<PAGE>
As filed with the Securities and Exchange Commission on July 24, 2000
Registration No. 333-34590
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT No. 2 To
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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Comdisco, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Delaware 36-2687938
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
6111 North River Road
Rosemont, Illinois 60018
(847) 698-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
JEREMIAH M. FITZGERALD, Esq.
Vice President and Chief Legal Officer
Comdisco, Inc.
6111 North River Road
Rosemont, Illinois 60018
(847) 698-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
LOLA M. HALE, Esq. ROBERT J. DONATUCCI, Esq.
MICHAEL J. BOLAND, Esq. Brown & Wood LLP
McBride Baker & Coles One World Trade Center, 58th Floor
500 West Madison, 40th Floor New York, New York 10048
Chicago, Illinois 60661 (212) 839-5300
(312) 715-5700
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Approximate date of commencement of proposed sale to the public: as soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Amount of
Title of each class of securities to be maximum aggregate registration fee
registered offering price (1) (2)
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<S> <C> <C>
Comdisco, Inc.--Comdisco Ventures Stock,
par value $0.10 per share................ $184,000,000 $48,576.00
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Previously paid $39,600 on April 12, 2000.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to such Section 8(a),
may determine.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a U.S. and Canadian offering of the Comdisco Ventures
Stock of the registrant and one to be used in a concurrent international
offering of the Comdisco Ventures Stock. The international prospectus will be
identical to the U.S. prospectus except that it will have a different front
cover page, underwriting section and back cover page. The U.S. prospectus is
included herein and is followed by the alternate front cover page, underwriting
section and back cover page to be used in the international prospectus, each of
which has been labeled "Alternative Page for International Prospectus."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This preliminary prospectus +
+is not an offer to sell these securities and it is not soliciting an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus Dated July 24, 2000
PROSPECTUS
10,000,000 Shares
Comdisco, Inc.
Comdisco Ventures Stock
-----------
We are offering Comdisco Ventures Stock, a new series of our common stock
intended to reflect the performance of Comdisco Ventures, our venture financing
business. The U.S. underwriters are offering 8,500,000 shares in the U.S. and
Canada and the international managers are offering 1,500,000 shares outside the
U.S. and Canada.
We anticipate that the price to the public will be between $14.00 and
$16.00 per share. Currently, no public market exists for Comdisco Ventures
Stock. We have applied to list our Comdisco Ventures Stock on the Nasdaq
National Market, under the symbol "CDOV."
Investing in Comdisco Ventures Stock involves risks. See "Risk Factors,"
beginning on page 13.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................. $ $
Underwriting discount............................ $ $
Proceeds, before expenses, to Comdisco........... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional 1,275,000
shares of Comdisco Ventures Stock at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The international managers may similarly purchase up to an
additional 225,000 shares.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of Comdisco Ventures Stock will be ready for delivery on or
about , 2000.
-----------
Merrill Lynch & Co.
-----------
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 13
Special Note Regarding Forward Looking Statements........................ 24
Use of Proceeds.......................................................... 25
Dividend Policy.......................................................... 25
Capitalization........................................................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Comdisco Ventures...................................... 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations of Comdisco, Inc. ........................................ 36
Business of Comdisco Ventures............................................ 51
Description of Comdisco Capital Stock.................................... 73
Relationship Between Comdisco Ventures and Comdisco Group................ 92
Material U.S. Federal Income Tax Considerations.......................... 99
Underwriting............................................................. 102
Legal Matters............................................................ 106
Experts.................................................................. 106
Where You Can Find More Information...................................... 106
Incorporation of Information Comdisco Files With the SEC................. 107
Annex I--Illustration of Terms of Comdisco Ventures Stock................ I-1
Comdisco Ventures and Comdisco, Inc. Financial Statements................ F-1
</TABLE>
-----------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may have changed since
that date.
This prospectus contains trademarks and tradenames of other companies.
1
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that is important to
you in making an investment decision. To better understand the offering, you
should read this entire prospectus carefully, as well as those additional
documents to which we refer you. See "Where You Can Find More Information," on
page 106. All references to "we," "our," or "us" in this prospectus are to
Comdisco, Inc. All references to fiscal years are to Comdisco's fiscal years
ended September 30, unless otherwise indicated.
Introduction
On April 20, 2000 our stockholders approved our tracking stock proposal.
In order to implement the proposal, we filed our restated charter with the
Secretary of State of Delaware on May 4, 2000. Our restated charter, among
other things:
. increased the total authorized shares of our common stock from
750,000,000 to 1,800,000,000;
. authorized our board of directors to issue common stock in multiple
series;
. designated the initial two series of common stock as Comdisco Stock
and Comdisco Ventures Stock;
. re-classified each outstanding share of our then existing common
stock as one share of Comdisco Stock; and
. initially authorized 750,000,000 shares of Comdisco Stock and
750,000,000 shares of Comdisco Ventures Stock.
We intend our Comdisco Ventures Stock to reflect the performance of
Comdisco Ventures, our venture financing business division.
We intend Comdisco Stock to reflect the performance of Comdisco Group,
which consists of our other businesses and our retained interest in Comdisco
Ventures. This retained interest is currently 100% but will decrease to
approximately 88% when we issue the Comdisco Ventures Stock in this offering.
In implementing its tracking stock structure, Comdisco allocated all of
the assets, liabilities, revenues, expenses, and cash flows attributable to its
venture financing business to Comdisco Ventures for financial reporting
purposes. Comdisco will provide separate financial information about Comdisco
Ventures that is intended to allow Comdisco stockholders and potential
investors the ability to track the performance of those assets, liabilities,
revenues, expenses and cash flows allocated to Comdisco Ventures--or more
generally the "economic performance" of Comdisco Ventures--as a separate group.
There are no assurances that the market price of Comdisco Ventures Stock
will reflect the performance of the current group of assets allocated to
Comdisco Ventures. However, while Comdisco's board and management has the
discretion to re-allocate assets, liabilities, revenues, expenses and cash
flows allocated to Comdisco Ventures, any such re-allocations are intended to
be made in the context of the allocation and management policies governing the
relationship between the Comdisco groups adopted by the board and subject to
the fiduciary duties of Comdisco's board and management to all Comdisco
stockholders.
Comdisco
Comdisco provides global technology infrastructure solutions to help its
customers maximize their technology's reliability, efficiency and flexibility.
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<PAGE>
We provide equipment leasing, continuity services, which include disaster
recovery, contingency planning, and availability solution services, as well as
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. We completed the acquisition of our
majority owned subsidiary, Prism Communication Services, Inc., during the
quarter ended March 31, 1999. Through Prism, we are developing a high-speed,
always-on digital network, which will provide customers with leading-edge
connectivity. Through our Comdisco Ventures division, we provide equipment
leasing and other financing to venture capital-backed start-up companies.
Comdisco was founded in 1969 and incorporated in Delaware in 1971. Since
our inception, our markets and the services that we offer, and therefore, the
way we conduct our business, have changed significantly. We expect these
changes to continue. These changes are primarily the result of rapid changes in
technology including declining prices, manufacturer consolidations, the rapid
rise of industries such as telecommunications and the rise of new dominant
technologies like the Internet and their related impact on customers' needs and
requirements. Initially, we were engaged primarily in the procurement and
placement of new and used computer equipment, principally mainframe and related
peripherals. We developed disaster recovery and contingency planning services
in 1980. In the mid-1980's we expanded our 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, we formed Comdisco Ventures. Comdisco
Ventures has grown significantly in the last three fiscal years and has become
a significant and material contributor to our earnings.
On March 24, 1999, we announced a major shift in corporate strategy,
including our intent to focus on high-margin service businesses and shed low-
margin businesses, such as our mainframe residual-based leasing and medical
equipment refurbishing business. In conjunction with our repositioning, we
recorded a one-time pre-tax charge of $150 million, or $96 million on an after
tax basis, which is equal to approximately $0.59 per share, in the quarter
ended March 31, 1999. The components of this pretax charge include $100 million
associated with our plans to exit the mainframe residual-based leasing
business, $20 million to exit the medical equipment refurbishing business and
$30 million associated with a realignment of our service businesses. We
completed the sale of our mainframe computer leasing portfolio and the sale of
the medical equipment refurbishing business in the fiscal quarter ended June
30, 1999. In addition to these sales, we completed the sale of substantially
all of our vendor lease portfolio in September, 1999.
We recently introduced our web-availability services to provide one-stop
hosting and recovery solutions that meet the availability needs of e-businesses
of all sizes. By building on our significant business continuity experience, we
believe we can deliver cost-effective availability solutions, offering advanced
protection of our customer's data, servers, network and applications.
Our principal executive offices are located at 6111 North River Road,
Rosemont, Illinois 60018. Our telephone number is (847) 698-3000.
Comdisco Ventures
Comdisco Ventures is a provider of venture leases, venture debt and direct
equity financing to venture capital-backed companies.
Venture leases are leases with warrants that compensate Comdisco Ventures
for providing equipment leases with terms having lower periodic cash costs than
leases or loans without warrants. Similarly, venture debt is a high-risk loan
with warrants or a conversion-to-equity feature with more flexible terms having
lower periodic cash costs and security conditions than more traditional debt
financing.
3
<PAGE>
Comdisco Ventures' relationships with established venture capital firms
help it identify what it believes are the best positioned companies in the most
attractive high-growth industries. Comdisco Ventures offers a broad range of
equity-linked financing products, which complement equity from venture capital
firms and debt from venture-oriented banks and asset-based lenders.
Comdisco Ventures provides its customers with financing "commitments"--
agreements to provide up to a stated dollar amount of financing over a stated
period of time. Since its formation, Comdisco Ventures has committed over $2
billion in venture leases, venture debt and direct equity financings, including
$738 million in fiscal 1999 and $681 million in the first six months of fiscal
2000.
Historically, two primary sources of capital for start-up companies have
been venture capitalists and venture-oriented banks and asset-based lenders.
While the availability of venture capital has increased along with the volume
of start-up activity, venture capital generally represents the most dilutive
and intrusive type of financing. Venture capitalists generally require
substantial ownership and exercise substantial control when they make an
investment in a company. Typically these positions are reflected in significant
equity holdings, contractual shareholder rights and representation on the
company's board of directors. In addition, while financings from venture-
oriented banks and asset-based lenders generally result in no or minimal
dilution of the ownership of existing equity holders, they typically involve
high monthly cash disbursements, limitations on the use of funds and adherence
to restrictive financial covenants.
Comdisco Ventures believes these two primary sources of capital do not
optimize the capital needs of start-up companies in the current economic
environment. Additionally, their disadvantages highlight the need for less
costly and less dilutive financing sources, creating opportunities for
alternative capital providers, like Comdisco Ventures.
Comdisco Ventures was established as a division of Comdisco in 1987, and
has been operated as a division since that time. It is not a separate legal
entity. We have allocated all of the assets, liabilities, revenues, expenses
and cash flows attributable to Comdisco's venture financing business to
Comdisco Ventures. We currently intend to include all future venture financing
activities in Comdisco Ventures; however, Comdisco's board and management has
the discretion to direct new businesses and assets to Comdisco Ventures or to
Comdisco Group or dispose of or transfer the business or assets of either
group. Any such actions are intended to be made in the context of the
allocation and management policies governing the relationship between the
Comdisco groups adopted by our board and subject to the fiduciary duties owed
by Comdisco's board and management to all Comdisco stockholders.
Comdisco Ventures Stock is intended to reflect the separate economic
performance of Comdisco Ventures. We will report the assets, liabilities,
revenues, expenses and cash flows attributable to Comdisco Ventures' operations
as separate financial information, but Comdisco Ventures remains a division of
Comdisco, and its assets, liabilities, revenues, expenses and cash flows are
included in the consolidated financial statements of Comdisco.
Comdisco Ventures' Solution
Comdisco Ventures believes it provides significant value to entrepreneurs
and their venture capital investors through flexible financing products and
services which allow entrepreneurs to build their companies quickly, while
minimizing the dilution of their equity ownership positions.
Comdisco Ventures has proven its ability to understand the capital needs
of its customers and to develop and customize attractive financings to meet
those needs. Currently, Comdisco Ventures' primary financing products are
venture leases, venture debt and direct equity financings. The warrants or
conversion feature of venture leases and venture debt generally provide
Comdisco Ventures the ability to buy equity at a price based on the price paid
by venture capitalists. The opportunity to realize higher
4
<PAGE>
returns from the exercise of the warrants or from the conversion feature
enables Comdisco Ventures to offer more flexible financing and security terms.
Direct equity financings involve Comdisco Ventures' purchase of convertible
preferred stock and common stock from its customers. Comdisco Ventures also
provides other ancillary financings, including convertible debt, bridge loans,
expansion loans, acquisition financings and landlord guarantees.
Comdisco Ventures' Strategy
Comdisco Ventures intends to expand its position as a provider of venture
leases and venture debt and to introduce complementary services to venture
capital-backed companies. See "Business of Comdisco Ventures--Comdisco
Ventures' Strategy" on page 53 and "--Comdisco Ventures' Products" on page 55
for a more detailed description of these products and services. Its strategy is
to continue to leverage its management experience and resources to capitalize
on the growing demand for financing by venture capital-backed companies.
Components of Comdisco Ventures' strategy include:
. leveraging relationships with established venture capitalists;
. providing capital through products that meet the varied needs of its
venture capital-backed companies;
. maintaining a diversified customer base;
. expanding funding sources;
. capitalizing on the Comdisco affiliation and resources; and
. developing complementary service offerings that respond to the
changing needs of venture capital-backed companies.
Comdisco Ventures expects to generate future revenues from:
. the sale of common stock holdings in public companies;
. the disposition of current equity holdings in private companies,
through the sale of common stock following initial public offerings
or in connection with a merger, acquisition or other liquidity
event;
. returns it receives from ownership interests in alternative funding
sources, such as limited partnership funds;
. lease payments, interest payments on venture debt and related
proceeds from its customers; and
. fees or equity components received in connection with its service
offerings.
Comdisco Group
Comdisco Stock is intended to reflect the economic performance of all of
Comdisco's assets, liabilities, revenue, expenses and cash flows other than
those allocated to Comdisco Ventures. In addition, Comdisco Stock will reflect
the retained interest that Comdisco holds in Comdisco Ventures, so long as
Comdisco maintains the retained interest. We refer to the assets, liabilities,
revenues, expenses and cash flows whose economic performance is intended to be
reflected by the Comdisco Stock as the Comdisco Group.
Comdisco Group includes:
. our technology services businesses, including: continuity services,
managed network services, desktop management solutions and web
hosting and availability services;
. our global leasing and remarketing businesses in areas such as
electronics, communications, laboratory and scientific and
industrial automation equipment;
5
<PAGE>
. our interest in Prism Communication Services, Inc., a majority-owned
subsidiary through which we provide integrated communications
services; and
. our retained interest in Comdisco Ventures.
The Disposition of Our Retained Interest
The shares of Comdisco Ventures Stock issued in this offering are intended
to reflect only a percentage of the total number of shares of Comdisco Ventures
Stock initially designated by Comdisco's board of directors to represent 100%
of the economic performance of Comdisco Ventures. Comdisco will retain the
remaining interest in the economic performance of Comdisco Ventures in the form
of an inter-group retained interest. We currently intend to dispose of Comdisco
Group's interest in Comdisco Ventures following this offering by means of the
disposition of the retained Comdisco Ventures Stock. This disposition would
likely include a distribution by means of a spin-off in the form of a dividend
to holders of Comdisco Stock for at least a portion of the retained interest
but may also include a split-off in the form of an exchange offer of Comdisco
Ventures Stock for Comdisco Stock, a further sale of Comdisco Ventures Stock or
a combination of those methods. A split-off will result in a gain or loss,
based on fair market value, to stockholders, whereas a spin-off will be
reflected at historical cost and, accordingly, no gain or loss to stockholders
will be recorded. The exact method and timing of this disposition, however, has
not yet been determined. We expect to base our decision with regard to the
method and timing of the disposition on market conditions and the target of
maximizing value for all Comdisco stockholders. The disposition may occur in
several stages, following which we expect that we would have no retained
interest in Comdisco Ventures and the outstanding shares of Comdisco Ventures
Stock will reflect 100% of the economic performance of Comdisco Ventures. There
is no guarantee, however, that any disposition will follow this offering.
Following any disposition of our retained interest in Comdisco Ventures,
the assets of Comdisco Ventures will remain a part of, and under the control
of, Comdisco. Holders of Comdisco Ventures Stock will be stockholders of
Comdisco and will not have a claim on the separate assets and liabilities of
Comdisco Ventures.
Selected Rights and Terms of Comdisco Ventures Stock
Selected rights and terms of Comdisco Ventures Stock, which are set forth
in full in our restated charter, are summarized below.
Voting Rights. On all matters as to which all series of our common stock
vote together as a single class, each share of Comdisco Ventures Stock will
have a number of votes equal to the ratio of the average market value of one
share of Comdisco Ventures Stock to the average market value of one share of
Comdisco Stock over a specified twenty-day trading period prior to the record
date of that vote; provided, however, that
. prior to the thirty-first trading day after the effective date of
our restated charter, each outstanding share of Comdisco Ventures
Stock will have one vote; and
. outstanding Comdisco Ventures Stock will in no event represent more
than 35% of the total voting power of all outstanding shares of our
capital stock.
Dividends. Provided that we have sufficient assets to pay a dividend under
applicable law, Comdisco may declare and pay dividends on Comdisco Ventures
Stock up to an "available dividend amount." This amount is designed to be
equivalent to the amount that would legally be available for dividends on that
stock if Comdisco Ventures were a stand-alone corporation. We do not, however,
expect to pay dividends on Comdisco Ventures Stock.
6
<PAGE>
Rights on Disposition of the Assets of Comdisco Ventures. If we dispose of
all or substantially all of the assets of Comdisco Ventures, and the
disposition is not an exempt disposition, as described beginning on page 76, we
would be required to choose one of the following alternatives:
. pay a dividend to the holders of Comdisco Ventures Stock in an
amount equal to the net proceeds of the disposition (net of
corresponding amounts allocated to Comdisco Group in respect of its
retained interest in Comdisco Ventures);
. if the disposition involves all of the assets of Comdisco Ventures,
redeem all outstanding shares of Comdisco Ventures Stock in exchange
for an amount equal to the net proceeds of the disposition (net of
corresponding amounts allocated to Comdisco Group in respect of its
retained interest in Comdisco Ventures);
. if the disposition involves substantially all, but not all, of the
assets of Comdisco Ventures, redeem a number of whole shares of
Comdisco Ventures Stock in exchange for an amount equal to the net
proceeds of the disposition (net of corresponding amounts allocated
to Comdisco Group in respect of its retained interest in Comdisco
Ventures); or
. convert each share of Comdisco Ventures Stock into a number of
shares of Comdisco Stock equal to 115% of the ratio of the average
market value of one share of Comdisco Ventures Stock to the average
market value of one share of Comdisco Stock, calculated during a
specified twenty-day trading period prior to the disposition.
Conversion of Comdisco Ventures Stock at Option of Comdisco. We will have
the right, at any time, to convert shares of Comdisco Ventures Stock into a
number of shares of Comdisco Stock initially equal to 125% of the ratio of the
average market value of one share of Comdisco Ventures Stock to the average
market value of one share of Comdisco Stock over a specified twenty-day trading
period prior to the mailing of the conversion notice for conversions occurring
in the first quarter after we first issue Comdisco Ventures Stock. The
percentage applied to the ratio of market values will decline ratably each
quarter, beginning with the quarter ended December 31, 2000, over a period of
ten quarters to 115%.
Notwithstanding the conversion provisions outlined above, if tax law
changes that would have an adverse effect on the current tax treatment afforded
to Comdisco with respect to Comdisco Ventures Stock were to take place, we will
have the right to convert shares of Comdisco Ventures Stock into a number of
shares of Comdisco Stock equal to 110% of the ratio of their average market
values, regardless of when the adverse tax law change takes place.
See "Description of Comdisco Capital Stock--Description of Comdisco
Ventures Stock--Conversion of Comdisco Ventures Stock at Option of Comdisco,"
beginning on page 77, for a discussion of these adverse tax law changes.
7
<PAGE>
The Offering
Unless we specifically state otherwise, the information in this prospectus
does not take into account the possible issuance of up to 1,500,000 additional
shares of Comdisco Ventures Stock, which the underwriters have the option to
purchase from us solely to cover over-allotments. If the underwriters exercise
this option in full, there will be 11,500,000 shares of Comdisco Ventures Stock
outstanding following this offering.
<TABLE>
<S> <C>
Comdisco Ventures Stock offered:
U.S. and Canadian offering....... 8,500,000 shares
International offering........... 1,500,000 shares
Total.......................... 10,000,000 shares
Comdisco Ventures Stock to be
outstanding after this offering... 10,000,000 shares
Equivalent shares of Comdisco
Ventures Stock represented by
Comdisco Group's retained
interest.......................... 75,000,000 shares
Total Comdisco Ventures Stock and
equivalent shares of Comdisco
Ventures Stock to be outstanding
after this offering............... 85,000,000 shares
Use of proceeds.................... The proceeds from this offering, after
expenses, will be used by Comdisco Ventures
to repay inter-group loans to Comdisco
Group. Comdisco Group will use those funds
it receives from Comdisco Ventures for
general corporate purposes.
Preferred share purchase rights.... As part of Comdisco's stockholder rights
plan, one preferred share purchase right
will be attached to each share of Comdisco
Ventures Stock sold in the offering and
thus the rights are also a part of this
offering. See "Description of Comdisco
Capital Stock--Amended and Restated Rights
Agreement," beginning on page 86 for a
description of the Comdisco Ventures Stock
rights.
</TABLE>
The number of shares of Comdisco Ventures Stock to be outstanding after
this offering does not include shares of Comdisco Ventures Stock underlying
stock-based awards granted to senior executives of Comdisco Ventures under the
Management Incentive Plan. See "Business of Comdisco Ventures--Management--
Management Incentive Plan," beginning on page 71 for a description of those
awards.
Immediately after this offering, the remaining interest not represented by
Comdisco Ventures Stock issued in the offering will be reflected in the
financial statements of Comdisco Group as a "retained interest" in Comdisco
Ventures.
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<PAGE>
Summary Historical Financial Data of Comdisco Ventures
The following summary historical financial data should be read in
conjunction with Comdisco Ventures' financial statements and the related notes
contained elsewhere in this prospectus, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Comdisco
Ventures," beginning on page 27 of this prospectus. You should also review the
audited financial information of Comdisco provided elsewhere in this
prospectus, and the unaudited financial information of Comdisco, Comdisco Group
and Comdisco Ventures provided in Comdisco's Form 10-Q for the quarter ended
March 31, 2000. The summary income statement data for fiscal 1999, 1998 and
1997, and the balance sheet data as of September 30, 1999 and 1998, are derived
from audited financial statements of Comdisco Ventures which are included
elsewhere in this prospectus. The summary income statement data for the six
months ended March 31, 2000 and 1999 and the balance sheet data as of March 31,
2000 and 1999 are derived from unaudited financial statements of Comdisco
Ventures which are also included elsewhere in this prospectus. The unaudited
summary financial data reflects all adjustments (consisting of normal recurring
accruals) which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods. The operating results for
the six months ended March 31, 2000 and 1999 are not necessarily indicative of
the results to be expected for any other interim period or any future fiscal
year.
9
<PAGE>
COMDISCO VENTURES
SUMMARY HISTORICAL FINANCIAL DATA
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31, Years Ended September 30,
---------------- -------------------------
2000 1999 1999 1998 1997
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue:
Leasing............................ $ 84,927 $52,561 $118,403 $ 85,086 $68,620
Sales.............................. 4,864 1,885 6,142 7,136 6,942
Interest income on notes........... 23,711 6,424 22,580 6,655 3,139
Warrant sale proceeds and capital
gains............................. 187,224 17,000 80,731 14,938 16,435
Other.............................. 897 329 683 483 195
-------- ------- -------- -------- -------
Total revenue....................... 301,623 78,199 228,539 114,298 95,331
-------- ------- -------- -------- -------
Costs and expenses:
Leasing............................ 63,508 39,128 88,114 60,363 46,355
Sales.............................. 2,772 1,374 4,460 3,980 4,423
Selling, general & administrative.. 41,923 3,088 18,166 5,793 5,436
Interest........................... 23,919 8,564 23,373 10,835 7,670
Bad debt expense................... 45,801 1,600 23,200 4,786 6,250
-------- ------- -------- -------- -------
Total costs and expenses............ 177,923 53,754 157,313 85,757 70,134
-------- ------- -------- -------- -------
Earnings before income taxes........ 123,700 24,445 71,226 28,541 25,197
Income taxes........................ 49,325 9,747 28,402 11,381 10,047
-------- ------- -------- -------- -------
Net earnings........................ $ 74,375 $14,698 $ 42,824 $ 17,160 $15,150
======== ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
March 31, September 30,
------------------- -----------------
2000 1999 1999 1998
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Equity securities......................... $ 581,136 $ 86,013 $197,335 $ 16,995
Receivables, net.......................... 526,286 198,127 367,339 66,425
Net leased assets......................... 390,770 233,709 288,347 189,747
Total assets.............................. 1,521,863 531,125 871,852 281,243
Inter-group payable....................... 846,613 371,425 559,575 189,281
Division net worth........................ 433,179 119,608 199,649 71,080
</TABLE>
Explanatory Note: Earnings per share is not presented because Comdisco
Ventures has not been a "stand-alone entity" and, as a result, the presentation
of earnings per share is not applicable. If Comdisco issues a separate series
of common stock, it will present in its financial statements the earnings per
share for each outstanding series of its common stock.
10
<PAGE>
Comdisco, Inc.
The following summary historical consolidated financial data should be
read in conjunction with Comdisco Inc.'s consolidated financial statements and
the related notes, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Comdisco, Inc." beginning on page 36 of
this prospectus. The summary income statement data for fiscal 1999, 1998 and
1997 and the balance sheet data as of September 30, 1999 and 1998 are derived
from Comdisco Inc.'s audited financial statements which are included elsewhere
in this prospectus. The summary income statement data for the six months ended
March 31, 2000 and 1999 and the balance sheet data as of March 31, 2000 and
1999 are derived from Comdisco Inc.'s unaudited financial statements which are
also included elsewhere in this prospectus. The unaudited summary financial
information reflects all adjustments, consisting of normal recurring accruals,
which are, in the opinion of management, necessary for a fair presentation of
the results of the interim periods. The operating results for the six months
ended March 31, 2000 and 1999 are not necessarily indicative of the results to
be expected for any other interim period or any future fiscal year.
11
<PAGE>
COMDISCO, INC.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(in millions, except share data)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended September
March 31, 30,
------------- ---------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue:
Leasing................................. $1,166 $1,469 $2,655 $2,435 $2,116
Sales................................... 166 125 891 329 269
Technology services..................... 303 243 522 433 354
Other................................... 255 36 91 46 80
------ ------ ------ ------ ------
Total revenue.......................... 1,890 1,873 4,159 3,243 2,819
------ ------ ------ ------ ------
Costs and expenses:
Leasing................................. 869 1,121 1,969 1,791 1,534
Sales................................... 128 109 846 275 210
Technology services..................... 263 205 440 362 296
Selling, general & administrative....... 258 142 306 249 244
Interest................................ 171 171 337 326 299
Prism Communication Services............ 70 3 36 -- --
Other................................... -- 150 150 -- 25
------ ------ ------ ------ ------
Total costs and expenses............... 1,759 1,901 4,084 3,003 2,608
------ ------ ------ ------ ------
Earnings (loss) before income taxes...... 131 (28) 75 240 211
Income taxes............................. 47 (10) 27 87 80
------ ------ ------ ------ ------
Net earnings (loss) before preferred
dividends............................... 84 (18) 48 153 131
Preferred dividends...................... -- -- -- (2) (8)
------ ------ ------ ------ ------
Net earnings (loss) to common
stockholders............................ $ 84 $ (18) $ 48 $ 151 $ 123
====== ====== ====== ====== ======
Net earnings (loss) per common share:
Earnings (loss) per common share--
basic.................................. $ .55 $ (.12) $ .32 $ .99 $ .83
Earnings (loss) per common share--
diluted................................ $ .52 $ (.12) $ .30 $ .93 $ .78
Pro forma net earnings (loss) per common
share:
Comdisco Group--earnings (loss) per
common share--basic.................... $ .06 $ (.22) $ .04 $ .88 $ .73
Comdisco Group--earnings (loss) per
common share--diluted.................. $ .06 $ (.22) $ .03 $ .82 $ .68
Comdisco Ventures--earnings per common
share--basic........................... $ .49 $ .10 $ .28 $ .11 $ .10
Comdisco Ventures--earnings per common
share--diluted......................... $ .46 $ .10 $ .27 $ .11 $ .10
</TABLE>
<TABLE>
<CAPTION>
March 31, September 30,
------------- -------------
2000 1999 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.......................... $ 87 $ 366 $ 361 $ 63
Receivables, net................................... 962 479 722 340
Net leased assets.................................. 5,638 5,926 5,623 5,900
Total assets....................................... 8,415 7,651 7,807 7,063
Total debt......................................... 5,902 5,793 5,571 5,035
Total stockholders' equity......................... 1,273 920 1,060 979
</TABLE>
Explanatory Note: The pro forma net earnings (loss) per common share
amounts were calculated using the outstanding shares of Comdisco Inc.
12
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, as well as the
other information included in this prospectus, before making a decision to buy
Comdisco Ventures Stock. Comdisco Ventures' business, financial condition or
results of operations could be materially adversely affected by any of these
risks. The trading price of Comdisco Ventures Stock could decline due to any of
these risks, and you may lose all or part of your investment.
Risks Relating to the Business of Comdisco Ventures
Comdisco Ventures' customers typically consist of venture capital-backed
companies. Providing financings to these companies involves a high degree of
business and financial risk, which can result in substantial losses, and
accordingly, an investment in Comdisco Ventures should be considered
speculative
Comdisco Ventures' customers typically are venture capital-backed
companies in a start-up development stage, often have yet to generate revenues
and most likely need substantial additional capital to expand, compete or even
meet current obligations. Traditional banks and leasing companies will provide
financing to these types of entities, if at all, with high interest rates and
restrictive covenants. Moreover, these entities may be more vulnerable to
changes in economic conditions, particularly changes that would further
adversely affect their ability to raise necessary capital from traditional
sources. If changes in economic conditions--a rise in interest rates, for
example--make it more difficult and costly for these companies to raise the
capital they require, their businesses would be adversely affected.
