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Danka Reports Q2 Operating Results: Revenue Down 4%

Press release from the issuing company

ST. PETERSBURG, Fla.--Nov. 4, 2004-- Danka Business Systems PLC today announced second-quarter results for the period ended September 30, 2004 that include operating earnings of $6.0 million, an increase over the $1.0 million from the second quarter a year ago and a 10% year-over-year decrease in selling, general and administrative expenses ("SG&A"). Total revenue was $308.7 million, a decline of 4% from the second quarter a year ago. Gross margins were 36.3%, cash flow from operations was $27.6 million and free cash flow was $21.9 million. Net loss was $1.8 million for the quarter compared to a net loss of $17.3 million in the year-ago quarter. The year-ago quarter included $20.6 million of pre-tax expense for the write-off of debt issuance costs. Including the impact of dividends on participating shares, basic and diluted EPS was a loss of $0.11 per share compared to a loss of $0.35 per share in the year-ago period. "Our overall performance in the second quarter was highlighted by the year-over-year improvement in operating earnings," stated Danka Chief Executive Officer Todd Mavis. "SG&A was also down approximately $12 million over the year-ago quarter which further demonstrates that we are delivering on promised cost savings, even as we make growth-oriented investments in our product offerings, our sales force and our infrastructure. Our efforts remain focused on the creation of value across the enterprise and the second quarter results were validation that we are on the right track." "In the quarter, we successfully executed on key initiatives to increase equipment sales and cash generation over last quarter," continued Mavis. "Equipment and related revenue increased 15% sequentially and free cash flow was $21.9 million. As expected, we did see a sequential decline in service revenue largely due to the seasonality of our business." Key second-quarter financial metrics: Total second-quarter revenue was $308.7 million, a 4% decline from the year-ago quarter but essentially flat with the first quarter. Adjusting for currency exchange, total revenue declined 8% year-over-year. Most of the decline was attributable to service revenue which declined by 6% year-over-year. The retail supplies and rentals business also declined, as expected, because of the de-emphasis of rentals, as well as the declining need for supplies related to the heritage Kodak analog equipment base. The digital portion of Danka's equipment base increased to 60% and digital output now represents 75% of total volume, both of which are key elements in the stabilization and ultimate growth of service revenues. Consolidated gross margins were 36.3% of revenue compared to 37.2% in the same quarter last year. The primary reason for the decline was a 250 basis point decrease in equipment and related sales margins. Service margins were stable at 40.5%. SG&A was $107.6 million, 10% lower than the year-ago quarter, and 3% lower than the first quarter. As a percentage of revenue, SG&A was 34.9% in the second quarter, 200 basis points lower than the year-ago period, and 100 basis points lower than the first quarter. Operating earnings were $6.0 million compared to $1.0 million in the year-ago second quarter. Operating earnings were favorably impacted this quarter by the net reversal of $2.1 million of restructuring reserves and the approximate $1 million reversal of an accrual related to a historic asset disposition. Operating earnings were negatively impacted in the quarter by higher than expected costs in Danka's Sarbanes-Oxley compliance program and consulting fees related to cost reduction efforts. Free cash flow (net cash provided by operating activities less capital expenditures) was $21.9 million compared to negative free cash flow of $28.1 million in the first quarter. As a result, the company's cash balance at the end of the second quarter was $106.6 million compared to $85.9 million at the end of the first quarter. Total revenue for the six months ended September 30, 2004 was $619.0 million compared to $656.7 million in the year-ago period. Gross margins were 37.3% for the period compared to 37.0% in the year-ago period. Operating earnings were $13.9 million compared to $6.0 million, an increase of 132%. Cash flow from operations was $3.9 million compared to $44.0 million in the year-ago period. "During the second quarter, we increased the size of our U.S. sales force to improve our sales coverage, added new technology offerings to our product portfolio and continued to leverage our recent IT investments to improve back office processes, all of which will lead to improved execution, new revenue opportunities and the rightsizing of our cost structure," concluded Mavis. "Moving forward, we will further expand sales coverage, accelerate our TechSource business and bring additional product offerings to market. We are also progressing a multi-faceted reengineering of our business that we believe will generate important new cost reductions and operational efficiencies. We believe these actions will provide long term benefit to our customers, provide a platform for growth and create value across all aspects of our business."