type leases is recognized in accordance with SFAS 13 and FASB Statement No. 140, “Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”), respectively. Revenue from all other sales of equipment is recognized in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). Rental operating lease income is recognized straight-line over the lease term. Retail service revenues are generally recognized ratably over the term of the underlying product maintenance contracts. Under the terms of the product maintenance contract, the customer is billed a flat periodic charge and/or a usage-based fee. The typical agreement includes an allowance for a minimum number of copies for a base service fee plus an overage charge for any copies in excess of the minimum. We record revenue each period for the flat periodic charge and for actual or estimated usage. Taxes assessed by governmental authorities that are directly imposed on revenue-producing transactions between the Company and customers (which may include, but are not limited to, sales, use, value added and some excise taxes) are excluded from revenues. As discussed above under “Allowance for Doubtful Accounts”, the Company estimates that a portion of its recorded revenues is inaccurate due to billing disputes or other errors. The Company reduces revenue for an estimate of future credits that will be issued for billing disputes and inaccuracies at the time of sale. Billed revenues are reduced based on estimates derived by historically based statistical analysis. Measurement of such estimates requires consideration of prior experience, including the need to adjust for current conditions and judgments about probable effects. Cost of sales: Inbound freight charges are included in inventory. When the inventory is sold, the cost of the inventory, including the inbound freight charges, is relieved and charged to cost of sales. When the inventory is rented, the cost of the inventory, including the inbound freight charges, is relieved and transferred to the rental equipment asset account. The cost of the rental equipment asset is then depreciated over the estimated useful life of the equipment. The depreciation of rental equipment assets is included in rental costs. Purchasing and receiving costs, inspection costs, warehousing costs and other distribution costs are included in selling, general and administrative costs because no meaningful allocation of these expenses to equipment, supplies and rental costs of sales is practicable. Accordingly, our gross margins may not be comparable to other companies, since some companies include all of the costs related to their distribution network in cost of sales, while others exclude a portion of them, instead including them in operating expense line items. These costs totaled $11.3 million, $12.0 million and $14.9 million for fiscal years 2008, 2007 and 2006, respectively. Deferred Income Taxes—As part of the process of preparing our consolidated financial statements, we have to determine our income and corporation taxes in each of the taxing jurisdictions in which we operate. This process involves determining our actual current tax expense and loss carryforwards together with assessing any temporary differences resulting from the different treatment of certain items, such as the timing for recognizing revenues and expenses for tax and accounting purposes. These differences and loss carryforwards result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. In assessing the realizability of deferred tax assets, management considers whether it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Our past financial performance is a significant factor which contributes to our inability, pursuant to FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”), to use projections of future taxable income in assessing the realizability of deferred tax assets. Management therefore is limited to considering the scheduled reversal of deferred tax liabilities and tax planning strategies in making this assessment. Considering all relevant data, management concluded that it is not “more likely than not” we will realize the benefits of the deferred tax assets at March 31, 2008. Consequently, we have a valuation allowance against net deferred tax assets in all jurisdictions at March 31, 2008.
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Table of ContentsIn addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. In management’s opinion, adequate provisions for income and corporation taxes have been made for all years. Goodwill—We had goodwill of $93.5 million as of March 31, 2008. We review our goodwill and indefinite-lived intangible assets annually for possible impairment, or more frequently if impairment indicators arise in accordance with FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Separable intangible assets that have finite lives are amortized over their estimated useful lives. Goodwill was reviewed for possible impairment during each of the fourth quarters of our fiscal years 2007 and 2006, in accordance with SFAS 142. As of January 1, 2008, management determined that the fair value exceeded the carrying amount of goodwill based on the potential sale of DOIC to Konica Minolta as more fully described in Note 18. “Subsequent Events” to the consolidated financial statements. In performing its impairment testing at January 1, 2007, the fair value of the reporting unit was determined using a combination of a discounted cash flow model and multiple market approaches. The discounted cash flow model used estimates of future revenue and expenses for each reporting unit as well as appropriate discount rates, and the estimates that were used are consistent with the plans and estimates the Company is using to manage the underlying business. Based on the analysis as of January 1, 2007 management determined that the fair value exceeded the carrying amount and therefore, goodwill was not considered to be impaired. Accounting for Stock Based Compensation—Effective April 1, 2006, we adopted FASB Statement No. 123R, “Share-Based Payment” (“SFAS 123R”), using the modified prospective transition method to account for our employee stock-options. Under that transition method, compensation costs for the portion of awards for which the requisite service had not yet been rendered, and that were outstanding as of the adoption date, will be recognized as the service is rendered based on the grant date fair value of those awards calculated under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Prior period results are not restated. Since all options were fully vested on April 1, 2006, the adoption of SFAS 123R had no impact on net income or earnings per share. See Note 14. “Share Option and Stock Compensation Plan” to the consolidated financial statements for disclosures related to stock-based compensation. The fair value of options granted prior to the implementation of SFAS 123R are estimated at the date of grant using a Black-Scholes option pricing model, while those granted after the implementation of SFAS 123R use a multiple point binomial model. See Note 14. “Share Option and Stock Compensation Plan” to the consolidated financial statements for assumptions. Future compensation to be incurred through fiscal year 2010 related to the nonvested options is approximately $0.3 million as of March 31, 2008. Restructuring Charges—We recognized restructuring charges for the consolidation of back office functions, exiting non-strategic real estate facilities and reducing headcount. These charges are recorded pursuant to formal plans developed and approved by management. These charges are accounted for under the provisions of FASB Statement No. 112, “Employers’ Accounting for Postemployment Benefits” (“SFAS 112”) and FASB Statement No. 146, “Accounting for Cost Associated with Exit or Disposal Activities” (“SFAS 146”) and the recognition of restructuring charges requires that we make certain judgments and estimates regarding the nature, timing and amount of costs associated with these plans. The estimates of future liabilities may change, requiring additional restructuring charges or the reduction of liabilities already recorded. At the end of each reporting period, we evaluate the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with the restructuring programs. For further discussion of our restructuring programs, refer to Note 3. “Restructuring Charges” to the Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
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Table of ContentsFinancial Condition The following table sets forth information concerning our financial position as of March 31, 2008 and 2007:
Total assets as of March 31, 2008 decreased $194.9 million or 46.7% from March 31, 2007. This decrease was due primarily to the use of cash received on the sale of our European operations during fiscal year 2007 to repay our outstanding senior and subordinated notes as more fully described in Note 11. “Debt” to the consolidated financial statements. In addition, accounts receivable decreased by $6.5 million due to better collections and lower revenues and inventory decreased by $4.5 million due to reduced purchasing resulting from better forecasting of inventory needs. Fixed assets decreased $5.7 million due to continuing depreciation of assets and decreased capital spending during fiscal year 2008. Total liabilities decreased $159.8 million from March 31, 2007, or 41.1%. This decrease was due to the payoff of our senior and subordinated notes offset by a new financing arrangement with GECC as more fully described in Note 11. “Debt” to the consolidated financial statements. In addition, accounts payable and accrued expenses decreased $33.0 million due to the payout of restructuring accruals and professional fees and the paydown of vendor balances. Working capital, defined as current assets less current liabilities, decreased $91.4 million or 243.0% from March 31, 2007. This decrease was the result of decreased restricted cash balances at March 31, 2008, and the repayment of our outstanding senior and subordinated notes, which were partially offset by borrowings under our new financing arrangement with GECC as more fully described in Note 11. “Debt” to the consolidated financial statements. Liabilities to liabilities and capital increased 10% at March 31, 2008 compared to March 31, 2007 due to the impact of additional operating losses during fiscal year offset by the decrease in liabilities discussed above. For the period ending March 31, 2008, our annualized inventory turnover ratio remained stable at 5x.
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Table of ContentsRESULTS OF OPERATIONS The following table sets forth for the periods indicated the percentage of total revenue from continuing operations represented by certain items in our Consolidated Statements of Operations:
The following table sets forth for the periods indicated, the change in our revenue from continuing operations from the prior year:
The following table sets forth for the periods indicated the gross profit margin percentage from continuing operations for each of our revenue classifications:
Fiscal Year 2008 Compared to Fiscal Year 2007 Revenue Revenue includes customer purchases of office peripherals; supplies; software and related support products; professional, consulting and maintenance services; and leasing arrangements. For the fiscal year 2008, our revenue decreased by $32.0 million or 7.1% from fiscal year 2007 with retail equipment, supplies and related sales declining $10.5 million or 5.3% to $189.6 million. Retail service revenue declined $19.0 million or 8.0% to $217.1 million and rental revenue was down $2.5 million or 17.8% to $11.5 million for fiscal year 2008.
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Table of ContentsOur retail equipment, supplies and related sales are declining due to new entrants and existing providers competing for product placement, and lower productivity of newly hired sales personnel. While we added sales personnel in strategic locations, we continued to lack the necessary sales coverage throughout the United States to cover and protect our existing installed base, due to earlier cost cutting measures. This inhibited our ability to retain and upgrade customers as their contracts ended and/or their machines aged out. Year over year, our new product placements or new machines in field (“MIF”) decreased by 8%. This decrease in product placement was partially offset by increases in average selling prices over all product lines. Our supplies revenue decreased by $1.0 million year over year due to the sale of Image One, our wholly owned print services subsidiary, in fiscal year 2007. Service revenue includes revenue from the maintenance and servicing of equipment and is driven by the total number MIF that we serviced. Service revenues continued to decrease due in part to the continued conversion from analog devices to digital devices and decreased MIF. Year over year, digital devices in our installed base grew 5.8%, however, they generated a lower average cost per copy charge than the analog devices. This decrease in copy charges from the conversion to digital devices has been offset, somewhat by a shift to color copies which have a higher average per copy charge than traditional black and white copies. We also experienced a decline in our MIF due in part to lower hardware sales. During fiscal year 2008, our net MIF decline was 10,594 machines resulting in a base service revenue decline of $13.5 million. In addition, pricing pressures from competition and enhanced technology inhibited price maintenance on renewals and new contracts entered into. Rental revenue declined by $2.5 million or 17.8% to $11.5 million in fiscal year 2008. During the fiscal year 2007, revenue was recognized for fiscal year 2006 rental activity on rental equipment on contracts with certain governmental customers that did not meet revenue recognition criteria in fiscal year 2006. Gross Profit Our total gross profit margin after costs of goods sold, which primarily includes inventory, service labor and overhead, management costs and depreciation of equipment, decreased to 33.9% during fiscal year 2008 from 34.6% in the year-ago period. Inbound freight charges are included in inventory. When the inventory is sold, the cost of the inventory, including the inbound freight charges, is relieved and charged to costs of sales. When the inventory is rented, the cost of the inventory, including the inbound freight charges, is relieved and transferred to the rental equipment asset account. The cost of the rental equipment asset is then depreciated over the estimated useful life of the equipment. The depreciation of rental equipment assets is included in rental costs. Purchasing and receiving costs, inspection costs, warehousing costs and other distribution costs are included in selling, general and administrative costs because no meaningful allocation of these expenses to equipment, supplies and rental costs of sales is practicable. Accordingly, our gross margins may not be comparable to other companies, since some companies include all of the costs related to their distribution network in cost of sales, while others exclude a portion of them from gross margin, including them instead in operating expense line items. These costs totaled $11.3 million and $12.0 million during fiscal years 2008 and 2007, respectively. We receive vendor rebates based on arrangements with certain equipment vendors. Those arrangements typically require vendors to make incentive payments to the Company based on the volume of periodic purchases (dollar amounts, quantity of specific units, etc.). Such rebates are accrued when purchases are made and can be reasonably estimated, recorded as reductions of inventory costs when accrued and recognized as a reduction to cost of sales when the related inventories are sold. Credits to cost of sales during fiscal year 2008 were $6.0 million compared to $4.5 million in the prior year period. Retail equipment, supplies and related sales margins decreased slightly to 28.4% from 29.0% in the year-ago period. This decrease was the result of a shift toward lower margin deals at the end of the fiscal year offset by vendor credits of $1.0 million received during the current period. Retail service margins increased to 37.6% from 37.3%. The increase in retail service margins was a direct result of a reduction in fixed costs related to our service organization of approximately $6.2 million and an increase year over year of vendor credits of $1.5 million offset by the transition to all inclusive service contracts that contain provisions for service and consumables which are typically lower margin. Rental margins decreased in the current year period compared to the year-ago period. During fiscal year 2006, we entered into a government contract with a 36 month term which requires annual purchase orders for budgetary purposes. Revenue and depreciation expense were expected to be recognized ratably over the contract term. However, a delay in the execution of the purchase order by the government entity caused us to defer all of the revenue we expected to recognize in
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Table of Contentsfiscal year 2006 to fiscal year 2007. This resulted in an increase to our fiscal year 2007 gross profit as the depreciation associated with the deferred revenue was recognized in fiscal year 2006. In fiscal year 2008, our rental gross profit returned to historical levels resulting in a decrease in rental margins from 68.3% in fiscal year 2007 to 55.3% in fiscal year 2008. Selling, General and Administrative Expenses Selling, general and administrative expenses (“SG&A”) in the current year decreased by $15.7 million or 9.9% from the year-ago period to $143.8 million from $159.5 million. The decrease in SG&A for the year resulted from a decrease in professional fees of $10.2 million year over year, primarily relating to the outsourcing agreements for our general and administrative functions, including lower variable costs due to lower transactions generated. This decrease was offset by increases in sales headcount and commission expenses of approximately $0.2 million in an effort to increase sales coverage in certain strategic markets. While we added sales personnel in strategic locations, we experienced lower productivity due to these newly hired sales personnel and we continued to lack the necessary sales coverage throughout the United States to cover and protect our existing installed base, due to earlier cost cutting measures. As a percentage of total revenue, SG&A expenses decreased to 34.4% in the current fiscal year from 35.4% in the year-ago period. Restructuring Charges (Credits) During the last two fiscal years, we formulated plans to continue to eliminate inefficiencies in our field operations and to reduce our SG&A costs by eliminating and consolidating back office functions, reducing sales and service personnel and exiting certain facilities. During the prior fiscal year, we recorded $2.0 million of severance charges and $3.5 million of facility charges primarily relating to our Field Support Office. In addition, we recorded approximately $0.5 million in charges relating to our prior restructuring plans. During the current period, we recorded severance charges of $2.5 million relating to the 2008 plan, and $0.6 million of facility charges relating to prior year plans. Loss on Sale of Subsidiary During fiscal year 2007, we sold our interest in our wholly-owned subsidiary, Image One, resulting in a loss of $2.5 million. Other (Income) Expense Other income for the current fiscal year primarily included a gain on the sale of a building during the first quarter of approximately $0.9. The prior year income included a gain of $0.5 million relating to grants from taxing authorities offset by amortization on intangibles related to our Image One subsidiary and foreign exchange losses. Operating Earnings (Loss) from Continuing Operations Our operating loss from continuing operations was $4.3 million for fiscal year 2008 compared to a loss of $13.0 million in the prior year period. The increase in operating earnings for the current year was due to lower SG&A expenses, lower restructuring charges and the gain on the sale of a building offset by lower revenues and gross margin. The operating loss from continuing operations in the prior-year was principally due to increased restructuring charges and the loss on the sale of our wholly owned subsidiary discussed above. Interest Expense and Interest Income Interest expense decreased by $15.6 million or 44.2% due to the payoff of our senior and subordinated notes and our new financing agreements with GECC as more fully described in Note 11. “Debt” to the consolidated financial statements. Interest income increased $1.6 million due to increased cash balances at the beginning of the current fiscal year as the result of the sale of our European businesses in the prior fiscal year. Loss on Early Extinguishment of Debt During the current fiscal year, we redeemed our senior and subordinated notes as more fully described in Note 11. “Debt” to the consolidated financial statements, resulting in a loss of $9.7 million. Income Taxes We recorded a tax benefit of $1.0 million during fiscal year 2008 and a tax provision of $2.2 million in the prior year period. The income tax benefit in the current period resulted from a $2.4 million benefit associated with the refund, in the UK, of previously paid tax offset by a $1.3 million increase in the valuation allowance against deferred taxes and $0.1 million in minimum taxes and other charges. The income tax provision for the prior year period resulted from a $1.5 million increase in the valuation allowance against deferred taxes and $0.7 million in minimum taxes and other charges.