Additionally, these customers may have substantial variations in operating
results from period to period, face intense competition, and experience
failures or substantial declines in value at any stage. All of these factors
will affect Comdisco Ventures' customers' ability to meet their obligations to
Comdisco Ventures, and will affect the fair market value of any of their equity
securities or obligations held by Comdisco Ventures. At the time that Comdisco
Ventures provides financing, a customer may lack one or more key attributes
(e.g., proven technology, marketable product, complete management team, or
strategic alliances) necessary for success, and may never achieve these
attributes. In some cases, returns on financings will be long term in nature
and may require many years from the date of initial financing before they can
be achieved, if at all.
Market conditions, along with contractual and regulatory restrictions, may
affect Comdisco Ventures' ability to dispose of its equity positions in the
most economically advantageous manner
Comdisco Ventures generates a significant part of its revenues and
profits when its customers achieve a liquidity event, like an initial public
offering or a merger with, or an acquisition by, a public company, which gives
Comdisco Ventures the opportunity to sell the equity securities it holds in
those customers. The recent economic environment accelerated the ability of
Internet-based and other high-technology companies to position themselves for a
public offering, merger, acquisition or other liquidity event. Continuation of
these favorable economic conditions is beyond our control. Historically,
Comdisco Ventures' general policy has been to sell its equity positions in an
orderly manner as soon as reasonably possible after a liquidity event. This
general policy allows Comdisco Ventures to generate cash for reinvestment in
new transactions; Comdisco Ventures believes it is preferable to make new
advances to start-ups rather than hold the securities of public companies. In
most cases, securities law restrictions on transfer and contractual lock-up
provisions restrict Comdisco Ventures' ability to sell its equity positions for
several months after a liquidity event. Consequently, Comdisco Ventures'
general policy and these restrictions mean that Comdisco Ventures may be unable
to realize the highest possible price for its equity positions. Comdisco
Ventures' management consults with its outside asset manager on at least a
quarterly basis and has adjusted its general policy on occasion to respond to
market conditions. However, Comdisco Ventures' policy, with respect to
disposition of its equity holdings is not intended to, and does not, assure
that Comdisco Ventures will maximize its return on any particular holding.
13
<PAGE>
Comdisco Ventures' financings in Internet-related and other high technology
industries could expose Comdisco Ventures to financial risk if those industries
suffer an economic downturn
Comdisco Ventures has provided a majority of its outstanding financing
commitments to Internet-related and other high technology companies. The public
market for high-technology and other emerging growth companies is extremely
volatile. This volatility may adversely affect both the ability of Comdisco
Ventures to dispose of those equity securities and the value of those equity
securities prior to the dates on which they are disposed.
The market price of Comdisco Ventures Stock may fluctuate or decline because
the value of some of Comdisco Ventures' assets fluctuates
A significant portion of Comdisco Ventures assets may include the equity
securities of both publicly traded and non-publicly traded companies. The
market price and valuations of the securities that Comdisco Ventures holds in
these companies may fluctuate significantly due to market conditions and other
conditions over which Comdisco Ventures has no control. Fluctuations in the
market price and valuations of the securities that Comdisco Ventures holds may
result in fluctuations in the market price of Comdisco Ventures Stock.
Fluctuations in future periods may be greater than those experienced in
past periods as a result of Comdisco Ventures' focus on Internet-related,
communications and other high-technology companies. The market prices of equity
securities of companies in these industries can fluctuate significantly. We
expect the market price of Comdisco Ventures Stock to be particularly
susceptible to such volatility, because Comdisco Ventures may be valued in the
future in part on the basis of the interests it holds in public and private
Internet-related, communications and other high-technology companies.
Therefore, fluctuations in the valuations of any of Comdisco Ventures'
customers may cause the market price of Comdisco Ventures Stock to fluctuate.
During the first half of 2000, the prices of many high technology stocks
recorded historical lows and have been highly volatile. Also, the rate of
initial public offerings has slowed considerably during the spring of 2000. In
addition, for those customers whose securities are not publicly traded, the
realizable value of Comdisco Ventures' interests may prove to be lower than the
carrying value reflected in Comdisco Ventures' financial statements.
The value of the warrants that Comdisco Ventures generally receives in
connection with its venture leases and venture debt is dependent on the value
of the equity securities for which the warrants can be exercised. The value of
those securities is dependent primarily on the success of the underlying
company's business strategy, as well as general economic and equity market
conditions. The prospects for achieving consistent profitability in the case of
many companies to which Comdisco Ventures provides financing are speculative.
The warrants and equity securities for which the warrants can be exercised
generally will be restricted securities that cannot readily be sold for some
period of time. If the value of the equity securities underlying a warrant does
not increase above the exercise price during the life of the warrant, Comdisco
Ventures would permit the warrant to expire unexercised and the warrant would
then have no value.
The market price of Comdisco Ventures Stock may fluctuate or decline due to an
inability to predict future earnings and substantial variation in earnings from
quarter-to-quarter and year-to-year
A substantial portion of Comdisco Ventures' income comes from the sale of
the equity interests that it holds in its customers. Profits are recognized
upon those sales.
The sales of these equity interests are dependent on the sale, merger, or
initial public offering of the customer as well as the sales price of the
equity interest. Comdisco Ventures has no control over the sale, merger,
initial public offering or market price of its customers. Moreover, whether or
not a sale, merger or initial public offering takes place depends on both
general market conditions as well as the success of Comdisco Ventures'
customers. Adverse market conditions may prevent or deter sales, mergers and
initial public offerings from taking place. These factors, when combined with
Comdisco Ventures' practice of disposing of equity interests in an orderly way
as soon as reasonably and legally possible, mean
14
<PAGE>
that income and profits from the sale of equity interests can and will vary
substantially from quarter-to-quarter and year-to-year. This will make it
difficult or impossible to project future performance based on past results.
Fluctuations in earnings and uncertainty about future earnings may result
in a lower and more volatile price for Comdisco Ventures Stock than would be
achieved with predictable, steadily growing earnings.
If Comdisco Ventures is unable to maintain its relationships with the venture
capital community its ability to identify and evaluate financing opportunities
would be impaired
Comdisco Ventures has established working relationships with twenty to
thirty venture capital firms. These venture capital firms serve as referral
sources utilized by Comdisco Ventures to broaden its customer base. There can
be no assurance that these relationships can be maintained or sustained. To the
extent that Comdisco Ventures is unable to maintain these relationships, its
ability to identify potential customers may be substantially impaired.
Comdisco Ventures has no reliable performance history with its venture debt and
direct equity financing products. We cannot assure you that those products will
continue to be accepted by venture capital-backed companies as an attractive
source of capital or that they will continue to provide acceptable returns on
capital to Comdisco Ventures.
While Comdisco Ventures has provided venture debt and direct equity
financing products since 1995, Comdisco Ventures has extended over $926 million
in venture debt and direct equity financing since January, 1999, which
constitutes 39% of its total financing commitments since inception. We cannot
assure you that this growth will continue. Furthermore, there has not been a
long enough period of time in which to assess the potential loss history of
these products. Finally, Comdisco Ventures cannot predict how a change in
recent favorable economic conditions would affect the market for, or
performance of, these financing products.
The growth of early-stage companies and investment in these companies could be
slowed significantly, which could materially affect Comdisco Ventures' business
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, especially in high-
technology industries. Comdisco Ventures targets those early-stage companies
that have been able to attract venture capital financing to their businesses.
Any adverse change in the current economic environment could materially reduce
the rate at which new companies are developed and financed by venture
capitalists, and this reduction could have a material adverse effect on
Comdisco Ventures.
Many of the companies to which Comdisco Ventures provides financing are
dependent on third parties for liquidity. Venture capitalists have been able to
raise significant funds for investment in Internet-related, communications and
other high-technology companies. Additionally, a number of public companies
have funds available for investments in these industries as part of their
strategic plans. Any significant change in the availability of these funds
would have a material impact on Comdisco Ventures' customer base, and,
potentially, Comdisco Ventures' ability to collect on its venture leases and
venture debt, as well as the fair market value of its equity holdings.
If Comdisco Ventures cannot raise additional capital on acceptable terms from
alternative funding sources, it may not be able to grow its business
Historically, Comdisco Ventures has funded its financings out of cash
flow from operations and by borrowing funds from Comdisco. To take advantage of
the current increased market and demand for
15
<PAGE>
its venture financing products, Comdisco Ventures must substantially increase
its funding levels. To do so, it intends to identify and raise alternative
sources of funds with acceptable economic terms, such as the formation of
limited partnership funds. If Comdisco Ventures cannot do so, its business
would be limited to whatever growth could be funded by cash flow, additional
sales of Comdisco Ventures Stock to the public or borrowings from Comdisco,
which is not under any current obligation to provide those borrowings. If
Comdisco Ventures is unable to expand its funding sources, its growth may be
limited. See "Business of Comdisco Ventures--Comdisco Ventures Strategy--
Expanding Comdisco Ventures' funding sources," beginning on page 54.
Any adverse changes in the current favorable economic environment may
impact potential investors in any alternative funding source Comdisco Ventures
may use, and this in turn, may have a material impact on Comdisco Ventures'
liquidity and access to funds.
Conflicts between Comdisco Ventures and any alternative funding source it
establishes over the allocation of shared resources and financing decisions
with respect to customers could adversely affect Comdisco Ventures' ability to
provide its products and maintain its relationships with its customers
Comdisco Ventures intends, depending on market conditions, to expand its
funding sources by establishing limited partnership funds and raising capital
from sources in addition to Comdisco. As Comdisco Ventures establishes these
funds, we anticipate that
. senior management of Comdisco Ventures would be involved in the
management of these funds; and
. Comdisco Ventures would provide these funds with support and other
administrative services using Comdisco Ventures' employees and
resources.
Conflicts may occur between Comdisco Ventures and these funds over the
allocation of management time, support and administrative resources.
Additionally, Comdisco Ventures and any fund it establishes may be both asked
to provide financing products to the same customer. Financing decisions for
Comdisco Ventures and its funds likely will be made by the same persons.
However, decisions with respect to different financing products are made on
different criteria. For example, a decision to provide a customer venture lease
financing by Comdisco Ventures will involve a different financial and credit
analysis than a decision to provide the same customer direct equity financing
by a fund. A decision by Comdisco Ventures or a fund not to provide financing
to a customer could adversely affect the other's relationship with that
customer. In some circumstances, financing could also be provided to a "joint"
customer of Comdisco Ventures or a fund where it would not have been provided
if that joint relationship did not exist. If Comdisco Ventures and a fund both
provide financing products to the same customer, actions taken by one of them
with respect to the customer could adversely affect the other's ability to
collect amounts due from the customer or otherwise adversely affect the other's
relationship with the customer.
The availability of capital to start-up companies from numerous and diverse
sources could adversely impact Comdisco Ventures' financial performance
In the current financing marketplace, venture capital firms, venture-
oriented banks and other asset-based lenders, leasing companies and other
capital providers are all available to provide capital to start-up companies.
Many of these financing sources have greater financial and management
resources, brand name recognition or industry contacts than Comdisco Ventures.
Also, the barriers to entry for companies wishing to provide capital and other
resources to entrepreneurs and their emerging technology companies are minimal.
More recently, both private and public companies with business models based on
providing capital to Internet-based, communications and other high-technology
companies have emerged as another source of capital for start-up companies. In
order to continue to compete effectively, Comdisco Ventures may be required to
provide financing under terms which would result in lower returns than it has
historically obtained.
16
<PAGE>
Comdisco Ventures depends on the relationships established with venture
capitalists by certain important employees, and the loss of any of these
employees may harm Comdisco Ventures' business
The familiarity of senior management with the venture capital industry
and the relationships they have established with venture capital firms makes
them important to Comdisco Ventures' future business prospects. The loss of the
services of Comdisco Ventures' senior management could affect these
relationships and may harm its business.
Comdisco Ventures' growth places strains on its managerial, operational and
financial resources
Of the over $2 billion of financing commitments provided by Comdisco
Ventures since 1987, over $1 billion of the venture lease, venture debt and
equity financing commitments have been made since January 1, 1999. Comdisco
Ventures' rapid growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational and financial resources.
Furthermore, if we are successful in expanding Comdisco Ventures' funding
sources through the organization and participation in limited partnership funds
and other entities, it is anticipated that those entities would utilize
Comdisco Ventures' managerial and operational resources. Further growth of
Comdisco Ventures will increase this strain on Comdisco Ventures' managerial,
operational and financial resources, which could inhibit Comdisco Ventures'
ability to implement its business plan. Comdisco Ventures' continued success
will depend on its ability to attract, train, retain and motivate high-quality
personnel, especially for its management team. The demand for these kinds of
persons in a growing venture capital market is high, and Comdisco Ventures
cannot assure you that it will be able to obtain and retain the necessary
personnel to meet its needs.
If Comdisco Ventures' management fails to identify properly and to select
financing opportunities appropriately, it will adversely affect the business of
Comdisco Ventures
Identifying and participating in attractive financing opportunities is
difficult. Comdisco Ventures' success depends on the ability of its management
to identify desirable businesses, to propose financings and to successfully
negotiate the terms of those financings. Management will have sole and absolute
discretion in identifying and selecting these companies. There is generally no
publicly available information about potential financing customers, and
Comdisco Ventures must rely on the diligence of its employees and business
contacts to obtain information in connection with Comdisco Ventures' financing
decisions. You will not be able to evaluate the merits of providing financing
to any particular company before Comdisco Ventures provides financing.
If collateral for Comdisco Ventures' venture leases and venture debt is
inadequate or unavailable to Comdisco Ventures if a customer defaults, Comdisco
Ventures may lose the economic benefits of its financing to that customer
Comdisco Ventures' venture leases and venture debt are typically secured
by a lien on the underlying equipment or the customer's assets. This collateral
may not be of adequate value to protect Comdisco Ventures in the event of a
customer's default, either as a result of the depreciating value of that
collateral over the life of the venture lease or venture debt or, in the case
of some venture leases, because the value of the venture lease includes items
in addition to the equipment collateral (e.g., software) for which no security
is provided. Additionally, more of Comdisco Ventures' venture debt financings
are being made on a basis subordinated to the customer's senior creditors or on
an unsecured basis. In those cases, Comdisco Ventures' right to liquidate the
collateral in the event of a default by a customer will be subject to the
superior rights of the customer's senior creditors. There can be no assurance
that the collateral for a venture lease or for venture debt will be available
to satisfy a customer's obligations to Comdisco Ventures or, if available, will
be sufficient to satisfy those obligations. See "Business of Comdisco
Ventures--Comdisco Ventures' Products," beginning on page 55 for a description
of these products.
Comdisco may incur significant costs to avoid investment company status and
Comdisco Ventures may suffer adverse consequences if Comdisco is deemed an
investment company
Investment positions we hold through Comdisco Ventures may be considered
"investment securities" under the Investment Company Act of 1940. Generally,
any company that owns investment
17
<PAGE>
securities with a value exceeding 40% of its total assets (excluding cash items
and government securities) is an "investment company" subject to registration
under, and compliance with, the 1940 Act unless a particular exemption or safe
harbor applies. While the current value of investment securities held by
Comdisco is less than 15% of Comdisco's total assets, if the dramatic and
broad-based appreciation in the market values of Internet-related businesses
continues, it is possible that at some point in the future, the value of the
investment securities Comdisco holds through Comdisco Ventures and otherwise
may exceed the 40% threshold. The 1940 Act, however, provides a company that
has a bona fide intent to be primarily engaged in a business other than that of
investing or trading in securities with one year to reduce the value of its
investment securities assets to a level below 40%. If we are ever required to
reduce the value of investment securities we hold we may accomplish this by
selling investment securities or increasing our other assets. As a result, we
may be obligated to dispose of assets sooner than we otherwise would at prices
which could be lower than they otherwise might be. We will also incur tax
liabilities in connection with any asset dispositions. In addition, we may be
forced to forego an opportunity to purchase an investment security that would
be important to our core operating strategy. Accordingly, the investment
security dispositions and asset purchases may harm our business and results of
operations.
Regardless of the 40% test, we could also be deemed an investment company
if we were judged to be, or hold ourselves out as, being primarily engaged in
the business of investing in, reinvestment in, or trading in securities.
If Comdisco were deemed to be in violation of the 1940 Act, we would be
prohibited from engaging in business or selling our securities and could be
subject to civil and criminal actions for doing so. Therefore, classification
as an investment company would harm our business and results of operations.
Risks Relating to Ownership of Comdisco Ventures Stock
Holders of Comdisco Ventures Stock will be common stockholders of Comdisco and
will not have any legal rights relating to specific assets of Comdisco Ventures
Comdisco Ventures will not be a separate legal entity but rather will be
a part of Comdisco. Accordingly, holders of Comdisco Ventures Stock will be
common stockholders of Comdisco. As a result, stockholders will continue to be
subject to all of the risks of an investment in Comdisco and all of our
businesses, assets and liabilities, including those of Comdisco Group. The
issuance of Comdisco Ventures Stock, and the allocation of assets and
liabilities and stockholders' equity between Comdisco Group and Comdisco
Ventures will not result in a distribution or spin-off to stockholders of any
of our assets or liabilities and will not affect ownership of our assets or
responsibility for our liabilities or those of our subsidiaries, and will not
affect the rights of the holders of any debt of Comdisco or its subsidiaries.
The assets we attribute to Comdisco Ventures will be subject to the liabilities
of Comdisco Group, whether those liabilities arise from lawsuits, contracts or
indebtedness that we attribute to Comdisco Group. If we are unable to satisfy
one group's liabilities out of the assets we attribute to it, we would be
required to satisfy those liabilities with assets we have attributed to another
group. Furthermore, holders of Comdisco Ventures Stock will only have the
rights specified in our restated charter, and will not have any legal rights
related to specific assets of any specific group.
The financial performance of Comdisco Group could adversely affect the
financial condition of Comdisco Ventures
The financial performance of Comdisco Group will affect Comdisco's
consolidated results of operations and financial condition and could affect the
results of operations or financial condition of Comdisco Ventures and the
market price of Comdisco Ventures Stock. Cash flow from operations, including
the cash flow from either group, is expected to be used for debt service
obligations of Comdisco. In addition, net losses of either group and dividends
and distributions on, or repurchases of, any series of common stock or
repurchases of preferred stock at a price per share greater than par value will
reduce the funds we can pay on each series of common stock under Delaware law.
For these reasons, you should read Comdisco's consolidated financial
information in addition to the financial information we provide for each group.
18
<PAGE>
Limits exist on the voting rights and power of Comdisco Ventures Stock and, as
a result, the holders of Comdisco Stock will be able to control majority votes
Holders of Comdisco Ventures Stock will vote together with holders of
Comdisco Stock as a single class, except in limited circumstances required by
Delaware General Corporation Law or New York Stock Exchange or Nasdaq Stock
Market rules. In addition to the approval of the holders of a majority of the
voting power of all shares of all classes of Comdisco common stocks voting
together as a single class, the approval of a majority of the outstanding
shares of Comdisco Stock and Comdisco Ventures Stock, each voting as a separate
class, would be required under Delaware law only to approve any amendment to
our restated charter that
. would change the par value of the shares of the series, or
. alter or change the powers, preferences or special rights of the
shares in a manner adverse to the holders of those shares of
common stock.
In addition, the aggregate voting power of all of the outstanding shares
of Comdisco Ventures Stock is limited to 35% of the total voting power of all
of the outstanding shares of all series of Comdisco common stock. Consequently,
the aggregate voting power of all of the outstanding shares of Comdisco
Ventures Stock will never represent a majority of the outstanding voting power
of all of the outstanding shares of all series of Comdisco common stock. Thus,
if matters come before the stockholders of Comdisco which require a majority
vote, the holders of Comdisco Stock, if they vote in a similar manner, will be
able to control the vote. These matters may include mergers or other
extraordinary transactions. In addition, the issuance or repurchase of shares
of either series of common stock could cause changes in the relative voting
power of the groups, subject to the 35% limitation on the voting power of the
Comdisco Ventures Stock described above. The effect of this 35% limitation is
likely to be more significant if additional shares of Comdisco Ventures Stock
are issued as part of the disposition of Comdisco Group's retained interest in
Comdisco Ventures.
Our right to convert Comdisco Ventures Stock into Comdisco Stock at any time
without stockholder approval may prevent the holders of Comdisco Ventures Stock
from retaining an investment in a tracking stock under circumstances in which
they would wish to retain their investment
At any time, the board of directors, without stockholder approval but
subject to the fiduciary duties owed by the board to all Comdisco Stockholders,
could choose to convert shares of Comdisco Ventures Stock into shares of
Comdisco Stock, including a conversion at a time when either or both series of
our common stock may be considered to be overvalued or undervalued. Any
conversion would preclude holders of Comdisco Ventures Stock from retaining
their investment in a security that is intended to reflect the separate
performance of Comdisco Ventures. It could also give holders of shares of
Comdisco Ventures Stock a lesser premium than any premium that might be paid by
a third-party buyer of all or substantially all of the assets of Comdisco
Ventures.
Our board of directors may resolve issues involving both Comdisco Group and
Comdisco Ventures in a manner that adversely affects holders of Comdisco
Ventures Stock
Our board of directors has adopted policies governing the relationship
between Comdisco Ventures and Comdisco Group. For a more comprehensive
description of these policies, see "Relationship Between Comdisco Ventures and
Comdisco Group," beginning on page 92. We cannot assure you that the policies
determined by our board of directors are as favorable to the holders of
Comdisco Ventures Stock as policies that could be set by Comdisco Ventures if
it were a separate company. Our board of directors will make operational and
financial decisions concerning Comdisco Ventures and implement these policies
in a manner that may affect the interests of the holders of Comdisco Ventures
Stock in a manner differently than if Comdisco Ventures were a separate
company. These decisions could include:
. the amount of the proceeds of sales or the costs of repurchases of
Comdisco Ventures Stock to allocate to the equity of Comdisco
Ventures, if any;
19
<PAGE>
. the amount of consideration received in connection with a merger
involving Comdisco to allocate to holders of Comdisco Ventures
Stock;
. the conversion of Comdisco Ventures Stock;
. the allocation of available cash to Comdisco Ventures;
. the allocation of management resources to Comdisco Ventures; and
. the allocation of costs and expenses to Comdisco Ventures.
Our board of directors will be required to make any decision relating to
these matters in the good faith business judgement that the decision is in the
best interests of Comdisco and all of our stockholders as a whole. Although it
has no present intention to do so, the board of directors also may, in the
exercise of its business judgment in accordance with the directors' fiduciary
duties to Comdisco and our stockholders, modify, rescind or add to any of these
policies without stockholder approval. A decision to modify or rescind these
policies, or adopt additional policies, could adversely affect the holders of
Comdisco Ventures Stock.
Principles of Delaware law may protect decisions of our board of directors that
have a disparate impact upon holders of Comdisco Ventures Stock
Delaware law provides that a board of directors owes an equal duty to all
stockholders regardless of class or series and does not have separate or
additional duties to the holders of any particular class or series of stock.
Recent cases in Delaware involving tracking stocks have established that
decisions by directors or officers involving differing treatment of tracking
stocks may be judged under the "business judgment rule." Under these principles
of Delaware law and the "business judgment rule," you may not be able to
challenge board of directors' decisions that have a disparate impact upon
holders of Comdisco Ventures Stock, if the board of directors is adequately
informed with respect to those decisions and acts in good faith and in the
honest belief that it is acting in the best interest of our stockholders and
does not have a conflict of interest.
Holders of Comdisco Ventures Stock have no right to vote on how to allocate
consideration received in connection with a merger of Comdisco
Our restated charter does not contain any provisions governing how
consideration received in connection with a merger or consolidation involving
Comdisco is to be allocated among the holders of Comdisco Ventures Stock and
Comdisco Stock. None of the holders of Comdisco Ventures Stock or Comdisco
Stock will have a separate class vote in any merger or consolidation so long as
we divide the type and amount of consideration among these holders in a manner
we determine, in our sole discretion, to be fair. As a result, depending on our
allocation decision, the consideration to be received by holders of Comdisco
Ventures Stock in these mergers or consolidations may be materially less
valuable than the consideration they would have received if Comdisco Ventures
had been sold separately or if a separate class vote on the merger or
consolidation occurred.
We may dispose of assets of Comdisco Ventures without your approval
Delaware law requires stockholder approval only for a sale or other
disposition of all or substantially all of the assets of Comdisco. Any
disposition requiring stockholder approval would require a vote of all Comdisco
stockholders voting as a single class. As long as the assets attributed to
Comdisco Ventures represent less than substantially all of our assets, we may
approve sales and other dispositions of any amount of the assets of Comdisco
Ventures without stockholder approval. Under these circumstances, our board of
directors would determine the fair value of all assets, except for cash and
unrestricted publicly traded securities. Any fair value determination by the
board of directors would be subject to the fiduciary duties owed by the board
to all Comdisco stockholders. If we dispose of all or substantially all of the
assets attributed to Comdisco Ventures, we would be required, if the
disposition is not an exempt disposition under the terms of our restated
charter, to choose one of the following three alternatives:
. declare and pay a dividend to holders of Comdisco Ventures Stock;
20
<PAGE>
. redeem the outstanding shares of Comdisco Ventures Stock; or
. convert shares of Comdisco Ventures Stock into outstanding shares
of Comdisco Stock.
Holders of Comdisco Ventures Stock may receive less value for their
shares than the value that a third-party buyer might pay for all or
substantially all of the assets attributed to Comdisco Ventures. The board of
directors will decide, in its sole discretion, how to proceed and is not
required to select the option that would result in the highest value to holders
of Comdisco Ventures Stock.
If we dispose of less than substantially all of the assets of Comdisco
Ventures, we currently intend to allocate the proceeds we receive to Comdisco
Ventures. However, consistent with the management and allocation policies
described beginning on page 93, our board of directors, in its discretion,
would have the right to allocate those proceeds in a different manner, subject
to the fiduciary duties owed by the board to all Comdisco stockholders.
Corporate-level income taxes may be incurred on a sale of Comdisco Ventures'
assets that would not be incurred if Comdisco Ventures were a separate
corporation
Comdisco may incur a tax liability upon a sale of the assets of Comdisco
Ventures, which would be allocated to Comdisco Ventures and reduce the amount
available for distribution to the holders of Comdisco Ventures Stock. By
contrast, if Comdisco Ventures were a separate corporation whose stock was held
directly by those holders, they could sell their stock directly to the buyer,
in which case no corporate-level tax would be incurred. Consequently, the
holders of Comdisco Ventures Stock could receive less upon a disposition of
Comdisco Ventures than they would if they held stock of a separate corporation.
We do not intend to pay dividends on Comdisco Ventures Stock, and even if we
decide to do so, are not required to pay dividends equally on Comdisco Ventures
Stock and Comdisco Stock
We do not intend to pay cash dividends in the foreseeable future on
Comdisco Ventures Stock. Under our restated charter, however, if our board of
directors decides to pay dividends on Comdisco Ventures Stock, we are not
required to pay dividends on that stock in amounts equal to any dividends we
pay on Comdisco Stock or any other authorized series of common stock. This
decision would not necessarily have to reflect:
. the financial performance of any group;
. the amount of assets available for dividends on any series of
common stock; or
. the amount of prior dividends declared on any series of common
stock.
Because Comdisco Ventures Stock is a series of common stock of Comdisco, and
because Comdisco Ventures is a part of Comdisco and not an independent entity,
a person intent on acquiring control of Comdisco Ventures must acquire control
of Comdisco as a whole and thus may be deterred from an acquisition of Comdisco
Ventures
If Comdisco Ventures were a separate company, any person interested in
acquiring it without negotiating with management could seek control of Comdisco
Ventures by obtaining control of its outstanding voting stock by means of a
tender offer or proxy contest. Although we intend Comdisco Ventures Stock to
reflect the separate performance of Comdisco Ventures, a person interested in
acquiring Comdisco Ventures without negotiation with Comdisco's management
could obtain control of Comdisco Ventures only by obtaining control of the
outstanding voting stock of Comdisco.
Comdisco's tracking stock structure could make it more costly for a
potential acquiror to obtain control of Comdisco, and in turn Comdisco
Ventures. As a result, the tracking stock structure could prevent stockholders
from profiting from an increase in the market value of their shares as a result
of a change in control of Comdisco by delaying or preventing that change in
control.
21
<PAGE>
In addition, some of the provisions of our restated charter, bylaws, and
Delaware law may inhibit changes of control not approved by the board of
directors. For additional anti-takeover constraints, see "Description of
Comdisco Capital Stock--Anti-Takeover Considerations," on page 91.
The market price of Comdisco Ventures Stock could decline if we issue more
Comdisco Ventures Stock
In addition to any distribution of Comdisco Ventures Stock representing
Comdisco Group's retained interest in Comdisco Ventures, our board of directors
may issue additional Comdisco Ventures Stock to, among other things:
. raise capital for Comdisco Ventures;
. pay stock dividends or provide for stock splits;
. acquire companies or businesses; or
. provide compensation or benefits to employees.
Under Delaware law, the board of directors would not need your approval
for these issuances. We do not intend to seek your approval for any of these
issuances unless NYSE or Nasdaq Stock Market regulations or other applicable
law require approval, or the board of directors deems it advisable. These
issuances could cause the market price of Comdisco Ventures Stock to decline as
more stock becomes available.
The IRS could assert that an exchange of Comdisco Ventures Stock is taxable to
you or us
There are no court decisions or other authorities that control the tax
treatment of tracking stock such as Comdisco Ventures Stock. In addition, the
IRS has announced that it will not issue rulings on the characterization of
stock with characteristics similar to Comdisco Ventures Stock. It is possible,
therefore, that the IRS could successfully assert that the sale of Comdisco
Ventures Stock by Comdisco is taxable to Comdisco, or that any subsequent
conversion of Comdisco Ventures Stock into Comdisco Stock could be taxable to
you or Comdisco. See "Material U.S. Federal Income Tax Considerations,"
beginning on page 99.
A recent Clinton Administration proposal, if enacted, could result in taxation
on issuances of tracking stock
In February 2000, the Clinton Administration proposed legislation that
would tax stockholders on the receipt of tracking stock as a distribution on or
in exchange for their existing stock, and grant the IRS authority to treat
tracking stock as nonstock or stock of another entity. While this proposal, if
enacted, would not directly apply to Comdisco Ventures Stock sold pursuant to
this offering prior to the date of enactment, it could impede Comdisco's
ability to distribute or sell Comdisco Ventures Stock after it is enacted. The
enactment of the Clinton Administration proposal could be a "Tax Event" that
would entitle Comdisco to convert each outstanding share of Comdisco Ventures
Stock into a number of shares of Comdisco Stock equal to 110% of the ratio of
the average market values of Comdisco Ventures Stock and the Comdisco Stock
over a specified trading period prior to such conversion. See "Material U.S.
Federal Income Tax Considerations," beginning on page 99, and "Description of
Comdisco Capital Stock--Description of Comdisco Ventures Stock," beginning on
page 74.
