UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to __________
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Commission file number 1-7725
I.R.S. Employer Identification number 36-2687938
COMDISCO, INC.
(a Delaware Corporation)
6111 North River Road
Rosemont, Illinois 60018
Telephone: (847) 698-3000
Name of each Number of shares
Title of exchange on outstanding as of
each class which registered March 31, 1999
Common stock, New York Stock Exchange 150,989,489
$.10 par value Chicago Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No .
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<PAGE>
Comdisco, Inc. and Subsidiaries
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Earnings and Retained Earnings --
Three and Six Months Ended March 31, 1999 and 1998 ......................3
Consolidated Balance Sheets --
March 31, 1999 and September 30, 1998....................................4
Consolidated Statements of Cash Flows --
Six Months Ended March 31, 1999 and 1998.................................5
Notes to Consolidated Financial Statements................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................18
SIGNATURES....................................................................20
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<PAGE>
PART I. FINANCIAL INFORMATION
Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED) (in
millions except per share data) For the Three and Six Months Ended March 31,
1999 and 1998
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue
Leasing
Operating ............................................. $ 507 $ 455 $ 1,038 $ 903
Direct financing ...................................... 45 41 86 81
Sales-type ............................................ 191 72 351 162
------- ------- ------- -------
Total leasing ...................................... 743 568 1,475 1,146
Sales ................................................... 67 84 125 135
Technology services ..................................... 125 110 243 214
Other ................................................... 14 15 27 26
------- ------- ------- -------
Total revenue ...................................... 949 777 1,870 1,521
------- ------- ------- -------
Costs and expenses
Leasing
Operating ............................................. 407 365 837 724
Sales-type ............................................ 157 46 284 106
------- ------- ------- -------
Total leasing ...................................... 564 411 1,121 830
Sales ................................................... 58 74 109 114
Technology services ..................................... 105 90 205 176
Selling, general and administrative ..................... 73 61 142 123
Interest ................................................ 87 83 171 164
Other ................................................... 150 -- 150 --
------- ------- ------- -------
Total costs and expenses .............................. 1,037 719 1,898 1,407
------- ------- ------- -------
Earnings (loss) before income taxes ........................ (88) 58 (28) 114
Income taxes (benefit) ..................................... (32) 21 (10) 41
------- ------- ------- -------
Net earnings (loss) before preferred dividends ............. (56) 37 (18) 73
Preferred dividends ........................................ -- -- -- (2)
------- ------- ------- -------
Net earnings (loss) to common stockholders ................. $ (56) $ 37 $ (18) $ 71
======= ======= ======= =======
Retained earnings at beginning of period ................... $ 1,135 $ 995 $ 1,101 $ 965
Net earnings (loss) to common stockholders ................. (56) 37 (18) 71
Cash dividends paid on common stock ........................ (4) (3) (8) (7)
------- ------- ------- -------
Retained earnings at end of period ......................... $ 1,075 $ 1,029 $ 1,075 $ 1,029
======= ======= ======= =======
Net earnings (loss) per common share:
Earnings (loss) per common share--basic ............. $ (.37) $ .24 $ (.12) $ .47
======= ======= ======= =======
Earnings (loss) per common share--diluted ........... $ (.37) $ .23 $ (.12) $ .44
======= ======= ======= =======
Common shares outstanding
Average common shares outstanding--basic ............ 151 151 152 150
Average commons shares outstanding--diluted ......... 151 165 152 162
See accompanying notes to consolidated financial statements
</TABLE>
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Comdisco, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in millions except number of shares)
March 31, September 30,
1999 1998
(unaudited) (audited)
ASSETS
Cash and cash equivalents .............................. $ 366 $ 63
Cash - legally restricted .............................. 43 30
Receivables, net ....................................... 479 340
Inventory of equipment ................................. 148 165
Leased assets:
Direct financing and sales-type ...................... 2,133 1,779
Operating (net of accumulated depreciation) .......... 3,793 4,121
------- -------
Net leased assets .................................. 5,926 5,900
Buildings, furniture and other, net .................... 159 137
Other assets ........................................... 530 428
------- -------
$ 7,651 $ 7,063
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable .......................................... $ 1,441 $ 1,121
Term notes payable ..................................... 550 550
Senior notes ........................................... 3,154 2,768
Accounts payable ....................................... 198 308
Income taxes ........................................... 311 333
Other liabilities ...................................... 429 408
Discounted lease rentals ............................... 648 596
------- -------
6,731 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 222,170,427 shares
(221,657,318 at September 30, 1998)................ 22 22
Additional paid-in capital ........................... 262 257
Accumulated other comprehensive income ............... (25) (13)
Retained earnings .................................... 1,075 1.101
------- -------
1,334 1,367
Common stock held in treasury, at cost ............... (414) (388)
------- -------
Total stockholders' equity ....................... 920 979
------- -------
$ 7,651 $ 7,063
======= =======
See accompanying notes to consolidated financial statements.
