ITEM 3 LEGAL PROCEEDINGS
The Company is a party to various lawsuits, all of which are of a routine nature and are incidental to the Company's present business activities. These proceedings are not material, nor would the adverse resolution thereof materially affect the business or properties of the Company.
ITEM 4

ITEM 4 SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDER
No matters were submitted to security holders during the 4th quarter. The annual Meeting of Shareholders of the Registrant has been scheduled for May 22, 1997. The Company will file its definitive proxy material pursuant to Regulation 14, prior to April 30, 1997.
PART II
ITEM 5

ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information required by this item is incorporated by reference to the Registrant's 1996 Annual Report to Shareholders.
ITEM 6

ITEM 6 SELECTED FINANCIAL DATA
Information required by this item is incorporated by reference to the Registrant's 1996 Annual Report to Shareholders.
ITEM 7

ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
General. The following table sets forth for the periods indicated certain items of the Company's Consolidated Financial Statements expressed as a percentage of the Company's total revenues:
Backlog. The following table sets forth the Company's backlog at December 31, 1994, 1995 and 1996.
The Company's backlog generally represents units under contract for which a full deposit has been received, any statutory rescission right has expired, and in the case of a mortgage contingency, the buyer has been qualified for a mortgage loan. The Company generally fills all backlog within twelve months. The Company estimates that the period between receipt of a sales contract and delivery of the completed home to the purchaser is four to eight months. The Company's backlog historically tends to increase between January and May. Trends in the Company's backlog are subject to change from period to period for a number of economic conditions including consumer confidence levels, interest rates and the availability of mortgages.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's revenues from home sales increased $27.3 million (or 37.1%) during the calendar year 1996 as compared to the same period in 1995. The Company delivered 597 homes in 1996 compared to 433 in 1995, with a decrease of 0.5% in the average selling price of homes delivered (from $169,500 to $168,600). The number of new contracts signed (670) and the aggregate dollar value of those new contracts ($110.1 million) increased in 1996 from 483 and $79.4 million, repectively, in 1995. The average selling price of new contracts entered into in 1996 was $164,361, which was subtantially the same as 1995.
Other operating revenues increased to $3.2 million during 1996 from $3.1 million in 1995 due to a lower vacancy rate on our rental apartments. Interest, rentals and other income decreased to $3.8 million in 1996 from $4.0 million in 1995 due to a lower return on joint venture investments.
Cost of home sales increased to $87.6 million in 1996 from $62.2 million in 1995 primarily as a result of an increase in the number of homes delivered. As a percentage of home sales, cost of home sales increased to 87.1% in 1996 from 85.7% in 1995 due to the absorption of higher construction costs and the impact of higher previously capitalized interest.
It should be noted that the Company's gross margins during 1996 were adversely impacted by the decision made last year to reduce prices on certain models in order to spur sales at some of our communities. This action was undertaken following an evaluation of the marketplace in 1995 resulting in a determination that there was growing buyer resistance to the higher home prices the Company was seeking to obtain. The Company's higher prices resulted from increases in costs of building homes due to increases in material and labor costs, new building code provisions and accumulated capitalized interest on units in older subdivisions. Throughout 1996, the Company focused its efforts on promoting its reduced pricing in the marketplace and generating sales and cash flow. At the same time, the Company has sought to introduce new models that can be priced competitively and sold at a faster pace. The Company believes that through these efforts it will be able to increase cash flow, reduce interest expense and increase net income. There can be no assurance that the Company will be successful in these efforts.
Selling, general and administrative expenses ("SG&A") increased to $17.3 million in 1996 from $15.5 million in 1995, but as a percentage of total revenues, these expenses decreased to 15.5% in 1996 from 18.9% in 1995. The Company's interest cost incurred in 1996 was $11.0 million as compared to $10.7 million the same period in 1995.
Net income increased to $0.08 million in 1996 from a net loss of $11,761,564 in 1995. Included in these net results are non cash pre-tax writedowns of $1.7 million in 1996 and $13.9 million in 1995, pertaining to the carrying cost of certain land inventory.
Included in net results for 1996 is a pre-tax gain of $2,355,119 on the sale of non-residential parcels of land, the sale of a Recreation Lease and the sale of a group of residential lots.
RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's revenues from home sales decreased $36.7 million (or 33.3%) during the calendar year 1995 as compared to the same period in 1994. The Company delivered 433 homes in 1995 compared to 775 in 1994, with an increase of 19.3% in the average selling price of homes delivered (from $142,100 to $169,500). The increase in the average selling price per home is primarily the result of the Company's entry into an upscale condominium community where the average selling price is $565,000 and a single family home community where the average selling price is $272,000. The decrease in home sales is believed to be the result of resistance to higher home prices that were precipitated by increases in material costs and by new building codes requiring greater hurricane protection. Also, resales were weak thoughout the country which negatively affected the ability of the Company's prime customers, active adults, to sell their present homes and use those funds to purchase retirement homes in Florida.
The number of new contracts signed (483) and the aggregate dollar value of these new contracts ($79.4 million) decreased in 1995 from 661 and $100.1 million in 1994.
The Company's backlog has increased from $29.3 million at December 31, 1994 to $35.3 million as of December 31, 1995. A decrease in interest rates in the second half of 1995 contributed to a larger number of new sales contracts received by the Company and this trend continued in early 1996 and is expected to remain through 1996.
Other operating revenues decreased to $3.1 million during 1995 from $3.4 million in 1994 primarily as a result of higher vacancies in the rental units project. Interest, rentals and other income decreased to $4.0 million from $4.3 million in 1994.
Cost of home sales decreased to $62.2 million in 1995 from $91.8 million in 1994 as a result of a decrease in the dollar volume of homes delivered. As a percentage of home sales, cost of home sales increased to 84.8% from 83.4% due to increased competition, the absorption of higher construction costs and the impact of higher previously capitalized interest.
Selling, General and Administrative expenses ("SG&A") decreased to $15.5 million in 1995 from $16.3 million in 1994, but as a percentage of total revenues, these expenses increased to 18.9% from 13.6% in the same period of 1994. Interest costs incurred in 1995 increased to $10.7 million from $10.4 million in 1994.
The Company incurred a net loss for the year ended December 31, 1995 of $11.8 million or $2.54 per share, after a non-cash pre-tax write down of $13.9 million as of December 31, 1995, pertaining to the carrying cost of certain land inventory. In 1994 the Company had a net income of $4.1 million or $.89 per share. The write-down affects the carrying cost of land inventory for approximately 360 unsold housing units located in three developments originally purchased in 1989 and 1991. Land inventories are carried at cost, plus accumulated development and construction costs, including capitalized interest and real estate taxes. As these developments are among the Company's oldest and slower selling projects, they have been materially affected by the accumulated cost allocations. As a result, the accumulated cost of this inventory was in excess of its net realizable value. Results for 1995 also include a reduction of $686,744 in the Company's reserve for construction defects, which reflects unused warranty reserve related to finished projects.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing needs depend primarily upon sales volume, asset turnover, land acquisition, inventory balances and disposition of non-residential parcels of land. The Company has financed its working capital needs through funds generated by operations, sale of land, borrowings and the periodic issuance of common stock.
On January 13, 1993, the Company issued $70.0 million of its 12 1/2% Senior Notes ("Notes") due January 15, 2003. The Notes are senior unsecured obligations of the Company subject to redemption, at the Company's option, on or after January 15, 1998 at 105% of the principal amount and thereafter at prices declining annually to 100% on or after January 15, 2001. The indenture under which the Notes were issued requires sinking fund payments of $17.5 million on January 15, 2001 and January 15, 2002. The indenture contains provisions restricting the amount and type of indebtedness the Company may incur, the purchase by the Company of its stock and the payment of dividends. At December 31, 1996, dividend payments were restricted and will continue to be restricted until the Company posts cumulative net income in excess of $20.5 million.
The Company had, as of December 31, 1996, a $20.0 million revolving line of credit of which $17.3 million was available at a rate of prime plus 1.5%, which line expires on July 1, 1997. This line is secured by assets aggregating not less than 2 times