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Table of ContentsNet Earnings (Loss) from Continuing Operations Net loss from continuing operations was $29.3 million in fiscal year 2008 compared to a loss from continuing operations of $48.7 million in the year-ago period. We incurred a net loss from continuing operations available to common shareholders of $0.83 per ADS during the current period compared to net loss from continuing operations of $1.11 per ADS in the year-ago period. Fiscal Year 2007 Compared to Fiscal Year 2006 Revenue Revenue includes customer purchases of office peripherals; professional, consulting and maintenance services; supplies; software and related support products; and leasing arrangements. During fiscal year 2007, our revenue decreased by $72.2 million or 13.8% from fiscal year 2006. Our retail equipment, supplies and related sales declined due to increased pricing pressures and a worldwide reduction in sales force that took place in prior periods. These issues combined with the advent of other competitive equipment from printer manufacturers may continue to hinder our progress in growing our retail equipment, supplies and related sales revenue. Service revenues continued to decrease due in part to the continued conversion from analog devices to digital devices and a shift and decline in certain segments of our installed base. In addition, we are experiencing decreases in our click rates (per copy charge) due to competitive pricing pressures. Retail equipment, supplies and related sales decreased by $46.2 million or 18.7% to $200.1 million primarily resulting from continued pricing pressures and a decrease in sales headcount year over year due to a realignment of our sales force towards a more market-based approach. Our supplies revenue decreased year-over-year due to the sale of our wholly-owned subsidiary, Image One. Retail service revenue declined by $23.6 million or 9.1% to $236.1 million due to the factors discussed above. This decrease was also a direct result of lower average service prices. In addition, these pricing pressures inhibited price maintenance or increases on renewals and new contracts. Rental revenue declined by $2.4 million or 14.6% to $14.0 million due to the strategic decision to not pursue new rental business in an effort to lower investments in rental equipment. Gross Profit Our total gross profit margin increased slightly in fiscal year 2007 to 34.6% from 34.2% in fiscal year 2006. The retail equipment, supplies and related sales margin remained stable at 29.0%. Gross margins increased by shifting incentives for our sales personnel from revenue-based incentives to margin-based. In addition, increased automation and efficiency in our purchasing systems has allowed us to pursue vendor credits, thereby lowering our equipment costs. These increases were offset by increased supplies costs as a result of starter kits being sent with equipment sales. Retail service margins decreased slightly to 37.3% from 37.7% in the year-ago period. Rental margins increased to 68.3% from 55.1% in the year-ago period due to revenue recognized on rental equipment on contracts with certain governmental customers which resulted from the resolution of previously delayed revenue recognition on rental contracts. Due to delays in executing purchase orders by those customers, depreciation on the equipment was taken in prior periods, while the revenue was not recognized until this period. Selling, General and Administrative Expenses Selling, general and administrative expenses (“SG&A”) decreased by $43.7 million or 21.5% from the year-ago period to $159.5 million. This decline is primarily the direct result of headcount reductions and facility closures as a result of our restructuring activities in prior years. While we have lowered SG&A costs due to reduced headcount in our sales force, this has also contributed to our declines in revenue, predominantly our retail equipment, supplies and related sales. As a percentage of total revenue, SG&A expenses decreased to 35.4% in the current period from 38.9% in the prior-year period ended March 31, 2006.
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Table of ContentsRestructuring Charges (Credits) In fiscal year 2007, we formulated plans to continue to eliminate inefficiencies in our field operations and to reduce our SG&A costs by eliminating and consolidating back office functions, reducing sales and service personnel and exiting certain facilities. As part of these plans, in fiscal year 2007, we recorded a $6.0 million restructuring charge comprised of $2.0 million relating to severance charges due to additional cost reduction efforts and $3.5 million in facility costs primarily related to our Field Support Offices in St. Petersburg, Florida. In addition, we recorded an additional $0.5 million in facility costs primarily related to our fiscal year 2004 plan. Loss on Sale of Subsidiary During the current fiscal year, we sold our interest in our wholly-owned subsidiary, Image One, resulting in a loss of $2.5 million. Other (Income) Expense Other expense for the current fiscal year consisted primarily of foreign exchange losses and amortization on intangible assets. These expenses were offset by a gain of $0.5 million relating to grants from taxing authorities. The prior year income primarily related to foreign exchange gains offset by amortization on intangible assets. Operating Earnings (Loss) from Continuing Operations Our operating loss from continuing operations was $13.0 million in fiscal year 2007 compared to a loss of $28.4 million in fiscal year 2006. The reduction in the operating loss from continuing operations is principally due to the decreases in SG&A offset by lower sales, higher restructuring charges and the loss on the sale of subsidiary as discussed above. Interest Expense and Interest Income Interest expense increased by $5.7 million, or 19.2%, year over year to $35.2 million. This increase was the result of the accelerated amortization of the debt issue costs and accretion of the bond discount costs related to our senior notes due to the reclassification of the debt from long-term to short-term. Interest income in fiscal year 2007 was generated from interest received on cash balances in our banks resulting from the proceeds from the sale of our European operations. Income Taxes We recorded an income tax provision of $2.2 million in fiscal year 2007 compared to a tax benefit of $8.6 million in the prior year period. The income tax provision for the current year period resulted from a $1.5 million increase in the valuation allowance against deferred taxes and $0.7 million in minimum taxes and other charges. The income tax benefit for the prior year period resulted from the resolution of various tax contingencies in the United States totaling $10.1 million, which was partially offset by an increase in the valuation allowance against deferred taxes of $1.4 million and minimum and other taxes of $0.1 million. Net Earnings (Loss) from Continuing Operations Our net loss from continuing operations was $48.7 million in fiscal year 2007 compared to net loss of $49.3 million in the year-ago period. We incurred a net loss from continuing operations available to common shareholders of $1.11 per ADS in each of fiscal years 2007 and 2006.
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Table of ContentsLIQUIDITY AND CAPITAL RESOURCES The following table summarizes our cash flows from continuing operations for fiscal years 2008, 2007 and 2006 as reported in our Consolidated Statements of Cash Flows in the accompanying Consolidated Financial Statements:
Cash flows Our generation and use of cash is cyclical within a quarter. Typically, we generate a significant portion of our cash toward the end of each quarter where we typically conclude a large percentage of our retail equipment transactions while our use of cash is more evenly spread during the quarter after a greater use of cash toward the beginning of the quarter, when we typically pay vendors for products sold toward the end of the quarter and for other services provided during the quarter. Generally, cash provided by operations and cash on the balance sheet continue to be our primary source of funds to finance operating needs and capital expenditures. Our net cash flow used in continuing operations during fiscal year 2008, 2007 and 2006 was $29.8 million, $25.9 million and $34.0 million, respectively. The cash flows used in continuing operations during each fiscal year is a result of the continuing decline in our revenues and the resulting decline in our gross profit, payouts of restructuring, payouts of accrued professional fees and reductions in other accrued expenses. These uses of cash were offset somewhat by improved collections of accounts receivable. Our net cash flow used in continuing investing activities during fiscal years 2008, 2007 and 2006 was $4.2 million, $11.2 million and $5.6 million, respectively. This outflow was the result of capital expenditures. During fiscal year 2008, we sold a building in London that resulted in net proceeds of $1.5 million. Our net cash flow provided by continuing financing activities during fiscal years 2007 and 2006 was $5.0 million and $8.4 million while our net cash flow used in continuing financing activities was $141.5 million for fiscal year 2008. The cash outflow during fiscal year 2008 was the result of the redemption of our senior and subordinated notes offset by the new financing agreements with GECC as more fully described in Note 11. “Debt” to the consolidated financial statements. During fiscal year 2007, $5.0 of restricted cash relating to our credit facility with Bank of America was released. During fiscal year 2006, we had borrowings of $10.0 million outstanding on our credit lines at the end of the year. The Company also has restricted cash at March 31, 2008 of $5.3 million related to an escrow established per the terms of an agreement for the sale of our European operations as more fully described below and in Note 6. “Discontinued Operations and Assets and Liabilities Held for Sale” to the consolidated financial statements. During fiscal year 2007, we sold our European operations to Ricoh in a sale of all the outstanding capital stock of those European subsidiaries set forth in the Share Purchase Agreement for a purchase price of U.S. $215 million in cash, after an upward adjustment of U.S. $5 million as more fully described in Note 6. “Discontinued Operations” to the consolidated condensed financial statements. Under the indenture governing our 11% senior notes, we were obligated to make a tender offer within 365 days of the sale for the notes at par, utilizing the balance of the asset sale proceeds that has not been used under the permitted expenditures defined in the indenture. In compliance with this requirement, we initiated a tender offer at par to the holders of the senior notes on June 25, 2007, which expired on July 24, 2007 as more fully described in Note 6. “Debt” to the consolidated condensed financial statements. The sale of our European operations was completed in anticipation of the repayment of our senior and subordinated notes in an effort to lower our interest expense (and subsequent payments) on a go forward basis. The cash contribution from our European operations generally had not been substantial enough to cover these interest payments. Notices of Redemption were initiated by the Company on June 25, 2007 to the holders of the 11.0% Senior Notes due 2010 at 105.5% of par plus accrued and unpaid interest and to the holders of the 10.0% Subordinated Notes due 2008 at
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Table of Contents100.0% of par plus accrued and unpaid interest. On July 27, 2007, the senior notes and subordinated notes were redeemed and paid and during the second quarter of fiscal year 2008, the Company recorded a charge of approximately $9.4 million for the call premium on the redemption of the senior notes as more fully described in Note 11. “Debt” to the consolidated condensed financial statements. Also on June 25, 2007, the Company completed new financing agreements with GECC pursuant to which it may borrow up to $145.0 million including $40.0 million in revolving loans as more fully described in Note 11. “Debt” to the consolidated condensed financial statements. Proceeds from this financing were used in conjunction with the proceeds of the previously completed sale of our European businesses to reduce and refinance our existing debt and enhance working capital. The credit agreements governing these new financing arrangements contain customary financial covenants that we must comply with on a quarterly basis relating to our leverage ratios, fixed charge coverage ratio, cumulative EBITDA and an annual capital expenditure threshold, all as more fully described in the financing agreements. Our liquidity is dependent upon cash on hand, cash generated from operations and the availability of funding under our credit agreements with GECC. The borrowing base under our GECC credit agreements is limited to certain multiples of our adjusted EBITDA, as described in the agreements. Our availability of financing under the credit agreements is also dependent upon the satisfaction of a number of other conditions including meeting leverage and other financial covenants. If we are unable to continue meeting these covenants, GECC could declare us in default, among other possible courses of action. We are not in compliance with these covenants at March 31, 2008. On June 27, 2008, Danka Business Systems PLC completed the sale of its U.S. operating subsidiary, DOIC. Pursuant to the Stock Purchase Agreement, the Company sold its U.S. operations to Konica Minolta in a sale of all the outstanding capital stock of DOIC for a purchase price of U.S. $240 million in cash, subject to an upward or downward adjustment of U.S. $10 million. The purchase price adjustment cannot exceed $10 million. In addition, the sum of $10 million was held back by Konica Minolta from the amount paid at closing as security for the Company’s purchase price adjustment obligations. $25 million of the purchase price paid by Konica Minolta at closing will be held in escrow for a period of four years following closing to satisfy any and all claims by Konica Minolta which may be made under the Stock Purchase Agreement. After the repayment of the Company’s outstanding indebtedness, including repayment of approximately $146 million under the Company’s credit facilities provided by GECC, including additional borrowings of $15 million since March 31, 2008 and early termination fees and accrued and unpaid interest of approximately $6 million, the payment of certain change-of-control and severance obligations and the fees and expenses incurred in connection with the sale transaction and minus the holdback and escrow amounts set forth above, the net sale proceeds received by the Company were approximately $40 million. For further information regarding the GECC credit facilities and the sale of DOIC to Konica Minolta, see Note 11. “Debt” and Note 18. “Subsequent Events,” respectively, to the consolidated financial statements herein. In connection with the sale of DOIC, as described above, the credit facilities provided by GECC were repaid and terminated. We believe cash and cash equivalents on hand, which include the net proceeds of approximately $40 million after transaction costs from the sale of DOIC, holdbacks and paydown of our debt with GECC is sufficient to fund our cash requirements for the next twelve months. The Board of Directors of the Company is evaluating the alternatives available with respect to the net proceeds from the sale of DOIC to Konica Minolta – primarily how such proceeds may be distributed to Danka shareholders. There is no guarantee that any future alternative chosen by the board of directors will result in any return to holders of Danka’s ordinary shares (including holders of American Depositary Shares). In addition, there is no guarantee that the holders of the Company’s 6.50% senior convertible participating shares will not take action(s) available to them under applicable law, for example seeking a winding up of the Company, to recover amounts to which they are entitled pursuant to the Company’s articles of association. Such amounts exceed the amount of the net proceeds from the sale of DOIC. Restructuring Charges Fiscal Year 2008 Plan: In fiscal year 2008, the Company formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions, reducing sales and service personnel and exiting certain facilities. These charges were accounted for under the provisions of FASB Statement No. 112, “Employers’ Accounting for Post Retirement Benefits” (“SFAS 112”) and FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).
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Table of ContentsAs part of these plans, the Company recorded a $2.5 million restructuring charge in fiscal year 2008 consisting of severance charges due to additional cost reduction efforts. Cash outlays for severance during the period were $1.5 million. The remaining liability of the fiscal year 2008 Plan restructuring charge is categorized within “Accrued expenses and other current liabilities”. The following table summarizes the fiscal year 2008 Plan restructuring charge: 2008 Plan Restructuring Charge:
Fiscal Year 2007 Plan: In fiscal year 2007, the Company formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions, reducing sales and service personnel and exiting certain facilities. These charges were accounted for under the provisions of FASB Statement No. 112, “Employers’ Accounting for Post Retirement Benefits” (“SFAS 112”) and FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). As part of these plans, the Company recorded a $5.5 million restructuring charge in fiscal year 2007 consisting of $2.0 million relating to severance charges due to additional cost reduction efforts and $3.5 million in facility costs primarily related to the Company’s Field Support Office in St. Petersburg, Florida. During the second quarter of fiscal year 2008, the Company eliminated the remaining reserve related to its Field Support office due to favorable sublease negotiations. The remaining obligation relating to this facility consists of broker fees incurred as part of the sublease agreement. Cash outlays for severance and facilities during the period were $0.5 million and $1.6 million, respectively. The remaining liability of the fiscal year 2007 Plan restructuring charge is categorized within “Accrued expenses and other current liabilities”. The following table summarizes the fiscal year 2007 Plan restructuring charge: 2007 Plan Restructuring Charge:
Fiscal Year 2005 Plan: In fiscal year 2005, the Company formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions and exiting certain facilities. These charges were accounted for under the provisions of SFAS 112 and SFAS 146. As part of these plans, the Company recorded $2.6 million in restructuring charges related to severance in fiscal year 2005. During fiscal year 2006, the Company recorded additional charges of $3.9 million and $1.0 million relating to severance and facilities, respectively, due to continued reduction efforts. During fiscal year 2008, the Company recorded a $0.2 million restructuring charge related to facilities. Cash outlays for facilities during the period were $0.3 million. The remaining liability of the 2005 Plan restructuring charge of $0.1 million is categorized within “Accrued expenses and other current liabilities”.