The market price of Comdisco Ventures Stock may fluctuate widely, and this
volatility could cause Comdisco Ventures Stock to trade at a price below the
initial public offering price
We will determine the initial public offering price for Comdisco Ventures
Stock through negotiations with the underwriters and that price may not be
indicative of the market price that will prevail after this offering. For a
description of the factors that will be taken into account to determine the
offering price, please see "Underwriting," on page 102. We believe the
following factors could cause the
22
<PAGE>
market price of Comdisco Ventures Stock to fluctuate widely and could possibly
cause Comdisco Ventures Stock to trade at a price below the initial public
offering price:
. announcements of financing transactions by us or our competitors;
. announcements of new services, products, technological
innovations, acquisitions or strategic relationships by our
customers;
. trends or conditions in the Internet-related, communications and
other high-technology industries;
. changes in valuation estimates by securities analysts and in
analysts' recommendations;
. failure to meet or exceed expectations of analysts or investors;
. changes in the stock prices of our customers that are publicly
traded;
. changes in market valuations of other capital and service
providers for Internet-related, communications and other high-
technology companies;
. changes in interest rates;
. changes in the public equity markets for initial public offerings;
and
. general political, economic and market conditions.
Many of these factors are beyond our control. These factors may decrease
the market price of Comdisco Ventures Stock regardless of the operating
performance of Comdisco Ventures.
The complex nature of Comdisco's tracking stock structure may be confusing to
investors and, consequently, the market may not accurately reflect the economic
performance of Comdisco Ventures and, therefore, the trading price of Comdisco
Ventures Stock may be adversely affected
Tracking stock structures are relatively new and tracking stocks have a
limited trading history. Further, the number of tracking stocks currently
trading is relatively small, especially in relation to the number and volume of
traditional classes of common stock. The market and/or the investment community
in general may be confused by the complex nature of tracking stocks and the
relative lack of information about their performance. This lack of
understanding and information may cause the market to inaccurately value the
economic performance of Comdisco Ventures and the trading price of Comdisco
Ventures Stock may be adversely affected.
23
<PAGE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this prospectus that are not historical facts are hereby
identified as "forward-looking statements" for the purpose of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A
of the Securities Act of 1933. These forward-looking statements, including,
without limitation, those relating to the future business prospects, revenues,
working capital, liquidity, capital needs, interest or other costs and income,
in each case, relating to Comdisco, Comdisco Group and Comdisco Ventures,
wherever they occur in this prospectus, are necessarily estimates reflecting
the best judgment of our senior management and involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by the forward-looking statements. These forward-looking statements
should, therefore, be considered in light of various important factors,
including those set forth in this prospectus. Important factors that could
cause actual results to differ materially from estimates or projections
contained in the forward-looking statements include, without limitation, those
factors set forth under "Risk Factors," beginning on page 13 in this
prospectus.
The words "estimate," "project," "intend," "expect," "believe" and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this
prospectus and throughout other documents incorporated in this prospectus by
reference, including, but not limited to, Comdisco's 1999 Annual Report on Form
10-K, as amended by Form 10-K/A, and Comdisco's Form 10-Q for the quarter ended
March 31, 2000. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of the filing in
which the statement appears, unless otherwise specified. Comdisco undertakes no
obligation to publicly release any revisions to these forward-looking
statements to reflect the occurrence of unanticipated events. Moreover, in the
future, Comdisco and its officers may make forward-looking statements about the
matters described in the prospectus or other matters concerning Comdisco,
Comdisco Ventures or Comdisco Group.
24
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $15.00 per share, which is
the midpoint of the initial public offering price range set forth on the cover
of this prospectus, and no exercise by the underwriters of their over-allotment
options, the net proceeds from this offering are estimated to be $137,500,000,
after deducting underwriting discounts and commissions of $10,500,000 and
estimated offering expenses of $2,000,000. The net proceeds from the offering
will be allocated to Comdisco Ventures and will be used by Comdisco Ventures to
repay inter-group loans to Comdisco Group. Comdisco Ventures has been using
these inter-group loans, together with cash flow from operations, to fund its
venture financing activities. As of March 31, 2000, this indebtedness was
approximately $847 million, bearing an interest rate of approximately 7 1/2%
per annum. Comdisco Group in turn will use the funds it receives from the
repayment of those inter-group loans by Comdisco Ventures for general corporate
purposes including paying down short-term debt.
DIVIDEND POLICY
We do not expect to pay any dividends for the foreseeable future on
Comdisco Ventures Stock. However, should we decide to pay dividends on Comdisco
Ventures Stock, we may do so (and transfer corresponding amounts to Comdisco
Group in respect of its retained interest in Comdisco Ventures) out of the
assets of Comdisco legally available for the payment of dividends under
Delaware law. The limit on any dividends we desire to pay will generally be
that amount that would be legally available for the payment of dividends under
Delaware law if Comdisco Ventures was a single, separate Delaware corporation.
We call this the "available dividend amount" for Comdisco Ventures in this
prospectus.
We expect that a decision to pay dividends on Comdisco Ventures would be
based primarily upon Comdisco Ventures' financial condition, results of
operations, regulatory and business capital requirements, any restrictions
contained in financing or other agreements binding upon Comdisco Ventures or us
and other factors that our board of directors deems relevant.
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<PAGE>
CAPITALIZATION
Comdisco, Inc.
The following table sets forth the total capitalization of Comdisco, Inc.
at March 31, 2000 and as adjusted to reflect (1) the sale of 10,000,000 newly-
issued shares of Comdisco Ventures Stock pursuant to this offering and (2) the
re-classification of the existing common stock of Comdisco into Comdisco Stock.
This table should be read in conjunction with the consolidated financial
statements of Comdisco and related notes appearing elsewhere in this
prospectus, and in Comdisco's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000 that are incorporated by reference into this prospectus.
<TABLE>
<CAPTION>
March 31, 2000
-------------------
Actual As Adjusted
------ -----------
(in millions,
except for per
share data)
<S> <C> <C>
Interest bearing liabilities
Notes payable and term notes.......................... $1,707 $1,569
Senior notes.......................................... 3,683 3,683
Other................................................. 512 512
Preferred stock, $.10 par value; authorized 100,000,000
shares; issued 0 shares................................ -- --
Comdisco Stock, $.10 par value; authorized 750,000,000
shares; issued 224,116,824 shares...................... 22 22
Comdisco Ventures Stock, $.10 per value per share;
authorized 750,000,000 shares; issued 10,000,000
shares; and 75,000,000 notional shares in respect of
Comdisco Group's retained interest (1)................. -- 1
Additional paid-in capital.............................. 361 498
Accumulated other comprehensive income.................. 189 189
Retained earnings....................................... 1,210 1,210
------ ------
1,782 1,920
Common stock held in treasury, at cost.................. (509) (509)
------ ------
Total stockholders' equity............................ 1,273 1,411
------ ------
Total capitalization................................ $7,175 $7,175
====== ======
</TABLE>
--------
(1) The number of shares of Comdisco Ventures stock outstanding excludes
15,000,000 shares of Comdisco Ventures Stock that have been reserved for
issuance under the Management Incentive Plan. As of May 26, 2000, options for
13,725,000 shares had been granted.
Comdisco Ventures
The following table sets forth as of March 31, 2000 the total
capitalization of Comdisco Ventures as adjusted to give effect to the issuance
of 10,000,000 newly-issued shares of Comdisco Ventures Stock and the use of
proceeds from this offering as described above in "Use of Proceeds." This table
should be read in conjunction with the historical financial information we
include elsewhere in this prospectus, and assumes no exercise of the
underwriters' options to purchase additional shares that are described under
"Underwriting," beginning on page 102.
<TABLE>
<CAPTION>
March 31, 2000
----------------------
Actual As Adjusted
---------- -----------
(in thousands)
<S> <C> <C>
Inter-group payable.................................. $ 846,613 $ 709,003
Division net worth................................... 433,179 570,789
---------- ----------
Total capitalization............................... $1,279,792 $1,279,792
========== ==========
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF COMDISCO VENTURES
Forward Looking Statements
Comdisco intends that the forward-looking statements herein be subject to
the safe harbors created pursuant to Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. 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 Comdisco's current
views with respect to future events and financial performance, but are subject
to many uncertainties and factors relating to Comdisco's operations and
business environment which may cause Comdisco's actual results 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" beginning on page 48 of
this prospectus, as well as "Risk Factors" beginning on page 13 of this
prospectus, and should be read in conjunction with Comdisco's 1999 Annual
Report on Form 10-K, as amended by Form 10-K/A, under "Business--Forward-
Looking Information," and Comdisco's Form 10-Q for the quarter ended March 31,
2000, under "Risk Factors," as filed with the Securities and Exchange
Commission.
Overview
This discussion should be read along with the Comdisco Ventures'
financial statements included in this prospectus. Historical results and
percentage relationships may not necessarily be indicative of operating results
for any future periods. The financial statements of Comdisco Ventures include
the balance sheets, statements of earnings and division net worth, and cash
flows of our venture financing business.
Comdisco Ventures' financial statements and Comdisco Group's financial
statements comprise all of the accounts included in the consolidated financial
statements of Comdisco. The separate business financial statements give effect
to all allocation and related party transaction policies as adopted by the
board of directors of Comdisco. These policies are described in the Notes to
Financial Statements of Comdisco Ventures beginning on page F-7 in this
prospectus. Comdisco Ventures' financial statements have been prepared in a
manner which management believes is reasonable and appropriate. These financial
statements include the financial position, results of operations and cash flows
of Comdisco Ventures, presented to give effect to the accounting principles
applicable to Comdisco's tracking stock capital structure.
So long as Comdisco Ventures Stock is outstanding, management will
provide to the holders of Comdisco Ventures Stock separate financial
statements, financial reviews, descriptions of the business, and other relevant
financial information for Comdisco Ventures and Comdisco Group as well as
consolidated financial information for Comdisco. Notwithstanding the allocation
of assets and liabilities, including contingent liabilities, between Comdisco
Ventures and Comdisco Group for the purposes of preparing their respective
financial statements, this allocation and the change to a tracking stock
capital structure by Comdisco will not result in the distribution or spin-off
to stockholders of any of Comdisco's assets and liabilities and will not affect
ownership of its assets or responsibility for its liabilities or those of its
subsidiaries. Holders of Comdisco Ventures Stock are common stockholders of
Comdisco. The assets attributed to one business will be subject to the
liabilities of the other business, even if these liabilities arise from
lawsuits, contracts or indebtedness that are attributed to the other business.
If Comdisco is unable to satisfy one business's liabilities out of the assets
attributed to it, Comdisco would be required to satisfy those liabilities with
assets Comdisco has attributed to the other business. Furthermore, holders of
Comdisco Ventures Stock and Comdisco Stock will have no legal rights related to
specific assets of either business and in any liquidation will receive a fixed
share of the net assets of Comdisco, which may not reflect the actual trading
prices, if any, of the respective businesses at such time.
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<PAGE>
While Comdisco's board and management has the discretion to re-allocate
assets, liabilities, revenues, expenses and cash flows allocated to Comdisco
Ventures, any such re-allocations are intended to be made in the context of the
allocation and management policies governing the relationship between the
Comdisco groups adopted by the board and subject to the fiduciary duties owed
by Comdisco's board and management to all Comdisco stockholders.
Financial effects from one business that affect Comdisco's consolidated
results of operations or financial condition could affect the results of
operations or financial condition of the other business and the market price of
the stock relating to the other business. In addition, net losses of either
business and dividends and distributions on, or repurchases of, either series
of common stock or repurchases of preferred stock at a price per share greater
than par value will reduce the funds we can pay on each class of common stock
under Delaware law. Accordingly, Comdisco Ventures' financial statements should
be read in conjunction with Comdisco's audited consolidated financial
information contained elsewhere in this prospectus and the unaudited financial
information of Comdisco, Inc., Comdisco Group and Comdisco Ventures provided in
Comdisco's Form 10-Q for the quarter ended March 31, 2000, included elsewhere
in or incorporated by reference into this prospectus.
On April 20, 2000, the stockholders of Comdisco, at a special meeting,
approved the authorization of a new series of Comdisco common stock, "Comdisco
Ventures Stock," that is intended to track the economic performance of Comdisco
Ventures. On May 4, 2000, Comdisco filed its restated charter which established
Comdisco Ventures Stock as a series of common stock.
Revenue
Currently, Comdisco Ventures' revenues are derived primarily from
leasing, interest income on venture debt and the sale of public equity
holdings.
. Lease revenue: Comdisco Ventures leases almost all types of
equipment from all manufacturers. These leases are "full payout"
leases, or leases in which Comdisco Ventures recovers, through
lease payments, all acquisition and other costs incurred with
respect to the lease plus an acceptable rate of return. Generally,
"full payout" leases would be accounted for as financings, similar
to an installment purchase. However, Comdisco Ventures records
these transactions as operating leases in accordance with FAS 13,
"Accounting for Leases," which requires operating lease accounting
where the collectability of the lease payments is not assured.
Under FAS 13, operating leased assets consist of the equipment
cost, less the amount depreciated to date, revenue consists of the
contractual lease payments recognized on a straight-line basis,
and depreciation expense is recognized on a straight-line basis
over the lease term to Comdisco Ventures' estimate of the
equipment's fair market value at lease termination. As part of the
lease transaction, Comdisco Ventures receives warrants to purchase
an equity interest in the borrower at a stated exercise price
based on the price paid by venture capitalists.
. Interest income: Venture debt is generally structured as an
equipment loan or a subordinated loan. The debt bears fixed
interest rates with coupons currently ranging from 8.0% to 13.0%
per annum, although the effective rate may be greater. In
addition, fees typically ranging from 0.75% to 1.5% of the
principal amount of the loan commitment may be paid at closing. As
part of the transaction, Comdisco Ventures receives warrants to
purchase an equity interest in its customer, or a conversion
option, in each case at a stated exercise price based on the price
paid by venture capitalists.
. Sale of equity holdings: Comdisco Ventures also provides financing
to its customers by purchasing convertible preferred stock or
common stock. Comdisco Ventures generates capital gains when the
equity is sold. In addition, Comdisco Ventures records the
proceeds from the sale of warrants received in conjunction with
its lease and loan
28
<PAGE>
transactions as income when received. Historically, Comdisco
Ventures' general policy has been to sell its equity positions in
an orderly manner as soon as reasonably possible after a liquidity
event. In most cases, securities law restrictions on transfer and
contractual lock-up provisions restrict Comdisco Ventures' ability
to sell its equity position for several months after a liquidity
event. Comdisco Ventures' management consults with its outside
asset manager on at least a quarterly basis and has adjusted its
general policy on occasion to respond to market conditions.
However, Comdisco Ventures' policy with respect to disposition of
its equity holdings is not intended to, and does not, assure that
Comdisco Ventures will maximize its return on any particular
holding. Furthermore, because the creation of a public market or
an acquisition/merger (collectively referred to as a "liquidity
event") is beyond Comdisco Ventures' control and is difficult, if
not impossible, to predict, Comdisco Ventures' operating results
are subject to significant and material quarterly fluctuations.
Fluctuations in future quarters may be greater than those
experienced in past quarters as a result of the growth in the
number of direct equity financings made by Comdisco Ventures,
market volatility for emerging growth companies and as a result of
Comdisco Ventures' focus on Internet-related, communications and
other high-technology companies. For those securities without a
public trading market, the realizable value of Comdisco Ventures'
interests may prove to be lower than the carrying value currently
reflected in the financial statements.
Comdisco Ventures also generates revenue from buy/sell activities and
from selling equipment at lease termination, generally to the original lessee.
Comdisco Ventures expects continued growth in all revenue sources in
fiscal 2000. In addition, the valuation of Comdisco Ventures' warrant and
equity holdings has increased significantly during the eighteen months ending
March 31, 2000, primarily as a result of strong equity markets for these
securities. Accordingly, Comdisco Ventures expects, based upon current stock
market valuations, an increase in revenue and earnings contributions from its
equity holdings in fiscal 2000. See "Risk Factors--Risks Relating to the
Business of Comdisco Ventures," beginning on page 13.
Costs and Expenses
Leasing: Costs and expenses are principally depreciation of equipment.
Depreciation is recognized on a straight-line basis over the lease term to
Comdisco Ventures' estimate of the equipment's fair market value at lease
termination. In addition to depreciation, initial direct costs related to
operating leases, primarily salespersons' commissions, are capitalized and
amortized over the lease term.
Selling, general and administrative: Comdisco Ventures' selling, general
and administrative expenses consist primarily of costs relating to management
compensation, personnel, customer service, finance, billing, administrative
services, recruiting, insurance, legal services and depreciation expense.
Comdisco has provided to Comdisco Ventures finance, billing, administrative
services, insurance, budgeting, legal services and other functions through a
shared services program and going forward will provide these services under a
master inter-group agreement. As part of its business plan, Comdisco Ventures
has hired and expects to continue to hire additional employees. As a result,
Comdisco Ventures expects these expenses to increase as the number of
employees increases. In addition, since management compensation is based upon
pretax earnings of Comdisco Ventures, compensation expenses are expected to
increase in fiscal 2000, primarily as a result of higher earnings
contributions from the sale of equity holdings.
Interest: Comdisco Ventures funds its business with cash flow from
operations and with inter-group loans from Comdisco. See "--Liquidity and
Capital Resources," on page 34. Interest on inter-group loans is computed
monthly based on the average inter-group balance.
29
<PAGE>
Bad debt expense: Comdisco Ventures records an expense for credit losses
based on 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
the venture lease and venture debt portfolio.
Results of Operations
Fiscal 1999 compared to Fiscal 1998 and Fiscal 1998 compared to Fiscal 1997
Net earnings of approximately $42.8 million and $17.2 million in fiscal
1999 and 1998, respectively, represent increases of 150% and 13%, respectively
over the prior year periods. The principal reasons for the increase in earnings
during fiscal year 1999 and 1998 are the significant increase in warrant sale
proceeds and capital gains, increased interest income on notes, and increased
revenues from leasing.
Total revenue of approximately $228.5 million and $114.3 million in
fiscal 1999 and 1998, respectively represent increases of 100% and 20%,
respectively over the prior year periods. The increases were due to higher
total leasing revenue and interest income on venture debt and, in fiscal 1999,
an increase in the sale of equity holdings.
Lease revenue: Total leasing revenue of $118.4 million for fiscal 1999
represented an increase of 39% compared to the prior year. Total leasing
revenue of $85.1 million in fiscal 1998 represented an increase of 24% over
fiscal 1997 total leasing revenue of $68.6 million.
Leasing volume increased in both fiscal 1999 and 1998 as compared to the
prior years. Lease volume in the last fiscal year was the highest annual volume
in Comdisco Ventures' history. Cost of equipment placed on lease was $204.2
million in fiscal 1999 compared to cost of equipment placed on lease of $113.9
million and $77.9 million in fiscal 1998 and 1997, respectively.
The Operating Lease Margin was $28.8 million, or 24.7% of operating lease
revenue and $23.3 million, or 28.0% of operating lease revenue in fiscal 1999
and 1998, respectively. This decrease in the Operating Lease Margin in fiscal
1999 versus fiscal 1998 is due to an increase in the lease volume. Comdisco
Ventures expects the Operating Lease Margin to remain at approximately 25% of
operating lease revenue in fiscal 2000.
Interest income: Interest income on venture debt was $22.6 million in
fiscal 1999 compared to $6.7 million and $3.1 million in fiscal 1998 and 1997,
respectively. During fiscal 1999, Comdisco Ventures funded loans totaling
$323.9 million, compared to $57.2 million in fiscal 1998 and $34.3 million in
fiscal 1997. See Note 3 of Notes to Financial Statements beginning on page F-9
for information concerning Comdisco Ventures' notes receivable and "Risk
Factors," beginning on page 13, for a discussion of factors that may affect
earnings contributions from notes receivable and Comdisco Ventures' financial
condition.
Sale of equity holdings: Warrant sale proceeds and capital gains for
fiscal 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
-------------------
1999 1998 1997
----- ----- -----
(in millions)
<S> <C> <C> <C>
Proceeds from sale of equity securities................. $10.9 $ 2.0 $ 3.9
Less: Cost of equity securities......................... (5.7) (.6) (.5)
----- ----- -----
Capital gains........................................... 5.2 1.4 3.4
Warrant sale proceeds................................... 75.5 13.5 13.0
----- ----- -----
Total................................................... $80.7 $14.9 $16.4
===== ===== =====
</TABLE>
30
<PAGE>
During fiscal 1999, approximately sixty companies were acquired or merged
or completed an initial public offering, compared to approximately thirty
companies in fiscal 1998.
Total costs and expenses were $157.3 million, $85.8 million and $70.1
million in fiscal 1999, 1998 and 1997, respectively. The increase in fiscal
1999 and 1998 compared to the prior years is primarily due to the growth in
leasing volume and loan originations including higher interest and bad debt
expense and increased leasing costs related to increased operating lease
revenue.
Selling, general and administrative expenses: Selling, general and
administrative expenses totaled $18.2 million in fiscal 1999, $5.8 million in
fiscal 1998, and $5.4 million in fiscal 1997. Charges for shared services from
Comdisco were $3.0 million, $1.0 million and $1.0 million in fiscal 1999, 1998
and 1997. The primary reason for the increase in selling, general and
administrative expenses in fiscal 1999 compared to 1998 was higher incentive
compensation expenses. Management incentive compensation is based upon pretax
earnings of Comdisco Ventures, which increased 150% in fiscal 1999 compared to
fiscal 1998. The increase in fiscal 1998 compared to fiscal 1997 is primarily
due to increased personnel costs.
Interest: Interest expense for fiscal 1999 totaled $23.4 million in
comparison to $10.8 million in fiscal 1998 and $7.7 million in fiscal 1997. The
increases in fiscal 1999 and 1998 compared to the prior year is due to higher
average daily borrowings resulting from the Comdisco Ventures' larger lease and
venture debt portfolios. The interest rate on inter-group loans from Comdisco
was 7.5% in fiscal 1999, 1998 and 1997.
Bad debt expense: Bad debt expense for fiscal 1999 totaled $23.2 million
compared to $4.8 million in fiscal 1998 and $6.3 million in fiscal 1997. The
increase in fiscal 1999 compared to the prior year reflects the increase in the
reserve related to increased venture lease, venture debt and direct equity
financing volume.
Income taxes: The effective income tax rate was 40% in each of fiscal
1999, 1998 and 1997. The effective income tax rate approximates the statutory
rate.
Three Months Ended March 31, 2000
Total revenue for the three months ended March 31, 2000 was $160.4
million compared to $42.0 million in the quarter ended March 31, 1999 and
$141.2 million in the quarter ended December 31, 1999; this represented
increases of 282% and 14%, respectively, over those prior quarterly periods.
Net earnings for the three months ended March 31, 2000 were $37.2
million, as compared to $8.4 million for the three months ended March 31, 1999.
The principal reasons for the increase in net earnings during the three months
ended March 31, 2000 compared to the year earlier period are the significant
increase in warrant sale proceeds and capital gains, increased interest income
on notes, and increased revenues from leasing.
Lease revenue: Total leasing revenue of $46.9 million for the quarter
ended March 31, 2000 represented an increase of 74% over $27.0 million recorded
for the quarter ended March 31, 1999. Total leasing revenue was $38.0 million
in the first quarter of fiscal 2000. Cost of equipment placed on lease was
$96.5 million during the quarter ended March 31, 2000, compared to $49.5
million and $79.2 million during the quarters ended March 31, 1999 and December
31, 1999, respectively. These increases are the result of increases in both
number of customers and average lease size.
Operating Lease Margins were $10.9 million, or 24.2%, and $5.9 million,
or 22.2% of operating lease revenue, in the three months ended March 31, 2000
and 1999, respectively. The Operating Lease Margin was $9.6 million, or 25.3%
in the quarter ended December 31, 1999. The decrease in the Operating Lease
Margin in the current year period compared to the first quarter of fiscal 2000
is due to an
31
<PAGE>
increase in the quarterly lease volume. Generally, new leases written have
lower margins in their initial quarter compared to future quarters.
Interest income: Interest income on venture debt was $12.0 million in the
quarter ended March 31, 2000 compared to $4.1 million and $11.8 million during
the quarters ended March 31, 1999 and December 31, 1999, respectively. During
the quarter ended March 31, 2000, Comdisco Ventures funded loans totaling
$157.8 million, compared to $72.6 million and $128.6 million in the quarters
ended March 31, 1999 and December 31, 1999, respectively.
Sale of equity holdings: Revenue from the sale of equity holdings, that
is warrant sale proceeds and capital gains, for the quarters ended March 31,
2000 and 1999 and December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Three months Three months
ended ended
March 31, December 31,
------------- ------------
2000 1999 1999
------ ----- ------------
(in millions)
<S> <C> <C> <C>
Proceeds from sale of equity securities....... $ 57.7 $ -- $ 55.8
Less: Cost of equity securities............... (5.6) -- (3.3)
------ ----- ------
Capital gains................................. 52.1 -- 52.5
Warrant sale proceeds......................... 46.4 10.0 36.2
------ ----- ------
Total......................................... $ 98.5 $10.0 $ 88.7
====== ===== ======
</TABLE>
During the quarter ended March 31, 2000, Comdisco Ventures funded equity
financings totaling $81.6 million, including a capital call of $50 million for
Hybrid Fund, compared to $4.7 million and $36.2 million in the quarters ended
March 31, 1999 and December 31, 1999, respectively.
The increase in revenue from the sale of equity holdings in the current
quarter compared to the prior periods is due to an increase in the number of
companies in which Comdisco Ventures has equity holdings that have experienced
liquidity events, which impacts the number of securities available for sale.
Market valuations from an initial public offering can also significantly affect
the revenue from the sale of equity investments. During the quarter ended March
31, 2000, approximately twenty-four companies were acquired/merged or completed
an initial public offering, compared to fourteen companies in the year earlier
period and thirty-five in the prior quarter.
The valuation of Comdisco Ventures' warrant and other equity holdings has
increased significantly during the twelve months ending March 31, 2000,
primarily as a result of strong equity markets for these securities.
Accordingly, Comdisco Ventures expects, based on current stock market
valuations, an increase in revenue and earnings contributions from its equity
holdings in fiscal 2000. See "Risk Factors," beginning on page 13 for a
discussion of the factors that may affect proceeds from the sale of warrants
and capital gains.
Total costs and expenses for the quarter ended March 31, 2000 were $97.6
million compared to $27.9 million in the prior year period. Total costs and
expenses were $80.3 million in the quarter ended December 31, 1999. The
increase in total costs and expenses in the current quarter compared to the
prior year's quarter and prior quarter is due to the increase in venture lease
and venture debt activities, and higher selling, general and administrative
expenses related to increased personnel costs and higher incentive compensation
expenses.
Selling, general and administrative: Selling, general and administrative
expenses totaled $23.5 million in the quarter ended March 31, 2000 compared to
$1.5 million in the quarter ended March 31, 1999 and $18.4 million in the
quarter ended December 31, 1999. The principal reason for the increase in the
current year quarter compared to the year earlier period and prior quarter is
an increase in incentive compensation expenses as a result of higher revenue
from the sale of equity holdings.
32
<PAGE>
Interest: Interest expense for the three months ended March 31, 2000 was
$13.1 million compared to $4.6 million in the prior year period and $10.8
million in the quarter ended December 31, 1999. The increase in the current
quarter compared to the prior year period and prior quarter is due to higher
average daily inter-group borrowings resulting from the growth in Comdisco
Ventures' business.
Bad debt expense: Bad debt expense for the three months ended March 31,
2000 totaled $24.0 million compared to $0.8 million in the quarter ended March
31, 1999 and $21.8 million in the quarter ended December 31, 1999. The increase
in the current quarter compared to the prior year period and prior quarter
reflects the increase in the reserve related to increased venture lease,
venture debt and direct equity financing volume.
Income taxes: The effective income tax rate was 41% in the quarter ended
March 31, 2000 compared to 40% in the quarter ended March 31, 1999 and 39% in
the quarter ended December 31, 1999. The effective income tax rate approximates
the statutory rate.
Six Months Ended March 31, 2000
Total revenue was $301.6 million and $78.2 million for the six months
ended March 31, 2000 and 1999, respectively, an increase due to the sale of
equity holdings.
Net earnings for the six months ended March 31, 2000 were $74.4 million,
as compared to $14.7 million for the six months ended March 31, 1999.
Lease revenue: Total leasing revenue of $84.9 million for the six months
ended March 31, 2000 represented an increase of 62% over $52.6 million recorded
in the year earlier period.
The Operating Lease Margin was $20.5 million, or 24.7% and $12.8 million,
or 24.7% of operating lease revenue, in the six months ended March 31, 2000 and
1999, respectively.
Interest income: Interest income on venture debt was $23.7 million for
the six months ended March 31, 2000 as compared to $6.4 million for the year
earlier period. During the six months ended March 31, 2000 and 1999, Comdisco
Ventures funded loans totaling $286.4 million and $140.0 million, respectively.
Revenue from the sale of equity holdings, that is warrant sale proceeds
and capital gains, for the six months ended March 31, 2000 and 1999 were as
follows:
<TABLE>
<CAPTION>
Six months
ended
March 31,
-------------
2000 1999
------ -----
(in
millions)
<S> <C> <C>
Proceeds from sale of equity securities.................... $113.5 $ --
Less: Cost of equity securities............................ (8.9) --
------ -----
Capital gains.............................................. 104.6 --
Warrant sale proceeds...................................... 82.6 17.0
------ -----
Total...................................................... $187.2 $17.0
====== =====
</TABLE>
During the six months ended March 31, 2000 and 1999, Comdisco Ventures
funded equity financings totaling $117.8 million, including a capital call of
$50 million for Hybrid Fund, and $8.3 million, respectively.
The increase in revenue from the sale of equity holdings in the current
period compared to the prior year period is due to an increase in the number of
companies in which Comdisco Ventures has equity holdings that have experienced
liquidity events, which impacts the number of securities available
33
<PAGE>
for sale. Market valuations from an initial public offering can also
significantly affect the revenue from the sale of equity investments. During
the six months ended March 31, 2000, approximately sixty companies were
acquired/merged or completed an initial public offering, compared to eighteen
companies in the year earlier period.
The valuation of Comdisco Ventures' warrant and other equity holdings has
increased significantly during the last twelve months, primarily as a result of
strong equity markets for these securities. Accordingly, Comdisco Ventures
expects, based on current stock market valuations, an increase in revenue and
earnings contributions from its equity holdings in fiscal 2000. See "Risk
Factors That May Affect Future Results" beginning on page 48 for a discussion
of the factors that may affect proceeds from the sale of warrants and capital
gains.
Total costs and expenses for the six months ended March 31, 2000 were
$177.9 million compared to $53.8 million in the prior year period. The increase
in total costs and expenses reflects the growth in business activities.
Selling, general and administrative expense: Selling, general and
administrative expenses totaled $41.9 million during the first six months of
fiscal 2000 compared to $3.1 million in the prior year period. The increase is
due to higher incentive compensation costs.