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<PAGE>
Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
For the Six Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Operating lease and other leasing receipts ............... $ 1,042 $ 993
Direct financing and sales-type leasing receipts ......... 471 475
Sale of direct financing and sales-type leasing receipts . -- 77
Leasing costs, primarily rentals paid .................... (9) (10)
Sales .................................................... 169 148
Sales costs .............................................. (58) (48)
Technology services receipts ............................. 239 195
Technology services costs ................................ (185) (129)
Other revenue ............................................ 27 23
Selling, general and administrative expenses ............. (152) (135)
Interest ................................................. (171) (161)
Income taxes ............................................. (16) (35)
------- -------
Net cash provided by operating activities .............. 1,357 1,393
------- -------
Cash flows from investing activities:
Equipment purchased for leasing ........................... (1,468) (1,433)
Investment in continuity and network services facilities .. (42) (43)
Acquisition ............................................... (45) --
Other ..................................................... (193) (11)
------- -------
Net cash used in investing activities .................. (1,748) (1,487)
------- -------
Cash flows from financing activities:
Discounted lease proceeds ................................ 215 179
Net increase (decrease) in notes payable ................. 320 (6)
Issuance of term notes and senior notes .................. 719 287
Maturities and repurchases of term notes and senior notes (319) (120)
Principal payments on secured debt ....................... (163) (251)
Preferred stock purchased ................................ -- (68)
Common stock purchased and placed in treasury ............ (31) (47)
Dividends paid on preferred stock ........................ -- (2)
Dividends paid on common stock ........................... (8) (7)
Stock Incentive Plan ..................................... -- 109
Decrease (increase) in legally restricted cash ........... (13) 2
Other .................................................... (26) 15
------- -------
Net cash provided by financing activities .............. 694 91
------- -------
Net increase (decrease) in cash and cash equivalents ........ 303 (3)
Cash and cash equivalents at beginning of period ............ 63 37
------- -------
Cash and cash equivalents at end of period .................. $ 366 $ 34
======= =======
</TABLE>
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Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- CONTINUED
(in millions)
For the Six Months Ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Reconciliation of net earnings (loss) to net cash
provided by operating activities:
Net earnings (loss) ......................................... $ (18) $ 73
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Leasing costs, primarily
depreciation and amortization ......................... 1,112 820
Leasing revenue, primarily principal portion of
direct financing and sales-type lease rentals ......... 38 322
Sale of direct financing and sales-type receivables ..... -- 77
Cost of sales ........................................... 51 66
Technology services costs, primarily
depreciation and amortization ........................ 20 47
Interest ................................................ -- 3
Income taxes (benefit) .................................. (26) 6
Other expenses .......................................... 150 --
Other - net ............................................. 30 (21)
------- -------
Net cash provided by operating activities ............... $ 1,357 $1 ,393
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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Comdisco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999 and 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended September 30, 1998.
The balance sheet at September 30, 1998 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended September 30, 1998.
Legally restricted cash represents cash and cash equivalents that are restricted
solely for use as collateral in secured borrowings and are not available to
other creditors.
2. Notes Receivable and Equity Investments
The Company provides loans to and invests in equity instruments of
privately-held companies in networking, communications, software and Internet
based industries. Loans are included in receivables on the balance sheet.
Investments are included in other assets and are accounted for under the cost
method. Interest income on loans is recorded in the statement of earnings as
direct financing income. For non-quoted investments, the Company's policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. The Company identifies and
records impairment losses on long-lived assets when events and circumstances
indicate that such assets might be impaired. During 1999, certain of these
investments in privately-held companies became available-for-sale securities
when the investees completed initial public offereings. At March 31, 1999, the
Company had approximately $193 million in loans and $30 million in equity
instruments.
Available-for-sale securities are carried at fair value as of March 31, 1999,
based on quoted market prices, net of a market value discount to reflect the
remaining restrictions on transferability on certain of these securities. A net
unrealized holding gain of $19 million, net of deferred income taxes of $7
million, has been reflected in the equity section of the consolidated balance
sheet based on the change in market value of the available-for-sale securities
from dates of acquisition to March 31, 1999.