the amount of the line and in addition to typical restrictions and covenants the Company must:
a) maintain a consolidated tangible net worth of not less than $60.0 million.
b) The issuance of additional debt is restricted by covenants in the agreement.
The Company anticipates that it would be able to either renew its existing line of credit or obtain a new line of credit on terms satisfactory to the Company prior to the expiration of the existing line. This line can be used to finance ongoing development, construction of residential real estate and other short-term capital needs.
The Company had outstanding an aggregate balance of approximately $12.6 million of a purchase money mortgage at an interest rate of 7.15% which is collateralized by land and buildings. Of this mortgage, $.2 million is due in 1997 and $12.4 million is payable by 2003.
INFLATION
The Company, as well as the home building industry in general, may be adversely affected during periods of high inflation, primarily because of higher land and construction costs. In addition, higher mortgage interest rates may significantly affect the affordability and availability of permanent mortgage financing to prospective purchasers.
Inflation also increases the Company's cost of labor and materials. The Company attempts to pass through to its customers any increases in its costs through increased selling prices. During the last three years, the Company has experienced a reduction in gross margins on the sale of homes. In some part, these reduced margins are the result of the Company being unable to raise selling prices and pass on increased construction and capitalized interest costs. There is no assurance that inflation will not have a material adverse impact on the Company's future results of operations.
ACCOUNTING METHODS
The Company is required to apply the provisions of Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121 establishes guidance for when to recognize and how to measure impairment losses of long-lived assets and certain identifiable intangible assets. The Company was required to implement this standard in its fiscal year 1996. The implementation of SFAS 121 did not have a material effect on the Company's financial position or results of operations.
The Company is required to apply the provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No.123"), "Accounting for Stock-Based Compensation." The Company is required to present additional disclosures regarding the fair value of stock options. The Company was required to implement this standard in fiscal year 1996. The implementation of SFAS No. 123 did not have a material effect on the Company's financial position or results of operations.
ORIOLE HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS
(continued)
ORIOLE HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these statements.
ORIOLE HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
The accompanying notes are an integral part of these statements.
ORIOLE HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these statements.
ORIOLE HOMES CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
The accompanying notes are an integral part of these statements.
ORIOLE HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
PRINCIPLES OF CONSOLIDATION
The accompanying Consolidated Financial Statements include the accounts of Oriole Homes Corp. and all wholly-owned subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation.
OPERATIONS
The Company, a Florida corporation, is engaged principally in the design, construction, marketing and sale of single and multi-family residential homes (including condominiums) primarily in southeast (Palm Beach, Broward and Martin Counties) Florida. The Company also has developments in Naples and Ocala, Florida.
REVENUE RECOGNITION
The Company records revenues and profits from sales of real estate in accordance with generally accepted accounting principles governing profit recognition for real estate transactions.
INVENTORIES
Inventories are carried at cost, plus accumulated development and construction costs (including capitalized interest and real estate taxes). House and condominium inventories which are completed and being held for sale aggregate approximately $13,516,000 in 1996 and $13,275,000 in 1995. The accumulated costs of land, houses and condominiums are not in excess of estimated net realizable value. Estimated net realizable value is based upon sales achieved and backlog in the normal course of business less estimated cost to complete and dispose of the property. The Company's management, on an on-going basis, reviews individual projects in inventory for impairment.
INTEREST CAPITALIZATION
The Company capitalizes certain interest costs incurred on land under development and houses and condominiums under construction. Such capitalized interest is included in cost of house and condominium sales when the units are delivered. During the years 1996, 1995, and 1994 respectively, the Company capitalized interest in the amount of $10,336,279, $9,898,999 and $9,736,452 and expensed as a component of cost of goods sold $6,727,484, $6,270,173 and $9,313,121.
(continued)
ORIOLE HOMES CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION - Continued
DEPRECIATION
The Company provides for depreciation of property and equipment by the straight-line and accelerated methods over the following estimated useful lives of the various classes of depreciable assets:
Buildings 25 to 27 years Furniture, fixtures and equipment 5 to 7 years
DEBT ISSUANCE COSTS AND UNAMORTIZED DISCOUNT
Costs incurred in connection with obtaining debt have been deferred and are being amortized by the interest method over the term of the debt.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities of three months or less when purchased.
NET INCOME PER SHARE
Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares outstanding during each year: 4,625,524 shares in 1996, 1995 and 1994.
ADVERTISING
The Company expenses advertising costs as incurred, except for sales brochures and site plans which are accounted for in "Other Assets." Sales brochures and site plans are expensed as the materials are used or distributed to customers. Advertising expense for the years ended December 31, 1996, 1995 and 1994 was $2,112,364, $1,411,412 and $1,713,158, respectively.
(continued)
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION - Continued
ESTIMATES
In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions that affect the reported amounts and disclosures of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
FINANCIAL STATEMENT RECLASSIFICATION
Certain amounts reflected in the consolidated financial statements for the year ended December 31, 1995 have been reclassified to conform to the presentation for the year ended December 31, 1996.
NOTE B - MORTGAGE NOTES
First and second mortgage notes receivable bear interest at rates ranging from 8% to 10%. The Company's receivables are primarily mortgages which are collateralized by real estate. Minimum payments required on the first and second mortgage notes subsequent to December 31, 1996 are: 1997 - $3,844; 1998 - $4,167; 1999 - $266,421 and 2000 - $2,773.
NOTE C - SPECIAL CHARGES
The Company recorded, in the fourth quarter 1996, a non-recurring charge of $1,723,130 ($1,137,266, net of tax benefit, or $.25 per common share) related to the write-down in the book value of a parcel of land located in southern Broward County that is under contract for sale and scheduled to close in 1997.
(continued)
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE C - SPECIAL CHARGES - Continued
During the fourth quarter 1995, the Company recorded a non-recurring charge of $13,917,025 ($11,079,381, net of tax benefit, or $2.40 per common share) related to the write-down of certain land inventory to its estimated net realizable value. The write-down pertains to land inventory for approximately 360 unsold housing units located in three developments. These three developments were originally purchased in 1989 and 1991.
NOTE D - LIFE INSURANCE
The Company purchased life insurance on the lives of two of its officers and their spouses who own significant shares of common stock of the Company. An irrevocably designated trustee of the officers is the beneficiary. Upon the death of the officers or termination of the policies, the Company shall receive an amount equal to the aggregated premiums paid less any policy loans and unpaid interest or cash withdrawals received by the Company. The accumulated premiums paid by the Company on the above policies during the years ended December 31, 1996 and 1995 were $668,085 and $641,352, respectively, and are classified as other assets.
In connection with the policies, the Company has an option with the officers to acquire all or any part of the Class A or Class B common stock of the Company owned by such individuals at the market price of such securities at the time of their death.
NOTE E - INVESTMENT IN JOINT VENTURES
The Company has three and two joint venture agreements in 1996 and 1995, respectively. The joint ventures construct and sell homes. The Company is guaranteed a preferred return ranging from 10% to 15% on these investments. All risks of loss are borne by the joint venturee. The joint ventures are accounted for using the cost method. At December 31, 1996 and 1995, there were no advances from the Company to the joint ventures.
NOTE F - LINE OF CREDIT
A revolving loan agreement (line of credit) with a bank, collateralized by land, provides up to $20,000,000 of borrowings, at an interest rate of prime plus 1.5%, of which $17,300,000 is available at December 31, 1996. The agreement expires July 1, 1997.
(continued)
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE F - LINE OF CREDIT - Continued
The line of credit can be used to finance ongoing development and construction of residential real estate and short-term capital needs and only requires monthly interest payments. The credit agreement has no compensating balance arrangements and contains typical restrictions and covenants, the most restrictive of which include the following:
a. The Company shall maintain, at all times through the life of the loan, its consolidated tangible net worth at not less than $60,000,000.
b. The Company's ability to incur additional debt is restricted by covenants in the agreement.
Average interest rates and balances outstanding, for revolving lines of credit payable to banks, based on a weighted average are as follows:
NOTE G - MORTGAGE NOTES PAYABLE
Mortgage notes payable at December 31, 1996 and 1995, are summarized as follows:
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G - MORTGAGE NOTES PAYABLE - Continued
Aggregate maturities of the mortgage note payable as of December 31, 1996, is as follows:
1997 $ 185,577 1998 216,768 1999 232,785 2000 249,986 2001 268,458 Thereafter 11,487,927 ----------- $12,641,501 ===========
NOTE H - INCOME TAXES
Deferred income taxes and benefits are provided for significant income and expense items recognized in different years for tax and financial reporting purposes. Temporary differences which give rise to significant deferred tax assets (liabilities) follow:
(continued)
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES - Continued
At December 31, 1995, the Company recorded a valuation allowance for the deferred tax assets relating to the inventory adjustment as the Company's ability to realize these benefits is not "more likely than not". During 1996, the Company decreased the valuation based on management's reevaluation of the likelihood of realization.
The Company files consolidated income tax returns. The components of the provision for (benefit from) income taxes are as follows:
The reasons for the difference between the total tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows:
(continued)
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES - Continued
The Company has a Federal net operating loss carryback and a State net operating loss carryforward of $7,055,630 and $11,581,273, respectively. The Federal net operating loss will be carried back and fully absorbed in 1993 and 1994. The State net operating loss carryforward expires in the years 2010 and 2011.
NOTE I - CUSTOMER DEPOSITS
Certain customer deposits, pursuant to statutory regulations of the State of Florida or by agreement between the buyer and seller, are held in segregated bank accounts. At December 31, 1996 and 1995, cash in the amounts of approximately $216,000 and $289,000, respectively, was so restricted.
The Company entered into an escrow agreement with a bank and the Division of Florida Land Sales and Condominiums which allowed the Company to use customer deposits which were previously maintained in an escrow account. Deposits of up to $900,000 in 1996 and $1,100,000 in 1995, which could be released to the Company, are guaranteed by performance bonds aggregating $2,500,000 for 1996 and $5,000,000 for 1995.
NOTE J - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities include the following:
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K - SENIOR NOTES
Senior Notes are comprised as follows:
On January 13, 1993, the Company issued 12 1/2% senior notes ("Notes"), due January 15, 2003. The Notes have a face value of $70,000,000 and were issued at a discount of $1,930,000. The notes are senior unsecured obligations of the Company subject to redemption at the Company's option on or after January 15, 1998 at 105% of the principal amount and thereafter at prices declining annually to 100% of the principal amount on or after January 15, 2001.
The indenture under which senior notes were issued requires sinking fund payments of $17,500,000 on January 15, 2001 and January 15, 2002. The indenture, contains provisions restricting the amount and type of indebtedness the Company may incur, the purchase by the Company of its stock and the payment of cash dividends. At December 31, 1996, dividend payments are restricted and will be restricted until the Company posts cumulative net income in excess of $20,500,000.
NOTE L - STOCK OPTIONS
The Company has two stock option plans accounted for under APB Opinion 25 and Related Interpretations. The plans allow the Company to grant options to employees for up to 400,000 shares of Class B common stock and nonemployee directors for up to 20,000 shares of Class B common stock. The options have terms of five years for employees and ten years for nonemployee directors when issued. The stock options for employees vest at the end of the second year, and stock options for nonemployee directors vest 50% each after the first and second year. The exercise price of each option equals the market price of the Company's stock on the date of grant.
(continued)
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - STOCK OPTIONS - Continued
Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of Statement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation (SFAS 123), the Company's net income and earnings per share would have been reduced to the proforma amounts indicated below. Disclosure of such amounts is not required for the fiscal year ended December 31, 1994 and accordingly is not presented below:
The fair value of each option grant is estimated on the date of grant using the binomial options-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: expected volatility of 37.18 and 36.33 percent; risk-free interest rate of 6.43 and 7.45 percent; and expected life of 5.3 and 5.4 years.
A summary of the status of the Company's fixed stock option plan as of December 31, 1996 and 1995, and changes during the years ending on those dates is presented below:
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE L - STOCK OPTIONS - Continued
The following information applies to options outstanding at December 31, 1996:
Number outstanding 88,700 Range of exercise prices $6 to $9 Weighted-average exercise price $7.34 Weighted-average remaining contractual life 4.5 years
NOTE M - COMMON STOCK
Class A common stock and Class B common stock have identical dividend rights with the exception that the Class B common stock is entitled to a $.025 per share additional dividend. Class A common stock is entitled to one vote per share, while Class B common stock is entitled to one-tenth vote per share. Holders of Class B common stock are entitled to elect 25% of the Board of Directors as long as the number of outstanding shares of Class B common stock is at least 10% of the number of outstanding shares of both classes of common stock. At the option of the holder of record, each share of Class A common stock may be converted at any time into one share of Class B common stock.
NOTE N - LEASING ARRANGEMENTS
RENTAL PROPERTIES
In connection with certain housing developments, the Company leases recreation facilities. The Company also leases rental units. These leases are accounted for as operating leases.
The following schedule provides an analysis of the Company's property under operating leases (included in property and equipment) by major classes as of December 31, 1996 and 1995:
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE N - LEASING ARRANGEMENTS - Continued
The following is a schedule of approximate future minimum rental income required under these leases as of December 31, 1996:
1997 $ 2,204,000 1998 562,000 1999 562,000 2000 562,000 2001 562,000 Thereafter 46,404,000 -----------------
$ 50,856,000 =================
OFFICES AND WAREHOUSE
The Company leases its offices and warehouse under lease agreements extending through 1997, with options to renew for up to five years, accounted for as operating leases. The approximate future minimum rental payments as of December 31, 1996 are as follows: 1997 - $135,000.
Total rent expense, including common area maintenance expenses, for each of the years ended December 31, 1996, 1995 and 1994 amounted to approximately $300,000, $320,000 and $320,000, respectively.
NOTE O - DEFERRED COMPENSATION PLAN
The Company has a defined contribution plan established pursuant to Section 401(K) of the Internal Revenue Code. Employees contribute to the plan a percentage of their salaries, subject to certain dollar limitations, and the Company matches a portion of the employees' contributions. The Company's contribution to the plan amounted to $68,238 in 1996, $72,981 in 1995 and $63,685 in 1994.
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments does not purport to represent the aggregate net fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value because of the short maturity of those instruments.
MORTGAGE NOTES RECEIVABLES
The carrying amount approximates fair value due to interest rates currently offered for loans with similar terms to borrowers of similar credit quality not being significantly different.
LINE OF CREDIT
The carrying amount of the line of credit approximates fair value due to the length of the maturities and interest rates being tied to market indices.
MORTGAGE NOTES PAYABLE
The carrying amounts of mortgage notes payable approximate fair value due to the interest rates not being significantly different from the current market rates available to the Company.
SENIOR NOTES
Quoted market prices offered to the Company are used to estimate fair value of the Company's senior notes.
All of the Company's financial instruments are held for purposes other than trading. The carrying amounts in the table below are the amounts at which the financial instruments are reported in the financial statements.
(continued)
Oriole Homes Corp. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE P - FINANCIAL INSTRUMENTS - Continued
The estimated fair values of the Corporation's financial instruments, at December 31, are as follows:
NOTE Q - CONTINGENCIES
The Company is involved, from time to time, in litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the Company's consolidated financial position or results of operations.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors Oriole Homes Corp.
We have audited the accompanying consolidated balance sheets of Oriole Homes Corp. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Oriole Homes Corp. and Subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Miami, Florida March 7, 1997
ITEM 9

ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
This item is not applicable.
PART III
ITEM 10

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item of this part is incorporated by reference to Registrant's definitive proxy statement for the Annual Meeting of Shareholders.
ITEM 11

ITEM 11 EXECUTIVE COMPENSATION
The information required by this item of this part is incorporated by reference to Registrant's definitive proxy statement for the Annual Meeting of Shareholders.
ITEM 12

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item of this part is incorporated by reference to Registrant's definitive proxy statement for the Annual Meeting of Shareholders.
ITEM 13

ITEM 13 CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by this item of this part is incorporated by reference to Registrant's definitive proxy statement for the Annual Meeting of Shareholders.
PART IV
ITEM 14

ITEM 14 EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Oriole Homes Corp. and subsidiaries are included in Part II of this annual report and in the Company's 1996 Annual Report to Shareholders.
Consolidated balance sheets as of December 31, 1996 and 1995.
Consolidated statements of operations for the three years ended December 31, 1996.
Consolidated statements of cash flows for the three years ended December 31, 1996.
Consolidated statements of shareholders' equity for the three years ended December 31, 1996.
Notes to consolidated financial statements.
Report of independent certified public accountants.
Selected Quarterly Financial Data for the years ended December 31, 1996 and 1995 included in the Company's 1996 Annual Report to Shareholders which is incorporated by reference as Part II of this annual report.
2. Financial Statement Schedules
The following financial statement schedules of Oriole Homes Corp. and subsidiaries are included in Part IV of this report:
Report of independent certified public accountants.
All other schedules are omitted because they are not applicable or not required or because the required information is included in the consolidated financial statements or notes thereto.
3. Exhibits
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be Signed on its behalf by the undersigned, thereunto duly authorized.
ORIOLE HOMES CORP.
DATE 3-24-97 s/ R.D. Levy ----------------------- -------------------------------- R.D. Levy, Chairman of the Board Chief Executive Officer, Director
DATE 3-24-97 s/ A. Nunez ----------------------- -------------------------------- A. Nunez, Senior Vice President, Treasurer, Chief Financial Officer, Chief Accounting Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934 this Annual Report has also been signed by the following persons on behalf of the Registrant in the capacities indicated.
MEMBER OF THE BOARD OF DIRECTORS


Item 1. Business --------- Not applicable.
Item 2.

Item 2. Properties ---------- Not applicable.
Item 3.

Item 3. Legal Proceedings ------------------- There are no material pending legal proceedings with respect to NationsBank Auto Owner Trust 1996-A (the "Trust") involving the Trust, The Chase Manhattan Bank, as Indenture Trustee, and Bankers Trust (Delaware), as Owner Trustee (collectively, the "Trustees"), or NationsBank, N.A., as Servicer, other than ordinary or routine litigation incidental to the Trust assets or the Trustees' or the Servicer's duties under the applicable Sales and Servicing Agreement.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None.
PART II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder ------------------------------------------------------------------ Matters ------- (a) Market Information. There is no established public trading market for the Notes or the Certificates.
(b) Holders. Since each of the Notes and Certificates was issued in book entry form only, there is only one holder of record of each Series of Notes and Certificates. See Item 12 below.
(c) Dividends. Not applicable.
Item 6.

Item 6. Selected Financial Data ----------------------- Not applicable.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations ---------------------- Not applicable.
Item 8.

Item 8. Financial Statements and Supplementary Data ------------------------------------------- Not applicable.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None.
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant -------------------------------------------------- Not applicable.
Item 11.

Item 11. Executive Compensation ---------------------- Not applicable.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The Notes are represented by one or more notes registered in the name of Cede & Co., the nominee of The Depository Trust Company ("DTC"). An investor holding an interest in the Trust is not entitled to receive a note representing such interest except in limited circumstances. Accordingly, Cede & Co. is the sole holder of record of the Notes, which it holds on behalf of brokers, dealers, banks and other participants in the DTC system. Such participants may hold notes for their own accounts or for the accounts of their customers. The address of Cede & Co. is: Cede & Co. c/o The Depository Trust Company Attention: Proxy Department Seven Hanover Square New York, New York 10004
The Certificates are represented by Bankers Trust, who is the sole holder of record of the Certificates, which it holds on behalf of brokers, dealers, banks and other participants. Such participants may hold Certificates for their own accounts or for the accounts of their customers. The address of Bankers Trust is: Bankers Trust Four Albany Street 9th Floor New York, New York 10006 Attention: Corporate Trust and Agency Group
Item 13.

