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Imaging Index

1 Jul, 2005 By: Michael Dudek imageSource

Imaging Index

Each month we track changes in
stock values of major public players in the imaging industry. Stock performance
for these 11 major public players in the industry during the prior eight months
has been mixed and fairly volatile. Five of the 11 stocks gained value and six
dropped in value. If you had invested your money evenly across the board, you
would be down 3 percent in the past eight months.

Atop the leader board is Adobe. It has gained 34 percent, including a two for
one stock split on May 24. HP has bounced back nicely and has gained 20 percent.
The technology giant is followed by EFI and Canon at 17 percent and 15 percent
respectively. Danka, IKON and Lexmark, however, are the “leaders” at the bottom.
Danka’s stock value has plummeted 67 percent and IKON and Lexmark have both seen
a 19 percent decrease.

While we are not in the business of advising public stock investors, if you
followed our articles in this publication for the last two years, you would have
observed a number of fascinating trends, developments and rather substantial
volatility in these companies; even among the so-called “blue chips.”

Latest Industry Developments

Danka: The company expects to report revenue of $300 million in the
fourth quarter ending March 31, 2005. Annual revenues will come in about $1.23

The company expects to report a quarterly loss of $46 million, excluding
restructuring and goodwill impairment charges. Attributing to this loss is an
increase of $15 million in its accounts receivable allowance, $9 million for
Sarbanes-Oxley external expenses, plus $5 million of other adjustments. In
addition to the $46 million, the company expects to incur a goodwill impairment
charge of $70 million, along with a restructuring charge of $13 million in the

Opinion: Danka must be very discouraged by these substantial losses. The
management team is undoubtedly feverishly working to foster a constructive
environment and future; however, such mounting losses are clearly taking a toll
on all stakeholders. Unless my calculator is malfunctioning, the loss tally for
the fourth quarter alone is expected to be around a whopping $129 million.

IKON: The company announced the opening of new offices in Spain and
Italy, and reported that it intends to add offices in 10 European cities

Opinion: IKON wants to fill a substantial marketplace void by replicating
its North American-like footprint in Europe. Large multi-national customers have
very few alternatives for one-stop shopping. Many would prefer to source
equipment, service and supplies from a single vendor, and IKON would like to
accommodate these customers.

Global: Global announced record annual revenues of $926 million—up 23
percent. In addition, it reported operating income of $105 million—up 24
percent. Fourth quarter revenues increased 28 percent over the prior year while
operating income increased 20 percent.

Opinion: The market wanted higher fourth quarter earnings as Global
incurred additional external costs and consumed valuable management time
associated with Sarbanes-Oxley compliance. After Global’s stock declined
following its earnings release, the company immediately announced its board
approved a share repurchase program of $20 million.

Global also announced its first acquisition in fiscal 2006, Scottsboro Business
Equipment. We enjoyed representing and advising the owner of Scottsboro on this
transaction with Global.

Xerox: Xerox announced that it has doubled equity, recaptured $6 billion
of shareholder value, and cut its debt in half—all in the past four years.

Opinion: I haven’t double-checked Xerox’s math yet, but it’s obvious that
it has made great strides in stabilizing its company in the last few years.

On the color front, Xerox contends that only 3 percent of pages are currently
produced in color. Lots of folks are making lots of money on color. As always,
we are very bullish on color, but there are always risks to dealers associated
with high-growth, fast-changing markets. How about inventory becoming obsolete?

HP: HP reported quarterly revenue of $21.6 billion—a 7 percent increase.
Profits were reported at $966 million—up 9 percent. New CEO Mark Hurd signaled
additional cost-cutting moves, including sending more jobs off-shore.

The imaging (printers and ink) division reported quarterly revenue of $6.4
billion—a 5 percent increase. HP believes they are recapturing some lost market

Opinion: HP seems to be willing to cut hardware margins to capture
additional high-margin supply revenue. Short term, this strategy may be
effective; however, the problem with such a short-term strategy is when it
becomes the long-term norm. Such price-cutting may have dramatic consequences
throughout the market and channels of distribution.

EFI closed its pending acquisition of Vutek, the global provider of
super-wide format digital inkjet printers.

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