3. Interest-Bearing Liabilities
At March 31, 1999, the Company had $1.6 billion of available domestic and
international borrowing capacity under various lines of credit from commercial
banks and commercial paper facilities.
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<PAGE>
The average daily borrowings outstanding during the six months ended March 31,
1999 were approximately $5.3 billion, with a related weighted average interest
rate of 6.40%. This compares to average daily borrowings during the first six
months of fiscal 1998 of approximately $4.9 billion, with a related weighted
average interest rate of 6.65%.
4. Senior Notes
On October 9, 1998 the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission for a shelf offering of up to $1.5
billion of senior debt securities on terms to be set at the time of each sale
(the "1998 Shelf"). On January 19, 1999, the Company designated $600 million of
senior debt securities as "Medium-Term Notes, Series H" under the 1998 Shelf,
none of which had been issued as of May 14, 1999 Pursuant to the 1998 Shelf, the
Company, on January 26, 1999, also issued $350 million of 6.0% Senior Notes Due
January 30, 2002, and, on April 21, 1999, $350 million of 5.95% Notes due April
30, 2002. The Company plans to continue to be active in issuing senior debt
during fiscal 1999, primarily to support the anticipated growth of the leased
assets and, where appropriate, to refinance maturities of interest-bearing
liabilities.
5. Stockholders' Equity
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130-
Reporting Comprehensive Income, which requires presentation of comprehensive
earnings (net earnings (loss) plus all changes in net assets from non-owner
sources) and its components in the financial statements.
Other comprehensive earnings (loss) consists of the following:
Three months ended Six months ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
Foreign currency trans-
lation adjustments .............. $(25) $ (5) $(25) $(13)
Change in net unrealized gains and
losses on marketab securities.... 31 -- 19 --
Income tax ....................... (11) -- (6) --
---- ---- ---- ----
Other comprehensive (loss) ....... (5) (5) (12) (13)
---- ---- ---- ----
Net earnings (loss)............... (56) 37 (18) 71
---- ---- ---- ----
Total comprehensive income (loss). $(61) $ 32 $(30) $ 58
==== ==== ==== ====
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.
On April 19, 1999, the Board of Directors declared a quarterly cash dividend of
$.025 per common share to be paid on June 14, 1999 to holders of record on May
14, 1999.
During the quarter ended March 31, 1999, the Company purchased 1,482,800 shares
of its common stock at an aggregate cost of approximately $21 million. During
the six months ended March 31, 1999, the Company purchased 2,211,200 shares of
its common stock at an aggregate cost of approximately $31 million.
-8-
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 current total shares outstanding.
6. Acquisitions and Sale of Assets
On February 28, 1999, the Company completed the acquisition of Prism
Communications Services, Inc. for a cash purchase price of approximately $53
million, of which approximately $45 million was paid in fiscal 1999. Prism is an
integrated communications provider of dedicated high-speed connectivity and
other services to small businesses, telecommuters and the 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 the period
February 28, 1999 are included in the accompanying consolidated financial
statements. Assets acquired and liabilities assumed have been recorded at their
estimated fair values, and are subject to adjustment when additional information
concerning asset and liability valuations is finalized.
The excess of cost over the estimated fair value of net assets acquired was
approximately $61 million and has been recorded as goodwill, which is being
amortized on a straight-line basis over 20 years. The following selected,
unaudited pro forma data is presented to provide a summary of the combined
results of the Company and Prism as if the acquisition had been made as of the
beginning of fiscal 1999. The effect of the acquisition on the three and six
months ended March 31, 1998 is not material and, accordingly, has been excluded
from the pro forma presentation (in millions except per share data):
Three Months ended Six Months ended
March 31, 1999 March 31, 1999
-------------- --------------
Total revenue $ 949 $ 1,870
Net loss (68) (33)
Net loss per common share
Basic $ (0.45) $ (0.22)
Diluted $ (0.45) $ (0.22)
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 three-and six-month periods ending March 31, 1999. No effect has
been given for synergies, if any, that may be realized through the acquisition.
On March 24, 1999, the Company announced a major shift in corporate strategy,
including focusing on high-margin service businesses and shedding low-margin
businesses, including its mainframe leasing and vendor lease portfolios and its
medical refurbishing business. In conjunction with this repositioning, the
Company recorded a one-time pre-tax charge of $150 million, $96 million after
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<PAGE>
tax, or approximately $0.63 per share, in the quarter ended March 31, 1999. The
components of the pre-tax charge included $100 million associated with the
Company's plan to exit the mainframe residual leasing business, $20 million to
exit the medical refurbishing business and $30 million associated with the
realignment of the Company's services businesses. On May 3, 1999, the Company
announced it had reached an agreement in principle to sell its mainframe
computer leasing portfolio to IBM Credit Corporation. Comdisco expects the
transaction to conclude in its third fiscal quarter (ending June 30, 1999),
pending the execution of definitive agreements and receipt of regulatory
approval. The Company is currently negotiating with a third party for the sale
of the medical refurbishing business.
