Danka Reports Third Quarter Results; Sequential U.S. Retail Equipment Sales Rise 12%; Earnings from Operations Increase 15% Over the Second Quarter.

Business Editors

ST. PETERSBURG, Fla.--(BUSINESS WIRE)--Jan. 27, 2000

Danka Business Systems PLC (Nasdaq:DANKY) today announced results for its third quarter and nine months ended December 31, 1999. For the three months ended December 31, 1999, earnings from operations increased to $41.6 million compared to a loss of $298.9 million for the comparable quarter last year. The Company's results for the comparable quarter last year included $236.2 million in restructuring and other special charges related to the Company's restructuring and worldwide cost reduction program implemented in 1998. Net earnings increased to $9.9 million or $0.16 per American Depositary Share (&uot;ADS&uot;) on a diluted basis, versus a loss of $4.82 per ADS for the comparable quarter last year. During the third quarter, the Company incurred $5.5 million in bank waiver fees relating to its current credit facility. Excluding these fees from interest expense, the Company reported net earnings of $0.22 per ADS for the three months ended December 31, 1999.

For the nine months ended December 31, 1999, earnings from operations increased to $116.8 million compared to a loss of $278.3 million for the nine months ended December 31, 1998. Net earnings for the nine months increased to $28.9 million or $0.49 per ADS on a diluted basis, versus a loss of $4.96 for the comparable nine months last year.

Larry K. Switzer, Danka's Chief Executive Officer, commented, &uot;We are pleased with the sequential improvements evident in our operations and the significant achievements we made during the third quarter towards improving our financial structure. As a result of $218 million in equity investments from two strong financial partners, Danka is financially solid and positioned for future growth.&uot;

Operational Overview

Sequentially, retail equipment sales in the third quarter reflect a 12% increase in the U.S. while international retail equipment sales were down due to foreign currency movements and an extremely strong DigiSource launch in the second quarter. Strengthened by the Company's expanded product portfolio, worldwide placements of black and white digital and color equipment grew solidly, increasing 18% and 35%, respectively, over the second quarter. The launch of the DigiSource 9110 last year has continued to be highly successful in both the U.S. and international markets.

Brian L. Merriman, Danka's President and Chief Operating Officer, commented, &uot;Our new vendor strategy focusing on color, digital and high-volume products enhanced Danka's third quarter results. Our U.S. division experienced continued growth in its retail equipment sales for a second consecutive quarter. The vendor alliances we formed last year are improving Danka's market position and allowing us to be a major player in the digital transition.&uot;

Revenue for the third quarter fell 15% to $614.5 million from $723.9 million in the comparable quarter last year. Excluding the U.S. wholesale division closed in March 1999 and the Company's Omnifax business sold in July 1999, total revenue declined 9% over the comparable quarter last year. Compared with the second quarter, revenue remained relatively flat excluding the Omnifax business. A 2% decline in retail service, supplies and rentals revenue was offset by a 1% increase in retail equipment sales and a solid revenue increase in the Company's international wholesale business. The decline in retail service, supplies and rentals revenue was primarily related to lower service revenue resulting from the decline in the Company's analog machine base as the industry transitions to a digital product environment. The Company is aggressively moving away from the sale of low segment analog machines.

The combined gross profit margin increased to 35.4% for the third quarter of fiscal 2000 compared to 27.9% before special charges for the same period a year ago. The improvements were due to stronger margins evident in all of the Company's revenue segments.

The third quarter retail equipment margin increased to 31.9% versus 8.7% before special charges for the comparable period a year ago. The margin for the comparable quarter last year was affected by the write-down of certain of the Company's non-Kodak branded inventory to estimated market value and efforts to reduce out-of-box inventories. Sequentially, the equipment margin improved 300 basis points from 28.9% in the second quarter. The improvement primarily related to changes in the current product mix resulting from new, higher margin products in color, digital and high-volume.

The Company's retail service, supplies and rentals margin increased to 38.3% for the third quarter compared with 37.0% for the comparable quarter last year before special charges primarily due to improvements in U.S. service productivity. Compared with the second quarter, the retail service, supplies and rentals margin declined 70 basis points from 39.0% due in part to the decline in the Company's analog machine base.

