ST. PETERSBURG, Fla.--Feb. 4, 2004-- Danka Business Systems PLC today announced results for the three and nine month periods ended December 31, 2003. The highlights for the quarter reflect: as expected, the company delivered substantially improved overall operating performance versus the first two quarters, an increase in cash of almost $7 million during the quarter, after interest payments of approximately $13 million, and significant progress in the implementation of its restructuring plan, resulting in lower SG&A. Listed below are definitions of non-GAAP terms that are used in this press release. Adjusted EBITDA is defined as net income before income taxes, interest expense, depreciation, amortization, restructuring charges/(credits) and write-off of debt issuance costs (see GAAP reconciliation on page 10). Free cash flow is defined as net cash provided by operating activities, less capital expenditures, plus proceeds from the sale of property and equipment (see GAAP reconciliation on page 11). Net debt is defined as current maturities of long-term debt and notes payable plus long-term debt and notes payable less cash and cash equivalents (see GAAP reconciliation on page 11). Third Quarter Results Total revenues were $331.1 million in the third quarter of fiscal year 2004, a decline of $22.0 million or 6.2% from the year-ago quarter including a currency benefit of 7.1%. Retail equipment and related sales revenue were $114.6 million in the third quarter, a 5.9% decrease from the year-ago quarter. This decrease was primarily due to reduced revenues in the U.S. and Europe offset, in part, by an increase in International. Retail service revenues were $156.5 million in the third quarter, down 10.1% from the year-ago quarter. This decrease was primarily due to a decline in the U.S. Retail service revenues increased slightly from the second quarter. Retail supplies and rental revenues were $35.0 million during the third quarter, a 0.3% decrease from the year-ago quarter. This decrease was primarily due to the past downsizing of the capital intensive U.S. and European rental business and a reduction in our U.S. supplies business. Wholesale revenues were $25.0 million during the third quarter, a 12.8% increase from the year-ago quarter which is attributable to a foreign currency benefit. Total gross margins decreased to 36.3% in the third quarter from 37.2% in the year-ago and sequential quarter. Gross margins in the U.S. decreased to 39.6% from 42.2% in the year-ago quarter while Europe's gross margins increased slightly to 31.9% from 31.7% and International's gross margins increased to 36.6% from 31.4% in the year-ago quarter. The retail equipment and related sales margin increased to 35.1% in the third quarter from 34.0% in the year-ago quarter primarily due to a shift in the mix of our sales toward higher margin equipment in Europe and International even though we experienced a $2.0 million decrease in lease and residual payments in the U.S. from a diminishing external lease funding program which contributed $2.4 million, or 2.0% to gross margins in the year-ago quarter. Gross margins for retail service decreased to 38.7% from 40.2% primarily due to a decrease in the U.S. offset by improved operational efficiency in Europe. Gross margins for supplies and rentals decreased to 41.1% from 45.2% in the year-ago quarter due to declines in Europe. The wholesale gross margins increased to 19.4% from 18.5%. Overall, SG&A expenses in the third quarter decreased by $11.2 million or 9.3% from the year-ago quarter to $108.7 million. The decrease was due to the Company's ongoing cost reduction efforts, the progress in the implementation of our worldwide cost restructuring program and $3.0 million of one-time favorable pension adjustments in Europe offset, in part, by an unfavorable foreign currency movement of $7.2 million. As a percentage of revenue, SG&A costs decreased to 32.8% from 34.0% in the year-ago quarter and 36.9% in the second quarter. Total capital expenditures in the quarter were $4.8 million which, as expected, was a substantial decrease from prior quarters. This decrease was driven in part by reductions in capital spending resulting from the completion of the implementation of phase one of our Oracle ERP system in the U.S. and the substantial completion of our U.S. headquarters building. On December 12, 2003, the company announced the initial phase of a cost restructuring plan that is expected to provide total annual savings of approximately $40 to $45 million, primarily resulting from headcount and facility reductions. As a result of the employee severance and related costs, and the costs associated with the facility reductions, the Company took a restructuring charge of $20.0 million in the quarter. In addition to the plan announced on December 12, 2003, Danka will take immediate additional steps designed to further reduce costs. These further reductions will be focused in all segments of the business and are expected to result in an additional restructuring charge ranging from $20 to $25 million. These actions are expected to provide additional annual savings of up to $11 million when fully implemented. These reductions primarily result from a decrease of approximately 375 employees or approximately 5% of the workforce. These additional steps will be instrumental in Danka achieving its longer-term goal of lowering SG&A to 30% of revenue. Including the initial restructuring charges discussed above, the company reported an operating loss of $10.6 million for the third quarter of fiscal year 2004 compared to operating earnings of $12.8 million in the comparable year-ago quarter. The company's net loss for the third quarter was $16.9 million or a loss of $.35 per basic and diluted American Depository Share (ADS) after allowing for the dilutive effect of dividends and accretion on participating shares. CEO Comments and Observations