<PAGE>
Comdisco, Inc. and Subsidiaries
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. The
words and phrases "looking ahead," "we are confident," "should be," "will be,"
"predicted," "believe," "expect" and "anticipate" and similar expressions
identify forward-looking statements. These forward-looking statements reflect
the company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating to the
Company's operations and business environment which may cause the actual results
of the Company to be materially different from any future results expressed or
implied by such forward-looking statements. Examples of such uncertainties
include, but are not limited to, those risk factors set forth generally
throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations and specifically under "Risk Factors that May Affect
Future Results" and should be read in conjuction with the Company's Annual
Report on Form 10-K dated December 20, 1998 and filed with the Securities and
Exchange Commission on December 30, 1998, under Business-Forward-Looking
Information which is incorporated herein by reference.
Net Earnings
- ------------
Net earnings (loss) available to common stockholders (hereinafter referred to as
"net earnings (loss)") for the three months ended March 31, 1999 was a net loss
of $56 million, or $.37 per share, as compared to net earnings of $37 million,
or $.23 per share, for the three months ended March 31, 1998. Net loss for the
six months ended March 31, 1999 was $18 million, or $.12 per share, as compared
to net earnings of $71 million, or .44 per diluted common share, in the year
earlier period. The net loss for the three and six months ended March 31, 1999
was due to $150 million of pre-tax charges related to the divestiture of
low-margin businesses and the realignment of the Company's service businesses
(see "Business" for a discussion of this pre-tax charge). Excluding the charges,
net earnings for the three and six months ended March 31, 1999 were $40 million,
or $.25 per diluted common share, and $78 million, or $.49 per diluted common
share, respectively. For the quarter ended March 31, 1999, the acquisition of
Prism (as defined and described in "Business") reduced net earnings by $2
million, or $.01 per diluted common share. Excluding the charges, the increase
in net earnings in the current periods compared to the year earlier periods is
due to remarketing activities.
Business
- --------
On March 24, 1999, the Company announced a major shift in corporate strategy,
including focusing on high-margin service businesses and shedding low-margin
businesses, including its mainframe leasing portfolio and vendor lease
portfolio.
As part of this strategy, the Company finalized the acquisition of Prism
Communication Services, Inc. ("Prism") during the quarter ended March 31, 1999.
Prism is developing 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,
adn to consumer end users. Prism's services are provided over standard copper
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telephone lines at speeds significantly faster that the speed available through
a 56.6 Kilobits per second modem. Prism introduced its services in New York City
area in January 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, which include continuity, network, lifecycle management
services, and Prism, and on global leasing businesses in high-margin areas such
as electronics, communications, medical, laboratory and scientific and venture
leasing.
In conjunction with its repositioning, the Company recorded a one-time pre-tax
charge of $150 million, $96 million after tax, or approximately $0.64 per share,
in the quarter ended March 31, 1999. The components of this pretax charge
include $100 million associated with the Company's plans to exit the mainframe
residual leasing business, $20 million to exit the medical refurbishing business
and $30 million associated with a realignment of the service businesses. On May
3, 1999, the Company announced it had reached an agreement in principle to sell
its mainframe computer leasing portfolio to IBM Credit Corporation. The Company
anticipates closing on the sale, subject to the execution of a definitive
agreement and regulatory approval, during the third fiscal quarter ending June
30, 1999. The Company is negotiating with a third party for the sale of the
medical refurbishing business.
Cost of equipment placed on lease was $689 million during the quarter ended
March 31, 1999. This compares to cost of equipment placed on lease of $783
million and $797 million during the quarters ended March 31, 1998 and December
31, 1998, respectively. During the six months ended March 31, 1999 and 1998,
cost of equipment placed on lease totaled $1.5 billion. Diversified technology
services had worldwide cost of equipment placed on lease of $181 million and
$397 million in the three and six months ended March 31, 1999, respectively,
compared to $220 million and $401 million in the year earlier periods. See below
for a discussion of remarketing and "Risk Factors that May Affect Future
Results" for a discussion of large system leasing.
In addition to originating new equipment lease financing, the Company remarkets
used equipment from its lease portfolio. Remarketing is the sale or re-lease of
equipment either at original lease termination or during the original lease.