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Table of ContentsThe following table summarizes the fiscal year 2005 Plan restructuring charge: 2005 Plan Restructuring Charge:
Fiscal Year 2004 Plan: In fiscal year 2004, the Company formulated plans to significantly reduce its selling, general and administrative costs by consolidating the back-office functions, exiting non-strategic real estate facilities and reducing headcount. These charges were accounted for under the provisions of SFAS 112 and SFAS 146. As part of these plans, the Company recorded a $25.3 million restructuring charge in fiscal year 2004 that included $5.7 million related to severance for employees and $19.6 million related to future lease obligations for facilities that were vacated by March 31, 2004. During fiscal year 2006, the Company incurred $0.4 million of facility charges as a result of broker commissions paid due to the sublease of certain facilities. During fiscal year 2007, the Company recorded an additional $0.4 million charge related to facilities due to longer sublease negotiations. During fiscal year 2008, the Company recorded $0.5 million of fiscal year 2004 Plan facility charges. Cash outlays for facilities during fiscal year 2008 were $1.0 million. The remaining liabilities of the 2004 Plan restructuring charge of $0.6 million and $0.8 million is categorized within “Accrued expenses and other current liabilities” and “Deferred income taxes and other long-term liabilities”, respectively. The following table summarizes the fiscal year 2004 Plan restructuring charge: 2004 Plan Restructuring Charge:
The remaining obligations for the restructuring plans above have been assumed by Konica Minolta following the completion of the sale of DOIC to Konica Minolta as more fully described in Note 18. “Subsequent Events” to the consolidated financial statements. As such, no future payout under these plans is expected to be paid by Danka. Debt The following table sets forth our future payments for our debt as of March 31, 2008:
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Table of ContentsOn June 18, 2007, DOIC entered into new financing agreements with GECC pursuant to which DOIC may borrow up to $145.0 million including $40.0 million in revolving loans. Proceeds from this financing were used in conjunction with the proceeds of the previously completed sale of our European businesses to redeem the senior notes and the subordinated notes, to reduce and refinance the Company’s existing debt, to pay fees and expenses in connection therewith and for working capital and general corporate purposes. The credit agreements governing DOIC’s financing agreements contain customary financial covenants that the Company must comply with on a quarterly basis relating to its leverage ratios, fixed charge coverage ratio, cumulative EBITDA and an annual capital expenditure threshold, all as more fully described in Exhibit 10.66. “First Lien Credit Agreement” and Exhibit 10.67. “Second Lien Credit Agreement” attached to the Company’s Annual Report on Form 10-K filed June 27, 2007. The borrowings under DOIC’s financing agreements will accrue interest at one of the following rates, at the Company’s option: (i) in the case of a base rate loan, at the base rate plus the applicable margin; (ii) if a eurodollar rate loan, at the eurodollar rate plus the applicable margin; and (iii) in the case of swing line loans and all other obligations under the financing agreements, at the base rate plus the applicable margin. The applicable margin is initially, with respect to each of base rate loans and eurodollar rate loans, a fixed percentage, per annum, and thereafter, with respect to the revolving loans, swing line loans and term loans, a percentage, per annum, determined by reference to the leverage ratio in effect from time to time. On November 14, 2007, the First Lien Credit Agreement was amended to extend the Consolidated First Lien Leverage Ratio to 3.7 to 1 from 3.5 to 1 to December 15, 2007 and to increase the applicable interest rate margin on the term loan by one percent. The Second Lien Credit Agreement was also amended to increase the applicable interest rate margin on the term loan by one percent. On December 14, 2007 the First Lien Credit Agreement was further amended to extend the Consolidated First Lien Leverage Ratio of 3.7 to 1 to January 31, 2008, and was further extended on January 31, 2008 to March 31, 2008. On March 31, 2008, the First Lien Credit Agreement was amended to increase the Consolidated First Lien Leverage Ratio to 4.5 to 1 upon the execution of the Share Purchase Agreement with Konica Minolta Business Solutions U.S.A, Inc as more fully described in Note 18. “Subsequent Events” to the consolidated financial statements. In addition, the applicable interest rate margin on the term loan was further increased by one percent. Also on March 31, 2008, the Company entered into a fee letter agreement with GECC whereby the Company agreed to pay to GECC a non-refundable amendment fee in the amount of $2.5 million upon the execution of the Share Purchase Agreement and a non-refundable ticking fee of $0.1 million per week until the re-payment of the term loan. As of March 31, 2008, the borrowing base for the revolving credit facility was $24.3 million and DOIC had $20.8 million of borrowings under the revolver. In addition, DOIC had $2.9 million reserved on the revolver for various letters of credit issued on its behalf. The borrowings are included in “Current maturities of long-term debt and notes payable” on the consolidated condensed balance sheet. The borrowing base fluctuates each month and is generally highest at the end of the quarter. The borrowing base is subject to certain multiples of adjusted EBITDA (as more fully described in the credit agreements) and therefore, the cash availability that we have under the financing arrangements are reliant on the Company meeting these adjusted EBITDA multiples which become more restrictive with the passage of time. The Company’s liquidity is dependent upon cash on hand, cash generated from operations and the availability of funding under the credit agreements with GECC. The borrowing base under the GECC credit agreements is limited to certain multiples of the Company’s adjusted EBITDA, as described in the agreements. The Company’s availability of financing under the credit agreements is also dependent upon the satisfaction of a number of other conditions including meeting leverage ratios and other financial covenants. Per the terms of the agreements, if the Company is unable to meet these covenants, GECC could declare it in default, among other possible courses of action. The Company is not in compliance with these covenants at March 31, 2008, and therefore reclassified all its debt with GECC to current. DOIC incurred $6.9 million in debt issuance costs relating to its new credit facilities with GECC and is amortizing these costs straight line over the remaining terms of the facilities which approximates the effective interest method. The remaining balance of the unamortized costs was $5.4 million at March 31, 2008. On June 27, 2008, Danka Business Systems PLC completed the sale of its U.S. operating subsidiary, DOIC. Pursuant to the Stock Purchase Agreement, the Company sold its U.S. operations to Konica Minolta in a sale of all the outstanding capital stock of DOIC for a purchase price of U.S. $240 million in cash, subject to an upward or downward adjustment of U.S. $10 million. The purchase price adjustment cannot exceed $10 million. In addition, the sum of $10 million was held back by Konica Minolta from the amount paid at closing as security for the Company’s purchase price adjustment obligations. $25 million of the purchase price paid by Konica Minolta at closing will be held in escrow for a period of four years following closing to satisfy any and all claims by Konica Minolta which may be made under the Stock Purchase Agreement. After the repayment of the Company’s outstanding indebtedness, including repayment of approximately $146 million under the Company’s credit facilities provided by GECC, including additional borrowings of $15
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Table of Contentsmillion since March 31, 2008 and early termination fees and accrued and unpaid interest of approximately $6 million, the payment of certain change-of-control and severance obligations and the fees and expenses incurred in connection with the sale transaction and minus the holdback and escrow amounts set forth above, the net sale proceeds received by the Company were approximately $40 million. For further information regarding the GECC credit facilities and the sale of DOIC to Konica Minolta, see Note 11. “Debt” and Note 18. “Subsequent Events,” respectively, to the consolidated financial statements herein. In connection with the sale of DOIC, as described above, the credit facilities provided by GECC were repaid and terminated. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as defined under Item 303(a)(4) of Regulation S-K. Other Financing Arrangements Senior Convertible Participating Shares On December 17, 1999, we issued 218,000 6.50% senior convertible participating shares, or the participating shares, for $218.0 million. The participating shares are entitled to dividends equal to the greater of 6.50% per annum or ordinary share dividends on an as converted basis. In accordance with the terms of their issue, dividends were payable in the form of additional participating shares in the period through to December 2004. The terms of the issue of the senior notes due 2010 forbid the payment of cash dividends. Accordingly, dividends, which are cumulative, were paid in the form of additional participating shares from issuance to December 2004. At that time, we were obliged to pay the participating share dividends in cash. However, the terms of the participating shares permit us to continue to pay payment-in-kind dividends following December 17, 2004 if our then existing principal indebtedness, which includes our credit facility and debt securities issued in an aggregate principal amount in excess of $50.0 million in a bona fide underwritten public or private offering, prohibits us from paying cash dividends. Further, if we are not permitted by the terms of the participating shares to pay payment-in-kind dividends following December 17, 2004 and we have insufficient distributable reserves under English law to pay cash dividends, the amount of any unpaid dividend will be added to the “liquidation return” of each participating share. The holders of the participating shares are, in general, entitled to appoint two directors to the board. Since we have not paid dividends in cash for six successive quarters following December 2004, they are entitled to appoint a further two directors until the time we have paid cash dividends on the participating shares for four successive quarters. As of the date of this filing, the holders of the participating shares have appointed two directors to the Company’s Board of Directors. The participating shares are currently convertible into ordinary shares at a conversion price of $3.11 per ordinary share (equal to $12.44 per ADS), subject to adjustment in certain circumstances to avoid dilution of the interests of participating shareholders. As of March 31, 2008 the participating shares have voting rights, on an as converted basis, currently corresponding to approximately 29.9% of the total voting power of our capital stock which includes an additional 151,040 participating shares in respect of payment-in-kind dividends. We accrete to the redemption value of our 6.5% convertible participating shares using the straight-line method that approximates the effective interest method. The unaccreted amount at March 31, 2008 was $3.2 million. If, by December 17, 2010, we have not converted or otherwise redeemed the participating shares, we are required, subject to compliance with applicable laws and the instruments governing our indebtedness, and except as set out immediately following, to redeem all of the then outstanding participating shares. If we fail to do this, we must then redeem the maximum number of such shares that can then lawfully be redeemed, assuming that the liquidation value per participating share is at that time greater than the market value of the ordinary shares into which the participating shares are convertible. The amount to be paid on the redemption of each participating share in cash is the greater of (a) the then liquidation value or (b) the then market value of the ordinary shares into which the participating shares are convertible, in each case plus accumulated and unpaid dividends from the most recent dividend payment date. If the price set out in (b) above is applicable, we are permitted to convert the participating shares into the number of ordinary shares into which they are convertible instead of making the cash payment. English Company law (to which we are subject, as an English corporation) requires that the participating shares may be redeemed only out of our accumulated, realized profits (as described below, and generally described under English law as “distributable profits”) or, subject to some restrictions, the proceeds of a new issuance of shares for the purposes of financing the redemption. We currently estimate that, as of December 17, 2010, the liquidation value of the then outstanding participating shares will be approximately $419.8 million. To the extent that we are legally permitted to do so, and except where a majority of our
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Table of Contentsboard of directors decided bona fide that to do so would be materially prejudicial to the business of the subsidiary undertaking, we are required to use our best efforts to ensure that our subsidiary undertakings distribute to us a sufficient amount of their profits, if any, to enable us to redeem the convertible participating shares. If we have insufficient distributable profits on December 17, 2010 to redeem the participating shares in full, we will be required to use our best efforts to complete a fresh issue of shares and use the proceeds of that fresh issue to finance the redemption. As of the date of this document, we have no distributable profits. However, in determining whether we are able to issue new shares, we may take into account then prevailing market conditions and other factors deemed reasonable by a majority of our board of directors, and we will not be required to issue new shares to the extent prohibited by our then existing indebtedness, whether under our principal bank credit facilities or pursuant to debt securities issued in an aggregate principal amount in excess of $50.0 million in a bona fide underwritten public offering or in a bona fide private offering. In the event that we are unable to redeem all of the then outstanding participating shares on December 10, 2010, we are required to redeem so many of the shares as we are able, pro rata among the holders of the participating shares. Any participating shares that are not so redeemed shall remain outstanding, but shall thereafter be entitled to dividends at an increased rate of 8.5% per annum until redemption. In the event of liquidation of Danka, participating shareholders will be entitled to receive a distribution equal to the greater of (a) the liquidation return per share (initially $1,000 and subject to upward adjustment on certain default events by us) plus any accumulated and unpaid dividends accumulating from the most recent dividend date or b) the amount that would have been payable on each participating share if it had been converted into ordinary shares if the market value of those shares exceed the liquidation value of the participating shares. General Electric Capital Corporation We have an agreement with General Electric Capital Corporation (“GECC”) under which GECC agrees to provide financing to our qualified customers to purchase equipment. The agreement expires March 31, 2009. In connection with this agreement, we are obligated to provide a minimum level of customer leases to GECC. The minimum level of customer leases is equal to a specified percentage of retail equipment, supplies and related sales revenues. If we fail to provide a minimum level of customer leases under the agreement, we are obligated to pay penalty payments to GECC. For the fiscal years ended March, 31, 2008, 2007 and 2006, the Company was not required to make any penalty payments. Tax Payments We have not paid substantial amounts of income tax in the prior three years because of our net operating losses in most jurisdictions. We are subject to audits by multiple tax authorities with respect to prior years and certain of these audits are in the latter stages. Where we disagree with any of these positions adopted by the tax authorities, we may formally protest them. NEW ACCOUNTING PRONOUNCEMENTS In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 effective April 1, 2007. As a result of the adoption of FIN 48, the Company identified $10.5 million of unrecognized tax benefits of which, $0.6 million would affect the Company’s effective tax rate, if recognized. Of this amount, less than $0.1 million was recorded as a reduction to the April 1, 2007 retained earnings balance. As a result of the implementation of FIN 48, the Company recognized a $2.1 million decrease in assets for unrecognized tax benefits associated with federal net operating losses, a $0.6 million decrease in assets for unrecognized tax benefits associated with state net operating losses and a $3.8 million decrease in assets for unrecognized tax benefits associated with foreign net operating losses. The Company files numerous income tax returns in the U.S. at the federal, state and local levels, and in certain foreign jurisdictions. The Company has analyzed filing positions in all of the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or foreign income tax examinations by taxing authorities for years prior to the fiscal year ended March 31, 2005. The Company is not currently under audit by the Internal Revenue Service but is currently under audit in certain state and local jurisdictions, and in certain foreign jurisdictions. Returns filed in the United Kingdom for tax years ended March 31, 2006, are currently under review.