Interest expense: Interest expense for the six months ended March 31,
2000 was $23.9 million compared to $8.6 million in the prior year period. The
increase is due to higher inter-group borrowings.
Bad debt expense: Bad debt expense for the six months ended March 31,
2000 totaled $45.8 million compared to $1.6 million for the prior year period.
The increase reflects the growth in business volume.
Income taxes: The effective income tax rate was 40% during the six months
ended March 31, 2000 and 1999. The effective income tax rate approximates the
statutory rate.
Liquidity and Capital Resources
Comdisco Ventures' operating activities during fiscal 1999, including
capital expenditures for equipment and venture debt originations, were funded
primarily by cash flow from operations and inter-group loans from Comdisco.
Total net cash provided (used) by Comdisco was $295.7 million in fiscal 1999,
compared to $32.9 million in fiscal 1998 and ($1.9) million in fiscal 1997 and
$187.0 million in the first six months of fiscal 2000, compared to $147.8
million in the prior year period. The increase in fiscal 1999 and in the first
six months of fiscal 2000 compared to the prior year periods, is primarily due
to increased business opportunities in venture leases, venture debt and direct
equity financings. In order to continue to be able to pursue these increased
opportunities, Comdisco Ventures is pursuing alternative means of funding its
activities, including, but not limited to, the establishment of limited
partnerships to raise funds from third parties, in addition to Comdisco
Ventures.
Hybrid Fund was established in October 1999 to act as a funding vehicle
for origination of venture debt and direct equity financings. See "Business of
Comdisco Ventures--Hybrid Fund," beginning on page 65, for a description of the
relationship between Comdisco Ventures and Hybrid Fund.
As of September 30, 1999, Comdisco Ventures estimates that future
contractual cash flows from venture leases and venture debt could generate
gross cash receipts of approximately $724 million, including approximately $262
million in fiscal 2000.
Comdisco Ventures' capital requirements may vary based upon the timing
and the success of implementation of its business plan and as a result of
competitive developments or if:
. demand for Comdisco Ventures' services or its cash flow from
operations is less than or more than expected;
34
<PAGE>
. development plans or projections change or prove to be inaccurate;
. Comdisco Ventures makes any acquisitions or commitments in excess
of the current plan; or
. Comdisco Ventures accelerates or otherwise alters the schedule or
targets of its business plan implementation.
Comdisco's management has final authority over when and how to finance
capital expenditures at Comdisco Ventures. While Comdisco has been the primary
source of funds for Comdisco Ventures, Comdisco has no obligation to provide
funds to Comdisco Ventures in the future and has made no formal commitments
about its ability or willingness to continue to provide funds beyond fiscal
year 2000. There can be no assurance that any limited partnerships formed by
Comdisco Ventures in the future will be funded at levels that will permit
Comdisco Ventures to effectively pursue its business strategy. If Comdisco
Ventures were otherwise unable to obtain funding, from Comdisco or otherwise,
on acceptable terms, Comdisco Ventures' ability to fund its expansion or
respond to competitive pressures would be significantly impaired.
Comdisco could also attempt to raise funds for Comdisco Ventures by
selling more Comdisco Ventures Stock to the public and allocating those
proceeds to Comdisco Ventures. Comdisco has no plans at this time for another
offering.
Qualitative Information About Market Risk
Comdisco Ventures' primary market risk exposures are interest rate risk
and market price risk.
Comdisco Ventures' interest rate risk is primarily related to its
interest-bearing obligations to Comdisco. Comdisco Ventures' leased assets and
notes receivable are at fixed rates, whereas its interest-bearing obligations
to Comdisco are floating. For new venture lease or venture debt transactions,
the effects of higher or lower borrowing costs would be reflected in the rates
on these transactions. However, for the existing venture lease and venture
debt portfolio at September 30, 1999, a hypothetical increase of 1% in
prevailing interest rates would result in a decrease in net earnings of
approximately $3 million.
Comdisco Ventures' holdings of equity securities are subject to market
price risk. A 10% decrease in market values would reduce the September 30,
1999 market value of the Comdisco Ventures' publicly traded equity securities
by $20 million. Many of these equity securities are highly volatile stocks.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF COMDISCO, INC.
Forward-Looking Statements
See "Forward-Looking Statements" on page 27 of this prospectus.
Overview
This discussion should be read along with the Comdisco financial
statements included in this prospectus. Historical results and percentage
relationships may not necessarily be indicative of operating results for any
future periods.
The industry in which Comdisco operates has become service oriented,
with the business driven by service capabilities. Accordingly, Comdisco has
aligned into four primary business lines: technology services; global leasing,
which we refer to as "Leasing," in areas such as electronics, communications,
medical, laboratory and scientific equipment and other high technology
equipment, including information technology equipment; Prism Communication
Services, Inc., which we refer to as "Prism" and we refer to technology
services, Leasing and Prism, together with Comdisco's retained interest in
Comdisco Ventures, as Comdisco Group; and Comdisco Ventures.
Business
Comdisco'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, such as 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) Comdisco 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.
In addition to originating new equipment lease financing, Comdisco
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 2000 and fourth quarter of fiscal 1999. 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. In addition,
remarketing activity will be critical in the residual leasing business.
On March 24, 1999, Comdisco 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. In conjunction with this repositioning, the company
recorded a pretax charge of $150 million in the quarter ended March 31, 1999.
The components of the pre-tax charge included $100 million associated with
Comdisco'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 Comdisco's services businesses. 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. In addition to these
sales, Comdisco completed the sale of substantially all of its vendor lease
portfolio in September 1999.
The company finalized the acquisition of Prism during the quarter ended
March 31, 1999.
36
<PAGE>
The industry in which the Comdisco operates is evolving, and Comdisco's
business is becoming more service oriented, with the business driven by
Comdisco's service capabilities. Accordingly, Comdisco has realigned to focus
on technology services, Comdisco Ventures, Prism, and on global leasing
businesses in historically high-margin areas such as electronics,
communications, medical, laboratory and scientific equipment.
Results of Operations
Fiscal 1999 compared to Fiscal 1998 and Fiscal 1998 compared to Fiscal 1997
Net Earnings
Fiscal 1999 net earnings to common stockholders, referred to below 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, collectively referred to as the "Charge," related to the
divestiture of low-margin businesses and the realignment of Comdisco's service
businesses and due to losses attributable to 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. See "Business" for a discussion of the Charge.
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, which we refer to as 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.
In conjunction with its shift in corporate strategy, Comdisco 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 Comdisco'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, Comdisco
completed the sale of its mainframe computer leasing portfolio, which we refer
to as the "Sale," and the sale of the medical refurbishing business. Comdisco
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 Comdisco'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, Comdisco
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.
Comdisco 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"
beginning on page 48 for a discussion of the factors that may affect
remarketing activities.
37
<PAGE>
Comdisco'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
Comdisco'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. Comdisco's network services as well as its desktop
management services had strong growth during fiscal 1999 and should have a
positive impact on Comdisco's pre-tax earnings in fiscal 2000. Included in the
Charge is $30 million associated with the realignment of Comdisco'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" beginning on page 48 for a discussion of the factors that may
affect earnings contributions from services.
Financial Condition
Comdisco'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 in the form of 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 Comdisco'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. Comdisco 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 well as continued investment in Advance Recovery Services, which we refer to
as "ARS." ARS is designed to reduce the risk of data loss as well as recovery
time across all market-leading platforms. Comdisco 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, Comdisco 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, such as 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.
Comdisco 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 $3.2 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, Comdisco 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. Comdisco'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.
38
<PAGE>
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. Comdisco had committed credit lines of
$1.3 billion established with twenty-nine banks at September 30, 1999.
Senior Notes: Comdisco issued $370 million of medium-term notes in fiscal
1999 pursuant to a registration statement filed in June 1997. Comdisco 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, Comdisco
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
with terms to be set at the time of each sale, which we refer to as the "1998
Shelf." Pursuant to the 1998 Shelf, Comdisco, in fiscal 1999 issued the
following senior notes:
. $350 million of 6.000% Notes Due January 30, 2002
. $350 million of 5.950% Notes Due April 30, 2002
. $300 million of 7.250% Notes Due September 1, 2002
. $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, Comdisco plans to continue to be active in
issuing senior debt during fiscal 2000, primarily to support the anticipated
growth of the leased assets, services, Comdisco Ventures, Prism, and, where
appropriate, to refinance maturities of interest-bearing liabilities. On
September 24, 1999 Comdisco 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, which
we refer to as the "1999 Shelf," on terms to be set at the time of each sale.
As of the end of fiscal 1999, no senior debt had been sold pursuant to the 1999
Shelf. In September 1999, Comdisco established a 500 million Euro Medium Term
Note Program under which Comdisco would issue Euro medium term notes. An
application has been made to list notes issued under the program on the
Luxembourg Stock Exchange and Comdisco may apply for listing on other stock
exchanges.
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, Comdisco believes that in a changing rate
environment, secured debt may offer attractive financing rates during fiscal
2000. Comdisco's credit committee establishes concentration levels by credit
rating and customer.
Maturities: At September 30, 1999, Comdisco 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, Comdisco 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, which we refer
to as the "Ratio," was 5.3:1, 5.1:1 and 5.4:1 at September 30, 1999, 1998 and
1997, respectively. During fiscal 1998, Comdisco 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 Comdisco'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
39
<PAGE>
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 Comdisco'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 Margins were $375 million, or 19.3%, and $369
million, or 19.5% in fiscal 1999 and 1998, respectively. Comdisco 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" beginning on page 48
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 table presents the Lease Margin for total leasing,
operating and sales-type leases for the five years ended September 30, 1999:
<TABLE>
<CAPTION>
99 98 97 96 95
--- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Total leasing......................................... 26% 26% 27% 31% 35%
Operating lease....................................... 19% 20% 21% 24% 26%
Sales-type lease...................................... 25% 30% 30% 26% 28%
</TABLE>
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>
99 98 97
---------------------- ---------------------- ----------------------
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.
Comdisco Ventures: Comdisco 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 $81 million in fiscal 1999
40
<PAGE>
compared to $15 million and $16 million in fiscal 1998 and 1997, respectively.
See "Risk Factors That May Affect Future Results" beginning on page 48 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 Comdisco
Ventures revenue previously discussed, fiscal 1999 includes a reduction in
Comdisco 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 Comdisco.
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 Comdisco'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.
Interest: Interest expense for fiscal 1999 totaled $337 million in
comparison to $326 million in fiscal 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 Comdisco's
increased investment in leasing, Comdisco 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.
Comdisco 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:
. developing criteria for market selection and analyzing potential
markets against these criteria;
. obtaining required governmental authorizations;
. negotiating and entering into interconnection agreements with
traditional telephone companies;
. acquiring space in traditional telephone companies' central
offices and installing Prism's network equipment in those offices;
. launching service in target markets;
. selling and marketing to, and installing service for, customers in
markets where Prism has established service;
41
<PAGE>
. hiring management and other personnel;
. developing and implementing operations support systems and other
information systems.
Prism has incurred losses in every month since its inception and Comdisco
expects to substantially increase its operating expenditures in an effort to
rapidly expand Prism's 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.
In the second quarter of fiscal 1997, Comdisco 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 F-33
provides details about the company's income tax provision.
International Operations
Comdisco 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 Comdisco 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 Comdisco'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 F-40.
Recently Issued Professional Accounting Standards: Comdisco 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 Comdisco's financial statements.
Year 2000: Comdisco 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.
Comdisco'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, Comdisco is attempting
to monitor the Year 2000-compliance status of its vendors, suppliers and
service providers. Comdisco 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 Comdisco. However,
there can be no assurance that Year 2000 issues will not adversely affect
Comdisco.
42
<PAGE>
The SEC issued an interpretive guidance regarding disclosure of Year 2000
issues and consequences, effective August 4, 1999. On September 23, 1999,
Comdisco 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 Comdisco's Annual Report on Form
10-K for the year ended September 30, 1999, as amended by Form 10-K/A.
Euro Compliance: While Comdisco 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 Comdisco's financial condition or overall
trends in results of operations.
Inflation: Comdisco does not consider the present rate of inflation to
have a significant impact on the businesses in which it operates.
Three months ended March 31, 2000
Net Earnings
Net earnings for the three months ended March 31, 2000 were $43 million,
or $.26 per diluted common share, as compared to a net loss of $56 million, or
$.37 per share, for the three months ended March 31, 1999. Net earnings for the
six months ended March 31, 2000 were $84 million, or $.52 per share, as
compared to a net loss of $18 million, or $.12 per share, in the year earlier
period. The net loss for the three and six months ended March 31, 1999 was due
to the Charge. See "Business" for a discussion of the Charge.
Excluding the charges and the Prism losses, Comdisco had net earnings of
$69 million, or $.42 per share, compared to $41 million , or $.26 per share,
for the three months ended March 31, 2000 and 1999, respectively. Excluding the
charges and the Prism losses, Comdisco had net earnings of $128 million, or
$.78 per share, compared to $80 million, or $.50 per share, for the six months
ended March 31, 2000 and 1999, respectively. The increase for the three and six
months ended March 31, 2000 compared to the year earlier periods is primarily
due to increased earnings by Comdisco Ventures, offset by lower earnings
contributions from Comdisco Group, primarily from leasing activities.
Business
Comdisco Group:
. Services: Comdisco's technology services business attained record
revenues for the three and six months ended March 31, 2000. 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 $18 million in the quarter ended March 31, 2000, compared
to $20 million in the quarter ended March 31, 1999 and $22 million in
the quarter ended December 31, 1999. Revenue from continuity
contracts, which is recognized monthly during the noncancelable
continuity contract and is therefore recurring and predictable, was
approximately $92 million, $80 million and $89 million during the
three months ended March 31, 2000 and 1999, and December 31, 1999,
respectively, representing approximately 59%, 64% and 60% of
technology services revenue. Included in the $150 million pre-tax
charge (as discussed below), is $30 million associated with the
relocation of some of its continuity services facilities worldwide.
See "--Risk Factors That May Affect Future Results" beginning on page
48 for a discussion of the factors that may affect earnings
contributions from services.
43
<PAGE>
. Leasing: Cost of equipment placed on lease was $528 million during
the quarter ended March 31, 2000. This compares to cost of equipment
placed on lease of $689 million and $780 million during the quarters
ended March 31, 1999 and December 31, 1999, respectively. During the
six months ended March 31, 2000 and 1999, cost of equipment placed on
lease totaled $1.3 billion and $1.5 billion, respectively. The
residual leasing business of Comdisco in the areas of electronics,
communications, medical, laboratory and scientific had worldwide cost
of equipment placed on lease of $232 million and $613 million in the
three and six months ended March 31, 2000, respectively, compared to
$181 million and $397 million in the year earlier periods. See below
for a discussion of remarketing and "--Risk Factors That May Affect
Future Results" beginning on page 48 for a discussion of leasing.
. Prism: Comdisco 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 than
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
is in the process of implementing a nationwide rollout of its network
and services.
In January 2000, Prism began offering carrier-grade voice and
high-speed data services simultaneously over existing telephone lines to
customers in the New York metropolitan area. Prism believes it is the
first competitive local exchange carrier to offer such services. In
January and April 2000, Prism introduced its high-speed Internet service
to the Philadelphia and Providence markets, respectively.
On April 19, 2000, Prism introduced RED TurboSM, a high-speed
connectivity solution that offers users a choice in bandwidth
allocation. RED Turbo allows for speeds up to 4 megabits per second
(Mbps), which may be allocated symmetrically, i.e., 2 Mbps upstream/2
Mbps downstream, or dynamically, i.e., all 4 Mbps upstream, or all
downstream. With RED Turbo, Prism believes it is one of the first CLEC's
to offer dynamically allocated broadband access at these speeds.
Prism has entered into an agreement with Nortel Networks 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 this 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. As part of the Nortel strategic relationship Nortel purchased
for cash common stock of Prism valued at $10 million.
Prism entered into an agreement to purchase a 20-year indefeasible
right to use, which we refer to as "IRU," approximately 2,500 miles of
dark fiber from Williams Communications, Inc. This purchase will allow
Prism to transport data and voice traffic, utilizing dense wave division
multiplexing, which we refer to as "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.
44
<PAGE>
Comdisco Ventures:
. The second quarter of fiscal 2000 was a record quarter for Comdisco
Ventures, with record revenues from leasing, interest income on
venture debt and from the sale of equity investments. For the three
months ended March 31, 2000 and 1999, Comdisco Ventures recorded
revenue of $160 million and $42 million, which represented increases
of 281% and 52%, respectively, over the prior year periods. For the
six months ended March 31, 2000 and 1999, Comdisco Ventures recorded
revenue of $302 million and $78 million, which represented increases
of 287% and 38%, respectively, over the prior year periods. Revenue
from the sale of equity investments, i.e., warrant sale proceeds and
capital gains, for the three and six months ended March 31, 2000 and
1999 were as follows (in millions):
<TABLE>
<CAPTION>
Three Six
Months Months
Ended Ended
March 31, March 31,
---------- ----------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Proceeds from the sale of equity securities.............. $57 $-- $113 $--
Less: cost of equity securities.......................... (6) -- (9) --
--- ---- ---- ----
Capital gains............................................ 51 -- 104 --
Warrant sale proceeds.................................... 47 10 83 17
--- ---- ---- ----
Total.................................................... $98 $ 10 $187 $ 17
=== ==== ==== ====
</TABLE>
See "--Risk Factors That May Affect Future Results" beginning on
page 48 for a discussion of the factors that may affect proceeds from
the sale of warrants and capital gains. The general policy of Comdisco
Ventures has been to sell its equity positions in an orderly manner as
soon as reasonably possible after a liquidity event. This general policy
allows Comdisco Ventures to generate cash for reinvestment in new
transactions; Comdisco Ventures believes it is preferable to make new
advances to start-ups rather than hold the securities of public
companies. In addition, Comdisco Ventures has benefited from a strong
IPO market for venture capital-backed companies. There can be no
assurance that the strong IPO market for venture capital-backed
companies will continue in the near or long term.
Comdisco Ventures formed Hybrid Fund in October 1999 to originate
venture debt and direct equity financing products. Comdisco Ventures
committed $250 million as a limited partner to Hybrid Fund, all of which
has been invested in, or committed to, customers. Comdisco Ventures has
closed Hybrid Fund and will not seek additional capital commitments.
On April 20, 2000, Comdisco's stockholders approved an amended and
restated certificate of incorporation that, among other things, would
permit Comdisco to create a separate series of its common stock, the
Comdisco Ventures Stock, which would track the performance of Comdisco's
venture financing business.
Revenue
Total revenue for the three months ended March 31, 2000 was $1.01 billion
compared to $952 million in the prior year quarter and $877 million in the
quarter ended December 31, 1999. The increase in total revenue in the current
quarter compared to the prior year quarter is primarily due to increased
revenue by Comdisco Ventures, offset by lower leasing revenue. Total leasing
revenue of $611 million for the quarter ended March 31, 2000 represented a
decrease of 17% compared to the year earlier period. Total leasing revenue was
$555 million in the first quarter of fiscal 2000. The decrease in the current
quarter's leasing revenues compared to the prior year quarter was primarily due
to the sales of the mainframe and vendor lease portfolios. Approximately $124
million of mainframe and vendor leasing revenue was included in the revenue
reported for the quarter ended March 31, 1999. The increase in leasing revenue
in the current quarter compared to the first quarter of fiscal 2000 can be
attributed to increased revenue from remarketing activities.
Operating Lease Margins were $84 million, or 19.1%, and $100 million, or
19.7% of operating lease revenue, in the three months ended March 31, 2000 and
1999, respectively. The Operating Lease
45
<PAGE>
Margin was $83 million, or 19.1% in the quarter ended December 31, 1999.
Comdisco expects the Operating Lease Margin to be at or below current levels
throughout the remainder of fiscal 2000, depending on the equipment leased and
the volume of operating leases. The decrease in operating lease revenue minus
operating lease cost in the current quarter compared to the year earlier period
was due to the sales of the mainframe and vendor lease portfolios. In addition,
the growth of the operating lease portfolio is expected to slow as the mix of
leases results in more direct financing leases rather than operating leases.
See "--Risk Factors That May Affect Future Results" beginning on page 48 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 $98 million in the second quarter of fiscal year 2000
compared to $67 million in the year earlier quarter. Margins on sales were and
20% and 13% in the quarters ended March 31, 2000 and 1999, respectively. The
increase in revenue in the current quarter is due to remarketing, primarily
communications equipment, which also had above average margins on their
remarketing transactions in the current quarter.
Revenue from technology services for the three months ended March 31,
2000 and 1999 was $156 million and $125 million, respectively, a 25% increase.
Cost of technology services for the three months ended March 31, 2000 and 1999
was $138 million and $105 million, respectively, a 31% increase. The increase
in cost of technology services is attributed to the development and
implementation of the company's network services infrastructure.
Other revenue for the three months ended March 31, 2000 and 1999 was $148
million and $21 million, respectively. Revenue from the sale of equity
positions by Comdisco Ventures was $98 million and $10 million in the three
months ended March 31, 2000 and 1999, respectively. During the current quarter
the company realized an additional $33 million of revenues from the sale of
other available-for-sale investments. Prism revenue from subscribers was
approximately $1 million in the quarter ended March 31, 2000.
Total costs and expenses for the quarter ended March 31, 2000 were $946
million compared to $1.04 billion in the prior year period. The decrease in
total costs and expenses is primarily due to the $150 million pre-tax charge
included in the prior year and the sales of the mainframe and vendor lease
portfolios, offset by higher expenses incurred by Prism in the current year
quarter.
Selling, general and administrative expenses totaled $143 million in the
quarter ended March 31, 2000 compared to $73 million in the quarter ended March
31, 1999 and $115 million in the quarter ended December 31, 1999. The increase
in the current year quarter compared to the year earlier period is primarily
due to an increase in bad debt expense and an increase in Comdisco Ventures
incentive compensation costs as a result of gains realized on the sale of
equity positions. The increase in the current quarter compared the quarter
ended December 31, 1999 is primarily due to an increase in the company's bad
debt expense. Comdisco expects selling, general and administrative expenses to
increase throughout fiscal 2000 primarily because of higher revenue from
Comdisco Ventures, which will increase incentive compensation costs, and higher
personnel costs.
Interest expense for the three months ended March 31, 2000 and 1999
totaled $87 million. Increases in interest expense resulting from a higher
average daily borrowings in the current quarter compared to the prior year
quarter were offset by lower interest rates in the current period.
Prism expenses for the three months ended March 31, 2000 totaled $42
million, compared to $3 million in the year earlier quarter and $27 million in
the first quarter of fiscal 2000. The prior year amount includes the expenses
incurred by Prism from the February 28, 1999 date of acquisition to March 31,
1999. Network and product costs were $17 million for the three months ended
March 31, 2000 compared to $9 million in the first quarter of fiscal 2000.
These costs are attributable to the expansion of Prism's networks and increased
orders resulting from their sales and marketing efforts. Sales, marketing,
general and administrative expenses were $14 million and $13 million for the
three months ended March 31, 2000 and December 31, 1999, respectively. These
costs are attributable to growth in headcount in all
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areas of Prism, continued expansion of Prism's sales and marketing efforts,
deployment of Prism's networks and building of Prism's operating
infrastructure. Depreciation and amortization was approximately $6 million for
the current quarter compared to $3 million for the first quarter of fiscal
2000.
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.
Six months ended March 31, 2000
Total revenue was $1.89 billion and $1.87 billion for the six months
ended March 31, 2000 and 1999, respectively. Total leasing revenue was $1.17
billion and $1.47 billion for the six months ended March 31, 2000 and 1999,
respectively. The decrease in total leasing revenue compared to the prior year
period was primarily due to the sales of the mainframe and vendor lease
portfolios.
Operating lease revenue minus operating lease cost was $167 million, or
19.1% of operating lease revenue, and $201 million, or 19.4% of operating lease
revenue, in the six months ended March 31, 2000 and 1999, respectively. The
decrease in operating lease revenue minus operating lease cost in the current
year period compared to the year earlier period was due to the sales of the
mainframe and vendor lease portfolios. Comdisco expects the growth of the
operating lease portfolio to slow as the mix of leases written results in more
direct financing leases rather than operating leases. See "--Risk Factors That
May Affect Future Results" beginning on page 48 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 $166 million in the six months ended March 31, 2000,
compared to $125 million in the year earlier period. Margins on sales were and
23% and 13% in the six months ended March 31, 2000 and 1999, respectively. The
increase in revenue in the current period is due to remarketing, primarily
communications equipment, which also had above average margins on their
remarketing transactions in the current period.
Revenue from technology services for the six months ended March 31, 2000
and 1999 was $303 million and $243 million, respectively, a 25% increase. Cost
of technology services for the three months ended March 31, 2000 and 1999 was
$263 million and $205 million, respectively, a 28% increase.
Other revenue for the six months ended March 31, 2000 and 1999 was $255
million and $36 million, respectively. Revenue from the sale of available-for-
sale securities by Comdisco Ventures was $187 million and $17 million in the
six months ended March 31, 2000 and 1999, respectively. During the six months
ended March 31, 2000, approximately fifty-nine companies in the equity
securities portfolio were acquired/merged or completed an initial public
offering, compared to eighteen companies in the year earlier period. During the
current period Comdisco realized an additional $30 million of revenues from the
sale other available-for-sale securities. Prism revenue from subscribers was
approximately $1 million in the six months ended March 31, 2000.
Total costs and expenses for the six months ended March 31, 2000 were
$1.76 billion compared to $1.90 billion in the prior year period. The decrease
is due to the sales of the mainframe and vendor lease portfolios.
Selling, general and administrative expenses totaled $258 million in six
months ended March 31, 2000 compared to $142 million in the prior year period.
The principal reasons for the increase in the current year period compared to
the year earlier period are an increase in bad debt expense for Comdisco
Ventures and an increase in incentive compensation costs as a result of gains
realized on the sale of equity positions held in the Comdisco Ventures
portfolio.
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Interest expense for the six months ended March 31, 2000 and 1999 totaled
$171 million. Increases in interest costs resulting from higher average daily
borrowings in the current period compared to the prior year period were offset
by lower interest rates in the current period.
Prism expenses for the six months ended March 31, 2000 totaled $70
million, compared to $3 million in the year earlier period. The prior year
amount includes expenses incurred by Prism from the February 28, 1999 date of
acquisition to March 31, 1999. Network and product costs were $26 million for
the six months ended March 31, 2000. Sales, marketing, general and
administrative expenses were $27 million for the six months ended March 31,
2000. Depreciation and amortization was approximately $9 million for the
current period.
Financial Condition
Comdisco's current financial resources and estimated cash flows from
operations are considered adequate to fund anticipated future growth and
operating requirements. Comdisco 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 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, 2000 and 1999 was $1.64 billion and $1.36 billion,
respectively. Cash provided by operations has been used to finance equipment
purchases and, accordingly, had a positive impact on the level of borrowing
required to support Comdisco's investment in its lease portfolio. Comdisco
expects this trend to continue, with cash flow from leasing and remarketing
reinvested in the equipment portfolio.
Risk Factors That May Affect Future Results
Potential Fluctuations in Operating Results: Comdisco'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.
Earnings Contributions From Leasing: Lower margins on large systems
transactions, i.e. mainframes and related peripherals, including DASD and tape
drives, have resulted in lower margins on leasing. Although Comdisco 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 Comdisco'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 Comdisco'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 Comdisco is devoting
resources to its remarketing activities, there can be no assurance that
Comdisco will achieve the appropriate level of activity necessary to meet or
match Comdisco's prior and desired operating results.
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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
Comdisco with an industry in which leasing is an attractive alternative to
ownership. Comdisco'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 Comdisco'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, Comdisco has limited meaningful historical data in
which to base its planned operating expenses. Accordingly, a significant
portion of Comdisco's expense levels, i.e. 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, Comdisco'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, Comdisco must meet its obligations under
the agreements underlying transactions in process at September 30, 1999, also
referred to by Comdisco 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. Comdisco must also successfully compete with organizations
offering similar services. Comdisco'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 Comdisco will be able to maintain and/or
increase its margins on technology services in fiscal 2000.
One of the impacts of Comdisco'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: Through Comdisco Ventures, Comdisco 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 Comdisco may lose its entire investment and/or principal
balance. Equity instruments held by Comdisco 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 Comdisco Ventures to dispose of the equity securities and the value
of those securities on the date of sale.
Prism: Prism is a start up company that has incurred operating losses
since inception and Comdisco 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 Comdisco is unable to adjust operating expense levels and/or
capital expenditures of Prism accordingly, Comdisco'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.
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Economic Conditions: With respect to economic conditions, a recession can
cause customers to put off new investments and increase Comdisco'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 Comdisco's customers,
suppliers and business partners.
Due to all of the foregoing factors, in some future quarter Comdisco's
operating results may fall below the expectations of securities analysts and
investors. In such an event, the trading price of Comdisco's common stock would
likely be materially and adversely affected.
Comdisco 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 At September 30, 1999
Qualitative Information About Market Risk: Comdisco's primary market risk
exposure is interest rate risk, primarily related to Comdisco's interest-
bearing obligations. Generally, a changing interest rate environment does not
impact Comdisco's margins since the effects of higher or lower borrowing costs
would be reflected in the rates on newly leased assets. In addition, Comdisco
attempts to match the maturities of its borrowings with the cash flows from its
leased assets and notes receivables, thereby reducing Comdisco's interest rate
exposure.
Comdisco 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. Comdisco does
not speculate on interest rates, but rather manages its portfolio of assets and
liabilities to mitigate the impact of interest rate fluctuations. Comdisco does
not use derivatives for trading purposes. See Note 7 of Notes to Consolidated
Financial Statements for information on Comdisco's average daily borrowings,
Comdisco'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 Comdisco's notes
payable, term notes and senior notes.
<TABLE>
<CAPTION>
00 01 02 03 04+
(IN MILLIONS) ---- ---- ----- ---- ----
<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 Comdisco's interest-bearing
obligations and not its lease portfolio, the information presented therein has
limited predictive value.
Comdisco's investment in equity securities is subject to market price
risk. A 10% decrease in market values would reduce the carrying value of
Comdisco's publicly traded equity securities by $20 million. Many of these
equity securities are highly volatile stocks.
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BUSINESS OF COMDISCO VENTURES
Overview
Comdisco Ventures provides venture leases, venture debt and direct equity
financing to venture capital-backed companies. Comdisco Ventures' relationships
with established venture capital firms help it identify what it believes are
the best positioned companies in the most attractive high growth industries.