These transactions may be with existing lessees or, when equipment is returned,
with new customers. Remarketing activities are comprised of earnings from
follow-on leases and gross profit on equipment sales. Remarketing activity, an
important factor in quarterly earnings, increased in the current quarter as
compared to both the first quarter of fiscal 1999 and fourth quarter of fiscal
1998. Remarketing activity will continue to be an important contributor to
quarterly earnings in the near and long term because of the size of the
Company's lease portfolio, net of the mainframe equipment, and in the residual
leasing business for communication, electronics, medical, laboratory and
scientific equipment.
The Company's technology services attained record revenues in the first quarter
of fiscal 1999, however, higher costs, primarily associated with higher
personnel costs and continued investment in new service development, negatively
impacted margins on the Company's technology services business. Costs associated
with the development and implementation of the Company's network services
infrastructure had a negative impact on the network services earnings
contribution. Technology services had pretax earnings of $20 million in the
quarter ended March 31, 1999. This compares to pretax earnings of $20 million in
the quarter ended March 31, 1998 and $18 million in the quarter ended December
31, 1998. Revenue from continuity contracts, which is recognized monthly during
the noncancelable continuity contract and is therefore recurring and
predictable, was approximately $80 million, $75 million and $80 million during
the three months ended March 31, 1999 and 1998, and December 31, 1998,
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<PAGE>
respectively, representing approximately 64%, 68% and 68% of technology services
revenue. Based on transactions in process at March 31, 1999, the Company
anticipates its network services as well as its desktop management services to
have a positive impact on the Company's pretax earnings in fiscal 1999,
primarily beginning in the third quarter of fiscal 1999. Included in the $150
million pretax charge (as discussed above), is $30 million associated with the
realignment of the Company's service businesses, including costs associated with
the relocation of its network management centers and consolidation and
reconfiguration of some of its continuity services facilities worldwide. See
"Risk Factors That May Affect Future Results" for a discussion of the factors
that may affect earnings contributions from services.
Three months ended March 31, 1999
- ---------------------------------
Total revenue for the three months ended March 31, 1999 was $949 million,
compared to $777 million, in the prior year quarter and $921 million in the
quarter ended December 31, 1998. The increase in the current quarter compared to
the prior year quarter was primarily due to higher total leasing revenue,
principally from sales-type leases, and higher revenue from continuity services
and sales. Total leasing revenue of $743 million for the quarter ended March 31,
1999 represented an increase of 31% compared to the year earlier period.
Sales-type revenue increased 165% compared to the year earlier quarter,
reflecting the Company's emphasis on and the importance of remarketing
activities.
Operating lease revenue minus operating lease cost was $100 million, or 19.7% of
operating lease revenue (collectively, the "Operating Lease Margin"), and $90
million, or 19.8% of operating lease revenue, in the three months ended March
31, 1999 and 1998, respectively. The Operating Lease Margin was $101 million, or
19.0% in the quarter ended December 31, 1998. The Company expects the Operating
Lease Margin to be at approximately current levels throughout fiscal 1999,
depending on the mix of equipment leased and product announcements by
manufacturers. See "Risk Factors that May Affect Future Results" for a
discussion of factors that could affect the Operating Lease Margin.
Revenue from sales, which includes remarketing by selling and buy/sell
activities, totaled $67 million in the second quarter of fiscal 1999 compared to
$84 million in the year earlier quarter. Margins on sales were 12% and 13% in
the quarters ended March 31, 1999 and 1998, respectively.
Revenue from technology services for the three months ended March 31, 1999 and
1998 was $125 million and $110 million, respectively, a 14% increase. Cost of
continuity and network services activities for the three months ended March 31,
1999 was $105 million and $90 million, respectively, a 17% increase.
Other revenue for the three months ended March 31, 1999 and 1998 was $14 million
and $15 million, respectively. Revenue from the sale of equity positions held as
a result of the Company's lease and other financing transactions with
early-stage high technology companies was $10 million and $5 million in the
quarters ended March 31, 1999 and 1998, respectively.
Total costs and expenses for the quarter ended March 31, 1999 were $1,037
million compared to $719 million in the prior year period. The increase in the
current year quarter is due to the $150 million pre-tax charge. Excluding the
charge, the increase in total costs and expenses is primarily due to increased
leasing costs, primarily related to increasing operating lease revenue and
sales-type lease revenue.
