SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section
13 or 15(d) of the Securities
Exchange Act of 1934 For the
fiscal year ended September 30,
1999
or
[ ] Transition Report Pursuant to Section 13 of
15(d) of the Securities Exchange Act of 1934
For the transition period from
___________________ to ________________
Commission file number 1-7725
COMDISCO, INC.
(a Delaware Corporation)
6111 North River Road
Rosemont, Illinois 60018
Telephone (847) 698-3000
I.R.S. Employer Identification Number 36-2687938
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLES OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
$.10 par value Chicago Stock Exchange, Inc.
Common Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange, Inc.
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.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by nonaffiliates of the
Registrant as of December 1, 1999 was approximately $2,560,000,000. For purposes
of the foregoing calculation only, all directors and executive officers of the
registrant have been deemed affiliates. As of September 30, 1998, there were
152,100,362 shares of the Registrant's common stock, $.10 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Annual Report to Stockholders for the fiscal year
ended September 30, 1999 are incorporated by reference into Parts I
and II.
2. Portions of Comdisco, Inc.'s definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on January 25, 2000 filed
within 120 days of fiscal year end are incorporated by reference
into Part III.
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Comdisco, Inc. and Subsidiaries
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PART I.
Item 1. Business:
Overview............................................................................. 3
Investment Considerations............................................................ 4
Leasing and Services................................................................. 8
Ventures ............................................................................ 12
Prism Communication Services, Inc. .................................................. 17
Item 2. Properties .............................................................................. 29
Item 3. Legal Proceedings ....................................................................... 30
Item 4. Submission of Matters to a Vote of Security Holders...................................... 30
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................ 31
Item 6. Selected Financial Data.................................................................. 32
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 32
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 32
Item 8. Financial Statements and Supplementary Data.............................................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..... 32
PART III.
Item 10. Directors and Executive Officers of Registrant........................................... 33
Item 11. Executive Compensation .................................................................. 33
Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 33
Item 13. Certain Relationships and Related Transactions........................................... 33
PART IV.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K........................... 34
SIGNATURES............................................................................................. 35
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE......................................... 36
INDEX TO EXHIBITS...................................................................................... 39
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PART I.
Item 1. Business
A. GENERAL DEVELOPMENT OF BUSINESS
OVERVIEW
Comdisco, Inc. (with its subsidiaries, the "Company" or "Comdisco") provides
global technology services to help its customers maximize technology
functionality, predictability and availability. The Company provides equipment
leasing, continuity, managed network services, and desktop management solutions.
These services are designed to provide integrated, long-term, cost effective
asset and technological planning as well as data and voice availability and
recovery to users of high technology equipment. Through its subsidiary, Prism
Communication Services, Inc. ("Prism"), Comdisco is developing a high-speed,
always-on digital network, which will provide customers with leading-edge
connectivity. Through its Ventures group, Comdisco provides equipment leasing
and other financing to venture capital backed start-up companies. Additional
information about each of the business groups is include later in this section.
The executive offices of the Company are located in the Chicago area, at 6111
North River Road, Rosemont, Illinois 60018, and its telephone number is (847)
698-3000.
GENERAL DEVELOPMENT OF BUSINESS
The Company was founded in 1969 and incorporated in Delaware in 1971. Since its
incorporation, the Company's business, its markets and the services it offers
and the way it conducts its business has changed significantly and is expected
to continue to change and evolve. These changes are primarily the result of
rapid changes in technology (including declining prices, manufacturer
consolidations and the rise of new industries such as telecommunications), the
rise of new dominant technologies (such as the Internet) and their related
impact on customers' needs and requirements. Initially, Comdisco was engaged
primarily in the procurement and placement of new and used computer equipment,
principally mainframe and related peripherials. Comdisco developed disaster
recovery and contingency planning services in 1980. In the mid-1980's the
company expanded its operations to include the leasing of non-computer equipment
(office equipment, PBX, point-of-sale, and other high-technology equipment),
eventually adding healthcare, communications, semiconductor manufacturing and
other industry specific equipment leasing, remarketing and other services. In
1987, Comdisco formed Comdisco Ventures. Comdisco Ventures has grown
significantly in the last three fiscal years and has become a significant and
material contributor to the Company's earnings.
On March 24, 1999, the Company announced a major shift in corporate strategy,
including its intent to focus on high-margin service businesses and shed
low-margin businesses, such as its mainframe leasing portfolio and medical
refurbishing business. In conjunction with its repositioning, the Company
recorded a one-time pre-tax charge of $150 million, $96 million after tax, or
approximately $0.59 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. The Company completed the sale of its
mainframe computer leasing portfolio and the sale of the medical refurbishing
business in the fiscal quarter ended June 30, 1999. In addition to these sales,
the Company completed the sale of substantially its entire vendor lease
portfolio in September, 1999.
The Company finalized the acquisition of Prism during the quarter ended March
31, 1999.
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The industry in which the company operates is in a state of constant change,
and, as part of this environment, 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, ventures, Prism, and on global leasing businesses in historically
high-margin areas such as electronics, communications, medical, laboratory and
scientific.
INVESTMENT CONSIDERATIONS
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Certain statements herein and in the future filings by the Company with the
Securities and Exchange Commission and in the company's written and oral
statements made by or with the approval of an authorized executive officer
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," "is
confident," "should be," "will" "predicted," "believe," "plan," "intend,"
"estimates," "likely," "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 affect the accuracy of forward-looking statements and
cause the actual results of the company to be materially different from any
future results expressed or implied by such forward-looking statements.
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 "Risk Factors." As a result of
these and other 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. Many of the factors that will determine
results of operations are beyond the Company's ability to control or predict.
RISK FACTORS
OPERATING RESULTS ARE SUBJECT TO QUARTERLY FLUCTUATIONS
The Company's operating results are subject to quarterly fluctuations resulting
from a variety of factors, including earnings contributions from remarketing
activities and services, 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.
THE COMPANY'S GROWTH STRATEGY DEPENDS ON PRODUCT AND MARKET DEVELOPMENT
The markets for the Company's principal products are characterized by rapidly
changing technology, evolving industry standards, and declining prices. The
company's operating results will depend to a significant extent on its ability
to continue to introduce new services and to control and/or reduce costs on
existing services. The success of these and other new offerings is dependent on
several factors, including proper identification of customer needs, cost, timely
completion and introduction, differentiation from offerings of the company's
competitors and market acceptance.
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THE COMPANY'S SUCCESS DEPENDS IN PART ON ANTICIPATING AND ADAPTING TO NEW
TECHNOLOGICAL DEVELOPMENTS AND CHANGING MARKET CONDITIONS.
Lower margins on large systems transactions (mainframes and related peripherals,
including DASD and tape drives) have 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.
REMARKETING IS AN IMPORTANT CONTRIBUTOR TO ANNUAL AND QUARTERLY EARNINGS
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 2000, remarketing contributions, primarily for
the company's global equipment leasing businesses, must be at the level achieved
in fiscal 1999. 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 COMPANY'S GROWTH STRATEGY DEPENDS IN PART ON THE COMMUNICATIONS INDUSTRY. IF
THAT INDUSTRY DOES POORLY, THE COMPANY'S BUSINESS AND FINANCIAL RESULTS MAY
SUFFER
The emergence of the communications market--facilities-based broadband
communications companies, Internet Service Providers and other
telecommunications carriers--and the growth of broadband networks, provides the
Company with an industry in which leasing is an attractive alternative to
ownership. The Company's communications equipment customers are generally
companies with accumulated net deficits and extensive liquidity requirements. To
the extent that these companies are unable to meet their business plans, or
unable to obtain funding or funding at reasonable rates to complete their
business plans, there could be an increase in the Company's credit losses above
historical levels.
THE COMPANY'S SUCCESS IS HIGHLY DEPENDENT ON DEVELOPING AND EXPANDING ITS
SERVICES' BUSINESS. THE SERVICES BUSINESS MAY BE LESS PREDICTABLE AND THE
REVENUE IS LESS RECURRING THAN CONTRACTUAL LEASE AND CONTINUITY SERVICES
REVENUE. COMPETITION IN SERVICES MAY NEGATIVELY IMPACT THE COMPANY'S BUSINESS
STRATEGY. REVENUE RECOGNITION CAN BE NEGATIVELY AFFECTED BY LONGER SALES CYCLES
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. To attain its services earnings contribution goals for fiscal 2000, the
Company must: meet its obligations under the agreements underlying transactions
in process at September 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 IT CAP Solutions,
advanced recovery services, availability options, remote computing services and
web hosting; and contain costs. The Company must also 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 2000.
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One impact 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.
COMDISCO VENTURES CUSTOMERS ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY BE
UNABLE TO COMPLETE THEIR BUSINESS PLANS. EQUITY INSTRUMENTS HELD BY COMDISCO
VENTURES ARE RISKY INVESTMENTS AND THE PUBLIC MARKET FOR THESE COMPANIES IS
EXTREMELY VOLATILE. TO THE EXTENT THESE COMPANIES DO NOT MEET THEIR PLANS OR THE
COMPANY IS UNABLE TO DISPOSE OF ITS EQUITY SECURITIES, THE COMPANY'S BUSINESS
AND FINANCIAL RESULTS MAY SUFFER.
The Company has made loans to and equity investments in various privately held
companies. These companies typically are in an early stage of development with
limited operating histories, and limited or no revenues and may be expected to
incur substantial losses. Accordingly, investments in these companies may not
result in any return and the Company may lose its entire investment and/or
principal balance.
Equity instruments held by the Company are subject to lockup agreements
restricting its ability to sell until several months after an initial public
offering. The public market for high technology and other emerging growth
companies is extremely volatile. Such volatility may adversely affect the
ability of the company to dispose of the equity securities and the value of
those securities on the date of sale.
The Company has established working relationships with successful venture
capital organizations. There can be no assurance that these relationships can be
maintained or sustained. To the extent that the company is unable to maintain
these relationships, its ability to identify potential customers may be
substantially impaired.
The current economic environment has been sustained over a number of years and
is currently the longest continuous period of economic growth in the last thirty
years. This environment has encouraged entrepreneurs to conceive, develop and
bring to market new products and services. The Company targets these early-stage
companies for its services and products. A slow down in economic growth could
materially affect the market in which the Company operates. Furthermore, a slow
down would impact potential investors in any limited partnerships the Company
may form, and this in turn, would have a material impact on the Ventures
liquidity and access to funds.
Many of the companies to which the Company provides financing are dependent on
third parties for liquidity. Any significant change in the availability of
funds, would have a material impact on the Company's customer base, and,
potentially, its loan collectability, as well as, the fair market value of its
equity instruments.
If companies with which Ventures has effected transactions are not successful or
the markets become unfavorable, Ventures' customers may not be able to complete
securities offering and Ventures may not be able to generate gains or receive
proceeds from the sale of securities.
Fluctuations in future periods may be greater that those experienced in past
periods as a result of Ventures' focus on companies related to the Internet and
telecommunications. Furthermore, for those customers whose securities are not
publicly traded, the realizable value of Ventures' interests may ultimately
prove to be lower than the carrying value currently reflected in the
consolidated and the separate Ventures' financial statements.
In the past Ventures financed its operations with inter-company loans from
Comdisco. Ventures my need to obtain funding from outside sources and may not be
able to obtain funding from outside sources. Furthermore, even if funding is
available, such financing may not be on terms as favorable as those obtained
from Comdisco.
Ventures depends on certain important employees and the loss of those employees
could harm and disrupt Ventures' business.
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THE COMPANY'S PRISM SUBSIDARY IS A START UP COMPANY WITH AN AGGRESSIVE BUSINESS
PLAN IN A NEW AND UNPROVEN INDUSTRY.
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 substantial additional capital to
support its data network, to expand its services, to increase its sales and
marketing efforts and to support the its 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 of Prism 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.
Prism operates in a highly regulated environment. Changes in regulatory policies
may adversely impact its ability to provide services and increase the costs of
providing those services.
Prism's business strategy is largely unproven. A number of factors may affect
Prism's ability to attain its business plan, including the following:
o its ability to successfully market it's existing and planned services to
current and new customers;
o its ability to generate customer demand for it's services in target
markets;
o the development of its target market and market opportunities;
o market pricing for its services and for competing services;
o the extent of increasing competition;
o ability to acquire funds to expand its network;
o the ability of its equipment and service suppliers to meet its needs;
o trends in regulatory, legislative and judicial developments;
o its ability to manage growth of its operations;
o its ability to access regions and enter into suitable interconnection
agreements with traditional telephone companies;
o its ability to improve its existing services and introduce new service
offering without interruption or interference with its operations, in a
timely and cost effective manner;
o its ability to improve its technology infrastructure to respond to
technological change and new industry standards;
o its ability and that of its customers to be year 2000 compliant;
o its reliance on third parties, including some of its competitors and
potential competitors to develop and provide Prism with access to
communications and networking technology;
o its ability to rapidly expand the geographic coverage of its services;
o its ability to attract, retain and motivate qualified persons;
o its ability to rapidly install high-speed access lines;
o its ability to effectively manage growth of operations; and
o its ability to deliver additional value-added services to its customers.
Furthermore, Prism's operating results are likely to fluctuate significantly in
the future as a result of numerous factors, many of which are outside of its
control. These factors include, but are not limited to:
o the timing and willingness of traditional telephone companies to provide
it with central office space and the prices, terms and conditions on which
they make available the space to Prism;
o the amount and timing of capital expenditures and other costs relating to
the expansion of its networks and the marketing of its services
o delays in the commencement of operations in new regions and the generation
of revenue because certain network elements have lead times that are
controlled by traditional telephone companies and other third parties;
o the ability to develop and commercialize new services by Prism or its
competitors
o the ability to deploy on a timely basis its services to adequately satisfy
end-user demand
o the ability to successfully operate its networks;
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o the rate at which customers subscribe to its services;
o decreases in the prices for its services due to competition, volume-based
pricing and other factors;
o the mix of line orders between consumer end-users and business
end-users(which typically have higher margins);
o the success of its relationship with Williams, Nortel and potential third
parties;
o the development and operation of Prism's billing and collection systems
and other operational systems and processes;
o the rendering of accurate and verifiable bills by Prism's traditional
telephone suppliers and resolution of billing disputes;
o the incorporation of enhancements, upgrades and new software and hardware
products into its network and operation processes that may cause
unanticipated disruptions; and
o the interpretation and enforcement of regulatory developments and court
rulings concerning the 1996 telecommunications act, interconnection
agreements and the anti-trust laws.
Prism's business strategy is largely unproven.
ECONOMIC CONDITIONS AND OTHER FACTORS MAY NEGATIVELY IMPACT THE COMPANYS
OPERATIONS
With respect to economic conditions, a recession can cause customers to put off
new investments and increase the company's bad debt experience.
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.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 16 of Notes to Consolidated Financial Statements on page 52 of the
Annual Report to Stockholders for the year ended September 30, 1999 for
financial information about the Company's segments.
C. NARRATIVE DESCRIPTION OF BUSINESS
Principal Services:
The Company's operations are organized into four reportable groups of
businesses. These groups are Leasing, Services, Ventures and Prism.
The following is a narrative description of the Leasing and Services businesses.
Leasing:
General: Leasing and remarketing services for distributed computing
systems--servers, workstations, PCs, local area networks and other high
technology equipment; acquisition management, expenditures tracking and other
services that facilitate equipment procurement and expense tracking.
The Company buys, sells and leases and remarkets PCs and workstations made by
most of the leading manufacturers. The Company's lease transactions also include
high-end servers, printers and other desktop related equipment. The Company's
strategy for the distributed systems market is to provide financing,
professional services and software tools (see "Services") to its existing and
prospective customers. The Company estimates that approximately 34% of the cost
of equipment placed on lease by the Company (including International operations)
in fiscal 1999 was distributed equipment
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Industry Specific: Leasing and remarketing, asset management and reconditioning
services for industry specific equipment, including semiconductor manufacturers,
communication and pharmaceutical companies.
ELECTRONICS GROUP: The Company leases new and used electronic manufacturing,
testing and monitoring equipment, including semiconductor production equipment,
automated test equipment and assembly equipment. Additionally, the Company
maintains a dedicated refurbishing and sales facility in the Silicon Valley
area. The semiconductor manufacturing industry is characterized by rapidly
advancing technology, high capital outlays, increased competition, and a growing
concern over the total cost of ownership in high technology equipment. The
Company assists its customers in developing an effective strategy for acquiring
and managing its high-tech assets.
HEALTHCARE GROUP: Through its healthcare subsidiaries, the Company leases
medical and other high technology equipment to healthcare providers, including
used, reconditioned medical equipment. The Company's portfolio includes
angiography, MRI systems, CT Scanners, nuclear imaging devices, test equipment
such as oscilloscopes, analyzers and testers and laboratory equipment such as
microscopes and centrifuges.
LABORATORY AND SCIENTIFIC GROUP: The Company's laboratory and scientific group
assists organizations in the pharmaceutical, chemical, research, healthcare and
biotechnology industries through the implementation of an equipment life-cycle
management strategy. Its marketing strategy includes financing, technology risk
management and remarketing.
Services:
CONTINUITY SERVICES: These services include continuity services for large
central processing sites, client/server, workstation and PC environments, local
and wide area networks and voice availability and recovery capabilities, as well
as consulting services in continuity planning, network services and data
protection, and other related data processing services throughout the United
States, Canada and Europe. The Company provides backup capabilities for, among
others, Digital Equipment Corporation, Hitachi Data Systems, IBM, Hewlett
Packard, Sequent, Stratus, Sun Micro Systems, Tandem and Unisys equipment users.
Comdisco's services are designed to help customers avoid and minimize the impact
of a significant interruption to critical business functions as a result of the
inaccessibility to the customer's data processing facility, communications
network(s) or workstations.
Through its network and facilities strategy entitled CCS Net, the Company offers
customers access to its North American facilities, including a range of data
processing recovery services at hot sites, Customer Control Centers ("CCC") and
shell sites. Hot sites are equipped computer facilities that include central
processing units, peripherals and communications equipment. A CCC interfaces
customers to geographically separated hot sites by means of telecommunications
lines. Most facilities also include workstation and/or desktop recovery, voice,
and network capabilities. Capabilities also include client/server platforms and
midrange systems. These facilities also are used for the Company's Millennium
Testing Services, which allows customers to test their Year 2000 conversion
projects.
Of the Company's approximately forty continuity locations, nine serve as data
center recovery environments providing hot site and/or shell site services.
These nine regional recovery centers serve major commercial centers, including
New York, Chicago, Northern and Southern California, Texas, Georgia, as well as
a location in Southern New Jersey that serves the Mid-Atlantic region and a
center located in Toronto, Canada. Each recovery center has at least one hot
site or CCC and includes telecommunications capabilities, conference rooms,
office space, support areas, and appropriate on-site technical personnel.
Comdisco believes it operates one of the largest communications networks in
North America.
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MANAGED NETWORK SERVICES: Comdisco Network Services offers network assessment,
design, implementation, help desk and professional management services designed
to reduce the total cost of network technology. The Company's customer base is
primarily North American-based enterprises as its monitoring and on-site support
capabilities are predominantly within the United States.
IT CAP: The Company provides strategic solutions for desktop management services
to its customers to assist them in managing their information technology assets
with the objective of increasing productivity and reducing technology cost and
risk. These technology service solutions are built around the collection,
integration, and management of information on enterprise assets through the
implementation of an integrated database of asset information. These solutions
may also include improving, supporting, and managing distributed systems and
critical business processes through a single point of contact. The services,
which are designed to complement the Company's leasing activities, include
transitional strategies, integration planning and implementation, financing
(hardware and software), and continuity planning. The Company's integrated
desktop management software tools let customers order, track and manage their
inventory of distributed systems equipment.
The Company's operations are conducted through its principal office in the
Chicago area and approximately one hundred offices in the United States, Canada,
Europe and the Pacific Rim. Subsidiaries in Europe and Canada offer services
similar to those offered in the United States.
The Company's services are provided through separate business units. Each
business is directed by its own management team and has its own sales,
marketing, product development, operations and customer support personnel.
Overall corporate control and coordination are achieved through centralized
budgeting, financial and legal reporting, cash management, additional customer
support and strategic planning.
The Company may, from time-to time, enter into marketing relationships with high
technology equipment manufacturers and value-added resellers in order to expand
its customer base and name recognition. In its marketing operations, the Company
attempts to cross-sell services where and when appropriate.
Customers and Raw Materials
Comdisco's business is diversified by customer, customer type, equipment
segments, geographic location of its customers and maturity of its lease and
notes receivables. The Company's customers include "Fortune 1000" corporations
or companies of a similar size as well as smaller organizations, including
privately-held corporations. The Company's businesses are not dependent on any
single customer or on any single source for the purchasing, selling or leasing
of equipment, or in connection with its continuity services.
Competition
The Company competes as a lessor and as a dealer of new and used computer and
selected other high technology equipment. The Company competes with different
firms in each of its activities. The Company's competition includes equipment
manufacturers such as IBM, Hewlett Packard ("HP"), Amdahl, Hitachi Data Systems,
AT&T, Rolm, Hitachi Medical Systems, Siemens Medical Systems and General
Electric, other equipment dealers, brokers and leasing companies (including
captive or related leasing companies of IBM, HP and General Electric and others)
as well as financial institutions, including commercial banks and investment
banking firms. While its competitive methodologies will differ, in general, the
Company competes mainly on the basis of its expertise in remarketing equipment,
terms offered in its transactions, its reliability in meeting its commitments,
its independence from the manufacturer and its ability to develop and offer
alternative solutions and options to high technology equipment users.
Primarily as a result of technological changes, competition has increased in the
leasing industry and the number of companies offering competitive services, such
as desktop management and other high technology equipment leasing, has
increased. Competitive alliances have also impacted the leasing industry.
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In PCs, workstations, electronics, healthcare and telecommunications, the
Company believes it competes with the manufacturers and their captive leasing
companies and approximately three significant leasing companies, as well as
banks and other lessors and financial and lending institutions throughout the
United States and Canada. In its other services, the Company competes with
manufacturers and other national and regional consulting and services
organizations.
In continuity services, the Company believes that its major competitors are IBM
and SunGard Data Systems, Inc. Additionally, it competes with regional firms in
the domestic, Canadian and European marketplace, which provide contract
continuity services. Comdisco believes that it is the largest international
provider of such services.
In managed network services, the Company competes with telecommunications firms,
such as AT&T and MCI Communications, consulting organizations, such as Andersen
Consulting and EDS, and other local and regional providers.
In desktop management, the Company believes it competes with a number of large
general contractors such as AT&T, GE Capital ITS, Hewlett-Packard and IBM, all
companies with significant resources and with experience in leasing and
financing. In addition, other companies, such as Amdahl and Unisys--companies
that have traditionally focused on equipment break/fix and maintenance
services--have begun offering more comprehensive asset management strategies.
The Company's continued ability to compete is also affected by its ability to
attract and retain well qualified personnel and the availability of financing.
Other
The Company does not own any patents, licenses, or franchises which it considers
to be material to the Company's businesses.
The Company's businesses are not seasonal, however, quarter-to-quarter results
from operations can vary significantly.
The Company currently believes that the amount of backlog orders is not material
to understanding the Company's business.
Because of the nature of the Company's business, the Company is not required to
carry significant amounts of inventory either for delivery requirements or to
assure continuous availability of goods from suppliers.
At September 30, 1999, the Company had approximately 3600 full-time employees.
-11-
<PAGE>
Ventures:
The following is a narrative description of the Ventures business.
Overview
Ventures is a leading provider of financing to venture capital-backed companies.
Its long-term relationships with certain leading venture capital firms help
Ventures identify well-positioned companies in attractive high growth
industries. Ventures offers companies a broad range of innovative equity-linked
financing products, primarily venture debt and venture leases, which are loans
or leases combined with warrants or equity conversion options that give Ventures
the right to purchase or convert into common or preferred stock at a
predetermined price. In addition to venture debt and leases, Ventures may also
purchase direct equity stakes in companies. Its financing products complement
equity from venture capital firms and debt from commercial banks and asset-based
lenders.
Ventures was formed in 1987, and since that time, Ventures has committed
approximately $1.7 billion in venture debt, venture leasing and equity financing
to over six hundred seventy-five venture-backed companies. Of the companies
Ventures has helped finance, over one hundred fifty have gone public and over
one hundred ten have been acquired. During the last two years, some of its most
successful customers include Ariba Technologies, Ask Jeeves, Copper Mountain
Networks, Critical Path, e-Loan, e.Piphany, e-Toys, Extreme Networks, Gadzoox,
Inktomi, Next Card, Northpoint Communications, Siara Systems, and Stratum One.
Venture debt and venture leasing can be utilized at various stages of a
company's development and for various purposes including the following:
o Early stage capital to supplement the initial venture capital raised
and support growth requirements;
o Expansion capital between venture capital rounds to enable an emerging
company to reach milestones and increase the prospect of raising future
capital at higher valuations;
o Capital to help a company acquire additional equipment, technology, and
businesses;
o Late stage capital to provide financial flexibility to deal with the
uncertainty of a liquidity event such as an initial public offering or the
sale of the company; and
o Various other stages of capital to provide financing flexibility and
negotiating strength versus mezzanine and corporate equity rounds.
As a result of the specialized nature of venture debt and venture leasing,
providers of these products must have expertise in technology-related industry
sectors, access to capital, the ability to assess risk, relationships with
venture capital firms, access to deal flow, and the ability to structure
transactions appropriately.
Markets
Ventures focuses its activities on what it believes are the most attractive
emerging industries. Within these industries, Ventures leverages its industry
knowledge and strong relationships to provide financing to the most promising
emerging companies. Ventures identified the following common characteristics of
potential customers, which help to guide financing decisions:
Growth. Ventures seek to fund customers that have or are projected to
have significant and sustainable growth in their business operations
and industry sectors.
Foreseeable liquidity event. Prior to entering into a commitment with
a customer, Ventures reviews the likelihood of a liquidity event in a
time frame acceptable to us and estimate the fair market value, which
could be realized from such a liquidity event. Typical liquidity
events include an initial public offering or a sale of the company.
Liquidity events historically have enhanced the value of Ventures
equity-linked and equity interests in many cases.
-12-
<PAGE>
Providing capital through innovative products
Ventures success has been fueled by its ability to identify the capital needs of
its customers and to develop and customize attractive financings to meet those
needs. Its initial venture lease products have evolved and expanded over time.
Ventures currently offers a broad spectrum of innovative financing alternatives.
Its primary financing products currently are leases with warrants, subordinated
debt with warrants, as well as direct investments in convertible preferred stock
and common stock.
Typically, Ventures products are structured as commitments to provide financing
in one or more advances during a specified period of time. This commitment to
finance is typically subject to the absence of any default or material adverse
change under the loan or lease and compliance with other loan requirements.
Ventures generally receives warrants to purchase equity securities or the right
to convert some of the debt into equity securities of the customer in connection
with the lease and debt financings. Warrants typically represent less than 10%
of the customer's ownership at the date of origination. The terms of the
warrants or equity conversion, including the expiration date, exercise price and
terms of the equity security for which the warrant may be exercised, will be
negotiated individually with each customer, and will likely be affected by the
price and terms of securities issued by the customer to its venture capitalists
and other holders. Based upon its past experience, it is anticipated that most
warrants will be exercisable for a term of three to ten years. The equity
securities for which the warrant will be exercised generally will be convertible
preferred stock or common stock (of which there may be one or more classes).
Substantially all the warrants and underlying equity securities will be
restricted securities.
Venture Leasing
Ventures'equipment-based venture lease and loans activities consist primarily of
the direct origination of non-cancelable, full-payout leases or loans structured
like leases (collectively "Venture Leasing"). These leases are generally for a
variety of equipment including information technology, scientific hardware,
facilities, software and production equipment. The rental rate and all other
transaction terms are individually negotiated.
Substantially all equipment leases that Ventures originate have specified
non-cancelable initial terms ranging from 2 to 5 years. The general terms and
conditions of all of its leases are substantially similar and are embodied in a
master lease agreement. For each lessee, the lease term, rent interval, lease
rate factor and other specific terms for each piece of leased equipment are set
forth on equipment schedules, which also incorporate the terms and conditions of
its master lease agreement.
Venture Debt
Most subordinated and other debt financings are made pursuant to subordinated,
secured loan agreements. The loans bear fixed interest rates with coupons
currently ranging from 8.0% to 13.0% per annum, although the effective rate may
be greater. These loans are generally scheduled to be repaid in 36 monthly
installments; with a varying number of installments of interest only, the
balance being amortizing installments of principal and interest. In addition,
fees, typically ranging from 0.75% to 1.25% of the principal amount of the loan,
may be paid at closing.
Subordinated loans are often times secured by a lien on all of the borrower's
assets, which, in most cases, is subordinated to the lien of the borrower's
senior lenders. Loan documents generally do not contain extensive financial
covenants, although the documentation usually contains cross-default provisions
linked to any defaults by the customer on any debt outstanding and may have
specific provisions governing future financing or pledging of assets.
-13-
<PAGE>
Direct Equity Investments
Ventures also provides equity financing to customers by purchasing common or
preferred convertible stock. Ventures generally purchases equity at a valuation
based on the most recent previous financing round to venture capitalists or, as
applicable, a current or contemplated financing round.
During the fiscal years ended September 30, 1998 and September 30, 1999,
Ventures made direct equity investments with 36 and 91 customers, representing
$7 million and $32 million, respectively. As of September 30, 1999, Ventures has
made total direct investments with an original cost of $52 million.
The following table shows total new lease, debt and equity commitments for
Ventures in the last five years.
<TABLE>
<CAPTION>
Total New Commitments By Year-Last Five Years
(Dollars in Millions)
1995 1996 1997 1998 1999
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Leases $77.3 $103.5 $144.3 $220.6 $332.1
Debt 2.5 7.5 19.5 67.7 367.1
EQUITY 1.6 3.1 3.7 7.4 32.1
----- ------ ------ ------ ------
TOTAL $81.4 $114.1 $167.5 $295.7 $731.3
===== ====== ====== ====== ======
</TABLE>
The following table shows the 15 largest original commitments for Ventures at
September 30 , 1999.
<TABLE>
<CAPTION>
<CAPTION>
15 Largest Commitments
(Dollars in millions)
AS OF SEPTEMBER 30, 1999
ORIGINAL COMMITMENT <F1> BOOK VALUE <F2> OPEN COMMITMENTS <F3>
----------------------- -------------- --------------------
<S> <C> <C> <C>
HomeGrocer.com, Inc. $ 18.1 $ 2.8 $10.2
Avici Systems, Inc. 15.3 9.6 2.5
Digital Generation Systems, Inc. 15.0 2.0 --
Equinix, Inc. 15.0 7.4 5.3
CORVIS Corporation 14.0 13.4 --
Telocity, Inc. 11.6 7.7 0.6
NextCard, Inc. 11.2 10.2 0.0
Concur Technologies, Inc. 10.4 7.5 --
Living.com, Inc. 10.3 9.3 0.8
Acusphere, Inc. 10.1 7.5 --
RemarQ Communities, Inc. 9.8 7.9 0.7
Integral Development Corporation 9.5 6.0 0.9
StockPower, Inc. 9.3 8.0 0.9
PlanetRx, Inc. 9.2 1.9 2.0
FlyCast Communications Corp. 9.1 7.4 0.1
------ ------ -----
Total $177.9 $108.6 $24.0
====== ====== =====
<FN>
<F1> Since inception.
<F2> Book Value represents total capital currently owed by customers as of
September 30, 1999 and/or cost of equity investment.
<F3> Open commitments equal the total amount of commitments that customers have
the right to draw upon.
</FN>
</TABLE>
CURRENT EQUITY STAKES. Ventures exercises its warrants only after a
liquidity event, such as an initial public offering or acquisition/merger. Using
an outside manager, Ventures generally sells its equity positions as soon as
reasonably possible after an initial public offering and in a manner intended to
maximize the return on its original investment subject in most cases to
securities law restrictions on transfer and contractual lock-up provisions which
restrict its ability to sell its equity position for several months after the
initial public offering.
