UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _______________
Commission file number 1-7725
I.R.S. Employer Identification Number 36-2687938
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COMDISCO, INC.
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(a Delaware Corporation)
6111 North River Road
Rosemont, Illinois 60018
Telephone: (847) 698-3000
Name of each Number of shares
Title of exchange on outstanding as of
each class which registered June 30, 1999
Common stock, New York Stock Exchange 153,139,853
$.10 par value Chicago Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No .
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<PAGE>
Comdisco, Inc. and Subsidiaries
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Earnings and Retained Earnings --
Three and Nine Months Ended June 30, 1999 and 1998.......................3
Consolidated Balance Sheets --
June 30, 1999 and September 30, 1998.....................................4
Consolidated Statements of Cash Flows --
Nine Months Ended June 30, 1999 and 1998.................................5
Notes to Consolidated Financial Statements.................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................16
SIGNATURES....................................................................18
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<PAGE>
PART I. FINANCIAL INFORMATION
Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
(in millions except per share data)
For the Three and Nine Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Leasing
Operating ................................. $ 443 $ 483 $ 1,481 $ 1,386
Direct financing .......................... 45 41 131 122
Sales-type ................................ 91 69 442 231
------- ------- ------- -------
Total leasing .......................... 579 593 2,054 1,739
Sales ........................................ 565 106 690 241
Technology services ....................... 133 107 376 321
Other ..................................... 25 11 55 37
------- ------- ------- -------
Total revenue .......................... 1,302 817 3,175 2,338
------- ------- ------- -------
Cost and expenses
Leasing
Operating ................................. 358 390 1,195 1,114
Sales-type ................................ 53 43 337 149
------- ------- ------- -------
Total leasing ......................... 411 433 1,532 1,263
Sales ........................................ 553 88 662 202
Technology services .......................... 112 91 317 267
Selling, general and administrative .......... 77 62 219 185
Interest ..................................... 82 81 253 245
Other ........................................ 11 -- 164 --
------- ------- ------- -------
Total costs and expenses .............. 1,246 755 3,147 2,162
------- ------- ------- -------
Earnings before income taxes ................. 56 62 28 176
Income taxes ................................. 20 22 10 63
------- ------- ------- -------
Net earnings before preferred dividends ..... 36 40 18 113
Preferred dividends .......................... -- -- -- (2)
------- ------- ------- -------
Net earnings to common stockholders ......... $ 36 $ 40 $ 18 $ 111
======= ======= ======= =======
Retained earnings at beginning of period ..... $ 1,075 $ 1,029 $ 1,101 $ 965
Net earnings to common stockholders ......... 36 40 18 111
Cash dividends paid on common stock .......... (4) (5) (12) (12)
------- ------- ------- -------
$ 1,107 $ 1,064 $ 1,107 $ 1,064
======= ======= ======= =======
Net earnings per common share:
Earnings per common share--basic ....... $ .23 $ .26 $ .12 $ .73
======= ======= ======= =======
Earnings per common share--diluted ..... $ .22 $ .24 $ .11 $ .68
======= ======= ======= =======
Common shares outstanding:
Average common shares--basic ............ 152 153 152 151
Average common shares--diluted .......... 164 164 162 163
See accompanying notes to consolidated financial statements
</TABLE>
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<PAGE>
Comdisco, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in millions except number of shares)
June 30, September 30,
1999 1998
(unaudited) (audited)
ASSETS
Cash and cash equivalents .......................... $ 39 $ 63
Cash - legally restricted .......................... 87 30
Receivables, net ................................... 760 340
Inventory of equipment ............................. 142 165
Leased assets:
Direct financing and sales-type .................. 2,027 1,779
Operating (net of accumulated depreciation) ...... 3,437 4,121
------- -------
Net leased assets ................................ 5,464 5,900
Buildings, furniture and other, net ................ 209 137
Other assets ....................................... 594 428
------- -------
$ 7,295 $ 7,063
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable ...................................... $ 1,007 $ 1,121
Term notes payable ................................. 550 550
Senior notes................ ....................... 3,252 2,768
Accounts payable ................................... 195 308
Income taxes ....................................... 320 333
Other liabilities .................................. 480 408
Discounted lease rentals ........................... 512 596
------- -------
6,316 6,084
------- -------
Stockholders' equity:
Preferred stock $.10 par value
Authorized 100,000,000 shares: ................. -- --
Common stock $.10 par value
Authorized 750,000,000 shares
issued 223,007,939 shares
(221,657,318 at September 30, 1998) ............ 22 22
Additional paid-in capital ........................ 295 257
Accumulated other comprehensive income ............ (13) (13)
Retained earnings ................................. 1,107 1,101
------- -------
1,411 1,367
Common stock held in treasury, at cost ............ (432) (388)
------- -------
Total stockholders' equity ...................... 979 979
------- -------
$ 7,295 $ 7,063
======= =======
See accompanying notes to consolidated financial statements.