Selling, general and administrative expenses totaled $73 million in the quarter
ended March 31, 1999 compared to $61 million in the quarter ended March 31, 1998
and $69 million in the quarter ended December 31, 1998. The principal reason for
the increase in the current year quarter compared to the year earlier period is
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<PAGE>
increased personnel costs, primarily in marketing and related support services
and in data processing. The Company expects selling, general and administrative
expenses to increase throughout fiscal 1999 as the Company continues to invest
in its infrastructure to increase revenue and support the increase in business
volume.
Interest expense for the three months ended March 31, 1999 totaled $87 million
in comparison to $83 million in the quarter ended March 31, 1998 and $84 million
in the quarter ended December 31, 1998. The increase in the current quarter
compared to the year earlier quarter is due to higher average daily borrowings
resulting primarily from increased leased assets compared to the year earlier
period.
Six Months Ended March 31, 1999
- -------------------------------
Total revenue was $1.9 billion and $1.5 billion for the six months ended March
31, 1999 and 1998, respectively. Total leasing revenue of $1.5 billion for the
six months ended March 31, 1999, represented an increase of 29% compared to the
year earlier period.
Revenue from sales, which includes remarketing and buy/sell activities, totaled
$125 million for the six months ended March 31, 1999 compared to $135 million in
the year earlier period. Sales from distributed systems equipment, which
generally have higher margins as compared to large system sales, decreased in
the current year period compared to the year earlier period. Margins on sales
were 13% and 16% in the six months ended March 31, 1999 and 1998, respectively.
The Operating Lease Margin was $201 million, or 19.4% of operating lease
revenue, and $179 million, or 19.8% of operating lease revenue, in the six
months ended March 31, 1999 and 1998, respectively. Lower margins on large
systems transactions has resulted in lower margins on leasing, particularly for
operating leases.
Selling, general and administrative expenses totaled $142 million and $123
million for the six months ended March 31, 1999 and 1998, respectively. The
principal reason for the increase in the current year period compared to the
year earlier period is increased personnel costs, primarily in marketing and
related support services and in data processing.
Interest expense was $171 million for the six months ended March 31, 1999 as
compared to $164 million for the year earlier period. The increase in interest
expense is primarily due to higher average daily borrowings offset by lower
interest rates.
Financial Condition
- -------------------
The Company's current financial resources and estimated future cash flows from
operations are considered adequate to fund anticipated growth and operating
requirements. The Company utilizes a variety of financial instruments to fund
its short and long-term needs.
Capital expenditures for equipment are generally financed by cash provided by
operating activities, recourse debt, or where appropriate or cost effective, by
assigning the noncancelable lease rentals to various financial institutions at
fixed interest rates on a nonrecourse basis. Cash provided by operating
activities for the six months ended March 31, 1999 and 1998 was $1.4 billion.
Cash provided by operations has been used to finance equipment purchases and,
accordingly, had a positive impact on the level of borrowing required to support
the Company's investment in its lease portfolio. The Company expects this trend
to continue, with cash flow from leasing and remarketing reinvested in the
equipment portfolio.
-14-
<PAGE>
Risk Factors That May Affect Future Results
- -------------------------------------------
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual revenues and results of operations could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in the following risk
factors and elsewhere in this Report.
Potential Fluctuations in Operating Results: The Company's operating results are
subject to quarterly fluctuations resulting from a variety of factors, including
earnings contributions from remarketing activities, product announcements by
manufacturers, economic conditions and variations in the financial mix of leases
written. The financial mix of leases written is a result of a combination of
factors, including, but not limited to, changes in customer demands and/or
requirements, new product announcements, price changes, changes in delivery
dates, changes in maintenance policies and the pricing policies of equipment
manufacturers, and price competition from other lessors and finance companies.
Earnings Contributions from Leasing: Lower margins on large systems transactions
(mainframes and related peripherals, including DASD and tape drives) has
resulted in lower margins on leasing, particularly for operating leases for the
three and six months ended March 31, 1999 compared to the year earlier periods.
Although the Company has reached an agreement in principle to sell 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, not withstanding the sale of the mainframe lease portfolio,
remarketing has been and will continue to be an important factor in determining
quarterly earnings. To meet earnings goals for fiscal 1999, remarketing
contributions, primarily for it's the Company's Diversified Technology Services
division and for its communications and desktop equipment leasing businesses,
have to be at or above the level achieved in fiscal 1998. Quarterly operating
results depend substantially upon the remarketing transactions within the
quarter, which are difficult to forecast accurately. While the Company is
devoting resources to its remarketing activities, there can be no assurance that
the Company will achieve the appropriate level of activity necessary to meet or
match the Company's prior and desired operating results.