-14-
<PAGE>
As of September 30, 1999, Ventures' current public equity holdings had a market
value of $194 million and represented ownership in 65 companies. The 10 largest
equity holdings represented 78% of the total of these holdings and was composed
of the following companies:
Largest Public Equity Stakes held by Ventures as of September 30, 1999
<TABLE>
<CAPTION>
Date of Original
Company Industry Sector Commitment Shares Held
- ------------------------------ ---------------------------- ----------------- ----------
<S> <C> <C> <C>
e.Piphany, Inc. Software & Computer Services June 10, 1999 771,875
BabyCenter, Inc. Internet October 18, 1998 357,036
FlyCast Communications Corp. Internet December 1, 1997 502,051
Agile Software Corporation Software & Computer Services August 22, 1995 158,301
NextCard, Inc. Consumer Related May 29, 1998 412,945
Vignette Corporation Internet December 8, 1998 180,716
Northpoint Communications, Inc. Communications & Networking December 8, 1997 397,210
Critical Path, Inc. Software & Computer Services May 6, 1998 161,603
Lightera Networks, Inc. Communications & Networking June 4, 1998 151,976
</TABLE>
In addition to its public equity holdings, as of September 30, 1999 Ventures
held warrants and other equity positions in approximately 360 companies that are
still private.
Expanding its funding sources
Historically, Comdisco has funded Ventures' business with inter-division loans
and retained earnings. In order to continue to capitalize on increasing demand,
Comdisco is pursuing alternative means of funding Ventures, activities,
including, but not limited to, the establishment of a limited partnership and
the offering of partnership interests to a limited number of accredited
investors, including Comdisco. The limited partnership, or possibly
partnerships, could become a significant source of liquidity for Ventures for
fiscal 2000. In addition, Ventures may use public markets or any other funding
sources.
Capitalizing on the Comdisco affiliation
As a division of Comdisco, Ventures is able to bring a number of benefits to its
customers. First, as a result of Comdisco's experience in leasing and
remarketing equipment and Comdisco's equipment purchasing power, Ventures is
able to offer its customers an equipment procurement service designed to save
them time, effort and money. Second, because all of Comdisco's other businesses
are technology related and the bulk of its customers are technology related,
some natural business relationships evolve with Comdisco, as either vendor to,
or customer of, its customers. Comdisco can supply network bandwidth and
co-location space, serve as a beta test site, enter into marketing arrangements
and supply business continuity services to its customers. Comdisco also provides
more traditional leasing services to its customers once they develop beyond the
venture stage.
Competition
Ventures primary competitors include financial institutions, equipment lessors
and manufacturers, venture capital firms, large corporate investors, and
non-traditional lenders that provide debt and/or equity financing to emerging,
high technology companies. Ventures believes that it competes effectively with
these competitors based on creative and innovative deal structuring,
flexibility, reputation, quality of service, timely credit analysis and timely
decision-making.
-15-
<PAGE>
Employees
As of September 30, 1999, Ventures employed 38 people on a full time basis. 10
personnel were involved in marketing and sales, 25 were in processing, servicing
and administrative support and 3 were executive employees. No employees are
represented by a labor union. Ventures believes that its future success will
depend in part on its continued ability to attract, hire and retain qualified
personnel. Competition for those personnel is intense, and Ventures may be
unable to identify, attract and retain those personnel in the future.
Legal Proceedings
Ventures is not currently a party to any material litigation.
Additional Information
FOR INFORMATIONAL PURPOSES ONLY, Ventures financial statements are attached to
this Form 10-K as Exhibit 99.02. These statements are not incorporated by
reference in this or any other filing with the Securities and Exchange
Commission. THESE STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE COMDISCO,
INC. CONSOLIDATED FINANCIAL STATEMENTS AND THIS INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
-16-
<PAGE>
Prism:
The following is a narrative description of the Prism business:
Overview
Prism intends to become a leading integrated communications carrier by directly
offering communications services that enhance productivity. Its array of
services will include high-speed data connectivity, local and long distance
voice, video conferencing, virtual private networks, business continuity and
teleworking solutions. Prism will provide these services over a facilities-based
network consisting of splitterless, integrated data and voice line card
technology from Nortel Networks(TM) ("Nortel") and an optical backbone that
enables the Company to efficiently transport voice and data traffic from network
edge to the Internet, a LAN/WAN or other destinations. Prism intends to build
long-term relationships with target customers, which include small and mid-sized
businesses, teleworkers and residential power users, by initially providing
affordable, reliable data and voice services supported by integrated, simple
billing and excellent customer service. Prism intends to build its brand, RED,
because the Company believes a well-recognized brand can reduce costs required
to acquire new customers, lower customer turnover and serve as a platform from
which to sell additional, complementary business and communications services. In
the future, Prism plans to expand its applications offerings, utilizing its
customers' high-speed data connectivity to offer broadband content and
business-to-business services. Over time, Prism believes such applications will
increase in importance to its customers and business model. Through its
relationship with Comdisco, Prism plans to further extend its service
distribution by utilizing Comdisco's strong customer relationships among larger
corporations.
Prism launched its RED high-speed data connectivity services in February 1999 in
New York City. Initially, Prism focused on the greater New York City
metropolitan area because of its population density, robust telephone network
infrastructure, and perceived high user demand. Since February, approximately
1,000 customers have been placed in service, and Prism has expanded its service
territory in the greater New York City market from six to thirty-nine
collocations and points of presence. These points of presence allow Prism to
provide services to Manhattan, Brooklyn, Queens, and areas of Westchester
County, Long Island and Connecticut. In addition, Prism recently opened the
northern New Jersey market and is providing service out of ten collocations in
the state. Based on the response to its service offering in the greater New York
City metropolitan area, Prism has initiated a nationwide rollout of its network
and services to thirty-three of the largest markets in the United States, as
well as three markets in Canada.
Prism currently offers three high-speed data connectivity services that enable
customers to access the Internet at speeds ranging from 56 Kilobits per second
(Kbps) to 1.0 Megabits per second (Mbps). In the first quarter of 2000, Prism
will upgrade its current high-speed data services to speeds of up to 1.3 Mbps in
the downstream direction and 320 Kbps in the upstream direction. Beginning in
the second quarter of 2000, Prism plans to offer a burst, rate adaptive ethernet
technology that delivers bandwidth of up to 6 Mbps in either direction. Prism
also intends to offer services at speeds of up to 7 Mbps in the downstream
direction, and up to 2 Mbps in the upstream direction. These services will be
packaged in a combination of symmetrical and asymmetrical product offerings
depending on customer requirements, distance between the premise and the traffic
aggregation equipment, and the copper binder group environment that these
services will run through.
Based on its market research, Prism believes its primary target market, small
and medium sized businesses, prefer to have their voice and data services
provided by a single company. Prism is testing its voice services in the greater
New York City metropolitan area and plans to commence a commercial offering in
the first quarter of 2000. Its voice services include local and local toll
calling, long distance calling, and a bundle of four features- three-way
calling, call waiting, call forwarding and caller ID.
In preparation for its national expansion, Prism has aggressively pursued
obtaining the necessary legal and regulatory qualifications to offer integrated
voice and data services in its thirty-three target markets. Prism has signed
interconnection agreements with Bell Atlantic, BellSouth, Ameritech and
Cincinnati Bell covering seventeen states and obtained Certificate of Public
Convenience and Necessity status in twenty-one states. As a result, Prism has
-17-
<PAGE>
obtained authority as a competitive local exchange carrier or has been permitted
to operate as a competitive local exchange carrier in twenty-six of its
thirty-three target markets. Prism anticipates obtaining the remainder of the
necessary approvals and entering into the remaining necessary interconnection
agreements by March 2000, although Prism is dependent on state and local
authorities, as well as incumbent local exchange companies to meet its
expectations.
In addition to its regulatory activities, Prism has proceeded with establishing
a national network. Prism has approximately 130 collocations in its target
markets, of which 49 are ready to receive customers. Prism anticipates
approximately 350 more collocations by March 2000, bringing its total
collocations to approximately 480. Further, Prism plans to bring total
collocations to over 750 by the fourth quarter of 2000.
Prism has entered into an agreement with Nortel to purchase up to $460 million
of switches, integrated line cards, customer premise equipment and ancillary
technology to establish a national, facilities-based network. Based on its
financial commitments to date, Prism will deploy the largest amount of Nortel's
digital modem technology in the United States, and because of the magnitude of
its relationship with Nortel, Prism expects to further benefit from advances in
Nortel's future network technology, such as its optical Internet platform. Prism
believes its network architecture, centered on Nortel's integrated voice and
data approach, offers cost benefits and could reduce provisioning time lags. See
"Customer Service--Hot Cut Provisioning" As part of the Nortel strategic
relationship, Prism recently issued to Nortel $10 million of its common stock.
Because it is its aim to achieve carrier class reliability and security in its
network, Prism recently entered into an agreement to purchase a 20-year
indefeasible right to use ("IRU") approximately 2,500 miles of dark fiber from
Williams Communications, Inc. ("Williams"). This purchase will allow Prism to
transport data and voice traffic, utilizing dense wave division multiplexing
("DWDM") and high speed SONET technology, over its own dedicated fibers covering
the Eastern half of the United States for the foreseeable future. Prism also
agreed to purchase a minimum of approximately $110 million of network capacity
from Williams over the next 20 years to convey voice and data traffic in areas
not covered by its dark fiber IRU purchase. In return, Prism issued to Williams
$10 million of common stock and will pay for the remainder of its obligation to
Williams with cash as capacity is used or as Prism accepts segments of the dark
fiber IRU. With this transaction and the Nortel relationship, Prism believes it
can achieve carrier class network reliability and performance, a world class
benchmark for all telecommunications companies.
Market Opportunity
Prism believes that a substantial market opportunity exists as a result of a
number of factors including:
o the growing demand for and increased adoption of high-speed data networks
in order to increase productivity in the workplace;
o the need among small and mid-sized businesses for integrated communications
solutions which include bundled services, competitive pricing and excellent
customer service;
o the inherent limitations of current data network connectivity options,
including dial-up modems; and
o the growing willingness of consumers and businesses to switch from
traditional telephone companies to competitive local exchange carriers
("CLECs") offering more options at competitive prices.
-18-
<PAGE>
Additionally, Prism believes current research supports its strategy.
International Data Corporation projects that the small business data and voice
markets will grow substantially over the next three years, as noted below
(dollars in millions):
COMPOUND ANNUAL
1999 2002 GROWTH RATE
---- ---- -----------
High speed lines 60,000 1,700,000 205%
High speed revenue $50 $1,690 222%
Voice lines 63,300,000 84,600,000 10%
Voice revenue $58,123 $75,684 9%
Prism believes its strategy and network positions it to gain a portion of the
rapidly growing data market while also participating in the multi-billion local
and long distance voice markets.
NEEDS OF SMALL AND MID-SIZED BUSINESSES FOR INTEGRATED COMMUNICATIONS. Prism
expects that a significant portion of the growth in data communications will be
generated by small and mid-sized businesses with up to 500 employees. Within the
business market, the small and medium business segment is perceived by many data
communications providers as the largest untapped market for their services.
Industry sources estimate that there are over 10 million businesses in the U.S.
with between 1 and 500 employees. Following the high penetration of personal
computers (98% or more have a personal computer), the perceived importance of
the Internet in future business activity and the limited financial resources of
many of these businesses, it has become increasingly important to develop
technologies to connect these personal computers cost-effectively. DSL-based
technologies have emerged as the high-speed, cost-effective solution for these
customers.
GROWING DEMAND FOR HIGH-SPEED DATA COMMUNICATION SERVICES. Businesses are
implementing internal networks using Internet technology, or intranets, and
remote local area networks to enable employees to work from remote locations and
home, and to create private networks that connect corporate networks in multiple
locations. Gartner Group estimates that the U.S. market for packet-based,
virtual private network and Internet data services will grow from $3.4 billion
in 1997 to $18.5 billion in 2002, a compounded annual growth rate of 40.3%.
Gartner also indicates that business demand for Internet access, e-mail, video
and audio services, Web hosting and electronic commerce is increasing.
High-speed data communications have become important to businesses in part due
to the dramatic increase in Internet usage. According to International Data
Corporation, the number of Internet users worldwide reached approximately 69
million in 1997 and is forecasted to grow to approximately 320 million by 2002.
International Data Corporation also estimates that the value of goods and
services sold worldwide through the Internet will increase from $12 billion in
1997 to over $400 billion in 2002. To remain competitive, businesses
increasingly need high-speed connections to maintain complex Web sites, access
critical business information and communicate more efficiently with employees,
customers and business partners.
NEEDS OF HOME OFFICE AND TELEWORKERS. Prism expects that people using computers
from their homes to connect to corporate networks or to the Internet for in-home
business purposes will also be a significant source of demand for high-speed
data connectivity. According to International Data Corporation, there were 26
million residences with computers in their home offices in the U.S. in 1998,
growing to an estimated 39.2 million by 2002. A significant number of home
office and teleworkers need access to corporate networks and/or the Internet for
a variety of applications, including e-mail, databases and corporate intranets.
According to The Yankee Group, the market for remote access services is expected
to grow from $460 million in 1998 to $2 billion by 2002.
LIMITATIONS OF DIAL-UP MODEMS AND ISDN. Neither the slow dial-up modems and
integrated services digital network ("ISDN") service nor the expensive T1 option
is an adequate solution for most small- and mid-sized businesses, home office
and teleworkers. The lack of optimal price-performance solutions has left these
end users underserved.
-19-
<PAGE>
Traditionally, small and mid-sized businesses, home office and teleworkers have
relied on low-speed connectivity options for data transport. For example,
according to IDC, approximately 78% of Internet access revenues derived from
small- and mid-sized businesses in 1997 were generated through the traditional
telephone system, using relatively slow 28.8 Kbps to 56 Kbps dial-up modems or
ISDN lines. For higher speed connections, these end users have had to purchase
T1 service, a digital transmission link which operates at (1.544 Mbps) and,
while always on, is expensive for these markets (typically up to $1000 per month
depending upon distance and region).
EMERGENCE OF BROADBAND AND PACKET-BASED TECHNOLOGIES. The full potential of the
Internet and remote local area network applications cannot be realized without
removing the performance bottlenecks of the local telephone networks. Broadband
technology removes this performance bottleneck by increasing the data carrying
capacity of copper telephone lines from the 56 kbps speeds available with common
dial-up modems and 128 kbps speeds available on ISDN. Because broadband
technology reuses existing copper telephone lines, broadband requires a lower
initial fixed investment than that needed for existing alternative technologies,
such as cable modems, fiber, wireless, and satellite communications systems.
Subsequent investments in broadband technology are directly related to the
number of paying customers.
For companies such as Prism to provide broadband services, they must become a
CLEC to gain access to the traditional telephone company's or incumbent's
central office which is granted only to CLECs. Over the last two years, the FCC
has taken a series of steps to make it easier for competitors to gain access to
the central office. One recent move requires the traditional telephone companies
to offer "cageless" collocation, thereby eliminating the need for CLECs to rent
a cage of predetermined size and a fixed number of racks in a central office.
This order should permit CLECs to extend the reach of their broadband networks
more easily and inexpensively. The process of ordering space in a central office
and then ordering lines can take up to six months, requiring advance planning.
The state regulatory commissions are also undertaking initiatives intended to
improve the ability of competitive carriers offering advanced services to
compete in the marketplace. For example, the New York Public Service Commission
recently held a series of collaboratives and working groups between the
competitive data carriers and Bell Atlantic to develop processes to address the
ordering, provisioning and maintenance issues unique to advanced services
offerings.
WILLINGNESS OF CONSUMERS AND BUSINESSES TO SWITCH TELECOMMUNICATION PROVIDERS.
The Yankee Group estimates that from 1984 to 1999, AT&T's share of the long
distance voice market declined from 68% to 39%. Further, since 1993, CLECs
offering local voice services have also been successful in taking market share
from incumbent local exchange carriers ("ILECs"). The Federal Communications
Commission ("FCC") reports that CLECs have grown from 0.2% of the local voice
market to 2.4% today. Consumer and business experience with choice in the local
and long distance voice market enhances CLEC prospects to garner more market
share in the future.
The RED Solution
PRISM DATA SERVICES. In February 1999, Prism began commercially offering its RED
services. RED uses a variety of DSL technologies to provide high speed
continuously connected packet- based and channelized communications services.
RED currently connects business users to the Internet, And in the future, will
connect customers to LAN/WANS and extranets, using broadband technologies over
traditional copper telephone lines. As Prism completes its national expansion,
RED customers will be able to connect to its regional network either within a
city or between cities, to obtain high capacity, secure and reliable connections
between geographically dispersed locations. Prism plans to deliver a true wide
area, virtual private network with the capacity, speed, reliability and level of
service that its customers require.
-20-
<PAGE>
Prism offers three high-speed data services designed to answer the needs of its
various target market segments:
o RED HomeWork and RED PowerWork are applicable primarily for single users in
residential or small office settings requiring a dedicated, "always-on"
connection to the Internet and, in the future, a LAN/WAN, or other
destinations.
o RED NetWork serves the small to medium-sized business with capacity for
multiple users. Prism includes a router and multiple e-mail accounts with
each NetWork package, and customers have the option to support their own
Web and e-mail servers behind the router.
The chart below shows the service, speed, retail price (which includes equipment
installed at the customer's location), range and performance of its RED
services, as of December, 1999:
<TABLE>
<CAPTION>
RETAIL LIST
SPEED TO SPEED RETAIL LIST PRICE RANGE FROM
END FROM END PRICE FOR FOR MONTHLY CENTRAL
SERVICE USER USER ACTIVATION SERVICE OFFICE (FEET) MARKET/USAGE
- -------------------------- ------------ ----------- --------------- ----------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
RED HOMEWORKSM 960 Mbps 120 Kbps $299 $80 18,000 SOHO, Teleworker
RED POWERWORKSM 960 Mbps 120 Kbps $299 $150 18,000 Small Business
RED NETWORKSM 960 Mbps 320 Kbps $399 $300-$350 18,000 Small to Medium
Business
</TABLE>
In addition to the services noted above, Prism is developing a new family of
higher-speed data and voice products, some of which Prism is testing in the
greater New York City metropolitan area. These products fall into the following
categories:
o Burst, rate adaptive ethernet technology that delivers bandwidth up to 6
Mbps in either direction over copper loops. This solution uses Etherloop
technology from Elastic Networks, an independent unit of Nortel, and
allocates bandwidth dynamically based on changing transmission conditions
and crosstalk environment detected within a copper binder group.
o Higher-speed broadband services at speeds up to 7 Mbps in the downstream
direction, and up to 2 Mbps in the upstream directions. These services will
be packaged in a combination of symmetrical and asymmetrical product
offerings depending on customer requirements, distance between the premise
and the location of the broadband aggregation equipment and the copper
binder group environment that these services will run through.
Prism plans to bundle together and differentiate these services based on
customers' preferences for transmission speeds, security and flexibility to
choose transmission paths. Prism anticipates offering some of these services
beginning in the second quarter of 2000.
Prism also offers standard 56k and ISDN dial-up services to those customers who
are not located in a high-speed service area or who do not wish to take
high-speed service. Prism prices such services as $8.00 and $19.95 per month for
unlimited use, respectively. Prism plans to solicit this base of approximately
3,000 customers for upgrades to its high-speed access services, as well as for
voice services.
PRISM VOICE SERVICES. Prism plans to offer voice services in the greater New
York City metropolitan area in the first quarter of 2000 and expects to make a
similar offering in every market entered. Prism voice services include local and
local toll calling, long distance calling, and a bundle of four features-
three-way calling, call waiting, call forwarding and caller ID. In addition, as
a standard voice carrier, Prism is required to provide emergency (911) services
and directory and operator assistance. To be consistent with its goal of
offering its customers simple, integrated billing, Prism plans to offer such
services for a flat monthly charge, plus flat rate per minute charges for local
toll and long distance services.
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Prism prices for voice services will vary from market to market depending on
local competitive conditions and regulatory considerations. Further, the prices
listed above may change over time.
ADDITIONAL PRISM SERVICES. Prism either offers or is planning to offer several
services to RED customers by the first quarter of calendar 2000, including
domain name hosting, on-line data back-up and web hosting, as described below:
o Domain name hosting- RED customers can switch from their current Internet
service providers to its services without having to change their e-mail
addresses. Prism offers three types of domain name hosting based on the
size of the customer and whether they have their own mail servers.
o On-line data back-up- Prism plans to offer automatic data backup service to
RED customers together with its high-speed data services. This service
stores redundant copies of files from customer desktops and servers as
often as requested by the customer, protecting customers against unexpected
loss of critical data.
o Web hosting- Prism intends to host Web addresses for both residential and
small and medium sized business Web sites. Prism basic Web hosting service
includes 10 Mbps of web space, one e-mail address and online tutorial and
support. Heavy-user business Web site hosting will include 25 to 50 Mbps of
Web space, eight e-mail accounts and security features to ensure secure
communications between a server and Web browser.
Later in calendar year 2000, Prism plans to introduce virtual private network
capability and broadband content such as media and entertainment presentations.
Over the next several years, Prism believes that enhancements to the
applications described above, together with new applications, will be key to
retaining existing customers, attracting new ones, and offsetting potential
revenue declines from competition in high speed data and voice services.
The Prism Strategy
Prism intends to become a leading integrated communications carrier by directly
offering customers, namely small and mid-sized businesses, teleworkers and
residential power users, communications services that enhance productivity.
Prism's array of services will include high-speed connectivity, local and long
distance voice, video conferencing and secure applications such as automatic
data storage and recovery and teleworking solutions currently utilizing
broadband technology. Prism believes there are five key components of its
strategy that will enable us to achieve its objective:
o Build a national, facilities-based network to offer integrated data and
voice services to the largest and most densely populated markets.
o Pursue multiple marketing channels supported by brand advertising.
o Focus on building customer relationships.
o Develop applications that benefit from high-speed connectivity.
o Leverage the key benefits of its strategic relationship with Comdisco.
Customers, Sales And Marketing
CUSTOMERS. Prism offers its services to small-to mid-sized businesses,
teleworkers and residential power users. Currently, more than half of its
customers are small and medium sized businesses. The average recurring monthly
revenue per customer is slightly in excess of $160.
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PRISM MARKETS SERVICES THROUGH PRINT AND BROADCAST ADVERTISING, OUTBOUND
TELEMARKETING, direct sales force, indirect value - added resale agreements and
through its relationship with Comdisco.
ADVERTISING. Prism has established a strong brand identity in the greater New
York City metropolitan area through its advertising on television, billboards,
and in newspapers, as well as by selectively sponsoring public relations and
other events. Prism intends to accompany the launch of its voice and data
services in other markets with similar advertising efforts as appropriate.
DIRECT SALES. Prism markets its services in the greater New York City
metropolitan area through a direct sales force of 20 people. Prism also
generates lead referrals for its direct sales force through in-house
telemarketing efforts. Prism intends to increase the size of its sales and
technical support force to sell and support these services as Prism expands its
business. Prism plans to have up to 20 salespersons in each of its designated
market areas depending upon market size. Prism's direct sales process, from
initial solicitation to installation, generally ranges from 30 to 60 days for
small and medium businesses and individuals, while sales to larger businesses
with more complex communications requirements may require more time to develop
customized solutions. The large business sales process may take up to six months
and may involve:
o coordination with other Comdisco-offered services;
o a significant technical evaluation;
o an initial trial roll-out of its services; and
o a commitment of capital and other resources by the customer.
INDIRECT SALES CHANNELS. Prism also markets services, under the RED brand, to
small and medium businesses through indirect channels, value-added resellers,
and integrators. RED is available in New York City from select high-end computer
retail outlets, including DataVision and J&R Computer, as well as 67
valued-added resellers. Prism intends to pursue indirect sales channels in its
other markets as it expands.
WEB SITE SALES. Prism recently upgraded its Web site to enable customers to
order dial-up and high-speed data services electronically. This automated
process generates a completed customer contract and authorizes and charges
credit cards for payment. All 56k and ISDN dial-up orders are routed through its
Web site, reducing its costs of processing and billing these lower price point
customers.
FUTURE INTEGRATED COMMUNICATIONS SERVICES DEVELOPMENT. Prism believes it can
develop a significant competitive advantage by bundling core service offerings
(high-speed data connectivity and voice service) with other applications, tools
and content that have been tailored to meet the specific needs of an individual
or a business. These bundled communications packages will be comprised of a full
suite of complementary services including voice, data connectivity, broadband
applications, software, content, as well as appropriate equipment and corporate
incentives for those businesses with needs across multiple locations. This
integral solution will capitalize on favorable partnership arrangements
including its unique relationship with Comdisco. For example, a medical office
that needs imaging equipment in addition to the appropriate imaging software
will be able to realize significant savings through favorable leasing of
equipment through Comdisco's Lab/Scientific division.
Prism has designed the flexibility into its network to support this evolutionary
strategy and Prism believes it will enable us to fully support its promise to
deliver a bundled service and billing solution to its customers. Additionally,
these services will be made available to customers in an online retail
environment via the Web. A vertically- and geographically-driven user interface
will enable prospective customers to select (or Prism to recommend) services
packages that are commensurate with their needs. Prism's marketing approach
within this environment will allow us to offer real-time promotions and
incentives e.g., vertical market or corporate group discounts. In this way,
Prism believes it will be able to differentiate Prism from others whose
offerings and network capacities have not been designed to support this
integrated strategy.
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Customer Service
Prism offers customers a single point of contact for implementation,
maintenance, and billing. Prism's network operations center in New York City
provides both proactive and customer initiated maintenance services 24 hours a
day, seven days a week.
Prism's comprehensive solution includes:
o Customer line installation.
o "Hot Cut" provisioning.
o End user premises wiring and modem configuration.
o Network monitoring.
o Customer reporting and billing.
o Customer service and technical support.
o Operating support systems.
Prism believes that "Hot Cut" provisioning will enable Prism to provision voice
and data customers faster than other companies that are required to provide a
new copper telephone line as part of the service. Hot Cut Provision avoids the
customer line installation process by simply re-terminating the customer's
existing local loop from the ILEC switch to Prism's switch within the central
office collocation space.
Network Architecture
OVERVIEW. Prism intends to deploy a national, facilities-based network utilizing
Nortel's high-speed digital modem technology. Prism believes this technology,
combined with its network architecture, will yield cost savings in three areas:
o INITIAL CAPITAL COST OF EQUIPMENT- Because its network will transport both
data and voice, Prism believes its initial investment in switching
equipment is lower than if Prism attempted to build a voice network first,
and then overlaid additional data switching capabilities. Prism believes it
is one of the first companies, if not the first, to initiate the building
of a network in this fashion.
While Prism believes its costs may be lower due to its network design,
Prism also is planning for service flexibility. Prism believes the
broadband services market is still in its infancy, and technology and
products are evolving rapidly. Prism plans to deploy ITU-standardized
G992.2 G.Lite splitterless modems if and when this technology becomes
ubiquitous in the marketplace. To hedge against this possible technology
discontinuity, Prism is deploying multiple services access shelf technology
from Nortel that will support its current services as well as G.Lite,
full-rate ADSL, and SDSL access applications for both voice and high-speed
data. Furthermore, this multiple services access shelf technology in
collocations permits us to offer a suite of services from the same access
platform, reducing overall network provisioning and operations costs. A
multiple services platform allows us to invest in one network management
and operations support system infrastructure, instead of seeking solutions
with multiple access platforms and backend network products.
o PROVISIONING AND INSTALLATION- A 1998 Bellcore white paper compared the
provisioning and operating costs of a digital subscriber line access
multiplexer ("DSLAM") network to an integrated line card network (like the
one Prism is deploying) and found that the integrated line card network
resulted in operations cost savings. These savings result primarily from an
ability to offer both data and voice transport over the same copper circuit
between the customer and its remote node, thereby potentially eliminating
the need for an installation visit by ILEC technicians or Prism
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installation technicians. Further, Nortel's digital modem and integrated
line card technology has been approved by the Federal Communications
Commission ("FCC") and is the only high speed data technology that has been
specifically authorized by the FCC to operate on regular telephone loops,
rather than qualified data loops. By purchasing non-qualified POTS loops to
offer its services using Nortel's technology, Prism is able to avoid the
nonrecurring charges associated with the DSL qualified loops offered by the
incumbent carriers.
o NETWORK FACILITIES- By utilizing asynchronous transfer mode ("ATM")
technology, Prism has the ability to transport both data and voice over a
single network, thereby more efficiently using facilities that connect its
network elements. Prism plans to use a combination of ILEC and competitive
access providers for intra-city facilities, and both dark fiber and network
capacity provided through the agreement with Williams (see "Optical
Backbone" below) for longer distances.
Prism is constructing a voice network using Nortel DMS-500, Access Node Express,
RSC, and multiple services access shelf technology using the Universal Edge 9000
and Succession 9000 products. Prism is building its voice network to
carrier-grade voice standards found in many of today's copper-based voice
networks. Prism believes its carrier-grade standard will enable Prism to provide
high network reliability and consistent data bandwidth availability to its
customers.
Prism's network is designed to be highly secure between the subscriber's premise
and the integrated line card located in its collocation. Prism broadband service
gateway technology is based on a powerful IP Services platform that offers
firewall and IP address anti-spoofing capabilities for public high-speed data
access networks. Prism security solution means that data and voice traffic
cannot be viewed by others until it reaches a provider network, such as a
corporate network, or the Internet, and upon reaching its destination, traffic
is shared as directed by the customer and subject to rules established by the
customer. In the future, Prism plans to provide virtual private network ("VPN")
services to its customers that will offer equivalent or enhanced security to
today's frame relay or ATM managed network offerings. For RED HomeWork and RED
PowerWork subscribers, Prism will also optionally configure and package personal
firewall software to provide additional protection from accidental or
intentional attacks to the subscriber's personal computer from other Internet
users.