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Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
Nine Months Ended June 30, 1999 and 1998
Increase (decrease) in cash and cash equivalents:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Operating lease and other leasing receipts ............................ $ 1,527 $ 1,500
Direct financing and sales-type leasing receipts ...................... 722 732
Sale of direct financing and sales-type receivables ................... -- 77
Leasing costs, primarily rentals paid ................................. (14) (15)
Sales ................................................................. 447 201
Sales costs ........................................................... (110) (105)
Technology services receipts .......................................... 357 298
Technology services costs ............................................. (271) (213)
Other revenue ......................................................... 69 37
Other expense ......................................................... (14) --
Selling, general and administrative expenses .......................... (220) (190)
Interest .............................................................. (254) (236)
Income taxes .......................................................... (1) (54)
------- -------
Net cash provided by operating activities .......................... 2,238 2,032
------- -------
Cash flows from investing activities:
Equipment purchased for leasing ....................................... (2,159) (2,235)
Investment in continuity and network services facilities .............. (71) (57)
Acquisition ........................................................... (45) --
Purchase of property and equipment .................................... (54) --
Other investing activities ............................................ (238) (35)
------- -------
Net cash used in investing activities .............................. (2,567) (2,327)
------- -------
Cash flows from financing activities:
Discounted lease proceeds ............................................. 274 223
Net increase (decrease) in notes payable .............................. (114) 168
Issuance of term notes and senior notes ............................... 1,145 692
Maturities and repurchases of term notes and senior notes ............ (644) (414)
Principal payments on secured debt .................................... (258) (320)
Decrease (increase) in legally restricted cash ....................... (57) 16
Preferred stock redeemed .............................................. -- (68)
Common stock purchased and placed in treasury ......................... (58) (84)
Dividends paid on common stock ........................................ (11) (11)
Stock Incentive Plan .................................................. -- 109
Dividends paid on preferred stock ..................................... -- (2)
Other ................................................................. 26 16
------- -------
Net cash provided by financing activities .......................... 305 325
------- -------
Net increase (decrease) in cash and cash equivalents ................... (24) 30
Cash and cash equivalents at beginning of period ........................ 63 37
------- -------
Cash and cash equivalents at end of period .............................. $ 39 $ 67
======= =======
</TABLE>
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<PAGE>
Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- CONTINUED
(in millions)
Nine Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings ....................................................... $ 18 $ 113
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Leasing costs, primarily
depreciation and amortization ................................ 1,517 1,249
Leasing revenue, primarily principal portion of
direct financing and sales-type lease rentals ................ 195 492
Sale of direct financing and sales-type receivables ............. -- 77
Cost of sales ................................................... 584 70
Sales revenue ................................................... (306) --
Technology services costs, primarily
depreciation and amortization ................................ 46 54
Interest ........................................................ -- 9
Income taxes .................................................... 9 9
Other expense ................................................... 150 --
Other - net ..................................................... 25 (41)
------- -------
Net cash provided by operating activities ........... $ 2,238 $ 2,032
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Comdisco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999 and 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended September 30, 1998.
The balance sheet at September 30, 1998 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended September 30, 1998.
Legally restricted cash represents cash and cash equivalents that are restricted
solely for use as collateral in secured borrowings and are not available to
other creditors.
Certain reclassifications have been made in the 1998 financial statements to
conform to the 1999 presentation.
2. Notes Receivable and Equity Investments
The Company provides loans to and invests in equity instruments of
privately-held companies in networking, communications, software and Internet
based industries. Loans are included in receivables on the balance sheet.
Investments are included in other assets and are accounted for under the cost
method. Interest income on loans is recorded in the statement of earnings as
direct financing income. For non-quoted investments, the Company's policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. The Company identifies and
records impairment losses on long-lived assets when events and circumstances
indicate that such assets might be impaired. At June 30, 1999, the Company had
approximately $267 million in loans and $38 million in equity instruments. At
September 30, 1998, the Company had approximately $65 million in loans and $22
million in equity instruments. During 1999, certain of these equity instruments
became available-for-sale securities when the investees completed initial public
offerings.
Notes receivable at June 30, 1999 includes $195 million note in connection with
the sale of the Company's mainframe leasing portfolio.
Available-for-sale securities are carried at fair value as of June 30, 1999,
based on quoted market prices, net of a market value discount to reflect the
remaining restrictions on transferability on certain of these securities. A net
unrealized holding gain of $35 million, net of deferred income taxes of $20
million, has been reflected in the equity section of the consolidated balance
sheet based on the change in market value of the available-for-sale securities
from dates of acquisition to June 30, 1999.
3. Interest-Bearing Liabilities
At June 30, 1999, the Company had $1.6 billion of available domestic and
international borrowing capacity under various lines of credit from commercial
banks and commercial paper facilities.
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<PAGE>
The average daily borrowings outstanding during the nine months ended June 30,
1999 were approximately $5.4 billion, with a related weighted average interest
rate of 6.24%. This compares to average daily borrowings during the first nine
months of fiscal 1998 of approximately $4.8 billion, with a related weighted
average interest rate of 6.59%.