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Table of ContentsDuring the current fiscal period, the Company reduced its unrecognized tax benefits by $9.3 million consisting of a $5.4 million reduction related to the expiration of the applicable statute of limitations, a $0.1 million increase based on tax positions of prior years related to current year and a $4.0 million reduction related to settlements of tax positions. Included in the balance of unrecognized tax benefits at March 31, 2008 is $0.8 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as part of its provision for federal and state income tax expense. As of March 31, 2008, the Company has accrued $0.1 million of interest and penalties related to unrecognized tax benefits. In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”) which provides enhanced guidance for using fair value to measure assets and liabilities. FAS 157 clarifies the principle that fair value should be based on assumptions market participants would use when pricing an asset or liability. Under FAS 157, fair value measurements would be separately disclosed by level within a fair value hierarchy. FAS 157 is effective for Danka beginning April 1, 2008 although early adoption is permitted. The Company is currently evaluating the requirements of FAS 157 and has not yet determined the impact of adoption, if any, on its financial position, results of operations or cash flows. In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, (e.g., debt issue costs). The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of FAS 159, changes in fair value are recognized in earnings. FAS 159 is effective for Danka beginning April 1, 2008. The Company is currently evaluating the requirements of FAS 159 and has not yet determined the impact of adoption, if any, on its financial position, results of operations or cash flows.
Not Applicable
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Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Danka Business Systems PLC We have audited the accompanying consolidated balance sheets of Danka Business Systems PLC and subsidiaries as of March 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity (deficit), and cash flows for each of the three years in the period ended March 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Danka Business Systems PLC and subsidiaries at March 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying financial statements have been prepared assuming that Danka Business Systems PLC will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring operating losses, has a working capital deficiency and has not complied with certain covenants of loan agreements with a bank. In addition, on June 27, 2008, the Company sold its remaining operations to Konica Minolta Business Solutions U.S.A., Inc. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The 2008 financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP Certified Public Accountants Tampa, Florida July 11, 2008
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Table of ContentsConsolidated Statements of Operations for the Years Ended March 31, 2008, 2007 and 2006 (In thousands, except per American Depositary Share (“ADS”) amounts)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsConsolidated Balance Sheets as of March 31, 2008 and 2007 (In thousands except share data)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsConsolidated Statements of Cash Flows for the Years Ended March 31, 2008, 2007 and 2006 (In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsConsolidated Statements of Shareholders’ Equity (Deficit) For the Years Ended March 31, 2008, 2007 and 2006 (In thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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Table of ContentsNotes to the Consolidated Financial Statements (all tables in thousands except American Depositary Share (“ADS”) amounts) Note 1. Summary of Significant Accounting Policies Basis of preparation: The consolidated financial statements of Danka Business Systems PLC (also referred to herein as “Danka” or the “Company”) have been prepared in accordance with U.S. generally accepted accounting principles. The principal accounting policies are set forth below. Basis of consolidation: The consolidated financial statements include the Company’s accounts and the accounts of its majority and wholly owned subsidiaries. The Company’s principal operating subsidiaries are located in the United States and are principally engaged in the distribution and service of photocopiers and related office imaging equipment. All inter-company balances and transactions have been eliminated in consolidation. References herein to “we” or “our” refer to Danka Business Systems PLC and consolidated subsidiaries unless the context specifically states otherwise. Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at year end and the reported amounts of revenues and expenses during the reporting period. Certain significant estimates are disclosed throughout this report. The Company’s actual results could differ from these estimates. Cash and cash equivalents: Cash and cash equivalents consists of cash on hand and all highly liquid investments or deposits with original maturities of three months or less. Restricted cash: Restricted cash was $5.3 million at March 31, 2008 and $169.0 million at March 31, 2007, of which $5.0 million was classified as long-term at March 31, 2007, primarily related to the restrictions placed on the proceeds from the sale of our European operations as more fully described in Note 6. “Discontinued Operations and Assets and Liabilities Held for Sale” to the consolidated financial statements. Allowance for doubtful accounts: The Company provides allowances for doubtful accounts and allowances for billing disputes and inaccuracies on its accounts receivable as follows:
The following table summarizes the Company’s net accounts receivable:
Inventories: The Company acquires inventory based on its projections of future demand and market conditions. Inventories consist of photocopiers, facsimile equipment and other automated office equipment which are stated at the lower of specific cost or market of $12.0 million at March 31, 2008 and $14.8 million at March 31, 2007. The related parts and supplies are valued at the lower of average cost or market of $15.2 million at March 31, 2008 and $16.9 million at March 31, 2007. Inventories are stated at the lower of cost or market using a method that approximates FIFO and consist of finished goods available for sale. The Company acquires inventory based on its projections of future demand and market conditions. Any unexpected decline in demand and/or rapid product improvements or technological changes may cause the Company to have excess and/or obsolete inventories. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based upon assumptions about
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Table of Contentsfuture demand and market conditions. If actual market conditions are less favorable than those anticipated, inventory adjustments may be required. On an ongoing basis, the Company reviews for estimated obsolete or unmarketable inventories and writes-down its inventories to their estimated net realizable value based upon forecasts of future demand and market conditions using historical trends and analysis. If actual market conditions are less favorable than the Company’s forecasts, due in part to a greater acceleration within the industry to digital color office imaging equipment, additional inventory write-downs may be required. The Company’s estimates are influenced by a number of considerations including, but not limited to, the following: decline in demand due to economic downturns, rapid product improvements and technological changes, and its ability to return to vendors a certain percentage of our purchases. The difference between actual write-offs and estimated write-offs has not been material. Equipment on Operating Leases: Equipment on operating leases is stated at cost less accumulated depreciation. Depreciation is provided using the straight-line method over the assets’ estimated economic lives, generally three to five years. Depreciation is recorded in cost of sales as rental costs. Property and equipment: Property and equipment is stated at cost. Depreciation and amortization is provided using the straight-line method over the assets’ estimated economic lives. Expenditures for additions, major renewals or betterments are capitalized and expenditures for repairs and maintenance are charged to operations as incurred. When property and equipment is retired or otherwise disposed of, the cost and the applicable accumulated depreciation is removed from the respective accounts and the resulting gain or loss is reflected in operations. The Company expenses software costs incurred in preliminary project stages. The Company capitalizes costs incurred in developing or obtaining internal use software during the application development stage. Capitalized software costs are amortized over a period of three to five years. Costs related to software maintenance and training are expensed as incurred. Long-lived assets: The carrying value of long-lived assets to be held and used, including property and equipment, equipment on operating leases and other intangible assets, is evaluated for recoverability whenever adverse effects or changes in circumstances indicate that the carrying amount may not be recoverable. Impairments are recognized if discounted cash flows and earnings from operations (fair value) are not expected to be sufficient to recover the long-lived assets. Goodwill: Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company reviews its goodwill balances for impairment in the fourth quarter of its fiscal year or more frequently if impairment indicators arise. Goodwill is tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined utilizing a combination of discounted cash flow and multiple market approaches. Other intangible assets: Other intangible assets consist of tradenames, customer lists and non-compete agreements. Tradenames have an indefinite life and are not amortized. Customer lists are amortized over their useful lives, generally two to five years, on a straight-line basis. Non-compete agreements are amortized over the lives of the agreements, generally three to fifteen years, on a straight-line basis which approximates the effective interest method. Other assets: Other assets include restricted assets of $2.3 million related to the Company’s deferred compensation plan as of March 31, 2008. Income taxes: In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences which give rise to the deferred tax asset become deductible. The Company’s past financial performance is a significant factor which contributes to its inability, pursuant to Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”), to use projections of future taxable income in assessing the realizability of deferred tax assets. Management therefore is limited to considering the scheduled reversal of deferred tax liabilities and tax planning strategies in making this assessment. Considering the relevant data, management concluded that it is not “more likely than not” that the Company will realize the benefits of certain deferred tax assets at March 31, 2008 and 2007. Consequently, the Company recorded a valuation allowance against net deferred tax assets in all jurisdictions at March 31, 2008 and 2007. Revenue recognition: The Company generally has agreements to provide product maintenance services for the equipment that it sells or leases to customers. The Company follows the guidance in the Emerging Issues Task Force (“EITF”) Issue 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), as modified for the impact of higher level accounting literature, to allocate revenue received between the two deliverables in the arrangement—the equipment and the product maintenance services. For arrangements in which the product maintenance services meet the definition in the Financial Accounting Standards Board (“FASB”) Technical Bulletin (“TB”) No. 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts” (“TB 90-1”), of a separately priced product
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Table of Contentsmaintenance contract, revenue equal to the amount paid by the customer to obtain the product maintenance services is allocated to the separately priced maintenance agreement, with the remainder of the revenue allocated to the equipment (or operating lease payments for use of the equipment). For arrangements in which the product maintenance services do not meet the definition in TB 90-1 of a separately priced product maintenance contract, but the revenue recognized related to the equipment is governed by FASB Statement No. 13, “Accounting for Leases” (“SFAS 13”), revenue is allocated between the equipment (or operating lease payments for use of the equipment) and product maintenance services on a relative fair value basis using our best estimate of fair value of the equipment (or operating lease payments for use of the equipment) and of the product maintenance services. Revenue from retail equipment, supplies and related sales, including revenue allocated to equipment sales as discussed above, is recognized upon proof of delivery to the customer. In the case of equipment sales financed by third party finance/leasing companies, revenue is recognized at the later of proof of delivery to the customer or credit acceptance by the finance/leasing company. In addition, for the sale of certain digital equipment that requires a comprehensive setup by us before it can be used by a customer, revenue is recognized upon the customer’s written confirmation of delivery and installation. Supply sales to customers are recognized at the time of shipment unless supply sales are included in a service contract, in which case supply sales are recognized upon equipment usage by the customer. The Company sells equipment with embedded software to its customers. The embedded software is not sold separately, is not a significant focus of the marketing effort, and the Company does not provide post contract customer support specific to the software or incur significant costs that are within the scope of FASB Statement No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS 86”). Additionally, the functionality that the software provides is marketed as part of the overall product. The software embedded in the equipment is incidental to the equipment as a whole such that FASB Statement of Position No. 97-2, “Software Revenue Recognition” (“SFAS 97-2”), is not applicable. Revenue from sales of equipment subject to operating and sales-type leases is recognized in accordance with SFAS 13 and FASB Statement No. 140, “Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities” (“SFAS 140”), respectively. Revenue from all other sales of equipment is recognized in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). Rental operating lease income is recognized straight-line over the lease term. Retail service revenues are generally recognized ratably over the term of the underlying product maintenance contracts. Under the terms of the product maintenance contract, the customer is billed a flat periodic charge and/or a usage-based fee. The typical agreement includes an allowance for a minimum number of copies for a base service fee plus an overage charge for any copies in excess of the minimum. We record revenue each period for the flat periodic charge and for actual or estimated usage. Taxes assessed by governmental authorities that are directly imposed on revenue-producing transactions between the Company and customers (which may include, but are not limited to, sales, use, value added and some excise taxes) are excluded from revenues. As discussed above under “Allowance for Doubtful Accounts”, the Company estimates that a portion of its recorded revenues is inaccurate due to billing disputes or other errors. The Company reduces revenue for an estimate of future credits that will be issued for billing disputes and inaccuracies at the time of sale. Billed revenues are reduced based on estimates derived by historically based statistical analysis. Measurement of such estimates requires consideration of prior experience, including the need to adjust for current conditions and judgments about probable effects. Cost of sales: Inbound freight charges are included in inventory. When the inventory is sold, the cost of the inventory, including the inbound freight charges, is relieved and charged to cost of sales. When the inventory is rented, the cost of the inventory, including the inbound freight charges, is relieved and transferred to the rental equipment asset account. The cost of the rental equipment asset is then depreciated over the estimated useful life of the equipment. The depreciation of rental equipment assets is included in rental costs. Purchasing and receiving costs, inspection costs, warehousing costs and other distribution costs are included in selling, general and administrative costs because no meaningful allocation of these expenses to equipment, supplies and rental costs of sales is practicable. Accordingly, our gross margins may not be comparable to other companies, since some companies include all of the costs related to their distribution network in cost of sales, while others exclude a portion of them, instead including them in operating expense line items. These costs totaled $11.3 million, $12.0 million and $14.9 million for fiscal years 2008, 2007 and 2006, respectively. Rebates: The Company receives vendor rebates based on arrangements with certain vendors. Those arrangements require vendors to make incentive payments to the Company based on the volume of purchases (dollar amounts, quantity of specific units, etc.) for monthly or quarterly periods. Such rebates are accrued when purchases are made and can be reasonably estimated, recorded as reductions of inventory costs when earned, and recognized as a reduction to cost of sales when the related inventories are sold.
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Table of ContentsShipping and handling costs: Shipping and handling charges billed to the Company’s customers are included in the same revenue category as the related sale. The cost of shipping and handling is included in cost of sales. Advertising: Advertising costs are charged to expense as incurred. Advertising expenses totaled $0.3 million, $0.4 million and $0.2 million for fiscal years 2008, 2007 and 2006, respectively. Restructuring charges: The Company recognizes a liability for costs associated with an exit or disposal activity when the liability is incurred under the provisions of FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). The Company accounts for ongoing benefit arrangements under FASB Statement No. 112, “Employers’ Accounting for Postemployment Benefits,” (“SFAS 112”) which requires that a liability be recognized when the costs are probable and reasonably estimable. Loss on sale of subsidiary: In June 2006, the Company sold a wholly-owned subsidiary which was engaged in the sale and servicing of office imaging equipment. A loss of $2.5 million was recorded during the fiscal year 2007, which is included in operating expenses. Earnings per share: Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise of stock options or the conversion of securities into stock. Earnings (loss) attributable to common shareholders is determined by reducing net earnings or loss by the dividends and accretion for the relevant fiscal year paid on the 6.5% senior convertible participating shares. Earnings per American Depositary Share (“ADS”) are based on the current ratio of four ordinary shares to one ADS. Concentrations of risk: Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, restricted cash, trade receivables, trade payables and long-term debt. The Company’s cash and cash equivalents and restricted cash are placed with high credit quality financial institutions, and are invested in short-term maturity, highly rated securities. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different industries and geographical areas. As of March 31, 2008, the Company had no significant concentrations of credit risk. The Company’s business is dependent upon close relationships with its vendors and its ability to purchase photocopiers and related office imaging equipment from these vendors on competitive terms. The Company primarily purchases products from several key vendors including Canon, Nexpress and Toshiba, each of which represented 10% or more of equipment purchases for continuing operations for the years ended March 31, 2008, 2007 and 2006. Convertible Participating Shares: The Company accretes to the redemption value of its 6.5% convertible participating shares over the period from the date of issuance to the earliest redemption date of the convertible participating shares using the straight-line method which approximates the interest method. The unaccreted amount at March 31, 2008 was $3.2 million. Stock Based Compensation: The Company has employee stock benefit plans, which are described more fully in Note 14. “Share Option and Stock Compensation Plans”. Effective April 1, 2006, the Company adopted FASB Statement No. 123R, “Share-Based Payments” (“SFAS 123R”), using the modified prospective transition method to account for its employee stock-options. Under that transition method, compensation costs for the portion of awards for which the requisite service had not yet been rendered, and that were outstanding as of the adoption date, will be recognized as the service is rendered based on the grant date fair value of those awards calculated under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Prior period results are not restated. Since all options were fully vested on April 1, 2006, the adoption of SFAS 123R had no impact on net income or earnings per share.