COMPONENTS. Prism components are integrated into networks across local,
metropolitan and wide areas that combine speed and balanced capacity in a manner
designed to deliver a high performance networking experience for its customers.
o CUSTOMER EQUIPMENT. Prism leases to the customer a Nortel digital modem as
part of its complete service offering, the cost of which is included in the
list price of the service. Prism configures and installs these modems with
the end user's computer AND NETWORK EQUIPMENT ALONG WITH ANY REQUIRED
ON-site wiring needed to connect the modem and the telephone line. Under
FCC policies, a customer also is free to obtain compatible modems from
sources other than us. For customers with multiple users, Prism also
provides routers that efficiently route data traffic over a single digital
modem and copper circuit.
o COPPER TELEPHONE LINES. Prism leases copper telephone lines, known as
unbundled network elements, or local loops, which run from its network
access points in central offices or other remote node locations, to the
customer location under terms specified in telecommunications regulations
and its interconnection agreements. Prism works closely with traditional
telephone companies to define specifications that ensure the quality of the
copper telephone lines Prism receives, thereby ensuring the transmission
speed of end user connections.
o CENTRAL OFFICE COLLOCATION SPACES AND OTHER REMOTE NODE LOCATIONS. Through
FCC and state telecommunications regulatory policies as well as its
interconnection agreements with traditional telephone companies, Prism
secures collocation space in central offices from which it desires to offer
services. These collocation spaces are designed to offer the same high
reliability and availability standards as traditional telephone company's
other central office space. In approximately 85% of its collocation spaces,
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Prism has installed or plans to install its own switch in a secure cage,
accessible only by its switch operations technicians. In the limited number
of cases where Prism has been unable to obtain physical space within a
desired central office, Prism has obtained SCOPE or cageless collocation
rights. With SCOPE collocation, Prism installs and maintains its equipment
in the traditional telephone company's central offices, but its access to
the space is non-exclusive. Pursuant to a recent order by the FCC, Prism
expects in the future to be entitled to additional collocation options,
including adjacent collocation. Typical equipment in a collocation space
includes a Nortel remote switching device, such as an access node, with
integrated line cards used to process both data and voice traffic.
o HOST SITES. A host site is a physical location where Prism connects all of
its remote nodes and aggregate voice and data traffic in one city for
transport to other cities, the Internet, LAN's/WAN's and other networks. A
typical Prism host site includes a Nortel switch, such as a DMS-500, as
well as additional equipment used to efficiently switch and route voice and
data traffic. Prism currently has a host site in New York City, has secured
leases for an additional 26 sites, and is currently installing host
switches in eight of such sites.
o OPTICAL BACKBONE. In the Eastern half of the United States, Prism plans to
connect hub sites to regional hubs using a dedicated backbone of fiber
Prism obtained in its agreement with Williams. Prism plans to purchase
Nortel optical Internet equipment to enable us to efficiently transport
data and voice traffic over this dedicated fiber. In other areas, Prism
intends to lease network capacity from Williams and other providers as
needs dictate. In those areas where Prism does not have dedicated fiber,
Prism will establish data hubs in regional offices throughout the United
States as traffic requires.
o NETWORK OPERATIONS CENTER. Prism manages its network from its network
operations center located in New York City. Prism provides end-to-end
network management to its customers using advanced network management tools
on a 24-hour-a-day, seven-day-a-week basis. This enhances its ability to
address performance or connectivity issues before they affect the end user
experience. From its network operations center, Prism can monitor its
network, including the equipment and circuits in its metropolitan area
networks and central offices, and its customers' networks, including
individual end user lines and DSL modems.
o NORTEL NETWORKS MONITORING CENTER. Through its relationship with Nortel,
Prism also has the monitoring and diagnosis capabilities of its network
management center (NMC). This facility provides network surveillance and
analysis to remotely address trouble reports and establish preventative
maintenance in advance of problems. In addition, Nortel personnel are
available for dispatch to assist us in the field.
Competition
Prism believes that its most direct competition for high-speed data
communications services will come from traditional telephone companies and other
major DSL providers operating in its target markets. However, Prism also
anticipates competition from service providers using other technologies.
TRADITIONAL TELEPHONE COMPANIES. Traditional telephone companies present in its
target markets are conducting technical and/or market trials or have commenced
commercial deployment of DSL-based services. Prism recognizes that each
traditional telephone company has the potential to quickly overcome many of the
obstacles that Prism believes have delayed widespread deployment of DSL services
by traditional telephone companies in the past.. The traditional telephone
companies have an established brand name, a large number of existing customers
and a reputation for high quality in their service areas. They also possess
sufficient capital to deploy DSL equipment rapidly, have their own copper lines
and can bundle digital data services with their existing analog voice services
to achieve economies of scale in serving customers. In the absence of strong
oversight by the FCC and state telecommunications regulators, traditional
telephone companies also have an economic incentive to benefit their own DSL
retail operations by providing themselves with the copper telephone lines,
collocation, support services and other essential DSL service inputs on more
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favorable terms than they provide these facilities and services to their
broadband competitors, ;like Prism. These factors give the traditional telephone
companies a potential competitive advantage compared with Prism. Accordingly,
Prism may be unable to compete successfully against Bell Atlantic or the other
traditional telephone companies, and any failure to do so would materially and
adversely affect its business, operating results and financial condition.
MAJOR DSL PROVIDERS. Other competitive telecommunications companies plan to
offer or have begun offering DSL-based access services in its targeted markets,
and others are likely to do so in the future. Competitive telecommunications
companies that provide DSL service include Covad Communication Group Inc.,
Rhythms NetConnections Inc., NorthPoint Communications Group Inc. and Network
Access Solutions Corp., but currently, Prism believes such companies only
provide data services.
OTHER SERVICE PROVIDERS. Many of its competitors are offering, or may soon
offer, technologies and services that will compete with some or all of its
broadband service offerings. These technologies include T1, integrated services
digital network, satellite, cable modems and analog modems and could be provided
by:
o Cable Modem Service Providers
o Traditional Long Distance Carriers
o Interexchange Carriers
o Internet Service Providers
o Wireless and Satellite Data Service Providers
VOICE SERVICES. In each designated market area in which Prism introduces voice
services, it will face, and expect to continue to face, significant competition
from the traditional telephone companies, which currently dominate their local
telecommunications markets. Prism competes with the traditional telephone
companies for local exchange services on the basis of product offerings,
reliability, state-of-the-art technology, price, route diversity, ease of
ordering and customer service. However, the traditional telephone companies have
long-standing relationships with their customers and provide those customers
with various transmission and switching services that Prism, in many cases, does
not currently offer. Prism has sought, and will continue to seek, to achieve
parity with the traditional telephone companies in order to become able to
provide a full range of local telecommunications services. Existing competition
for private line and special access services is based primarily on quality,
capacity and reliability of network facilities, customer service, response to
customer needs, service features and price, and is not based on any proprietary
technology.
Prism will also face competition from other potential competitors with respect
to its local and long distance voice services. In addition to the traditional
telephone companies and competitive access providers, potential competitors
capable of offering switched local and long distance services include long
distance carriers such as AT&T Corp., MCI WorldCom and Sprint Corporation, cable
television companies, such as Tele-Communications, Inc. and Time Warner Inc.,
electric utilities, microwave carriers, wireless telephone system operators and
private networks built by large end-users.
Prism believes that the 1996 Telecom Act as well as a recent series of completed
and proposed transactions between traditional telephone companies and long
distance companies and cable companies increase the likelihood that barriers to
local exchange competition will be removed. The 1996 Telecom Act states that
regional Bell operating companies must meet certain requirements that
essentially lower barriers to entry to competitive carriers before they are
permitted to provide in-region, interLATA services. When traditional telephone
companies that are regional Bell operating company subsidiaries are permitted to
provide those services, they will be in a position to offer single source
service. Traditional telephone companies that are not regional Bell operating
company subsidiaries may offer single source service presently.
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In some cases, cable television companies are upgrading their networks with
fiber optics and installing facilities to provide fully interactive transmission
of broadband voice, video and data communications. In addition, under the 1996
Telecom Act, electric utilities may install fiber optic telecommunications cable
and may facilitate provision of telecommunications services by electric
utilities over those networks if granted regulatory authority to do so. Cellular
and PCS providers may also be a source of competitive local telephone service.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors. In addition,
many of its existing and potential competitors have financial, personnel and
other resources, including name recognition, significantly greater than Prisms'.
Prism also competes with long distance carriers in the provision of long
distance services. Although the long distance market is dominated by three major
competitors, AT&T, MCI WorldCom and Sprint, hundreds of other companies also
compete in the long distance marketplace.
Relationship with Traditional Telephone Companies
Prism's relationships with traditional telephone companies are critical to its
business. Prism depends on traditional telephone companies for collocation
facilities, copper telephone lines, support services and some of the fiber optic
transport that Prism uses for its network. Prism's interconnection agreements
with each of the traditional telephone companies in its market areas govern much
of this critical relationship. Prism has signed interconnection agreements with
Bell Atlantic in New York, New Jersey, Pennsylvania, Maryland, Virginia,
Connecticut, Delaware, Massachusetts and Washington D.C., with Ameritech in
Illinois, Ohio, Indiana, Michigan and Wisconsin and with BellSouth in North
Carolina, Florida, Georgia and Kentucky and with Cincinnati Bell for the greater
Cincinnati area.
These interconnection agreements all have terms which expire within the next two
years, subject to certain regulatory mandated extensions. Thus, Prism may be
required to renegotiate its agreements in the future. Although Prism expects to
renew its interconnection agreements, there can be no assurance that Prism can
extend or renegotiate agreements on favorable terms.
Additionally, the FCC, state telecommunications regulators and the courts have
authority to interpret its interconnection agreements and to resolve disputes in
the event of a disagreement between a contracting traditional telephone company
and Prism. There can be no assurance that these bodies will not interpret the
terms or prices of its interconnection agreements in ways that could adversely
affect its business, operating results and financial condition.
In order to expand into other regions, Prism is also negotiating interconnection
agreements with the other incumbent LECs, including U S WEST, SBC (including
Southwestern Bell and PacBell) and GTE.
Government Regulation
The facilities and services that Prism obtains from traditional telephone
companies in order to provide its services are regulated extensively by the FCC
and state telecommunications regulatory agencies. To a lesser extent, the FCC
and state telecommunications regulators exercise direct regulatory control over
the terms under which Prism provides services to the public. Municipalities also
regulate limited aspects of the telecommunications business by imposing zoning
requirements, permit or right-of-way procedures or fees, among other
regulations. The FCC and state regulatory agencies generally have the authority
to condition, modify, cancel, terminate or revoke operating authority for
failure to comply with applicable laws, or rules, regulations or policies. Fines
or other penalties also may be imposed for these violations. Prism cannot assure
you that regulators or third parties would not raise issues regarding its
compliance or non-compliance with applicable laws and regulations. Prism
believes that it operates its business in compliance with applicable laws and
regulations of the various jurisdictions in which Prism operate and that it
possesses the approvals necessary to conduct its current operations.
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Employees
As of December 1999 Prism had approximately 285 employees. Prism believes that
its future success will depend in part on its continued ability to attract, hire
and retain qualified personnel. Competition for those personnel is intense, and
Prism may be unable to identify, attract and retain those personnel in the
future. None of its employees are represented by a labor union or are the
subject of a collective bargaining agreement. Prism has never experienced a work
stoppage and believes that its employee relations are good.
Legal Proceedings
Prism is not currently involved in any legal proceedings that Prism believes
could have a material adverse effect on its business, financial position,
results of operations or cash flows. Prism is, however, subject to state
telecommunications regulators, FCC and court decisions as they relate to the
interpretation and implementation of the 1996 Telecomm Act, the Federal
Communications Act of 1934, as amended, various state telecommunications
statutes and regulations, the interpretation of competitive telecommunications
company interconnection agreements in general, and its interconnection
agreements in particular. In some cases, Prism may be deemed to be bound by the
results of ongoing proceedings of these bodies or the legal outcomes of other
contested interconnection agreements that are similar to its agreements. The
results of any of these proceedings could have a material adverse affect on its
business, operating results, and financial condition.
Additional Information
FOR INFORMATIONAL PURPOSES ONLY, Prism financial statements are attached to this
Form 10-K as Exhibit 99.03. These statements are not incorporated by reference
in this or any other filing with the Securities and Exchange Commission. THESE
STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE COMDISCO, INC. CONSOLIDATED
FINANCIAL STATEMENTS AND THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
D. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
See Note 16 of Notes to Consolidated Financial Statements for information about
foreign and domestic operations.
Item 2. Properties
The Company owns its principal executive office building in Rosemont, Illinois
that has approximately 269,000 square feet. The Company leases office space for
sales offices in various domestic and international locations. The Company's
technical services division utilizes a 250,000 square foot building owned by the
Company in Schaumburg, Illinois. This space is used primarily for refurbishing,
maintenance and equipment storage.
The Company's continuity services group presently occupies eight recovery
centers owned by the Company, including 151,000 square feet in Illinois, 34,000
square feet in Texas, 42,000 square feet in Georgia, 56,000 square feet in
Toronto, Canada, two recovery centers each in New Jersey of 81,000 and 72,000
square feet, and California of 52,000 and 38,000 square feet. The Company's
continuity services group also leases 255,000, 14,000 and 10,000 square feet in
New Jersey, Missouri, and Canada, respectively. In addition, the continuity
services group leases space throughout North America for work area recovery.
Existing Company-owned facilities can be enlarged and expanded as required to
support additional growth. The Company's continuity services division also owns
and leases facilities in several European countries.
Ventures principal executive offices are located and its venture leasing and
venture debt activities are conducted at 3000 Sand Hill Road, Menlo Park,
California. Ventures leases office space at the following locations:
LOCATION SQUARE FOOTAGE LEASED
Menlo Park, CA 3,685
Palo Alto, CA 4,518
Waltham, MA 2,393
Rosemont, IL 2,066
Ventures believes its current facilities are adequate for its existing needs and
that additional, suitable space will be available as required.
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Prism's headquarters is in New York City, at 770 Broadway, in facilities
consisting of approximately 40,000 square feet under a lease that expires in
2009.
Prism's network operations center is also in New York City, at 11 Beach Street,
in facilities consisting of approximately 12,500 square feet under a lease that
expires in 2008.
Prism also leases collocation space in central offices from traditional
telephone companies where Prism operates or plan to operate under the terms of
its interconnection agreements with those traditional telephone companies and
regulations imposed by state telecommunications regulators and the FCC. While
the terms of these leases are perpetual, the productive use of its collocation
facilities is subject to the terms of its interconnection agreements which have
initial terms that expire in the years 2000 through 2002. Prism intends to
increase collocation space as it expands its network.
The Company's electronics group leases approximately 68,000 square feet in San
Jose, California, to be used primarily for equipment demonstration, maintenance
and storage.
Item 3. Legal Proceedings
No material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the three
months ended September 30, 1999.
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PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
STOCK SPLIT
On April 22, 1998, the Board of Directors authorized a two-for-one split of the
Company's common stock to be distributed on June 15, 1998, to holders of record
on May 22, 1998. Accordingly, all references in the Company's Annual Report to
Stockholders for the year ended September 30, 1999 and the Company's Annual
Report on Form 10-K for the year ended September 30, 1999 to common share data
have been adjusted to reflect the split.
PRICE RANGE OF COMMON STOCK
Price Range of Common Stock on page 34 of the Annual Report to Stockholders for
the year ended September 30, 1999 is incorporated herein by reference.
SHARED INVESTMENT PLAN
On February 2, 1998, the Company announced that 106 senior managers of the
Company exercised options to purchase over six million shares of the Company's
common stock for approximately $109 million (the "Proceeds"). Under the
voluntary program, the senior managers took out full recourse, personal loans to
fund their purchase of 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. Most of the Proceeds were used by the
Company to purchase its common stock under the Company's existing repurchase
program.
COMMON STOCK REPURCHASE PROGRAM
The Company has an on-going common stock repurchase program. During fiscal 1999
and 1998, the Company purchased five million shares at an aggregate cost of $82
million and six million shares at an aggregate cost of $88 million,
respectively.
SHAREHOLDER RIGHTS PLAN
On November 4, 1997, the Board of Directors of the Registrant declared a
dividend distribution of one right (a "Right") for each outstanding share of the
Registrant's Common Stock, $0.10 par value per share ("Common Stock"), to
stockholders of record at the close of business on November 17, 1997 (the
"Record Date"). The description and terms of the Rights are set forth in a
Rights Agreement, dated as of November 17, 1997 (the "Rights Agreement"),
between the Registrant and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent. The Board of Directors of the Registrant also authorized the issuance of
one Right for each share of Common Stock issued after the Record Date and prior
to the earliest of the Distribution Date (as defined in the Rights Agreement),
the redemption, exchange or expiration of the Rights. Except as set forth below
and subject to adjustment as provided in the Rights Agreement (defined below),
each Right entitles the registered holder to purchase from the Registrant one
one-thousandth of a share of Series C Junior Participating Preferred Stock (the
"Preferred Stock"), at a purchase price of $150 per Right (the "Purchase
Price").
The Rights Agreement and a related form of the rights certificate was filed as
Exhibit 4.1 with the Company's Current Report on Form 8-K, filed on November 6,
1997, File No. 1-7725. The foregoing description of the shareholder rights plan
does not purport to be complete and is qualified in its entirety by reference to
such exhibit.
-31-
<PAGE>
DIVIDENDS
The Company has paid cash dividends quarterly since February 1979. Cash
dividends paid on common stock were $15 million in fiscal 1999 and fiscal 1998.
The most recently declared quarterly common stock cash dividend, $.025 per
share, was paid on December 13, 1999 to stockholders of record on November 12,
1999. There are no restrictions on the Company's present or future ability to
pay common dividends, except its agreement to maintain a debt to net worth ratio
pursuant to, and certain other limitations contained in, the Company's
multi-option and global revolving credit agreements, none of which have any
current application. The Company expects to continue its policy of paying
regular cash dividends, although there is no assurance as to future dividends
because they are dependent upon the Company's profit levels and capital
requirements as well as financial and other conditions existing at the time.
Common stock cash dividends paid were $.10 per share in fiscal 1999 and fiscal
1998.
Item 6. Selected Financial Data
Six Year Summary on pages 24 and 25 of the Annual Report to Stockholders for the
fiscal year ended September 30, 1999 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 26 through 34 of the Annual Report to Stockholders for the
fiscal year ended September 30, 1999 is incorporated herein by reference.
Information relating to the Company's Year 2000 Readiness has been included in a
Current Report on Form 8-K dated and filed with the Commission on September 23,
1999 and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Qualitative Information About Market Risk on pages 33 and 34 of the Annual
Report to Stockholders for the fiscal year ended September 30, 1999 is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements on pages 35 through 53 of the Annual Report to Stockholders
for the fiscal year ended September 30, 1999 is incorporated herein by
reference. Quarterly Financial Data on page 52 of the Annual Report to
Stockholders for the fiscal year ended September 30, 1999 is incorporated herein
by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-32-
<PAGE>
PART III.
Item 10. Directors and Executive Officers of Registrant
The information relating to Directors and Executive Officers of Registrant
contained in the Company's definitive Proxy Statement filed within one hundred
twenty days of the last day of the year ended September 30, 1999 is incorporated
herein by reference.
Item 11. Executive Compensation
The information relating to Executive Compensation contained in the Company's
definitive Proxy Statement filed within one hundred twenty days of the last day
of the year ended September 30, 1999 is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information relating to Security Ownership of Certain Beneficial Owners and
Management contained in the Company's definitive Proxy Statement filed within
one hundred twenty days of the last day of the year ended September 30, 1999 is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information relating to Certain Relationships and Related Transactions
contained in the Company's definitive Proxy Statement filed within one hundred
twenty days of the last day of the year ended September 30, 1999 is incorporated
herein by reference.
-33-
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a)(1) and (a)(2) Certain Documents Filed as Part of the Form 10-K:
The financial statements, including the supporting
schedule, listed in the Index to Financial Statements
and Financial Statement Schedule are filed as part of
this form 10-K on page 36.
(a)(3) Exhibits:
See index to exhibits filed as part of this form 10-K
on pages 39 through 43
Items identified as exhibits 10.01 through 10.15 of
that index are management contracts or compensation
arrangements required to be filed as exhibits to this
Form 10-K.
(b) Exhibits:
Included in Item (a)(3) above.
(c) Financial Statement Schedule Required by Regulation S-X:
Included in Item (a)(1) and (a)(2) above.
-34-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
COMDISCO, INC.
DATE: DECEMBER 21, 1999 BY: /S/ DAVID J. KEENAN
-------------------------
David J. Keenan
Senior Vice President and
Corporate Controller
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ NICHOLAS K. PONTIKES
Nicholas K. Pontikes
CHIEF EXECUTIVE OFFICER /S/PHILIP A. HEWES
(Principal Executive Officer), Philip A. Hewes
President and Director Director
/S/ JOHN J. VOSICKY /S/ JAMES VOELKER
John J. Vosicky James Voelker
Chief Financial Officer (Principal Director
Financial Officer) and Director
/S/ DAVID J. KEENAN /S/ WILLIAM N. PONTIKES
David J. Keenan William N. Pontikes
Senior Vice President Director
(Principal Accounting Officer)
and Corporate Controller
/S/ ROBERT A. BARDAGY /S/ THOMAS H. PATRICK
Robert A. Bardagy Thomas H. Patrick
Director Director
/S/ HARRY M. JANSEN KRAEMER, JR.
Harry M. Jansen Kraemer, Jr. Rick Kash
Director Director
/S/ C. KEITH HARTLEY /S/ CAROLYN L. MURPHY
C. Keith Hartley Carolyn L. Murphy
Director Director
Each of the above signatures is
AFFIXED AS OF DECEMBER 21, 1999
-35-
Comdisco, Inc. and Subsidiaries
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements and notes to consolidated
financial statements of Comdisco, Inc. and Subsidiaries and related Independent
Auditors' Report, included in the Registrant's Annual Report to Stockholders for
the fiscal year ended September 30, 1999, are incorporated by reference in Item
8:
<TABLE>
<CAPTION>
Annual Report
page number
<S> ------------
<C>
Consolidated Statements of Earnings --
Years Ended September 30, 1999, 1998 and 1997 . . . . . . . . 35
Consolidated Balance Sheets -- September 30, 1999 and 1998 . . . 36
Consolidated Statements of Stockholders' Equity --
Years Ended September 30, 1999, 1998 and 1997 . . . . . . . . 37
Consolidated Statements of Cash Flows --
Years Ended September 30, 1999, 1998 and 1997 . . . . . . . . 38-39
Notes to Consolidated Financial Statements . . . . . . . . . . . 40-53
Independent Auditors' Report . . . . . . . . . . . . . . . . . . 54
The following consolidated financial statement schedule of Comdisco, Inc. and
Subsidiaries is included in Item 14(d):
</TABLE>
Form 10-K
PAGE NUMBER
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS . . . . . . . . . 38
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
-36-
[KPMG LLP Letterhead]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Comdisco, Inc.:
Under date of November 2, 1999, we reported on the consolidated balance sheets
of Comdisco, Inc. and subsidiaries as of September 30, 1999 and 1998, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three-year period ended September 30, 1999,
as contained in the 1999 annual report to stockholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year ended September 30, 1999. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related consolidated financial statement schedule as listed in
the accompanying index. The 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, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Chicago, Illinois
November 2, 1999
-37-
<PAGE>
Comdisco, Inc. and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended September 30, 1999
(in millions)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and end
DESCRIPTION of period expenses Other of period
- ------------------------------- ---------- ---------- ----- ----------
Year ended September 30, 1997:
<S> <C> <C> <C> <C>
Allowance for
doubtful accounts $21 $10 $(9)<F1> $22
=== === ==== ===
Year ended September 30, 1998:
Allowance for
doubtful accounts $22 $12 $ (10)<F1> $24
=== === ====== ===
Year ended September 30, 1999:
Allowance for
doubtful accounts $24 $41 $(22)<F1> $43
=== === ===== ===
<FN>
<F1> Write off of receivables net of recoveries.
</FN>
</TABLE>
-38-
<PAGE>
Comdisco, Inc. and Subsidiaries
INDEX TO 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 Certificate of Designations for Series C Junior
Participating Preferred Stock
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
3.04 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 Indenture Agreement between Registrant and Citibank,
N.A., as Trustee dated as of June 15, 1992
Incorporated by reference to Exhibit 4.1 filed
with the Company's Current Report on Form 8-K
dated September 1, 1992, as filed with the
Commission on September 2, 1992, File No. 1-7725,
the copy of Indenture, dated as of June 15, 1992,
between Registrant and Citibank, N.A., as Trustee
(said Indenture defines certain rights of
security holders).
4.02 Indenture Agreement between Registrant and Chemical Bank,
N.A., as Trustee, dated as of April 1, 1988
Incorporated by reference to Exhibit 4.5 filed
with the Company's Form 8 dated February 21,
1991, File No. 1-7725, the copy of Indenture
dated as of April 1, 1988, between Registrant and
Manufacturers Hanover Trust Company (said
Indenture defines certain rights of security
holders).
4.03 First Supplemental Indenture between Registrant and
Chemical Bank, N.A., as Trustee, dated as of January 1,
1990
Incorporated by reference to Exhibit 4.8 filed
with the Company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1990, File No.
1-7725, the copy of the First Supplemental
Indenture dated as of January 1, 1990, between
Registrant and Manufacturers Hanover Trust
Company, as Trustee (said Indenture defines
certain rights of security holders).
-39-
Exhibit No. Description of Exhibit
4.04 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.
4.05 Indenture Agreement between Registrant and The Fuji Bank
and Trust Company, as Trustee, dated as of February 1,
1995
Incorporated by reference to Exhibit 4.1 filed
with the Company's Current Report on Form 8-K
dated May 15, 1995, as filed with the Commission
on May 15, 1995, File No. 1-7725, the copy of the
Indenture dated as of February 1, 1995 between
the Registrant and The Fuji Bank and Trust
Company, as Trustee (said Indenture defines
certain rights of security holders).
4.06 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 20, 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).
4.07 Indenture Agreement between Registrant and SunTrust Bank,
Atlanta, as Trustee, dated as of September 15, 1999
Incorporated by reference to Exhibit 4.1 filed
with the Company's Registration Statement on
Form S-3 dated September 24, 1999, as filed with
the Commission on September 24, 1999, File No.
333-87725, the copy of the Indenture dated as of
September 15, 1999 between the Registrant and
SunTrust Bank, Atlanta, as Trustee (said
Indenture defines certain rights of security
holders).
10.01 1981 Stock Option Plan of the Registrant
Incorporated by reference to Exhibit 10.4 filed
with the Company's Annual Report for the year
ended September 30, 1982 on Form 10-K, File No.
1-7725.
10.02 Amendment to 1979 and 1981 Stock Option Plans of the
Registrant dated December 15, 1986
Incorporated by reference to Exhibit 10.6 filed
with the Company's Annual Report for the year
ended September 30, 1987 on Form 10-K, File No.
1-7725.
-40-
Exhibit No. Description of Exhibit
10.03 1987 Stock Option Plan of the Registrant
Incorporated by reference to Exhibit 10.7 filed
with the Company's Annual Report for the year
ended September 30, 1988 on Form 10-K, File No.
1-7725.
10.04 Amendment to 1981 and 1987 Stock Option Plans of the
Registrant dated November 4, 1987
Incorporated by reference to Exhibit 10.9 filed
with the Company's Annual Report for the year
ended September 30, 1987 on Form 10-K, File No.
1-7725.
10.05 1989 Non-Employee Director Stock Option Plan
Incorporated by reference to Exhibit 10.11 filed
with the Company's Annual Report for the year
ended September 30, 1990 on Form 10-K, File No.
1-7725.
10.06 1996 Non-Employee Director Stock Option Plan
Incorporated by reference to Exhibit 10.10 filed
with the Company's Annual Report for the year
ended September 30, 1996 on Form 10-K, File No.
1-7725.
10.07 1991 Stock Option Plan
Incorporated by reference to Exhibit 10.08 filed
with the Company's Annual Report for the year
ended September 30, 1992 on Form 10-K, File No.
1-7725.
10.08 1992 Long-Term Stock Ownership Incentive Plan
Incorporated by reference to Exhibit 10.09 filed
with the Company's Annual Report for the year
ended September 30, 1992 on Form 10-K, File No.
1-7725
10.09 1995 Long-Term Stock Ownership Incentive Plan
Incorporated by reference to Exhibit 10.13 filed
with the Company's Annual Report for the year
ended September 30, 1996 on Form 10-K, File No.
1-7725.
10.10 Amended and Restated 1998 Employee Stock Purchase Plan
Incorporated by reference to Exhibit 10.01 to the
Company's Quarterly Report for the quarter ended
March 31, 1998 on Form 10-Q, File No. 1-7725.
-41-
Exhibit No. Description of Exhibit
10.11 Amended and Restated International Employee Stock
Purchase Plan
Incorporated by reference to Exhibit 10.02 to the
Company's Quarterly Report for the quarter ended
March 31, 1998 on Form 10-Q, File No. 1-7725.
10.12 1998 Stock Option Program
Incorporated by reference to Exhibit 10.01 to the
Company's Quarterly Report for the quarter ended
June 30, 1998 on Form 10-Q, File No. 1-7725.
10.13 Amendments to the 1995 Long-Term Stock Ownership Incentive
Plan; 1992 Long-Term Stock Ownership Incentive Plan; 1991
Stock Option Plan; 1987 Stock Option Plan; 1981 Stock
Option Plan; 1996 Non-Employee Director Stock Option Plan;
and 1989 Non-Employee Director Stock Option Plan, each
dated November 3, 1999.
10.14 Management Compensation Arrangements and Plans
11.00 Computation of Earnings Per Share
12.00 Ratio of Earnings to Fixed Charges
13.00 Annual Report to Security Holders
Six Year Summary, Management's Discussion and
Analysis of Financial Condition and Results of
Operations, and the Consolidated Financial
Statements on pages 24 through 53 and the
Quarterly Financial Data on page 52 and the
Independent Auditors' Report on page 54 of the
Annual Report to security holders for the fiscal
year ended September 30, 1999 have been
incorporated by reference as part of this Form
10-K.
21.00 Subsidiaries of Registrant
23.01 Consent of KPMG LLP dated December 22, 1999
23.02 Consent of KPMG LLP dated December 22, 1999
23.03 Consent of KPMG LLP dated December 22, 1999
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 September 23,
1999, File No. 1-7725.
-42-
Exhibit No. Description of Exhibit
99.02 Financial Statements of Comdisco Ventures
These financial statements are filed with this
Annual Report on Form 10-K for informational
purposes only and are not incorporated by
reference in this or any other filing with the
Securities and Exchange Commission.
99.03 Financial Statements of Prism Communications Services,Inc.
These financial statements are filed with this
Annual Report on Form 10-K for informational
purposes only and are not incorporated by
reference in this or any other filing with the
Securities and Exchange Commission.
-43-
Comdisco, Inc. and Subsidiaries Exhibit 11.00
COMPUTATION OF EARNINGS PER SHARE
(in millions except per share data)
Average shares used in computing earnings per common and common equivalent share
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Average shares issued 222 221 220 216 214
Effect of dilutive options 10 12 10 10 6
Treasury Stock (70) (70) (72) (66) (54)
---- ---- ---- ---- ----
Total 162 163 158 160 166
==== ==== ==== ==== ====
Net earnings to common stockholders $ 48 $151 $123 $106 $ 96
==== ==== ==== ==== ====
Net earnings per common share:
Earnings per common share-basic $.32 $.99 $.83 $.70 $.60
==== ==== ==== ==== ====
Earnings per common share-diluted $.30 $.93 $.78 $.67 $.57
==== ==== ==== ==== ====
</TABLE>
On April 22, 1998 the Board of Directors authorized a two-for-one split of the
Company's common stock to be distributed on June 15, 1998, to holders of record
on May 22, 1998. All data with respect to earnings per common share, dividends
per common share, and weighted average number of common shares outstanding has
been retroactively adjusted to reflect the two-for-one split.
-44-
Comdisco, Inc. and Subsidiaries Exhibit 12.00
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
For the years ended September 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed charges
Interest expense $341 $329 $301 $267 $278<F1>
Approximate portion of
rental expense representative
of an interest factor 6 5 4 7 11
---- ---- ---- ---- ----
Fixed charges 347 334 305 274 289
Earnings from operations
before income taxes , net of preferred
stock dividends 75 238 203 176 160
---- ---- ---- ---- ----
Earnings from operations before income taxes
and fixed charges $422 $572 $508 $450 $449
==== ==== ==== ==== ====
Ratio of earnings to fixed charges 1.22 1.71 1.67 1.64 1.55
==== ==== ==== ==== ====
Rental expense:
Equipment subleases $ 4 $ 5 $ 6 $ 14 $ 22
office space, furniture, etc. 14 9 7 8 10
---- ---- ---- ---- ----
Total $ 18 $ 14 $ 13 $ 22 $ 32
==== ==== ==== ==== ====
1/3 of rental expense $ 6 $ 5 $ 4 $ 7 $ 11
==== ==== ==== ==== ====
<FN>
<F1>
Includes interest expense incurred by technology services and included in
technology services expense on the consolidated statements of earnings.