Item 13. Certain Relationships and Related Transactions ---------------------------------------------- There has not been, and there is not currently proposed, any transaction or series of transactions, to which either the Trust or NationsBank, N.A., as Servicer, is a party with any Noteholder or Certificateholder or any member of the immediate family of any such Noteholder or Certificateholder who, to the knowledge of the Servicer, owns of record or beneficially more than five percent of the Notes or Certificates
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ----------------------------------------------------------------- (a) 1. Not applicable. 2. Not applicable. 3. Exhibits: 99 Annual Statement as to Compliance.
(b) Reports on Form 8-K. NationsBank Auto Owner Trust 1996-A filed a Current Report on Form 8-K pursuant to Items 5 and 7 for the following monthly distribution dates during 1996, including the Servicer's Certificate for each due period provided to The Chase Manhattan Bank, as Indenture Trustee, and Bankers Trust (Delaware), as Owner Trustee. Date of Reports on Form 8-K August 15, 1996 September 16, 1996 October 15, 1996 November 15, 1996 December 16, 1996 (c) The exhibits filed as part of this report are listed in the Index to Exhibits on page 5.
(d) Not applicable.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NationsBank Auto Owner Trust 1996-A
By: /s/ Leslie J. Fitzpatrick ------------------------- Leslie J. Fitzpatrick Senior Vice President NationsBank, N.A. (Duly Authorized Officer)
Date: March 25, 1997