Comdisco Ventures offers a broad range of equity-linked financing products,
which complement equity from venture capital firms and debt from venture-
oriented banks and asset-based lenders. Comdisco Ventures also plans to offer a
number of additional services to its network of customers. During the last two
years, some of Comdisco Ventures' notable customers include Ariba, Ask Jeeves,
Be Free, Copper Mountain Networks, Critical Path, E-Loan, E.piphany, eToys,
Extreme Networks, Gadzoox Networks, Inktomi, NextCard, Niku, Northpoint
Communications, Siara Systems and StratumOne Communications.
Comdisco Ventures provides its customers with financing "commitments"--
agreements to provide up to a stated dollar amount of financing over a stated
period of time. Comdisco Ventures was formed in 1987 as a division of Comdisco,
Inc. It has been operated as a division since that time and is not a separate
legal entity. Since 1987, Comdisco Ventures has committed approximately $2
billion in venture leases, venture debt and direct equity financings, including
$738 million in fiscal 1999 and $681 million in the first six months of fiscal
2000. Of the over 800 companies Comdisco Ventures has helped finance, over 175
have gone public and over 130 have been acquired, in each case providing
Comdisco Ventures with the opportunity to liquidate its equity position in
those companies.
Net earnings increased 150% to $42.8 million for fiscal 1999, as compared
to $17.2 million for fiscal 1998, and were $74.4 million in the first six
months of fiscal 2000.
The Market for Venture Financing
The emergence of Internet-related, communications and other high-
technology companies has been unprecedented in the last few years. The need for
capital to support the growth of these companies has likewise been
unprecedented. More specifically, a typical start-up company today has to raise
more capital faster than a similarly situated company a few years ago.
Several factors are behind this change. Technological advances have
accelerated, making product and service life cycles shorter. Innovative
companies must get their products to market as fast as possible before a
competitor renders their product obsolete. Getting to market faster requires
greater capital expenditures.
There is also a perception that the public equity markets reward a price
premium to companies that can establish the largest market share, build the
most compelling brand or create a new market niche early on. To gain this so-
called "first mover advantage," some companies today spend heavily on product
development, brand awareness, sales force expansion and infrastructure. All
these efforts accelerate the need for capital.
According to the National Venture Capital Association and Venture
Economics, venture capital firms invested a record $48.3 billion in portfolio
companies in 1999, representing a 151.6% increase over the $19.2 billion they
invested in 1998. Additionally, those same sources report the number of
companies receiving financing increased 25.6% in 1999 to 3,649 while the
average venture capital investment per company has also increased
significantly, to $13.2 million in 1999 from $6.6 million in 1998.
Historically, two primary sources of capital for start-up companies have
been venture capitalists and venture-oriented banks and asset-based lenders.
While the availability of venture capital has increased along with the volume
of start-up activity, venture capital generally represents the most dilutive
and intrusive type of financing. Venture capitalists generally require
substantial ownership and exercise substantial control when they make an
investment in a company. Typically these positions are reflected in
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significant equity holdings, contractual shareholder rights and representation
on the company's board of directors.
Start-up companies also turn to venture-oriented banks and asset-based
lenders for financing. While these financings generally result in no or minimal
dilution of ownership of existing equity holders, they typically involve high
monthly cash disbursements, limitations on the use of funds and adherence to
restrictive financial covenants.
Comdisco Ventures believes these two primary sources of capital do not
optimize the capital needs of start-up companies in the current economic
environment. Additionally, their disadvantages highlight the need for less
costly and less dilutive financing sources, creating opportunities for
alternative capital providers, like Comdisco Ventures.
Comdisco Ventures' Solution
Comdisco Ventures believes it provides significant value to entrepreneurs
and their venture capital investors through flexible financing products and
services which allow entrepreneurs to build their companies quickly, while
minimizing the dilution of their equity ownership positions.
Comdisco Ventures has proven its ability to understand the capital needs
of its customers and to develop and customize attractive financings to meet
those needs. Currently, Comdisco Ventures' primary financing products are
venture leases, venture debt and direct equity financings. Venture leases are
leases with warrants that compensate Comdisco Ventures for providing the leases
at more attractive financing terms than leases without warrants. Venture debt
is a high-risk loan with warrants or a conversion-to-equity feature with more
flexible terms and security conditions than more traditional debt financing.
The warrants or conversion feature of venture leases and venture debt generally
provide Comdisco Ventures the ability to buy equity at a price based on the
price paid by venture capitalists. The opportunity to realize higher returns
from the exercise of the warrants or from the conversion feature enables
Comdisco Ventures to offer more flexible financing and security terms. Direct
equity financings involve Comdisco Ventures' purchase of convertible preferred
stock and common stock from its customers. Comdisco Ventures also provides
other ancillary financings, including convertible debt, bridge loans, expansion
loans, acquisition financings and landlord guarantees.
Venture leases and venture debt can be utilized at various stages of a
company's development and for various purposes including the following:
. early stage capital to supplement the initial venture capital
raised and support growth requirements;
. 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; and
. 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.
As a result of the specialized nature of venture leases and venture debt,
Comdisco Ventures 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.
Comdisco Ventures currently offers equipment procurement, exchange, and
upgrade services to its customers. Comdisco Ventures plans to introduce
Comdisco Group services to its customers. We expect that Comdisco Ventures
customers will use web hosting and web availability services, business
continuity services, and network management services. In the future, Comdisco
Ventures intends to develop other services to its network of customers. It is
anticipated that, when introduced, these services will be designed to save
Comdisco Ventures' customers' time, effort and money as they race to build
their businesses.
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Comdisco Ventures' Strategy
Comdisco Ventures intends to expand its position as a provider of venture
leases and venture debt and introduce complementary services to venture
capital-backed companies. Its strategy is to continue to leverage its
management experience and resources to capitalize on the growing demand for
financing by venture capital-backed companies. Components of Comdisco Ventures'
strategy include:
. leveraging relationships with established venture capitalists;
. providing capital through products that meet the varied needs of
venture capital-backed companies;
. maintaining a diversified customer base;
. expanding funding sources;
. capitalizing on the Comdisco affiliation and resources; and
. developing complementary service offerings that respond to the
changing needs of venture capital-backed companies.
Leveraging Comdisco Ventures' relationships with established venture
capitalists
Comdisco Ventures believes that, increasingly, the best deals are awarded
to established venture capital firms. Comdisco Ventures has developed long-term
working relationships with twenty to thirty of these firms by participating in
numerous transactions with them over the years. These venture capital firms
serve as an important referral source for leads. Additionally, since the
venture capital firms have already invested in these customers, Comdisco
Venture benefits indirectly from their diligence and expertise in starting and
building new companies. This working relationship affords Comdisco Ventures
continued access to attractive financing opportunities. Comdisco Ventures
believes that these venture capital firms view Comdisco Ventures as an
important financial partner for their customers, both at the initial and
subsequent stages of growth, due to Comdisco Ventures' financial resources,
varied financing products and industry expertise. Comdisco Ventures believes
that, as a general rule, Comdisco Ventures' financing products serve as an
effective source of financial leverage for the return on the venture capital
firms' equity investments in the same manner as traditional debt provides
financial leverage for more mature companies. Moreover, Comdisco Ventures'
flexibility has been and could be useful in those rare situations that require
a specifically crafted financial solution. Comdisco Ventures also provides
advice as to the financeability of particular companies to assist venture
capital firms and entrepreneurs in preparing business plans.
Providing capital through products that meet the varied needs of venture
capital-backed companies.
Comdisco Ventures currently offers a broad range of financing
alternatives to venture capital-backed companies. The success of Comdisco
Ventures has been fueled, in part, by its ability to understand the capital
needs of its customers and to develop and customize attractive financings to
meet those needs. Currently, Comdisco Ventures' primary financing products are
venture leases, venture debt and direct equity financings through the purchase
of convertible preferred stock and common stock. See "--Comdisco Ventures'
Products," beginning on page 55 for a description of these products.
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Maintaining a diversified customer base
Comdisco Ventures provides financing products to customers diversified
across many industry sectors. This diversification reduces the impact to
Comdisco Ventures should there be a downturn in any sector. The following chart
illustrates customer industry sector diversification by aggregate commitments
from October 1, 1996 through March 31, 2000.
[GRAPH]
Communications & Networking 27%
Computer Hardware & Semiconductors 7%
Internet 40%
Life Sciences 8%
Other Products & Services 2%
Software & Computer Services 16%
Comdisco Ventures often provides financings to several venture capital-
backed companies in a specific emerging industry sector in order to increase
the likelihood of aligning itself with the most successful venture capital-
backed companies within that sector. Because most venture capitalists have
significant equity ownership, board representation and strategic alignment with
management of the companies in which they invest, they can be limited in their
abilities to invest in multiple companies within a single industry sector.
Comdisco Ventures, due to its limited ownership and lack of strategic
involvement (e.g. typically no board representation) generally avoids these
kinds of conflict limitations. This allows Comdisco Ventures to diversify its
financings across several start-ups within an industry sector.
Expanding Comdisco Ventures' funding sources
Historically, Comdisco Ventures has funded its financing activities
through cash flows from its operations, as well as inter-group borrowings from
Comdisco. As demand for its financing products has grown, and to reduce the
balance sheet risk to Comdisco shareholders, Comdisco Ventures has explored
possible alternative sources of funds for its financing activities, including
selling shares of Comdisco Ventures Stock to the public in the offering
contemplated by the prospectus. Comdisco Ventures may, depending on market
conditions, form funding vehicles in which it seeks to raise capital from third
parties.
Capitalizing on the Comdisco affiliation and resources
As a division of Comdisco, Comdisco Ventures is able to bring a number of
benefits to its customers:
. Equipment Procurement. As a result of our experience in leasing
and remarketing equipment and our equipment purchasing power,
Comdisco Ventures is able to offer its customers an equipment
procurement service designed to save them time, effort and money.
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. Technology Services. Comdisco Ventures offers a range of
Comdisco's technology services to its customers in order to help
them build their businesses more quickly. These services include
continuity services, web availability and other hosting services,
and managed network services.
. Post-Venture Stage Services. Comdisco Ventures can also introduce
Comdisco as a potential customer for, or partner, to a customer as
the customer evolves beyond the start-up stage.
Developing complementary service offerings that respond to the changing needs
of venture capital-backed companies
In addition to financing products, Comdisco Ventures intends to develop
and provide value-added services to its network of customers in the future.
Comdisco Ventures will charge its customers for the use of these services. The
fees will be payable in cash or equity or a combination of cash and equity.
These services, when developed, will also be designed to allow Comdisco
Ventures' customers to take advantage of opportunities provided by the other
members of Comdisco Ventures' network of customers. Comdisco Ventures also
plans to introduce Comdisco Group Services to its customers.
Comdisco Ventures' Products
Typically, Comdisco Ventures' products are structured as commitments by
it to provide financing in one or more advances during a specified period of
time. The total commitment made available to a customer may or may not be drawn
upon and used by that customer over the life of the commitment, although
Comdisco Ventures generally must keep those committed but undrawn amounts
available for the customer. Comdisco Ventures also may receive the right, as
part of a commitment, to purchase a specific amount of equity in a planned
future equity round of its customer. Comdisco Ventures usually receives a fee
for providing its financing commitment based on the original amount committed.
Comdisco Ventures' commitment to finance is typically subject to the absence of
any material adverse change or any default under the loan or lease and
compliance by its customers with other loan or lease requirements.
Comdisco Ventures generally will receive warrants to purchase equity
securities or the right to convert some of its debt into equity securities of
its customers in connection with the commitment. Warrants typically represent
less than 5% 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 Comdisco Ventures' 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.
Venture Leases
Comdisco Ventures' venture leasing activities consist primarily of the
direct origination of non-cancelable, full-payout leases. These leases cover a
variety of equipment including computers, servers and other information
technology equipment, laboratory and scientific equipment, testing equipment,
production equipment and software. The rental rate and all other transaction
terms are individually negotiated with Comdisco Ventures' customers. The leased
equipment is owned by Comdisco Ventures through Comdisco, which in turn
purchased the equipment from a variety of manufacturers.
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Substantially all equipment leases that Comdisco Ventures originates have
specified non-cancelable initial terms ranging from two to five years. The
general terms and conditions of all of these 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 our master lease agreement. The lessee is also
required to provide to Comdisco Ventures monthly and annual financial
information.
Comdisco Ventures may also structure transactions as a loan secured by
the underlying equipment, and Comdisco Ventures considers these kinds of
arrangements as part of its venture equipment financing activities.
Factors considered in determining which financing structure to use
include the customer's desire to keep the equipment at the end of the
financing, Comdisco Ventures' need for security, the flexibility at the end of
the financing and accounting and tax treatment. For example, a customer that
wants to keep the equipment at the end of the term may prefer the secured loan
structure and be treated as the owner of the equipment at inception of the
financing. On the other hand, a customer that does not want to keep the
equipment at the end of the term, or wants flexibility to return the equipment,
may prefer the lease structure whereby it has the right to return the equipment
at the end of the lease and may treat the transaction as an operating lease.
Under the lease structure, Comdisco Ventures, through Comdisco, is the owner of
the equipment and is generally in a better position than an unsecured lender in
the event of default. In addition, under the lease structure, Comdisco
Ventures, through Comdisco, is responsible for the remarketing of the equipment
at the end of the term. Under the loan structure, Comdisco is not responsible
for remarketing at the end of the term.
During fiscal 1999 and 1998, Comdisco Ventures originated leases through
approximately 230 and 180 separate transactions, respectively, representing
total commitments of approximately $332 million and $221 million, respectively.
In the six months ended March 31, 2000, Comdisco Ventures' originated
leases through approximately 150 separate transactions, representing total
commitments of approximately $290 million.
Venture Debt
Historically, Comdisco Ventures' venture debt activities have consisted
primarily of the direct origination of debt financings to customers pursuant to
subordinated, secured loan agreements. These loans bear fixed interest rates
over the prime rate and are usually repaid in thirty-six monthly installments.
Typically, the customer makes several months of interest-only payments, the
balance being amortizing installments of principal and interest. In addition,
fees may be paid to Comdisco Ventures at closing.
These subordinated loans typically have been secured by a lien on all of
the customer's assets, which, in most cases, is subordinated to the lien of the
customer's senior lenders. Comdisco Ventures' loan documents usually contain
cross-default provisions and may have specific provisions governing future
financing or pledging of assets. Occasionally, Comdisco Ventures makes
unsecured loans to companies in anticipation of an acquisition, initial public
offering, or a longer term venture financing. These unsecured loans are
typically short-term or payable on demand by Comdisco Ventures. These unsecured
loans involve more risk than secured loans because Comdisco Ventures is a
general creditor of the customer and has no priority claim on any specific
assets. However, the unsecured loans are made in anticipation of events that
should provide sufficient funds for repayment of the unsecured loans. Because
the unsecured loans involve more risk than secured loans, unsecured loans
command better economic terms, and therefore typically provide higher interest
rates, shorter terms, and higher warrant coverage and conversion features.
Comdisco Ventures believes that the increased risk from unsecured loans is not
material because the amount of such unsecured loans is small.
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<PAGE>
During fiscal 1999 and 1998, Comdisco Ventures committed $3.3 million in
three unsecured transactions, and $2.5 million in two unsecured transactions,
respectively, representing about 0.9% and 3.7% respectively, of total
subordinated loan commitments. In the six months ended March 31, 2000, Comdisco
Ventures committed $7.7 million in two unsecured transactions, representing
about 2.4% of total subordinated loan commitments. One $7 million unsecured
loan was refinanced into a convertible loan three months later. Comdisco
Ventures believes that the overall percentages of unsecured loans to total
subordinated loan commitments is not likely to materially change in the future.
During fiscal 1999 and 1998, Comdisco Ventures originated subordinated
loans through approximately 145 and 30 separate transactions, respectively,
representing total commitments of approximately $367 million and $68 million,
respectively.
In the six months ended March 31, 2000, Comdisco Ventures originated
subordinated loans through approximately ninety separate transactions,
representing total commitments of approximately $323 million.
Hybrid Fund expects to begin funding subordinated loan financings in the
third or fourth quarter of fiscal 2000. Comdisco Ventures intends to sell those
subordinated loan financings it originated in the second and third quarters of
fiscal 2000 to Hybrid Fund once Hybrid Fund begins funding these types of
transactions. Comdisco Ventures will participate in the returns generated by
the fund as a limited partner and as a member of the general partner of Hybrid
Fund. See "--Hybrid Fund," on page 65.
Direct Equity Financings
Through December 31, 1999, Comdisco Ventures provided equity financing to
its customers by directly purchasing common or convertible preferred stock.
Comdisco 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 fiscal 1999 and 1998, Comdisco Ventures made direct equity
investments with approximately ninety and thirty-five customers, representing
approximately $39 million and $7 million, respectively.
In the six months ended March 31, 2000, Comdisco Ventures made direct
equity investments with approximately ninety-five customers, representing
approximately $118 million, including a capital call of $50 million to Hybrid
Fund. As of March 31, 2000, Comdisco Ventures has made total direct investments
with an original investment value of approximately $179 million.
Hybrid Fund began funding direct equity financings beginning in the
second fiscal quarter of 2000, and made direct equity investments with
approximately seven customers representing approximately $5 million in that
quarter. Comdisco Ventures will participate in the returns generated by the
fund as a limited partner and as a member of the general partner of Hybrid
Fund. See "--Hybrid Fund," on page 65.
Overview of Financing Commitments and Equity Holdings of Comdisco Ventures
Comdisco Ventures believes that it is one of the largest sources of
venture leases and venture debt in its market.
New Lease, Debt and Equity Commitments
The following table illustrates total new lease, debt and direct equity
commitments made by Comdisco Ventures during each of the last five fiscal years
and the first six months of fiscal 2000.
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Total New Commitments By Fiscal Year
1995-Current
(Dollars in Millions)
<TABLE>
<CAPTION>
First
Six Months
1995 1996 1997 1998 1999 2000
----- ------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Leases............................. $77.3 $103.5 $144.3 $220.6 $332.1 $290.2
Debt............................... 2.5 7.5 19.5 67.7 367.1 322.5
Equity............................. 1.6 3.1 3.7 7.4 39.0 68.5
----- ------ ------ ------ ------ ------
Total............................ $81.4 $114.1 $167.5 $295.7 $738.2 $681.2
===== ====== ====== ====== ====== ======
</TABLE>
The following table lists Comdisco Ventures' fifteen largest commitments
provided through March 31, 2000.
Fifteen Largest Commitments Provided Through March 31, 2000
Avici Systems, Inc.
Blue Nile, Inc.
Chorum Technologies, Inc.
Corio, Inc.
Corvis Corporation
Digital Generation Systems, Inc.
EthnicGrocer.com
Equinix, Inc.
Flashcom, Inc.
HomeGrocer.com, Inc.
Impresse Corporation
living.com Inc.
New Edge Networks, Inc.
OurHouse.com
Telocity, Inc.
Comdisco Ventures tries to avoid concentrating its financing risk in a
few customers. The largest commitment Comdisco Ventures has made to any single
customer is approximately $25 million. At March 31, 2000, no commitment to any
single customer represents more than 2% of Comdisco Ventures' total assets.
Equity Holdings
Liquidity Events. Comdisco Ventures has been successful in identifying
companies that ultimately proceed to a liquidity event, such as an initial
public offering, or a merger with or sale to another company. In addition to
its ability to identify these companies, Comdisco Ventures benefits from the
IPO market's wide acceptance of transactions representing venture capital-
backed companies. According to the National Venture Capital Association and
Venture Economics, approximately 50%, or 271, of the 544 companies that went
public in 1999 were venture capital-backed. These liquidity events give
Comdisco Ventures the opportunity to sell or otherwise dispose of its equity
interests in those companies in an orderly manner to generate cash that
Comdisco Ventures generally looks to reinvest in new transactions, because
Comdisco Ventures believes it is comparatively advantageous to make new
advances to start-ups rather than hold the securities of public companies. In
most cases, securities law restrictions on transfer and contractual lock-up
provisions restrict Comdisco Ventures' ability to sell its equity positions for
several months after a liquidity event. The following table lists customers of
Comdisco Ventures that have been acquired by a public company or have had their
IPO, since October 1, 1996.
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<PAGE>
Comdisco Ventures' Customers That Have Completed Their Initial Public Offering
or Been Acquired by Public Companies Since October 1, 1996
First Six Months of Fiscal 2000
IPO Acquisition by Public Company
Be Free, Inc. Abaton.com, Inc.
CacheFlow, Inc. AdKnowledge, Inc.
Caliper Technologies Corp. Arithmos, Inc.
C-Bridge Internet Solutions, Inc. FirstSense Software, Inc.
Data Critical Corp. FlowWise Networks
Digital Impact, Inc. Foglight Software, Inc.
Digital Insight FreeGate Corp.
Diversa Corporation iMark.com, Inc.
DSL.net, Inc. Mitotix, Inc.
Edison Schools, Inc. (formerly, Edison Project)
Novera Software, Inc.
Egreetings Network, Inc. Oberon Software, Inc.
Extensity, Inc. Power Trends, Inc.
GetThere.com, Inc. Promatory Communications
HomeGrocer.com, Inc. Quote.com, Inc.
iGo Corporation Raycer, Inc.
Interwoven, Inc. RightPoint Software, Inc.
Lightspan Partnership, Inc. Rubric, Inc.
MotherNature.com, Inc. Sandpiper Networks, Inc.
Neoforma.com, Inc. Siara Systems, Inc.
Net.Genesis Corp. TimeShift, Inc.
Tycho Networks, Inc.
<TABLE>
<S> <C>
Niku Corporation
OnDisplay, Inc.
Onvia.com, Inc.
PlanetRx.com, Inc.
Quantum Effect Devices, Inc.
QuickLogic Corp.
SciQuest.com, Inc.
Sequenon, Inc.
Silicon Image, Inc.
Silicon Laboratories, Inc.
Snowball.com, Inc.
Telocity, Inc.
Tularik, Inc.
Turnstone Systems, Inc.
Virata Corp.
Webvan Group, Inc.
</TABLE>
WaveSpan Corporation
WebSpective Software, Inc.
59
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1999
-----------
IPO Acquisition by Public Company
--- -----------------------------
<S> <C>
Adforce, Inc. Academic Systems
Agile Software Corporation BabyCenter, Inc.
Allaire Corporation BFC Enterprises, Inc.
Ariba Technologies, Inc. BioStar, Inc.
Ask Jeeves, Inc. BrainPlay.com, Inc.
Audible, Inc. Chabi.com
Concur Technologies, Inc. CytoMed, Inc.
Continuus Software Corp. DAS Devices, Inc.
Copper Mountain Networks, Inc. Diamond Lane Communications Corp.
Critical Path, Inc. Excel Switching Corporation
E.piphany, Inc. Expersoft Corp.
Efficient Networks, Inc. Fibex Systems, Inc.
E-Loan, Inc. Internet Profiles Corp.
eToys, Inc. Lightera Networks, Inc.
Extreme Networks, Inc. LinkExchange, Inc.
FlyCast Communications Corp. Monterey Networks, Inc.
Gadzoox Networks, Inc. Pivot Technologies, Inc.
Intraware, Inc. Seeker Software
Keynote Systems, Inc. Sentryl Software Corporation
NetObjects, Inc. SpringStreet, Inc.
Netro Corporation StratumOne Communications, Inc.
NextCard, Inc. TransMedia Communications, Inc.
NorthPoint Communications, Inc. When, Inc. (when.com)
NVidia Corporation Whistle Communications
Packeteer, Inc. Zip2 Corporation
Phone.com, Inc.
Portal Software, Inc.
Quokka Sports
Ramp Networks, Inc.
SalesLogix Corporation
Select Comfort Direct Corp.
Showcase Corporation
TiVO, Inc.
Ventro Corporation (formerly, Chemdex
Corp.)
Viant Corporation
Vignette Corporation
Vixel Corporation
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fiscal 1998
-----------
IPO Acquisition by Public Company
--- -----------------------------
<S> <C>
Com21, Inc. AnyRiver Entertainment, Inc.
CombiChem, Inc. ComCore Semiconductor, Inc.
Corixa Corporation CommQuest Technologies, Inc.
FlexiInternational Software, Inc. European Software Publishing Ltd.
Focal, Inc. gene/Networks, Inc.
FVC.COM Global Center, Inc.
Gene Logic, Inc. Hotmail Corporation
Hybrid Networks, Inc. ICAST Corp.
Information Advantage, Inc. Insight Micro Array Systems
Inktomi Corporation Netbot, Inc.
MicroMuse, Inc. OnLive! Technologies, Inc.
Power Integrations, Inc. PetCare Plus, Inc.
Preview Travel, Inc. Prominet Corporation
SportsLine.com, Inc. Research Holdings, Ltd.
USWeb Corporation Wayfarer Communications, Inc.
<CAPTION>
Fiscal 1997
-----------
IPO Acquisition by Public Company
--- -----------------------------
<S> <C>
Cardima, Inc. Agile Networks, Inc.
Cerus Corporation Alexon Biomedical, Inc.
Concentric Network Corp. Allelix Neuroscience, Inc.
Corsair Communications, Inc. Books That Work
Cubist Pharmaceuticals, Inc. ChemGenics/Millennium Pharmaceuticals
Endocardial Solutions, Inc. Digital Style Corp.
Intensiva HealthCare Corp. Dynasty Technologies, Inc.
Leukofile, Inc. Informed Access Systems, Inc.
Lightbridge, Inc. Integrity QA Software, Inc.
Micro Therapeutics, Inc. Light Source Computer Images, Inc.
NeoMagic Corporation NetObjects, Inc.
Netmoves Corporation OnStream Networks, Inc.
(formerly, faxSAV, Inc.) PharmaGenics, Inc.
Peapod, Inc. PharmaSource Group, Inc.
Triangle Pharmaceuticals, Inc. Quinta Corporation
ViroPharma, Inc. Rapid City Communications Corp.
Sahara Networks, Inc.
Sneaker Stadium, Inc.
TransGlobal Systems, Inc.
TravelNet, Inc.
TView, Inc.
ViewStar Corporation
Web TV Networks, Inc.
Whitetree, Inc.
Zane Publishing, Inc.
</TABLE>
Public Equity Holdings. Comdisco Ventures directs the management of its
public equity holdings through a third party asset manager, E.M. Warburg,
Pincus & Co. Comdisco Ventures' disposition policy with respect to its equity
holdings is not intended to, and does not, assure that Comdisco Ventures will
maximize its return on any particular holding. Rather, Comdisco Ventures'
general policy historically has been to sell its equity positions in an orderly
manner as soon as reasonably possible after a liquidity event. In almost all
cases, securities law restrictions on transfer and contractual lock-up
provisions restrict Comdisco Ventures' ability to sell its equity position for
several months after a liquidity event. Consequently, Comdisco Ventures'
general policy and these restrictions mean that Comdisco Ventures may be unable
to realize the highest possible price for its equity positions. Comdisco
Ventures' management consults with its outside manager on at least a quarterly
basis and has
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<PAGE>
adjusted its general policy on occasion to respond to market conditions. Going
forward, Comdisco Ventures may review and change this general policy.
As of March 31, 2000, the current public equity holdings of Comdisco
Ventures had an equity value of $530 million and represented ownership in
approximately 75 companies. The ten largest equity holdings represented 56% of
the total equity value of these holdings and was composed of the following
companies:
Largest Public Equity Stakes as of March 31, 2000
<TABLE>
<CAPTION>
Company Industry Sector
---------------------------- ----------------------------
<S> <C>
Be Free, Inc. Internet
CacheFlow, Inc. Communications & Networking
E.piphany, Inc. Software & Computer Services
FlyCast Communications Corp. Internet
Niku Corporation Software & Computer Services
OnDisplay, Inc. Internet
Onvia.com, Inc. Internet
Redback Networks, Inc./1/ Communications & Networking
Telocity, Inc. Communications & Networking
Turnstone Systems, Inc. Communications & Networking
</TABLE>
--------
/1/ Comdisco Ventures received shares in Redback Networks, Inc. as a
result of that company's purchase of Siara Systems, Inc.
The equity instruments Comdisco Ventures holds are generally subject to
securities law restrictions on transfer and contractual lock-ups restricting
its ability to sell them for up to approximately 180 days after an initial
public offering or longer. Of the $530 million in equity value of the current
public equity holdings of Comdisco Ventures at March 31, 2000, approximately
$376 million was not then available for sale as a result of unexpired
restrictions. The public market for high-technology and other emerging growth
companies is extremely volatile. This volatility may adversely affect both
Comdisco Ventures' ability to dispose of those equity securities and the value
of those equity securities on disposal.
Private Equity Holdings. In addition to the public equity holdings of
Comdisco Ventures, as of March 31, 2000, it held warrants and other equity
positions in approximately 405 companies that are still private. The following
table sets forth those companies, grouped by business sector, to which Comdisco
Ventures has committed $3 million or more in financing (whether as a venture
lease, venture debt or direct equity purchase) as of March 31, 2000.
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<PAGE>
Private Company Equity Holdings of Comdisco Ventures
as of March 31, 2000
Commitments Greater than $3 million
Communications & Networking
2Wire, Inc. MainStreet Networks, Inc.
AccessLan Communications, Inc. Mapletree Networks, Inc.
Agility Communications, Inc. Metawave Communications Corp.
Airspan Communications Corporation New Edge Networks, Inc.
Applicast, Inc. Octave Communications, Inc.
Atmosphere Networks, Inc. Optical Micro-Machines, Inc.
Avici Systems, Inc. Optical Networks, Inc.
Bandwidth9 Optical Solutions, Inc.
BrightLink Networks, Inc. Optimight Communications, Inc.
Caly Networks, Inc. Oresis Communications, Inc.
Chorum Technologies, Inc. Pluris, Inc.
Cinta Corporation Positive Communications, Inc.
COLO.COM ProactiveNet, Inc.
Corvis Corporation QuantumShift
eConvergent, Inc. Quintessent Communications, Inc.
Endgate Corporation Santera Systems, Inc.
Equinix, Inc. Shoreline Teleworks, Inc.
eVoice, Inc. dba TalkStar.com Telera, Inc.
Exterprise, Inc. Tellium, Inc.
Flashcom, Inc. Vertical Networks Incorporated
Geyser Networks, Inc. Video Networks, Inc.
Gotham Networks, Inc. Warpspeed Communications, Inc.
iBEAM Broadcasting Corporation Wavtrace, Inc.
Indus River Networks, Inc. Yipes Communications, Inc.
iPass, Inc. Zaffire, Inc.
Jetstream Communications, Inc.
LGC Wireless, Inc.
Computer Hardware & Semiconductors
Monterey Design Systems
Agere, Inc. Silicon Access Technology, Inc.
Aptix Corporation Silicon Spice, Inc.
Censtor Corporation Siros Technologies
Chip2Chip, Inc. Stream Machine, Inc.
Cielo Communications, Inc. Transmeta Corporation
C-Port Corporation Volterra Semiconductor Corporation
Gemfire, Inc. ZettaCom, Inc.
Handspring, Inc.