Danka Chairman and Chief Executive Officer, Lang Lowrey, commented, "Our third quarter was highlighted by a 76% increase in Adjusted EBITDA over our second quarter. I am pleased with the rebound in the U.S. which contributed significantly to this improvement. Our Adjusted EBITDA totaled $24.4 million and was assisted by a $3.0 million gain from one-time European pension adjustments. We continued to increase our cash balance in a quarter where we paid our semi-annual interest of approximately $13 million. This and the additional cash generated in the normal course of our business will allow us to fund the restructuring plan as well as accelerate our growth plans, to which we will be devoting substantial attention in the coming quarters. We continue to experience a favorable confluence of events which include revenue stabilization, costs rationalization and positioning for growth. Of course, all of this has created a high level of enthusiasm about our future prospects." Danka increased its cash balance in the third quarter to $105.1 million from $98.3 million in the previous quarter. Nine Month Results Total revenues were $987.8 million in the first nine months of fiscal year 2004, a decline of $56.1 million or 5.4% from the year-ago period, including a currency benefit of 6.6%. Retail equipment and related sales revenue were $342.6 million in the first nine months, a 2.1% decrease from the year-ago period. The decrease was primarily due to decreased revenues in the U.S. and Europe. Retail service revenues were down 9.2% from the year-ago period to $477.7 million. This decline was largely due to the continuing industry-wide conversion from analog-to-digital equipment. Retail supplies and rental revenues were $97.2 million during the first nine months, an 8.9% decrease from the year-ago period. This decrease was primarily due to the company's downsizing of the capital intensive U.S. and European rental business. Wholesale revenues were $70.3 million during the first nine months, a 14.5% increase from the year-ago period which is attributable entirely to a foreign currency benefit. Total gross margins decreased slightly to 36.7% in the first nine months from 37.3% in the year-ago period. Gross margins in the U.S. declined to 40.6%, from 42.4% in the year-ago period while Europe's gross margins increased to 32.2% from 32.1% and International's gross margins increased to 36.1% from 27.9% in the year-ago period. The International gross margin percentage for the year-ago period was adversely affected by a $3.4 million charge that consisted primarily of inventory and residual write-downs in Canada in the prior year second quarter. The retail equipment and related sales margin increased slightly to 34.0% in the first nine months from 33.9% in the year-ago period. The retail equipment and related sales revenue gross margin increased despite an $8.8 million decrease in lease and residual payments from a diminishing external lease funding program which contributed $10.6 million to gross margins in the year-ago period. Gross margins for retail service increased slightly to 40.5% from 40.4% primarily due to operational efficiencies in Europe. Gross margins for supplies and rentals decreased to 40.7% from 43.1%. The wholesale gross margins increased to 19.2% from 19.0%. During the first nine months, SG&A decreased by $11.3 million or 3.2% to $346.3 million from the year-ago period. This decrease was due to our ongoing cost reduction efforts, the progress in the implementation of our restructuring program and favorable one-time pension adjustments in Europe. The unfavorable foreign currency movement increased SG&A by 5.4% or $19.2 million. As a percentage of revenue for the period, SG&A costs increased to 35.1% from 34.3%. Danka reported an operating loss of $4.7 million in the first nine months of fiscal year 2004 compared to operating earnings of $37.1 million in the comparable year-ago period. The company's net loss for the first nine months was $35.0 million, compared to net earnings of $10.8 million in the year-ago period. The net loss for the first nine months includes the impact of the $20.6 million pre-tax write-off of debt issuance costs related to the company's former credit facility and the $20.0 million third quarter pre-tax restructuring charge. After allowing for the dilutive effect of dividends and accretion on participating shares, Danka posted a loss in the first nine months of $.79 per basic and diluted ADS compared to a loss of $.04 per basic and diluted ADS in the year-ago period. Net cash provided by operating activities during the nine months ended December 31, 2003 was $52.3 million compared to $121.8 million in the year-ago period. The decrease in free cash flow is primarily related to the reduction in net working capital that occurred last year during the de-leveraging of the company. In the first nine months of the prior fiscal year, $55.2 million of free cash flow was generated from net working capital versus $6.2 million this fiscal year. Total capital expenditures to date in the current fiscal year were $35.9 million compared to $32.1 million in the year-ago period. Total capital expenditures during the current fiscal year related to the Vision 21 project and the new U.S. headquarters building were $11.3 million and $6.3 million, respectively. CFO Comments and Observations "We are pleased with our strong cash generation in the third fiscal quarter, which helped us reduce our net debt to its lowest level in recent years. We also concluded a new credit facility in Europe which will free up restricted cash, increase short-term liquidity and allow us to better manage our cash globally," stated Mark Wolfinger, Danka's Chief Financial Officer. "In addition to those accomplishments, the operating groups have begun to execute on their cost reduction initiatives and made strides toward achieving our long-term 30% SG&A goal."