ITEM 1. BUSINESS
INTRODUCTION
Danka Business Systems PLC and its Subsidiaries (the "Company") is one of the largest independent suppliers of photocopiers, facsimiles and other automated office equipment in North America and Europe. The Company primarily markets these products and related service, parts and supplies on a direct basis to retail customers. The Company also markets photocopiers, facsimile equipment, and related parts and supplies on a wholesale basis to dealers. In addition, the Company markets private label photocopier and facsimile equipment and related supplies on a direct and wholesale basis under the Company's Infotec trademark, and facsimile equipment under its dex and Omnifax trademarks. Danka has offices in 40 states, nine Canadian provinces and seven European countries.
The Company is one of the largest independent suppliers of Canon, Konica, Minolta, Sharp and Toshiba photocopiers and facsimile equipment. As a result of its recent acquisition of Infotec, a European retail and wholesale supplier, the Company is also one of the largest independent suppliers of Ricoh products in Europe. On September 6, 1995, the Company entered into a marketing agreement with Eastman Kodak's Office Imaging division ("Kodak") granting the Company the non-exclusive right to sell and service certain high-volume Kodak copiers in the United States and Canada.
The Company provides a wide range of customer-related support services, maintenance and supply contracts, training and technical support, and third-party leasing arrangements. The Company's focus on customer service and the contractual nature of its service business, combined with its service contract renewals, provide a significant source of recurring revenue.
The Company's principal business strategy is to increase its presence as a leading independent supplier of automated office equipment and related service, parts and supplies in existing and strategic new geographic markets in North America and Europe. The Company's internal expansion has resulted from increased product offerings, aggressive marketing to new customers and emphasis on providing service and supplies. The Company has expanded externally as a result of the acquisition of selected suppliers of automated office equipment, and over the last three years has completed over 100 acquisitions in the industry. The Company seeks to improve the profitability of the businesses it acquires by integrating them into the Company's sales and service network. The Company's operating philosophy is to support its sales and service network through training in technical, marketing, and administrative support procedures; advertising campaigns; volume purchasing; and uniform operating procedures.
The North American and European photocopier and facsimile markets are highly fragmented, with numerous dealers engaged in the same or similar businesses as the Company. Due to the complexity of new products and the high costs of product support, new technology is driving consolidation within both markets. As a result, the Company believes that significant acquisition opportunities exist in these markets.
Danka Business Systems PLC is a corporation organized under the laws of England and Wales. The Company's principal operating subsidiaries are located in the United States, Canada and Europe. The registered and principal executive office of the Company is located at Masters House, 107 Hammersmith Road, London, W14 0QH, England, and its telephone number is 011-44171-603-1515. The Company's principal operating headquarters is located at 11201 Danka Circle North, St. Petersburg, Florida 33716, and its telephone number is 813-576-6003.
ACQUISITION STRATEGY
The Company expands its business through internal growth by increasing its penetration in existing markets, and by entering new geographic areas primarily through the acquisition of existing businesses. The Company's acquisition strategy is focused on acquiring businesses in current territories to increase penetration in those markets and on acquiring businesses in new territories. The Company seeks to acquire companies that generally have (i) an established customer base, (ii) a product line comparable with the Company's current and anticipated products; (iii) necessary manufacturer authorizations, and (iv) the potential to benefit from the Company's uniform operating procedures and centralized purchasing power.
Acquired companies are integrated into the Company through the implementation of the Company's operating procedures, which (i) establishes financial controls, common information systems and reporting requirements, (ii) introduces the Company's service, marketing and sales programs and compensation plans, (iii) evaluates, transfers and retrains personnel as necessary, and (iv) in many cases, expands the acquiree's product mix to incorporate new products which are sold by the Company. This integration generally results in a replication of the Company's service, sales, marketing and other business programs. In most business acquisitions, the acquired businesses' owners and management are contractually bound by executive non-compete and trade secret protection agreements.
Over the last three years, the Company has completed over 100 acquisitions in the industry which has resulted in a network of over 400 locations. The Company believes that significant additional acquisition opportunities exist in the highly fragmented North American and European automated office equipment industry. Technology has increased the complexity of new products, and the higher costs of product support are driving the consolidation within the North American and European markets. This trend has caused smaller independent distributors to consider selling their dealerships to larger marketing and service organizations such as the Company. Through acquisitions, the Company entered the United Kingdom market in 1993, the Canadian market in 1994, and Continental Europe in 1995.
The Company's continued success in future acquisitions will be relative to many things, including the timing and size of an acquisition; the success or failure to successfully integrate any significant acquisition and minimize integration costs related thereto; the Company's ability to successfully grow its infrastructure to sustain, manage, operate and continue significant expansion; and its ability to maintain, manage and operate its core business.
The Company is currently engaged in preliminary discussions and consideration of various possible acquisitions, some of which could be material. However, the Company currently has no agreement, arrangement or understanding with respect to any acquisitions that are, individually or in the aggregate, material to the Company.
INFOTEC ACQUISITION
Effective November 1, 1995, the Company acquired all of the issued and outstanding shares of Infotec Europe B.V. and its operating subsidiaries ("Infotec"), for aggregate cash consideration of approximately $167.0 million (the "Infotec Acquisition").
Infotec is one of Europe's largest independent suppliers of photocopiers, facsimile equipment, and related service, parts and supplies. Infotec markets a full line of Ricoh products under the Infotec brand name through its locations in Germany, the United Kingdom, France, Italy, Denmark, Belgium and the Netherlands, as well as through its wholesale distribution network of independent dealers in these and other European countries. For calendar 1994, Infotec had total revenue of approximately $256.0 million and income from operations of approximately $16.6 million.
The Infotec Acquisition has significantly increased the Company's business in Europe, and provides the Company with its initial operations in Germany, France, Italy and Denmark. In fiscal 1996, the Company's total revenue in Europe was $247 million, or approximately 20% of the Company's total consolidated revenue. The
Company is integrating its existing European operations with Infotec and believes such integrated operations will provide a substantial core operation from which to pursue its growth strategy in Europe. (Reference is made to Note 6 of the "Notes To The Consolidated Financial Statements" entitled "Foreign Operations" contained in the Company's Annual Report to Shareholders for the Year Ended March 31, 1996 which is incorporated by reference).
PRODUCTS
The Company's primary products are photocopiers, facsimile equipment, other automated office equipment, and related parts and supplies. The photocopier industry is informally divided into six segments. Segments one and two contain the least sophisticated photocopiers; segments three and four contain faster and more sophisticated midrange photocopiers; and segments five and six contain the most sophisticated and fastest photocopiers in the industry. The Company sells photocopiers primarily in segments one through five through its retail operations, while it sells photocopiers primarily in segment one through its wholesale operations. The principal manufacturers in segments one through four are Canon, Konica, Sharp, Mita, Minolta, Ricoh and Toshiba. The Company offers products from each of these manufacturers. Segments five and six are currently dominated by Kodak and Xerox. It is important that the Company offer all segments of photocopiers to its customers. Through its Kodak agreement described below, the Company has increased its revenues from the sale and service of segment five and six photocopiers. The Company will continue to expand its product offerings to encompass new equipment as it is made available by its vendors.
On September 6, 1995, the Company and Kodak entered into an agreement (the "Kodak Agreement") granting the Company the non-exclusive right to sell and service Kodak high-volume copiers throughout the United States and Canada. Danka is selling and servicing all configurations of the Kodak ImageSource 85 copier, as well as the Kodak 3100 duplicator, and the Kodak 2085 copier-duplicator. These Kodak models supplement Danka's existing product line, by offering a segment six copier (which copies at a rate of 100 copies per minute) and further enhances the Company's segment five (70 to 90 copies per minute) product line. The Kodak Agreement better positions Danka to market a full product line and the related services to major market customers. The Kodak Agreement is cancelable without cause by either party with 120 days notice. On January 18, 1996, Kodak announced that it is developing alternatives to strengthen and reposition its office imaging business. As a consequence, Kodak is exploring a variety of strategic options and structural alternatives, which range from expanded use of strategic alliances to the formation of joint ventures or a potential divestiture. The Company is currently assessing the possible effect of Kodak's potential actions and is considering various strategies in connection with these potential actions. Should the Kodak Agreement be terminated, the Company believes that it can obtain an alternative source of competing segment five and six equipment. However, there can be no assurance that the Company will be able to obtain such products or that the same would be available on terms that would make the Company competitive in such segments or that the same would be well accepted in the marketplace.
In addition, the Company distributes a range of facsimile equipment, with a concentration in the more sophisticated plain paper and multifunctional models. The plain paper and multifunctional models use toner and other supplies and require maintenance similar to photocopiers. A majority of these facsimile machines are private label products of the Company.
TECHNOLOGY
The Company believes that the black and white photocopier and facsimile equipment markets will continue to change with the increasing acceptance of digital technology. Digital photocopiers have the ability to communicate with other automated office equipment. This innovation is resulting in a blurring of the distinction between traditional photocopiers, facsimile equipment, and laser printers, with the emergence of a range of multifunctional office equipment.
Many of the Company's existing vendors have expended considerable resources in the research, development, and creation of digital products and have been recently introducing digital black and white photocopiers. To support this new technology, the Company has developed digital research and support laboratories which enable it to test the manufacturers' equipment in various networked environments in order to
evaluate performance prior to releasing the equipment to the Company's sales network. Additionally, the Company's digital labs provide training and support to its sales professionals and service technicians, and also serve as a beta test site for many of its manufacturers' equipment, as well as other vendors offering digital office products. More recently, the Company has begun offering digital support service contracts and providing customers with full software support from the desktop computer through the network to the digital copier/printer.
Currently, color photocopiers represent a small but growing portion of the Company's retail copier sales, and represent a growing segment of the photocopier market. Through the Company's expanded relationship with Ricoh in the U.S., the Company nearly doubled the number of markets in which it sells color products during fiscal 1996. Additionally, with a color server, color photocopiers can be converted into networkable color printers that will accept digital output from a computer as well as hard copy inputs which can be reproduced or scanned into the computer, thus increasing the functionality of the unit.
Due to the emergence of digital technology, the Company has experienced and could continue to experience increased expenses for the retraining of its service technicians and salespersons.
SERVICE
In fiscal 1996, retail service, supplies and rentals represented 48% of the Company's total revenue. This revenue is primarily derived from its equipment, maintenance and supply contracts ("EMS Contracts") and other maintenance contracts. Generally, EMS Contracts are for a one-year term and are automatically renewable. Although the Company has various payment arrangements, most maintenance contracts are based upon a per copy charge. These arrangements provide the customer with scheduled payments that can be conveniently budgeted and provide the Company with a steady source of revenue.