Selling, general and administrative expenses (&uot;SG&&uot;) declined 30% to $172.0 million for the third quarter of fiscal 2000 from $246.8 million in the comparable quarter last year before special charges. The decline was primarily due to cost savings achieved through the Company's restructuring initiatives and worldwide cost reduction program implemented in 1998. Sequentially, SG& expenses also improved declining 4% from the second quarter. As a percentage of revenue, SG& expenses declined 100 basis points to 28.0% of revenue.

Cash Flow &Financing

The Company generated $30.5 million and $117.8 million in operating cash flow for the three and nine months ended December 31, 1999. For the three months ended December 31, 1999, the Company generated $80.3 million in EBITDA, or 13.1% of revenue, compared to $73.6 million, or 11.9% of revenue, for the second quarter.

On December 17, 1999, the Company announced the completion of $218 million in investments for an aggregate 218,000 new convertible participating shares of Danka. Equity funds managed by affiliates of The Cypress Group LLC invested $200 million and The Prudential Assurance Company Limited, a subsidiary of Prudential Corporation plc, invested $18 million. As of December 31, 1999, the Company's credit facility had an outstanding balance of $665.9 million, reflecting a $212 million decrease since September 30, 1999.

Under terms of the agreement with Cypress, Danka expanded its Board of Directors from nine to eleven members. With effect from December 17, 1999, James L. Singleton and Anthony D. Tutrone, executives of Cypress, joined Danka's Board.

In January 2000, the Company entered into a commitment with Bank of America, N.A. and Banc of America Securities LLC, as agents, who will fully underwrite a new five-year $800 million senior credit facility. The Company expects closing to occur by the end of March 2000, subject to customary contingencies.

Danka Business Systems PLC, headquartered in London, England and St. Petersburg, Florida, is one of the world's largest independent suppliers of office imaging equipment, supplies and services. Danka provides office products and services globally in 30 countries around the world. Danka's Ordinary shares are listed on the London Stock Exchange and its ADSs are listed on NASDAQ. For additional information about copier, printer and other office imaging products, please visit Danka's web site at www.danka.com.

Forward-Looking Statements 

Certain statements contained in this press release, or otherwise made by officers of the Company, including statements related to the Company's future business, financial performance and contemplated financing arrangements, are forward-looking, and contain information relating to the Company that is based on the beliefs of management as well as assumptions, made by, and information currently available to, management. The words &uot;goal&uot;, &uot;anticipate&uot;, &uot;expect&uot;, &uot;believe&uot; and similar expressions as they relate to the Company or the Company's management, are intended to identify forward-looking statements. No assurance can be given that the results in any forward-looking statement will be achieved. For the forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements provided for in the Private Securities Litigation Act of 1995. Such statements reflect the current views of the Company 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 differences include, but are not limited to (i) any inability to finalize the $800 million senior credit facility, (ii) any material adverse change in financial markets or Danka, (iii) increased competition resulting from other high-volume and digital copier distributors and the discounting of such copiers by competitors, (iv) any inability of the Company to procure or any inability of the Company to continue to gain access to and successfully distribute new products, including digital products and high-volume copiers, or to continue to bring current products to the marketplace at competitive costs and prices, (v) any inability of the Company to maintain achieved cost savings, (vi) any negative impact from the loss of any key upper management personnel, (vii) fluctuations in foreign currencies and (viii) other risks including those risks identified in any of the Company's other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date they are made. The Company undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances that arise after the date such statements are made. Furthermore, as a matter of policy, the Company does not generally make any specific projections as to future earnings nor does it endorse any projections regarding future performance, which may be made by others outside the Company.

DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per American Depositary Share (&uot;ADS&uot;) amounts)
(Unaudited)
                                          For the three months ended
                                         December 31,     December 31,
                                            1999              1998
Revenue:
Retail equipment sales                    $ 180,416        $ 188,426
Retail service, supplies and rentals        399,144          479,960
Wholesale                                    34,925           55,488
 Total revenue                              614,485          723,874

Costs and operating expenses:
Cost of retail equipment sales              122,834          171,942
Special charges, cost of retail
 equipment sales                                 --           47,191
Retail service, supplies and rental costs   246,170          302,192
Special charges, retail service, supplies
 and rental costs                                --           25,991
Wholesale costs of revenue                   28,232           47,993
Selling, general and administrative
 expenses                                   172,018          246,837
Special charges, general and
 administrative expenses                         --           17,000
Amortization of intangible assets             3,621            5,131
Write-off of goodwill and other
 long-lived assets                               --          107,858
Commitment to Kodak under R& agreements         --           12,500
Restructuring charges                            --           38,174
 Total costs and operating expenses         572,875        1,022,809