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<PAGE>
Internet
Affinia, Inc. Impresse Corporation
Agillion.com, Inc. Indulge.com, Inc.
Andale, Inc. Interactive Transaction Services, Inc.
Asera, Inc. iOwn Holdings, Inc.
Autodaq Corporation IQ commerce Corporation
BenefitPoint, Inc. Lipstream Networks, Inc.
Bigstep.com living.com Inc.
Blue Nile, Inc. Lucy.com, Inc.
Bowstreet.com, Inc. Miadora, Inc.
BravoGifts.com, Inc. Mobshop.com, Inc. (formerly
Brigade Solutions, Inc. Accompany, Inc.)
Brightware, Inc MoneyLine Network, Inc.
Broadband Sports, Inc. Myplay, Inc.
Carstation.com, Inc. Myteam.com, Inc.
Celarix, Inc. Naisa Systems, Inc.
Chip Shot Golf Corporation Naxon Corporation
Christianity.com, Inc. NetFlix.com, Inc.
Collabria, Inc. NONSTOP Solutions, Inc.
Dental X Change, Inc. NowDocs.com, Inc.
Desktop.com, Inc. Obongo, Inc.
DoughNET Inc. Onebox.com, Inc.
Dunk.Net OurHouse.com, Inc.
eBates Shopping.com, Inc. perksatwork.com, Inc.
eCoverage, Inc. Pogo.com Inc.
eGroups, Inc. Primary Knowledge, Inc.
ePhysician, Inc. PurchasingCenter.com, Inc.
Embark.com, Inc. Qpass, Inc.
essential.com, Inc. Quickdot Corporation
e-STEEL Corporation remarQ Communities, Inc.
EthinicGrocer.com, Inc. Resonate, Inc.
eve.com, Inc. RightWorks Corporation
Firedrop, Inc. RocketTalk, Inc.
Firstlook.com, Inc. ServiceLane.com, Inc.
Flyswat, Inc. ShoppingList.com, Inc.
Food.com, Inc. Shutterfly.com, Inc.
Furniture.com, Inc. SocialNet.com
Gator.com Corporation StockPower, Inc.
Gloss.com, Inc. Topica, Inc.
Great Entertaining, Inc. WebSwap, Inc.
HomeWarehouse.com, Inc. Xtra On-line Corporation
IAM.com, Inc.
iExchange.com, Inc.
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Life Sciences
Accumetrics, Inc. FeRx Incorporated
Acusphere, Inc. Idun Pharmaceuticals, Inc.
Adesso Specialty Services Inspire Pharmaceuticals, Inc.
Advanced Medicine, Inc. InterVentional Technologies, Inc.
Align Technology, Inc. Kelson Physician Partners, Inc.
American WholeHealth, Inc. PercuSurge, Inc.
Argonaut Technologies, Inc. Radiant Research, Inc.
asterion.com, Inc. ScriptGen Pharmaceuticals, Inc.
Cryogen, Inc. TheraSense, Inc.
Cytokinetics, Incorporated XenoPort, Inc.
Eos Biotechnology, Inc.
Software & Computer Services
2Bridge Software Linuxcare, Inc.
Acta, Inc. Luminate Software Corporation
Allegrix, Inc. MarketTools, Inc.
Angara E-Commerce Software, Inc. Market-Touch Corporation
Annuncio Software, Inc. NewChannel, Inc.
Arbortext, Inc. NightFire Software, Inc.
Corio, Inc. Portera Systems
CrossWorlds Software Saba Software, Inc.
DataCore Software Corporation Support.com, Inc. (formerly Tioga
Docent, Inc. Systems, Inc.)
eALITY, Inc. TANTAU Software, Inc.
eDocs, Inc. Torrent Systems, Inc.
Efficient Market Services Trellix Corporation
Flashpoint Technology, Inc. TriStrata, Inc.
Instill Corporation ValiCert, Inc.
Integral Development Corporation Worldstreet Corporation
Linguateq, Incorporated Yantra Corporation
Other Products & Services
Advantage Schools, Inc. AnyTime Access, Inc.
Hybrid Fund
Comdisco formed Hybrid Venture Partners, L.P., a Delaware limited
partnership, in October 1999 to fund venture debt and direct equity financing
products for the benefit of Comdisco Ventures. Comdisco committed $250 million
as a limited partner to Hybrid Fund, all of which has been invested in, or
committed to, customers. The Hybrid Fund is now closed and will not seek
additional capital commitments beyond that $250 million. Hybrid Fund began
funding direct equity financings in the second quarter of fiscal 2000 and
expects to begin funding venture debt during the third or fourth quarter of
fiscal 2000. Comdisco Ventures intends to sell those venture debt transactions
it originated during the second and third quarters of fiscal 2000 to Hybrid
Fund once Hybrid Fund begins funding these types of transactions.
Comdisco Ventures intends to continue to fund venture leases and
equipment loans directly.
As the sole limited partner, Comdisco has committed 99% of the capital
of Hybrid and receives 99% of that part of the profits and losses allocated
based on capital commitments. Comdisco has allocated its interests in Hybrid
Fund to Comdisco Ventures as part of the implementation of the tracking
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<PAGE>
stock structure. Items of profit and loss of Hybrid Fund attributable to the
short-term investment of idle cash will be allocated among the partners of
Hybrid Fund in proportion to their respective capital commitments. All other
items of net profit of Hybrid Fund will be allocated among Comdisco, the sole
limited partner and the general partner, as follows:
. First, 100 percent to all the partners in proportion to their
respective capital commitments until each partner has been
allocated net profits representing an 8 percent priority return on
its unreturned capital contributions.
. Next, 100 percent to the general partner until cumulative
allocations of net profit over the term of Hybrid Fund have been
made:
(1) 80 percent to all the partners in proportion to their
respective capital commitments; and
(2)20 percent to the general partner as a carried interest.
. Next, 80 percent to all the partners in proportion to their
respective capital commitments and 20 percent to the general
partner as a carried interest.
Net losses of Hybrid Fund will be allocated first to reverse prior
allocations of net profits and thereafter to the partners in proportion to
their respective capital commitments.
Distributions by Hybrid Fund to its partners may be made in cash or in
securities.
The general partner of Hybrid Fund is Rosemont Venture Management I,
L.L.C., a Delaware limited liability company. The managing members of the
general partner primarily responsible for Hybrid Fund's investment activities
initially will include James P. Labe and Geoffrey L. Tickner, members of
management of Comdisco Ventures. Comdisco also holds a non-managing membership
interest in this general partner, an interest it has allocated to Comdisco
Ventures as part of the implementation of the tracking stock structure, and is
entitled to participate in the general partner's profits and losses. Prior to
the offering of Comdisco Ventures Stock, Comdisco generally receives 30% of the
profit and losses of the general partner. After the offering of Comdisco
Ventures Stock, Comdisco generally will receive 49% of the profits and losses
of the general partner. In addition to its share of the profits and losses of
Hybrid Fund, the general partner will receive an annual management fee equal to
2% of the aggregate committed capital of Hybrid Fund. Beginning in 2005, this
fee will be equal to 2% of the aggregate cost basis of securities held by
Hybrid Fund and reasonable reserves for the payment of fund expenses and the
purchase of portfolio securities under pre-existing binding commitments.
Comdisco has the right to participate in a manner and on an economic
level similar to its participation in Hybrid Fund in any fund in which any of
the members of current senior management responsible for its investment
activities are substantially involved in the future, provided that Comdisco
Ventures Stock remains outstanding and Comdisco commits to provide at least 25%
of the committed capital of that subsequent fund. Comdisco intends to allocate
these interests to Comdisco Ventures should they become available.
Instead of receiving payments of principal and interest and loan fees
associated with venture debt and the payments of sales proceeds associated with
its direct equity holdings, Comdisco Ventures will receive, and has allocated
to Comdisco Ventures, returns from venture debt and direct equity financings
held by Hybrid Fund through its limited partnership interests in Hybrid Fund
and membership interests in the general partner.
Financing Procedures
The successful execution of Comdisco Ventures' business and operating
strategy is dependent upon its underwriting and investment policies and
procedures.
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<PAGE>
Comdisco Ventures reviews business plans generated by its referral
network in order to identify potential customers. After identifying potential
customers that it believes merit further investigation, Comdisco Ventures
evaluates those potential customers in more depth. This review process,
described below, forms the basis of Comdisco Ventures' decision to fund or
reject a lease, loan and/or direct equity financing.
Preliminary Evaluation
Comdisco Ventures meets with the potential customer's management and
performs a preliminary investigation of its management, business operations,
and prospects. Comdisco Ventures generally consults with and gathers
information from a wide variety of industry sources to assess the prospects of
a potential customer and its industry. Comdisco Ventures reviews the
commitments of the existing venture capitalists (including their intention to
participate in future financing rounds) and the potential customer's capital
structure. The customer also provides projected financial statements, a
description of its market and competitive landscape, and a description of
operations (marketing and sales, research and development, employee issues, and
so forth). If Comdisco Ventures is satisfied with its preliminary investigation
of management, operations and prospects, it typically issues a term sheet
outlining a proposed transaction. After reaching an agreement on the term
sheet, Comdisco Ventures begins due diligence.
Due Diligence
Comdisco Ventures' due diligence may initially include on-site visits to
the potential customer's headquarters and other facilities, interviews with key
management and board members, references for senior management and discussions
with industry research analysts, other industry participants, customers and
suppliers where appropriate. Comdisco Ventures may also review the potential
customer's charter, capital structure, subsidiaries, assets, liabilities,
employee plans, litigation, tax matters and other relevant legal documentation.
Portfolio Monitoring and Risk Management
Comdisco Ventures has three primary tools to monitor the performance and
quality of its financings:
. Comdisco Ventures monitors the progress of product development,
cash burn and overall adherence to the business plan;
. Comdisco Ventures maintains regular contact with management teams
to discuss business enrichment, cash flow needs and potential
financing and other capital structure issues; and
. Comdisco Ventures reviews various financial statements received
from its customers on a quarterly basis.
Workouts
All loans that are 60 days or more overdue are classified as a work-out
account. Whenever feasible, Comdisco Ventures attempts to use its position as a
lender and equity investor to work with other investors and lenders to
rehabilitate, rather than liquidate, defaulted loans. Comdisco Ventures'
primary objective at this stage is to minimize its loss on the lease and loan
obligations.
Loss experience
Since the initiation of its financing activities, credit losses have been
less than 3% of Comdisco Ventures' total commitments originated. This
percentage does not reflect any significant loss experience from Comdisco
Ventures' subordinated debt products, which were only first introduced on a
large scale beginning in fiscal 1998.
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<PAGE>
Comdisco Ventures believes that its low level of credit losses are
largely a result of its (1) transaction structuring experience, (2) due
diligence procedures specifically designed to analyze transactions with
emerging growth companies, (3) extensive monitoring and review of these
transactions, and (4) corrective approach to addressing delinquency. Comdisco
Ventures' loss experience has also benefited from the experience and diligence
of those established venture capital firms that typically precede Comdisco
Ventures into a financing relationship with its customers.
Competition
Comdisco Ventures' primary competitors include financial institutions,
equipment lessors and manufacturers, venture capital firms, and non-traditional
lenders that provide debt and/or equity financing to emerging, high technology
companies. The competition that Comdisco Ventures faces is situation-specific
and depends, in part, on the issues that concern the customer. For example, a
customer that has a financing need of several hundred thousand dollars, or that
is unconcerned about restrictive covenants, may find a venture-oriented bank
more attractive. Or, a customer that needs a large quantity of equipment from
one specific vendor may be able to negotiate vendor financing that is more
attractive than alternative financing offered by Comdisco Ventures. Some non-
traditional funding sources, such as distribution channel partners, joint
venture partners, and owners of complementary technologies, may be motivated to
provide attractive financing as one part of a larger collaboration. An
increasing number of public companies also provide substantial capital to
companies who might otherwise be candidates for Comdisco Ventures' financing
products. Comdisco Ventures believes it competes effectively with these
competitors based on its creative deal structuring and flexibility, willingness
to craft individual solutions to financing needs, reputation, quality of
service, ability to leverage its relationship with Comdisco, and ability to
respond rapidly.
Employees
As of March 31, 2000, Comdisco Ventures employed thirty-nine people on a
full time basis--twenty-five people personnel were involved in marketing and
sales, twelve were in processing, servicing and administrative support and two
were executive employees. No employees are represented by a labor union.
Facilities
Comdisco Ventures' principal executive offices are located and its
venture leasing and venture debt activities are conducted at 3000 Sand Hill
Road, Menlo Park, California. In addition to its principal offices, Comdisco
Ventures leases office space in Palo Alto, California, Waltham, Massachusetts
and Rosemont, Illinois.
Comdisco Ventures believes its current facilities are adequate for its
existing needs and that additional, suitable space will be available as
required.
Regulation, Licenses and Qualifications, Federal And State
Because Comdisco Ventures is a non-bank, commercial lender, it is not
subject to material federal regulation. Nevertheless, Comdisco Ventures may be
required to comply with the Equal Credit Opportunity Act ("ECOA"). Under the
ECOA, Comdisco Ventures is required to give all credit applicants notice of the
right to receive a written statement of reasons an application for credit is
denied, unless the applicant has gross revenues exceeding $1 million during its
last fiscal year.
Comdisco Ventures is not subject to material regulation in most states,
although some states do require licensing for some kinds of commercial
financing activities. Most states' usury laws, which limit the amount of
interest charged on loans originated in a state, either exempt commercial loans
or do not extend the benefit of the usury laws to corporate borrowers.
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To date, substantially all documentation relating to Comdisco Ventures'
financing products is accepted in, and funding is made through, Comdisco's
principal offices in Illinois and these transactions are intended to be
governed by Illinois law, which does not require licensing for those
activities. Hybrid Fund has applied for a license in California. Comdisco has
applied for a license in California as well, as it expands its funding sources.
Comdisco Ventures believes it is currently in material compliance with
any applicable state usury laws as well as other applicable federal and state
statutes and regulations.
Comdisco Ventures believes existing federal and state laws and
regulations have not had a material adverse effect on its operations. There
can, however, be no assurance that future laws and regulatory changes will not
occur and will not place additional burdens on its operations.
Management
The following table shows information about Comdisco Ventures'
management.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
James P. Labe 43 Chief Executive Officer
Geoffrey L. Tickner, Jr. 39 Chief Operating Officer
John J. Vosicky 51 Chief Financial Officer
</TABLE>
Jim Labe is Comdisco Ventures' Chief Executive Officer. He has been
involved in the debt-financing field within venture capital for more than
seventeen years. He founded Comdisco Ventures as a division of Comdisco in
early 1987, and served as President of the division until April 10, 2000, at
which time he was designated the chief executive officer of Comdisco Ventures.
Prior to Comdisco, Jim spent four years with Equitec Financial Group,
structuring "venture leases" with venture backed companies. His background also
includes computer marketing and new business development. Jim has been a
speaker at venture capital industry conferences. He has also participated in
programs on venture leasing and other forms of creative equity-linked financing
at both the University of Chicago Graduate School of Business and at Harvard
Graduate School of Business. Jim received his MBA degree from the University of
Chicago and his BA degree from Middlebury College. He has been a corporate
officer and Senior Vice President of Comdisco, Inc. since January, 1996.
Geoffrey Tickner is Comdisco Ventures' Chief Operating Officer. He joined
Comdisco Ventures in 1998 after fifteen years in investment banking at Smith
Barney in San Francisco and New York. Geoff was a Managing Director in Smith
Barney's Technology Investment Banking Group where he was responsible for the
Communication Equipment and Enterprise Software sectors. Geoff received his BA
from Princeton University in 1982 and his MBA degree from Stanford University
in 1986.
John Vosicky is Comdisco Ventures' Chief Financial Officer. He is also
Executive Vice President and Chief Financial Officer of Comdisco and will
continue to serve in those capacities. John is also the Comdisco executive
officer in charge of Comdisco Ventures and the person to whom Mr. Labe reports
at Comdisco. He has served as Executive Vice President of Comdisco since July,
1994 and Chief Financial Officer of Comdisco since November, 1984. John was
Senior Vice President of Comdisco from November, 1985 to July, 1994. He joined
Comdisco in 1975 as controller and prior to doing so, worked for Peat, Marwick,
Mitchell & Company in Chicago, Illinois. John received his BA degree from St.
Mary's University in 1970 in accounting, and received his CPA certificate from
the State of Illinois in 1973.
Glen Howard is Comdisco Ventures' Managing Director and Group Head of
Venture Lease Investments. He has been involved in sales and marketing for more
than twenty years. He has been with Comdisco for more than thirteen years,
serving ten years in lease financing sales and marketing at Comdisco before
joining Comdisco Ventures three years ago. Prior to joining Comdisco, he had
more than six years of sales and financing experience at IBM Corporation. Glen
received his BS degree in Systems Industrial Engineering from the University of
Arizona and received his MBA degree from Saint Mary's College.
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Comdisco Ventures Management Compensation And Benefits
Cash Compensation. The following table shows fiscal 1999 cash
compensation we paid to Comdisco Ventures' management.
<TABLE>
<CAPTION>
Name Salary Bonus
---- -------- ----------
<S> <C> <C>
James P. Labe........................................... $300,000 $4,887,493 (a)
Geoffrey L. Tickner, Jr. ............................... 225,000 882,345 (a)
John J. Vosicky (b)..................................... 260,000 65,000
</TABLE>
--------
(a) Bonus payments earned for fiscal 1999.
(b) Mr. Vosicky is also the Executive Vice President and Chief Financial
Officer of Comdisco. Additional information about his compensation appears
in the proxy statement concerning the special meeting of stockholders held
April 20, 2000 relating to the tracking stock proposal, filed with the SEC
on March 20, 2000.
Profit Sharing Plans. Each of Messrs. Labe and Tickner are participants
in two Comdisco Ventures' profit sharing plans under which they are eligible to
receive cash bonus payments. The first of these plans was established on
October 1, 1996 ("1996 Plan"). Under the 1996 Plan, plan participants are
entitled to receive cash bonus payments out of a total pool of 20% of the pre-
tax earnings attributable to Comdisco Ventures' transactions documented and
executed between October 1, 1996 and December 31, 1999. Bonus payments under
the 1996 Plan are made semi-annually, and will continue until all profits
attributable to those transactions covered by the 1996 Plan are realized by
Comdisco Ventures. The amounts paid as a cash bonus to each of Messrs. Labe and
Tickner under the 1996 Plan for fiscal 1999 are included in the cash
compensation table above. Mr. Vosicky is not a participant in this plan.
Comdisco Ventures established another profit sharing plan as of January
1, 2000 ("2000 Plan"). Under the 2000 Plan, plan participants are entitled to
receive cash payments out of a total pool of 20% of the pre-tax earnings
attributable to Comdisco Ventures' transactions documented and executed on or
after January 1, 2000 and before completion of this initial public offering,
excluding any transactions effected through, or assigned to, Hybrid. Bonus
payments under the 2000 Plan are made semi-annually and will continue until all
profits attributable to those transactions covered by the 2000 Plan are
realized by Comdisco Ventures. Mr. Vosicky is not a participant in this plan.
Employment Agreements. Each of Messrs. Labe and Tickner have entered into
a management agreement with Comdisco Ventures, commencing effective on the
closing of this offering, that contains these material provisions:
. a term of three years for Mr. Labe and two years for Mr. Tickner;
. an increase in fiscal year 2000 current annual salary for Mr.
Labe, from $300,000 to $500,000, and Mr. Tickner, from $300,000 to
$450,000.
. severance arrangements if the executive's employment is terminated
without cause before the end of the agreement;
. percentage participation in the Management Incentive Plan (as
described in the immediately following section);
. protection of Comdisco Ventures' confidential or proprietary
information; and
. limitations on the ability of the executive to compete with
Comdisco Ventures' business, or to solicit Comdisco Ventures'
employees, during the term of employment and for one year after a
termination of employment with Comdisco Ventures.
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Management Incentive Plan
The Management Incentive Plan was approved by Comdisco stockholders at
the April 20, 2000 special meeting. The Management Incentive Plan provides
Comdisco Ventures' senior management with a proprietary stake in the
performance of Comdisco Ventures and the creation of stockholder value and
further aligns the interests of Comdisco Ventures' senior management with the
stockholders of Comdisco Ventures Stock.
The following is a summary of the material features of the Management
Incentive Plan. You should review the full text of the Management Incentive
Plan, which has been filed as an exhibit to the registration statement of which
this prospectus is a part.
Grants of Awards. Under the Management Incentive Plan, we will grant
options and/or restricted stock awards of Comdisco Ventures Stock to senior
management of Comdisco Ventures (other than Mr. Vosicky).
Shares Available for Issuance under the Management Incentive Plan. Under
the Management Incentive Plan, the number of shares of Comdisco Ventures Stock
available for grant is limited to 12,750,000 shares, representing 15% of the
shares of Comdisco Ventures Stock deemed issued and outstanding upon completion
of this offering assuming for this purpose that Comdisco Group's retained
interest in Comdisco Ventures is represented by issued and outstanding Comdisco
Ventures Stock. Shares subject to an award that expires unexercised, are
forfeited, or terminated, or settled in cash instead of Comdisco Ventures
Stock, and shares tendered to pay for the exercise of an option, will not again
be available for grant under the Management Incentive Plan.
Initial Awards Under the Management Incentive Plan. As of May 26, 2000 we
granted non-qualified stock options for Comdisco Ventures Stock under the
Management Incentive Plan to members of the current management of Comdisco
Ventures and to a former employee who recently resigned his position as a
senior investment professional with Comdisco Ventures. Of the options granted,
10,391,250 were granted at $2.5647 per share and 1,275,000 were granted at
$7.20 per share. The number of shares and exercise price of the options granted
assumed that 85,000,000 shares of Comdisco Ventures Stock would represent 100%
of the equity value of Comdisco Ventures as of the close of this offering. The
options are subject to adjustment if that is not the case.
The initial options will vest in equal installments over a three year
period. The number of shares subject to these options may be reduced over the
life of the options to reflect cash bonuses paid to those executives under the
Comdisco Ventures' profit sharing plans or other bonus arrangements.
Federal Income Tax Consequences. The following is a brief description of
the federal income tax consequences generally arising with respect to awards
under the Management Incentive Plan. The initial options granted under the plan
will be non-qualified stock options.
The grant of an option will create no tax consequences for the
participant or Comdisco. Upon exercising an option other than an incentive
stock option, the participant generally must recognize ordinary income equal to
the difference between the exercise price and fair market value of the freely
transferable and nonforfeitable shares acquired on the date of exercise. In the
case of an employee, withholding will apply to amounts recognized as ordinary
compensation income. A participant will not recognize taxable income upon
exercising an incentive stock option (within the meaning of Section 422 of the
Code) except that the alternative minimum tax may apply.
If the participant does not hold the Comdisco Ventures Stock acquired
upon exercise of an incentive stock option for at least one year from the date
of exercise and two years from the date of grant (the "holding period"), the
participant generally must recognize ordinary income equal to the lesser of (1)
the fair market value of the shares at the date of exercise of the incentive
stock option minus the
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exercise price or (2) the amount realized upon the disposition of the incentive
stock option shares minus the exercise price. Otherwise, a participant's
disposition of shares acquired upon the exercise of an option (including an
incentive stock option for which the incentive stock option holding periods are
met) generally will result in capital gain or loss measured by the difference
between the sale price and the participant's tax basis in those shares (the tax
basis generally being the exercise price plus any amount recognized as ordinary
income in connection with the exercise of the option). The holding period for
purposes of determining whether this capital gain or loss is long-term or
short-term does not begin until the option is exercised.
We generally will be entitled to a tax deduction equal to the amount
recognized as ordinary income by the participant in connection with an option.
We generally are not entitled to a tax deduction relating to amounts that
represent a capital gain to a participant. Accordingly, we will not be entitled
to any tax deduction with respect to an incentive stock option if the
participant holds the shares for the incentive stock option holding period
prior to disposition of the shares.
With respect to awards granted under the Management Incentive Plan that
result in the payment or issuance of cash or shares or other property that is
either not restricted as to transferability or not subject to a substantial
risk of forfeiture, the participant generally must recognize ordinary income
equal to the cash or the fair market value of shares or other property
received. We generally will be entitled to a deduction in an amount equal to
the ordinary income recognized by the participant.
With respect to awards involving the issuance of shares or other property
that is restricted as to transferability and subject to a substantial risk of
forfeiture (e.g., restricted stock), the participant generally must recognize
ordinary income equal to the fair market value of the shares or other property
at the first time the shares or other property becomes transferable or is not
subject to a substantial risk of forfeiture, whichever occurs earlier. We
generally will be entitled to a deduction in an amount equal to the ordinary
income recognized by the participant.
Related Transactions with Management
Mr. Labe and Mr. Tickner are managing members of the general partner of
Hybrid Fund. As managing members, they are entitled to participate in the
profits and losses of the general partner. See "--Hybrid Fund," beginning on
page 65.
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DESCRIPTION OF COMDISCO CAPITAL STOCK
The following is a summary and should be read with our restated charter
which we have filed as an exhibit to the registration statement of which this
prospectus is a part.
Our Restated Charter and Initial Designations of Series of Common Stock and
Preferred Stock
On April 20, 2000, our stockholders authorized us to file our restated
charter. Under our restated charter, which we filed with the Secretary of State
of Delaware on May 4, 2000, there are 1,800,000,000 shares of common stock of
Comdisco authorized. The board of directors may issue the common stock in
multiple series. The board has designated two series of common stock as of the
date of this prospectus--750,000,000 shares of Comdisco Ventures Stock and
750,000,000 shares of Comdisco Stock.
We intend Comdisco Ventures Stock to reflect the performance of Comdisco
Ventures, our venture financing business division.
We intend Comdisco Stock to reflect the performance of Comdisco Group,
which consists of our other businesses and a retained interest in Comdisco
Ventures.
We have allocated, for financial reporting purposes, all of Comdisco's
consolidated assets, liabilities, revenue, expenses and cash flow between
Comdisco Group and Comdisco Ventures. In the future, so long as Comdisco
Ventures Stock is outstanding, we will publish financial statements for each of
Comdisco Ventures and Comdisco Group, together with consolidated financial
statements of Comdisco covering all of Comdisco Ventures and Comdisco Group.
This description refers in many places to "Comdisco Group's retained
interest in Comdisco Ventures." This represents the ownership of Comdisco Group
in that portion of Comdisco Ventures that is not represented by outstanding
Comdisco Ventures Stock. The size of this retained interest relative to the
interest represented by Comdisco Ventures Stock may change in the future if
actions are taken such as:
. issuances of additional shares of Comdisco Ventures Stock,
. repurchases of Comdisco Ventures Stock, or
. transfers of cash or other property between Comdisco Group and
Comdisco Ventures
that change either the total amount of the assets of Comdisco Ventures or the
number of shares of Comdisco Ventures Stock that is outstanding.
Our board of directors has designated 75,000,000 shares of Comdisco
Ventures Stock to represent those shares that would be deemed owned by Comdisco
Group in respect of its retained interest in Comdisco Ventures. See "--General
Conversion and Redemption Provisions--Retained Interest of Comdisco Group in
Comdisco Ventures" beginning on page 82 and our restated charter for additional
information about Comdisco Group's retained interest in Comdisco Ventures and
the initial number of shares of Comdisco Ventures Stock that would be deemed
owned by Comdisco Group in respect of its retained interest in Comdisco
Ventures.
Under our restated charter and to the extent permitted by Delaware law,
our board of directors could, without the need to obtain stockholder approval:
. designate common stock not previously designated by the board of
directors, or re-designate previously designated but unissued
common stock, into one or more additional new series of common
stock; or
. increase or decrease from time to time the total number of
authorized shares of each designated series of common stock.
However, the board of directors could not increase the number of shares
of authorized stock of a designated series above a number which, when added to
the number of authorized shares of all designated common stock, would exceed
the total number of authorized shares of common stock. In
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addition, the board of directors could not decrease the number of shares
authorized of any series of common stock below the number of shares outstanding
of such series and shares reserved for options, warrants, the rights plan and,
as applicable, any retained interest of one group by another.
At the time it creates any new series of common stock, our board of
directors would be authorized to determine and designate the number of shares
of each new series and all rights and privileges of each new series, including
dividend rights, exchange or redemption provisions, rights upon liquidation or
merger, and voting rights.
Authorized but unissued shares of Comdisco Ventures Stock and Comdisco
Stock and previously undesignated common stock would be available for issuance
by Comdisco from time to time, as determined by the board of directors, for any
proper corporate purpose. These purposes could include raising capital, paying
stock dividends, effecting a stock split, providing compensation or benefits to
employees or acquiring other companies or businesses, or designating a new
series of common stock. Comdisco would not be required to solicit your approval
for any issuance described above, unless required by the Delaware law or NYSE
or Nasdaq Stock Market rules.
Preferred Stock
Our board of directors has the authority to issue preferred stock in one
or more series, without stockholder approval and is authorized to fix the
dividend rights and terms, conversion rights, voting rights, redemption rights,
liquidation preferences, sinking funds and any other rights, preferences,
privileges and restrictions applicable to each series of preferred stock. Our
restated charter designates two series of preferred stock:
.200,000 shares of Series C Junior Participating Preferred Stock; and
. 200,000 shares of Series D Junior Participating Preferred Stock.
These shares are reserved for issuance in connection with Comdisco's
preferred stock purchase rights described below. None of these shares are
currently issued or outstanding.
Description of Comdisco Ventures Stock
Under the restated charter, we will have the authority to issue up to
750,000,000 shares of Comdisco Ventures Stock. We plan to sell up to 10,000,000
shares in this offering. The following additional shares of Comdisco Ventures
Stock initially will be reserved for issuance:
. 12,750,000 shares under the Management Incentive Plan described
beginning on page 71;
. 8,250,000 shares under Comdisco's other stock-based compensation
plans; and
. 75,000,000 shares to represent Comdisco Group's retained interest
in Comdisco Ventures.
Dividends. We will be permitted to pay dividends on Comdisco Ventures
Stock out of assets of Comdisco legally available for the payment of dividends
under Delaware law. Our restated charter, however, provides that the total
amounts paid as dividends on Comdisco Ventures Stock cannot exceed the
available dividend amount for Comdisco Ventures.
The "available dividend amount" for Comdisco Ventures at any time is the
amount that would then be legally available for the payment of dividends on
Comdisco Ventures Stock under Delaware law if:
. Comdisco Ventures was an independent Delaware corporation; and
. Comdisco Ventures had outstanding a number of shares of common
stock, par value $0.10 per share, equal to the number of shares of
Comdisco Ventures Stock that are
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then outstanding plus the number of shares of Comdisco Ventures
Stock that would be issuable with respect to Comdisco Group's
retained interest in Comdisco Ventures.
The amount legally available for the payment of dividends on common
stock of a corporation under Delaware law is generally limited to:
. the total assets of the corporation,
. less its total liabilities,
. less the aggregate par value of the outstanding shares of its
common and preferred stock.
