DNK.L Regulatory News (DNK)

17 Feb 2009 13:00



17th February, 2009

DANKA BUSINESS SYSTEMS PLC

("Danka", the "Company" or the "Group")

Announcement of unaudited financial results for the three and nine month periods ended 31st December, 2008

Danka Business Systems PLC has today released its unaudited financial results for the three and nine month periods ended 31st December, 2008, prepared in accordance with International Financial Reporting Standards ("IFRS") as required under the Disclosure and Transparency Rules.

Financial and Business Operating Review:

• On 27th June, 2008, the group sold its U.S. operations to Konica Minolta for $240 million. These operations represented the only trading operations of the group, the remainder being the group's administrative functions based primarily in the U.S. The results of the group's U.S. operations have been classified as discontinued operations since 31st March, 2008 in the financial statements. The following analysis of the group's results for the period ended 31st December, 2008 discusses the results of the residual group (as defined below in note 2). 

• As noted above, the residual group represents administrative functions. Administrative expenses were $0.9 million compared to $0.4 million for the comparative three month periods and were $1.4 million compared for each of the comparative nine month periods. This increase in the current three month period is primarily due to professional fees relating to the on-going liquidation efforts of the group.

• Investment revenue was $0.3 million compared to $3.1 million in the comparative prior year nine month period. This resulted from interest income generated on the proceeds received from the 2007 sale of the group's European operations until these proceeds were used to fund partially the repayment of the 11% and 10% notes.

Since the completion of the sale of the group's U.S. operations ("DOIC"), the Company's board of directors has assessed the alternatives available with respect to the net proceeds from the sale of DOIC to Konica Minolta, primarily how to distribute such proceeds among Danka shareholders. In addition, in assessing the available alternatives, the board of directors has been mindful of the fact that there is no guarantee that the holders of Danka's convertible participating shares will not take action(s) that may be available to them under applicable law, for example seeking an involuntary winding up of the Company, to recover amounts to which they are ultimately entitled pursuant to Danka's Articles of Association. Such amounts exceed the amount of net proceeds from the sale of DOIC. The passage of time continues the accretion in the value of our convertible participating shares (which exceeds the amount of the net proceeds from the sale of DOIC), further reducing the return to the holders of convertible participating shares and increasing the possibility of no return to the holders of ordinary shares (and ADSs). Accordingly, in an involuntary liquidation, it is unlikely that ordinary shareholders (including ADS holders) would receive any distribution. 

On 20th January, 2009, the Company filed a preliminary proxy statement with the SEC to convene an extraordinary general meeting of Danka shareholders on 19th February, 2009 to again consider and vote on a members' voluntary liquidation to distribute the net proceeds from the sale of DOIC among Danka shareholders, which would permit the net cash in the Company to be returned to Danka shareholders in the most cost effective and timely manner and allow for Danka's affairs to be wound up in an orderly and efficient manner. Under the terms of Danka's existing Articles of Association, the holders of Danka's ordinary shares (and ADSs) would not be entitled to receive any portion of the amount which is expected to be available for distribution to Danka's shareholders. Rather, given the approximately $388 million in accreted value of our convertible participating shares, under the Articles of Association, holders of such shares would be entitled to all the distributable proceeds a liquidation of the Company. However, the Company has procured the agreement of the convertible participating shareholders to pay to the holders of ordinary shares (including holders of ADSs) a cash amount equal to $0.03 per ordinary share, or $0.12 per ADS, in a members' voluntary liquidation, prior to any distribution to the holders of convertible participating shares in a members' voluntary liquidation. 

The Company has been advised by Cypress Merchant Banking Partners II LP and certain of its affiliates (the "Cypress Shareholders") that they intend to file an application in the near future seeking the involuntary winding up of the Company under the provisions of the English Insolvency Act 1986. That application will be made to the English High Court. The Cypress Shareholders have also informed the Company that, in the event that the proposed members' voluntary liquidation is rejected once again, they will seek the support of the Company's management and board of directors for the involuntary liquidation application.

Enquiries

Danka: Jean Johnson, General Counsel, 00 1 727-456-4460

Weber Shandwick Financial (London)

Nick Oborne, 020 7067 0700

Evolution Securities Limited (London)

(Sponsor to Danka Business Systems PLC)