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See Note 14. “Share Option and Stock Compensation Plans” for a discussion of the assumptions used in the option pricing model and estimated fair value of employee stock options. New Accounting Pronouncements: In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 effective April 1, 2007. As a result of the adoption of FIN 48, the Company identified $10.5 million of unrecognized tax benefits, of which, $0.6 million would affect the Company’s effective tax rate, if recognized. Of this amount, less than $0.1 million was recorded as a reduction to the April 1, 2007 retained earnings balance. As a result of the implementation of FIN 48, the Company recognized a $2.1 million decrease in assets for unrecognized tax benefits associated with federal net operating losses, a $0.6 million decrease in assets for unrecognized tax benefits associated with state net operating losses and a $3.8 million decrease in assets for unrecognized tax benefits associated with foreign net operating losses. The Company files numerous income tax returns in the U.S. at the federal, state and local levels, and in certain foreign jurisdictions. The Company has analyzed filing positions in all of the federal, state and foreign jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local, or foreign income tax examinations by taxing authorities for years prior to the fiscal year ended March 31, 2005. The Company is not currently under audit by the Internal Revenue Service but is currently under audit in certain state and local jurisdictions, and in certain foreign jurisdictions. Returns filed in the United Kingdom for tax years ended March 31, 2006, are currently under review. During the current fiscal period, the Company reduced its unrecognized tax benefits by $9.3 million consisting of a $5.4 million reduction related to the expiration of the applicable statute of limitations, a $0.1 million increased based on tax positions of prior years related to current year and a $4.0 million reduction related to settlements of tax positions. Included in the balance of unrecognized tax benefits at March 31, 2008 is $0.8 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
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Table of ContentsThe Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as part of its provision for federal and state income tax expense. As of March 31, 2008, the Company has accrued $0.1 million of interest and penalties related to unrecognized tax benefits. In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”) which provides enhanced guidance for using fair value to measure assets and liabilities. FAS 157 clarifies the principle that fair value should be based on assumptions market participants would use when pricing an asset or liability. Under FAS 157, fair value measurements would be separately disclosed by level within a fair value hierarchy. FAS 157 is effective for Danka beginning April 1, 2008 although early adoption is permitted. The Company is currently evaluating the requirements of FAS 157 and has not yet determined the impact of adoption, if any, on its financial position, results of operations or cash flows. In February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115” (“FAS 159”). FAS 159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. Under FAS 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees and issued debt. Other eligible items include firm commitments for financial instruments that otherwise would not be recognized at inception and non-cash warranty obligations where a warrantor is permitted to pay a third party to provide the warranty goods or services. If the use of fair value is elected, any upfront costs and fees related to the item must be recognized in earnings and cannot be deferred, (e.g., debt issue costs). The fair value election is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. At the adoption date, unrealized gains and losses on existing items for which fair value has been elected are reported as a cumulative adjustment to beginning retained earnings. Subsequent to the adoption of FAS 159, changes in fair value are recognized in earnings. FAS 159 is effective for Danka beginning April 1, 2008. The Company is currently evaluating the requirements of FAS 159 and has not yet determined the impact of adoption, if any, on its financial position, results of operations or cash flows. United Kingdom Companies Act 1985: The financial statements for the years ended March 31, 2008, 2007, and 2006 do not comprise statutory accounts within the meaning of Section 240 of the United Kingdom Companies Act 1985. Statutory accounts prepared under International Financial Reporting Standards for the year ended March 31, 2007 were delivered to the Registrar of Companies for England and Wales on October 15, 2007. The auditors’ reports on those statutory accounts was unqualified. Reclassifications: Certain prior year amounts have been reclassified to conform to current year presentations. Note 2. Going Concern Considerations The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplates continuation of the Company as a going concern. However, the Company has incurred recurring operating losses, has a working capital deficiency and has not complied with certain covenants of loan agreements with a bank. In addition, on June 27, 2008, the Company sold its remaining operations to Konica Minolta Business Solutions U.S.A., Inc. as more fully described in Note 18. “Subsequent Events”. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty. The Board of Directors of the Company is also evaluating the alternatives available with respect to the net proceeds from the sale of DOIC to Konica Minolta – primarily how such proceeds may be distributed to Danka shareholders. There is no guarantee that any future alternative chosen by the board of directors will result in any return to holders of Danka’s ordinary shares (including holders of American Depositary Shares). In addition, there is no guarantee that the holders of the Company’s 6.50% senior convertible participating shares will not take action(s) available to them under applicable law, for example seeking a winding up of the Company, to recover amounts to which they are entitled pursuant to the Company’s articles of association. Such amounts exceed the amount of the net proceeds from the sale of DOIC.
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Table of ContentsNote 3. Goodwill and Other Intangible Assets Goodwill was reviewed for possible impairment as of January 1, 2008 and 2007 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. As of January 1, 2008, management determined that the fair value exceeded the carrying amount of goodwill based on the potential sale of the Company to Konica Minolta Business Solutions USA, Inc. as more fully described in Note 18. “Subsequent Events” to the consolidated financial statements. In performing its impairment testing at January 1, 2007, the fair value of the reporting unit was determined using a combination of a discounted cash flow model and multiple market approaches. The discounted cash flow model used estimates of future revenue and expenses for each reporting unit as well as appropriate discount rates, and the estimates that were used are consistent with the plans and estimates the Company is using to manage the underlying business. Based on the analysis as of January 1, 2007 management determined that the fair value exceeded the carrying amount and therefore, goodwill was not considered to be impaired. As of March 31, 2008, goodwill was $93.5 million. Other intangible assets, principally customer lists, was $0.5 million, net of $1.2 million of accumulated amortization as of March 31, 2008. Aggregate amortization expense of other intangible assets for fiscal years 2008, 2007 and 2006 was $0.1 million, $0.2 million and $1.3 million respectively. Estimated amortization expense for fiscal year 2009 and the succeeding two fiscal years is approximately $0.1 million per year. Note 4. Restructuring Charges Fiscal Year 2008 Plan: In fiscal year 2008, the Company formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions, reducing sales and service personnel and exiting certain facilities. These charges were accounted for under the provisions of FASB Statement No. 112, “Employers’ Accounting for Post Retirement Benefits” (“SFAS 112”) and FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). As part of these plans, the Company recorded a $2.5 million restructuring charge in fiscal year 2008 consisting of severance charges due to additional cost reduction efforts. Cash outlays for severance during the period were $1.5 million. Payments for the 2008 plan are expected to continue until December 2008. The remaining liability of the fiscal year 2008 Plan restructuring charge is categorized within “Accrued expenses and other current liabilities”. The following table summarizes the fiscal year 2008 Plan restructuring charge: 2008 Plan Restructuring Charge:
Fiscal Year 2007 Plan: In fiscal year 2007, the Company formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions, reducing sales and service personnel and exiting certain facilities. These charges were accounted for under the provisions of FASB Statement No. 112, “Employers’ Accounting for Post Retirement Benefits” (“SFAS 112”) and FASB Statement No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). As part of these plans, the Company recorded a $5.5 million restructuring charge in fiscal year 2007 consisting of $2.0 million relating to severance charges due to additional cost reduction efforts and $3.5 million in facility costs primarily related to the Company’s Field Support Office in St. Petersburg, Florida. During the second quarter of fiscal year 2008, the Company eliminated the remaining reserve related to its Field Support office due to favorable sublease negotiations. The remaining obligation relating to this facility consists of broker fees incurred as part of the sublease agreement. Cash outlays for severance and facilities during the period were $0.5 million and $1.6 million, respectively. Payments for the 2007 plan are expected to continue until June 2008. The remaining liability of the fiscal year 2007 Plan restructuring charge is categorized within “Accrued expenses and other current liabilities”.
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Table of ContentsThe following table summarizes the fiscal year 2007 Plan restructuring charge: 2007 Plan Restructuring Charge:
Fiscal Year 2005 Plan: In fiscal year 2005, the Company formulated plans to continue to eliminate inefficiencies in its field operations and to reduce its selling, general and administrative costs by eliminating and consolidating back office functions and exiting certain facilities. These charges were accounted for under the provisions of SFAS 112 and SFAS 146. As part of these plans, the Company recorded $2.6 million in restructuring charges related to severance in fiscal year 2005. During fiscal year 2006, the Company recorded additional charges of $3.9 million and $1.0 million relating to severance and facilities, respectively, due to continued reduction efforts. During fiscal year 2008, the Company recorded a $0.2 million restructuring charge related to facilities. Cash outlays for facilities during the period were $0.3 million. Payments for the remaining 2005 Plan obligations are expected to continue through July 2008. The remaining liability of the 2005 Plan restructuring charge of $0.1 million is categorized within “Accrued expenses and other current liabilities”. The following table summarizes the fiscal year 2005 Plan restructuring charge: 2005 Plan Restructuring Charge:
Fiscal Year 2004 Plan: In fiscal year 2004, the Company formulated plans to significantly reduce its selling, general and administrative costs by consolidating the back-office functions, exiting non-strategic real estate facilities and reducing headcount. These charges were accounted for under the provisions of SFAS 112 and SFAS 146. As part of these plans, the Company recorded a $25.3 million restructuring charge in fiscal year 2004 that included $5.7 million related to severance for employees and $19.6 million related to future lease obligations for facilities that were vacated by March 31, 2004. During fiscal year 2006, the Company incurred $0.4 million of facility charges as a result of broker commissions paid due to the sublease of certain facilities. During fiscal year 2007, the Company recorded an additional $0.4 million charge related to facilities due to longer sublease negotiations. During fiscal year 2008, the Company recorded $0.5 million of fiscal year 2004 Plan facility charges. Cash outlays for facilities during fiscal year 2008 were $1.0 million. Payments for the remaining 2004 Plan obligations are expected to continue through November 2011. The remaining liabilities of the 2004 Plan restructuring charge of $0.6 million and $0.8 million is categorized within “Accrued expenses and other current liabilities” and “Deferred income taxes and other long-term liabilities”, respectively.
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Table of ContentsThe following table summarizes the fiscal year 2004 Plan restructuring charge: 2004 Plan Restructuring Charge:
Note 5. Other (Income) Expense Other income and other expense include the following for the years ended March 31:
Note 6. Discontinued Operations and Assets and Liabilities Held For Sale European operations During fiscal year 2007, the Company completed the sale of its European businesses. Pursuant to a share purchase agreement (the “Share Purchase Agreement”) dated as of October 12, 2006 among Danka Business Systems PLC, certain of its subsidiaries (Danka Business Systems PLC and such subsidiaries collectively referred to hereinafter as “Danka,” or the “Company”) and Ricoh Europe B.V. (“Ricoh”), the Company sold its European businesses to Ricoh in a sale of all the outstanding capital stock of those European subsidiaries set forth in the Share Purchase Agreement for a purchase price of U.S. $215 million in cash, including an upward purchase price adjustment of U.S. $5.0 million and a holdback of $7.5 million, both of which were received during fiscal year 2008. The operating activities of the Company’s European operations (including several non-operating companies not purchased by Ricoh) have been reported as discontinued operations and the consolidated financial statements have been adjusted to reflect this presentation. Summarized information for the European operations for the years ended March 31 is set forth below:
The loss on the sale of discontinued operations during fiscal year 2008 was primarily related to the settlement of tax audits in certain jurisdictions. The gain on the sale of discontinued operations during fiscal year 2007 included write offs of goodwill of $121.2 million, currency translation adjustments of $16.7 million and minimum pension liabilities of $14.0 million. The indenture governing the Company’s 11.0% senior notes due June 15, 2010 restricted the use of the net proceeds (as defined in the indenture) from the sale of the Company’s European businesses as more fully described in Note 11. “Debt”. In addition, per the terms of the sale agreement, the Company established an escrow in the amount of $15.8 million to cover various obligations in respect of certain of the European operations’ property leases and banking and financing agreements. This escrow reduced the net proceeds from the sale of the European businesses. In fiscal year 2008, this escrow was reduced to $5.3 million and is included in the Company’s restricted cash balance at March 31, 2008.
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Table of ContentsThe Company is subject to tax audits in certain jurisdictions that were sold during fiscal year 2007. Per the terms of the Share Purchase Agreement, the Company is liable for any adverse outcome of these audits up through the date of sale of the operations. The tax audits are ongoing and as of March 31, 2008, the recorded liability is the Company’s best estimate of the exposure from these audits. The Company intends to vigorously defend any adverse findings which may or may not be material. Australia In fiscal year 2007, the Company sold its Australia business unit, Danka Australia Pty Limited (“Danka Australia”) to One Source Group Limited for a purchase price of $12.6 million in cash. The operating activities of Danka Australia have been reported as discontinued operations and the consolidated financial statements have been adjusted to reflect this presentation. Summarized information for Danka Australia for the years ended March 31 is set forth below:
The gain on the sale of discontinued operations includes a currency translation adjustment of $0.9 million. Central and South America In fiscal year 2006 the Company sold the shares of its business units in Central and South America for a purchase price of $10.0 million in cash. The operating activities of the business units in Central and South America have been reported as discontinued operations and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation. Summarized information for the Central and South America business units for the years ended March 31 are set forth below:
The loss on the sale of discontinued operations includes a write off of currency translation adjustments of $19.9 million. Canada In fiscal year 2006 the Company sold the shares of its Canadian business unit, Danka Canada, Inc. to Pitney Bowes of Canada, LTD., a subsidiary of Pitney Bowes, Inc. for a purchase price of $14.0 million in cash. The operating activities of Danka Canada, Inc. have been reported as discontinued operations, and the consolidated financial statements for all prior periods have been adjusted to reflect this presentation. Summarized information for Danka Canada, Inc. for the years ended March 31 is set forth below:
The loss on the sale of discontinued operations during fiscal year 2006 includes a write off of currency translation adjustments of $4.7 million and goodwill of $2.9 million. In addition, the purchase price was subject to adjustment based upon working capital, as defined in the purchase and sale agreement. An additional loss on the sale of discontinued operations of $1.4 million was recorded due to working capital adjustments during fiscal year 2007. During fiscal year 2008, a gain on the sale of discontinued operations of $0.5 million was recorded when the working capital adjustment was finalized.
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Table of ContentsNote 7. Income Taxes The provision (benefit) for income taxes attributable to continuing operations for the years ended March 31 is as follows:
A reconciliation of income tax provision (benefit) on continuing operations at the United Kingdom statutory corporation tax rate to the reported amounts for income taxes for the years ended March 31 is as follows:
The United Kingdom statutory corporation tax rate was 28% in fiscal year 2008 and 30% in fiscal years 2007 and 2006.