</FN>
</TABLE>
-45-
SIX-YEAR SUMMARY
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED SUMMARY OF EARNINGS
Revenue
Leasing ............................................. $ 2,655 $ 2,435 $ 2,116 $ 1,797 $ 1,573 $ 1,538
Sales ............................................... 406 329 269 262 358 271
Mainframe portfolio sale ............................ 485 -- -- -- -- --
Technology services ................................. 522 433 354 318 267 242
Other ............................................... 91 46 80 54 42 47
------- ------- ------- ------- ------- -------
Total revenue .................................. 4,159 3,243 2,819 2,431 2,240 2,098
------- ------- ------- ------- ------- -------
Costs and expenses
Leasing ............................................. 1,969 1,791 1,534 1,246 1,023 1,004
Sales ............................................... 361 275 210 218 304 225
Mainframe portfolio sale ............................ 485 -- -- -- -- --
Technology services ................................. 440 362 296 277 238 224
Selling, general and administrative ................. 306 249 244 244 233 213
Litigation settlement ............................... -- -- -- -- -- 70
Litigation charge ................................... -- -- -- -- -- 10
Interest ............................................ 337 326 299 262 274 263
Prism Communication Services ........................ 36 -- -- -- -- --
Other ............................................... 150 -- 25 -- -- --
------- ------- ------- ------- ------- -------
Total costs and expenses ....................... 4,084 3,003 2,608 2,247 2,072 2,009
------- ------- ------- ------- ------- -------
Earnings before income taxes ............................. 75 240 211 184 168 89
Income taxes ............................................. 27 87 80 70 64 36
------- ------- ------- ------- ------- -------
Net earnings before preferred dividends .................. 48 153 131 114 104 53
Preferred dividends ...................................... -- (2) (8) (8) (8) (9)
------- ------- ------- ------- ------- -------
Net earnings to common stockholders ............. $ 48 $ 151 $ 123 $ 106 $ 96 $ 44
======= ======= ======= ======= ======= =======
COMMON SHARE DATA
Earnings per common share-basic .......................... $ .32 $ .99 $ .83 $ .70 $ .60 $ .26
Earnings per common share-diluted ........................ .30 .93 .78 .67 .57 .26
Common stockholders' equity (per common share outstanding) 6.94 6.44 5.24 4.77 4.37 3.89
Cash dividends paid on common stock ...................... .10 .10 .10 .09 .08 .07
Average common shares (in thousands)-diluted ............. 161,787 162,770 157,590 159,684 165,502 173,274
FINANCIAL POSITION
Total assets ............................................. $ 7,807 $ 7,063 $ 6,350 $ 5,591 $ 5,039 $ 4,807
Notes payable ............................................ 820 1,121 1,024 1,127 661 593
Total long-term debt ..................................... 4,236 3,318 2,918 2,145 1,796 1,364
Discounted lease rentals ................................. 515 596 742 781 1,124 1,548
Stockholders' equity ..................................... 1,060 979 865 799 776 741
OTHER DATA
Total rents of new leases ................................ $ 3,100 $ 3,400 $ 3,200 $ 2,800 $ 2,300 $ 1,800
Future contractual cash flows ............................ 6,731 6,089 5,440 4,903 4,380 4,185
</TABLE>
-24 and 25-
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
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. These
forward-looking statements 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 in the "Note on Forward-Looking Information" on
page 57 of this annual report to stockholders.
SUMMARY
Fiscal 1999 net earnings to common stockholders (hereinafter referred to as "net
earnings") were $48 million, or $.30 per common share-diluted, compared to $151
million, or $.93 per common share-diluted, and $123 million, or $.78 per common
share-diluted, in fiscal 1998 and 1997, respectively. The decrease in net
earnings in fiscal 1999 compared to fiscal 1998 was due to $150 million of
pre-tax charges (the "Charge") 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 due to losses
attributable to Prism Communication Services ("Prism"), which reduced net
earnings by $36 million, or $.14 per diluted common share. Excluding the Charge
and Prism, net earnings for the year ended September 30, 1999 were $167 million,
or $1.03 per diluted common share. Excluding the Charge and Prism, the increase
in net earnings in the year ended September 30, 1999 compared to fiscal 1998 is
primarily due to remarketing activities and earnings contributions from
Ventures. The increase in net earnings in fiscal 1998 and 1997 compared to the
prior year is due to increases in earnings contributions from remarketing and
technology services.
Earnings per common share (basic and diluted) in fiscal 1999 and 1998
benefited from the company's stock repurchase program, which has reduced the
average common shares outstanding. However, average common shares outstanding
increased during fiscal 1998 as compared to fiscal 1997 primarily as a result of
the company's shared investment program (the "SIP") (see Note 12 of Notes to
Consolidated Financial Statements). Shares issued under the SIP in fiscal 1998
exceeded the number of shares repurchased in fiscal 1998.
BUSINESS
The company's businesses are designed to bring solutions that reduce technology
cost and risk to the customer and in supporting the customer's technology
infrastructure. These businesses are: 1) Leasing, which includes the leasing and
remarketing of distributed systems (PCs, servers, workstations and routers),
communications equipment, equipment leasing and technology lifecycle management
services for the semiconductor manufacturing, pharmaceutical and communications
industries; 2) Technology services, which includes business continuity services,
desktop management services (marketed under the company's IT CAP Solutions brand
name), managed network services and software tools to support these areas; 3)
Ventures, which provides venture debt and venture leasing to emerging technology
companies; and 4) Prism, which provides high speed, leading edge connectivity
and other communications services.
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.
-26-
<PAGE>
The company finalized the acquisition of Prism during the quarter ended
March 31, 1999.
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, Ventures, Prism, and on global leasing businesses in
historically high-margin areas such as electronics, communications, medical,
laboratory and scientific equipment.
In conjunction with its repositioning, the company recorded a one-time
pre-tax charge of $150 million, $96 million after tax, or approximately $0.59
diluted per share, in the quarter ended March 31, 1999. The components of the
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. In the fiscal quarter ended June 30, 1999, the company
completed the sale of its mainframe computer leasing portfolio (hereinafter
referred to as the "Sale) and the sale of the medical refurbishing business. The
company also completed the sale of the majority of the vendor lease portfolio in
September 1999.
Leasing volume decreased in fiscal 1999 as compared to fiscal 1998,
primarily as a result of the company's decision to exit the mainframe leasing
business and its focus on technology services. Cost of equipment placed on lease
was $2.9 billion in fiscal 1999, compared to cost of equipment placed on lease
of $3.3 billion and $3.1 billion in fiscal 1998 and 1997, respectively.
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 contributor to earnings, was strong
throughout both fiscal 1999 and 1998 and was at record levels in fiscal 1999.
The company believes that 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 at September 30, 1999, and as a result of the
residual leasing business for communication, electronics, medical, laboratory
and scientific equipment. See "Risk Factors That May Affect Future Results" for
a discussion of the factors that may affect remarketing activities.
The company's technology services attained record revenues in 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 pre-tax earnings of $82 million, excluding the pre-tax charge,
compared to pre-tax earnings of $71 million and $58 million in fiscal 1998 and
1997, respectively. The company's network services as well as its desktop
management services had strong growth during fiscal 1999 and should have a
positive impact on the company's pre-tax earnings in fiscal 2000. Included in
the Charge is $30 million associated with the realignment of the company's
service businesses, including costs associated with the relocation of its
network management center 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.
FINANCIAL CONDITION
The company's operating activities during the year ended September 30, 1999,
including capital expenditures for equipment facilities expansion and other
capital expenditures, were funded primarily by cash flow from operations
(primarily lease receipts), including the realization of residual values through
remarketing activities, and external financing. See Note 7 of Notes to
Consolidated Financial Statements for information on the company's
interest-bearing liabilities, including average daily borrowings, effective
interest rates and maturities.
During the last five years, equipment purchased for leasing totaled $13
billion. Expenditures for equipment in fiscal 1999 totaled approximately $2.8
billion. The company continues to invest additional capital to upgrade its
service capabilities and enhance future continuity services revenues. In fiscal
1999, capital expenditures were $151 million, compared to $87 million and $61
million in fiscal 1998 and 1997, respectively. This includes additions in large
systems, mid-range systems, network products and expansion of its work areas, as
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<PAGE>
well as continued investment in Advance Recovery Services ("ARS"). ARS is
designed to reduce the risk of data loss as well as recovery time across all
market-leading platforms. The company is also investing in additional personnel
to expand its other technology services offerings and to ensure the quality of
its services offerings.
During fiscal 1999, the company invested approximately $136 million in
Prism, including $91 million in the development and expansion of this business.
The company currently estimates that Prism capital expenditures will be
approximately $400 million in fiscal 2000 and $250 million in fiscal 2001
including capital expenditures for the expansion of Prism's network, costs
associated with the buildup phase in each metropolitan area (the procurement,
design and construction of central office cages, end-user DSL line cards, and
expenditures for other elements of network design), and the improvement of
Prism's network management, billing and other back office systems.
The company believes that its estimated cash flow from operations and
current financial resources will be sufficient to fund anticipated future growth
and operating requirements. In addition, the company expects to continue to
utilize a variety of financial instruments to fund its short- and long-term
needs.
CASH PROVIDED BY OPERATING ACTIVITIES: Net cash provided by operating activities
was $3.3 billion, $2.9 billion and $2.5 billion in fiscal 1999, 1998 and 1997,
respectively. During the last five years, net cash provided by operating
activities totaled $12.8 billion.
As of September 30, 1999, the company estimates that future contractual
cash flows from leasing, services and ventures could generate gross cash
receipts of approximately $6.7 billion, including $3.1 billion in fiscal 2000.
The company's liquidity has typically been augmented by the realization of cash
from the future remarketing of leased equipment. Assuming realization of
independent forecasts of equipment values at lease termination and management
estimates, the estimated gross cash receipts to be provided from remarketing in
future years totals $1.6 billion.
CREDIT LINES: At September 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, of which approximately $801
million was unused. The company had committed credit lines of $1.3 billion
established with twenty-nine banks at September 30, 1999.
SENIOR NOTES: The company issued $370 million of medium-term notes in fiscal
1999 pursuant to a registration statement filed in June 1997. The company also
issued an additional $370 million of medium-term notes in fiscal 1999 pursuant
to a registration statement filed in June 1997. In October, 1998, the company
filed a registration statement on Form S-3 with the Securities and Exchange
Commission (the "SEC") for a shelf offering of up to $1.5 billion of senior debt
securities with terms to be set at the time of each sale (the "1998 Shelf").
Pursuant to the 1998 Shelf, the company, in fiscal 1999 issued the following
senior notes:
o $350 million of 6.000% Notes Due January 30, 2002
o $350 million of 5.950% Notes Due April 30, 2002
o $300 million of 7.250% Notes Due September 1, 2002
o $318 million of medium-term notes
At September 30, 1999, an aggregate of $182 million of medium-term notes
remained available for issuance under the 1998 Shelf. Subject to market
conditions, the company plans to continue to be active in issuing senior debt
during fiscal 2000, primarily to supportthe anticipated growth of the leased
assets, services, Ventures, Prism, and, where appropriate, to refinance
maturities of interest-bearing liabilities. On September 24, 1999 the company
filed a registration statement on Form S-3 with the SEC 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 "1999 Shelf"). No senior debt has been sold pursuant to the 1999
Shelf. In September 1999, the company established a 500 million Euro Medium Term
Note Program under which the company would issue Euro medium term notes. An
application has been made to list notes issued under the program on the
Luxembourg Stock Exchange and the company may apply for listing on other stock
exchanges.
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<PAGE>
SECURED DEBT: Proceeds from the discounting of lease rentals were $341 million,
$279 million and $430 million in fiscal 1999, 1998 and 1997, respectively.
Secured debt is currently utilized as a tool to manage credit risk and
concentration risk. However, the company believes that in a changing rate
environment, secured debt may offer attractive financing rates during fiscal
2000. The company's credit committee establishes concentration levels by credit
rating and customer.
MATURITIES: At September 30, 1999, the company had debt of $2.5 billion
scheduled to mature in fiscal 2000, including $820 million of commercial paper
and short-term bank borrowings. At September 30, 1999, the company had expected
future contractual cash flows from existing lease, services and venture
contracts of $3.1 billion in fiscal 2000. See Notes 6 and 7 of Notes to
Consolidated Financial Statements for information on contractual cash flows and
interest-bearing liabilities, respectively.
RATIOS: The ratio of debt to total stockholders' equity (the "Ratio") was 5.3:1,
5.1:1 and 5.4:1 at September 30, 1999, 1998 and 1997, respectively. During
fiscal 1998, the company redeemed its outstanding preferred stock, which reduced
stockholders' equity by $89 million. The 1998 Ratio was positively impacted by
the SIP, under which 106 senior managers of the company purchased over six
million shares of the company's common stock for approximately $109 million.
REVENUE
Total revenue of approximately $4.2 billion and $3.2 billion in fiscal 1999 and
1998 represented increases of 28% and 15% respectively, over the prior year
periods. The increase in fiscal 1999 compared to fiscal 1998 was primarily due
to the Sale, which increased sales revenue by $485 million, and higher revenue
from technology services. Total leasing revenue of $2.7 billion for the year
ended September 30, 1999 represented an increase of 9% compared to the prior
year. Sales-type revenue increased 44% in fiscal 1999 compared to fiscal 1998,
reflecting the company's emphasis on, and the importance of, remarketing
activities. Technology services revenue increased 21% in fiscal 1999 compared to
fiscal 1998. See "Technology Services" for a discussion of technology services
revenue and margins and "Sales" for a discussion of sales revenue and margins.
LEASING: Operating lease revenue minus operating lease costs was $375 million,
or 19.3% of operating lease revenue (the "Operating Lease Margin"), and $369
million, or 19.5% of operating lease revenue, in fiscal 1999 and 1998,
respectively. The company expects the Operating Lease Margin to be at
approximately current levels throughout fiscal 2000, depending on the mix of
equipment leased and product announcements by manufacturers. The relatively
modest increase in operating lease revenue minus operating lease cost in fiscal
1999 compared to fiscal 1998 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. The Sales-type Lease Margin decreased in fiscal 1999
compared to the prior year primarily because of lower margins on electronics
equipment remarketing.
The following graph presents the Lease Margin for total leasing, operating
and sales-type leases for the five years ended September 30, 1999:
95 96 97 98 99
-- -- -- -- --
Total leasing 35% 31% 27% 26% 26%
Operating lease 26% 24% 21% 20% 19%
Sales-type lease 28% 26% 30% 30% 25%
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<PAGE>
SALES: Revenue from sales, which includes remarketing and buy/sell activities,
in fiscal 1999, 1998 and 1997 is shown in the table below:
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ ------------------------
Revenue Expense Margin Revenue Expense Margin Revenue Expense Margin
------- ------- ------ ------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 293 $ 250 15% $ 329 $ 275 16% $ 269 $ 210 22%
Sale of mainframe portfolio 485 485 - - - - - - -
Sale of vendor portfolio 95 93 2% - - - - - -
Sale of medical refurbishment business 18 18 - - - - - - -
----- ----- --- ----- ----- --- ----- ----- ---
$ 891 $ 846 5% $ 329 $ 275 16% $ 269 $ 210 22%
===== ===== === ===== ===== === ===== ===== ===
</TABLE>
Margins in fiscal 1997 were unusually high, primarily as a result of
significant sales of distributed systems equipment.
TECHNOLOGY SERVICES: Revenue from technology services was $522 million, $433
million and $354 million in fiscal 1999, 1998 and 1997, respectively. The
increases are primarily the result of the growth in products and services.
Revenue from continuity contracts, which is recognized monthly during the
noncancelable continuity contract and is therefore recurring and predictable,
was approximately $325 million, $298 million and $280 million during fiscal
1999, 1998 and 1997, respectively, representing approximately 62%, 69% and 79%
of technology services revenue.
VENTURES: Ventures revenue of approximately $229 million in fiscal 1999 and $114
million in fiscal 1998 represent an increase of 100% and 20%, respectively, over
the prior year periods. The increases were due to higher total leasing revenue
and, in fiscal 1999, higher revenue from the sale of equity interests in
early-high stage technology companies and higher interest income on venture
debt. Total leasing revenue of $118 million for the year ended September 30,
1999 represented an increase of 39% compared to the prior year. Revenue from the
sale of equity interests obtained in conjunction with the company's financing
transactions with early-stage high technology companies, which is included in
"Other revenue" on the Statement of Earnings, was $80 million in fiscal 1999
compared to $15 million and $17 million in fiscal 1998 and 1997, respectively.
See "Risk Factors that May Affect Future Results" for a discussion of factors
that could affect the timing of, and the amounts received, from the sales of the
company's equity interests in these companies.
PRISM: Prism is a start up company, and, as such, has only recently began
developing a revenue base. Revenues were approximately $1 million in fiscal
1999.
OTHER REVENUE: Other revenue was $91 million, $46 million and $80 million in
fiscal 1999, 1998 and 1997, respectively. In addition to the Ventures revenue
previously discussed, fiscal 1999 includes a reduction in Ventures revenue of
$20 million as an increase to the allowance for credit losses, and fiscal 1998
and 1997 includes $5 million and $4 million, respectively, of gains from the
sale of direct financing and sales-type receivables. Other revenue for fiscal
1997 includes a gain of $25 million ($16 million after-tax, or $.10 per common
share-diluted) resulting from the receipt of amounts in settlement of
litigation. In addition, fiscal 1997 other revenue includes approximately $11
million of gains from the sale of other investments owned by the company.
COSTS AND EXPENSES
Total costs and expenses were $4.1 billion and $3.0 billion in fiscal 1999 and
1998, respectively. The increase in fiscal 1999 compared to the prior year is
primarily due to the Sale and the Charge. Other factors contributing to the
higher costs and expenses in fiscal 1999 and 1998 compared to the prior years
were increased leasing costs related to increased operating lease revenue and,
in fiscal 1999, increased sales-type revenue, and increased costs associated
with the company's technology services.
SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses totaled $306 million in fiscal 1999, $249 million in fiscal 1998, and
$244 million in fiscal 1997. The increase in fiscal 1999 compared to fiscal 1998
is primarily due to higher compensation and personnel costs. Despite the level
of growth in fiscal 1998, cost containment efforts begun in fiscal 1997 resulted
in a modest increase in selling, general and administrative costs in fiscal 1998
compared to fiscal 1997.
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<PAGE>
INTEREST: Interest expense for fiscal 1999 totaled $337 million in comparison to
$326 million infiscal 1998 and $299 million in fiscal 1997, respectively. The
increase in interest expense in fiscal 1999 compared to fiscal 1998 is due to
higher average daily borrowings resulting from the company's increased
investment in leasing, Ventures and Prism compared to the prior period, offset
by lower average rates.
PRISM: PRISM INITIALLY INTRODUCED ITS SERVICES, MARKETED UNDER THE REDSM brand
name, in Manhattan in January 1999 and has subsequently expanded its service to
the greater New York area, Newark, Jersey City and Rutherford. The company
intends to continue Prism's network expansion into a total of 36 cities
throughout North America. Since January 1999, Prism's principal activities have
included: o developing criteria for market selection and analyzing potential
markets against these criteria;
o obtaining required governmental authorizations;
o negotiating and entering into interconnection agreements with traditional
telephone companies;
o acquiring space in traditional telephone companies' central offices and
installing Prism's network equipment in those offices;
o launching service in target markets;
o selling and marketing to, and installing service for, customers in markets
where Prism has established service;
o hiring management and other personnel;
o developing and implementing operations support systems and other information
systems.
Prism has incurred losses in every month since its inception and the
company expects to substantially increase its operating expenditures in an
effort to rapidly expand its network infrastructure and service areas. Prism
expects to incur substantial operating losses, net losses and net operating cash
outflows during its network build-out and during the initial penetration of each
new market. Its losses and net operating cash outflows are expected to continue
and to increase as it expands its operations.
OTHER: See "Business" for a discussion of the Charge recorded in the second
quarter of fiscal 1999.
In the second quarter of fiscal 1997, the company recorded a noncash,
non-operating charge of $25 million ($16 million after-tax, or $.10 per common
share) as an addition to its equipment valuation allowance.
INCOME TAXES
Note 9 of Notes to Consolidated Financial Statements on page 47 provides details
about the company's income tax provision.
INTERNATIONAL OPERATIONS
The company operates principally in four geographic areas: the United States,
Europe, Canada and the Pacific Rim. In its operations, the company works with
multinational corporations, and the company provides global solutions in its
services.
Revenue from international operations, excluding export sales, was $905
million in fiscal 1999 compared to $659 million and $570 million in fiscal 1998
and 1997, respectively. International revenues represented 22% of the company's
total revenue in fiscal 1999 and 20% in both fiscal 1998 and fiscal 1997.
Geographic area data is included in Note 16 of Notes to Consolidated
Financial Statements on page 52.
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 and services, 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.
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<PAGE>
EARNINGS CONTRIBUTIONS FROM LEASING: Lower margins on large systems transactions
(mainframes and related peripherals, including DASD and tape drives) have
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 2000, remarketing
contributions, primarily for the company's global equipment leasing businesses,
must be at or above the level achieved in fiscal 1999. 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 emergence of the communications market-- facilities-based broadband
communications companies, Internet Service Providers and other
telecommunications carriers--and the growth of broadband networks, provides the
company with an industry in which leasing is an attractive alternative to
ownership. The company's communications equipment customers are generally
companies with accumulated net deficits and extensive liquidity requirements. To
the extent that these companies are unable to meet their business plans, or
unable to obtain funding or funding at reasonable rates to complete their
business plans, there could be an increase in the company's credit losses above
historical levels.
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 2000, the company must meet its obligations under the
agreements underlying transactions in process at September 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 IT CAP Solutions, advanced recovery
services, availability options, remote computing services and web hosting; and
contain costs. The company must also 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 2000.
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.
VENTURES: Through Ventures, 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.
Accordingly, investments in these companies may not result in any return and the
company may lose its entire investment and/or principal balance. Equity
instruments held by the company are generally subject to lockups restricting its
ability to sell until several months after an initial public offering. The
public market for high technology and other emerging growth companies is
extremely volatile. Such volatility may adversely affect the ability of the
company to dispose of the equity securities and the value of those securities on
the date of sale.
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<PAGE>
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 substantial additional
capital to support its data network, to expand its services, to increase its
sales and marketing efforts and to support its 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 of Prism 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.
Prism operates in a highly regulated environment. Changes in regulatory
policies may adversely impact its ability to provide services and increase the
costs of providing those services.
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: 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.
OTHER MATTERS
QUALITATIVE INFORMATION ABOUT MARKET RISK: The company's primary market risk
exposure is interest rate risk, primarily related to the company's
interest-bearing obligations. Generally, a changing interest rate environment
does not impact the company's margins since the effects of higher or lower
borrowing costs would be reflected in the rates on newly leased assets. In
addition, the company attempts to match the maturities of its borrowings with
the cash flows from its leased assets and notes receivables, thereby reducing
the company's interest rate exposure.
The company has an on-going program to manage its assets and liabilities.
This program includes establishing levels of fixed and floating rate debt,
liquidity and duration analysis, monitoring credit quality of the lease
portfolio and related account review procedures and oversight of interest rate
and foreign exchange hedging policies. This program includes the use of
derivatives in certain identifiable situations to manage risk. The company does
not speculate on interest rates, but rather manages its portfolio of assets and
liabilities to mitigate the impact of interest rate fluctuations. The company
does not use derivatives for trading purposes. See Note 7 of Notes to
Consolidated Financial Statements for information on the company's average daily
borrowings, the company's derivative financial instruments, comprising interest
rate swaps and foreign currency forward exchange contracts and effective
interest rates.
The table below presents principal (or notional) amounts and related
weighted-average interest rates by year of maturity for the company's notes
payable, term notes and senior notes.
(IN MILLIONS)
<TABLE>
<CAPTION>
00 01 02 03 04+
------ ----- ------ ----- -----
<S> <C> <C> <C> <C> <C>
Notes payable
Fixed rate .......... $ 820 $ -- $ -- $ -- $ --
Average interest rate 4.87%
Term notes
Floating rate ....... 550 -- -- -- --
Average interest rate 5.25%
Senior notes
Fixed rate .......... 851 857 1,435 268 275
Average interest rate 6.69% 6.51% 6.42% 6.14% 6.13%
</TABLE>
As the above table incorporates only the company's interest-bearing
obligations and not its lease portfolio, the information presented therein has
limited predictive value.
The company's investment in equity securities is subject to market price
risk. A 10% decrease in market values would reduce the carrying value of the
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<PAGE>
company's publicly traded equity securities by $20 million. Many of these equity
securities are highly volatile stocks.
RECENTLY ISSUED PROFESSIONAL ACCOUNTING STANDARDS: The company does not believe
that SFAS 133, Accounting for Derivative Instruments and Hedging Activity, which
will become effective in fiscal 2001, will have a material impact on the
company's financial statements.
YEAR 2000: The company has substantially completed a program to assess,
remediate, mitigate and contingency plan for the potential impact of "Year 2000"
issues throughout the company. "Year 2000" issues arise where date-sensitive
software uses two digit year date fields, sorting the year 2000 ("00") before
the year 1999 ("99"). As a result, these systems may not process dates beyond
1999, resulting in data corruption and processing errors and possible system
failures.
The company's program has addressed its internal computer systems and
applications, facilities, equipment portfolio, and continuity and network
services operations. This program includes assessment and mitigation of Year
2000 issues with respect to information technology and other equipment that uses
software embedded on computer chips. In addition, the company is attempting to
monitor the Year 2000-compliance status of its vendors, suppliers and service
providers. The company believes that it is taking the necessary steps regarding
Year 2000 compliance with respect to matters within its control to provide that
Year 2000 issues will not materially impact the company. However, there can be
no assurance that Year 2000 issues will not adversely affect the company.
The SEC issued an interpretive guidance regarding disclosure of Year 2000
issues and consequences, effective August 4, 1999. On September 23, 1999, the
company provided this disclosure in a Form 8-K filing, a copy of which is
available for download at the SEC Internet home page (www.sec.gov). This Year
2000 Readiness is incorporated by reference in the company's Annual Report on
Form 10-K for the year ended September 30, 1999.
EURO COMPLIANCE: While the company will continue to evaluate the impact of the
Euro introduction over time, based on currently available information,
management does not believe that the introduction of the Euro currency will have
a material adverse impact on the company's financial condition or overall trends
in results of operations.
INFLATION: The company does not consider the present rate of inflation to have a
significant impact on the businesses in which it operates.
PRICE RANGE OF COMMON STOCK
The company's common stock is listed on the New York Stock Exchange and the
Chicago Stock Exchange under the symbol CDO. At September 30, 1999, there were
approximately 1,900 holders of record of the company's common stock. The
following table shows the quarterly price range of the company's common stock,
as traded on the New York Stock Exchange, and cash dividends paid on common
stock for fiscal 1999 and 1998, adjusted for the two-for-one stock split (See
Note 12 of Notes to Consolidated Financial Statements).
<TABLE>
<CAPTION>
99 98
------------------------------ -----------------------------
Quarter High Low Dividends High Low Dividends
- ------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
First $19.44 $12.50 $.025 $16.88 $14.16 $.025
Second 17.88 10.75 .025 21.94 14.88 .025
Third 30.88 15.81 .025 22.44 16.50 .025
Fourth 26.94 17.50 .025 20.88 12.44 .025
</TABLE>
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<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
REVENUE
Leasing:
Operating ......................... $ 1,938 $ 1,897 $ 1,635
Direct financing .................. 174 162 145
Sales-type ........................ 543 376 336
Total leasing ..................... 2,655 2,435 2,116
Sales ............................. 891 329 269
Technology services ............... 522 433 354
Other ............................. 91 46 80
------- ------- -------
Total revenue ............... 4,159 3,243 2,819
------- ------- -------
COSTS AND EXPENSES
Leasing:
Operating ......................... 1,563 1,528 1,297
Sales-type ........................ 406 263 237
------- ------- -------
Total leasing ............... 1,969 1,791 1,534
Sales ................................. 846 275 210
Technology services ................... 440 362 296
Selling, general and administrative ... 306 249 244
Interest .............................. 337 326 299
Prism Communication Services .......... 36 -- --
Other ................................. 150 -- 25
------- ------- -------
Total costs and expenses .......... 4,084 3,003 2,608
------- ------- -------
Earnings before income taxes .......... 75 240 211
Income taxes .......................... 27 87 80
------- ------- -------
Net earnings before preferred dividends 48 153 131
Preferred dividends ................... -- (2) (8)
------- ------- -------
Net earnings to common stockholders ... $ 48 $ 151 $ 123
======= ======= =======
Net earnings per common share:
Earnings per common share-basic ... $ .32 $ .99 $ .83
======= ======= =======
Earnings per common share-diluted . $ .30 $ .93 $ .78
======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
-35-
<PAGE>
CONSOLIDATED BALANCE SHEETS
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 1998
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents ....................................... $ 387 $ 63
Cash-legally restricted ......................................... 46 30
Receivables, net ................................................ 696 340
Inventory of equipment .......................................... 115 165
Leased assets:
Direct financing and sales-type ............................. 2,107 1,779
Operating (net of accumulated depreciation) ................. 3,516 4,121
Net leased assets ........................................ 5,623 5,900
Buildings, equipment and other, net ............................. 229 137
Other assets .................................................... 711 428
------- -------
$ 7,807 $ 7,063
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable ................................................... $ 820 $ 1,121
Term notes ...................................................... 550 550
Senior notes .................................................... 3,686 2,768
Accounts payable ................................................ 263 308
Income taxes:
Current ..................................................... 15 14
Deferred .................................................... 367 319
Other liabilities ............................................... 531 408
Discounted lease rentals ........................................ 515 596
------- -------
6,747 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 223,464,344 shares (221,657,318 in 1998) .......... 22 22
Additional paid-in capital .................................. 302 257
Accumulated other comprehensive income ...................... 58 (13)
Retained earnings ........................................... 1,134 1,101
------- -------
1,516 1,367
Common stock held in treasury, at cost; 70,672,094 shares
(69,556,956 in 1998) ..................................... (456) (388)
------- -------
Total stockholders' equity ............................... 1,060 979
------- -------
$ 7,807 $ 7,063
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
-36-
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS EXCEPT PER SHARE DATA)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Additional Deferred other Common
Preferred Common paid-in compen- comprehen- Retained stock in
stock stock capital sation sive income earnings treasury Total
--------- ------ --------- -------- ----------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 ............... $ 89 $ 7 $ 165 $ (5) $ 5 $ 856 $ (318) $ 799
Net earnings ................................ 131 131
Translation adjustment ...................... (25) (25)
Total comprehensive income ............. 106
Cash dividends-preferred .................... (8) (8)
Cash dividends-common ($.10 per share) ...... (14) (14)
Stock options exercised ..................... 10 6 16
Reduction of guaranteed ESOP debt ........... 2 2
Purchase of common stock .................... (45) (45)
Retire treasury stock ....................... (2) 2 --
Stock split ................................. 4 (4) --
Income tax benefits resulting from the
exercise of non-qualified stock options 9 9
------ ------ ------ ------ ------ ------ ------ ------
BALANCE AT SEPTEMBER 30, 1997 .............. 89 11 178 (3) (20) 965 (355) 865
------ ------ ------ ------ ------ ------ ------ ------
Net earnings ............................... 153 153
Translation adjustment ..................... 7 7
Total comprehensive income ............ 160
Cash dividends-preferred ................... (2) (2)
Cash dividends-common ($.10 per share) ..... (15) (15)
Shared Investment Program .................. 77 31 108
Stock options exercised .................... (4) 24 20
Reduction of guaranteed ESOP debt .......... 3 3
Purchase of preferred stock ................ (89) (89)
Purchase of common stock ................... (88) (88)
Stock split ................................ 11 (11) --
Income tax benefits resulting from the
exercise of non-qualified stock options 17 17
------ ------ ------ ------ ------ ------ ------ ------
BALANCE AT SEPTEMBER 30, 1998 .............. -- 22 257 -- (13) 1,101 (388) 979
------ ------ ------ ------ ------ ------ ------ ------
Net earnings ............................... 48 48
Translation adjustment ..................... (21) (21)
Change in unrealized gain .................. 92 92
Total comprehensive income ............ 119
Cash dividends-common ($.10 per share) ..... (15) (15)
Stock options exercised .................... 21 14 35
Purchase of common stock ................... (82) (82)
Income tax benefits resulting from the
exercise of non-qualified stock options 24 24
------ ------ ------ ------ ------ ------ ------ ------
BALANCE AT SEPTEMBER 30, 1999 .............. $ -- $ 22 $ 302 $ -- $ 58 $1,134 $ (456) $1,060
====== ====== ====== ====== ====== ====== ====== ======
See accompanying notes to consolidated financial statements
</TABLE>
-37-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash flows from operating activities:
Operating lease and other leasing receipts ............... $ 2,002 $ 2,013 $ 1,739
Direct financing and sales-type leasing receipts ......... 958 905 861
Sale of direct financing and sales-type receivables ...... -- 125 81
Leasing costs, primarily rentals paid .................... (14) (20) (32)
Sales .................................................... 818 335 264
Sales costs .............................................. (105) (69) (84)
Technology services receipts ............................. 485 408 343
Technology services costs ................................ (390) (278) (204)
Other revenue ............................................ 83 44 55
Notes receivable receipts ................................ 66 33 16
Selling, general and administrative expenses ............. (289) (249) (225)
Litigation settlement .................................... -- -- 25
Interest ................................................. (338) (326) (291)
Income taxes ............................................. (12) (34) (44)
------- ------- -------
Net cash provided by operating activities ............. 3,264 2,887 2,504
------- ------- -------
Cash flows from investing activities:
Equipment purchased for leasing .......................... (2,838) (3,026) (2,940)
Investment in continuity and network services facilities . (151) (87) (61)
Notes receivable ......................................... (324) (57) (28)
Acquisition and investment in Prism Communication Services (136) (8) --
Other .................................................... (31) (2) (19)
------- ------- -------
Net cash used in investing activities ................. (3,480) (3,180) (3,048)
------- ------- -------
Cash flows from financing activities:
Discounted lease proceeds ................................ 341 279 430
Net increase (decrease) in notes payable ................. (301) 97 (103)
Issuance of term notes and senior notes .................. 1,842 1,017 1,151
Maturities of term notes and senior notes ................ (924) (617) (378)
Principal payments on secured debt ....................... (322) (425) (469)
Decrease (increase) in legally restricted cash ........... (16) 15 (18)
Preferred stock purchased ................................ -- (89) --
Common stock purchased and placed in treasury ............ (82) (88) (45)
Dividends paid on common stock ........................... (15) (15) (14)
Dividends paid on preferred stock ........................ -- (2) (8)
Shared Investment Program ................................ -- 109 --
Other .................................................... 17 38 6
------- ------- -------
Net cash provided by financing activities ............. 540 319 552
------- ------- -------
Net increase in cash and cash equivalents .................... 324 26 8
Cash and cash equivalents at beginning of year ............... 63 37 29
------- ------- -------
Cash and cash equivalents at end of year ..................... $ 387 $ 63 $ 37
======= ======= =======
See accompanying notes to consolidated financial statements
</TABLE>
-38-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
RECONCILIATION OF NET EARNINGS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net earnings ......................................................... $ 48 $ 153 $ 131
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Leasing costs, primarily depreciation and amortization ........... 1,954 1,771 1,502
Leasing revenue, primarily principal portion of direct
financing and sales-type lease rentals ........................ 371 478 484
Sale of direct financing and sales-type receivables .............. -- 125 81
Cost of sales .................................................... 641 193 126
Technology services costs, primarily depreciation and amortization 50 84 92
Income taxes ..................................................... 15 45 36
Interest ......................................................... -- -- 8
Other expense .................................................... 150 -- --
Other, net ....................................................... 35 38 44
------ ------ ------
Net cash provided by operating activities ........................ $3,264 $2,887 $2,504
====== ====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Reduction of discounted lease rentals in lease portfolio sale .... $ 100 $ -- $ --
====== ====== ======
See accompanying notes to consolidated financial statements
</TABLE>
-39-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS: Comdisco provides global technology services to help its
customers maximize technology functionality, predictability and availability.