Stuart Andrews / Bobbie Hilliam, 020 7071 4300

Certain statements contained herein, or otherwise made by the Group's officers, including statements related to the Group's future performance and the outlook for the Group's businesses and respective markets, projections, statements of the Group's plans or objectives, forecasts of market trends and other matters, are forward-looking statements, and contain information relating to the Group that is based on the Group's beliefs as well as assumptions, made by, and information currently available to the Group. The words "goal", "anticipate", "expect", "believe", "could", "should", "intend" and similar expressions as they relate to the Group 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, the Group claims 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 the Group's 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 the Group's remaining operations, including, without limitation, a members voluntary liquidation; (ii) any inability to successfully implement such alternative(s); (iii) any inability to comply with the Sarbanes-Oxley Act of 2002; (iv) any material adverse change in financial markets, the economy or in the Group's financial position; (v) any incurrence of tax or other liabilities or tax or other payments beyond the Group's current expectations, which could adversely affect the Group's liquidity; (vi) any negative impact of the accreted value of the Group's outstanding convertible participating shares or its continued accretion; (vii) any negative impact of the Company's continued organization as an England and Wales registered Company following the sale of the Group's U.S. operating business; (viii) actions of governmental entities, including regulatory requirements; (ix) actions by shareholders in connection with the distribution of the net proceeds from sale of Danka Office Imaging Company; (x) the outcome of legal proceedings to which the Group is or may become a party; and (xi) other risks including those risks identified in any of the Group's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect the Group's analysis only as of the date they are made. Except as required by applicable law, the Group undertakes no obligation, and does 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, the Group does not generally make any specific projections as to future earnings, nor does the Group endorse any projections regarding future performance, which may be made by others outside the Group.

The financial information for the three and nine month period ended 31st December, 2008 is unaudited and not reviewed. The financial information for all periods presented does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. However, the financial information for such periods is prepared on the same basis as the financial information for the year ended 31st March, 2008. The financial information for the year ended 31st March, 2008 has been extracted from the audited statutory accounts for the year ended 31st March, 2008 which were filed with the Registrar of Companies on 29th October, 2008. The report of the auditors was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985.

This financial information contains information regarding net debt that is computed as debt and bank loans less cash and cash equivalents. This measure is a non-IFRS financial measure, defined as a numerical measure of the Group's financial performance that excludes or includes amounts so as to be different than the most directly comparable measure calculated and presented in accordance with International Financial Reporting Standards, or IFRS, in the Group's income statement, balance sheet or cash flow statement. The notes hereto provide a reconciliation of this non-IFRS financial measure to the most directly comparable IFRS financial measure. 

Although net debt represents a non-IFRS financial measure, Danka considers the measure to be a key operating metric of the Group. Danka also believes that net debt is useful to investors because it provides an analysis of financial and operating results using the same measures that Danka uses in evaluating the Group. The calculation of net debt may not be consistent with the calculation of this measure by other companies in the industry. Net debt is not a measurement of financial performance under IFRS and should not be considered as an alternative to net earnings (loss) as an indicator of the Group's operating performance or cash flows from operating activities as a measure of liquidity or any other measures of performance derived in accordance with IFRS.

Group Income Statement

For the Three Months Ended 31st December 2008 and 2007

All results arise from discontinued operations.

Group Income Statement

For the Nine Months Ended 31st December 2008 and 2007

All results arise from discontinued operations.

Danka Business Systems PLC

Group Balance Sheet

Danka Business Systems PLC

Group Statement of Recognised Income and Expense

For the Three Months Ended 31st December 2008 and 2007 

Danka Business Systems PLC

Group Statement of Recognised Income and Expense

For the Nine Months Ended 31st December 2008 and 2007 

and Year Ended 31st March 2008

Danka Business Systems PLC

Group Cash Flow Statement

For the Three Months Ended 31st December 2008 and 2007

Danka Business Systems PLC

Group Cash Flow Statement

For the Nine Months Ended 31st December 2008 and 2007

Notes to the Financial Information

1. The financial information for the three and nine month period ended 31st December, 2008 is unaudited and not reviewed. The financial information for all periods presented does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. However, the financial information for such periods is prepared on the same basis as the financial information for the year ended 31st March, 2008. The financial information for the year ended 31st March, 2008 has been extracted from the audited ststutiry accounts for the year ended 31st March, 2008 which were filed with the Registrar of Companies on 29th October, 2008. The report of the auditors was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985.

2. Significant accounting policies

Danka Business Systems PLC ("the Company") is a company domiciled in the United Kingdom. This financial information consists of the consolidated interim financial statements of the Company for the three and nine months ended 31st December, 2008 and 2007, which comprise the Company and its subsidiaries (together referred to as the "Group"). The financial information was authorised for issuance on 17th February, 2008.

Basis of preparation

The financial statements have been prepared in conformity with current applicable IFRS accounting standards as more fully described below.

The financial statements are presented in U.S. dollars and all values in tables are rounded to the nearest thousand dollars ($000) except where otherwise indicated as the functional currency of substantially all of the Group's companies is the U.S. dollar.

On 27th June, 2008, the Group sold its U.S. operations through which the Group conducted its trading operations. At the Extraordinary General Meeting to approve the sale, a motion to put the company into members' voluntary liquidation was proposed, but it was not passed. The directors are evaluating the results of this vote. However, given the Group no longer has any trading operations and their belief that there is no other realistic alternative, the directors are evaluating how the remaining assets may be distributed to shareholders after the settlement of all liabilities. The directors have therefore decided that it is not appropriate to prepare the financial information on a going concern basis. Accordingly, the financial information has been prepared on a break-up basis. The assets and liabilities of the Group, after accounting for the sale of the U.S. operations as assets and liabilities held for sale as at 31st March, 2008, are disclosed in this financial information as the Residual Group.