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Table of ContentsThe tax effects of temporary differences that comprise the elements of deferred tax at March 31, 2008 and 2007 are as follows:
Net deferred tax assets (liabilities) as of March 31, 2008 and 2007 were classified in the consolidated balance sheets as follows:
At March 31, 2008, the Company has net operating losses and interest carryforwards relating to U.S. operations of approximately $366.4 million, which will begin to expire if not used by March 31, 2025. Additionally, the Company’s U.S. operations have an alternative minimum tax credit carryforward of $3.4 million which is available indefinitely, and capital loss carryforwards of $7.9 million. The Company has U.K. net operating loss carryforwards of approximately $96.5 million. All net operating losses have been offset by a full valuation allowance reflecting uncertainty as to future realization. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Included in the balance of unrecognized tax benefits at March 31, 2008 is $0.8 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months. During fiscal year 2006, the Company recorded favorable adjustments for changes in prior year estimates of tax liabilities in the United States of $10.1 million. These adjustments primarily related to favorable resolution of tax contingencies. The valuation allowance for deferred tax assets as of March 31, 2008, and 2007 was $190.0 million and $177.8 million respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that
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Table of Contentssome portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Our past financial performance is a significant factor which contributes to our inability, pursuant to FASB Statement No. 109, “Accounting for Income Taxes” (“SFAS 109”), to use projections of future taxable income in assessing the realizability of deferred tax assets. Management therefore is limited to considering the scheduled reversal of deferred tax liabilities and tax planning strategies in making this assessment. Considering all relevant data, management concluded that it is not “more likely than not” we will realize the benefits of the deferred tax assets at March 31, 2008 and 2007 in all jurisdictions and therefore a valuation allowance has been recorded to reserve our deferred tax assets at March 31, 2008 and 2007 in these jurisdictions. The repatriation of the undistributed earnings of the Company’s foreign subsidiaries to the United Kingdom at March 31, 2008 would not result in an additional material amount of tax. The number of years that are open for tax audits vary depending on tax jurisdiction. A number of years may elapse before a particular matter is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that the consolidated financial statements reflect the probable outcome of known tax contingencies. Note 8. Earnings per Share The effects of the Company’s 6.5% senior convertible participating shares, which represent the ADSs shown in the table below, are not included in the computation of diluted earnings per share for the years ended March 31, 2008, 2007 and 2006 because they are anti-dilutive as the Company incurred losses available to common shareholders. ADS equivalents from stock options shown in the table below, presented using the treasury stock method, are not included in the computation of diluted earnings per share for the years ended March 31, 2008, 2007 and 2006 because they are anti-dilutive as the Company is in a loss position. Potential ADSs issuance from:
Note 9. Equipment on Operating Leases, net Included in equipment on operating leases is equipment used to generate rental revenue. Substantially all of the Company’s governmental operating leases are cancelable after one year. Equipment on operating leases is depreciated over one to five years and consists of the following at March 31, 2008 and 2007:
Depreciation expense on equipment on operating leases for the years ended March 31, 2008, 2007 and 2006 was $4.0 million, $3.5 million and $5.4 million respectively, and is included in retail supplies and rental costs in the accompanying statements of operations.
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Table of ContentsNote 10. Property and Equipment, net Property and equipment, along with their useful lives, consists of the following at March 31, 2008 and 2007:
Depreciation expense on property and equipment and amortization of assets on capital leases for the years ended March 31, 2008, 2007 and 2006 was $8.9 million, $11.6 million and $13.2 million, respectively. Note 11. Debt Debt consists of the following as of March 31, 2008 and 2007:
The indenture governing the 11.0 % senior notes restricted the use of the net proceeds (as defined in the indenture) from the sale of the Company’s European businesses in fiscal year 2007. Per the terms of the indenture, the use of these net proceeds was restricted to the following:
Within 365 days from the date of the sale, the Company was obligated to make a tender offer at par for the outstanding 11.0% senior notes, using the balance of the net proceeds that has not been used for the permitted expenditures listed above. In compliance with this requirement, the Company initiated a tender offer at par to the holders of the 11.0% senior notes on June 25, 2007, which expired on July 24, 2007. Two holders of the 11.0 % senior notes accepted the tender offer and the Company redeemed and paid $4.4 million, which included an aggregate principal amount of $4.3 million plus accrued and unpaid interest, to the holders of the 11.0% senior notes that accepted the tender. In connection with the tender offer on the 11.0% senior notes described above and the reclassification of the 11.0% senior notes from long-term to short-term at March 31, 2007, the unamortized balance of the debt issuance costs of $3.5 million and debt discount of $2.4 million were written off during fiscal year 2007.
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Table of ContentsOn or after June 15, 2007, the Company had the right to, at its option, redeem all or part of the senior notes at the redemption prices set forth below plus accrued and unpaid interest on the senior notes if redeemed during the twelve-month period beginning on June 15 of the years indicated below:
A Notice of Redemption was initiated by the Company on June 25, 2007 to the holders of the 11.0% Senior Notes due 2010 at 105.5% of par plus accrued and unpaid interest. On July 27, 2007, the Company redeemed and paid $186.1 million, which included an aggregate principal amount of $170.7 million plus a 5.5% call premium and accrued and unpaid interest, to the holders of the remaining senior notes. During the second quarter of fiscal year 2008, the Company recorded a charge of approximately $9.4 million for the call premium on the redemption of the remaining senior notes and $0.3 million of other costs relating to the remaining debt issues cost on the Company’s terminated credit facility with Bank of America as discussed below. The Company also had the right to, at its option, redeem all or part of the subordinated notes at 100.0% of par plus accrued and unpaid interest on the subordinated notes. A Notice of Redemption was also initiated by the Company on June 25, 2007 to the holders of the 10.0% Subordinated Notes due 2008 at 100.0% of par plus accrued and unpaid interest. On July 27, 2007, the Company redeemed and paid $66.6 million, which included an aggregate principal amount of $64.5 million plus accrued and unpaid interest, to the holders of the subordinated notes. On June 18, 2007, DOIC entered into new financing agreements with GECC pursuant to which DOIC may borrow up to $145.0 million including $40.0 million in revolving loans. Proceeds from this financing were used in conjunction with the proceeds of the previously completed sale of our European businesses to redeem the senior notes and the subordinated notes, to reduce and refinance the Company’s existing debt, to pay fees and expenses in connection therewith and for working capital and general corporate purposes. The credit agreements governing DOIC’s financing agreements contain customary financial covenants that the Company must comply with on a quarterly basis relating to its leverage ratios, fixed charge coverage ratio, cumulative EBITDA and an annual capital expenditure threshold, all as more fully described in Exhibit 10.66. “First Lien Credit Agreement” and Exhibit 10.67. “Second Lien Credit Agreement” attached to the Company’s Annual Report on Form 10-K filed June 27, 2007. The borrowings under DOIC’s financing agreements will accrue interest at one of the following rates, at the Company’s option: (i) in the case of a base rate loan, at the base rate plus the applicable margin; (ii) if a eurodollar rate loan, at the eurodollar rate plus the applicable margin; and (iii) in the case of swing line loans and all other obligations under the financing agreements, at the base rate plus the applicable margin. The applicable margin is initially, with respect to each of base rate loans and eurodollar rate loans, a fixed percentage, per annum, and thereafter, with respect to the revolving loans, swing line loans and term loans, a percentage, per annum, determined by reference to the leverage ratio in effect from time to time. On November 14, 2007, the First Lien Credit Agreement was amended to extend the Consolidated First Lien Leverage Ratio to 3.7 to 1 from 3.5 to 1 to December 15, 2007 and to increase the applicable interest rate margin on the term loan by one percent. The Second Lien Credit Agreements was amended to increase the applicable interest rate margin on the term loan by one percent. On December 14, 2007 the First Lien Credit Agreement was further amended to extend the Consolidated First Lien Leverage Ratio of 3.7 to 1 to January 31, 2008, and was further extended on January 31, 2008 to March 31, 2008. On March 31, 2008, the First Lien Credit Agreement was amended to increase the Consolidated First Lien Leverage Ratio to 4.5 to 1 upon the execution of the Share Purchase Agreement with Konica Minolta Business Solutions U.S.A, Inc as more fully described in Note 18. “Subsequent Events” to the consolidated financial statements. In addition, the applicable interest rate margin on the term loan was increased by one percent. Also on March 31, 2008, the Company entered into a fee letter agreement with GECC whereby the Company agreed to pay to GECC a non-refundable amendment fee in the amount of $2.5 million upon the execution of the Share Purchase Agreement and a non-refundable ticking fee of $0.1 million per week until the re-payment of the term loan. As of March 31, 2008, the borrowing base for the revolving credit facility was $24.3 million and DOIC had $20.8 million of borrowings under the revolver. In addition, DOIC had $2.9 million reserved on the revolver for various letters of credit issued on its behalf. The borrowings are included in “Current maturities of long-term debt and notes payable” on the consolidated condensed balance sheet. The borrowing base fluctuates each month and is generally highest at the end of the
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Table of Contentsquarter. The borrowing base is subject to certain multiples of adjusted EBITDA as more fully described in the credit agreements and therefore, the cash availability that we have under the financing arrangements are reliant on the Company meeting these adjusted EBITDA multiples. The Company’s liquidity is dependent upon cash on hand, cash generated from operations and the availability of funding under the credit agreements with GECC. The borrowing base under the GECC credit agreements is limited to certain multiples of the Company’s adjusted EBITDA, as described in the agreements. The Company’s availability of financing under the credit agreements is also dependent upon the satisfaction of a number of other conditions including meeting leverage and other financial covenants. If the Company is unable to meet these covenants, GECC could declare it in default, among other possible courses of action. The Company is not in compliance with these covenants at March 31, 2008, and therefore reclassified all its debt with GECC to current. DOIC incurred $6.9 million in debt issuance costs relating to its new credit facilities with GECC and is amortizing these costs straight line over the remaining terms of the facilities which approximates the effective interest method. The remaining balance of the unamortized costs was $5.4 million at March 31, 2008. In connection with the sale of DOIC, as described in Note 18. “Subsequent Events”, the credit facilities provided by GECC were repaid and terminated. In connection with the refinancing, on June 25, 2007, DOIC terminated the credit facility which was to expire on January 4, 2009 with Bank of America (the “BofA Credit Facility”), which provided for a $50.0 million, senior secured revolving credit facility, including a $30.0 million sub-limit for standby and documentary letters of credit. The BofA Credit Facility bore interest at an annual rate equal to, at our option, (a) the sum of the rate of interest publicly announced from time to time by Bank of America as its prime or base rate of interest plus the applicable margin thereon or (b) the sum of LIBOR for interest periods at our option of one, two, three or nine months plus the applicable margin thereon. Aggregate annual maturities of debt at March 31, 2008, are as follows:
Note 12. 6.50% Senior Convertible Participating Shares On December 17, 1999, the Company issued 218,000 new 6.50% senior convertible participating shares (the “participating shares”) of Danka Business Systems PLC for $218.0 million. The net proceeds of the share subscription totaled approximately $204.6 million, after deducting transaction expenses. The participating shares are entitled to dividends equal to the greater of 6.50% per annum or ordinary share dividends on an as converted basis. In accordance with the terms of their issue, dividends were payable in the form of additional participating shares in the period through December 2004. However, the terms of the issue of the senior notes due 2010 forbid the payment of cash dividends. Accordingly, dividends, which are cumulative, were paid in the form of additional participating shares through December 2004. At that time, the Company was obliged to pay the participating share dividends in cash. However, the terms of the participating shares permit the Company to continue to pay payment-in-kind dividends following December 17, 2004 if its then existing principal indebtedness, which includes the Company’s credit facility and debt securities issued in an aggregate principal amount in excess of $50.0 million in a bona fide underwritten public or private offering, prohibits it from paying cash dividends. Further, if the Company is not permitted by the terms of the participating shares to pay payment-in-kind dividends following December 17, 2004 and it has insufficient distributable reserves under English law to pay cash dividends, the amount of any unpaid dividend will be added to the “liquidation return” of each participating share. The holders of the participating shares are, in general, entitled to appoint two directors to the board. Since the Company has not paid dividends in cash for six successive quarters following December 2004, they are entitled to appoint a further two directors until the time the Company has paid cash dividends on the participating shares for four successive quarters. As of the date of this filing, the holders of the participating shares have appointed two directors to the Company’s Board of Directors.
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Table of ContentsThe participating shares are currently convertible into ordinary shares at a conversion price of $3.11 per ordinary share (equal to $12.44 per ADS), subject to adjustment in certain circumstances to avoid dilution of the interests of participating shareholders. As of March 31, 2008, the participating shares have voting rights on an as converted basis, currently corresponding to approximately 29.9% of the total voting power of our capital stock, which includes an additional 151,040 participating shares in satisfaction of the payment-in-kind dividends. The Company accretes to the redemption value of its 6.5% convertible participating shares over the period from the date of issuance to the earliest redemption date of the convertible participating shares using the straight-line method which approximates the effective interest method. The unaccreted amount at March 31, 2008 was $3.2 million. Prior to December 17, 2010, the Company has the option to redeem the participating shares, in whole but not in part, and subject to compliance with applicable laws, for cash at the greater of (a) the redemption price per share as set out in the table below (based on the liquidation return per participating share described below) or (b) the then market value of the ordinary shares into which the participating shares are convertible, in each case plus accumulated and unpaid dividends from the most recent dividend payment date. Instead of redemption in cash at the price set out in (b) above, the Company may decide to convert the participating shares into the number of ordinary shares into which they are convertible if the market value of those shares exceed the redemption price set out below.
If, by December 17, 2010, the Company has not converted or otherwise redeemed the participating shares, it is required, subject to compliance with applicable laws and the instruments governing its indebtedness, and except as set out immediately following, to redeem all of the then outstanding participating shares. If the Company fails to do this, it must then redeem the maximum number of such shares that can then lawfully be redeemed, assuming that the liquidation value per participating share is at that time greater than the market value of the ordinary shares into which the participating shares are convertible. The amount to be paid on the redemption of each participating share in cash is the greater of (a) the then liquidation value or (b) the then market value of the ordinary shares into which the participating shares are convertible, in each case plus accumulated and unpaid dividends from the most recent dividend payment date. If the price set out in (b) above is applicable, the Company is permitted to convert the participating shares into the number of ordinary shares into which they are convertible instead of making the cash payment. English company law (to which we are subject, as an English corporation) requires that the participating shares may be redeemed only out of our accumulated, realized profits (as described below, and generally described under English law as “distributable profits”) or, subject to some restrictions, the proceeds of a new issuance of shares for the purposes of financing the redemption. The Company currently estimates that, as of December 17, 2010, the liquidation value of the then outstanding participating shares will be approximately $419.8 million. To the extent that the Company is legally permitted to do so, and except where a majority of its board of directors decides bona fide that to do so would be materially prejudicial to the business of the subsidiary undertaking, the Company is required to use its best efforts to ensure that its subsidiary undertakings distribute to the Company a sufficient amount of their profits, if any, to enable it to redeem the convertible participating shares. If the Company has insufficient distributable profits on December 17, 2010 to redeem the participating shares in full, it will be required to use its best efforts to complete a fresh issue of shares and use the proceeds of that fresh issue to finance the redemption. As of the date of this document, the Company has no distributable profits. However, in determining whether the Company is able to issue new shares, it may take into account then prevailing market conditions and other factors deemed reasonable by a majority of its board of directors, and it will not be required to issue new shares to the extent prohibited by the Company’s then existing indebtedness, whether under its principal bank credit facilities or pursuant to debt securities issued in an aggregate principal amount in excess of $50 million in a bona fide underwritten public offering or in a bona fide private offering. In the event that the Company is unable to redeem all of the then outstanding participating shares on December 10, 2010, it is required to redeem so many of the shares as it is able, pro rata among the holders of the participating shares. Any participating shares that are not so redeemed shall remain outstanding, but shall thereafter be entitled to dividends at an increased rate of 8.5% per annum until redemption. In addition, the holders of the remaining participating shares shall be entitled to elect an additional two directors to our board of directors until the participating shares are redeemed in full.