The Company has a stated mission of repairing a machine on the first service call, and has full time service trainers who teach classes to the Company's technicians. The Company also maintains an emergency toll-free number to assist its own service technicians and service technicians of independent dealers who are customers of its wholesale operations. The Company maintains a database of common service problems and related solutions to assist technicians in the field.
MARKETING AND CUSTOMERS
The Company believes that, in addition to price and product performance and capabilities, its retail customers primarily base their purchasing decisions on the quality of post-sales service and support, speed of service, and the availability of financing and rental programs. The Company believes that its wholesale customers primarily base their purchasing decisions on price, speed of delivery, dealer support, product performance and capabilities, and availability of financing.
The Company's retail operations target a broad range of customer groups which include small to large businesses, professional firms, and governmental and educational institutions. Customers of the Company's wholesale operations consist generally of independent dealers who are not authorized dealers for major manufacturers. Additionally, the Company markets Infotec private label copiers and facsimiles as well as its dex private label facsimile equipment and related supplies on a wholesale basis to a network of authorized independent dealers. No customer represents more than one percent of the Company's total revenue, and the loss of any one customer would not materially affect the Company.
As of March 31, 1996, there were 2,810 Company employees devoted to sales which represents a substantial increase from March 31, 1995. Sales personnel turnover is common in the industry and the Company makes a considerable effort to retain qualified sales personnel. Danka's sales teams are highly specialized, with each office dedicated to marketing the products of one or two particular manufacturers. Individual team members will concentrate on particular product groups, focusing on lower segment machines during their first year and graduating to more complex equipment as their knowledge and experience increases. With its sales force, Danka emphasizes product knowledge, commitment and professionalism. Each sales person negotiates a method of payment - lease, outright sale or rental - to suit the individual customer. Sales personnel
have pricing flexibility. Their compensation is comprised of a base salary and a selling commission, based on achievement of unit placements and gross profit dollars.
The Company has been aggressively hiring and training new field sales representatives and support staff. Such expansion of the Company's salesforce has resulted in substantial cost and expense and has not yet yielded expected productivity. However, the Company believes that the expansion is in the long-term best interest of the Company.
The Company utilizes a wide range of advertising and promotional activities, including television, radio, and billboard advertising campaigns, sponsorship of major sporting events and teams, distribution of descriptive brochures and direct mail pieces, and informational seminars and presentations. The Company's marketing efforts are enhanced by manufacturers' national advertising campaigns and co-op arrangements where appropriate and applicable.
MARKET BASED APPROACH
To better support the Company's growth strategy in digital color and high-volume products, major markets and its core commercial business, Danka is moving away from its traditional branch management concept to a more centralized, market oriented, support concept of administration ("Market Based Approach"). Under a Market Based Approach, most of the administrative and management functions which were performed at the branch level are centralized on a regional basis. Such functions include managerial support, service dispatch, billing and collections, supply sales and equipment setup and delivery. Danka's implementation of the Market Based Approach has resulted in unanticipated duplication of certain administrative and management functions, which has increased selling, general and administrative costs. However, the Company believes that this Market Based Approach is ultimately expected to provide for a higher quality of customer support, increased productivity and reduced administrative costs.
LEASING
Leasing plays a significant role in the Company's sales of equipment. The Company believes that the ability of its sales force to offer customers the option to lease equipment leads to additional sales. In substantially all of its lease transactions, the Company has initiated the lease, one of a number of available third-party leasing companies approved the customer's credit and the Company immediately financed the lease on a nonrecourse basis in return for a single payment. The Company has continued to hold title to the leased equipment while eliminating the credit risks normally associated with leasing arrangements and while improving its cash flow and profit margins. In December 1995, Danka finalized a strategic relationship with a third party leasing company. This relationship operates in a similar manner as the Company's previous third party leasing relationships, except that the Company participates in the leasing company's profits from financing these leases. The Company is currently negotiating similar agreements with other third party leasing companies, and intends to route most of its leasing business to these third party leasing companies.
The Company believes customers are less resistant to a small increase in monthly lease payments as opposed to an increase in the outright cash sales price of such equipment. As a result, in most of these leasing arrangements, the Company is able to achieve a higher sale price, and a higher profit margin than that which would have been obtained by a cash sale of such equipment. Finally, these leasing arrangements permit the Company to utilize its capital for other business activities. The Company has similar arrangements for leases which are offered to customers outside the U.S.
Through various recent acquisitions, the Company has acquired certain lease arrangements and installment receivables that have not been sold to third-party leasing companies. Over time, the Company will seek to convert these acquisition leasing programs to arrangements similar to those described above.
TRAINING
A key element of the Company's operating philosophy is the training of its sales, service and administrative employees in order to assist in uniform application of the Company's established operating procedures throughout the sales network. Upon employment, Company salespersons begin a sales program developed and conducted by the Company. Training continues throughout their careers in sales and sales management with certifications awarded upon completion of various courses. The training sessions, coupled with weekly sales meetings, assist the Company's staff in enhancing and maintaining their marketing and sales management skills.
Service technicians new to the Company are immediately trained and certified in accordance with the Company's methods, procedures, and standards. The Company's technical personnel are continuously updated and retrained as new technology is developed. The Company's service training centers are certified as manufacturers' authorized service facilities. The Company monitors service technicians' continued educational experience and fulfillment of requirements in order to evaluate the competence of its service technicians. All the Company's service technicians receive service bulletins, service technician tips and continued training seminars throughout their careers with the Company.
VENDORS
The Company's business is dependent upon close relationships with its vendors and its ability to purchase products from these vendors on competitive terms. During fiscal 1996, the Company's sales of Canon, Kodak, Konica, Minolta, Ricoh, Sharp and Toshiba equipment represented approximately 68% of its photocopier equipment revenue to retail customers. As a result of the Infotec Acquisition, the Company has increased its retail and wholesale revenues for Ricoh products. The facsimile equipment distributed by the Company is primarily its dex and Omnifax private label equipment which is imported from various Japanese and Korean manufacturers. Facsimile equipment is also purchased from various vendors including Canon, Konica, Ricoh and Sharp. The Company also relies on its photocopier and facsimile vendors for parts and supplies.
The Company conducts its business in reliance upon its continuing ability to purchase equipment, supplies, and parts from its current manufacturers pursuant to authorized retail dealer and wholesale agreements ("Authorized Manufacturer Agreements"). The Company's retail operations' primary Authorized Manufacturer Agreements are with Canon, Konica, Minolta, Sharp and Toshiba and, recently with Ricoh and Kodak. Such agreements are generally for one-year terms, cover only specific products, have specific territorial boundaries, and may be terminated with cause, and in some instances, without cause. Although Authorized Manufacturer Agreements are non-exclusive, they are generally limited to one or two authorized dealers within specific territorial boundaries. For additional information on the Kodak Agreement see "Products" above. The Company's wholesale operations' primary Authorized Manufacturer Agreements are with Copystar, Konica, Minolta and Sharp, and contain terms which are substantially similar to those of the Company's retail operations. Private label facsimile products are provided under purchase agreements with various manufacturers, and the terms of these agreements are similar to the agreements with the Company's photocopier vendors.
COMPETITION
The Company's business is highly competitive with a number of competitors in most geographic markets. The Company's retail operations are in direct competition with local and regional equipment suppliers and dealers, manufacturers, mass merchandisers, and wholesale clubs. Depending upon the customer, principal areas of competition may include: quality and speed of post-sales service support; availability of competitive products, parts and supplies; speed of delivery; product capability and performance; financing terms; and the availability of financing, leasing, or rental programs. The Company's wholesale operations are in direct competition with local, regional, and national distributors and manufacturers. Principal areas of competition for wholesale operations are availability of competitive products, price, speed of delivery, dealer support, centralized volume buying, product performance, and the availability of financing programs. The continued ability of the Company to offer competitive photocopiers in all segment areas is important in both retail and wholesale operations. See "Products". The Company also competes with other large competitors for acquisitions, particularly its principal competitor Alco Standard Corporation, and in many instances such competition can raise the price of an acquisition. Certain of the Company's competitors have greater resources than the Company.
EMPLOYEES
As of March 31, 1996, the Company employed approximately 10,500 persons, of which approximately 4,320 employees were devoted to service, and approximately 2,810 persons in the Company were devoted to sales. Of the remaining employees, 390 were devoted to training, management or other administrative positions at the corporate and regional administrative offices, and 2,980 were in various administrative and other support positions at other Company locations. Support provided by these employees at such locations includes receiving customer service calls and dispatching service technicians, contacting customers to obtain meter readings from customer copiers, renewing customer maintenance agreements, collecting accounts receivable, controlling inventory, and performing certain billing functions.
Some of Infotec's employees are subject to labor agreements with unions that establish rates of pay, hours of working, procedures for orderly settlement of disputes and other terms and conditions of employment. The
Company considers its employee relations to be good, and believes that it provides working conditions and wages which compare favorably to those of its competitors.
The Company relies heavily on its senior management, and the loss of certain Executive Officers could have an adverse effect on the Company. Additionally, the Company's ability to successfully grow and maintain its management and employee base, as well as to successfully integrate acquired company employees during periods of expansion, are extremely important to the Company's continued success.
TRADEMARKS AND SERVICE MARKS
The Company believes that its trademarks and service marks have gained significant recognition in the automated office equipment market and are important to its marketing efforts. The Company has registered various trademarks and service marks in certain markets. The trademarks "Danka", "dex", "Omnifax" and "Infotec" are among those registered marks which are viewed as important to the Company's ongoing business. The Company's policy is to continue to pursue registration of its marks whenever possible and to oppose vigorously any infringement of its proprietary rights. Depending on the jurisdiction, trademarks and service marks are valid as long as they are in use and/or their registrations are properly maintained, and they have not been found to have become generic. Registrations of trademarks and service marks in the United States can generally be renewed indefinitely as long as the trademarks and service marks are in use.
BACKLOG
The backlog of orders at March 31, 1996 and March 31, 1995 were not material.
ITEM 2.

