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Danka Posts Q2 Loss of $5 Million

Press release from the issuing company

ST. PETERSBURG, Fla.--Nov. 3, 2005-- Danka Business Systems PLC today reported second-quarter revenue of $266.7 million, gross margins of 32.6%, and an operating loss of $5.0 million that includes a $1.6 million restructuring charge. That charge relates to the company's ongoing Vision 21 reengineering program, which contributed to a decline in second-quarter selling, general and administrative (SG&A) expenses as a percentage of revenue to 33.7%. All of the second-quarter results, as well as results for prior reporting periods, are from continuing operations and have been adjusted to exclude Danka's former Latin America division, which was sold to Toshiba America Business Solutions, Inc., near the end of the quarter. "Our second-quarter results reflect continued pressure on our revenue and margins across the board, in part due to this period's normal seasonality and the effects of a highly competitive market environment," said Danka Chief Executive Officer Todd Mavis. "To meet these challenges, we have continued to take costs out of the business, and we expect recent organizational streamlining and outsourcing actions to yield further savings. In addition, we have significantly narrowed our geographical focus with recent sales of our operations in Canada and Latin America. We continue to be encouraged by the performance of our General Line Field Sales groups, but were disappointed in our U.S. National Accounts business, where a few larger transactions were delayed. Market pricing pressures, equipment mix, and other factors impacted our gross margins and we are taking steps to address this. In addition, while volume from newer service contracts with printer manufacturers ramped up more slowly than anticipated in the second quarter, our core annuity services metrics continued to improve with the digital portion of our installed base increasing to 72%, digital volume increasing to 85% of total volume, and sales of digital color systems growing by 16% over the year-ago quarter." For the second quarter: Total revenue was $266.7 million, 9% less than the year-ago period, with retail equipment and related sales declining by 6% and retail service revenue declining by 12%. Primary reasons for the decline in retail equipment revenue were the delay of certain transactions in the company's U.S. National Accounts business, softness in certain European geographies and gaps in our U.S. product portfolio. The decline in retail service revenue was due in large part to the decline in our analog business, a continuing decline and shift in our machines in field, and lower service pricing. We further experienced a slower than anticipated ramp-up in volume from newer printer manufacturer contracts. Consolidated gross margins were 32.6% of revenue, compared to 36.2% in the year-ago quarter. In the retail equipment segment the factors in the margin decline included worldwide market pressures on pricing, an unfavorable product mix during the quarter, primarily in Europe, certain product gaps and lower manufacturer incentives due to lower sales. The decline in retail service margins was due in large part to the effect of lower revenue on fixed service costs and continuing investments to meet service-level obligations to our newer, printer manufacturer partners. SG&A expenses were $90.0 million (or 33.7% of sales), 11% lower than the year-ago period. Contributing to the decrease were lower overhead and corporate costs as a result of the company's continued streamlining of operations and efficiencies from its Vision 21 initiative. SG&A was favorably impacted in the current quarter by a $4.0 million sales tax recovery in the U.S. Operating loss from continuing operations was ($5.0) million, including a $1.6 million restructuring charge, compared to operating earnings of $5.9 million (which included a $2.7 million restructuring reversal) in the year-ago quarter. "In addition to our continuing priority to streamline the business and reduce costs, we're also focused on the effective management of working capital," noted Danka Chief Financial Officer Ed Quibell, a veteran of the services and software industries who joined the company as CFO in August. "In the second-quarter we saw sequential improvements in key working capital areas, including a $9.3 million reduction in net accounts receivable and a $9.5 million decrease in inventories, along with a $18.2 million reduction in accounts payable and accrued expenses. Further evidence of improvement is U.S. Days Sales Outstanding, a major area of focus for us, which were just over 46 days compared to over 60 days a couple of quarters ago. On the expense side, we have cut our general and administrative expenses by 17% over the past year as we have become more efficient and increased employee productivity."