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Table of ContentsIn the event of liquidation of Danka, participating shareholders will be entitled to receive a distribution equal to the greater of (a) the liquidation return per share (initially $1,000 and subject to upward adjustment on certain default events by us) plus any accumulated and unpaid dividends accumulating from the most recent dividend date or (b) the amount that would have been payable on each participating share if it had been converted into ordinary shares if the market value of those shares exceed the liquidation value of the participating shares. Note 13. Employee Benefit Plans Substantially all of the Company’s U.S. employees are entitled to participate in its profit sharing plan established under Section 401(k) of the U.S. Internal Revenue Code. Employees are eligible to contribute voluntarily to the plan after 90 days of employment. At the Company’s discretion, it may also contribute to the plan. Employees are always vested in their contributed balance and become fully vested in the Company’s contributions after four years of service. Company contributions to the plan were $0.5 million for the fiscal year ended March 31, 2008. There were no contributions to the plan for the fiscal years ended March 31, 2007 and 2006. The Company has a supplemental executive retirement plan, which provides additional income for certain of its U.S. executives upon retirement. There were no contributions to the plan for the years ended March 31, 2008, 2007 and 2006. For the year ended March 31, 2008, $2.3 million of the plan assets are restricted. Note 14. Share Option and Stock Compensation Plans The Company has four share option and stock compensation plans, the 1996 Share Option Plan, the 1999 Share Option Plan, the 2001 Long-Term Incentive Plan and the 2002 Outside Director Stock Compensation Plan. Awards may be made under the first three plans to its officers and key employees. The average of the high and low stock prices on the date of grant is used to determine the grant price. Under all of the stock option plans, the option exercise price is equal to the fair market value of the Company’s ordinary shares or ADSs at the date of grant. Options granted by the Company currently expire no later than 10 years from the date of grant and generally fully vest within three years. 1996 Share Option Plan The Company’s 1996 Share Option Plan authorizes the granting of both incentive and non-incentive share options over an aggregate of 22,000,000 ordinary shares (5,500,000 ADS equivalents). The option balance outstanding at March 31, 2008 also includes options issued pursuant to a plan that preceded the 1996 Share Option Plan. There are no shares available for issuance under this plan. Options were granted at prices not less than market value on the date of grant and the maximum term of the options does not exceed ten years. Share options granted under the 1996 Share Option Plan generally vest ratably in equal tranches over three years beginning on the first anniversary of the date of grant. 1999 Share Option Plan In October 1999, shareholders approved the 1999 Share Option Plan authorizing the granting of both incentive and non-incentive share options for an aggregate of 12,000,000 ordinary shares (3,000,000 ADS equivalents). In October 2001, shareholders approved the issuance of an additional 20,000,000 ordinary shares (5,000,000 ADS equivalents) pursuant to the 1999 plan. Share options granted under the 1999 Share Option Plan generally have the same terms as those granted under the 1996 Share Option Plan. There were 300,000 ADS equivalent stock options granted during fiscal year 2006 that include a provision for a guaranteed intrinsic value of $0.8 million after three years. During fiscal year 2007, 1,030,000 ADS equivalent share options were granted to employees. There were no grants made during fiscal year 2008. 2001 Long Term Incentive Plan In October 2001, shareholders approved the Danka 2001 Long Term Incentive Plan, under which the Company may make awards of a variety of equity-related incentives to its executive directors, officers and employees. Awards under the 2001 plan may take the form of non-vested stock unit awards (“restricted stock”), stock appreciation rights and other share-based awards. The 2001 plan is administered by the Company’s human resources committee, which determines the persons to whom awards may be made, the form of the awards, the terms and conditions of the awards, the number of shares subject to each award and the dates of grant. The total number of ordinary shares in respect of which awards may be made under the 2001 plan is 18,000,000 ordinary shares (4,500,000 ADS equivalents). Awards may be made in ordinary shares or ADSs. As of March 31, 2008, 71,849 ADSs have been awarded under the 2001 plan. 2002 Outside Director Stock Compensation Plan In October 2002, the shareholders approved the 2002 Outside Director Stock Compensation Plan which allows the Company to pay part of its outside (non-executive) directors’ compensation in shares. The total number of shares in respect
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Table of Contentsof which awards may be made under the 2002 Plan are 2,000,000 ordinary shares or 500,000 ADS. There were no shares issued during fiscal year 2008. For the fiscal years ended March 31, 2007 and 2006, 619,328 and 342,664 ordinary shares, respectively were issued under the 2002 Plan. As of March 31, 2008, 1,442,388 ordinary shares or 360,597 ADS had been issued under the 2002 Plan. As of March 31, 2008, there were 32,261,564 ordinary shares (8,065,391 ADS equivalents) available to grant under all of the Company’s existing equity compensation plans. Additional information with respect to all stock option plan activity during the year ended March 31, 2008 was as follows in ADSs:
The aggregate intrinsic value of options outstanding and exercisable at March 31, 2008 are not significant to the financial statements presented herein taken as a whole. SFAS 123 (R) and SFAS 123 Assumptions and Fair Value The fair value of options granted prior to the implementation of SFAS 123R are estimated at the date of grant using a Black-Scholes option pricing model, while those granted after the implementation of SFAS 123R use a multiple point binomial model. Fiscal year 2007 The fair value of options granted during the year ended March 31, 2007 was estimated at the date of grant using a multiple point binomial model with the following weighted average assumptions:
The weighted average fair value of ADS equivalent stock options at grant date for the year ended March 31, 2007 was $1.12 per ADS equivalent stock option. The aggregate intrinsic value of options outstanding and exercisable at March 31, 2007, as well as the total intrinsic value of the options exercised during the year ended March 31, 2007 are not significant to the financial statements presented herein taken as a whole.
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Table of ContentsFuture compensation to be incurred through fiscal year 2010 related to the nonvested options is approximately $0.3 million as of March 31, 2008. Fiscal year 2006 The fair value of options granted during the years ended March 31, 2006 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
The weighted average fair value of ADS equivalent stock options at grant date for the years ended March 31, 2006 was $1.41 per ADS equivalent stock option, respectively. The aggregate intrinsic value of options outstanding and exercisable at March 31, 2006, as well as the total intrinsic value of the options exercised during the year ended March 31, 2006 are not significant to the financial statements presented herein taken as a whole. Exercise of options Upon the exercise of options, new shares are issued in settlement of the exercise. Note 15. Commitments and Contingencies Leases: The Company is obligated under various noncancelable operating leases for its office facilities, office equipment and vehicles. Future noncancelable lease commitments as of March 31, 2008, are as follows:
Rental expense for fiscal years ended March 31, 2008, 2007 and 2006 was $11.8 million, $12.0 million and $12.7 million, respectively. Equipment Leasing Commitment: The Company has an agreement with General Electric Capital Corporation (“GECC”) under which GECC agrees to provide financing to its qualified customers to purchase equipment. The agreement expires March 31, 2009. In connection with this agreement, the Company is obligated to provide a minimum level of customer leases to GECC. The minimum level of customer leases is equal to a specified percentage of retail equipment, supplies and related sales revenues. If the Company fails to provide a minimum level of customer leases under the agreement, it is obligated to pay penalty payments to GECC. For the fiscal years ended March, 31, 2008, 2007 and 2006, the Company was not required to make any penalty payments. Litigation: On June 27, 2008, DCML LLC (“DCML”), the beneficial owner of approximately 8.1% of the Company’s outstanding ordinary shares, filed a complaint in the U.S. District Court for the Southern District of New York against the Company, its board of directors, and one of the holders of the Company’s 6.50% senior convertible participating shares alleging that the defendants violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 thereunder in connection with the proxy statement and supplement to proxy statement issued by the Company to solicit votes with respect to the sale of DOIC, a proposed members voluntary liquidation and related proposals, which were voted on by Danka shareholders at an extraordinary general meeting held on June 27, 2008. The complaint also alleges that the Company’s board of directors breached its fiduciary duties to ordinary shareholders by, among other things, recommending that Danka shareholders vote in favor of the sale of DOIC, the proposed members voluntary liquidation and related proposals. The complaint seeks, among other things, unspecified compensatory damages. On July 9, 2008, the plaintiff filed an amended complaint. The Company believes that such complaint is wholly without merit and was filed for an improper purpose, and intends to defend itself vigorously against these allegations.
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Table of ContentsThe Company is also subject to legal proceedings and claims which arise in the ordinary course of its business. The Company does not expect these legal proceedings to have a material effect upon its financial position, results of operations or liquidity. Per the terms of the sale agreement for the Company’s European businesses, the Company has established an escrow in the amount of $15.8 million to cover various obligations in respect of certain of the European operations’ property leases and banking and financing agreements. $10.6 million of escrow funds was returned to the company during fiscal year 2008. The remaining escrow is included as part of the Company’s restricted cash balance at March 31, 2008. Note 16. Financial Instruments Fair Value of Financial Instruments: At March 31, 2008, the carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities and current maturities of long-term debt and notes payable approximated fair value due to the short-term maturities of these assets and liabilities. There are no quoted market prices for the Company’s 6.50% senior convertible participating shares. The participating shares currently are convertible into ordinary shares at a current conversion price of $12.44 per ADS. Assuming all participating shares were converted to ADSs at March 31, 2008, the resulting shares would have a market value of $6.3 million at that date, based on a per ADS price of $0.21. Note 17. Related Party Transactions During fiscal year 2006, the Company entered into an outsourcing agreement with Gevity HR, Inc. for Human Resource services. Erik Vonk, a Director, served as Chairman and Chief Executive Officer of Gevity until October 19, 2007. During fiscal years 2008, 2007 and 2006, the charges for these services were $2.2 million, $2.1 million and $1.5 million, respectively. The Company has determined that Mr. Vonk remains an independent director in accordance with the rules of the SEC and NASDAQ. In addition, A.D. Frazier who was appointed Chief Executive Officer and Chairman of the Board of Directors of the Company on March 15, 2006 was a director of Gevity until May 18, 2006. Note 18. Subsequent Events On June 27, 2008, Danka Business Systems PLC completed the sale of its U.S. operating subsidiary, DOIC. Pursuant to the Stock Purchase Agreement, the Company sold its U.S. operations to Konica Minolta in a sale of all the outstanding capital stock of DOIC for a purchase price of U.S. $240 million in cash, subject to an upward or downward adjustment of U.S. $10 million. The purchase price adjustment cannot exceed $10 million. In addition, the sum of $10 million was held back by Konica Minolta from the amount paid at closing as security for the Company’s purchase price adjustment obligations. $25 million of the purchase price paid by Konica Minolta at closing will be held in escrow for a period of four years following closing to satisfy any and all claims by Konica Minolta which may be made under the Stock Purchase Agreement. After the repayment of the Company’s outstanding indebtedness, including repayment of approximately $146 million under the Company’s credit facilities provided by GECC, including additional borrowings of $15 million since March 31, 2008 and early termination fees and accrued and unpaid interest of approximately $6 million, the payment of certain change-of-control and severance obligations and the fees and expenses incurred in connection with the sale transaction and minus the holdback and escrow amounts set forth above, the net sale proceeds received by the Company were approximately $40 million. In connection with the sale of DOIC, as described above, the credit facilities provided by GECC were repaid and terminated.
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Table of ContentsThe following represents the carrying amounts of the major classes of assets and liabilities to be sold or transferred to Konica Minolta at March 31, 2008:
With respect to the Company’s financial reporting, the Company is currently assessing the results of the sale of DOIC on its financial position and results of operations.
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None
We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this Annual Report. The controls evaluation was done under the supervision and with the participation of management, including our Principal Executive Officer (“PEO”) and Principal Accounting Officer (“PAO”). Attached as exhibits to this Annual Report are certifications of the PEO and the PAO, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This “Controls and Procedures” section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented. Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, authorized and reported on a timely basis, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer (together our “Certifying Officers”), as appropriate, to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our PEO and our PAO, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act), as of March 31, 2008. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the date of such evaluation, our disclosure controls and procedures were effective in timely alerting them to information relating to us that is required to be included in our reports filed under the Exchange Act. Limitations on the Effectiveness of Controls We maintain a system of internal control over financial reporting to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of financial statements in accordance with U. S. generally accepted accounting principles. However, our management, including the Certifying Officers, does not expect that our disclosure controls or internal control over financial reporting will prevent all errors 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 are 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 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 a 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 controls. 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, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Management’s Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those polices and procedures that:
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Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008. In making the assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on this assessment, management believes that, as of March 31, 2008, our internal control over financial reporting was effective based on those criteria. Management’s assessment of the effectiveness of our internal control over financial reporting as of March 31, 2008 has not been audited by an independent registered certified public accounting firm. Other Changes in Internal Control Over Financial Reporting No changes occurred during the quarter ended March 31, 2008 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On July 9, 2008, the Company appointed Mary K. Priolo, age 36 as the principal accounting officer of the Company. Ms. Priolo joined the Company in July 2004 as the Manager, External Reporting and most recently served as Assistant Controller of the Company.
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Directors and Executive Officers The table below contains information regarding our current Directors and executive officers.