However, if that amount is not greater than zero, the corporation may
also pay dividends out of the net profits for the corporation for the fiscal
year in which the dividend is declared and/or the preceding fiscal year. As
mentioned above, these restrictions will form the basis for calculating the
available dividend amounts for Comdisco Ventures. These restrictions will also
form the basis for calculating the aggregate amount of dividends that Comdisco
as a whole can pay on its common stock (regardless of series). Thus, net
losses of any business group, and any dividends and distributions on, or
repurchases of, any series of common stock, will reduce the assets legally
available for dividends on other series of common stock.
Subject to the above limitations, we have the right to pay dividends on
none, any or all of the series of common stock, in equal or unequal amounts,
notwithstanding the performance of any business group, the amount of assets
available for dividends on any series, the amount of prior dividends declared
on any series or any other factor. Dividend payments may also be subject to
any other limitations set forth in any future series of preferred stock or in
any agreements binding on Comdisco from time to time.
At the time we pay any dividend on the outstanding shares of Comdisco
Ventures Stock, we will credit to Comdisco Group, and charge against Comdisco
Ventures a corresponding amount in respect of Comdisco Group's retained
interest in that group for purposes of calculating available dividend amounts
for future dividends. Specifically, the corresponding amount will equal (1)
the aggregate amount of that dividend times (2) a fraction, the numerator of
which is the number of shares that would be issuable with respect to Comdisco
Group's retained interest in Comdisco Ventures and the denominator of which is
the number of shares of Comdisco Ventures Stock then outstanding.
Mandatory Dividend, Redemption or Conversion of Comdisco Ventures Stock.
If we sell or dispose of all or substantially all of the properties and assets
of Comdisco Ventures in a transaction other than one described below under "--
Exceptions to the Dividend, Redemption or Conversion Requirement if a
Disposition Occurs" our board of directors will decide if we will:
. pay a dividend to the holders of Comdisco Ventures Stock in cash
and/or securities or other property having a value equal to their
proportionate interest in the net proceeds of the disposition; or
. if the disposition involves all of the properties and assets,
redeem all outstanding shares of Comdisco Ventures Stock in
exchange for cash and/or securities or other property having a
value equal to the proportionate interest of the holders of
Comdisco Ventures Stock in the net proceeds of the disposition; or
. if the disposition involves substantially all, but not all, of the
properties and assets, redeem a number of whole shares of Comdisco
Ventures Stock having an aggregate average market value, during
the twenty-day trading period beginning on the sixteenth trading
day following consummation of that transaction, equal to the
proportionate interest of the holders of Comdisco Ventures Stock
in the value of the net proceeds of the disposition; or
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. convert each outstanding share of Comdisco Ventures Stock into a
number of shares of Comdisco Stock equal to 115% of the ratio of
the average market value of one share of Comdisco Ventures Stock
to the average market value of one share of Comdisco Stock during
the twenty-day trading period ending on the fifth trading day
prior to the first public announcement of that disposition
transaction.
We will determine the proportionate interest of the holders of Comdisco
Ventures Stock in the net proceeds of a disposition by assuming that Comdisco
Group's retained interest in Comdisco Ventures is represented by issued and
outstanding shares of Comdisco Ventures Stock. Under these circumstances, our
board of directors in its sole discretion, will determine the fair market value
of all assets, except for cash and unrestricted publicly traded securities.
We may only pay a dividend or redeem shares of a series of common stock
if we have legally available funds under Delaware law. We will pay the dividend
or complete the redemption or conversion on or prior to the ninetieth trading
day following the disposition date.
For purposes of determining whether a disposition has occurred,
"substantially all of the properties and assets" attributed to Comdisco
Ventures means a portion of the properties and assets that represents at least
80% of the value of the properties and assets attributed to Comdisco Ventures.
The "net proceeds" of a disposition means an amount equal to what remains
of the gross proceeds of the disposition after any payment of, or reasonable
provision is made as determined by our board of directors for:
. any taxes payable by us, or which would have been payable but for
the utilization of tax benefits attributable to Comdisco Group, in
respect of the disposition or in respect of any resulting dividend
or redemption;
. any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses; and
. any liabilities of or attributed to Comdisco Ventures, including,
without limitation, any liabilities for deferred taxes, any
indemnity or guarantee obligations incurred in connection with the
disposition or otherwise, any liabilities for future purchase
price adjustments and any preferential amounts plus any
accumulated and unpaid dividends in respect of the preferred stock
attributed to Comdisco Ventures.
We may elect to pay the dividend or redemption price either in the same
form as the proceeds of the disposition or in any other combination of cash,
securities or other property that our board of directors or, in the case of
securities that have not been publicly traded for a period of at least fifteen
months, an independent investment banking firm, determines will have an
aggregate market value of not less than the value of the net proceeds.
Exceptions to the Dividend, Redemption or Conversion Requirement if a
Disposition Occurs. We are not required to take any of the above actions for
any disposition of all or substantially all of the properties and assets
attributed to Comdisco Ventures in a transaction or series of related
transactions that results in our receiving for those properties and assets
primarily equity securities of any entity which:
. acquires those properties or assets or succeeds to the business
conducted with those properties or assets or controls that
acquirer or successor; and
. is primarily engaged or proposes to engage primarily in one or
more businesses similar or complementary to the businesses
conducted by Comdisco Ventures prior to the disposition, as
determined by our board of directors.
The purpose of this exception is to enable us technically to dispose of
properties or assets of Comdisco Ventures to other entities engaged or
proposing to engage in businesses similar or
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complementary to those of that group without requiring a dividend on, or a
conversion or redemption of, Comdisco Ventures Stock, so long as we hold an
equity interest in that entity. A joint venture in which we own a direct or
indirect equity interest is an example of such an acquirer. We are not
required to control that entity, whether by ownership or contract provisions.
As a result of these exceptions, holders of Comdisco Ventures Stock could find
themselves holding a tracking stock that tracks the performance of a set of
assets owned by an entity or entities supervised by management other than
Comdisco Ventures.
We are also not required to effect a dividend, redemption or conversion
if:
. the disposition is of all or substantially all of our properties
and assets in one transaction or a series of related transactions
in connection with our dissolution, liquidation or winding up and
the distribution of our assets to stockholders;
. the disposition is on a pro rata basis, such as in a spin-off, to
the holders of all outstanding shares of Comdisco Ventures Stock;
. the disposition is made to any person or entity controlled by us,
as determined by the board of directors;
. the disposition is made at a time when only one series of common
stock is outstanding; or
. before the thirtieth trading day following the disposition, we
have mailed a notice stating that we are exercising our right to
convert all of the outstanding shares of Comdisco Ventures Stock,
as applicable, into newly issued shares of Comdisco Stock as
contemplated under "Conversion of Comdisco Ventures Stock at
Option of Comdisco" below.
Sale of less than substantially all the assets of Comdisco Ventures. We
currently intend to allocate to Comdisco Ventures for its benefit the proceeds
from any disposition of less than all or substantially all of the Comdisco
Ventures properties and assets. However, consistent with the policies
described under "Relationship Between Comdisco Ventures and Comdisco Group,"
beginning on page 92, our board of directors has the right, to determine
whether to allocate those proceeds differently, subject to the fiduciary
duties owed by the board of directors to all Comdisco stockholders.
Conversion of Comdisco Ventures Stock at Option of Comdisco. We will
have the right, at any time, to convert shares of Comdisco Ventures Stock into
a number of shares of Comdisco Stock initially equal to 125% of the ratio of
the average market value of one share of Comdisco Ventures Stock to the
average market value of one share of Comdisco Stock over a twenty-day trading
period ending on the fifth trading day prior to the mailing of the conversion
notice for conversions occurring in the first quarter after the original
issuance of Comdisco Ventures Stock. The percentage applied to the ratio of
market values will decline ratably each quarter over a period of ten quarters
to 115%.
If, however, we convert Comdisco Ventures Stock into Comdisco Stock as a
result of a tax event, as defined below, we will have the right to convert
shares of Comdisco Ventures Stock into a number of shares of Comdisco Stock
equal to 110% of the ratio of the average market values of the Comdisco
Ventures Stock and the Comdisco Stock described above, regardless of when that
adverse tax law change takes place.
"Tax event" means Comdisco's receipt of an opinion of our tax counsel
that, as a result of:
. any amendment to, or change in, the laws or regulations
interpreting the laws of the United States or any political
subdivision or taxing authority thereof or therein, including any
announced proposed change in those regulations by an
administrative agency; or
. any official or administrative pronouncement, action or judicial
decision interpreting or applying those laws or regulations,
without regard to whether that pronouncement, action or judicial
decision involves Comdisco,
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it is more likely than not that for U.S. federal income tax purposes:
. Comdisco or our stockholders are, or at any time in the future
will be, subject to tax upon the issuance of shares of any of
Comdisco Stock or Comdisco Ventures Stock, or
. any Comdisco Stock or Comdisco Ventures Stock is not or at any
time in the future will not be treated solely as stock of
Comdisco, or
. any Comdisco Stock or Comdisco Ventures Stock is or will be
treated as section 306 stock under the Internal Revenue Code.
For purposes of rendering this opinion, tax counsel will assume that any
administrative proposals will be adopted as proposed. However, in the event of
an announced proposed legislative change, tax counsel shall render an opinion
only in the event of enactment.
These provisions allow us the flexibility to recapitalize our outstanding
series of common stocks into one class of common stock that would, after the
recapitalization, represent an equity interest in all of our businesses. The
optional conversion could be exercised at any future time if our board of
directors determines that, under the facts and circumstances then existing, an
equity structure consisting of multiple series of common stock was no longer in
the best interests of all of our stockholders. A conversion could be exercised,
however, at a time that is disadvantageous to the holders of Comdisco Ventures
Stock. For additional information on the risks of a conversion and the limited
remedies available to stockholders, see "Risk Factors--Risks Relating to
Ownership of Comdisco Ventures Stock--Our right to convert Comdisco Ventures
Stock into Comdisco Stock at any time without stockholder approval may prevent
the holders of Comdisco Ventures Stock from retaining an investment in a
tracking stock under circumstances in which they would wish to retain their
investment," on page 19.
The conversion ratio that will result in the specified premium will be
calculated based on the average market value of one share of Comdisco Ventures
Stock as compared to the average market value of one share of Comdisco Stock
during the twenty consecutive trading day period ending on, and including, the
fifth trading day immediately preceding the date on which we mail the notice of
conversion to holders of Comdisco Ventures Stock.
Conversion would be based upon the relative market values of Comdisco
Stock, on the one hand, and Comdisco Ventures Stock, on the other. Many factors
could affect the market values of Comdisco Stock and Comdisco Ventures Stock,
including our results of operations and those of each group, trading volume and
general economic and market conditions. Market values could also be affected by
decisions by our board of directors or our management that investors perceive
to affect adversely one series of common stock compared to the other. These
decisions could include changes to our management and allocation policies,
transfers of assets between groups, allocations of corporate opportunities and
financing resources between the groups and changes in dividend policies.
Redemption of Comdisco Ventures Stock in Exchange for Stock of
Subsidiary. Although it currently has no intention to do so, our board of
directors may redeem on a pro rata basis all of the outstanding shares of
Comdisco Ventures Stock for shares of the common stock of one or more of our
wholly owned subsidiaries which will then own all of the assets and liabilities
attributed to Comdisco Ventures, and no other assets or liabilities. We may
redeem shares of Comdisco Ventures Stock for subsidiary stock only if we have
legally available funds under Delaware law. In connection with any exchange, in
the event that we have a retained interest in Comdisco Ventures, we could
retain any remaining shares of common stock of the subsidiary holding Comdisco
Ventures' assets or distribute those shares as a dividend on Comdisco Stock.
As a result of a redemption in exchange for stock of a subsidiary,
holders of the series of common stock redeemed would hold securities of a
separate legal entity. This redemption could be authorized by the board of
directors at any time in the future if it determines that, under the facts and
circumstances then existing, an equity structure comprised of multiple series
of common stock designated as tracking stocks is no longer in the best
interests of all of our stockholders as a whole.
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Because Comdisco Ventures would most likely be subject to the
registration requirements of the 1940 Act if the exchange described above were
to occur, it is unlikely that our board of directors would redeem Comdisco
Ventures Stock in the manner described in this section.
General Conversion and Redemption Provisions
Notices Upon Disposition of Group Assets. Not later than the twentieth
trading day after the consummation of a sale of all or substantially all of the
properties and assets of Comdisco Ventures, we will announce publicly by press
release:
. the estimated net proceeds of the disposition;
. the number of shares of Comdisco Ventures Stock outstanding;
. the number of shares of any series of common stock into which
Comdisco Ventures Stock is convertible and the conversion,
exchange or exercise price of those convertible securities; and
. the number of shares issuable with respect to our retained
interest in Comdisco Ventures.
Not later than the 40th trading day after the consummation of the
disposition, we will announce publicly by press release whether we will:
. pay a dividend or redeem shares of Comdisco Ventures Stock with
the net proceeds of the disposition; or
. convert the shares of Comdisco Ventures Stock into shares of
Comdisco Stock.
We will mail to each holder of shares of Comdisco Ventures Stock any
additional notices and other information required by our restated charter.
Notice upon Optional Conversion or Redemption in Exchange for Stock of a
Subsidiary. If Comdisco determines to convert shares of Comdisco Ventures Stock
into shares of Comdisco Stock or into shares of stock of a subsidiary as
described above, Comdisco will send each holder of Comdisco Ventures Stock that
is being converted or redeemed a notice not less than thirty nor more than
forty-five days prior to the conversion or redemption date. This notice will
contain:
. a statement that all outstanding shares of Comdisco Ventures Stock
will be converted or redeemed, as applicable;
. the conversion or redemption date;
. the number of shares of Comdisco Stock or the number of shares of
stock of the subsidiary, as the case may be, which each holder of
Comdisco Ventures Stock will receive;
. the place or method for redemption or conversion; and
. any other information required by our restated charter.
Selection of Shares for Redemption. If less than all of the outstanding
shares of Comdisco Ventures Stock are to be redeemed, we will redeem those
shares proportionately from among the holders of outstanding shares of Comdisco
Ventures Stock or by the method as may be determined by our board of directors
to be equitable.
Fractional Interests; Transfer Taxes. We will not be required to issue
fractional shares of any capital stock or any fractional securities to any
holder of Comdisco Ventures Stock upon any conversion, redemption, dividend or
other distribution described above. If a fraction is not issued to a holder, we
will pay cash instead of that fraction.
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We will pay all documentary, stamp or similar issue or transfer taxes
that may be payable in respect of the issue or delivery of any shares of
capital stock and/or other securities on conversion or redemption of shares. We
would not, however, be required to pay any tax that might be payable in respect
of any transfer involved in the issue or delivery of any shares of capital
stock and/or other securities in a name other than that in which the shares of
Comdisco Ventures Stock so exchanged or redeemed were registered, and no issue
or delivery will be made unless and until the person requesting that issue pays
to Comdisco the amount of any tax or establishes to our satisfaction that this
tax has been paid.
Stockholder Rights Upon Conversion or Redemption. If shares of Comdisco
Ventures Stock are converted or redeemed as previously described, after this
conversion or redemption all rights of a holder of shares of Comdisco Ventures
Stock that were converted or redeemed will cease. The only right a holder of
shares of Comdisco Ventures Stock converted or redeemed would have at that time
is the right to receive the cash and/or the certificates representing shares of
capital stock, securities or other property into which Comdisco Ventures Stock
was converted or for which it was redeemed, together with any payments for
fractional shares or rights to dividends, as provided above, without interest.
No holder of a certificate that prior to the conversion or redemption
represented shares of Comdisco Ventures Stock converted or redeemed will be
entitled to receive any dividends or other distribution or interest payment
with respect to shares of any kind of capital stock into, or in exchange for
which, shares of the Comdisco Ventures Stock were converted or redeemed until
surrender of the holder's certificate in exchange for a certificate
representing shares of that capital stock. Upon the surrender of the holder's
certificate, there will be paid to the holder the amount of any dividends or
other distributions (without interest) which became payable with respect to a
record date occurring after the conversion, but which were not paid by reason
of the foregoing, with respect to the number of whole shares of capital stock
represented by the certificate or certificates issued upon that surrender. From
and after a conversion, Comdisco will, however, be entitled to treat the
certificates for Comdisco Ventures Stock that have not yet been surrendered for
conversion as being evidence of the ownership of the number of whole shares of
capital stock into which the shares of Comdisco Ventures Stock represented by
those certificates should have been converted, notwithstanding the failure to
surrender those certificates.
Voting Rights. Holders of Comdisco Ventures Stock will generally vote
together with holders of Comdisco Stock as a single class on all matters
requiring a stockholder vote.
Until the thirty-first trading day following the effective date of the
restated charter, on all matters as to which all series of Comdisco's common
stock will vote together as a single class:
. each share of Comdisco Ventures Stock will have one vote; and
. each share of Comdisco Stock will have one vote.
On and after that thirty-first trading day, at each vote of stockholders,
the aggregate voting power of the Comdisco Ventures Stock and Comdisco Stock
will be adjusted as follows:
. each share of Comdisco Ventures Stock will have a number of votes
(or a fraction of a vote) based on the ratio of the average market
value of one share of Comdisco Ventures Stock to the average
market value of one share of Comdisco Stock during the 20
consecutive trading days ending on (and including) the record date
of the vote; and
. each share of Comdisco Stock will have one vote.
For example, if the average market value of one share of Comdisco
Ventures Stock for the period specified above was $20.00, and the average
market value of one share of the Comdisco Stock for the period specified above
was $40.00, each share of Comdisco Stock would have one vote and each share of
Comdisco Ventures Stock would have 0.5 votes based on the following
calculation:
$20.00
-----
= .5 votes per share
$40.00
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However, in the event that the foregoing calculation results in the
holders of Comdisco Ventures Stock holding more than 35% of the total voting
power of all outstanding shares of common stock, the vote of each share of
Comdisco Ventures Stock that exceeds that amount will be reduced so that all of
the outstanding shares of Comdisco Ventures Stock in the aggregate represent
35% of the total voting power of all outstanding shares of Comdisco's common
stock.
Subject to the 35% limitation, the voting formula above is intended to
equate the relative voting rights of the series of common stock to their
relative market capitalization at the time of each adjustment. The periodic
adjustments could influence an investor interested in acquiring and maintaining
a fixed percentage of the voting power of Comdisco's outstanding stock to
acquire that percentage of all series of common stock, and would limit the
ability of investors in one class to acquire for the same consideration
relatively more or less votes per share than investors in the other series.
Because, of the limitations on the voting power of Comdisco Ventures
Stock, when the holders of Comdisco Ventures Stock and Comdisco Stock vote
together as a single class, the holders of Comdisco Stock will be in a position
to control the outcome of a majority vote even if the matter involves a
conflict of interest between the holders of Comdisco Ventures Stock and
Comdisco Stock.
If shares of only one series of common stock are outstanding, each share
of that series will have one vote. If any series of common stock is entitled to
vote as a separate class with respect to any matter, each share of that series
will, for purposes of that vote, have one vote on that matter.
We will set forth the number of outstanding shares of Comdisco Ventures
Stock and Comdisco Stock in our annual and quarterly reports filed pursuant to
the Exchange Act, and disclose in any proxy statement for a stockholder meeting
the number of outstanding shares and per share voting rights of each share of
Comdisco Ventures Stock and Comdisco Stock.
The holders of Comdisco Ventures Stock will not have any rights to vote
separately as a class on any matter coming before our stockholders, except for
the limited class voting rights provided under Delaware law or by Nasdaq Stock
Market rules. Matters that provide for separate class voting include amendments
to our restated charter that would change the par value of Comdisco Ventures
Stock or alter or change the powers, preferences or special rights of shares of
Comdisco Ventures Stock so as to adversely affect the holders of Comdisco
Ventures Stock.
Liquidation. In the event of our voluntary or involuntary liquidation,
dissolution or winding-up, the holders of Comdisco Ventures Stock and Comdisco
Stock will be entitled to receive our assets, if any, remaining for
distribution to stockholders on a per share basis in proportion to the
liquidation units per share of each series. Our assets remaining for
distribution will be determined after payment of, or provision for, all
liabilities, including contingent liabilities, and payment of the liquidation
preference payable to any holders of our preferred stock. Each share of
Comdisco Stock shall have one liquidation unit. Each share of Comdisco Ventures
Stock will have a number of liquidation units, including a fraction of one
liquidation unit, equal to the ratio of
(1)the average market value of a share of Comdisco Ventures Stock
during the twenty consecutive trading days prior to February 28, 2001,
to
(2) the average of the market value of one share of Comdisco Stock
over the same period, expressed as a decimal fraction rounded to the
nearest five decimal places.
If the voluntary or involuntary dissolution, liquidation or winding up of
Comdisco occurs prior to February 28, 2001, the average market value of one
share of Comdisco Ventures Stock will be determined based on:
(1)the twenty consecutive trading day period immediately prior to
the dissolution, liquidation or winding-up event, or
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(2)the actual number of consecutive trading days in the event that
the dissolution, liquidation or winding-up event, if that event occurs
prior to the 21st trading day after the effective date of our restated
charter.
After the number of liquidation units with respect to Comdisco Ventures
Stock has been determined in the manner above, the number will not be changed
except as described below. Thus, the liquidation rights of the holders of the
Comdisco Ventures Stock or Comdisco Stock may not bear any relationship to the
relative market values or the relative voting rights of that series.
The liquidation units of the Comdisco Ventures Stock and Comdisco Stock
were determined by Comdisco in consultation with our financial advisors and are
based upon, among other factors, each group's initial level of debt and equity
capitalization, each group's recent historical financial performance, the
market prices of shares of comparable companies that are publicly traded and
the current state of the markets for public offerings and other stock
transactions.
If Comdisco subdivides, by stock split, reclassification or otherwise, or
combines, by reverse stock split, reclassification or otherwise, the
outstanding shares of Comdisco Ventures Stock or Comdisco Stock, the number of
liquidation units of the Comdisco Ventures Stock or Comdisco Stock, as
applicable, shall be adjusted as determined by the board of directors so as to
avoid any dilution in the aggregate liquidation rights of either series of
common stock.
In the absence of a public trading market for the shares of Comdisco
Ventures Stock, our board of directors will exercise its good faith judgment to
determine the market value of a share of that stock for purposes of this
formula.
In the case of our dissolution, liquidation or winding up:
. no holder of Comdisco Stock will have any special right to receive
specific assets of Comdisco Group; and
. no holder of Comdisco Ventures Stock will have any special right
to receive specific assets of Comdisco Ventures.
Neither a merger nor consolidation of Comdisco into or with any other
corporation, nor any sale, transfer or lease of all or any part of our assets,
will, alone, be deemed a liquidation or winding up of Comdisco, or cause the
dissolution of Comdisco, for purposes of these liquidation provisions.
Comdisco considers that its complete liquidation is a remote contingency,
and its financial advisors believe that, in general, these liquidation
provisions are immaterial to the value of Comdisco Ventures Stock.
Retained Interest of Comdisco Group in Comdisco Ventures. The number of
shares of Comdisco Ventures Stock that, if issued, would initially represent
the equity value of Comdisco Ventures held by Comdisco Group has been set by
the board of directors at 75,000,000. The board of directors made this
determination following discussion with Comdisco's independent financial
advisors, based on:
. the historical and projected financial and operating information
of Comdisco Ventures;
. the market prices of securities and other financial and operating
information of companies engaged in activities similar to those of
Comdisco Ventures;
. prevailing equity market conditions; and
. the range of the initial public offering price of the Comdisco
Ventures Stock to be issued.
The equity value of Comdisco Ventures remaining after we first distribute
Comdisco Ventures Stock in this offering will be held by Comdisco Group. This
retained interest, because it represents an
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interest between two business groups within Comdisco, would not constitute
outstanding shares of common stock and, accordingly, would not be represented
by shares of Comdisco Ventures Stock and would not be voted on any matter by
the Comdisco Group, including any matter requiring the vote of the holders of
Comdisco Ventures Stock as a separate class. However, the market value
attributable to Comdisco Group's retained interest in Comdisco Ventures should
be reflected in the market value of the Comdisco Stock, which in turn would
affect the aggregate voting power represented by Comdisco Stock on any matter
in which holders of Comdisco Stock and Comdisco Ventures Stock vote together as
a single class.
We will adjust Comdisco Group's retained interest in Comdisco Ventures to
reflect further issuances or repurchases of Comdisco Ventures Stock that
relates to Comdisco Ventures (including the grant of any restricted stock
awards or exercises of any options granted to, Comdisco employees), capital
contributions to, or returns of capital from, Comdisco Ventures and certain
other events, including any distribution of that stock representing all of our
retained interest in Comdisco Ventures to holders of Comdisco Stock.
In this prospectus, we call the percentage interest in Comdisco Ventures
intended to be represented at any time by the outstanding shares of the series
of common stock that tracks that group the "Outstanding Interest Percentage",
and we call the remaining percentage interest in Comdisco Ventures intended to
be represented at any time by Comdisco Group's retained interest in that group
the "Retained Interest Percentage." At any time, the Outstanding Interest
Percentage equals the number of shares outstanding of Comdisco Ventures Stock
divided by the total number of notional shares of Comdisco Ventures Stock
deemed outstanding and the Retained Interest Percentage equals the number of
shares of Comdisco Ventures Stock issuable with respect to Comdisco Group's
retained interest in Comdisco Ventures divided by the total number of notional
shares of Comdisco Ventures Stock deemed outstanding, in each case expressed as
a percentage. The sum of the Outstanding Interest Percentage and the Retained
Interest Percentage always equals 100%.
Prior to this offering, the Retained Interest Percentage is 100% and the
Outstanding Interest Percentage is 0%.
Whenever we decide to issue shares of Comdisco Ventures Stock, we would
determine, in our sole discretion, whether to attribute that issuance and its
proceeds to:
. Comdisco Group in respect of its retained interest in Comdisco
Ventures in a manner analogous to a secondary offering of common
stock of a subsidiary owned by a corporate parent, or
. Comdisco Ventures in a manner analogous to a primary offering of
common stock.
If we issue any shares of Comdisco Ventures Stock and attribute that
issuance and its proceeds to Comdisco Group in respect of its retained interest
in Comdisco Ventures:
. the number of shares issuable with respect to Comdisco Group's
retained interest in Comdisco Ventures would be reduced by the
number of shares of that series we issue,
. the number of outstanding shares of Comdisco Ventures Stock would
be increased by the same amount,
. the total number of notional shares deemed outstanding of Comdisco
Ventures Stock would remain unchanged,
. the Retained Interest Percentage would be reduced, and
. the Outstanding Interest Percentage would be correspondingly
increased.
If we instead attribute that issuance and its proceeds to Comdisco
Ventures:
. the number of shares issuable with respect to Comdisco Group's
retained interest in Comdisco Ventures would remain unchanged,
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. the number of outstanding shares of Comdisco Ventures Stock and
the total number of notional shares deemed outstanding of Comdisco
Ventures Stock would be increased by the number of shares we
issue,
. the Retained Interest Percentage would be reduced, and
. the Outstanding Interest Percentage would be correspondingly
increased.
We have the right to issue shares of Comdisco Ventures Stock as a
distribution on Comdisco Stock. If we did so, we would attribute that
distribution to Comdisco Group in respect of its retained interest in Comdisco
Ventures. As a result:
. the number of shares of Comdisco Ventures Stock issuable with
respect to Comdisco Group's retained interest in Comdisco Ventures
would be reduced by the number of shares so distributed,
. the number of outstanding shares of Comdisco Ventures Stock would
be increased by the same amount,
. the total number of notional shares deemed outstanding of Comdisco
Ventures Stock would remain unchanged,
. the Retained Interest Percentage would be reduced, and
. the Outstanding Interest Percentage would be correspondingly
increased.
If instead we issued shares of Comdisco Ventures Stock as a distribution
on outstanding shares of Comdisco Ventures Stock, we would attribute that
distribution to Comdisco Ventures, in which case we would proportionately
increase the number of shares of Comdisco Ventures Stock issuable with respect
to Comdisco Group's retained interest in Comdisco Ventures. As a result:
. the number of shares of Comdisco Ventures Stock issuable with
respect to Comdisco Group's retained interest in Comdisco Ventures
and the total number of notional shares deemed outstanding of
Comdisco Ventures Stock would each be increased by the same
percentage as the number of outstanding shares of Comdisco
Ventures Stock is increased, and
. the Retained Interest Percentage and Outstanding Interest
Percentage would remain unchanged.
At the time of any dividend on the outstanding shares of Comdisco
Ventures Stock other than any dividend payable in shares of Comdisco Ventures
Stock, we will credit to Comdisco Group, and charge against Comdisco Ventures,
a corresponding amount in respect of Comdisco Group's retained interest in
Comdisco Ventures. Specifically, the corresponding amount will equal (1) the
aggregate amount of that dividend times (2) a fraction, the numerator of which
is the number of shares of Comdisco Ventures Stock issuable with respect to
Comdisco Group's retained interest in Comdisco Ventures and the denominator of
which is the number of shares of Comdisco Ventures Stock then outstanding.
If we decide to repurchase shares of Comdisco Ventures Stock, we would
determine, in our sole discretion, whether to attribute that repurchase and its
cost to:
. Comdisco Group in a manner analogous to a purchase of common stock
of a subsidiary by a corporate parent, or
. Comdisco Ventures in a manner analogous to an issuer repurchase.
If we repurchase shares of Comdisco Ventures Stock and attribute that
repurchase and its cost to Comdisco Group:
. the number of shares of Comdisco Ventures Stock issuable with
respect to Comdisco Group's retained interest in the Comdisco
Ventures would be increased by the number of shares so purchased,
. the number of outstanding shares of Comdisco Ventures Stock would
be decreased by the same amount,
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. the total number of notional shares of Comdisco Ventures Stock
deemed outstanding would remain unchanged,
. the Retained Interest Percentage would be increased, and
. the Outstanding Interest Percentage would be correspondingly
decreased.
If we instead attribute that repurchase of Comdisco Ventures Stock and
its cost to Comdisco Ventures:
. the number of shares of Comdisco Ventures Stock issuable with
respect to Comdisco Group's retained interest in the Comdisco
Ventures would remain unchanged,
. the number of outstanding shares of Comdisco Ventures Stock and
the total number of notional shares of Comdisco Ventures Stock
deemed outstanding would be decreased by the number of shares so
repurchased,
. the Retained Interest Percentage would be increased, and
. the Outstanding Interest Percentage would be correspondingly
reduced.
We may, in our sole discretion, determine to transfer cash or other
property of Comdisco Ventures to Comdisco Group in return for a decrease in
Comdisco Group's retained interest in Comdisco Ventures, in a manner analogous
to a return of capital, or to transfer cash or other property of Comdisco Group
to Comdisco Ventures in return for an increase in Comdisco Group's retained
interest in Comdisco Ventures, in a manner analogous to a capital contribution.