The company offers a complete suite of information technology services including
business continuity, managed network services, and IT control and predictability
solutions. Through its subsidiary, Prism Communication Services Inc., Comdisco
is developing a high-speed, always-on digital network, which will provide
customers with leading-edge connectivity. Comdisco also offers equipment
services to key vertical industries, including electronics, communications,
laboratory and scientific, and computer-integrated manufacturing. Through its
Ventures group, Comdisco provides equipment leasing and other financing and
services to venture capital backed start-up companies.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the company and its wholly-owned subsidiaries. Intercompany accounts
and transactions have been eliminated.
TRANSLATION ADJUSTMENTS: All assets and liabilities denominated in foreign
currencies are translated at the exchange rate on the balance sheet date.
Revenues, costs and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments are deferred as a separate
component of stockholders' equity. Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of earnings.
INCOME TAXES: The company uses the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. The measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits of which future realization is
uncertain.
LEASE ACCOUNTING: See "Leasing" section on pages 42 and 43 for a description of
lease accounting policies, lease revenue recognition and related costs.
TECHNOLOGY SERVICES: Revenue from continuity contracts is recognized monthly as
subscription fees become due. Revenue from other technology services is
recognized over the terms of the related contracts or as the service is
provided.
CASH AND CASH EQUIVALENTS: Cash equivalents are comprised of highly liquid debt
instruments with original maturities of 90 days or less.
CASH - LEGALLY RESTRICTED: 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.
INVENTORY OF EQUIPMENT: Inventory of equipment is stated at the lower of cost or
market by categories of similar equipment.
INVESTMENT IN EQUITY SECURITIES: The company determines the appropriate
classification of marketable securities at the time of purchase and reevaluates
such designation at each balance sheet date. Marketable securities classified as
available-for-sale are carried at fair value, based on quoted market prices, net
of market value discount to reflect any restrictions on transferability, with
unrealized gains and losses reported as a separate component of stockholders'
equity. Equity investments for which there is no readily determinable fair value
are carried at cost, less any appropriate valuation allowance.
-40-
<PAGE>
WARRANTS: The company's investments in warrants (received in connection with its
lease or other financings) are initially recorded at zero cost and carried in
the financial statements as follows:
o Warrants that meet the criteria for classification as
available-for-sale are carried at fair value based on quoted market
prices with unrealized gains and losses excluded from earnings and
reported in other comprehensive income.
o Warrants that do not meet the criteria for classification as
available-for-sale are carried at zero value.
The proceeds received from the sale or liquidation are recorded as earnings when
received.
DERIVATIVES: Interest rate differentials on swaps are accrued as interest rates
change over the contract period. Amounts receivable under cap agreements are
accrued as a reduction of interest expense. Unrealized gains and losses on
forward contracts are deferred on the balance sheet until they are exercised.
See Note 7 of the Notes to Consolidated Financial Statements for financial
information concerning derivatives.
EARNINGS PER COMMON SHARE: Earnings per common share-basic are computed by
dividing the net earnings to common stockholders by the weighted average number
of common shares outstanding for the period. All shares held in the Employee
Stock Ownership Plan (ESOP) are considered outstanding for both basic and
diluted earnings per share calculations. Earnings per common share-diluted
reflect the maximum dilution that would have resulted from the exercise of stock
options. Earnings per common share-diluted are computed by dividing the net
earnings to common stockholders by the weighted average number of common shares
outstanding and all dilutive stock options (dilutive stock options are based on
the treasury stock method). Anti-dilutive stock options were immaterial for
fiscal 1999, 1998 and 1997.
STOCK-BASED COMPENSATION: The company utilizes the intrinsic value based method
of accounting for its stock-based compensation arrangements.
RECLASSIFICATIONS: Certain reclassifications have been made in the 1997 and 1998
financial statements to conform to the 1999 presentation.
NOTE 2
ACQUISITIONS AND SALE OF ASSETS
On February 28, 1999, the company completed the acquisition of Prism
Communication Services, Inc. ("Prism") for a cash purchase price of
approximately $53 million, of which approximately $45 million was paid in fiscal
1999. Prism is a 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 10 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 year ended
September 30, 1998 is not material and, accordingly, has been excluded from the
pro forma presentation (in millions except per share data):
YEAR ENDED SEPTEMBER 30, 1999
Total revenue $ 4,159
Net earnings $ 35
Net earnings per common share:
Basic $ .23
Diluted $ .22
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 year ended September 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 require 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 pre-tax charge of $150 million, $96
-41-
<PAGE>
million after tax, or approximately $0.59 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. The sale of a majority of the vendor lease portfolio was
completed in the quarter ended September 30, 1999.
LEASING
NOTE 3
LEASE ACCOUNTING POLICIES
FASB Statement of Financial Accounting Standards No. 13 requires that a lessor
account for each lease by either the direct financing, sales-type or operating
method.
LEASED ASSETS:
o Direct financing and sales-type leased assets consist of the present value of
the future minimum lease payments plus the present value of the residual
(collectively referred to as the net investment). Residual is the estimated fair
market value at lease termination. In estimating the equipment's fair value at
lease termination, the company relies on historical experience by equipment type
and manufacturer and, where available, valuations by independent appraisers,
adjusted for known trends. The company's estimates are reviewed continuously to
ensure realization, however the amounts the company will ultimately realize
could differ from the estimated amounts.
o Operating leased assets consist of the equipment cost, less the amount
depreciated to date.
REVENUE, COSTS AND EXPENSES:
o Direct financing leases - Revenue consists of interest earned on the present
value of the lease payments and residual. Revenue is recognized periodically
over the lease term as a constant percentage return on the net investment. There
are no costs and expenses related to direct financing leases since leasing
revenue is recorded on a net basis.
o Sales-type leases - Revenue consists of the present value of the total
contractual lease payments which is recognized at lease inception. Costs and
expenses consist of the equipment's net book value at lease inception, less the
present value of the residual. Interest earned on the present value of the lease
payments and residual, which is recognized periodically over the lease term as a
constant percentage return on the net investment, is included in direct
financing lease revenue in the statement of earnings.
o Operating leases - Revenue consists of the contractual lease payments and is
recognized on a straight-line basis over the lease term. Costs and expenses are
principally depreciation of the equipment. Depreciation is recognized on a
straight-line basis over the lease term to the company's estimate of the
equipment's fair market value at lease termination, also commonly referred to as
"residual" value. In estimating the equipment's fair value at lease termination,
the company relies on historical experience by equipment type and manufacturer
and, where available, valuations by independent appraisers, adjusted for known
trends. The company's estimates are reviewed continuously to ensure realization,
however the amounts the company will ultimately realize could differ from the
amounts assumed in determining depreciation on the equipment in the operating
lease portfolio at September 30, 1999.
o Initial direct costs related to operating and direct financing leases,
including salesperson's commissions, are capitalized and amortized over the
lease term.
NOTE 4
LEASED ASSETS
The components of the net investment in direct financing and sales-type leases
as of September 30 are as follows:
(IN MILLIONS)
99 98
------- -------
Minimum lease payments receivable $ 2,162 $ 1,790
Estimated residual values ........ 219 203
Less: unearned revenue ........... (274) (214)
------- -------
Net investment in direct financing
and sales-type leases ........ $ 2,107 $ 1,779
======= =======
Unearned revenue is recorded as leasing revenue over the lease terms.
Operating leased assets include the following as of September 30:
(IN MILLIONS)
99 98
------- -------
Operating leased assets ...... $ 6,054 $ 6,803
Less: accumulated depreciation
and amortization ......... (2,538) (2,682)
------- -------
Net .......................... $ 3,516 $ 4,121
======= =======
-42-
<PAGE>
NOTE 5
LEASE PORTFOLIO INFORMATION
The size of the company's lease portfolio can be measured by the cost of leased
assets at the date of lease inception. Cost at lease inception represents either
the equipment's original cost or its net book value at termination of a prior
lease. The following table summarizes, by year of lease commencement and by year
of projected lease termination, the cost at lease inception for all leased
assets recorded at September 30, 1999 (in millions):
Projected year of lease termination
-----------------------------------------------
Cost at
Year lease lease
commenced inception 00 01 02 03 04+
- ----------- --------- ------ ------ ------ ------ ------
1995
and prior $ 854 $ 520 $ 185 $ 125 $ 18 $ 6
1996 781 433 265 70 8 5
1997 1,844 998 356 318 132 40
1998 2,756 712 1,003 508 464 69
1999 2,922 167 642 1,342 394 377
------ ------ ------ ------ ------ ------
$9,157 $2,830 $2,451 $2,363 $1,016 $ 497
====== ====== ====== ====== ====== ======
The following table summarizes the estimated net book value at lease
termination for all leased assets recorded at September 30, 1999. The table is
presented by year of lease commencement and by year of projected lease
termination (in millions):
Projected year of lease termination
-----------------------------------------------
Net book
value at
Year lease lease
commenced termination 00 01 02 03 04+
- ---------- ----------- ------ ------ ------ ------ ------
1995
and prior $ 37 $ 30 $ 2 $ 5 $ - $ -
1996 84 43 39 2 - -
1997 225 149 44 31 1 -
1998 437 118 171 70 75 3
1999 465 51 101 210 67 36
------ ------ ------ ------ ------ ------
$1,248 $ 391 $ 357 $ 318 $ 143 $ 39
====== ====== ====== ====== ====== ======
LIQUIDITY
NOTE 6
FUTURE CONTRACTUAL CASH FLOWS
Presented below is a summary of future noncancelable lease rentals on owned
equipment and future technology services revenue including noncancelable
continuity contracts (collectively, "cash in-flows").
The summary presents expected cash in-flows due in accordance with the
contractual terms in existence as of September 30, 1999.
<TABLE>
<CAPTION>
YEARS ENDING SEPTEMBER 30,
---------------------------------------------------
00 01 02 03 04+ Total
------ ------ ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Expected future cash in-flows:
Operating leases-leasing ...... $1,322 $ 803 $ 362 $ 96 $ 23 $2,606
Operating leases-ventures ..... 129 109 67 11 -- 316
Notes receivable-ventures ..... 130 153 107 13 -- 403
Direct financing and sales-type
leases-leasing .............. 989 652 317 118 81 2,157
Direct financing and sales-type
leases-ventures ............. 3 2 -- -- -- 5
Technology services ........... 483 353 232 131 45 1,244
------ ------ ------ ------ ------ ------
Total ....................... $3,056 $2,072 $1,085 $ 369 $ 149 $6,731
====== ====== ====== ====== ====== ======
</TABLE>
-43-
<PAGE>
FINANCING
NOTE 7
INTEREST-BEARING LIABILITIES
Interest-bearing liabilities include the following:
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ------------------------------------
At September 30 Average At September 30 Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes payable:
Credit lines and loan
participation contracts $ 369 4.19% $ 593 5.04% $ 774 5.39% $ 541 6.20%
Commercial paper 451 5.42% 586 5.11% 347 5.21% 606 5.72%
Term notes 550 5.25% 550 5.52% 550 5.52% 526 6.41%
Senior notes 3,686 6.45% 3,155 6.59% 2,768 6.47% 2,576 6.76%
Discounted lease rentals 515 6.60% 576 6.76% 596 7.29% 676 7.32%
------ ----- ------ ----- ------ ----- ------ -----
$5,571 6.11% $5,460 6.17% $5,035 6.21% $4,925 6.62%
====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
The changes in financing activities for the years ended September 30 were as
follows (notes payable changes are shown net):
(IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------- -----------------------------------------------
Outstanding Maturities Outstanding Maturities
beginning and Outstanding beginning and Outstanding
of year Issuances repurchases Other end of year of year Issuances repurchases end of year
----------- --------- ----------- ----- ----------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Notes payable:
Credit lines and
loan participation
contracts ........... $ 774 $ -- $ (405) $ -- $ 369 $ 505 $ 269 $ -- $ 774
Commercial paper .... 347 104 -- -- 451 519 -- (172) 347
Term notes ............ 550 -- -- -- 550 497 100 (47) 550
Senior notes .......... 2,768 1,842 (924) -- 3,686 2,421 917 (570) 2,768
Discounted
lease rentals ....... 596 341 (322) (100) 515 742 279 (425) 596
------ ------ ------- ----- ------ ------ ------ ------- ------
$5,035 $2,287 $(1,651) $(100) $5,571 $4,684 $1,565 $(1,214) $5,035
====== ====== ======= ===== ====== ====== ====== ======= ======
</TABLE>
The annual maturities of all interest-bearing liabilities at September 30,
1999 are shown in the table at right:
(IN MILLIONS)
YEARS ENDING SEPTEMBER 30,
00 01 02 03 04+ Total
------ ---- ------ ---- ---- ------
Notes payable:
Credit lines
and loan
participation
contracts $ 369 $ - $ - $ - $ - $ 369
Commercial
paper 451 - - - - 451
Term notes 550 - - - - 550
Senior notes 851 857 1,435 268 275 3,686
Discounted
lease rentals 303 139 51 19 3 515
------ ---- ------ ---- ---- ------
$2,524 $996 $1,486 $287 $278 $5,571
====== ==== ====== ==== ==== ======
-44-
<PAGE>
NOTES PAYABLE: The company had the following unsecured bank lines available in
the United States and foreign countries at September 30:
(IN MILLIONS)
99 98
------ ------
Total credit lines:
Committed $1,312 $1,253
Uncommitted 289 393
------ ------
$1,601 $1,646
====== ======
Utilized at September 30:
Committed $ 756 $ 644
Uncommitted 44 149
Total credit lines 800 793
Loan participation contracts 20 328
------ ------
Total notes payable $ 820 $1,121
====== ======
Credit lines available at
September 30 $ 801 $ 853
====== ======
Maximum amount outstanding
at any month end $1,441 $1,304
====== ======
COMMITTED LINES: The company's committed lines have been established with
twenty-nine banks, six of which are U.S. banks. A majority of the banks are
rated AA or better by rating agencies. At September 30, 1999, the company had
committed domestic and foreign unsecured lines of credit as follows:
Facility Number of banks Expiration date
Multi-Option Facilities 11
$275 million facility December, 2002
$275 million facility December, 1999
Global Facilities 17
$275 million facility December, 2002
$275 million facility December, 1999
Other credit agreements:
$ 75 million - domestic
and foreign 1 April, 2000
$137 million - foreign 5 Various
There are no compensating balance requirements on any of the committed
lines. At September 30, 1999, the company had $756 million outstanding under its
committed lines, including $451 million supporting the company's commercial
paper program.
The multi-option revolving credit agreements and the global revolving credit
agreements (collectively, the "Facilities") permit the company to borrow in U.S.
dollars or in other currencies, on a revolving credit basis. Interest rates on
debt outstanding under the Facilities are negotiated at the time of the
borrowings based either on "bid rates" from the participating banks, LIBOR plus
twenty basis points or, for the two $275 million facilities expiring December,
1999, twenty-two basis points, or at the banks' then current base rates. The
Facilities call for the company to pay a weighted average annual fee of nine
basis points per annum on the total committed amount. The two $275 million
facilities are renewable annually and should the banks decide not to renew,
include provisions to convert any amounts then outstanding to term loans with a
final maturity of December, 2000.
UNCOMMITTED LINES AND LOAN PARTICIPATION CONTRACTS: In addition to the committed
lines, the company maintains various domestic and international lines of credit
for short-term debt with banks, including approximately $289 million of
uncommitted lines of credit, under which the company can borrow on an unsecured
basis on such terms as the company and banks may mutually agree. The majority of
these arrangements do not have maturity dates, and can be withdrawn at the
banks' option. There are no fees or compensating balances associated with either
the uncommitted lines or the loan participation contracts.
COMMERCIAL PAPER: At September 30, 1999, the company had $900 million of
commercial paper facilities (of which $451 million was outstanding at September
30, 1999) all of which are supported by its committed lines of credit. The
facilities were rated D-2 by Duff & Phelps, P-2 by Moodys and A-2 by Standard &
Poors.
TERM NOTES: At September 30, 1999, the company had $550 million of receivable
backed commercial paper. This floating rate term note is due during fiscal year
2000.
SENIOR NOTES: Senior notes include the following at September 30:
(IN MILLIONS)
<TABLE>
99 98
------ ------
<S> <C> <C>
Medium term notes (5.75% to 9.95%) $1,461 $1,200
7.750% Senior Notes due 1999 - 89
6.500% Senior Notes due 1999 - 250
6.500% Senior Notes due 2000 200 200
5.750% Senior Notes due 2001 250 250
6.375% Senior Notes due 2002 250 250
6.000% Senior Notes due 2002 350 -
5.950% Senior Notes due 2002 350 -
7.250% Senior notes due 2002<F1> 300 -
6.125% Senior notes due 2003<F2> 250 250
6.130% Senior Notes due 2006 275 279
------ ------
Total senior notes $3,686 $2,768
====== ======
<FN>
<F1> The company had interest rate swap agreements at September 30, 1999 that
effectively converted $100 million of 7.250% Senior Notes to floating rate
obligations with an effective interest rate of 6.190%.
<F2> The company had interest rate swap agreements at September 30, 1999 that
effectively converted $200 million of 6.125% Senior Notes to floating rate
obligations with an effective interest rate of 5.152%.
The average remaining terms of these swap agreements was greater than 2 years at
September 30, 1999.
</FN>
</TABLE>
-45-
<PAGE>
On October 9, 1998 the company filed a registration statement on Form S-3
with the Securities and Exchange Commission (the "SEC") 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 in Senior Debt Securities as "Senior Medium-Term Notes, Series H" to be
issued under the 1998 Shelf, of which $182 million remained available for
issuance as of September 30, 1999. Pursuant to the 1998 Shelf, the company, on
January 26, 1999, 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. On
August 26, 1999, the company redesignated $100 million of the Series H
Medium-Term Notes, which together with the remaining $200 million in securities
previously unallocated under the shelf registration, were issued by the company
as $300 million of 7.25% Notes due September 1, 2002.
On September 24, 1999 the company filed a registration statement on Form S-3
with the SEC for a shelf offering of up to $1.5 billion senior debt securities
on terms to be set at the time of each sale ("1999 Shelf"). As of September 30,
1999, the entire 1999 Shelf remains available for sale.
There are no sinking fund requirements associated with any of the company's
senior notes.
DISCOUNTED LEASE RENTALS: The company utilizes its lease rentals receivable and
underlying equipment in leasing transactions as collateral to borrow from
financial institutions at fixed rates on a nonrecourse basis. In return for this
secured interest, the company receives a discounted cash payment. In the event
of a default by a lessee, the financial institution has a first lien on the
underlying leased equipment, with no further recourse against the company.
Proceeds from discounting are recorded on the balance sheet as discounted lease
rentals; as lessees make payments to financial institutions, lease revenue
(i.e., interest income on direct financing and sales-type leases and rental
revenue on operating leases) and interest expense are recorded. Discounted lease
rentals are reduced by the interest method.
Future minimum lease payments and interest expense on leases that have been
discounted as of September 30, 1999 are as follows (in millions):
YEARS ENDING SEPTEMBER 30,
Rentals to be
received by Discounted
financial lease Interest
institutions rentals expense
------------- ---------- --------
2000 $331 $303 $ 28
2001 150 139 11
2002 54 51 3
2003 20 19 1
2004 3 3 -
---- ---- ----
$558 $515 $ 43
==== ==== ====
Interest expense on discounted lease rentals was $38 million, $49 million,
and $55 million in fiscal 1999, 1998 and 1997, respectively.
INTEREST RATE SWAP AGREEMENTS AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS: The
company is a party to interest rate and cross-currency interest rate swap
agreements and other financial instruments in order to limit its exposure to a
loss resulting from adverse fluctuations in foreign currency exchange and
interest rates. Interest rate swap contracts generally represent the contractual
exchange of fixed and floating rate payments of a single currency.
Cross-currency interest rate swap contracts generally involve the exchange of
payments which are based on the interest reference rates available at the
inception of the contract on two different currency notional balances that are
exchanged. The principal balances are re-exchanged at an agreed upon rate at a
specified future date. Credit and market risk exist with respect to these
instruments.
The following table presents the contract or notional (face) amounts
outstanding and the fair value of the contracts based generally on their
termination values at September 30:
(IN MILLIONS)
1999 1998
------------------- --------------------
Notional Fair Notional Fair
amount value amount value
-------- ----- -------- -----
Interest rate swap
agreements $820 $ 5 $460 $ 2
Cross-currency interest
rate swap agreements 96 (6) 33 4
Forwards and futures 86 6 65 (3)
The impact of these contracts on interest expense for fiscal years 1999,
1998 and 1997 was immaterial. The average notional amount outstanding of the
floating rate to fixed rate contracts in fiscal 1999, including those noted in
the discussions above, was $234 million, with an average pay rate of 5.44% and
an average receive rate of 5.18%. The average notional amount outstanding of the
fixed rate to floating rate contracts in fiscal 1999 was $29 million, with an
average pay rate of 5.265% and an average receive rate of 6.384%. The company is
exposed to credit loss in the event of non-performance by the other parties to
the interest rate swap agreements. Although contract or notional amounts provide
one measure of the volume of these transactions, they do not represent the
amount of the company's exposure to credit risk. The amounts subject to credit
risk (arising from the possible inability of the counterparties to meet the
terms of their contracts) are generally limited to the amounts, if any, by which
the counterparties' obligation(s) exceed the obligation(s) of the company. The
company controls credit risk through credit approvals, limits and monitoring
procedures.
-46-
<PAGE>
OTHER FINANCIAL INFORMATION
NOTE 8
RECEIVABLES
Receivables include the following as of September 30:
(IN MILLIONS)
99 98
---- ----
Notes $354 $ 75
Accounts 297 215
Income taxes 6 6
Other 82 68
Total receivables 739 364
Allowance for credit losses (43) (24)
---- ----
Total $696 $340
==== ====
NOTES: The company provides loans to early-stage high technology privately held
companies in networking, communications, software and Internet based industries.
The company's loans are generally structured as equipment loans or subordinated
loans. Subordinated loans totaled $250 million and $33 million at September 30,
1999 and 1998, respectively. Interest income on notes is recorded in the
statement of earnings as direct financing income for equipment loans and as
other revenue for subordinated loans.
The amount of each loan varies, but generally does not exceed $5.0 million.
The loans bear fixed interest rates with coupons currently ranging from 8.0% to
13% per annum. In addition, loan processing fees typically ranging from 1.5% to
2% of the principal amount of the loan may be paid at loan closing. As part of
the loan transaction, the company receives warrants to purchase an equity
interest in the borrower at a nominal exercise price. The amount of the warrants
received and the exercise price varies based upon borrower-specific valuation
factors.
Loans provide current income from interest and fees.
Contractual maturities of total notes receivables as of September 30, 1999,
were as follows: 2000- $137 million; 2001- $155 million; 2002- $108 million;
2003 and thereafter- $16 million. Actual cash flows will vary from contractual
maturities due to prepayments and charge-offs.
ALLOWANCE: The allowance for credit loss includes management's estimate of the
amounts expected to be lost on specific accounts and for losses on other as of
yet unidentified accounts included in receivables at September 30, 1999,
including estimated losses on future noncancelable lease rentals and
subscription fees, net of estimated recoveries from remarketing of related
leased equipment. In estimating the reserve component for unidentified losses
within the receivables and lease portfolio, management relies on historical
experience, adjusted for any known trends, including industry trends, in the
portfolio.
NOTE 9
INCOME TAXES
The geographical sources of earnings before income taxes were as follows:
(IN MILLIONS)
99 98 97
---- ---- ----
United States $ 12 $183 $163
Outside United States 63 57 48
---- ---- ----
$ 75 $240 $211
==== ==== ====
Cumulative unremitted earnings of foreign operations amounting to $179
million after foreign taxes at September 30, 1999, were expected by management
to be reinvested. Accordingly, no provision has been made for additional U.S.
taxes which would be payable if such earnings were to be remitted to the parent
company as dividends. The amount of U.S. taxes, if any, are impracticable to
determine.
The components of the income tax provision (benefit) charged (credited) to
operations were as follows:
(IN MILLIONS)
99 98 97
---- ---- ----
Current:
U.S. Federal $ (3) $ 28 $ 24
U.S. state and local 3 2 7
Outside United States 13 36 8
---- ---- ----
13 66 39
---- ---- ----
Deferred:
U.S. Federal 7 33 35
U.S. state and local (2) 9 2
Outside United States 9 (21) 4
14 21 41
---- ---- ----
Total tax provision $ 27 $ 87 $ 80
==== ==== ====
The reasons for the difference between the U.S. Federal income tax rate and
the effective income tax rate for earnings were as follows:
99 98 97
---- ---- ----
U.S. Federal income
tax rate 35.0% 35.0% 35.0%
Increase (reduction)
resulting from:
State income taxes, net
of U.S. Federal tax
benefit .7 3.0 3.0
Foreign income tax rate
differential 2.8 2.0 .8
Tax effect of foreign
losses utilized (2.2) (4.0) (2.9)
Other, net (.3) - 2.1
---- ---- ----
36.0% 36.0% 38.0%
==== ==== ====
-47-
<PAGE>
Deferred tax assets and liabilities at September 30, 1999 and 1998 were as
follows:
(IN MILLIONS)
99 98
------ ------
Deferred tax assets (liabilities):
Equity transactions $ 260 $ 264
Foreign loss carryforwards 13 12
U.S. net operating loss
carryforwards 68 61
AMT credit carryforwards 120 123
Deferred income 44 35
Deferred expenses (20) 5
Other, net 101 82
------ ------
Lease accounting (839) (873)
Other comprehensive income (60) -
Foreign (26) (16)
------ ------
Gross deferred tax liabilities (339) (307)
Less: valuation allowance (28) (12)
------ ------
Net deferred tax liabilities $(367) $(319)
====== ======
For financial reporting purposes, the company has approximately $28 million
of foreign net operating loss carryforwards, most of which have no expiration
date. The company has recognized a valuation allowance of $13 million to offset
this deferred tax asset. During fiscal 1999, changes in the valuation allowance
included a decrease of $2 million from utilizing foreign net operating loss
carryforwards, increases totalling $3 million from foreign exchange rate and tax
rate changes, and an increase of $15 million relating to Prism's pre-acquisiton
net operating losses. These losses are subject to certain limitations under
Section 382 of the Internal Revenue Code of 1986 as amended.
At September 30, 1999, the company has available for U.S. Federal income tax
purposes, the following carryforwards (in millions):
Year scheduled to expire Net operating loss
- ------------------------ ------------------
2004 $ 2
2005 5
2006 3
2007 82
2009 3
2012 27
2018 54
------
$ 176
======
For U.S. Federal income tax purposes, the company has approximately $120
million of alternative minimum tax ("AMT") credit carryforwards available to
reduce regular taxes in future years. AMT credit carryforwards do not have an
expiration date.
All years prior to fiscal year 1989 are closed to further assessment by the
Internal Revenue Service (the "Service") due to the expiration of the Statute of
Limitations.
The company and the Service have tentatively reached a settlement agreement
for fiscal years 1989-1995. The Service is currently completing their Revenue
Agent's Report for these years. It is anticipated that the company will be
assessed approximately $8 million of tax plus interest thereon. As a result of
the above mentioned settlement, amended federal income tax returns for fiscal
years 1996, 1997, and 1998 will be filed requesting refunds of approximately $9
million. Additionally, the company has requested interest netting which will
substantially reduce any cash payment of tax and interest.
The Service is expected to commence a routine income tax audit for fiscal
years 1996, 1997, and 1998 during fiscal year 2000. The company also undergoes
audits by foreign, state and local tax jurisdictions. As of September 30, 1999,
no material assessments have been made by these tax authorities.