The costs to address the Year 2000 issues may have a negative impact on
equipment volume in fiscal 1999 if customers defer other IT projects due to the
Year 2000 efforts or if Year 2000 remediation costs increase as a percentage of
the total IT budget, thereby reducing capital expenditures on new technology.
Earnings Contributions from Services: As a result of the evolving nature of its
services business, particularly the emerging desktop management and managed
network services, the Company has limited meaningful historical data in which to
base its planned operating expenses. Accordingly, a significant portion of the
company's expense levels (investment in continuity facilities and hardware,
consultants, experts and back office personnel) are based in part on its
expectations as to future services revenues, and are, to a large extent, fixed.
Conversely, the Company's revenue base has become more diverse with the growth
of other technology services revenue, and therefore less recurring and less
predictable than in prior years. To attain its services earnings contribution
goals for fiscal 1999, the Company will have to 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 advanced recovery services, availability options,
remote computing services and web hosting, and contain costs. In addition, there
-15-
<PAGE>
can be no assurance that the Company will be able to maintain and/or increase
its margins on technology services in fiscal 1999.
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 "backlog" (or negotiations in
progress) which ultimately impacts the timing of revenue, earnings and volume
recognition. In addition, the Company's ability to obtain new business from
customers depends on its ability to anticipate technological changes,
successfully compete with organizations offering similar services, develop
services to meet customer requirements and to achieve delivery of services that
meet customer requirements.
Prism: Prism is a start up company that has incurred operating losses since
inception and the Company expects that Prism's operating losses will continue to
increase as it introduces its services throughout New York City and the
Northeast corridor. In addition, Prism will require additional capital to
support its data network, to expand its services, to increase its sales and
marketing efforts and to support the company's growth. To the extent that
revenues do not grow at anticipated rates or that increases in such operating
expenses precede or are not subsequently followed by commensurate increases in
revenues, or that the Company is unable to adjust operating expense levels
accordingly, the Company's business, results of operations and financial
condition could be adversely affected. There can be no assurance that in the
future Prism will be profitable on a quarterly or annual basis.
Economic Conditions and the Asian Economy: With respect to economic conditions,
a recession can cause customers to put off new investments and increase the
company's bad debt experience. In addition, the recent economic turmoil in Asia
may have an impact on the region's semiconductor manufacturing industry, which
in turn would have an impact on the Company's diversified technology business.
Continued pressures on credit in Asia and the Asian economy in general, could
also impact the domestic economy and/or the company's multinational customer
base.
Other Factors: The Company has made loans to and equity investments in various
privately-held companies. These companies typically are in an early stage of
development and may be expected to incur substantial losses. Any investments in
such companies may not result in any return, nor can there be any assurance as
to the timing of any such return, or that the Company may lose its entire
investment and/or principal balance.
Other uncertainties include continued business conditions, trend of movement to
client/server environment, competition, including competition from other
technology service providers, reductions in technology budgets and related
spending plans, price competition from other technology service providers, and
the Year 2000 readiness of the company's customers, suppliers and business
partners.
Due to all of the foregoing factors, in some future quarter the Company's
operating results may fall below the expectations of securities analysts and
investors. In such an event, the trading price of the Company's Common Stock
would likely be materially and adversely affected.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, further
events or otherwise.
-16-
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's market risk during the six
months ended March 31, 1999. For additional information, refer to page 37 of the
Company's Annual Report to Stockholders for the fiscal year ended September 30,
1998.
<PAGE>
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Description of Exhibit
----------- -------------------------------
3.01 Restated Certificate of Incorporation of Registrant dated
February 12, 1988
Incorporated by reference to Exhibit 4.1 filed
with the Company's Registration Statement on
Forms S-8 and S-3, File No. 33-20715, filed March
8, 1988.
3.02 Certificate of Amendment of Restated Certificate of
Incorporation dated February 3, 1998
Incorporated by reference to Exhibit 3.02 filed
with the Company's Annual Report for the year
ended September 30, 1998 on Form 10-K, File No.
1-7725.
3.03 By-Laws of Registrant dated November 4, 1997
Incorporated by reference to Exhibit 3.1 filed
with the Company's Current Report on Form 8-K
dated November 12, 1997, as filed with the
Commission November 14, 1997 File No. 1-7725.
4.01 Rights Agreement, dated as of November 17, 1997, between
the Registrant and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent, which includes as Exhibit A
thereto the Certificate of Designation, Preferences and
Right of Series C Junior Participating Preferred Stock
and as Exhibit B thereto the Form of Rights Certificate.
Incorporated by reference to Exhibit 4.1 filed
with the Company's Current Report on Form 8-K
dated November 5, 1997, as filed with the
Commission November 6, 1997 File No. 1-7725.
