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Imaging Index

4 Aug, 2005 By: Michael Dudek imageSource

Imaging Index

Each month we track changes in
stock values of major public players in the imaging industry. The following
chart depicts the change in value from September 30, 2004 to June 30, 2005.

Nine months into the fiscal year and five of 11 stocks are in the “black” and
six are in the “red.” EFI, HP, Adobe, and Canon have appreciated double digits
while Danka, Lexmark, IKON, and Ricoh have declined double digits.

Latest Industry Developments

Danka: Recent news for Danka was not encouraging. The company reported a
quarterly loss of $136 million that included a $71 million goodwill impairment,
$13 million restructuring and $18 million accounts receivable reserve.

Quarterly revenue declined 13 percent to $300 million, which was mainly caused
by a 17 percent decline in American service revenues. Annual revenue was $1.23
billion compared to $1.33 billion a year ago.

In other news: Danka announced the sale of its Canadian business unit to
Pitney Bowes. This unit had annual revenue of $36 million with a loss of $7.7
million and was sold for $14 million.

Opinion: We predict Pitney Bowes will be making additional moves in the

This transaction makes sense for Pitney Bowes as it has a higher probability of
making these operations successful and profitable.

We had been hearing rumors about the potential sale of this unit and had been
receiving multiple inquiries throughout the last year about its availability.
Dating back to when Danka acquired these companies, its Canadian operations were
geographically fragmented with relatively small individual operations, making it
challenging to form a cohesive profitable operation.

When Pitney Bowes exited the copier business through the Imagistics spin off, it
retained Canadian copier operations because it was intertwined with mailing
operations. Although Pitney Bowes has a tremendous value proposition and market
share in the mailing market segment, shareholders and Pitney’s management team
desire additional growth.

Stay tuned. Pitney Bowes has a $10 billion market cap, along with a couple
hundred million dollars in cash, and could make some interesting moves in the

IKON: The company announced that results will be restated from the first
quarter of 2005 back through fiscal year 2000 after a review of billing and
trade accounts receivable reserve practices. The cumulative impact is a $125
million revenue and $33 million net income decrease.

Opinion: IKON continues to struggle managing operations. Management
attributed this restatement to deficiencies identified in the process of
adjusting invoices, the centralization of billing centers and migration to a new
billing platform.

The rumors are flying that IKON is planning to go “back to the future” with more
focus on OMD applications and less focus on Oracle. One can only imagine the
amount of money, time and effort that has been invested in the Oracle
implementation rather than focusing on customer sales and service. There seems
to be no end in sight. Perhaps another restructuring is in the making. There are
many lessons to be learned from this ongoing case study, including:

• Always focus on the customer, especially before any dramatic changes to
administrative operations that impact the customer.

• Test a successful pilot project and measure success properly. Obtain objective
opinions on project success, including from personnel other than the
implementers and vendors prospering from the change.

• Be wary of rationalizing lack of pilot project success by concluding it failed
because the remaining operations have not been converted yet.

Global: The company announced the formation of Carolina Office Systems,
which entailed the merger of a core operation and three satellite companies
acquired in 1996, 2000 and 2001.

Opinion: Speaking of pilot projects, stakeholders will be monitoring
success of this micro Global merger; as it will, in part, foretell whether
Global will in fact implement more effective operational mergers than the other
mega dealers experienced.

Oce: The company reported that quarterly revenue declined 6 percent while
net income declined 51 percent.

Xerox and Canon: Xerox plans to invest $59 million to build a plant in New York
that produces emulsion aggregation toner, a chemically grown toner that
supposedly uses less toner per page and produces sharper images. Meanwhile,
Canon plans to invest $734 million in a Japanese factory to boost output of ink
and toner cartridges. This Canon factory alone is expected to produce 100
million ink cartridges by year 2008.

Opinion: Follow the leaders. Xerox and Canon are making these investments
based on expected future demand, growth and profitability for these consumables.

Mike Dudek, the “AcquisitionGuy.com” is the President and Owner of Zygoquest
Group, an authority on mergers and acquisitions in the office products,
document-services and telephony industry. Contact Dudek at 610.873.6555; e-mail:
mdudek@zygoquest.com; or visit www.zygoquest.com.

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