The impact of adopting the break-up basis of accounting on the Residual Group is as follows:

Notwithstanding the cessation of trading operations, the group has sufficient liquid resources to meet all reasonably foreseeable future liabilities other than the participating shares.

Accounting policies

This financial information has been prepared on the basis of the recognition and measurement requirements of IFRS accounting standards in issue that are endorsed by the EU and effective (or available for early adoption) at 31st March, 2009. The accounting policies have been applied consistently throughout the Group for the purposes of this consolidated interim financial information.

The income statement comprises the result/loss for the period for the residual group plus the profit/loss for the period from discontinued operations attributable to the equity holders of the parent. Restructuring costs, the release of provisions for future losses and future finance costs and the finance costs attributable to the early extinguishment of debt have been separately disclosed on the face of the income statement in accordance with IAS 1 in order to assist the assessment of financial performance owing to their materiality and infrequent nature.

3. Seasonality of operations

The Group's discontinued operations historically experienced lower revenue during the second quarter (ending 30th September) of the financial year, primarily due to lower levels of retail maintenance revenue from United States governmental agencies. This resulted in reduced sales activity and reduced usage of photocopiers, facsimiles and other office imaging equipment during the second quarter. Accordingly, the results of discontinued operations for the interim periods were not necessarily indicative of the results which could have been expected for the entire financial year.

4. Segmental information

The Group operated in one business segment, being the supply and servicing of office equipment and the provision of related services. The Group's primary segment reporting format was determined to be geographical as the Group's risks and rates of return were affected predominantly by the fact that it operated in different geographical areas. In the year ended 31st March, 2008 and up to the date of its disposal (note 5), the United States was the only primary reportable segment, but was reclassified to discontinued operations upon the disposal being initiated. The Group is managed through its administrative centre in the U.S., identified as Residual Group in the income statement. Its costs comprise salaries and direct costs incurred in maintaining the administrative centre. As the administrative centre has not been sold with the U.S. operations, it was not appropriate to allocate these costs to the discontinued operations. The analysis of results between the reportable segment and the residual group is given on the face of the income statement.

5. Disposal of operations

Year ending 31st March, 2009

With effect from 27th June, 2008, the Group sold its U.S. operations operations to Konica Minolta for $240 million cash subject to an upward or downward adjustment of $10 million and a pre-tax gain of $174.7 million was recorded in the nine months ended 31st December, 2008. The attributable tax was Nil. The U.S. operations are disclosed as discontinued operations.

During the nine months ended 31st December, 2008, the Group incurred a further $0.9 million of costs relating to the disposal of the Group's European operations. 

Year ended 31st March, 2008

During the nine months ended 31st December, 2007, the Group incurred a further $2.1 million of costs relating to the disposal of prior year discontinued operations. The holdback and working capital adjustment totalling $12.5 million referred to above were received in the nine months ended 31st December, 2007.

6. Reconciliation of the weighted average number of basic and diluted ordinary shares in issue

7. The calculations of the earnings/loss per share from the residual group and discontinued operations respectively are based on the profit/loss for the residual group and from discontinued operations respectively after taxation and the basic and diluted weighted average number of ordinary shares in issue during the period as per note 6 above. Outstanding share options and convertible participating shares have only been considered in dilutive per share computations when the residual group has reported a profit, in accordance with IAS 33.

8. The following is an analysis of net debt (current and non-current bank and other loans including finance leases less cash and cash equivalents):

Restricted cash for the Group at 31st December, 2008 and 31st March, 2008 totalled $5,250,000 in respect of the European sale proceeds required to be kept in an escrow account by the Group's credit facility. On 26th January, 2009, a claim was made against the remaining $5,250,000 held in escrow for tax amounts subject to tax audits in certain European jurisdictions. The 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 December 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. Any payments arising from these audits will be settled using the available funds in escrow. On January 26, 2009, Ricoh made a claim against the remaining $5.3 million held in escrow for the tax amounts subject to these tax audits.

9. Net cash flow from operating activities

10. Group Statement of Changes in Equity for the Three and Nine Months Ended 31st December, 2008 and the Year Ended 31st March, 2008

11. Copies of this report will be available from the Company's registered office at Masters House, 107 Hammersmith Road, London W14 0QH.

Statement of Directors' Responsibility

The Directors of Danka, a current list of which can be found in Danka's most recent annual report posted to the Company's website at www.dankabusinesssystemsplc.com, confirm to the best of their knowledge:

the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board of Directors

A.D. Frazier

Chairman and Chief Executive Officer

17th February, 2009