4. Senior Notes
On October 9, 1998 the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission for a shelf offering of up to $1.5
billion of senior debt securities on terms to be set at the time of each sale
(the "1998 Shelf"). On January 19, 1999, the Company designated $600 million of
senior debt securities as "Medium-Term Notes, Series H" under the 1998 Shelf, of
which $549 million remain available for issuance as of June 30, 1999. Pursuant
to the 1998 Shelf, the Company, on January 26, 1999, also issued $350 million of
6.0% Senior Notes due January 30, 2002, and, on April 21, 1999, $350 million of
5.95% Notes due April 30, 2002. The Company plans to continue to be active in
issuing senior debt during fiscal 1999, primarily to support the anticipated
growth of the leased assets and, where appropriate, to refinance maturities of
interest-bearing liabilities.
5. Stockholders' Equity
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130-
Reporting Comprehensive Income, which requires presentation of comprehensive
earnings (net earnings (loss) plus all changes in net assets from non-owner
sources) and its components in the financial statements.
Other comprehensive earnings (loss) consists of the following:
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Foreign currency translation adjustments .... $ (10) $ 1 $ (35) $ (12)
Change in net unrealized gains and
losses on marketable securities ............ 35 -- 54 --
Income tax .................................. 13 -- 19 --
----- ----- ----- -----
Other comprehensive (loss) .................. 12 1 -- (12)
----- ----- ----- -----
Net earnings ................................ 36 40 18 111
----- ----- ----- -----
Total comprehensive income .................. $ 48 $ 41 $ 18 $ 99
===== ===== ===== =====
On July 27, 1999 the Board of Directors declared a quarterly cash dividend of
$.025 per common share to be paid on September 13, 1999 to holders of record on
August 13, 1999.
During the quarter ended June 30, 1999, the Company purchased 1,233,700 shares
of its common stock at an aggregate cost of approximately $25 million. During
the nine months ended June 30, 1999, the Company purchased 3,540,900 shares of
its common stock at an aggregate cost of approximately $58 million.
On July 13, 1998 the Company redeemed all outstanding shares of the Series B
Preferred Stock (824,000 shares) at the redemption price of $25, plus accrued
and unpaid dividends.
On February 2, 1998, the Company announced that 106 senior managers of the
Company purchased over six million shares of the Company's common stock for
approximately $109 million. Under the voluntary program, the senior managers
took out full recourse, personal loans to purchase the shares. The Company has
guaranteed repayment of the loans in the event of default. The purchased shares
represented over 4% of the then current total shares outstanding.
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<PAGE>
6. Acquisitions and Sale of Assets
On February 28, 1999, the Company completed the acquisition of Prism
Communications Services, Inc. for a cash purchase price of approximately $53
million, of which approximately $45 million was paid in fiscal 1999. Prism is an
integrated communications provider of dedicated high-speed connectivity and
other services to small businesses, telecommuters and other power users.
The Prism acquisition has been accounted for by the purchase method of
accounting and, accordingly, the results of operations of Prism from February
28, 1999 are included in the accompanying consolidated financial statements.
Assets acquired and liabilities assumed have been recorded at their estimated
fair values, and are subject to adjustment when additional information
concerning asset and liability valuations is finalized.
The excess of cost over the estimated fair value of net assets acquired was
approximately $61 million and has been recorded as goodwill, which is being
amortized on a straight-line basis over 20 years. The following selected,
unaudited pro forma data is presented to provide a summary of the combined
results of the Company and Prism as if the acquisition had been made as of the
beginning of fiscal 1999. The effect of the acquisition on the nine months ended
June 30, 1998 is not material and, accordingly, has been excluded from the pro
forma presentation (in millions except per share data):
Nine Months ended
June 30, 1999
-----------------
Total revenue $3,176
Net loss (4)
Net loss per common share
Basic $(0.03)
Diluted $(0.03)
The selected, unaudited pro forma data is for informational purposes only and
may not necessarily reflect the results of operations had the companies operated
as one for the three-and nine-month periods ending June 30, 1999. No effect has
been given for synergies, if any, that may be realized through the acquisition.
In addition, the Company expects to expand its network within existing and into
new regions, which will required significant capital expenditures as well as
sales and marketing expenditures. Accordingly, the Company expects to incur
substantial and increasing operating expenses and net losses from Prism
operations for at least the next few years.
On March 24, 1999, the Company announced a major shift in corporate strategy,
including focusing on high-margin service businesses and shedding low-margin
businesses, including its mainframe leasing and vendor lease portfolios and its
medical refurbishing business. In conjunction with this repositioning, the
Company recorded a one-time pre-tax charge of $150 million, $96 million after
tax, or approximately $0.63 per share, in the quarter ended March 31, 1999. The
components of the pre-tax charge included $100 million associated with the
Company's plan to exit the mainframe residual leasing business, $20 million to
exit the medical refurbishing business and $30 million associated with the
realignment of the Company's services businesses. On May 3, 1999, the Company
announced it had reached an agreement in principle to sell its mainframe
computer leasing portfolio. The sale of the mainframe portfolio and the sale of
the medical refurbishing business were both concluded in the fiscal quarter
ended June 30, 1999.