4.02 Indenture Agreement between Registrant and The Fuji Bank
and Trust Company, as Trustee, dated as of December 15,
1998
Incorporated by reference to Exhibit 4.1 filed
with the Company's Current Report on Form 8-K
dated January 19, 1999, as filed with the
Commission on January 21, 1999, File No. 1-7725,
the copy of the Indenture dated as of December 15
1998 between the Registrant and The Fuji Bank
and Trust Company, as Trustee (said Indenture
defines certain rights of security holders).
<PAGE>
Exhibit No. Description of Exhibit
----------- --------------------------
11.00 Computation of Earnings Per Share
12.00 Ratio of Earnings to Fixed Charges
27.00 Financial Data Schedule
99.00 Year 2000 Readiness Disclosure
Incorporated by reference to the Company's
Current Report on Form 8-K filed April 16, 1999,
File No. 1-7725.
b) Reports on Form 8-K:
On April 23, 1999, the Company filed a current report on Form
8-K, dated April 19, 1999, reporting Item 7. Financial
Statements and Exhibits. The filing contained exhibits relating
to the Company's 5.95% Senior Notes due April 30, 2002.
On April 16, 1999, the Company filed a current report on Form
8-K, dated April 16, 1999, reporting Item 7. Other Events. The
filing contained information relating to the Company's Year
2000 Readiness.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMDISCO, INC.
Registrant
Date: May 14, 1999 /s/John J. Vosicky
-------------------
John J. Vosickey
Executive Vice President
and Chief Financial Officer
-20-
Comdisco, Inc. and Subsidiaries Exhibit 11.00
COMPUTATION OF EARNINGS PER COMMON SHARE
(in millions except per share data)
Average shares used in computing net earnings per common and common equivalent
share were as follows:
Three Months Six Months
ended ended
March 31 March 31
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Average shares outstanding--basic ......... 151 152 152 150
Effect of dilutive options (see note 1) ... -- 13 -- 12
----- ---- ----- ----
Average shares outstanding--diluted ....... 151 165 152 162
===== ==== ===== ====
Net earnings (loss) to common stockholders. $ (56) $ 37 $ (18) $ 71
===== ==== ===== ====
Net earnings (loss) per common share:
Basic .......................... $(.37) $.24 $(.12) $.47
===== ==== ===== ====
Diluted (see note 1) ........... $(.37) $.23 $(.12) $.44
===== ==== ===== ====
Note 1: In accordance with Statement of Financial Accounting Standards No. 128,
no potential common shares are included in the computation of any diluted
per-share amount when a loss exists.
-21-
Comdisco, Inc. and Subsidiaries Exhibit 12.00
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(dollars in millions)
<TABLE>
<CAPTION>
Six months ended
March 31, For the years ended September 30,
----------- ----------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges
Interest expense 1 ....................... $173 $165 $329 $301 $267 $278 $266
Approximate portion of
rental expense representative
of an interest factor .................. 3 2 5 4 7 11 13
---- ---- ---- ---- ---- ---- ----
Fixed charges ............................ 176 167 334 305 274 289 279
Earnings (loss) from continuing operations
before income taxes,
extraordinary item, and cumulative
effect of change in accounting principle,
net of preferred stock dividends ........ (28) 112 238 203 176 160 80
---- ---- ---- ---- ---- ---- ----
Earnings (loss)from continuing operations
before income taxes, extraordinary
item, and cumulative effect of change
in accounting principle, net of
preferred stock dividends,
plus fixed charges ....................... $148 $279 $572 $508 $450 $449 $359
==== ==== ==== ==== ==== ==== ====
Ratio of earnings to fixed charges ......... 0.84 1.67 1.71 1.67 1.64 1.55 1.29
==== ==== ==== ==== ==== ==== ====
Rental expense:
Equipment subleases ...................... $ 2 $ 3 $ 5 $ 6 $ 14 $ 22 $ 30
Office space, furniture, etc ............. 7 4 9 7 8 10 8
---- ---- ---- ---- ---- ---- ----
Total ................................. $ 9 $ 7 $ 14 $ 13 $ 22 $ 32 $ 38
==== ==== ==== ==== ==== ==== ====
1/3 of rental expense ................. $ 3 $ 2 $ 5 $ 4 $ 7 $ 11 $ 13
==== ==== ==== ==== ==== ==== ====
<FN>
<F1> Includes interest expense incurred by technology services and included
technology services expenses on the statements of earnings.
</FN>
</TABLE>
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000722487
<NAME> Comdisco, Inc.
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