Earnings (loss) from operations              41,610         (298,935)
Interest expense and other, net              27,878           21,923

Earnings (loss) before income taxes          13,732         (320,858)
Provision (benefit) for income taxes          3,845          (46,849)

Net earnings (loss)                        $  9,887        $(274,009)

Basic earnings (loss) per ADS:
  Net earnings (loss) per ADS              $   0.17        $   (4.82)
  Weighted average ADSs                      57,936           56,896

Diluted earnings (loss) per ADS:
  Net earnings (loss) per ADS              $   0.16        $   (4.82)
  Weighted average ADSs                      62,114           56,896


Note:  Certain prior year amounts have been reclassified to conform
       with the current year presentation.


DANKA BUSINESS SYSTEMS PLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per American Depositary Share (&uot;ADS&uot;) amounts)
(Unaudited)
                                           For the nine months ended
                                         December 31,     December 31,
                                            1999              1998

Revenue:
Retail equipment sales                    $ 526,897        $ 587,091
Retail service, supplies and rentals      1,264,793        1,458,825
Wholesale                                    88,783          177,201
 Total revenue                            1,880,473        2,223,117

Costs and operating expenses:
Cost of retail equipment sales              369,387          462,193
Special charges, cost of retail
 equipment sales                                 --           47,191
Retail service, supplies and rental costs   761,853          908,915
Special charges, retail service, supplies
 and rental costs                                --           25,991
Wholesale costs of revenue                   70,672          149,662
Selling, general and administrative
 expenses                                   551,095          691,402
Special charges, general and
 administrative expenses                         --           17,000
Amortization of intangible assets            10,705           15,510
Write-off of goodwill and other
 long-lived assets                               --          107,858
Commitment to Kodak under R& agreements         --           37,500
Restructuring charges                            --           38,174
 Total costs and operating expenses       1,763,712        2,501,396

Earnings (loss) from operations             116,761         (278,279)
Interest expense and other, net              76,638           55,867

Earnings (loss) before income taxes          40,123         (334,146)
Provision (benefit) for income taxes         11,234          (51,793)

Net earnings (loss)                       $  28,889       $ (282,353)

Basic earnings (loss) per ADS:
  Net earnings (loss) per ADS             $    0.50       $    (4.96)
  Weighted average ADSs                      57,324           56,881

Diluted earnings (loss) per ADS:
  Net earnings (loss) per ADS             $    0.49       $    (4.96)
  Weighted average ADSs                      59,137           56,881

Note:  Certain prior year amounts have been reclassified to conform
       with the current year presentation.


DANKA BUSINESS SYSTEMS PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
                                         December 31,      March 31,
                                            1999             1999
Assets
Current assets:
Cash and cash equivalents                 $  78,758       $  66,095
Accounts receivable, net                    551,889         571,470
Inventories                                 343,338         356,139
Prepaid expenses, deferred income taxes
 and other current assets                    60,552          56,951
Assets of business held for sale                 --          62,791
 Total current assets                     1,034,537       1,113,446

Equipment on operating leases, net          228,396         264,625
Property and equipment, net                  94,612          92,963
Intangible assets, net                      317,936         337,441
Deferred income taxes and other assets       82,326          96,667
 Total assets                            $1,757,807      $1,905,142

Liabilities and shareholders' equity
Current liabilities:
Current maturities of long-term debt
 and notes payable                       $   93,138      $   89,732
Accounts payable                            174,768         162,294
Accrued expenses and other current
 liabilities                                236,319         333,446
Deferred revenue                             46,225          51,818
Liabilities of business held for sale            --          17,240
 Total current liabilities                  550,450         654,530

6.75% convertible subordinated notes        200,000         200,000
Long-term debt and notes payable, less
 current maturities                         572,735         852,415
Deferred income taxes and other
 long-term liabilities                       27,369          27,033
 Total liabilities                        1,350,554       1,733,978

6.50% convertible participating shares,
  redeemable, $1.00 stated value            204,630              --

Shareholders' equity:
Ordinary shares, 1.25 pence stated value      4,875           4,758
Additional paid-in capital                  314,808         304,436
Retained earnings (deficit)                 (45,015)        (72,815)
Accumulated other comprehensive (loss)
 income                                     (72,045)        (65,215)
 Total shareholders' equity                 202,623         171,164
 Total liabilities and shareholders'
  equity                                 $1,757,807      $1,905,142