NOTE 10
EQUITY SECURITIES
The company invests in equity instruments of privately held companies in
networking, communications, software, Internet-based and other industries. For
equity instruments, which are 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 equity securities when events and circumstances
indicate that such assets might be impaired. During 1999 and 1998, certain of
these investments in privately held companies became available-for-sale
securities when the investees completed initial public offerings.
Equity securities, which are included in Other Assets, include the following
as of September 30:
(IN MILLIONS)
99 98
---- ----
Available-for-sale-securities:
Cost $ 49 $45
Unrealized gain 152 -
Market value 201 45
Equity instruments (at cost
less valuation adjustments) 51 35
---- ----
Carrying value $252 $80
==== ====
-48-
<PAGE>
Realized gains or losses are recorded upon disposition of investments based
upon the difference between the proceeds and the cost basis determined using the
specific identification method. All other changes in the valuation of portfolio
investments are included as changes in the unrealized appreciation or
depreciation of investments in the accumulated comprehensive income. Net
realized gains from the sales of equity investments were $1 million in fiscal
1999 and 1998 and $10 million in fiscal 1997. Gross realized gains from the
sales of equity securities were $9 million in fiscal 1999, $3 million in fiscal
1998, and $15 million in fiscal 1997.
The company records the proceeds received from the sale or liquidation of
warrants received in conjunction with its lease or other financings as income
when received. These proceeds were $75 million, $14 million and $13 million in
fiscal 1999, 1998 and 1997, respectively.
NOTE 11
PREFERRED STOCK
There are 100,000,000 authorized shares of preferred stock - $.10 par value, of
which none were outstanding at September 30, 1999. The board of directors
establishes and designates the series and fixes the number of shares and the
relative rights, preferences and limitations of the respective series. Dividends
paid on preferred stock were $2 million and $8 million, respectively in fiscal
1998, and 1997.
On November 4, 1997, the board of directors of the company adopted a new
shareholder rights plan (the "New Rights Plan") to replace the company's
existing plan, which expired on November 17, 1997. Under the New Rights Plan,
shareholders of record on November 17, 1997 received a dividend distribution of
one preferred stock purchase right for each share of the company's common stock
then held. Like the shareholder rights plan it replaced, the New Rights Plan
continues the company's policy of ensuring fair value to all shareholders in the
event of an unsolicited takeover offer for the company. The New Rights Plan will
expire on November 17, 2007. The New Rights Plan is incorporated by reference in
the company's Form 10-K for fiscal 1999.
8.75% CUMULATIVE PREFERRED STOCK: On September 19, 1997, the company announced
the redemption, effective October 20, 1997, of all shares of the Series A
Preferred Stock (2,738,200 shares) at the redemption price per share of $25,
plus accrued and unpaid dividends. On July 13, 1998, the company announced the
redemption, effective July 13, 1998, of all shares of the Series B Preferred
Stock (824,000 shares) at the redemption price of $25, plus accrued and unpaid
dividends.
NOTE 12
COMMON STOCK
All references in the financial statements and notes to common share data have
been adjusted to reflect the two-for-one stock split distributed in June, 1998.
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.
The share amounts for basic and diluted earnings per share calculations was
as follows (in thousands):
YEARS ENDED SEPTEMBER 30,
99 98 97
-------- ------- --------
Average shares issued 222,454 220,910 218,907
Average shares held in treasury (70,376) (69,663) (71,859)
-------- ------- --------
Basic shares outstanding 152,078 151,247 147,048
Stock options 9,709 11,523 10,541
-------- ------- --------
Diluted shares outstanding 161,787 162,770 157,589
======== ======= ========
There are no adjustments to net earnings to common stockholders for basic
and diluted earnings per share calculations for any of the years ended September
30, 1999, 1998 and 1997.
During fiscal 1999 and 1998, the company entered into a series of forward
purchase agreements on its common stock. These agreements can be settled, at the
option of the company, by paying cash for the forward purchase amount and
receiving the underlying shares of common stock, or on a net basis in shares of
the company's stock.
-49-
<PAGE>
Information on these forward agreements is as follows:
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
------------------------------ ---------------------------------
Average Average
forward price forward price
Amount Shares per share Amount Shares per share
------ ------ ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Agreements in place at September 30 $ 61 3 $20.41 $16 1 $ 13.74
Settlements during fiscal year 59 4 16.26 33 4 9.31
</TABLE>
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.
Components of other comprehensive earnings (loss) consists of the following:
(IN MILLIONS)
99 98 97
----- ----- -----
Foreign currency
translation adjustments $ (21) $ 7 $ (25)
Change in net unrealized
gains and losses on
marketable securities 152 - -
Income tax (60) - -
Other comprehensive
income/(loss) 71 7 (25)
Net earnings 48 153 131
----- ----- -----
Total comprehensive income $ 119 $ 160 $ 106
===== ===== =====
NOTE 13
EMPLOYEE BENEFIT PLANS
In fiscal 1988, the company established the Comdisco, Inc. Employee Stock
Ownership Trust (the "Trust"). The Trust borrowed $20 million (the "ESOP Debt")
to purchase 4.6 million shares of common stock held in treasury by the company
at a market price at the date of purchase of $4.42 per share. The outstanding
balance of the ESOP Debt was recorded in term notes payable in the consolidated
balance sheet and a like amount of deferred compensation was recorded as a
reduction of stockholders' equity.
The company has a profit sharing plan which, together with the Employee
Stock Ownership Plan (the "Plans"), covers substantially all domestic employees.
Company contributions to the Plans are based on a percentage of employees'
compensation, as defined. Benefits are accumulated on an individual employee
basis.
The company's stock option plans provide for the granting of incentive stock
options and/or nonqualified options to employees and agents to purchase shares
of common stock.
Additionally, under the 1989 Non-Employee Directors' Stock Option Plan, each
October 1, each individual who is a Non-Employee Director during the fiscal year
shall automatically be granted an option for 9,450 shares of the company's
common stock at the then fair market value.
The company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. Had compensation cost for the company's stock
option plans been determined consistent with FASB Statement of Financial
Accounting Standards No. 123 ("FAS 123"), the company's net earnings available
to common stockholders and earnings per common and common equivalent share would
have been reduced to the pro forma amounts indicated below:
(IN MILLIONS EXCEPT PER SHARE DATA)
99 98
----- -----
Net earnings
-to common stockholders
-As reported $ 48 $ 151
Pro forma 42 147
Earnings per common share:
As reported-basic $ .32 $ .99
Pro forma-basic .27 .97
As reported-diluted .30 .93
Pro forma-diluted .26 .90
Under the stock option plans, the exercise price of each option equals the
market price of the company's common stock on the date of grant. For purposes of
calculating the compensation cost consistent with FAS 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in fiscal 1999 and 1998, respectively: dividend yield of 1.0% for all
years; expected volatility of 40 percent and 32 percent; risk free interest
rates of 5.26% and 6.07%; and expected lives of five years.
-50-
<PAGE>
Additional information on shares subject to options is as follows:
(IN THOUSANDS EXCEPT WEIGHTED-
AVERAGE EXERCISE PRICE)
<TABLE>
<CAPTION>
99 98 97
--------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
--------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ..... 17,983 $ 7 19,185 $ 6 19,096 $ 5
Granted .............................. 5,001 15 3,274 13 5,282 9
Exercised ............................ (5,198) 7 (3,953) 5 (4,288) 4
Forfeited ............................ (809) 9 (523) 7 (905) 6
------ ------- ------ ------- ------ -------
Outstanding at the end of year ....... 16,977 $ 10 17,983 $ 7 19,185 $ 6
====== ======= ====== ======= ====== =======
Options exercisable at year-end ...... 11,930 $ 8 12,858 $ 6 12,578 $ 5
====== ======= ====== ======= ====== =======
Weighted-average fair value of options
granted during the year .......... $ 5.46 $ 4.72 $ 2.89
====== ====== ======
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999 (number of shares in thousands):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -------------------------
Weighted- Weighted- Weighted-
average average average
Number remaining exercise Number exercise
of shares contractual life price of shares price
--------- ---------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Range of exercise prices
$0 to 6 4,960 4.0 years $ 4 4,753 $ 6
$6 to 10 5,381 6.5 years 8 5,097 8
$10 to 16 4,554 8.0 years 14 1,424 13
$16 to 30 2,082 8.0 years 18 656 17
------ --------- ---- ------ ----
16,977 6.5 years $ 10 11,930 $ 8
====== ========= ==== ====== ====
</TABLE>
NOTE 14
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the company's financial instruments are as follows:
(IN MILLIONS)
<TABLE>
<CAPTION>
99 98
-------------------- -------------------
Carrying Carrying
amount Fair value amount Fair value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ........................... $ 387 $ 387 $ 63 $ 63
Equity securities ................................... 252 252 80 80
Notes receivable including noncurrent portion ....... 354 354 75 75
Liabilities:
Notes payable and commercial paper .................. 820 820 1,121 1,121
Term notes, senior notes and discounted lease rentals 4,751 4,681 3,914 3,729
Off-balance sheet financial instruments:
Interest rate swap agreements ....................... -- 5 -- 2
Cross-currency interest rate swap agreements ........ -- (6) -- 4
Forwards and futures ................................ -- 6 -- (3)
</TABLE>
-51-
<PAGE>
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents, notes payable and
commercial paper approximates fair value because of the short-term maturity of
these instruments.
Equity instruments are based on quoted market prices for available-for-sale
securities, and, for non-quoted equity instruments, based on the lower of
management's estimates of fair value or cost. The company's investment in
warrants of public companies were valued at the bid quotation.
Notes receivable are estimated by discounting future cash flows using the
current rates at which similar loans would be made to borrowers with similar
business profiles.
The fair value of term notes, senior notes and discounted lease rentals was
estimated based generally on quoted market prices for the same or similar
instruments or on current rates offered the company for similar debt of the same
maturity.
Off-balance sheet financial instruments were estimated by obtaining quotes
from brokers.
NOTE 15
QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the fiscal years ended September 30,
1999 and 1998, is as follows (in millions except for per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
December 31, March 31, June 30, September 30,
------------- --------------- -------------- --------------
98 97 99 98 99 98 99 98
----- ----- ----- ----- ------ ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue $ 921 $ 744 $ 952 $ 777 $1,302 $ 817 $ 984 $ 904
Net earnings (loss) to common stockholders $ 38 $ 34 $ (56) $ 37 $ 36 $ 40 $ 30 $ 40
Net earnings (loss) per common share-diluted $ .24 $ .21 $(.37) $ .23 $ .22 $ .24 $ .19 $ .25
</TABLE>
In accordance with Statement of Financial Accounting Standards No.
128-Earnings Per Share, no potential common shares (the assumed exercise of
stock options) are included in the computation of any diluted per share amount
when a loss exists.
NOTE 16
INDUSTRY SEGMENT AND OPERATIONS BY GEOGRAPHIC AREAS
The company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" in fiscal 1999 which changes the way the company
reports information about its operating segments. The information for 1998 and
1997 has been restated from the prior year's presentation in order to conform to
the 1999 presentation.
The company's operations are conducted through its principal office in the
Chicago area and approximately one hundred offices in North America, Europe and
the Pacific Rim. Coordination of the business units is accomplished through the
Office of the President, which is responsible for overall corporate control,
coordination and strategic planning, regional reporting structures that
coordinate marketing and support efforts across business units, and through the
home office with centralized budgeting and shared services. In Europe, the local
subsidiaries report directly to one European home office, which in turn reports
to the Office of the President.
LEASING: This segment provides leasing, asset management, equipment remarketing
and equipment refurbishment services. The principal markets for this segment
include North America, Europe and the Pacific Rim. Customers include major
multi-national corporations, independent and national or state-owned companies,
"Fortune 500" corporations or companies of a similar size as well as smaller
organizations.
-53-
<PAGE>
TECHNOLOGY SERVICES: This segment consists of four business units--Business
Continuity, Professional Services, Network Management and IT CAP Solutions--that
provide platform based hotsite recovery, mobile, workarea and trade floor
recovery, continuity and recovery planning services (services that emphasize
data availability across data centers, networks and work areas), network
assessment, design, implementation and professional management services and
services designed to help companies plan, manage, and accomplish their IT
initiatives through increased control and predictability of spending and
infrastructure to a broad range of industries. The principal markets for this
segment include all major manufacturing and financial services regions of North
America and Europe.
VENTURES: Ventures is a leading provider of venture debt and venture leasing to
emerging technology companies. The existing venture debt and equity portfolio is
diversified across many sectors, including communications, networking, Internet,
life sciences, computer hardware & semiconductors and computer services. The
principal markets for this segment are the high-tech regions in California and
Massachusetts.
PRISM COMMUNICATION SERVICES: The company finalized the acquisition of 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
and has subsequently expanded its build out plans to New Jersey and Canada.
The accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. The company
evaluates the performance of its operating segments based on earnings before
income taxes. Intersegment sales are not significant. Summarized financial
information concerning the company's reportable segments is shown in the
following table.
(IN MILLIONS)
Leasing Services Ventures Prism Total
-------- -------- -------- ----- -----
1999
Revenues .................... $3,407 $ 522 $ 229 $ 1 $4,159
Segment profit (loss) ....... (12) 52 71 (36) 75
Total assets ................ 6,358 479 846 124 7,807
Capital expenditures ........ 2,748 151 490 91 3,480
Depreciation and amortization 1,860 50 88 6 2,004
1998
Revenues .................... $2,696 $ 433 $ 114 $ -- $3,243
Segment profit .............. 140 71 29 -- 240
Total assets ................ 6,403 379 281 -- 7,063
Capital expenditures ........ 2,920 87 173 -- 3,180
Depreciation and amortization 1,711 84 60 -- 1,855
1997
Revenues .................... $2,370 $ 354 $ 95 $ -- $2,819
Segment profit .............. 128 58 25 -- 211
Total assets ................ 5,841 308 201 -- 6,350
Capital expenditures ........ 2,867 61 120 -- 3,048
Depreciation and amortization 1,459 92 43 -- 1,594
The following table presents revenue by geographic location based on the
location of the company's local office:
(IN MILLIONS)
99 98 97
------ ------ ------
North America $3,254 $2,584 $2,249
Europe 628 592 537
Pacific Rim 277 67 33
------ ------ ------
Total $4,159 $3,243 $2,819
====== ====== ======
The following table presents total assets by geographic location based on
the location of the asset:
(IN MILLIONS)
99 98 97
------ ------ ------
North America $6,272 $5,556 $5,334
Europe 1,029 1,181 852
Pacific Rim 506 326 164
------ ------ ------
Total $7,807 $7,063 $6,350
====== ====== ======
-53-
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE STOCKHOLDERS AND BOARD OF DIRECTORS, COMDISCO, INC We have audited the
accompanying consolidated balance sheets of Comdisco, Inc. and subsidiaries as
of September 30, 1999 and 1998, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1999. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated 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 financial position of Comdisco,
Inc. and subsidiaries at September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
November 2, 1999
-54-
AMENDMENT NO. 2 TO THE COMDISCO, INC.
1995 LONG-TERM STOCK OWNERSHIP INCENTIVE PLAN
DATED AS OF NOVEMBER 3, 1999
The Board of Directors of Comdisco, Inc. hereby amends and modifies the
Comdisco, Inc. 1995 Long-Term Stock Ownership Incentive Plan (the "Plan") in
accordance with the authority granted under Section 25 of the Plan. The
Effective Date of this Amendment shall be as of November 3, 1999.
1. Section 8 shall be revised to read as follows:
"8.NON-TRANSFERABILITY. Except for those assignments and transfers that are
approved by the Committee, or as otherwise may be provided by the Committee,
each Award (other than Restricted Stock) granted hereunder shall not be
assignable or transferable other than by will or the laws of descent and
distribution; provided, however, that a Grantee may (a) designate in writing
a beneficiary to exercise his/her Award after the Grantee's death and (b)
transfer an option (other than an Incentive Stock Option), Stock Appreciation
Right or Performance Unit to a revocable, inter vivos trust as to which the
Grantee is both the settlor and trustee, and (c) transfer an Award for no
consideration to any of the following permissible transferees (each a
"Permissible Transferee"): (w) any member of the Immediate Family of the
Grantee to whom such Award was granted, (x) any trust solely for the benefit
of the Grantee and members of the Grantee's Immediate Family, (y) any
partnership or limited liability company whose only partners or members are
the Grantee and members of the Grantee's Immediate Family, or (z) any other
transferee approved by the Committee in advance of the transfer; and further
provided that: (i) the transfer of any Award shall not be effective on a date
earlier than the date on which the Award is first exercisable as set forth in
this Plan; (ii) any Permitted Transferee to whom an Award is transferred by a
Grantee shall not be entitled to transfer the Award, other than to the
Grantee or by will or the laws of descent and distribution; and (iii) the
Permitted Transferee shall remain subject to all of the terms and conditions
applicable to such Award prior to such transfer. For purposes of this Section
8, "Immediate Family" means, with respect to a particular Grantee, such
Grantee's spouse, children, stepchildren, grandchildren parents, stepparents,
grandparents, siblings, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, and sister-in-law, and shall include
relationships arising from legal adoption. Each share of Restricted Stock
shall be nontransferable until such share becomes nonforfeitable and the
Restricted Period, if any, lapses."
2. Section 14 shall be revised to add the following sentence:
"In the event of a termination of employment other than for Cause, the
Committee in its discretion may extend the period of time following the
Grantee's termination of employment that an Award could otherwise be
exercised to permit the exercise of any unexercised portion of an Award to
the extent such Award was exercisable on the date of the Grantee's
termination of employment; provided however, that in no event may the term of
any Award expire or be exercisable more than 15 years (ten years for
Incentive Stock Options) after the Grant Date of such Award."
<PAGE>
AMENDMENT NO. 1 TO THE
COMDISCO, INC.1989 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
DATED AS OF NOVEMBER 3, 1999
The Board of Directors of Comdisco, Inc. hereby amends and modifies the
Comdisco, Inc. 1989 Non-Employee Directors Stock Option Plan (the "Plan") in
accordance with the authority granted under Section 10 of the Plan. The
Effective Date of this Amendment shall be as of November 3, 1999.
1. Section 8 shall be amended by revising the first sentence of that
section to read as follows:
"Except for those transfers that are approved by the Board, or as may
otherwise be provided by the Board, options are not transferable other
than by will or by the laws of descent or distribution, and during a
Director's lifetime are exercisable only by the Director or the
Director's guardian or legal representative; provided, however, that a
Director may (a) designate in writing a beneficiary to exercise his/her
option after the Director's death and (b) transfer an option to a
revocable, inter vivos trust as to which the Director is both the
settlor and trustee, and (c) transfer an option for no consideration to
any of the following permissible transferees (each a "Permissible
Transferee"): (w) any member of the Immediate Family of the Director to
whom such option was granted, (x) any trust solely for the benefit of
the Director and members of the Director 's Immediate Family, (y) any
partnership or limited liability company whose only partners or members
are the Director and members of the Director 's Immediate Family, or
(z) any other transferee approved by the Board in advance of the
transfer; and further provided that: (i) the transfer of any option
shall not be effective on a date earlier than the date on which the
option is first exercisable as set forth in this plan; (ii) any
Permitted Transferee to whom an option is transferred by a Director
shall not be entitled to transfer the option, other than to the
Director or by will or the laws of descent and distribution; and (iii)
the Permitted Transferee shall remain subject to all of the terms and
conditions applicable to such option prior to such transfer. For
purposes of this Section 8, "Immediate Family" means, with respect to a
particular Director, such Director 's spouse, children, stepchildren,
grandchildren parents, stepparents, grandparents, siblings,
mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, and sister-in-law, and shall include relationships
arising from legal adoption."
<PAGE>
AMENDMENT NO. 1 TO THE
COMDISCO, INC. 1981 STOCK OPTION PLAN
DATED AS OF NOVEMBER 3, 1999
The Board of Directors of Comdisco, Inc. hereby amends and modifies the
Comdisco, Inc. 1981 Stock Option Plan (the "Plan") in accordance with the
authority granted under Section 11 of the Plan. The Effective Date of this
Amendment shall be as of November 3, 1999.
1. Section 9 shall be amended by adding the following sentence immediately
before the last sentence in that section:
"Notwithstanding the foregoing provisions of this Section 9, if the
participant's employment with the Company terminates for any reason
other than for cause, the Committee in its discretion may extend the
period of time following the participant's termination of employment
that an option could otherwise be exercised to permit the exercise of
any unexercised portion of an option to the extent such option was
exercisable on the date of the participant's termination of
employment."
2. Section 10 shall be amended by revising the first sentence of that 3
section to read as follows:
"Except for those transfers that are approved by the Committee or as
may otherwise be provided by the Committee, options are not
transferable other than by will or by the laws of descent or
distribution, and during a participant's lifetime are exercisable only
by the participant or the participant's guardian or legal
representative; provided, however, that a participant may (a) designate
in writing a beneficiary to exercise his/her option after the
participant's death and (b) transfer an option to a revocable, inter
vivos trust as to which the participant is both the settlor and
trustee, and (c) transfer an option for no consideration to any of the
following permissible transferees (each a "Permissible Transferee"):
(w) any member of the Immediate Family of the participant to whom such
option was granted, (x) any trust solely for the benefit of the
participant and members of the participant 's Immediate Family, (y) any
partnership or limited liability company whose only partners or members
are the participant and members of the participant 's Immediate Family,
or (z) any other transferee approved by the Committee in advance of the
transfer; and further provided that: (i) the transfer of any option
shall not be effective on a date earlier than the date on which the
option is first exercisable as set forth in this plan; (ii) any
Permitted Transferee to whom an option is transferred by a participant
shall not be entitled to transfer the option, other than to the
participant or by will or the laws of descent and distribution; and
(iii) the Permitted Transferee shall remain subject to all of the terms
and conditions applicable to such option prior to such transfer. For
purposes of this Section 10, "Immediate Family" means, with respect to
a particular participant, such participant 's spouse, children,
stepchildren, grandchildren parents, stepparents, grandparents,
siblings, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, and sister-in-law, and shall include relationships
arising from legal adoption."
<PAGE>
AMENDMENT NO. 1 TO THE
COMDISCO, INC. 1987 STOCK OPTION PLAN
DATED AS OF NOVEMBER 3, 1999
The Board of Directors of Comdisco, Inc. hereby amends and modifies the
Comdisco, Inc. 1987 Stock Option Plan (the "Plan") in accordance with the
authority granted under Section 11 of the Plan. The Effective Date of this
Amendment shall be as of November 3, 1999.
1. Section 9 shall be amended by adding the following sentence immediately
before the last sentence in that section:
"Notwithstanding the foregoing provisions of this Section 9, if the
participant's employment with the Company terminates for any reason
other than for cause, the Committee in its discretion may extend the
period of time following the participant's termination of employment
that an option could otherwise be exercise to permit the exercise of
any unexercised portion of an option to the extent such option was
exercisable on the date of the participant's termination of
employment."
2. Section 10 shall be amended by revising the first sentence of that
section to read as follows:
"Except for those transfers that are approved by the Committee or as
may otherwise be provided by the Committee, options are not
transferable other than by will or by the laws of descent or
distribution, and during a participant's lifetime are exercisable only
by the participant or the participant's guardian or legal
representative; provided, however, that a participant may (a) designate
in writing a beneficiary to exercise his/her option after the
participant's death and (b) transfer an option to a revocable, inter
vivos trust as to which the participant is both the settlor and
trustee, and (c) transfer an option for no consideration to any of the
following permissible transferees (each a "Permissible Transferee"):
(w) any member of the Immediate Family of the participant to whom such
option was granted, (x) any trust solely for the benefit of the
participant and members of the participant 's Immediate Family, (y) any
partnership or limited liability company whose only partners or members
are the participant and members of the participant 's Immediate Family,
or (z) any other transferee approved by the Committee in advance of the
transfer; and further provided that: (i) the transfer of any option
shall not be effective on a date earlier than the date on which the
option is first exercisable as set forth in this plan; (ii) any
Permitted Transferee to whom an option is transferred by a participant
shall not be entitled to transfer the option, other than to the
participant or by will or the laws of descent and distribution; and
(iii) the Permitted Transferee shall remain subject to all of the terms
and conditions applicable to such option prior to such transfer. For
purposes of this Section 10, "Immediate Family" means, with respect to
a particular participant, such participant 's spouse, children,
stepchildren, grandchildren parents, stepparents, grandparents,
siblings, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, and sister-in-law, and shall include relationships
arising from legal adoption."
<PAGE>
AMENDMENT NO. 1 TO THE
COMDISCO, INC. 1991 STOCK OPTION PLAN
DATED AS OF NOVEMBER 3, 1999
The Board of Directors of Comdisco, Inc. hereby amends and modifies the
Comdisco, Inc. 1991 Stock Option Plan (the "Plan") in accordance with the
authority granted under Section 11 of the Plan. The Effective Date of this
Amendment shall be as of November 3, 1999.
1. Section 9 shall be amended by adding the following sentence immediately
before the last sentence in that section:
"Notwithstanding the foregoing provisions of this Section 9, if the
participant's employment with the Company terminates for any reason
other than for cause, the Committee in its discretion may extend the
period of time following the participant's termination of employment
that an option could otherwise be exercise to permit the exercise of
any unexercised portion of an option to the extent such option was
exercisable on the date of the participant's termination of
employment."
2. Section 10 shall be amended by revising the first sentence of that
section to read as follows:
"Except for those transfers that are approved by the Committee or as
may otherwise be provided by the Committee, options are not
transferable other than by will or by the laws of descent or
distribution, and during a participant's lifetime are exercisable only
by the participant or the participant's guardian or legal
representative; provided, however, that a participant may (a) designate
in writing a beneficiary to exercise his/her option after the
participant's death and (b) transfer an option to a revocable, inter
vivos trust as to which the participant is both the settlor and
trustee, and (c) transfer an option for no consideration to any of the
following permissible transferees (each a "Permissible Transferee"):
(w) any member of the Immediate Family of the participant to whom such
option was granted, (x) any trust solely for the benefit of the
participant and members of the participant 's Immediate Family, (y) any
partnership or limited liability company whose only partners or members
are the participant and members of the participant 's Immediate Family,
or (z) any other transferee approved by the Committee in advance of the
transfer; and further provided that: (i) the transfer of any option
shall not be effective on a date earlier than the date on which the
option is first exercisable as set forth in this plan; (ii) any
Permitted Transferee to whom an option is transferred by a participant
shall not be entitled to transfer the option, other than to the
participant or by will or the laws of descent and distribution; and
(iii) the Permitted Transferee shall remain subject to all of the terms
and conditions applicable to such option prior to such transfer. For
purposes of this Section 10, "Immediate Family" means, with respect to
a particular participant, such participant 's spouse, children,
stepchildren, grandchildren parents, stepparents, grandparents,
siblings, mother-in-law, father-in-law, son-in-law, daughter-in-law,
brother-in-law, and sister-in-law, and shall include relationships
arising from legal adoption. "
<PAGE>
AMENDMENT NO. 1 TO THE
COMDISCO, INC. 1992 LONG-TERM STOCK OWNERSHIP INCENTIVE PLAN
DATED AS OF NOVEMBER 3, 1999
The Board of Directors of Comdisco, Inc. hereby amends and modifies the
Comdisco, Inc. 1992 Long-Term Stock Ownership Incentive Plan (the "Plan") in
accordance with the authority granted under Section 25 of the Plan. The
Effective Date of this Amendment shall be as of November 3, 1999.
1. Section 8 shall be amended by revising the first sentence of that
section to read as follows:
"8.NON-TRANSFERABILITY. Except for those assignments and transfers that are
approved by the Committee, or as otherwise may be provided by the Committee,
each Award (other than Restricted Stock) granted hereunder shall not be
assignable or transferable other than by will or the laws of descent and
distribution; provided, however, that a Grantee may (a) designate in writing
a beneficiary to exercise his/her Award after the Grantee's death and (b)
transfer an option (other than an Incentive Stock Option), Stock Appreciation
Right or Performance Unit to a revocable, inter vivos trust as to which the
Grantee is both (the settlor and trustee, and (c) transfer an Award for no
consideration to any of the following permissible transferees (each a
"Permissible Transferee"): (w) any member of the Immediate Family of the
Grantee to whom such Award was granted, (x) any trust solely for the benefit
of the Grantee and members of the Grantee's Immediate Family, (y) any
partnership or limited liability company whose only partners or members are
the Grantee and members of the Grantee's Immediate Family, or (z) any other
transferee approved by the Committee in advance of the transfer; and further
provided that: (i) the transfer of any Award shall not be effective on a date
earlier than the date on which the Award is first exercisable as set forth in
this plan; (ii) any Permitted Transferee to whom an Award is transferred by a
Grantee shall not be entitled to transfer the Award, other than to the
Grantee or by will or the laws of descent and distribution; and (iii) the
Permitted Transferee shall remain subject to all of the terms and conditions
applicable to such Award prior to such transfer. For purposes of this Section
8, "Immediate Family" means, with respect to a particular Grantee, such
Grantee's spouse, children, stepchildren, grandchildren parents, stepparents,
grandparents, siblings, mother-in-law, father-in-law, son-in-law,
daughter-in-law, brother-in-law, and sister-in-law, and shall include
relationships arising from legal adoption. Each share of Restricted Stock
shall be nontransferable until such share becomes nonforfeitable and the
Restricted Period, if any, lapses."
2. Section 14 shall be revised to add the following sentence:
"In the event of a termination of employment other than for Cause, the
Committee in its discretion may extend the period of time following the
Grantee's termination of employment that an Award could otherwise be
exercised to permit the exercise any unexercised portion of an Award to
the extent such Award was exercisable on the date of the Grantee's
termination of employment; provided however, that in no event may the
term of any Award expire or be exercisable more than 15 years (ten
years for Incentive Stock Options) after the Grant Date of such Award."
<PAGE>
AMENDMENT NO. 1 TO THE
COMDISCO, INC. 1996 OUTSIDE DIRECTOR DEFERRED FEE OPTION PLAN
DATED AS OF NOVEMBER 3, 1999
The Board of Directors of Comdisco, Inc. hereby amends and modifies the
Comdisco, Inc. 1996 Outside Director Deferred Fee Option Plan (the "Plan") in
accordance with the authority granted under Section 13 of the Plan. The
Effective Date of this Amendment shall be as of November 3, 1999.
1. Section 10 shall be amended by revising the first sentence of that
section to read as follows:
"Except for those transfers that are approved by the Director Option
Committee, or as otherwise provided by the Director Option Committee,
the options granted under this Plan are not transferable except by will
or by the laws of descent and distribution; provided, however, that a
Participant may (a) designate in writing a beneficiary to exercise
his/her option after the Participant's death and (b) transfer an option
to a revocable, inter vivos trust as to which the Participant is both
the settlor and trustee, and (c) transfer an option for no
consideration to any of the following permissible transferees (each a
"Permissible Transferee"): (w) any member of the Immediate Family of
the Participant to whom such option was granted, (x) any trust solely
for the benefit of the Participant and members of the Participant 's
Immediate Family, (y) any partnership or limited liability company
whose only partners or members are the Participant and members of the
Participant 's Immediate Family, or (z) any other transferee approved
by the Director Option Committee in advance of the transfer; and
further provided that: (i) the transfer of any option shall not be
effective on a date earlier than the date on which the option is first
exercisable as set forth in this plan; (ii) any Permitted Transferee to
whom an option is transferred by a Participant shall not be entitled to
transfer the option, other than to the Participant or by will or the
laws of descent and distribution; and (iii) the Permitted Transferee
shall remain subject to all of the terms and conditions applicable to
such option prior to such transfer. For purposes of this Section 10,
"Immediate Family" means, with respect to a particular Participant,
such Participant 's spouse, children, stepchildren, grandchildren
parents, stepparents, grandparents, siblings, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, and
sister-in-law, and shall include relationships arising from legal
adoption. "
COMDISCO EXECUTIVE OFFICER COMPENSATION AND BENEFITS
Summary Compensation Table
This table shows the compensation paid to (i)Nicholas K. Pontikes, our
President and Chief Executive Officer, (ii) our four other most highly
compensated executive officers serving on September 30, 1999 and (iii) Jack
Slevin, who served as our Chairman and Chief Executive Officer until his
resignation, effective in January, 1999. The persons named in this table and in
this section are referred to as the "named executive officers".