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<PAGE>
Comdisco, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements
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Certain statements herein constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. The
words and phrases "looking ahead," "we are confident," "should be," "will be,"
"predicted," "believe," "expect" and "anticipate" and similar expressions
identify forward-looking statements. These forward-looking statements reflect
the company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating to the
Company's operations and business environment which may cause the actual results
of the Company to be materially different from any future results expressed or
implied by such forward-looking statements. Examples of such uncertainties
include, but are not limited to, those risk factors set forth generally
throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations and specifically under "Risk Factors that May Affect
Future Results" and should be read in conjunction with the Company's Annual
Report on Form 10-K dated December 20, 1998 and filed with the Securities and
Exchange Commission on December 30, 1998, under Business-Forward-Looking
Information which is incorporated herein by reference, and the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
Net Earnings
- ------------
Net earnings available to common stockholders (hereinafter referred to as "net
earnings") for the three months ended June 30, 1999 were $36 million, or $.22
per common share, as compared to $40 million, or $.24 per common share, for the
three months ended June 30, 1998. For the quarter ended June 30, 1999, Prism (as
defined and described in "Business") reduced net earnings by $7 million, or $.04
per diluted common share. Excluding the impact of Prism, the increase in net
earnings in the three months ended June 30, 1999 compared to the year earlier
period is due to remarketing activities.
Net earnings for the nine months ended June 30, 1999, were $18 million, or $.11
per common share, as compared to $111 million, or $.68 per common share, for the
year earlier period. The decrease in net earnings for the nine months ended June
30, 1999 compared to the year earlier period was due to $150 million of pre-tax
charges related to the divestiture of low-margin businesses and the realignment
of the Company's service businesses (see "Business" for a discussion of this
pre-tax charge) and Prism, which reduced net earnings by $9 million, or .05 per
diluted common share. Excluding the charges and Prism, net earnings for the nine
months ended June 30, 1999 were $123 million, or $.76 per diluted common share.
Excluding the charges and Prism, the increase in net earnings in the nine months
ended June 30, 1999 compared to the year earlier period is due to remarketing
activities.
Business
- --------
On March 24, 1999, the Company announced a major shift in corporate strategy,
including focusing on high-margin service businesses and shedding low-margin
businesses, including its mainframe leasing portfolio and medical refurbishing
business.
The Company finalized the acquisition of Prism Communication Services, Inc.
("Prism") during the quarter ended March 31, 1999. Prism is building out a
high-speed, always-on digital network, which will provide customers with
leading-edge connectivity. Prism markets its services to enterprise customers to
provide employees with high-speed remote access to their Local Area Network to
improve employee productivity and reduce operating costs, and to consumer end
users. Prism's services are provided over standard copper telephone lines at
speeds significantly faster that the speed available through a 56.6 Kilobits per
second modem. Prism introduced its services in the New York City area in January
1999.
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<PAGE>
The industry in which the Company operates is evolving, and the Company's
business is becoming more service oriented, with the business driven by the
Company's service capabilities. Accordingly, Comdisco has realigned to focus on
technology services, which include continuity, network, lifecycle management
services, and Prism, and on global leasing businesses in historically
high-margin areas such as electronics, communications, medical, laboratory and
scientific and venture leasing.
In conjunction with its repositioning, the Company recorded a one-time pre-tax
charge of $150 million, $96 million after tax, or approximately $0.63 per share,
in the quarter ended March 31, 1999. The components of this pretax charge
include $100 million associated with the Company's plans to exit the mainframe
residual leasing business, $20 million to exit the medical refurbishing business
and $30 million associated with a realignment of the service businesses.. On May
3, 1999, the Company announced it had reached an agreement in principle to sell
its mainframe computer leasing portfolio (hereinafter referred to as the
"Sale"). The Sale and the sale of the medical refurbishing business were both
concluded in the fiscal quarter ended June 30, 1999.
Cost of equipment placed on lease was $657 million during the quarter ended June
30, 1999. This compares to cost of equipment placed on lease of $905 million and
$689 million during the quarters ended June 30, 1998 and March 31, 1999,
respectively. During the nine months ended June 30, 1999 and 1998, cost of
equipment placed on lease totaled $2.1 billion and $2.4 billion, respectively.
Diversified technology services had worldwide cost of equipment placed on lease
of $88 million and $398 million in the three and nine months ended June 30,
1999, respectively, compared to $282 million and $628 million in the year
earlier periods. See below for a discussion of remarketing and "Risk Factors
that May Affect Future Results" for a discussion of leasing.
In addition to originating new equipment lease financing, the Company remarkets
used equipment from its lease portfolio. Remarketing is the sale or re-lease of
equipment either at original lease termination or during the original lease.
These transactions may be with existing lessees or, when equipment is returned,
with new customers. Remarketing activities are comprised of earnings from
follow-on leases and gross profit on equipment sales. Remarketing activity, an
important factor in quarterly earnings, increased in the current quarter as
compared to both the second quarter of fiscal 1999 and the third quarter of
fiscal 1998. Remarketing activity will continue to be an important contributor
to quarterly earnings in the near and long term because of the size of the
Company's lease portfolio, net of the mainframe equipment, and in the residual
leasing business for communication, electronics, medical, laboratory and
scientific equipment.