C – Chairman of the Committee Kevin C. Daly. Dr. Daly was appointed as a non-executive Director to our Board of Directors in January 2002. From July 2002 until June 2005, Dr. Daly was the Chief Executive Officer of Avamar Technologies Inc., a data protection solutions company. He was previously Chief Technical Officer of Quantum Corporation’s Storage Solutions Group, and prior to that he was Chief Executive Officer of ATL Products, Inc from its foundation in 1993 until 2001. Dr. Daly also served as Chief Technical Officer of Odetics, Inc. from 1985 until ATL’s separation from Odetics in 1997. David Downes. Mr. Downes was appointed as a non-executive Director to our Board of Directors in January 2005 and is a financial expert pursuant to Item 407(d)(5) of Regulation S-K. Mr. Downes was the Finance Director of Shanks Group PLC from 1993 until 2005. He has previously held Finance Director positions with Hunter Saphir PLC, MBS PLC and with the brewing division of Grand Metropolitan PLC and trained as a management accountant with Chrysler in Detroit before taking up financial management positions in their European operations and then held various controllerships within Air Products Europe. Mr. Downes is an engineering graduate of Kings College, London University and obtained his MBA from Stanford University, California. He is also a Fellow of both the Chartered Institute of Management Accountants and the Association of Corporate Treasurers. Jaime W. Ellertson. Mr. Ellertson was appointed as a non-executive Director to our Board of Directors in November 2002. He served as Chief Executive Officer and a member of the Board of Directors of S1, a NASDAQ National Market listed software company, from November 2000 until July 2005. Prior to joining S1, Mr. Ellertson served as General Manager
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Table of Contentsof worldwide strategic operations for BroadVision, Inc., a provider of self-service applications, from April 2000 until November 2000. From January 1997 until April 2000, Mr. Ellertson held the executive positions of Chairman of the Board and Chief Executive Officer of Interleaf, Inc., a NASDAQ listed provider of software tools for web content management that was acquired by Broadvision, a NASDAQ National Market listed software Company. Mr. Ellertson is a Director of Trigo Technologies, Inc., a privately held software company and Apropos Technology, Inc., a NASDAQ National Market listed software Company. A.D. Frazier. Mr. Frazier was appointed Chairman of the Board of Directors and Chief Executive Officer of Danka effective March 14, 2006. He is also Chairman of WolfCreek Broadcasting, Inc. and was of Counsel with the law firm of Balch & Bingham LLP, Atlanta, Georgia from January 2005 to March 2006. Mr. Frazier retired as a Director, President and Chief Operating Officer of Caremark Rx, Inc., a publicly-traded pharmacy benefit management company, in March 2004 having served in that role since August 2002. From March 2001 until August 2002, he was Chairman and Chief Executive Officer of the Chicago Stock Exchange. Mr. Frazier had been a global partner of AMVESCAP PLC, a London-based independent global investment management firm and the parent company of INVESCO, Inc., from 1997 until March 2001, having served INVESCO as President and Chief Executive Officer of its U.S. institution business from 1997 until December 2000, and Executive Vice President from 1996 to 1997. Mr. Frazier served on the Board of Directors of Gevity, Inc. a human resources management firm until May 2006. From October 2004 until its sale in January 2007, he was a Director and Chairman of the Board of Gold Kist, In., an integrated chicken production, processing and marketing company. Mr. Frazier currently serves on the Board of Apache Corporation and is a member of its management development and compensation committee and the stock option plan committee. He also serves on the Board of Directors and is a member of the Technical Committee of The Pinellas Education Foundation, which oversees all public schools in the Pinellas County, Florida area. Christopher B. Harned. Mr. Harned was appointed as a non-executive Director to our Board of Directors in March 2002. Mr. Harned has been a Managing Director of The Cypress Group L.L.C., a private equity fund, since November 2001. From 1985 to 2001, Mr. Harned was with Lehman Brothers, most recently as head of the Global Consumer Products Merger and Acquisitions Division. Mr. Harned also served as a member of Lehman Brothers’ Investment Banking Business Development Committee. Mr. Harned also serves on the board of Directors of Brand Connections, LLC, The Meow Mix Company, North American Midway Entertainment, FreshPet, Inc., and Quad/Graphics, Inc. Mr. Harned was designated by the owners of the participating shares as one of their nominees to serve on our board of Directors. W. Andrew McKenna. Mr. McKenna has been a Director since February 2002 and was appointed Chairman from March 2005 until March 13, 2006. He is a private investor. Until his retirement in 1999, he held various positions with The Home Depot, Inc., including Senior Vice President-Strategic Business Development from 1997 to 1999; President, Midwest Division from 1994 to 1997; and Senior Vice President-Corporate Information Systems from 1990 to 1994. He was President of SciQuest.com, Inc. in 2000. He is also a Director and Audit Committee Chairman of AutoZone, Inc., a New York Stock Exchange listed company. Joseph E. Parzick. Mr. Parzick was appointed as a non-executive Director to our Board of Directors effective May 19, 2006 and is a Managing Director of The Cypress Group. Mr. Parzick joined The Cypress Group in June 2003. He spent the previous four years as a Managing Director in Morgan Stanley’s financial sponsor group, where he led client teams for a number of the largest U.S. private equity funds. Immediately prior to this, he was a Managing Director of EXOR America Inc., a merchant banking affiliate of the Agnelli Group. In this capacity, he worked on new acquisitions, monitored existing portfolio companies and served on several boards, including Riverwood International. Mr. Parzick spent the first 12 years of his career at Lehman Brothers, where he was named a Managing Director and the co-head of the financial sponsor group. He holds a BS from The University of Virginia and an MBA from the University of Pennsylvania’s Wharton School. Mr. Parzick also serves on the Board of Directors of The Meow Mix Company, Republic National Cabinet Group and Stone Canyon Entertainment Group. Mr. Parzick was designated by the owners of the participating shares as one of their nominees to serve on the board of Directors. J. Ernest Riddle. Mr. Riddle was appointed as a non-executive Director to our Board of Directors in January 1998. Mr. Riddle is currently Chief Executive Officer of GrowthCircle LLC, a management and technology consulting firm. From March 1997 to July 1999, Mr. Riddle was President and Chief Operating Officer of Norrell Services, Inc., an outsourcing information technology and staffing services company based in Atlanta, Georgia. Before joining Norrell, Mr. Riddle spent four years with Ryder System, Inc., a logistics and transportation group, serving as President, Ryder Logistics International Group. Mr. Riddle served Xerox Corporation for 26 years in a variety of positions which included Vice President of Marketing and Vice President of Field Operations for the United States operations and Vice President of Marketing and Sales for the European operations. Mr. Riddle serves on the board of Directors of AirNet Systems, Inc., a provider of time-sensitive small package delivery services.
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Table of ContentsErik Vonk. Mr. Vonk was appointed as a non-executive Director to our Board of Directors in February 2004. Mr. Vonk was elected to the Board of the CBRL Group, Inc. in August 2005, and also has served as Chairman of the Board of Directors and Chief Executive Officer of Gevity, a NASDAQ National Market listed services company since April 2002. Mr. Vonk was retired from February 2001 to April 2002. Mr. Vonk was formerly President and Chief Executive Officer of Randstad North America from 1992 through 2001, a subsidiary of Randstad Holding NV, a worldwide staffing services provider, where he was responsible for organizing the North American operations. In addition, Mr. Vonk served as a member of the Executive Board of Bank Cantrade AG from 1989 to 1992. Jean Johnson. Ms. Johnson joined Danka in August 2001 and was appointed Senior Vice President, General Counsel and Secretary in January 2007. Prior to joining Danka, she served as Senior Corporate Counsel for Intermedia Communications from 1997 until 2001. Ms. Dinovo-Johnson received her undergraduate degree from the University of Nebraska and her J.D. from Creighton University School of Law in Omaha, Nebraska. Mary K. Priolo. Ms. Priolo joined Danka in July 2004, and was appointed Principal Accounting Officer and Assistant Secretary in July 2008. Most recently, Ms. Priolo served as Assistant Controller of the Company. Prior to joining Danka, Ms. Priolo was the Corporate Controller for Coast Dental Services, Inc. from June 2002 to June 2004. Ms. Priolo held various positions, up to and including Assistant Controller of Digital Lightwave, Inc. from December 1994 to March 2002. Ms. Priolo holds Bachelor of Science degrees in Accounting, Management and Human Resource Management from Florida State University and is a Certified Public Accountant in Florida. Our Articles of Association set the size of our board of Directors at not less than two persons. Our Board of Directors currently consists of nine members who serve pursuant to our articles of association. Audit Committee The members of the Audit Committee are Kevin C. Daly, J. Ernest Riddle and David J. Downes (chairman). The board has determined that Mr. Downes has been identified as an Audit Committee financial expert. The board made a qualitative assessment of Mr. Downes’ level of knowledge and experience based on a number of factors, including his formal education and experience as a senior executive with overall financial responsibility for various companies. Mr. Downes is considered independent pursuant to Item 407(d)(5)(i)(B) of Regulation S-K, and all of the Audit Committee members are considered to be independent as defined under NASDAQ listing standards. Section 16(a) Beneficial Ownership Reporting Compliance Based solely on our review of Forms 3, 4, and 5 furnished to Danka or written representations from certain persons that no Forms 5 were required for those persons, we believe that during our 2008 fiscal year, all filing requirements under Section 16(a) of the Exchange Act applicable to our Directors, officers and 10% beneficial owners were timely satisfied. Code of Ethics We adopted a code of ethics for all of our employees’ including our principal executive officers and senior financial officers. The code of ethics is posted on our website at http://www.dankabusinesssystemsplc.com. Any amendments to the code of ethics will also be posted on our website at: http://www.dankabusinesssystemsplc.com within five business days following the date of the amendment in lieu of filing Form 8-K.
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EXECUTIVE COMPENSATION Summary Compensation Table The Summary Compensation Table below provides compensation information for the named executive officers during fiscal year 2008. Summary Compensation Table
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Table of ContentsGrants of Plan-Bases Awards in Fiscal Year 2008 The following table provides additional information concerning grants of plan-based award in fiscal year 2008 to our named executive officers. Grants of Plan-Based Awards in Fiscal Year 2008
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Table of ContentsOutstanding Equity Awards Outstanding at End of Fiscal Year 2008 The following table displays outstanding share option awards held by each of the named executive officers at the end of fiscal year 2008. Outstanding Equity Awards At End of Fiscal Year 2008
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Table of ContentsOption Exercises and Stock Vested In fiscal year 2008, none of our named executive officers exercised options to purchase shares of our stock. In addition, none of our named executive officers acquired shares upon the vesting of any stock awards during fiscal year 2008. Compensation of Directors The following table provides compensation information for each of our Directors. Any Director also serving as an executive officer did not receive any Directors’ fees or stock awards granted in connection with his service as a Director. Compensation payable to the non-executive directors is determined by the Board as a whole and is reviewed annually. The policy of the Board in determining non-executive compensation is to align the interest of the non-executive directors with the Company’s shareholders and to provide for an appropriate level of compensation to recruit and retain non-executive directors of a suitable high calibre for the Company. To this end, the current compensation arrangements for non-executive directors include both cash and equity elements. However, non-executive directors may not hold share options. Specifically, non-executive directors receive:
The shares issued under the Plan are granted in one annual installment on the date of the company’s annual general meeting or as soon thereafter as permitted by applicable law and regulation. Shares issued under the Plan are “restricted shares” and generally vest on the first anniversary of the date of grant if the recipient is still a director on that date. Vesting is subject to acceleration in certain circumstances, including at the discretion of the Board. Director Compensation Table
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SECURITY OWNERSHIP OF MANAGEMENT AND OTHERS The following table sets forth, as of 30th June, 2008, information as to the beneficial ownership of our ordinary shares by:
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Cypress Associates is the managing general partner of Cypress Merchant B II C.V. and the general partner of Cypress Merchant Banking Partners II L.P. and 55th Street Partners II L.P. (collectively the “Cypress Funds”), and has voting and investor power over the shares held or controller by each of these funds. James A. Stern and Jeffrey P. Hughes (each a “Managing Member” of Cypress Associates II LLC), may be deemed to beneficially own these shares. In addition, Christopher Harned and Joseph Parzick are members of the investment committee that exercises voting control over the shares owned by the Cypress Funds. However, each of the foregoing individuals disclaims beneficial ownership. The share and percentage ownership figures are calculated at the conversion rate as of 30th June, 2008 of 324.156 ordinary shares for each convertible participating share. The principal business and office address of Cypress Associates II LLC and the Managing Members is 65 East 55th Street, New York, NY 10022.
On 30th June, 2008, The Bank of New York Mellon, as depositary for our ADS program, held 57,529,281 ADSs (each ADS is the equivalent of four ordinary shares) representing approximately 89% of the ordinary shares in issue.
During fiscal year 2006, the Company entered into an outsourcing agreement with Gevity HR, Inc. for Human Resource services. Erik Vonk, a Director, served as Chairman and Chief Executive Officer of Gevity until October 19, 2007. During fiscal years 2008, 2007 and 2006, the charges for these services were $2.2 million, $2.1 million and $1.5 million, respectively. The Company has determined that Mr. Vonk remains an independent director in accordance with the rules of the SEC and NASDAQ. In addition, A.D. Frazier who was appointed Chief Executive Officer and Chairman of the Board of Directors of the Company on March 15, 2006 was a director of Gevity until May 18, 2006. Director Independence We continue to maintain compliance with the listing standards of the Nasdaq Capital Market governing the composition of our Board of Directors, including the requirement that a majority of our directors are independent and that only independent directors serve on our Audit Committee and Governance and Compensation Committee. Our Board of Directors consists of 9 members, and our Board of Directors has affirmatively determined that each of the following directors qualifies as independent for Board and committee service: Kevin C. Daly, David J. Downes, Jaime W. Ellertson, Christopher B. Harned, W. Andrew McKenna, Joseph E. Parzick, J. Ernest Riddle and Erik Vonk. A.D. Frazier is not independent as a result of his employment with the Company. Mr. Frazier does not serve on any of our Board committees.
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We understand the need for Ernst & Young LLP (“E&Y”), to maintain objectivity and independence in its audit of our financial statements. To minimize relationships that could appear to impair the objectivity of E&Y, our Audit Committee has restricted the non-audit services that E&Y may provide to us primarily to tax services; merger and acquisition due diligence, audit services and audit-related services. It is also the committee’s goal that the fees which the Company pays E&Y for non-audit services should not exceed the audit fees paid to E&Y, a goal which the Company achieved in 2008. The Audit Committee has also adopted policies and procedures for pre-approving all audit and non-audit work performed by E&Y. Specifically, the committee has pre-approved the use of E&Y for detailed, specific types of services within the following categories of non-audit services: tax services, employee benefit plan audits, and reviews and procedures that the Company requests E&Y to undertake to provide assurances of accuracy on matters not required by laws or regulations. In each case, the committee has required management to report the specific engagements to the committee on a quarterly basis and to obtain specific pre-approval from the committee for any engagement. The aggregate fees billed for professional services by E&Y in fiscal years 2008 and 2007 were:
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Table of ContentsREPORT OF THE AUDIT COMMITTEE Our Board of Directors adopted a written charter for our Audit Committee on 29th October, 2003 and adopted the updated and revised charter on 17th May, 2005. A copy of the charter can be found on our website at: http://www.dankabusinesssystemsplc.com. Our Audit Committee consists of three Directors. Mr. Downes, Mr. Riddle and Dr. Daly are independent Directors for the purposes of the National Association of Securities Dealers’ (“NASD”) listing standards. Our Audit Committee has reviewed and discussed the audited financial statements for our 2008 fiscal year with management and with Ernst & Young. Specifically, the Audit Committee has discussed with Ernst & Young the matters required to be discussed by SAS 61 (Codification of Statements on Auditing Standards, AU Section 380) as may be modified or supplemented, which includes, among other things:
The Audit Committee has received the written disclosures and the letter from Ernst & Young LLP, required by Independence Standards Board Standard No. 1, Independence Discussions With Audit Committees. The Audit Committee has considered whether Ernst & Young’s provision of non-audit services to the Company is compatible with maintaining Ernst & Young’s independence. Additionally, the Audit Committee has discussed with Ernst & Young the issue of its independence from the Company. Based on its review of the audited financial statements and the various discussions noted above, the Audit Committee recommended to our Board of Directors that the audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended 31st March, 2008.
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(a) 1. The following consolidated financial statements and related notes of the registrant are filed as part of this Report: Report of Independent Registered Certified Public Accounting Firm Consolidated Statements of Operations—years ended March 31, 2008, 2007 and 2006 Condensed Consolidated Balance Sheets—as of March 31, 2008 and 2007 Consolidated Statements of Cash Flows—years ended March 31, 2008, 2007 and 2006 Consolidated Statements of Shareholders’ Equity (Deficit)—years ended March 31, 2008, 2007 and 2006 Notes to the Consolidated Financial Statements—years ended March 31, 2008, 2007 and 2006 2. The following financial statement schedule is filed as part of this Report: Schedule II—Valuation and Qualifying Accounts All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule, the information required is included in the financial statements and notes thereto included elsewhere in this Report or the schedule is not required or inapplicable under the related instructions.
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