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Annual Compensation Long-Term Compensation
-------------------------------------------------------------------------------
Awards Payouts
-------------------------------------------------
Name and Principal Year Salary Bonus Securities Long- All Other
Position Underlying Term Compensation<F1>
Options Incentive
(shares) Payouts
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nicholas K. Pontikes 1999 $450,000 $ 81,250 150,000 $170,129 $ 5,896
President and Chief 1998 325,000 325,000 687,210(b) 349,350 6,909
Executive Officer 1997 277,917 278,200 26,700 478,000 14,111
Thomas Flohr 1999 300,000 300,000 120,000 150,971 0
Senior Vice President 1998 300,000 227,000 323,530(b) 0 0
1997 300,000 300,000 21,400 0 0
John Kenning 1999 267,000 133,500 39,600 226,485 5,896
Executive Vice 1998 267,000 267,000 195,020(b) 0 6,909
President 1997 268,808 286,200 24,970 0 14,111
William N. Pontikes 1999 255,000 63,750 24,000 265,129 5,896
Executive Vice 1998 230,000 230,000 240,710(b) 339,350 6,909
President
1997 220,000 268,200 26,700 473,000 14,111
John J. Vosicky 1999 260,000 65,000 18,000 290,129 5,896
Executive Vice 1998 240,000 215,000 101,700(b) 359,350 6,909
President
& Chief Financial 1997 240,000 218,200 26,700 483,000 14,411
Officer
Jack Slevin 1999 206,250 0 240,000 0 5,896
1998 550,000 475,000 306,220(b) 764,350 6,909
1997 550,000 444,000 58,850 831,000 14,111
- ------------------------------------------------------------------------------------------------------------
<FN>
<F1> Amounts of "All Other Compensation" are amounts contributed by
Comdisco under the Comdisco Retirement Plan Trust Agreement, effective April 1,
1998 (formerly known as the Comdisco Profit Sharing Plan and Trust).
<F2> Amounts reflect options granted pursuant to Comdisco's Shared
Investment Plan (the "SIP") on Sunday, February 1, 1998 with a one-day term and
an exercise price based on the closing price of the New York Stock Exchange on
Friday, January 30, 1998. The options were exercised on the date of grant by the
named executive. Due to the one-day term of the option, there was no potential
realizable value for the option term. Under the terms of the voluntary plan, the
participants took out personal full-recourse loans to fund their exercise of the
options to purchase common stock at the January 30, 1998 closing price of $17.25
per share. The loans borrowed from a commercial bank, are the personal
obligation of the participants. Comdisco has agreed to guarantee repayment to
the bank in the event of a default by a participant. Pursuant to the SIP,
Comdisco received approximately $109 million in cash from 106 members of
Comdisco's senior management team who collectively purchased over 6 million
shares of common stock.
</FN>
</TABLE>
<PAGE>
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
This table presents additional information concerning the options shown in
the Summary Compensation Table for fiscal year 1999.
- -----------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable Value at
Assumed Annual Rates of Stock
Price Appreciation for Option
Term
----------------------------------
- -----------------------------------------------------------------------------------------------------------------
Name Number of Securities % of Total Exercise Expiration 0% 5% 10%
Underlying Options/ Options / or Base Date
SARs Granted SARs Price
(#) Granted to ($/Sh)
Employees
in Fiscal
1999
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Nicholas K. Pontikes 150,000<F1> 7.43 $14.5625 10/01/08 -0- $1,373,742 $3,481,331
Thomas Flohr 120,000<F1> 5.94 $14.5625 10/01/08 -0- $1,098,993 $2,785,065
John C. Kenning 39,600<F1> 1.96 $14.5625 10/01/08 -0- $ 362,668 $ 919,071
William N. Pontikes 24,000<F1> 1.19 $14.5625 10/01/08 -0- $ 219,799 $ 557,013
John J. Vosicky 18,000<F1> .89 $14.5625 10/01/08 -0- $ 164,849 $ 417,760
Jack Slevin 60,000<F1> 2.97 $14.5625 10/01/08 -0- $ 549,497 $1,392,532
- -----------------------------------------------------------------------------------------------------------------
<FN>
<F1>Reflects options issued in lieu of cash compensation pursuant to the
"Cash-to-Option Alternative" election referenced in the COMPENSATION COMMITTEE
REPORT.
</FN>
</TABLE>
We have included amounts under the columns labeled "5%" and "10%" pursuant
to certain rules promulgated by the Securities and Exchange Commission and those
amounts are not intended to forecast future appreciation, if any, in the price
of the our common stock. Such amounts are based on the assumption that the named
executive officers hold the options granted for their full term. The actual
value of the options will vary in accordance with the market price of our common
stock. The column headed "0%" is included to demonstrate that the options were
granted at fair market value and optionees will not recognize any gain without
an increase in the stock price, and any increase will benefit all stockholders
proportionately.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Value
This table contains information with respect to the named executive
officers concerning the exercise of options during the fiscal 1999 and
unexercised options held as of the end of fiscal 1999.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Number of Value Total Number of Shares Total Value of Unexercised,
Shares Underlying Unexercised in-the-Money Options Held
Acquired Options Held at at September 30, 1999<F1>
On September 30, 1999
-------------------------------------------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nicholas K. Pontikes -0- -0- 487,009 227,927 5,964,015 1,125,160
Thomas Flohr -0- -0- 746,725 214,835 8,507,341 924,466
John C. Kenning 53,842 1,162,978 208,550 164,936 1,968,322 1,346,843
William N. Pontikes -0- -0- 244,983 81,705 2,528,685 499,492
John J. Vosicky 34,286 874,893 379,148 57,472 4,813,915 307,429
Jack Slevin<F2> 950,000 16,013,536 400,774 123,926 5,823,115 756,811
- -------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Based on the closing price of our common stock, $19.3125, on September 30, 1999.
<F2> Mr. Slevin resigned as Chief Executive Officer, President and Chairman of the Board on January 11, 1999.
</FN>
</TABLE>
<PAGE>
Long Term Incentive Plan ("LTIP") Awards
This table provides information on the Performance Unit Awards granted
during the fiscal year ended September 30, 1999 under our 1995 Long-Term Stock
Ownership Incentive Plan to the named executive officers.
<TABLE>
<CAPTION>
- ---------------------------------- ----------- ------------------------- ---------------------------------------
Estimated Future Payouts under
Non-Stock Price-Based Plans<F1>
- ----------------------------------- ----------- ------------------------- ---------------------------------------
- ----------------------------------- ----------- ------------------------- ------------- ------------ ------------
Name Number Performance or Other Threshold Target Maximum
Of Units Period Until Maturation
or Payout
- ----------------------------------- ----------- ------------------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Nicholas K. Pontikes 300 September 30, 2001 $150,000 $300,000 $900,000
Thomas Flohr 133 September 30, 2001 66,500 133,000 399,000
John C. Kenning 167 September 30, 2001 83,000 166,000 498,000
William N. Pontikes 183 September 30, 2001 91,500 183,000 549,000
John J. Vosicky 183 September 30, 2001 91,500 183,000 549,000
- ----------------------------------- ----------- ------------------------- ------------- ------------ ------------
<FN>
<F1> The target performance objective is that our total shareholder return,
the sum of the stock price appreciation plus dividends (reinvested), be ranked
at or above the sixtieth percentile of the total shareholder return of all
companies in the S&P 500 for the period running from October 1, 1998 through
September 30, 2001. The threshold performance objective is a fiftieth percentile
ranking. If the actual ranking is less than the fiftieth percentile, no
compensation will be paid under these awards.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Exhibit 21.00
State or Jurisdiction Percentage of Voting
of incorporation Securities Owned
--------------------- --------------------
<S> <C> <C>
CDC Realty, Inc. Illinois 100%
CDO Capital, L.L.C. Delaware 98.28%
CDO RM, Inc. Delaware 100%
CDS Foreign Holdings, Inc. Delaware 100%
Prism Communication Services, Inc. Delaware 96.50%
CFS Railcar, Inc. Delaware 100%
COM-L 1989-A Corporation Illinois 100%
Comdisco Asia Pte Ltd Singapore 100%
Comdisco Australia Pty. Ltd. New South Wales, Australia 100%
Comdisco Belgium S.P.R.L. Belgium 100%
(f/k/a Comdisco Belgium S.A.)
Comdisco Canada Equipment Finance Ontario, Canada 100%
Limited Partnership
Comdisco Canada Finance, L.L.C. Delaware 100%
Comdisco Canada Ltd. Ontario, Canada 100%
Comdisco Continuity Services Canada Ontario, Canada 100%
Ltd. (f/k/a Comdisco Disaster Recovery
Services Canada Ltd.)
Comdisco Continuity Services (France) France 100%
(f/k/a/ Ageris International, S.A.)
Comdisco Continuity Services (UK) United Kingdom 100%
Limited (f/k/a Failsafe/ROC Ltd.)
Comdisco Direct (UK) Limited United Kingdom 100%
(f/k/a Comdisco Finance Ltd.)
Comdisco Deutschland GmbH Germany 100%
Comdisco Disaster Recovery Netherlands 100%
Services B.V.
Comdisco Factoring (Nederland) Netherlands 100%
B.V.
-49-
State or Jurisdiction Percentage of Voting
of incorporation Securities Owned
--------------------- ---------------------
Comdisco Finance (Nederland) B.V. Netherlands 100%
Comdisco Financial Services, Inc. Delaware 100%
Comdisco France S.A. France 100%
Comdisco Global, Inc. Cayman Islands 100%
Comdisco GmbH & Co. Leasing and Germany 100%
Finance KG
Comdisco Group Leasing Limited Illinois 75.25%
Partnership
Comdisco Handelsgesellschaft M.B.H. Austria 100%
Comdisco Healthcare Group, Inc. Delaware 100%
Comdisco Holdings (U.K.) Limited United Kingdom 100%
(f/k/a Comdisco Disaster Recovery
Services (U.K.) Ltd.)
Comdisco Investment Group, Inc. Delaware 100%
Comdisco Ireland Limited Ireland 100%
Comdisco Lease Finance Partnership Cayman Islands 100%
Comdisco Management GmbH Germany 100%
Comdisco de Mexico, S.A. de C.V. Mexico 100%
Comdisco Nederland B.V. Netherlands 100%
Comdisco Network Services, Inc. Illinois 100%
Comdisco New Zealand New Zealand 100%
(f/k/a Comdisco (NZ) Limited
Comdisco Sweden A.B. Sweden 100%
Comdisco (Switzerland), S.A. Switzerland 100%
-50-
State or Jurisdiction Percentage of Voting
of incorporation securities owned
--------------------- --------------------
Comdisco Trade, Inc. Delaware 100%
Comdisco United Kingdom Limited United Kingdom 100%
Commedco, Inc. Delaware 100%
Computer Discount Corporation Illinois 100%
Computer Discount Corporation, S.L. Spain 100%
(f/k/a Computer Discount Corporation
S.A.)
Computer Recovery Centre Sdn Bhd Malaysia 10%
Horizon Lease Partners, L.P. Delaware 100%
Promodata, SNC France 100%
628761 Alberta Ltd. Alberta, Canada 100%
-51-
</TABLE>
Subsidiaries of the Registrant are included in the consolidated financial
statements.
[KPMG LLP Letterhead]
Exhibit 23.01
Consent of KPMG LLP
The Board of Directors
Comdisco, Inc.:
We consent to incorporation by reference in Registration Statement No. 33-20715
on Forms S-8 and S-3, Registration Statement No. 333-65535 on Form S-3,
Registration Statement No. 333-12765 on Form S-8, Registration Statement No.
333-32215 on Form S-8, Registration Statement No. 333-45263 on Form S-8,
Registration Statement No. 333-50001 on Form S-8, and Registration Statement No.
333-87725 on Form S-3 of Comdisco, Inc. of our reports dated November 2, 1999,
relating to the consolidated balance sheets of Comdisco, Inc. and subsidiaries
as of September 30, 1999 and 1998 and the related consolidated statements of
earnings, stockholders equity, and cash flows for each of the years in the
three-year period ended September 30, 1999, and the related schedule, which
reports appear, or are incorporated by reference, in the September 30, 1999
annual report on Form 10-K of Comdisco, Inc.
/s/ KPMG LLP
Chicago, Illinois
DECEMBER 21, 1999
-46-
Exhibit 23.02
Consent of KPMG LLP
The Board of Directors
Comdisco, Inc:
We consent to the inclusion of our report dated December 2, 1999, with respect
to the balance sheets of Comdisco Ventures, a division of Comdisco, Inc., as of
September 30, 1999 and 1998, and the related statements of earnings and division
equity, and cash flows for each of the years in the three-year period ended
September 30, 1999, which report appears in Exhibit 99.02 of the Comdisco, Inc.
Annual Report on Form 10-K for the year ended September 30, 1999.
/s/ KPMG LLP
Chicago, Illinois
December 22, 1999
-47-
Exhibit 23.03
Consent of KPMG LLP
The Stockholders
Prism Communication Services, Inc.:
We consent to the inclusion of our report dated November 22, 1999, with respect
to the consolidated balance sheets of Prism Communications Services, Inc. and
subsidiaries as of September 30, 1998 (Predecessor) and 1999 (Successor) and the
related consolidated statements of operations, stockholder's equity and cash
flows for the period from November 6, 1997 (inception) to September 30, 1998
(Predecessor), the period from October 1, 1998 to February 26, 1999
(Predecessor) and the period from February 27, 1999 to September 30, 1999
(Successor), which report appears in Exhibit 99.03 of the Comdisco, Inc. Annual
Report on Form 10-K for the year ended September 30, 1999.
/s/ KPMG LLP
New York, New York
December 22, 1999
-48-
THE FOLLOWING IS FOR INFORMATIONAL PURPOSES ONLY. THESE STATEMENTS ARE NOT
INCORPORATED BY REFERENCE IN THIS OR ANY OTHER FILING WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE
COMDISCO, INC. CONSOLIDATED FINANCIAL STATEMENTS AND THIS INFORMATION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Comdisco, Inc.:
We have audited the accompanying balance sheets of Comdisco Ventures (a
division of Comdisco, Inc.) as of September 30, 1999 and 1998, and the
related statements of earnings and division equity, and cash flows for each
of the years in the three-year period ended September 30, 1999. These
financial statements are the responsibility of the Comdisco Ventures'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with general 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.
As described in note 1 to the financial statements, Comdisco Ventures is a
division of Comdisco, Inc.; accordingly, the financial statements of
Comdisco Ventures should be read in conjunction with the audited financial
statements of Comdisco, Inc.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Comdisco Ventures at
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30,
1999 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
December 2, 1999
<PAGE>
COMDISCO VENTURES
Balance Sheets
September 30, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS
Equity securities............................................ $197,335 $ 16,995
Receivables, net............................................. 341,061 66,425
Inventory of equipment....................................... 1,762 1,120
Leased assets:
Direct financing and sales-type......................... 5,106 7,344
Operating (net of accumulated depreciation)............. 283,241 182,403
Net leased assets.................................. 288,347 189,747
Other assets................................................. 17,069 6,956
-------- --------
$845,574 $281,243
======== ========
LIABILITIES AND DIVISION EQUITY
Inter-group loan............................................ $533,297 $189,281
Accounts payable............................................ 329 561
Deferred income taxes....................................... 72,265 4,116
Other liabilities........................................... 40,034 16,205
-------- --------
645,925 210,163
Division equity............................................. 199,649 71,080
-------- --------
$845,574 $281,243
======== ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COMDISCO VENTURES
Statements of Earnings and Division Equity
Years ended September 30, 1999, 1998, and 1997
(in thousands)
<TABLE>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenue:
Leasing:
Operating....................................... $116,678 $ 83,147 $ 61,544
Direct financing................................ 1,389 1,073 2,771
Sales-type...................................... 336 866 4,305
------- ------- -------
Total leasing............................. 118,403 85,086 68,620
Sales............................................. 6,142 7,136 6,942
Interest income on notes.......................... 22,580 6,655 3,139
Warrant sale proceeds and capital gains........... 80,731 14,938 16,435
Other............................................. 683 483 195
------- ------- -------
Total revenue............................. 228,539 114,298 95,331
------- ------- -------
Cost and expenses:
Leasing:
Operating....................................... 87,860 59,884 42,740
Sales-type...................................... 254 479 3,615
------- ------- ------
Total leasing............................. 88,114 60,363 46,355
Sales............................................. 4,460 3,980 4,423
Selling, general, and administrative.............. 18,166 5,793 5,436
Interest.......................................... 23,373 10,835 7,670
Bad debt expense.................................. 23,200 4,786 6,250
------- ------- ------
Total costs and expenses.................. 157,313 85,757 70,134
------- ------- ------
Earnings before income taxes.............. 71,226 28,541 25,197
Income taxes.......................................... 28,402 11,381 10,047
------- ------- ------
Net earnings.............................. $ 42,824 $ 17,160 $ 15,150
======= ======= ======
Division equity at beginning of year.................. $ 71,080 $ 53,920 $ 38,770
Comprehensive income:
Net earnings...................................... 42,824 17,160 15,150
Other comprehensive income
unrealized gains, net of tax.................... 85,745 -- --
Total comprehensive income................ 128,569 17,160 15,150
------- ------- ------
Division equity at end of year........................ $199,649 $ 71,080 $ 53,920
======= ======= =======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COMDISCO VENTURES
Statements of Cash Flows
Years ended September 30, 1999, 1998, and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Operating lease and other leasing receipts.......... $117,504 $ 91,632 $ 80,051
Leasing costs, primarily rentals.................... (90) (1,269) (111)
Sales............................................... 6,671 7,220 6,104
Cost of sales....................................... (113) (980) (423)
Warrant proceeds.................................... 80,731 14,938 16,435
Promissory note receipts............................ 66,912 32,685 15,753
Other revenue....................................... 15,231 6,883 3,334
Selling, general, and administrative expenses....... (7,546) (6,794) (5,435)
-------- -------- --------
Net cash provided by operating activities..... 279,300 144,315 115,708
-------- -------- --------
Cash flows from investing activities:
Equipment purchased for leasing..................... (205,624) (114,188) (91,297)
Purchase of property and equipment.................. (324) (140) (249)
Equity investments.................................. (39,641) (7,945) (4,294)
Issuance of promissory notes........................ (323,876) (57,213) (34,319)
Other............................................... (5,558) 2,366 16,273
-------- -------- --------
Net cash used in investing activities......... (575,023) (177,120) (113,886)
-------- -------- --------
Cash flows from financing activities:
Net change in inter-group loans..................... 295,723 32,931 (1,948)
Principal payments on nonrecourse debt.............. -- (126) 126
-------- -------- --------
Net cash provided by financing activities..... 295,723 32,805 (1,822)
-------- -------- --------
Net increase in cash and
cash equivalents............................ -- -- --
Cash and cash equivalents at beginning of period........ -- -- --
-------- -------- --------
Cash and cash equivalents at end of period.............. $ -- $ -- $ --
======== ======== ========
</TABLE>
<PAGE>
COMDISCO VENTURES
Statements of Cash Flows, Continued
Years ended September 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities -- net earnings........... $ 42,824 $ 17,160 $ 15,150
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Leasing costs, primarily depreciation and amortization... 88,024 59,094 46,244
Leasing revenue.......................................... 2,238 6,231 11,425
Principal portion of notes receivable.................... 44,332 26,030 12,614
Cost of sales............................................ 4,347 3,000 4,000
Selling, general, and administrative expenses............ 33,820 3,785 6,251
Income taxes............................................. 28,402 11,381 10,047
Interest................................................. 23,373 10,835 7,670
Other -- net............................................. 11,940 6,799 2,307
------- ------- -------
Net cash provided by operating activities..................... $279,300 $144,315 $115,708
======= ======= =======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
COMDISCO VENTURES
Notes to Financial Statements
September 30, 1999, 1998, and 1997
(in thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Formed in 1987 as a division of Comdisco, Inc., Comdisco Ventures
("Ventures") provides a wide variety of financing products to venture
capital-backed start-up companies. These include equipment leases and
loans, subordinated debt, receivables financing, and equity financing.
Its principal market is North America.
Ventures' cash activity is reflected through the inter-group loan
account. Interest expense on suc loan account, which amounted to
$23,373, $10,835, and $7,670 in the years ended September 30, 1999,
1998, and 1997, respectively, is included in interest expense in the
accompanying financial statements.
Ventures is allocated certain shared services and support activities
of Comdisco, Inc., consisting of, among other things, financial and
accounting services, information system services, certain selling and
marketing activities, executive management, human resources, corporate
finance, legal, and corporate planning activities. Such allocated
expenses amounted to $3,000 during the year ended September 30, 1999
and $1,000 in both of the years ended September 30, 1998 and 1997.
Ventures was allocated such expenses based on use and other criteria
which management believes is reasonable.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
INCOME TAXES
Ventures is included in the consolidated Federal and state income tax
returns of Comdisco, Inc. Income tax expense has been computed as if
Ventures filed its own income tax returns. Related current tax
liabilities are settled through the inter-group loan account.
Ventures uses the asset and liability method to account for income
taxes. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance
for any tax benefits of which future realization is uncertain.
LEASE ACCOUNTING
See note 4 and 5 of Notes to Financial Statements for a description of
lease accounting policies, lease revenue recognition, and related
costs.
INVENTORY OF EQUIPMENT
Inventory of equipment is stated at the lower of cost or market by
categories of similar equipment.
FURNITURE AND EQUIPMENT
Furniture and equipment is carried at cost and is depreciated using
the straight-line method over the estimated useful lives of the
related assets ranging from three to five years. Furniture and
equipment is included as a component of other assets.
INVESTMENTS IN EQUITY SECURITIES
Ventures determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation at
each balance sheet date. Marketable securities classified as
available-for-sale are carried at fair value, based on quoted market
prices, net of market value discount to reflect any restrictions on
transferability, with unrealized gains and losses reported as a
component of division equity. Equity investments for which there is no
readily determinable fair value are carried at cost, less any
appropriate valuation allowance.
WARRANTS
Ventures' investments in warrants (received in connection with its
lease or other financings) are initially recorded at zero cost and
carried in the financial statements as follows:
o Warrants that meet the criteria for classification as
available-for-sale are carried at fair value based on quoted market
prices with unrealized gains and losses excluded from earnings and
reported in other comprehensive income.
o Warrants that do not meet the criteria for classification as a
marketable security are carried at zero value.
The proceeds received from the sale or liquidation are recorded as
earnings when received.
<PAGE>
(2) EQUITY SECURITIES
Ventures invests in equity instruments of privately-held companies in
networking, communications, software, Internet-based, and other
industries. For equity instruments, which are non-quoted investments,
Ventures' policy is to regularly review the assumptions underlying the
operating performance and cash flow forecasts in assessing the
carrying values. Ventures identifies and records impairment losses on
equity securities when events and circumstances indicate that such
assets might be impaired. During 1999 and 1998, certain of these
investments in privately-held companies became available-for-sale
securities when the investees completed initial public offerings.
Equity securities include the following as of September 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Available-for-sale securities:
Cost...................................................... $ 7,735 $ 3,390
Unrealized gain........................................... 142,612 --
-------- --------
Market value....................................... 150,347 3,390
Equity instruments (at cost less valuation adjustments)..... 46,988 13,605
-------- --------
Carrying value..................................... $197,335 $ 16,995
======== ========
</TABLE>
Realized gains or losses are recorded upon disposition of investments
based upon the difference between the proceeds and the cost basis
determined using the specific identification method. All other changes
in the valuation of portfolio investments are included as changes in
the unrealized appreciation or depreciation of investments in the
other comprehensive income. Net realized gains from the sales of
equity investments were $5,161, $1,396, and $3,425 in fiscal 1999,
1998, and 1997, respectively. Gross realized gains from the sales of
equity securities were $7,646 in fiscal 1999, $2,084 in fiscal 1998,
and $3,515 in fiscal 1997.
Ventures records the proceeds received from the sale or liquidation of
warrants received in conjunction with its lease or other financings as
income when received. These proceeds were $75,570, $13,542, and
$13,010 in fiscal 1999, 1998, and 1997, respectively.
(3) RECEIVABLES
Receivables include the following at September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Equipment loans...................................... $ 85,088 $31,311
Subordinated loans................................... 249,565 32,521
Receivable financing and other....................... 5,477 --
Nonperforming loans.................................. 2,975 1,487
--------- --------
Total notes receivable........................ 343,105 65,319
Accounts............................................. 7,148 3,325
Other................................................ 7,321 3,781
--------- --------
Total receivables............................. 357,574 72,425
Allowance for credit losses.......................... (16,513) (6,000)
--------- --------
Total......................................... $341,061 $66,425
========= ========
</TABLE>
Ventures provides loans to high technology privately held companies
in networking, communications, software, Internet-based industries,
healthcare and other industries. Ventures' loans are generally
structured as equipment loans or subordinated loans.
The amount of each loan varies, but generally does not exceed $5.0
million. The loans bear fixed interest rates with coupons currently
ranging from 8.0% to 13.0% per annum. In addition, loan processing
fees typically ranging from .5% to 2.0% of the principal amount of
the loan may be paid at loan closing. As part of the loan transaction,
Ventures receives warrants to purchase an equity interest in the
borrower at a nominal exercise price. The amount of the warrants
received and the exercise price varies based upon borrower-specific
valuation factors. Loans provide current income from interest and
fees.
Contractual maturities of total notes receivables as of September 30,
1999 were as follows: 2000 -$130,000; 2001 - $153,000; 2002 -
$107,000; 2003 and thereafter - $13,000. Actual cash flows will vary
from contractual maturities due to prepayments and charge-offs.
Changes in the allowance for credit losses (combined notes and
accounts receivables) for the years ended September 30 were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year.......... $ 6,000 $ 5,500 $ --
Provision for credit losses........... 23,200 4,786 6,250
Net credit losses..................... (12,687) (4,286) (750)
-------- ------- -------
Balance at end of year............ $ 16,513 $ 6,000 $ 5,500
======== ======= =======
</TABLE>
<PAGE>
(4) LEASE ACCOUNTING POLICIES
FASB Statement of Financial Accounting Standards No. 13 requires that
a lessor account for each lease by either the direct financing,
sales-type, or operating method.
LEASED ASSETS
o Direct financing and sales-type leased assets consist of the present
value of the future minimum lease payments plus the present value of
the residual (collectively referred to as the net investment).
Residual is the estimated fair market value at lease termination. In
estimating the equipment's fair value at lease termination, Ventures
relies on historical experience by equipment type and manufacturer
and, where available, valuations by independent appraisers, adjusted
for known trends. Ventures' estimates are reviewed continuously to
ensure realization, however the amounts Ventures will ultimately
realize could differ from the estimated amounts.
o Operating leased assets consist of the equipment cost, less the
amount depreciated to date.
REVENUE, COSTS, AND EXPENSES
o DIRECT FINANCING LEASES - Revenue consists of interest earned on the
present value of the lease payments and residual. Revenue is
recognized periodically over the lease term as a constant percentage
return on the net investment. There are no costs and expenses related
to direct financing leases since leasing revenue is recorded on a net
basis.
o SALES-TYPE LEASES - Revenue consists of the present value of the
total contractual lease payments which is recognized at lease
inception. Costs and expenses consist of the equipment's net book
value at lease inception, less the present value of the residual.
Interest earned on the present value of the lease payments and
residual, which is recognized periodically over the lease term as a
constant percentage return on the net investment, is included in
direct financing lease revenue in the statement of earnings.
o OPERATING LEASES - Revenue consists of the contractual lease
payments and is recognized on a straight-line basis over the lease
term. Costs and expenses are principally depreciation of the
equipment. Depreciation is recognized on a straight-line basis over
the lease term to Ventures' estimate of the equipment's fair market
value at lease termination, also commonly referred to as "residual"
value. In estimating the equipment's fair value at lease termination,
Ventures relies on historical experience by equipment type and
manufacturer and, where available, valuations by independent
appraisers, adjusted for known trends. Ventures' estimates are
reviewed continuously to ensure realization, however the amounts
Ventures will ultimately realize could differ from the amounts assumed
in determining depreciation on the equipment in the operating lease
portfolio at September 30, 1999.
o Initial direct costs related to operating and direct financing
leases, including salesperson's commissions, are capitalized and
amortized over the lease term.
<PAGE>
(5) LEASED ASSETS
The components of the net investment in direct financing and
sales-type leases as of September 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Minimum lease payments receivable.................... $5,540 $7,876
Estimated residual values............................ 181 717
Less: unearned revenue............................... (615) (1,249)
------ ------
Net investment in direct financing and
sales-type leases......................... $5,106 $7,344
====== ======
</TABLE>
Unearned revenue is recorded as leasing revenue over the lease terms.
The following is a schedule of future minimum lease payments to be
received under direct financing and sales-type leases, based on
contractual terms in existence as of September 30, 1999:
YEARS ENDING MINIMUM
SEPTEMBER 30, PAYMENTS
---------------- --------
2000 $3,147
2001 1,954
2002 422
2003 17
2004 --
------
$5,540
======
Operating leased assets include the following as of September 30:
1999 1998
--------- ---------
Operating leased assets................. $ 432,862 $ 294,352
Less: accumulated depreciation
and amortization..................... (149,621) (111,949)
--------- ---------
Net............................. $ 283,241 $ 182,403
========= =========
<PAGE>
The following is a schedule of future minimum rental payments to be
received under operating leases, based on contractual terms in
existence as of September 30, 1999:
YEARS ENDING MINIMUM
SEPTEMBER 30, PAYMENTS
-------------- ----------
2000 $129,127
2001 109,085
2002 66,515
2003 10,565
2004 --
--------
$315,292
========
(6) LEASE PORTFOLIO INFORMATION
The size of Ventures' lease portfolio can be measured by the cost of
leased assets at the date of lease inception. Cost at lease inception
represents either the equipment's original cost or its net book value
at termination of a prior lease. The following table summarizes, by
year of lease commencement and by year of projected lease termination,
the cost at lease inception for all leased assets recorded at
September 30, 1999:
<TABLE>
<CAPTION>
PROJECTED YEAR OF LEASE TERMINATION
COST AT
YEAR LEASE LEASE --------------------------------------------------
COMMENCED INCEPTION 2000 2001 2002 2003
------------------ --------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1995 and prior $ 10,476 $10,156 $ 320 $ -- $ --
1996 39,838 38,168 1,393 277 --
1997 77,909 45,338 31,636 461 474
1998 113,881 3,942 40,899 64,608 4,532
1999 204,202 13 9,325 115,465 79,399
-------- ------- ------- -------- -------
$446,306 $97,617 $83,573 $180,711 $84,405
======== ======= ======= ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes the estimated net book value at lease
termination for all leased assets recorded at September 30, 1999. The
table is presented by year of lease commencement and by year of
projected lease termination:
NET BOOK PROJECTED YEAR OF LEASE TERMINATION
VALUE AT
YEAR LEASE LEASE -------------------------------------
COMMENCED TERMINATION 2000 2001 2002 2003
------------------ ----------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
1996 $ 3,625 $ 3,625 $ -- $ -- $ --
1997 10,306 6,421 3,885 -- --
1998 11,790 509 4,549 6,732 --
1999 24,209 -- 636 13,710 9,863
------ ------- ------ ------- ------
$49,930 $10,555 $9,070 $20,442 $9,863
======= ======= ====== ======= ======
</TABLE>
(7) INCOME TAXES
Ventures is included in the consolidated U.S. income tax return of
Comdisco, Inc. In absence of a tax sharing agreement, Ventures records
its income tax liabilities on a separate return basis.