The Company's technology services attained record revenues in the third quarter
of fiscal 1999, however, higher costs, primarily associated with higher
personnel costs and continued investment in new service development, negatively
impacted margins on the Company's technology services business. Costs associated
with the development and implementation of the Company's network services
infrastructure had a negative impact on the network services earnings
contribution. Technology services had pretax earnings of $21 million in the
quarter ended June 30, 1999. This compares to pretax earnings of $16 million in
the quarter ended June 30, 1998 and $20 million in the quarter ended March 31,
1999. Revenue from continuity contracts, which is recognized monthly during the
noncancelable continuity contract and is therefore recurring and predictable,
was approximately $82 million, $72 million and $80 million during the three
months ended June 30, 1999 and 1998, and March 30, 1999, respectively,
representing approximately 62%, 67% and 64% of technology services revenue.
Based on transactions in process at June 30, 1999, the Company anticipates its
network services as well as its desktop management services should have a
positive impact on the Company's pretax earnings in the fourth quarter of fiscal
1999. Included in the $150 million pretax charge (as discussed above), is $30
million associated with the realignment of the Company's service businesses,
including costs associated with the relocation of its network management centers
and consolidation and reconfiguration of some of its continuity services
facilities worldwide. See "Risk Factors That May Affect Future Results" for a
discussion of the factors that may affect earnings contributions from services.
Three months ended June 30, 1999
- --------------------------------
Total revenue for the three months ended June 30, 1999 was $1,302 million
compared to $817 million in the prior year quarter and $949 million in the
quarter ended March 31, 1999. The increase in the current quarter compared to
the prior year quarter was primarily due to the Sale, which increased sales
revenue by $485 million and decreased leasing revenue by $60 million. Total
leasing revenue of $579 million for the quarter ended June 30, 1999 represented
a decrease of 2% compared to the year earlier period. Sales-type revenue
increased 32% compared to the year earlier quarter, reflecting the Company's
emphasis on and the importance of remarketing activities.
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<PAGE>
Operating lease revenue minus operating lease cost was $85 million, or 19.2% of
operating lease revenue (collectively, the "Operating Lease Margin"), and $93
million, or 19.3% of operating lease revenue, in the three months ended June 30,
1999 and 1998, respectively. The Operating Lease Margin was $100 million, or
19.7% in the quarter ended March 31, 1999. The Company expects the Operating
Lease Margin to be at approximately current levels throughout fiscal 1999,
depending on the mix of equipment leased and product announcements by
manufacturers. The decrease in operating lease revenue minus operating lease
cost in the quarter ended June 30, 1999 was due to the Sale. See "Risk Factors
that May Affect Future Results" for a discussion of factors that could affect
the Operating Lease Margin.
Sales, which includes remarketing by selling and buy/sell activities, for the
three months ended June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -------------------------------
Revenue Expense Margin Revenue Expense Margin
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales..................................... $ 62 $ 50 19% $ 106 $ 88 17%
Sale of mainframe portfolio............... 485 485 -- -- -- --
Sale of medical refurbishment business.... 18 18 -- -- -- --
----- ----- -- ----- ----- --
$ 565 $ 553 2% $ 106 $ 88 17%
===== ===== == ===== ===== ==
</TABLE>
Revenue from technology services for the three months ended June 30, 1999 and
1998 was $133 million and $107 million, respectively, a 24% increase. Cost of
technology services for the three months ended June 30, 1999 and 1998 was $112
million and $91 million, respectively, a 23% increase.
Other revenue for the three months ended June 30, 1999 and 1998 was $25 million
and $11 million, respectively. Revenue from the sale of equity positions held as
a result of the Company's lease and other financing transactions with
early-stage high technology companies was $15 million and $6 million in the
three months ended June 30, 1999 and 1998, respectively. In addition, in the
third quarter of fiscal 1999, the Company recorded approximately $5 million of
gains from the sale of equity investments owned by the Company (see Note 2 of
Notes to Consolidated Financial Statements).
Total costs and expenses for the quarter ended June 30, 1999 were $1,246 million
compared to $755 million in the prior year period. The increase in total costs
and expenses is primarily due to the Sale, offset by decreased leasing costs,
primarily related to decreased operating lease revenue resulting from the Sale.
Selling, general and administrative expenses totaled $77 million in the quarter
ended June 30, 1999 compared to $62 million in the quarter ended June 30, 1998
and $73 million in the quarter ended March 31, 1999. The principal reason for
the increase in the current year quarter compared to the year earlier period is
increased personnel costs, primarily in marketing and related support services
and in data processing. The Company expects selling, general and administrative
expenses to increase throughout fiscal 1999 as the Company continues to invest
in its infrastructure to increase revenue and support the increase in business
volume.