ITEM 2. PROPERTIES
The Company's general policy is to lease, rather than own, its business locations. The Company leases numerous properties for administration, sales and service, and distribution functions. The terms vary under the respective leases and some contain a right of first refusal or an option to purchase the underlying real property and improvements. In general, the Company's lease agreements require it to pay its proportionate share of taxes, common area expenses, insurance, and related costs of such rental properties.
The Company leases its 35,000 square foot headquarters facility in St. Petersburg, Florida. In addition, the Company leases in excess of 400 properties throughout North America and Europe for its retail and wholesale operations.
The Company owns several smaller business locations, none of which are necessary to the success of the particular location's business. Generally, these properties were included among the assets obtained in certain acquisitions. In the future, the Company may dispose of such properties and enter into leases of properties which the Company believes may be more desirable or more centrally located.
Management believes that the properties which it occupies are, in general, suitable and adequate for the purposes for which they are utilized. Additional space will be occupied as necessary upon future expansion of operations.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party to which the Company believes will have a material adverse effect on its results of operations or its financial position.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.

ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The information required by this Item is incorporated herein by reference to the information under the heading "Market Prices of ADSs and Ordinary Shares" in the Company's Annual Report to Shareholders for the Year Ended March 31, 1996. See Exhibit 13 to this Report.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference to the information under the heading "Selected Consolidated Financial Data" in the Company's Annual Report to Shareholders for the Year Ended March 31, 1996. See Exhibit 13 to this Report.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference to the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the Year Ended March 31, 1996. See Exhibit 13 to this Report.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference to the information under the headings "Consolidated Statements of Earnings", "Consolidated Balance Sheets", "Consolidated Statements of Cash Flows", "Consolidated Statements of Shareholders' Equity" and "Notes to the Consolidated Financial Statements" in the Company's Annual Report to Shareholders for the Year Ended March 31, 1996. See Exhibit 13 to this Report. As is the case with any company, prior financial condition and results of operations are not necessarily indicative of future results.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the information under the headings "MANAGEMENT - Directors and Executive Officers" in the Company's definitive Proxy Statement to be used in connection with the Company's 1996 Annual Meeting of Shareholders, which has been filed with the Commission.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the information under the headings "MANAGEMENT - Compensation of Executive Officers and Directors" in the Company's definitive Proxy Statement to be used in connection with the Company's 1996 Annual Meeting of Shareholders, which has been filed with the Commission.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the information under the heading "MANAGEMENT - Security Ownership of Management and Others" in the Company's definitive Proxy Statement to be used in connection with the Company's 1996 Annual Meeting of Shareholders, which has been filed with the Commission.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the information under the heading "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the Company's definitive Proxy Statement to be used in connection with the Company's 1996 Annual Meeting of Shareholders, which has been filed with the Commission.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The following Financial Statements of the Registrant included in Part II, Item 8, of this Report are incorporated herein by reference as described in Item 8:
Consolidated Statements of Earnings - Years ended March 31, 1996, 1995 and 1994 Consolidated Balance Sheets - March 31, 1996 and 1995 Consolidated Statements of Cash Flows - Years ended March 31, 1996, 1995 and 1994 Consolidated Statements of Shareholders' Equity - Years ended March 31, 1996, 1995 and 1994 Notes to the Consolidated Financial Statements - Years ended March 31, 1996, 1995 and 1994 Independent Auditors' Report
2. The following Financial Statement Schedules of the Registrant are included in Item 14(d):
Independent Auditors' Report
II - Valuation and Qualifying Accounts
All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule, the information required is included in the financial statements and notes thereto or the schedule is not required or inapplicable under the related instructions.
3. Exhibit index:
* Document has heretofore been filed with the Commission and is incorporated by reference and made a part hereof.
(b) Reports on Form 8-K
On April 1, 1996, the Company filed a report on Form 8-K announcing that it had entered into a loan agreement providing a $400 million multicurrency credit facility with a consortium of banks replacing its previous principal credit facility.
On June 26, 1996, the Company filed a report on Form 8-K announcing expected results of operations for the first quarter of fiscal 1997 and the effects to the Company resulting from its change to a market based management approach, expansion of its sales division, and its increased commitment to the sale of color and higher segment products.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) to this Report are filed with this Report.
(d) Financial Statement Schedules
Report of Independent Auditors
II - Valuation and Qualifying Accounts
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules.
INDEPENDENT AUDITORS' REPORT
To the Members of Danka Business Systems PLC:
Under date of June 3, 1996, we reported on the consolidated balance sheets of Danka Business Systems PLC and subsidiaries as of March 31, 1996 and 1995, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996, as contained in the 1996 annual report to shareholders. These financial statements are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned financial statements, we also have audited the related financial statement schedule as listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Chartered Accountants Registered Auditors June 3, 1996 London England
DANKA BUSINESS SYSTEMS PLC
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
(1) Represents beginning balances of acquired companies.
(2) Represents accounts written off during the year, net of recoveries.
Note: Certain prior year amounts have been reclassified to conform to the current year presentation.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: June 24, 1996 DANKA BUSINESS SYSTEMS PLC -------------------------- (Registrant)
By: /s/ DANIEL M. DOYLE --------------------------------- Daniel M. Doyle, Chief Executive (Chief Executive Officer)
By: /s/ DAVID C. SNELL --------------------------------- David C. Snell, Finance Director (Chief Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Company and in the capacities indicated on June 24, 1996.