The components of the income tax provision (benefit) charged
(credited) to operations were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Current:
U.S. Federal....................... $13,899 $ 9,280 $ 4,776
U.S. state and local............... 3,220 2,150 1,106
------ ------ ------
17,119 11,430 5,882
------ ------ ------
Deferred:
U.S. Federal....................... 9,161 (40) 3,382
U.S. state and local............... 2,122 (9) 783
------ ------ ------
11,283 (49) 4,165
------ ------ ------
Total tax provision............ $28,402 $11,381 $10,047
====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The reasons for the difference between the U.S. Federal income tax
rate and the effective income tax rate for earnings were as follows:
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
U.S. Federal income tax rate 35.0% 35.0% 35.0%
Increase resulting from - state income taxes,
net of U.S. Federal tax benefit 4.9 4.9 4.9
------ ----- -----
39.9% 39.9% 39.9%
====== ===== =====
Deferred tax assets and liabilities at September 30, 1999 and 1998
were as follows:
1999 1998
--------------- ---------------
Deferred tax assets (liabilities):
Investments $ 3,504 $ 3,504
Accounts receivable 1,968 848
Lease accounting (18,420) (11,858)
Deferred income (2,450) 3,390
Accumulated other comprehensive income (56,867) --
-------------- ---------------
Gross deferred tax assets (liabilities) (72,265) (4,116)
Less: valuation allowance -- --
-------------- ---------------
Net deferred tax assets (liabilities) $ (72,265) $ (4,116)
============== ===============
</TABLE>
(8) COMMITMENTS
Ventures leases office spaces under operating leases that expire
periodically through February 29, 2004. Under the renewal options of
the agreement, Ventures may extend the lease terms. Rent expense was
$272, $198, and $161 in fiscal 1999, 1998, and 1997, respectively.
Minimum lease payments for the office spaces are as follows:
YEARS ENDING SEPTEMBER MINIMUM LEASE
30, PAYMENTS
-------------------------- --------------
2000 $ 214
2001 218
2000 25
2003 25
2004 and thereafter 11
--------
$ 493
========
<PAGE>
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Ventures' financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------ -------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Equity securities $197,335 $197,335 $16,995 $16,995
Notes receivable including
noncurrent portion 341,061 341,061 66,425 66,425
</TABLE>
Fair values were determined as follows:
o Equity instruments are based on quoted market prices for
available-for-sale securities, and, for non-quoted equity instruments,
based on the lower of management's estimates of fair value or cost.
Ventures' investment in warrants of public companies were valued at
the bid quotation.
o Notes receivable are estimated by discounting future cash flows
using the current rates at which similar loans would be made to
borrowers with similar business profiles.
(10) COMPREHENSIVE INCOME
Comprehensive income for the year ended September 30, 1999 is
comprised as follows:
Net income $ 42,824
Other comprehensive income:
Unrealized gains on marketable
equity securities 142,612
Less income tax expense 56,867
--------
Total comprehensive income $128,569
========
THE FOLLOWING IS FOR INFORMATIONAL PURPOSES ONLY. THESE STATEMENTS ARE NOT
INCORPORATED BY REFERENCE IN THIS OR ANY OTHER FILING WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE
COMDISCO, INC. CONSOLIDATED FINANCIAL STATEMENTS AND THIS INFORMATION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
PRISM COMMUNICATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
September 30, 1998 and 1999
With Independent Auditors' Report Thereon)
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders
Prism Communication Services, Inc.:
We have audited the accompanying consolidated balance sheets of Prism
Communication Services, Inc. and subsidiaries as of September 30, 1998
(Predecessor) and 1999 (Successor) and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from November 6,
1997 (inception) to September 30, 1998 (Predecessor), the period from October 1,
1998 to February 26, 1999 (Predecessor) and the period from February 27, 1999 to
September 30, 1999 (Successor). These consolidated 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 financial position of Prism Communication
Services, Inc. and subsidiaries as of September 30, 1998 (Predecessor) and 1999
(Successor) and the results of their operations and their cash flows for the
period from November 6, 1997 (inception) to September 30, 1998 (Predecessor),
the period from October 1, 1998 to February 26, 1999 (Predecessor) and the
period from February 27, 1999 to September 30, 1999 (Successor) in conformity
with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, on February 26,
1999, Comdisco, Inc. acquired a controlling interest in Prism Communication
Services, Inc. As a result of the change in control, the financial information
for the period after the change in control is presented on a different cost
basis than that for the period before the change in control and, therefore, is
not comparable.
/s/ KPMG LLP
November 22, 1999
<PAGE>
PRISM COMMUNICATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 1998 and 1999
($ in thousands)
<TABLE>
<CAPTION>
1998 1999
------------- -----------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 2,126 $ 902
Accounts receivable, net ................................. 19 361
Prepaid expenses and other current assets ................ 409 985
--------- ---------
Total current assets ...................... 2,554 2,248
--------- ---------
Property, plant and equipment, net (note 3) .................. 10,030 63,394
Goodwill, net of accumulated amortization of $3,601 (note 1) . -- 58,070
Other assets ................................................. 357 5,901
--------- ---------
$ 12,941 $ 129,613
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 2,258 $ 16,690
Accrued liabilities ...................................... 152 5,812
Equipment purchases payable .............................. 7,920 5,000
Due to parent (note 9) ................................... -- 82,461
--------- ---------
Total current liabilities ................. 10,330 109,963
--------- ---------
Stockholders' equity:
Common stock, $0.01 par value. Authorized 900,000 shares,
issued and outstanding 340,000 shares in 1998
and 446,111 shares in 1999 ............................ 3 4
Additional paid-in capital ............................... 7,359 54,650
Accumulated deficit ...................................... (4,751) (35,004)
--------- ---------
Total stockholders' equity ................ 2,611 19,650
--------- ---------
$ 12,941 $ 129,613
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PRISM COMMUNICATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Period from November 6, 1997 (inception) to
September 30, 1998, period from October 1, 1998 to
February 26, 1999 and the period from
February 27, 1999 to September 30, 1999
($ in thousands)
<TABLE>
PERIOD FROM PERIOD FROM PERIOD FROM
NOVEMBER 6, OCTOBER 1, FEBRUARY 27,
1997 (INCEPTION) 1998 TO 1999 TO
TO SEPTEMBER 30, FEBRUARY 26, SEPTEMBER 30,
1998 1999 1999
---------------- ------------- -------------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C>
Net sales and service revenues ................. $ 22 $ 56 $ 671
Operating expenses:
Cost of sales and services ................. 1,515 2,511 8,496
Selling, general and administrative expenses 6,063 18,238 19,035
Stock based compensation expense ........... -- 6,664 718
Depreciation and amortization .............. 105 439 5,633
------- -------- --------
Total operating expenses .... 7,683 27,852 33,882
------- -------- --------
Operating loss .............. (7,661) (27,796) (33,211)
Interest income (expense), net ................. 70 74 (1,793)
------- -------- --------
Net loss .................... $(7,591) $(27,722) $(35,004)
======= ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PRISM COMMUNICATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Period from November 6, 1997 (inception) to
September 30, 1998, period from October 1, 1998 to
February 26, 1999 and the period from
February 27, 1999 to September 30, 1999
(Amounts in thousands)
<TABLE>
ADDITIONAL TOTAL
SHARES COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL DEFICIT EQUITY
----------- ------ ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(PREDECESSOR)
Balances at November 6, 1997 ..... -- $ -- $ -- $ -- $ --
Issuances of common stock ........ 151 1 1,649 -- 1,650
Issuances of common stock
in consideration of
services rendered ............ 82 1 888 -- 889
Reclass of LLC losses to
additional paid-in capital ... -- -- (2,840) 2,840 --
Issuance of common stock ......... 100 1 7,499 -- 7,500
Conversion of loan to equity ..... 7 -- 163 -- 163
Net loss ......................... -- -- -- (7,591) (7,591)
------- ------ ------- -------- --------
Balances at September 30, 1998 ... 340 3 7,359 (4,751) 2,611
Net loss from October 1, 1998 to
February 26, 1999 ............ -- -- -- (27,722) (27,722)
------- ------ ------- -------- --------
Balances at February 26, 1999 .... 340 $ 3 $ 7,359 $(32,473) $(25,111)
(SUCCESSOR)
Effect of acquisition of shares by
Comdisco ..................... -- -- 36,574 32,473 69,047
Conversion of preferred
stock to common stock ........ 100 1 9,999 -- 10,000
Issuance of common stock ......... 6 -- 718 -- 718
Net loss from February 27, 1999 to
September 30, 1999 ........... -- -- -- (35,004) (35,004)
------- ------- ------- -------- --------
Balance at September 30, 1999 .... 446 $ 4 $54,650 $(35,004) $ 19,650
======= ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PRISM COMMUNICATION SERVICES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Period from November 6, 1997 (inception) to September 30, 1998,
period from October 1, 1998 to February 26, 1999 and the period from
February 27, 1999 to September 30, 1999
($ in thousands)
<TABLE>
PERIOD FROM PERIOD FROM PERIOD FROM
NOVEMBER 6, OCTOBER 1, FEBRUARY 27,
1997 (INCEPTION) 1998 TO 1999 TO
TO SEPTEMBER 30, FEBRUARY 26, SEPTEMBER 30,
1998 1999 1999
---------------- ------------- -------------
(PREDECESSOR) (PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $(7,591) (27,722) (35,004)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .................... 105 439 5,633
Stock issued in consideration of services rendered 889 -- --
Compensation expense ............................. -- 6,664 718
Increase in accounts receivable .................. (19) (9) (333)
(Increase) decrease in other current assets ...... (409) (2,103) 1,527
(Increase) decrease in other assets .............. (347) 301 (5,845)
Increase in accounts payable ..................... 2,258 4,781 9,651
Increase in accrued liabilities .................. 152 5,420 240
Increase in due to parent ........................ -- 14 4,392
------- ------- -------
Net cash used in operating activities ... (4,962) (12,215) (19,021)
------- ------- -------
Cash flows from investing activities:
Capital expenditures ................................... (2,215) (2,585) (55,458)
Purchase of investments ................................ (10) -- --
------- ------- -------
Net cash used in investing activities ... (2,225) (2,585) (55,458)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuances of common stock ................ 9,150 -- --
Proceeds from issuance of convertible redeemable
preferred stock ..................................... -- 10,000 --
Proceeds from loans .................................... 663 -- --
Payments under loan agreements ......................... (500) -- --
Proceeds from debt financing from parent ............... -- 6,000 72,055
------- ------- -------
Net cash provided by financing activities 9,313 16,000 72,055
------- ------- -------
Net increase in cash and cash equivalents 2,126 1,200 (2,424)
Cash and cash equivalents at beginning of period ........... -- 2,126 3,326
------- ------- -------
Cash and cash equivalents at end of period ................. $ 2,126 3,326 902
======= ======= =======
Noncash activities:
Equipment supplier financing ........................... $ 7,920 $ -- $ --
======= ======= =======
Conversion of loan to equity ........................... $ 163 $ -- $ --
======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PRISM COMMUNICATION SERVICES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998 and 1999
($ in thousands except share and per share amounts)
(Continued)
(1) DESCRIPTION OF BUSINESS AND ACQUISITION BY COMDISCO INC.
Prism Communication Services, Inc. (the "Company") (formerly ExtraCom LLC
and Transwire Communications, LLC) was incorporated on November 6, 1997
as a Delaware corporation for the purpose of providing high speed data
connectivity, local and long distance voice and other services over a
communications network using digital subscriber line (DSL) technology.
The Company began offering its services in the New York City market in
February 1999.
At September 30, 1998, Comdisco, Inc. ("Comdisco") held an equity
interest in the Company which it acquired on June 11, 1998 through the
purchase of 100,000 shares of common stock for $7,500. On February 26,
1999, Comdisco acquired the then remaining outstanding common stock of
the Company by purchasing 240,000 shares of common stock and the rights
to an additional 60,000 shares of common stock for $117.50 per share and
for each right to a share for an aggregate purchase price of $35,250. The
acquisition was accounted for as a step purchase transaction. As a result
of the acquisition and change in control, the financial information
subsequent to February 26, 1999 has been presented on the push down basis
of accounting and is not comparable to periods prior to February 26,
1999.
The total purchase price for the acquisition was allocated to assets and
liabilities as follows:
Current assets $ 5,866
Property, plant and equipment 12,774
Goodwill 61,671
Other noncurrent assets 56
Current liabilities (26,431)
Convertible redeemable preferred stock (see note 7) (10,000)
------------
Total purchase price $ 43,936
============
All of the purchase price in excess of the fair value of net assets was
allocated to goodwill. The Company amortizes goodwill over a life of ten
years.
Currently, the Company's primary source of funding is Comdisco. Comdisco
has indicated its intent to continue to provide the necessary operating
and capital funding until the earlier of the completion of a public or
private offering that will provide the necessary operating and capital
funding or January 1, 2001.
<PAGE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
transactions and balances of Prism Communication Services, Inc.
and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(B) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the financial statement date, as well as the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Estimates are used in determining the allowance for doubtful
accounts, depreciation and amortization and the recognition of
deferred tax assets.
(C) REGULATORY RISKS AND UNCERTAINTIES
The regulatory environment in which the Company operates is
undergoing significant change. As the regulatory environment
evolves, changes may occur which could create greater or unique
competitive advantages for all or some of the Company's current or
potential competitors, or could make it easier for other entities
to provide competitive services.
(D) CREDIT CONCENTRATIONS AND BUSINESS RISKS
Most of the Company's customers are located in New York City. No
single customer represented over 2.5% of the Company's revenues
from November 6, 1997 (inception) through September 30, 1998 or
the Company's accounts receivable at September 30, 1998. No single
customer represented over 1% of the Company's revenues during the
periods ended February 26, 1999 or September 30, 1999 or the
Company's accounts receivable at September 30, 1999.
The Company is dependent on a small number of major suppliers and
service providers. One vendor supplies the Company with all of its
telecommunications switching equipment, software, high speed
digital modems and line cards.
The Company is subject to significant risks and uncertainties,
including competitive, financial, managerial, operational,
technological, regulatory and other risks faced by a start-up
company.
<PAGE>
(E) REVENUE RECOGNITION
Revenue is recognized in the period services are provided.
Payments received in advance of providing services are recorded as
deferred revenue until the period such services are provided.
Installation fees are recognized to the extent of installation
costs. Installation fees in excess of related costs are deferred
and amortized over the lives of the related customer agreements.
(F) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a
maturity of three months or less to be cash equivalents.
(G) PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are recorded at cost. Depreciation
of property, plant and equipment is calculated on the
straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of
the lease term or the estimated useful life of the asset.
Maintenance and repairs are charged to expense in the period
incurred, and improvement and betterments which extend the life
are capitalized. The estimated useful lives of assets are as
follows:
Network, communication and customer
premise equipment 1 to 7 years
Computers and software 3 to 5 years
Leasehold improvements 5 to 10 years or life of
the lease if shorter
Furniture and fixtures and office equipment 5 years
The Company capitalizes costs associated with the design and
implementation of the Company's network including internally and
externally developed software. Capitalized external software costs
include the actual costs to purchase existing software from
vendors. Capitalized internal software costs generally include
personnel costs incurred in the enhancement and implementation of
purchased software packages. For the periods from November 6, 1997
(inception) to September 30, 1998, October 1, 1998 to February 26,
1999 and February 27, 1999 to September 30, 1999, $11, $160 and
$1,280, respectively, of internal software costs were capitalized.
Customer premise equipment consists of communications equipment
that will be installed at customer premises for the duration of
their service agreement with the Company.
<PAGE>
(H) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed OF." This Statement requires
that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount of
fair value less costs to sell.
(I) ADVERTISING COST
Advertising costs consist of advertising production costs and
media costs. Advertising production costs are deferred and
recognized in the period in which the advertisement first airs.
Advertising media costs are expensed in the period incurred. As of
September 30, 1999, deferred advertising production costs were $0.
Advertising expense was $490, $7,909 and $3,813 for the periods
from November 6, 1997 (inception) to September 30, 1998, October
1, 1998 to February 26, 1999 and February 27, 1999 to September
30, 1999, respectively.
(J) INCOME TAXES
From November 6, 1997 to May 18, 1998, the Company was a limited
liability corporation (LLC). As a LLC, the Company did not pay
Federal income taxes on its taxable income. Instead, the members
were liable for Federal income taxes on the Company's taxable
income during this period. From May 19, 1998, the Company is
taxable as a C-Corporation and under the provisions of the
Internal Revenue Code, the Company assumed the carrying basis in
assets and liabilities of the LLC and became liable for Federal
income taxes. As a result, the accumulated deficit for the period
when the Company was a LLC was reclassified to paid-in-capital.
As a result of the acquisition described in notes 1 and 7, the
Company will be included in the consolidated tax return of
Comdisco for periods subsequent to February 26, 1999. There is
presently no tax sharing agreement between Comdisco and the
Company. The Company accounts for income taxes using the liability
method in accordance with SFAS No. 109 as if it were a stand alone
entity. Under this method, current income tax expense or benefit
represents income taxes expected to be payable or refundable for
the current period. Deferred income tax assets and liabilities are
established for both the impact of differences between the
financial reporting bases and tax bases of assets and liabilities
and for the expected future tax benefit to be derived from tax
credits and tax loss carryforwards. Deferred income tax expense or
benefit
<PAGE>
represents the change during the reporting period in the net
deferred income tax assets and liabilities. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's cash and cash equivalents,
accounts receivable, accounts payable and debt approximates their
respective carrying value due to their short maturity.
(L) COMPREHENSIVE INCOME
In June 1998, the Financial Accounting Standards Board issued SFAS
130, "Reporting Comprehensive Income." SFAS 130 establishes the
standards for reporting and presentation of comprehensive income
and its components in a full set of financial statements. The
Company has no components of comprehensive loss; therefore,
comprehensive loss consists entirely of net loss.
(M) START-UP COSTS
The Company accounts for start-up costs in accordance with
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities
and organization costs to be expensed as incurred.
(N) STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance with
SFAS No. 123 which allows entities to continue to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25
and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method, as defined in SFAS
No. 123, had been applied. The Company has elected to apply the
provisions of APB Opinion No. 25 and provide the pro forma
disclosure required by SFAS No. 123.
<PAGE>
(3) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following assets:
<TABLE>
SEPTEMBER 30,
1998 1999
--------- ---------
<S> <C> <C>
Network, communication and customer premise .... $ 7,701 $ 26,944
equipment
Uninstalled customer premise equipment ......... 384 3,180
Computers and software ......................... 666 9,653
Leasehold improvements ......................... 1,219 24,085
Furniture, fixtures and office equipment ....... 165 1,331
Construction work-in-progress .................. -- 777
--------- ---------
Total property, plant and equipment ... 10,135 65,970
Less: accumulated depreciation and amortization (105) (2,576)
--------- ---------
Property, plant and equipment, net .... $ 10,030 $ 63,394
========= =========
</TABLE>
For the periods from November 6, 1997 (inception) to September 30, 1998,
October 1, 1998 to February 26, 1999 and February 27, 1999 to September
30, 1999 depreciation and amortization expense was $105, $439 and $2,032,
respectively.
(4) INCOME TAXES
The statutory Federal tax rate for the period from May 18, 1998 through
September 30, 1998 and for the periods from October 1, 1998 to February
26, 1999 and February 27, 1999 to September 30, 1999 was 35%. From
November 6, 1998 to May 18, 1999, the Company was a limited liability
corporation (LLC). As a LLC, the Company did not pay Federal income taxes
on its taxable income. The effective tax rate was zero for the periods
ended September 30, 1998, February 26, 1999 and September 30, 1999 due to
the Company incurring net operating losses for which no tax benefit was
recorded.
For Federal tax purposes, the Company has unused net operating losses of
approximately $32,500 expiring in 2018. For state and local tax purposes,
the Company has unused net operating losses of approximately $63,600
expiring in 2018. The availability of the net operating loss
carryforwards to offset income in future years is restricted as a result
of the acquisition of the Company's outstanding common stock by Comdisco
on February 26, 1999.
<PAGE>
As a result of the Comdisco acquisition, the Company will be included in
the consolidated tax return of Comdisco for periods subsequent to
February 26, 1999 and losses subsequent to that date of approximately
31,100 will be utilized on Comdisco's consolidated federal tax return.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
<TABLE>
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
------------- -------------
(predecessor) (successor)
<S> <C> <C>
Federal net operating loss (pre-February 27, 1999) $ 1,365 $ 11,386
Federal net operating loss (post-February 26, 1999) -- 10,872
State and local net operating losses 802 7,048
Start-up costs amortized for tax purposes 833 654
Equipment expenses capitalized for tax purposes -- 257
Organization costs amortized for tax purposes 81 64
Other -- 152
Total gross deferred tax losses 3,081 30,433
Depreciation -- (162)
Total deferred tax liability -- (162)
Net deferred tax asset (liability) 3,081 30,271
Less valuation allowance (3,081) (30,271)
--------- ---------
Net deferred tax assets $ -- $ --
========= =========
</TABLE>
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning in making
these assessments.
Since there is presently no tax sharing agreement between the Company and
Comdisco, it is uncertain whether or in what manner the Company will
realize the benefits of the net operating losses subsequent to February
26, 1999. As a result, a full valuation allowance has been recorded.
Should a future tax sharing agreement provide the Company with all or a
portion of the benefit of these losses the valuation allowance will be
adjusted accordingly.
<PAGE>
(5) EQUIPMENT PURCHASES PAYABLE
The Company entered into a master equipment deployment agreement with
Northern Telecom (Nortel) in November 1998, pursuant to which the Company
committed to deploy switches, lines cards, modems and other equipment to
establish a nationwide network.
On June 16, 1999, the Company entered into a revised agreement with
Nortel. The revised agreement replaced and superceded the original
agreement. Pursuant to the revised agreement, the Company committed to
pay $30,955 for historical and scheduled equipment and software
deployment, including those delivered under the prior agreement, through
September 30, 1999. In addition, the Company committed to deploy an
additional $120,226 of equipment and software from Nortel by December 31,
1999 and an additional $20,000 by June 30, 2000. The agreement expires on
August 5, 2001.
The Company has paid approximately $22,813 of the September 30, 1999
commitment of $30,955 under the terms of the revised agreement. The
Company will pay the difference as it receives the additional equipment
from Nortel.
(6) COMMITMENTS AND CONTINGENCIES
REGULATORY
The Company is subject to regulation by various governmental agencies and
jurisdictions. The Company believes it is in compliance with all
applicable laws and regulations. However, implementation and
interpretation of the Telecommunications Act of 1996 (the "Act") are
ongoing and subject to litigation within various federal and state
agencies and courts. As a result, the impact of the Act on the Company is
not yet completely determinable and future interpretations and rulings
may impact the financial position and results of operations of the
Company.
OPERATING LEASES
The Company leases office space and equipment under noncancelable
operating leases. The leases range in term from one to ten years, and in
certain cases, provide for options to extend the term. As of September
30, 1999, future minimum lease payments under operating leases are as
follows:
PERIOD ENDING SEPTEMBER 30
-----------------------------------------------------------------
2000 $ 3,085
2001 3,276
2002 3,269
2003 3,247
2004 3,145
Thereafter 16,780
-------------
Total $ 32,802
=============
<PAGE>
Rent expense from November 6, 1997 (inception) to September 30, 1998,
October 1, 1998 to February 26, 1999 and February 27, 1999 to
September 30, 1999 was $193, $573 and $3,469, respectively.
LITIGATION
From time to time, the Company is subject to litigation in the normal
course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's financial position, results of operations or liquidity.
COLLOCATION AND INTERCONNECTION AGREEMENTS
The Company has entered into interconnection agreements with three
incumbent local exchange carriers (ILECs). These agreements cover a
number of aspects of Prism's relationships with the ILECs, including the
price and terms for collocation of Prism equipment in the ILECs' control
offices. Such agreements require monthly rentals and are cancellable at
any time.
EMPLOYMENT CONTRACTS
On February 26, 1999, the Company entered into an employment agreement
with the founder of the Company, the terms of which expire on February
26, 2001 and are subject to earlier termination as provided in the
agreement. Such agreement provides for minimum salary levels, incentive
bonuses that are payable if specified management goals are attained and
certain equity grants from a Management Equity Pool that Comdisco will
establish.
(7) STOCKHOLDERS' EQUITY
In accordance with the Company's Amended and Restated Certificate of
Incorporation, the Company is authorized to issue 900,000 shares of
common stock at $0.01 par value and 100,000 shares of preferred stock at
$1.00 par value. As of September 30, 1999, the Company had issued 446,111
shares of common stock.
From November 13, 1997 through April 15, 1998, Prism Communications,
Inc., received capital contributions of $1,650 from two investors and
services with a value of $889 from two additional investors in exchange
for equity in the Company. In June 1998, pursuant to a May 1998 operating
agreement, the Company issued 233,063 shares to these investors.
In 1998, the Company received $163 and entered into a loan agreement and
during May 1998, this loan was converted into 6,937 shares of common
stock.
<PAGE>
On June 11, 1998, the Company and Comdisco entered into an Investment
Agreement (the Investment Agreement) in which Comdisco agreed to make an
equity investment of up to $17,500 in the Company. On June 11, 1998,
pursuant to the Investment Agreement, the Company issued 100,000 shares
of common stock to Comdisco for $7,500.
Pursuant to the Investment Agreement on October 16, 1998, the Company
issued 100,000 shares of 9% convertible redeemable preferred stock
("Preferred Stock") at a price of $100.00 per share to Comdisco.
Dividends were to accrue for two years from issuance and become payable
on June 30 and December 31 of each year thereafter. The Preferred Stock
was mandatorily redeemable on June 30, 2003, and convertible into the
Company's common stock on a one for one basis. On July 21, 1999, Comdisco
converted the Preferred Stock into 100,000 shares of common stock.
On January 11, 1999, the board of directors authorized the creation of
the Management Equity Stock Pool (MESP). Under the MESP, CERTAIN
CONSULTANTS AND employees were granted rights to a total of 60,000 shares
of common stock. The rights to these shares were acquired by Comdisco in
connection with the acquisition of common shares by Comdisco in February
1999 (see below). The MESP was discontinued subsequent to the acquisition
by Comdisco.
On January 25, 1999, the shareholders of Prism entered into a stock
purchase agreement with Comdisco whereby Comdisco purchased all of their
common stock and the rights to common stock granted under the MESP for
total consideration of $35,250. As a result of such transaction, which
was completed on February 26, 1999, the Company became a wholly owned
subsidiary of Comdisco.
(8) STOCK OPTION PLAN
On April 1, 1999, the Company adopted the 1999 Long-Term Stock Ownership
Incentive Plan (the "Plan") pursuant to which the Company's Board of
Directors may grant stock options, shares of restricted common stock,
stock appreciation rights, performance units and stock bonuses to the
Company's employees, officers and directors. The Plan authorizes up to
49,000 shares of common stock for issuance upon exercise of awards or for
payment of benefits in connection with the Plan. Awards to a single
participant in any one-year period may not exceed 10,000 shares of common
stock. Stock options are granted with an exercise price equal to the
stock's fair market value at the date of grant.
On April 1, 1999, the Company granted 6,111 shares of common stock to an
officer. The Company recorded compensation expense of $718 related to
this grant.
During 1999, the Company granted options to purchase 33,246 shares of
common stock. A portion of such options vested immediately, and the
remainder vest at the one-year anniversary of grant date. All options
have a ten-year term. At September 30, 1999, there were 9,643 additional
shares available for grant under the Plan.
No compensation expense has been recognized for the stock option grants
in the consolidated financial statements, since the exercise price of the
options equaled or exceeded the fair market value of the stock on the
grant date. If the Company had accounted for stock option grants pursuant
to SFAS No. 123, and recognized compensation cost based on the fair value
of the stock options at grant date, the Company's net loss would have
increased to the pro forma amount indicated below:
PERIOD FROM
BRUARY 27, 1999 TO
SEPTEMBER 30, 1999
------------------
Net loss as reported $ (35,004)
Pro forma compensation expense (2,648)
------------------
Pro forma net loss $ (37,652)
------------------
Pro forma net loss reflects all options granted since the acquisition of
Prism by Comdisco on February 26, 1999. The per share weighted average
fair value of stock options granted during 1999 was $115.80 on the date
of grant using the Black Scholes option pricing model. To arrive at fair
value, the Company assumed an expected dividend yield of 0.0%, a
risk-free interest rate of 6.5% and an expected life of ten years.
Stock option activity during the period from April 1, 1999 to September
30, 1999 is as follows:
<TABLE>
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Balance at April 1, 1999 -- $ --
Granted 33,246 117.50
Exercised -- --
Forfeited -- --
Expired -- --
---------------- ---------------
Balance at September 30, 1999 33,246 $ 117.50
================ ===============
</TABLE>
At September 30, 1999, the exercise price for all options was $117.50 and
the weighted average remaining contractual life of outstanding options
was 9.62 years.
At September 30, 1999, there were 11,086 stock options exercisable at a
weighted average exercise price of $117.50.
<PAGE>
17
(9) RELATED PARTY TRANSACTIONS
An officer of the Company owns 100% of the capital stock of a former
shareholder of the Company which also provided management SERVICES. THE
COMPANY'S PAYMENTS TO A FORMER SHAREHOLDER FOR MANAGEMENT SERVICES
TOTALED $1,621 from November 6, 1997 (inception) to September 30, 1998
and the Company had $79 and $0 of accounts payable to the former
shareholder at September 30, 1998 and 1999, respectively.
During the period from November 6, 1997 (inception) to September 30,
1998, two shareholders made loans to the Company aggregating $500, all of
which were repaid by September 30, 1998.
During the periods from November 6, 1997 to September 30, 1998, October
1, 1998 to February 26, 1999 and February 27, 1999 to September 1999, the
Company reimbursed related parties for travel and related business
expenses in the amount of $130, $312 and $368, respectively. During the
period from February 27, 1999 to September 30, 1999, the Company was
charged $2,555 by Comdisco for management and back-office services.
During February 1999, Comdisco provided $6,000 of financing to the
Company by issuing three promissory notes. Each of the notes bore
interest of 8.9378% and had a one-month maturity. On March 10, 1999, the
Company converted the three promissory notes into borrowings under a new
$100,000 revolving credit facility provided by Comdisco. The revolving
credit facility bears interest at LIBOR plus 4%, and may be cancelled at
any time, upon notice by Comdisco or the Company.
As of September 30, 1999, Prism had $79,906 outstanding under the
facility which included accrued interest of $1,865. On November 12, 1999,
the maximum amount available under revolving credit facility was
increased to $250,000.
(10) SUBSEQUENT EVENT (UNAUDITED)
Effective November 30, 1999, Prism entered into a 20-year agreement with
Williams Communications, Inc. to purchase (i) an indefeasible right to
use approximately 2,500 miles of dark fiber and (ii) approximately $110
million of network capacity on a take-or-pay basis, for the purpose of
transporting voice and data traffic across the United States. In
aggregate, Prism will pay Williams approximately $120 million, plus
related maintenance and collocation charges, over a 20-year period for
such rights and facilities. To satisfy $10 million of such obligation,
Prism issued to Williams shares of its common stock. As a result,
Williams has an approximate 1% fully-diluted interest in Prism. Prism
will make the remaining payments on a monthly basis, regardless of
whether it orders network capacity, and as it accepts major segments of
dark fiber.
To further the relationship between Prism and Nortel, on December 17,
1999, Nortel purchased shares of Prism common stock for $10 million. As a
result of this transaction, Nortel has an approximate 1% fully-diluted
ownership position in Prism.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the Annual
Report on Form 10-K for the year ended September 30, 1999 and is qualified in
its entirety by reference to such financial statments.
</LEGEND>
<CIK> 0000722487
<NAME> Comdisco, Inc.
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</TABLE>