Interest expense for the three months ended June 30, 1999 totaled $82 million in
comparison to $81 million in the quarter ended June 30, 1998 and $87 million in
the quarter ended March 31, 1999. The decrease in the current quarter compared
to the second quarter of fiscal 1999 is due to lower average daily borrowings
resulting from decreased leased assets resulting from the Sale.
-12-
<PAGE>
Prism expenses included in other expense for the three months ended June 30,
1999 totaled $11 million. In connection with the expansion of Prism services
within existing regions and into new regions, the Company expects to
significantly increase its capital expenditures, as well as its sales and
marketing expenditures, to deploy its networks and support additional end-users
in those regions. Accordingly, the Company expects to incur substantial and
increasing operating expenses and net losses for at least the next several
years.
Nine Months Ended June 30, 1999
- -------------------------------
Total revenue was $3.2 billion and $2.3 billion for the nine months ended June
30, 1999 and 1998, respectively. Total leasing revenue was $2.1 billion and $1.7
billion for the nine months ended June 30, 1999 and 1998, respectively. The
increase in the current period compared to the prior year period was primarily
due to the Sale, which increased sales revenue by $485 million and decreased
leasing revenue by $60 million. Sales-type revenue increased 91% compared to the
year earlier quarter, reflecting the Company's emphasis on and the importance of
remarketing activities.
Sales for the nine months ended June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -------------------------------
Revenue Expense Margin Revenue Expense Margin
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales..................................... $ 187 $ 159 15% $ 241 $ 202 16%
Sale of mainframe portfolio............... 485 485 -- -- -- --
Sale of medical refurbishment business.... 18 18 -- -- -- --
----- ----- -- ----- ----- --
$ 690 $ 662 4% $ 241 $ 202 16%
===== ===== == ===== ===== ==
</TABLE>
Other revenue for the nine months ended June 30, 1999 and 1998 was $55 million
and $37 million, respectively. Revenue from the sale of equity positions held as
a result of the Company's lease and other financing transactions with
early-stage high technology companies was $32 million and $18 million in the
nine months ended June 30, 1999 and 1999, respectively.
The Operating Lease Margin was $286 million, or 19.3% of operating lease
revenue, and $272 million, or 19.6% of operating lease revenue, in the nine
months ended June 30, 1999 and 1998, respectively. The increase in lease volume,
particularly during the last twelve months, coupled with lower margins on large
systems transactions, has resulted in lower margins on leasing, particularly for
operating leases.
Selling, general and administrative expenses totaled $219 million and $185
million for the nine months ended June 30, 1999 and 1998, respectively. The
principal reason for the increase in the current year period compared to the
year earlier period is increased personnel costs, primarily in marketing and
related support services and in data processing.
Interest expense was $253 million for the nine months ended June 30, 1999 as
compared to $245 million for the year earlier period. The increase in interest
expense is primarily due to higher average daily borrowings offset by lower
interest rates (see Note 3 of Notes to Consolidated Financial Statements).
Other expense totaled $164 million in fiscal 1999. In the second quarter of
fiscal 1999, the Company recorded a one-time pre-tax charge of $150 million, $96
million after tax, or approximately $0.63 per share, in conjunction with its
repositioning (see "Business" for a discussion of this charge). Other expense
also includes Prism expenses since the acquisition date totaling $14 million.
Financial Condition
- -------------------
The Company's current financial resources and estimated cash flows from
operations are considered adequate to fund anticipated future growth and
operating requirements. The Company utilizes a variety of financial instruments
to fund its short and long-term needs.
-13-
<PAGE>
Capital expenditures for equipment are generally financed by cash provided by
operating activities, recourse debt, or by assigning the noncancelable lease
rentals to various financial institutions at fixed interest rates on a
nonrecourse basis. Cash provided by operating activities for the nine months
ended June 30, 1999 and 1998 was $2.2 billion and $2.0 billion, respectively.
Cash provided by operations has been used to finance equipment purchases and,
accordingly, had a positive impact on the level of borrowing required to support
the Company's investment in its lease portfolio. The Company expects this trend
to continue, with cash flow from leasing and remarketing reinvested in the
equipment portfolio.
Risk Factors That May Affect Future Results
- -------------------------------------------
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual revenues and results of operations could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in the following risk
factors and elsewhere in this Report.
Potential Fluctuations in Operating Results: The Company's operating results are
subject to quarterly fluctuations resulting from a variety of factors, including
earnings contributions from remarketing activities, product announcements by
manufacturers, economic conditions and variations in the financial mix of leases
written. The financial mix of leases written is a result of a combination of
factors, including, but not limited to, changes in customer demands and/or
requirements, new product announcements, price changes, changes in delivery
dates, changes in maintenance policies and the pricing policies of equipment
manufacturers, and price competition from other lessors and finance companies.
Earnings Contributions from Leasing: Lower margins on large systems transactions
(mainframes and related peripherals, including DASD and tape drives) has
resulted in lower margins on leasing. Although the Company has sold its
mainframe residual leasing business, which may have a positive impact on leasing
margins in future quarters, the market for leasing and services is characterized
by rapid technological developments, evolving customer demands and frequent new
product announcements and enhancements. Failure to anticipate or adapt to new
technological developments or to recognize changing market conditions could
adversely affect the Company's business, including its lease volume, leasing
revenue and earnings contributions from leasing.
Furthermore, notwithstanding the sale of the mainframe lease portfolio,
remarketing has been and will continue to be an important factor in determining
quarterly earnings. To meet earnings goals for fiscal 1999, remarketing
contributions, primarily for the Company's Diversified Technology Services
division and for its communications and desktop equipment leasing businesses,
have to be at or above the level achieved in fiscal 1998. Quarterly operating
results depend substantially upon the remarketing transactions within the
quarter, which are difficult to forecast accurately. While the Company is
devoting resources to its remarketing activities, there can be no assurance that
the Company will achieve the appropriate level of activity necessary to meet or
match the Company's prior and desired operating results.
The costs to address the Year 2000 issues may have a negative impact on
equipment volume in fiscal 1999 if customers defer other IT projects due to the
Year 2000 efforts or if Year 2000 remediation costs increase as a percentage of
the total IT budget, thereby reducing capital expenditures on new technology.
Earnings Contributions from Services: As a result of the evolving nature of its
services business, particularly the emerging desktop management and managed
network services, the Company has limited meaningful historical data in which to
base its planned operating expenses. Accordingly, a significant portion of the
company's expense levels (investment in continuity facilities and hardware,
consultants, experts and back office personnel) are based in part on its
expectations as to future services revenues, and are, to a large extent, fixed.
Conversely, the Company's revenue base has become more diverse with the growth
of other technology services revenue, and therefore less recurring and less
predictable than in prior years. To attain its services earnings contribution
goals for fiscal 1999, the Company will have to meet its obligations under the
agreements underlying its transactions in process at June 30, 1999, (also
referred to by the Company as its "sales backlog"), expand its contract
subscription base (through new contract signings and contract renewals),
increase its revenues from other technology services, develop, promote and sell
additional service products, such as life cycle management services, advanced
recovery services, availability options, remote computing services and web
hosting, and contain costs. In these and other services, the Company must
successfully compete with organizations offering similar services. The Company's
ability to obtain new business and realize revenue on its sales backlog depends
on its ability to anticipate technological changes, develop services to meet
customer requirements and achieve delivery of services that meet customer
requirements. In addition, there can be no assurance that the Company will be
able to maintain and/or increase its margins on technology services in fiscal
1999.
-14-
<PAGE>
One of the impacts of the Company's changing business model is the lengthening
of the sales cycle--the length of time between initial sales contact and final
delivery of contracts--as compared to its traditional leasing business. This
increase in sales cycle results in an increase in negotiations in progress which
ultimately impacts the timing of revenue, earnings and volume recognition.
Prism: Prism is a start up company that has incurred operating losses since
inception and the Company expects that Prism's operating losses will continue to
increase as it introduces its services throughout New York City and the
Northeast corridor. In addition, Prism will require additional capital to
support its data network, to expand its services, to increase its sales and
marketing efforts and to support the company's growth. To the extent that
revenues do not grow at anticipated rates or that increases in such operating
expenses precede or are not subsequently followed by commensurate increases in
revenues, or that the Company is unable to adjust operating expense levels
and/or capital expenditures accordingly, the Company's business, results of
operations and financial condition could be significantly affected. There can be
no assurance that in the future Prism will be profitable on a quarterly or
annual basis.
Economic Conditions: With respect to economic conditions, a recession can cause
customers to put off new investments and increase the company's bad debt
experience.
Other Factors: The Company has made loans to and equity investments in various
privately-held companies. These companies typically are in an early stage of
development and may be expected to incur substantial losses. Any investments in
such companies may not result in any return, nor can there be any assurance as
to the timing of any such return, or that the Company may lose its entire
investment and/or principal balance.
Other uncertainties include continued business conditions, trend of movement to
client/server environment, competition, including competition from other
technology service providers, reductions in technology budgets and related
spending plans, price competition from other technology service providers, and
the Year 2000 readiness of the company's customers, suppliers and business
partners.
Due to all of the foregoing factors, in some future quarter the Company's
operating results may fall below the expectations of securities analysts and
investors. In such an event, the trading price of the Company's Common Stock
would likely be materially and adversely affected.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, further
events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk during the six
months ended March 31, 1999. For additional information, refer to page 37 of the
Company's Annual Report to Stockholders for the fiscal year ended September 30,
1998.
-15-
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Description of Exhibit
----------- -------------------------------
3.01 Restated Certificate of Incorporation of Registrant dated
February 12, 1988
Incorporated by reference to Exhibit 4.1 filed
with the Company's Registration Statement on
Forms S-8 and S-3, File No. 33-20715, filed March
8, 1988.
3.02 Certificate of Amendment of Restated Certificate of
Incorporation dated February 3, 1998
Incorporated by reference to Exhibit 3.02 filed
with the Company's Annual Report for the year
ended September 30, 1998 on Form 10-K, File No.
1-7725.
3.03 By-Laws of Registrant dated November 4, 1997
Incorporated by reference to Exhibit 3.1 filed
with the Company's Current Report on Form 8-K
dated November 12, 1997, as filed with the
Commission November 14, 1997 File No. 1-7725.
4.01 Rights Agreement, dated as of November 17, 1997, between
the Registrant and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent, which includes as Exhibit A
thereto the Certificate of Designation, Preferences and
Right of Series C Junior Participating Preferred Stock
and as Exhibit B thereto the Form of Rights Certificate.
Incorporated by reference to Exhibit 4.1 filed
with the Company's Current Report on Form 8-K
dated November 5, 1997, as filed with the
Commission November 6, 1997 File No. 1-7725.
4.02 Indenture Agreement between Registrant and The Fuji Bank
and Trust Company, as Trustee, dated as of December 15,
1998
Incorporated by reference to Exhibit 4.1 filed
with the Company's Current Report on Form 8-K
dated January 19, 1999, as filed with the
Commission on January 21, 1999, File No. 1-7725,
the copy of the Indenture dated as of December 15
1998 between the Registrant and The Fuji Bank
and Trust Company, as Trustee (said Indenture
defines certain rights of security holders).
11.00 Computation of Earnings Per Share
12.00 Ratio of Earnings to Fixed Charges
27.00 Financial Data Schedule
99.00 Year 2000 Readiness Disclosure
Incorporated by reference to the Company's
Current Report on Form 8-K filed April 16, 1999,
File No. 1-7725.
-16-
<PAGE>
b) Reports on Form 8-K:
None.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
COMDISCO, INC.
Registrant
Date: June 29, 1999 /s/John J. Vosicky
-------------------
John J. Vosickey
Executive Vice President
and Chief Financial Officer
-18-
Comdisco, Inc. and Subsidiaries Exhibit 11.00
COMPUTATION OF EARNINGS PER COMMON SHARE
(in millions except per share data)
Average shares used in computing net earnings per common and common equivalent
share were as follows:
Three Months Nine Months
Ended Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
Average shares outstanding--basic....... 152 153 152 151
Effect of dilutive options.............. 12 11 10 12
---- ---- ---- ----
Average shares outstanding--diluted..... 164 164 162 163
==== ==== ==== ====
Net earnings available to
common stockholders................. $ 36 $ 40 $ 18 $111
==== ==== ==== ====
Net earnings per common share:
Basic.............................. $.23 $.26 $.12 $.73
==== ==== ==== ====
Diluted............................ $.22 $.24 $.11 $.68
==== ==== ==== ====
-19-
Comdisco, Inc. and
Subsidiaries Exhibit 12.00
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
Nine months ended
June 30 For the years ended September 30,
------- ---------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges
Interest expense 1 ....................... $256 $247 $329 $301 $267 $278 $266
Approximate portion of
rental expense representative
of an interest factor .................. 4 4 5 4 7 11 13
---- ---- ---- ---- ---- ---- ----
Fixed charges ............................. 260 251 334 305 274 289 279
Earnings from continuing operations
before income taxes, extraordinary
item, and cumulative
effect of change in accounting principle,
net of preferred stock dividends ......... 28 174 238 203 176 160 80
---- ---- ---- ---- ---- ---- ----
Earnings from continuing operations
before income taxes, extraordinary
item, and cumulative effect of change
in accounting principle, net of
preferred stock dividends,
plus fixed charges ....................... $288 $425 $572 $508 $450 $449 $359
==== ==== ==== ==== ==== ==== ====
Ratio of earnings to fixed charges ........ 1.11 1.69 1.71 1.67 1.64 1.55 1.29
==== ==== ==== ==== ==== ==== ====
Rental expense:
Equipment subleases ..................... $ 3 $ 4 $ 5 $ 6 $ 14 $ 22 $ 30
Office space, furniture, etc ............ 10 7 9 7 8 10 8
---- ---- ---- ---- ---- ---- ----
Total ................................ $ 13 $ 11 $ 14 $ 13 $ 22 $ 32 $ 38
==== ==== ==== ==== ==== ==== ====
1/3 of rental expense ................ $ 4 $ 4 $ 5 $ 4 $ 7 $ 11 $ 13
==== ==== ==== ==== ==== ==== ====
-20-
<FN>
<F1>1 Includes interest expense incurred by technology services and included in
technology services expenses on the statements of earnings.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 and is
qualified in its entirety by reference to such financial statments.
</LEGEND>
<CIK> 0000722487
<NAME> Comdisco, Inc.
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> Oct-01-1998
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1.00000
<CASH> 39
<SECURITIES> 98
<RECEIVABLES> 790
<ALLOWANCES> 30
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<BONDS> 3,252
<COMMON> 22
0
0
<OTHER-SE> 957
<TOTAL-LIABILITY-AND-EQUITY> 7,295
<SALES> 2,054
<TOTAL-REVENUES> 3,175
<CGS> 1,532
<TOTAL-COSTS> 2,744
<OTHER-EXPENSES> 150
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18
<EPS-BASIC> 0.120
<EPS-DILUTED> 0.120
</TABLE>