If we determine to transfer cash or other property of Comdisco Ventures
to Comdisco Group in return for a decrease in Comdisco Group's retained
interest in Comdisco Ventures:
. the number of shares of Comdisco Ventures Stock issuable with
respect to Comdisco Group's retained interest in Comdisco Ventures
and the total number of notional shares of Comdisco Ventures Stock
deemed outstanding would each be decreased by an amount equal to
the fair value of that cash or other property divided by the
market value of a share of Comdisco Ventures Stock on the day of
transfer,
. the number of outstanding shares of Comdisco Ventures Stock would
remain unchanged,
. the Retained Interest Percentage would be decreased, and
. the Outstanding Interest Percentage would be correspondingly
increased.
If we instead determine to transfer cash or other property of Comdisco
Group to Comdisco Ventures in return for an increase in Comdisco Group's
retained interest in Comdisco Ventures:
. the number of shares of Comdisco Ventures Stock issuable with
respect to Comdisco Group's retained interest in Comdisco Ventures
and the total number of notional shares of Comdisco Ventures Stock
deemed outstanding would each be increased by an amount equal to
the fair value of that cash or other property divided by the
market value of a share of Comdisco Ventures Stock on the day of
transfer,
. the number of outstanding shares of Comdisco Ventures Stock would
remain unchanged,
. the Retained Interest Percentage would be increased, and
. the Outstanding Interest Percentage would be correspondingly
decreased.
We may not attribute issuances of Comdisco Ventures Stock to Comdisco
Group, transfer cash or other property of Comdisco Ventures to Comdisco Group
in return for a decrease in Comdisco's retained interest in Comdisco Ventures
or take any other action to the extent that doing so would cause the number of
shares of Comdisco Ventures Stock issuable with respect to Comdisco Group's
retained interest in Comdisco Ventures to decrease below zero.
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For illustrations showing how to calculate the Retained Interest
Percentage, the Outstanding Interest Percentage, the number of shares of
Comdisco Ventures Stock issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures, and the total number of notional shares deemed
outstanding of Comdisco Ventures Stock after giving effect to hypothetical
dividends, issuances, repurchases and transfers, see Annex I to this
prospectus.
Determinations by the Board
Any determinations made by our board of directors in good faith under our
restated charter or in any certificate of designation filed pursuant to our
restated charter would be final and binding on all stockholders of Comdisco,
subject to rights under applicable Delaware law and under the federal
securities laws.
Preemptive Rights
Holders of Comdisco Ventures Stock will not have any preemptive rights to
subscribe for any additional shares of capital stock or securities that we may
issue in the future.
Amended and Restated Rights Agreement
We have issued and will issue preferred stock purchase rights to all
holders of our common stock under a rights agreement amended and restated as of
May 4, 2000, between Comdisco and ChaseMellon Shareholder Services L.L.C., as
rights agent.
The restated rights agreement provides that:
. each right in effect at the date of restatement be redesignated as
a Comdisco Stock right, which will continue to allow holders of
outstanding Comdisco Stock to purchase shares of Series C Junior
Participating Preferred Stock of Comdisco if a distribution date
occurs;
. for each share of Comdisco Stock issued between the date of the
restated rights agreement and the expiration date of the rights,
we will issue one Comdisco Stock right which will allow holders to
purchase shares of Series C Junior Participating Preferred Stock
of Comdisco if a distribution date occurs; and
. for each share of Comdisco Ventures Stock issued between the date
of the restated rights agreement and the expiration date of the
rights, we will issue one Comdisco Ventures Stock right which will
allow holders to purchase shares of Series D Junior Participating
Preferred Stock of Comdisco if a distribution date occurs.
We refer to the Comdisco Stock rights and the Comdisco Ventures Stock
rights collectively as the "rights."
A "distribution date" will occur upon the earliest of:
. the tenth day, or a later day determined by our board of
directors, after a public announcement that a person or group of
affiliated or associated persons other than us, any subsidiary of
Comdisco, or any of our or our subsidiaries' employee benefit
plans (an "acquiring person") has acquired beneficial ownership of
15% or more of the voting power of all the shares of our common
stock; or
. the tenth business day, or a later day determined by our board of
directors, following the commencement of or announcement of the
intention to commence a tender or exchange offer that would result
in that person or group beneficially owning 15% or more of the
voting power of all the shares of our common stock; or
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. the tenth business day after our board of directors declares a
person to be an "adverse person."
Any person or group that beneficially owns 20% or more of our outstanding
common stock on the effective date of the amendment and statement of the rights
plan, which we refer to as an "existing holder," will not be deemed an
"acquiring person" until that existing holder acquires beneficial ownership of
30% or more of the voting power of our outstanding common stock. An adverse
person is a person or group (1) which beneficially owns 10% or more of the
voting power of our outstanding common stock and (2) which our board of
directors has determined has interests adverse to ours based on requirements
set out in the amended and restated rights agreement.
Until the distribution date, the rights will not be represented by a
separate certificate and may be transferred only with their respective series
of common stock.
Following the distribution date, holders of rights other than any
acquiring person or adverse person (whose rights will thereupon become null and
void) will be entitled to purchase from us:
. in the case of a Comdisco right, one one-thousandth of a share of
Series C Junior Participating Preferred Stock at a purchase price
of $75, subject to adjustment; and
. in the case of a Comdisco Ventures Stock right, one one-thousandth
of a share of Series D Junior Participating Preferred Stock at a
purchase price of $180, subject to adjustment.
The purchase prices discussed above are referred to as the "Series C
purchase price" and the "Series D purchase price."
Unless the rights are earlier redeemed, if any person or group becomes an
acquiring person or our board of directors declares a person to be an "adverse
person":
. a Comdisco Stock right will entitle its holder other than any
acquiring person or adverse person to purchase, at the Series C
purchase price, a number of shares of Comdisco Stock with a market
value equal to twice that purchase price;
. any Comdisco Ventures Stock right will entitle its holder other
than any acquiring person or adverse person to purchase, at the
Series D purchase price, a number of shares of Comdisco Ventures
Stock with a market value equal to twice that purchase price; and
. all rights of any acquiring person or adverse person will become
null and void.
After the rights have been triggered, the board of directors may exchange
the rights, other than rights owned by an acquiring person or adverse person,
at an exchange ratio of:
. one share of Comdisco Stock per Comdisco Stock right, subject to
adjustment, and
. one share of Comdisco Ventures Stock per Comdisco Ventures Stock
right, subject to adjustment.
Unless the rights are earlier redeemed, if, following the time a person
becomes an acquiring person or adverse person:
. Comdisco is acquired in a merger or other business combination
transaction and Comdisco is not the surviving corporation;
. any person consolidates or merges with Comdisco and all or part of
the common stock is converted or exchanged for securities, cash or
property of any other person or of Comdisco; or
. 50% or more of Comdisco's assets or earning power is sold or
transferred,
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then, each right will entitle its holder other than any acquiring person to
purchase, for the applicable purchase price, a number of shares of common stock
of the surviving entity in that merger, consolidation or other business
combination of, or the purchaser in, that sale or transfer with a market value
equal to twice the applicable purchase price.
The rights will expire on November 17, 2007, unless we extend or
terminate them as described below.
At any time until the close of business on the fifteenth day following a
public announcement that there is an acquiring person or our board of directors
declares a person to be an "adverse person", our board of directors may redeem
all of the rights at a price of $0.01 per right. On the redemption date, the
right to exercise the rights will terminate and the only right of the holders
of rights will be to receive that redemption price.
Prior to a distribution date, the board of directors may, without the
approval of any holders of rights, supplement or amend any provision of the
amended and restated rights agreement in any manner, whether or not that
supplement or amendment is adverse to any holders of the rights. From and after
a distribution date, the board of directors may, without the approval of any
holders of rights, supplement or amend the amended and restated rights
agreement only:
. to cure any ambiguity,
. to correct or supplement any provision that may be defective or
inconsistent with any other provision, or
. in any manner that it may deem necessary or desirable and which
does not materially adversely affect the interests of the holders
of rights other than an acquiring person, adverse person and their
associates and affiliates.
A holder of a right will not have any rights as a stockholder of
Comdisco, including the right to vote or to receive dividends, until a right is
exercised.
The amended and restated rights agreement contains provisions designed to
prevent the inadvertent triggering of the rights. A person will not be deemed
an acquiring person if the board of directors of Comdisco approved the
acquisition by that person of shares of common stock prior to that person
otherwise becoming an acquiring person. In addition, the amended and restated
rights agreement gives a person who has inadvertently acquired 15% or more of
the voting power of all series of our common stock and does not have any
intention of changing or influencing the control of Comdisco the opportunity to
sell a sufficient number of shares so that the acquisition would not trigger
the rights. In addition, the rights will not be triggered and a divestiture of
shares will not be required if a person becomes the holder of 15% or more, or
30% or more in the case of an existing holder, of the voting power of all of
our series of common stock, solely as a result of either (1) the reduction of
our outstanding common stock as the result of our repurchase of any of our
common stock or (2) any adjustment of the voting rights of Comdisco Ventures
Stock in accordance with the provisions of our restated charter. However, any
person who exceeds that threshold as a result of our stock repurchases or a
voting rights adjustment will trigger the rights if the person subsequently
acquires additional shares of our common stock. Our board may also further
amend the amended and restated rights agreement in the future, including in
connection with any distribution of Comdisco Group's retained interest in
Comdisco Ventures, to compensate for any unintended effects of the variable
voting rights associated with Comdisco Ventures Stock.
The restated rights agreement will permit disinterested stockholders to
acquire additional shares of our common stock or of an acquiring company at a
substantial discount in the event of those changes in control described in the
restated rights agreement. The restated rights agreement is intended to
discourage anyone from buying shares of common stock having more than 15% of
the voting power of all series of our common stock without prior approval by
the board of directors.
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We have filed the form of amended and restated rights agreement with the
SEC as an exhibit to the registration statement of which this prospectus is a
part.
Other Provisions of Our Restated Charter, Bylaws and Delaware Law
Authorized Shares. Our restated charter provides that we may from time to
time designate and issue shares of common stock or preferred stock in one or
more series, the terms of which will be determined by our board of directors,
and authorize and issue additional common stock of any previously designated
series. Our board of directors, is authorized to fix the dividend rights and
terms, conversion rights, voting rights, redemption rights, liquidation
preferences, and any other rights, preferences, privileges and restrictions
applicable to each series of common stock or preferred stock. We will not
solicit further approval of our stockholders to designate, authorize or issue
those shares unless our board of directors believes that approval is advisable
or is required by NYSE or Nasdaq Stock Market rules or Delaware law. The
purpose of authorizing the board of directors to determine these rights and
preferences is to eliminate delays associated with a stockholder vote on
specific issuances. This authority however could enable our board of directors
to issue shares to persons friendly to current management which could render
more difficult or discourage an attempt to obtain control of Comdisco by means
of a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of our management. These additional shares also could be used to
dilute the stock ownership of persons seeking to obtain control of Comdisco.
Classified Board of Directors; Removal of Directors; Limitation on
Ability to Call Special Meetings. Our restated charter provides that our board
of directors shall be divided into three classes and shall consist of such
number of directors as is set in our bylaws. Our bylaws provide that the board
of directors will be divided into three classes of an approximately equal
number of directors with each class of directors having a three-year term of
office. Our restated charter also provides that a director may be removed for
cause only upon the vote of two-thirds of the voting stock of Comdisco. These
provisions in our restated charter and bylaws may only be amended by a vote of
two-thirds of the voting power of all series of common stock of Comdisco voting
together as a class.
Our bylaws further provide that stockholders of Comdisco may not call
special meetings of the stockholders.
The provisions regarding classification of our board of directors,
removal of directors and the limitations on the stockholders' ability to call
special meetings may have the effect of discouraging anyone from attempting to
acquire control of Comdisco and thereby discouraging open market purchases of
any series of common stock.
Business Combinations with Substantial Stockholders. Our restated charter
provides that business combinations with substantial stockholders will require
the vote of two-thirds of the voting stock of Comdisco to approve that
transaction.
A "substantial stockholder" is defined as a person, other than a member
of our board of directors as of September 30, 1985 or any of our employee
benefit plans, who or which beneficially owns 10% or more of our outstanding
shares of common stock.
A "business combination" is defined to mean:
. a merger or consolidation of Comdisco with a substantial
stockholder;
. a sale, lease, exchange, transfer or other disposition of all or
any substantial part of the assets of Comdisco or any subsidiary
to a substantial stockholder (defined as 10% of the total book
value of the assets);
. a merger or consolidation of a substantial stockholder with
Comdisco or any subsidiary;
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. a sale, lease, exchange, transfer or other disposition of all or
any substantial part of the assets of a substantial stockholder to
Comdisco or a subsidiary;
. any re-classification of our common stock or any recapitalization
of Comdisco consummated within five years after a substantial
stockholder became a substantial stockholder;
. issuance of any securities of Comdisco or any subsidiary to a
substantial stockholder, except proportionately as a stockholder;
. acquisition by Comdisco or any subsidiary of securities of a
substantial stockholder; or
. any agreement providing for any of these types of transactions.
The business combination will not need to receive the two-thirds vote
outlined above if the consideration to be paid by the interested stockholder in
the business combination meets various tests set forth in our restated charter,
designed to ensure that the form and amount of consideration to be paid by the
interested stockholder is fair to the other holders of our common stock.
The business combination provisions outlined above may have the effect of
discouraging attempts to acquire control of Comdisco and thereby of
discouraging open market purchases of our common stock.
Stockholder Nominations and Proposals. Our bylaws provide that to
nominate directors, stockholders must submit a written notice to our corporate
secretary not less than 120 days nor more than 150 days before the first
anniversary of the date of the mailing of the proxy statement for our last
annual meeting. The notice must include the name and address of the stockholder
and of the nominee, a description of any arrangements between the stockholder
and the nominee, information about the nominee required by the SEC, the written
consent of the nominee to serve as a director and other information.
Similarly, to submit proposals at an annual meeting, a stockholder must
provide our corporate secretary of notice of the proposal not less than 120
days nor more than 150 days before the first anniversary of the date of the
mailing of the proxy statement for our last annual meeting. The notice must
include:
. a description of the proposal;
. the reasons for presenting the proposal at the annual meeting;
. the text of any resolutions to be presented;
. the stockholder's name and address and number of shares held;
. any material interest of the stockholder in the proposal; and
. a representation that the stockholder intends to appear at the
meeting, in person or by proxy, to submit the proposal.
In addition, the bylaws provide that only the board of directors,
chairman of the board, chief executive officer or president of Comdisco can
call special meetings of stockholders and that the only business that may be
brought before a special meeting is that business specified in the notice of
that meeting. These procedural requirements could have the effect of delaying
or preventing the submission of matters proposed by any stockholder to a vote
of the stockholders.
Delaware Law. Section 203 of the General Corporation Law of the State of
Delaware applies to Comdisco. Generally, Section 203 limits the ability of an
"interested stockholder" to effect various business combinations with Comdisco
for a three-year period following the time that that stockholder became an
interested stockholder. An "interested stockholder" is defined as a holder of
15% or more of our outstanding voting stock.
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An interested stockholder may engage in a business combination
transaction with Comdisco within the three-year period only if:
. our board of directors approved the transaction before the
stockholder became an interested stockholder or approved the
transaction in which the stockholder became an interested
stockholder;
. the interested stockholder acquired at least 85% of our voting
stock in the transaction in which it became an interested
stockholder; or
. our board of directors and the holders of shares entitled to cast
two-thirds of the votes entitled to be cast by all of our
outstanding voting shares held by all disinterested stockholders
approve the transaction.
Stock Transfer Agent and Registrar
ChaseMellon Shareholder Services L.L.C. will act as the registrar and
transfer agent for Comdisco Ventures Stock.
Anti-takeover Considerations
If Comdisco Ventures were a separate company and not part of a single
enterprise, any person interested in acquiring Comdisco Ventures without
negotiating with management could seek control of that entity by obtaining
control of its outstanding voting stock by means of a tender offer or proxy
contest. Although we intend Comdisco Ventures Stock to reflect the separate
performance of Comdisco Ventures, a person interested in acquiring Comdisco
Ventures without negotiation with Comdisco's management could obtain control of
that group only by obtaining control of all our outstanding voting stock.
The existence of multiple series of common stock could present
complexities and could pose obstacles, financial and otherwise, to an acquiring
person. The existence of multiple series of common stock could prevent
stockholders from profiting from an increase in the market value of their
shares as a result of a change in control of Comdisco by delaying or preventing
that change in control.
Additional shares of common stock and preferred stock are available for
future issuance without further stockholder approval. One of the effects of the
existence of authorized and unissued common stock and preferred stock could be
to enable the board to issue shares to persons friendly to current management
which could render more difficult or discourage an attempt to obtain control of
Comdisco by means of a merger, tender offer, proxy contest or otherwise, and
thereby protect the continuity of our management. These additional shares also
could be used to dilute the stock ownership of persons seeking to obtain
control of Comdisco.
For additional anti-takeover considerations, see "--Other Provisions of
Our Restated Charter, Bylaws and Delaware Law", beginning on page 89.
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RELATIONSHIP BETWEEN COMDISCO VENTURES AND COMDISCO GROUP
Because Comdisco Group and Comdisco Ventures will not be separate legal
entities, Comdisco has carefully considered a number of issues with respect to
the financing of each group, competition between groups, inter-group business
transactions, corporate opportunities and the allocation of shared services
expenses, corporate general and administrative expenses, debt, interest, taxes,
retirement benefit costs, and other support activities between the groups.
Following is a summary of policies and guidelines that we plan to follow to
help us to allocate costs and charges between the groups in a manner that will
ensure that transactions between the groups are made on a basis that in
management's judgment would be fair and equitable. These policies are not
subject to approval by Comdisco's stockholders and may be changed at any time
without stockholder approval.
The description of the Comdisco Ventures Policy Statement below is not
complete and is qualified in its entirety by reference to the text of the
Comdisco Ventures Policy Statement that is filed as an exhibit to the
registration statement of which this prospectus is a part. For information on
how to obtain this document, see "Where You Can Find More Information" on page
106. You are urged to read it in its entirety.
Fiduciary and Management Responsibilities
Under Delaware law, absent an abuse of discretion, a director or officer
will be deemed to have satisfied his or her fiduciary duties to Comdisco and to
the holders of our Comdisco Stock and Comdisco Ventures Stock if that person is
disinterested and acts in accordance with his or her good faith business
judgment in the interests of Comdisco and all of our stockholders as a whole.
Our board of directors and our chief executive officer, in establishing
policies with regard to intracompany matters such as business transactions
between groups and allocations of assets, liabilities, debt, shared services
expenses, corporate general and administrative costs, taxes, interest,
retirement benefit costs, corporate opportunities and other matters, will
consider various factors and information which could benefit or cause detriment
to the stockholders of the respective groups and will make determinations in
the best interests of Comdisco and all of our stockholders as a whole. Comdisco
will adhere to the principle that transactions and transfers between groups
should be made on a basis that in management's judgment would be fair and
equitable.
Comdisco Ventures Stock Committee
Our board of directors will establish the Comdisco Ventures Stock
Committee as a committee of our board of directors under our bylaws to oversee
the interaction between the businesses of Comdisco Group and Comdisco Ventures.
The members of the Comdisco Ventures Stock Committee are Nicholas K. Pontikes,
Keith Hartley and Carolyn Murphy, who are all members of our board of
directors. Members of the Comdisco Ventures Stock Committee have no separate
fiduciary duty to act solely in the best interests of the holders of Comdisco
Ventures Stock, but rather owe their fiduciary duties to all Comdisco
stockholders as a whole. In accordance with our bylaws, our board of directors
will delegate to the Comdisco Ventures Stock Committee authority to:
. interpret, make determinations under, and oversee the
implementation of the policies described in the Policy Statement
Regarding Comdisco Ventures Stock Matters described under "--
Comdisco Ventures Policy Statement," beginning on page 93;
. review our policies, programs and practices relating to:
. the business and financial relationships between Comdisco
Group and Comdisco Ventures,
. disclosures to stockholders and the public concerning, and
transactions by Comdisco or any of its subsidiaries, in
shares of Comdisco Ventures' tracking stock, and
. any matters arising in connection with any of the
foregoing, all to the extent the Comdisco Ventures Stock
Committee may deem appropriate;
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. recommend changes in the policies, programs and practices that
Comdisco Ventures Stock Committee may deem appropriate;
. recommend adoption of additional policies governing the
relationship between Comdisco Ventures and Comdisco Group; and
. engage the services of accountants, investment bankers,
appraisers, attorneys and other service providers to assist the
Comdisco Ventures Stock Committee in performing its duties.
The Comdisco Ventures Stock Committee will have and may exercise such other
powers, authority and responsibilities as our board of directors may determine
from time to time. Although our board of directors has no present intention to
do so, it may modify, suspend or rescind the authority of the Comdisco Ventures
Stock Committee at any time.
Comdisco Ventures Policy Statement
We will, effective upon issuance of Comdisco Ventures Stock, adopt the
Comdisco Ventures Policy Statement, which Comdisco intends to follow.
Amendment and Modification to the Comdisco Ventures Policy Statement
Our board of directors may amend, modify, suspend or rescind the policies
set forth in the Comdisco Ventures Policy Statement, including any resolution
implementing the provisions of the Comdisco Ventures Policy Statement. Our
board may also adopt additional or other policies or make exceptions with
respect to the application of the policies described in the Comdisco Ventures
Policy Statement in connection with particular facts and circumstances, all as
our board may determine, consistent with its fiduciary duties to Comdisco and
all of our stockholders.
General Policy
Our board of directors has determined, and the Comdisco Ventures Policy
Statement states, that all material matters in which holders of Comdisco Stock
and Comdisco Ventures Stock may have divergent interests will be generally
resolved in a manner that is in the best interests of Comdisco and all of its
common stockholders after giving fair consideration to the potentially
divergent interests and all other relevant interests of the holders of the
separate classes of the common stock of Comdisco.
Relationship Between the Comdisco Group and Comdisco Ventures
The Comdisco Ventures Policy Statement provides that Comdisco will seek
to manage Comdisco Group and Comdisco Ventures in a manner designed to maximize
the operations, unique assets and value of both groups. Comdisco expects that
the operating relationship between the two groups will include the coordination
and use of bundled offers, marketing, sales, branding, and other intellectual
property and technology. In addition, there will be various financial
arrangements between the two groups, including with respect to debt, other
financings and taxes.
General. The Comdisco Ventures Policy Statement provides that, except as
otherwise provided in the policy statement, all material commercial
transactions between Comdisco Group and Comdisco Ventures will be on
commercially reasonable terms taken as a whole and will be subject to the
review and approval of our board of directors and/or the Comdisco Ventures
Stock Committee as its designee.
Allocation of corporate overhead and support services. Generally,
Comdisco Ventures will have access to the support services of Comdisco Group,
including human resources, legal, payroll, accounting, tax, information
technology and network services.
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For shared corporate services that arise as a result of being part of a
combined entity, including securities filing and financial reporting services,
costs relating to these services will be:
. allocated directly to the group utilizing those services, and
. if not directly allocable to a group, allocated between the groups
on a fair and reasonable basis as our board of directors
determines.
For other support services, for example, billing and purchasing services,
the Comdisco Ventures Policy Statement provides that the groups will seek to
achieve enterprise efficiencies to minimize the aggregate costs incurred by the
two groups combined, although each group also will be entitled to negotiate and
procure other support services on their own from third parties.
Sourcing and provision of other services. Other than corporate overhead
and support services, Comdisco Ventures will use exclusively the services
offered by Comdisco Group if those types of services are required in Comdisco
Ventures transactions. The Comdisco Ventures Policy Statement further provides
that Comdisco Group will provide these services to Comdisco Ventures at the
best price offered by Comdisco Group to third parties in similar situations
when taking into account all relevant factors. In establishing these prices,
consideration of other factors, as appropriate, such as avoided costs and
synergies to be shared between the groups are expected to be taken into
account. In addition, each group will cooperate in good faith to develop offers
that reflect such other factors.
It is expected that when the combined services of the two groups are
bundled or offered together and the total cost to consumers of each of those
services are separately identified on a billing statement, Comdisco Group and
Comdisco Ventures will each control the pricing of its respective services and
receive the associated revenues.
In a combined transaction offering where the services of the two groups
are integrated and the total costs to consumers of each of those services are
not separately identified on a billing statement, the groups are expected to
work collaboratively to determine the nature of their arrangements and are also
permitted to source the services of the other group as described above;
provided, however, that Comdisco Ventures may not offer a combination of
services comprised primarily of Comdisco Group's services without Comdisco's
agreement.
Inter-Group Interest. The Comdisco Ventures Policy Statement provides
that Comdisco Ventures will not acquire Comdisco Stock.
No Employee Interest in Customers. The Comdisco Ventures Policy Statement
states that all employees of Comdisco are governed by Comdisco's conflicts and
insider trading policies. In addition, the Comdisco Ventures Policy Statement
provides that no employee of Comdisco Ventures may acquire any interest in any
customer of Comdisco Ventures.
Corporate Opportunities
The Comdisco Ventures Policy Statement provides that our board of
directors will allocate any business opportunities and operations, any acquired
assets and businesses and any assumed liabilities between the two groups, in
whole or in part, as it considers to be in the best interests of Comdisco and
its stockholders as a whole and as contemplated by the other provisions of the
policy statement. If a business opportunity or operation, an acquired asset or
business, or an assumed liability would be suitable to be undertaken by or
allocated to either group, our board of directors will allocate it using its
business judgment or in accordance with procedures that our board of directors
adopts from time to time to ensure that decisions will be made in the best
interests of Comdisco and its stockholders as a whole. Any allocation of this
type may involve the consideration of a number of factors that our board of
directors determines to be relevant, including, without limitation, whether the
business opportunity or operation, the acquired asset or business, or the
assumed liability is principally within the existing scope of a group's
business and whether a group is better positioned to undertake or have
allocated to it such
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business opportunity or operation, acquired asset or business or assumed
liability. Our board of directors currently intends, however, subject to and
without limiting the provisions of the Comdisco Ventures Policy Statement, to
allocate future venture financing opportunities to Comdisco Ventures.
Dividend Policy
The Comdisco Ventures Policy Statement provides that, subject to the
limitations on dividends set forth in our charter, including any preferential
rights of any series of preferred stock of Comdisco, and to the limitations of
applicable law, holders of shares of Comdisco Ventures Stock will be entitled
to receive dividends on that stock when, as and if our board of directors
authorizes and declares dividends on that stock.
Since Comdisco Ventures is expected to require significant capital
commitments to finance its operations and fund its future growth, the Comdisco
Ventures Policy Statement provides that Comdisco does not expect to pay any
dividends on shares of Comdisco Ventures Stock. If and when our board of
directors determines to pay any dividends on shares of Comdisco Ventures Stock,
the Comdisco Ventures Policy Statement provides that this determination will be
a business decision that our board of directors makes based upon the results of
operations, financial condition and capital requirements of Comdisco and other
factors that our board of directors considers relevant.
We expect that our dividend policy with respect to Comdisco Stock will be
consistent with the dividend policy we had for our prior existing common stock.
While the board of directors does not currently plan to change the policy
for payment of dividends referred to above, the board of directors has the
discretion to change this policy at any time. The amount of funds legally
available for dividends will reflect the gains or losses of all groups, and
Comdisco may be unable to pay dividends on a series of common stock that tracks
a group regardless of the financial condition or results of operations of that
group. We cannot assure you that there will be amounts available for payment of
dividends on any series of common stock.
In addition, subject to the limitations described above, and the
limitations set forth generally in this section, the board of directors may in
its sole discretion declare and pay dividends on neither series of common
stock, on one but not both series of common stock or on both series of common
stock. The amount of any dividend may likewise vary between Comdisco Stock and
Comdisco Ventures Stock in the sole discretion of the board of directors.
We will otherwise be permitted to pay dividends on Comdisco Ventures
Stock (and transfer corresponding amounts to Comdisco Group in respect of its
retained interest in the relevant group), but the total of the amounts paid as
dividends on the shares of Comdisco Ventures Stock and the corresponding
amounts transferred to Comdisco Group in respect of its retained interest in
the relevant group cannot exceed the available dividend amount for that group.
We will otherwise be permitted to pay dividends on Comdisco Stock out of
assets of Comdisco legally available for the payment of dividends under
Delaware law, but the total amounts paid as dividends on Comdisco Group Stock
cannot exceed the available dividend amount for Comdisco Group.
We expect that determinations to pay dividends on Comdisco Ventures Stock
or Comdisco Stock would be based primarily upon the financial condition,
results of operations, capital requirements, any restrictions contained in our
financing or other agreements and those other factors as our board of directors
deems relevant.
Financial Reporting
The Comdisco Ventures Policy Statement provides that Comdisco will
prepare and include in its filings with the SEC financial statements of
Comdisco Group and Comdisco Ventures for so long as
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Comdisco Ventures Stock is outstanding. The financial statements of Comdisco
Ventures will reflect the financial position, results of operations and cash
flows of the businesses attributed to Comdisco Ventures and in the case of
annual financial statements will be audited.
Comdisco Ventures Stock Committee
We will, effective upon issuance of Comdisco Ventures Stock, establish
the Comdisco Ventures Stock Committee of our board of directors that we
describe above under "--Comdisco Ventures Stock Committee," beginning on page
92.
In making determinations in connection with the policies set forth in the
Comdisco Ventures Policy Statement, the members of our board of directors and
Comdisco Ventures Stock Committee will act in a fiduciary capacity and in
accordance with legal guidance concerning their respective obligations under
applicable law. Members of the Comdisco Ventures Stock Committee have no
separate fiduciary duty to act solely in the best interests of the holders of
Comdisco Ventures Stock, but rather owe their fiduciary duties to all Comdisco
stockholders as a whole. The delegation of responsibilities to Comdisco
Ventures Stock Committee will be subject to changes our board of directors may
determine.
Preparation of Financial Statements
We will prepare financial statements in accordance with generally
accepted accounting principles, consistently applied, for Comdisco Group and
Comdisco Ventures and for Comdisco on a consolidated basis. The financial
statements of Comdisco Group and Comdisco Ventures taken together will comprise
all the accounts included in the corresponding consolidated financial
statements of Comdisco. The financial statements of each of Comdisco Group and
Comdisco Ventures will reflect the financial condition, results of operations
and cash flows of the businesses included in the corresponding group.
The financial statements of each group will also include the allocated
portions of debt, interest, retirement benefit costs, shared services costs,
corporate general and administrative costs and taxes for each group. We will
make these allocations for the purposes of preparing the financial statements
of each group. However, the holders of Comdisco Stock and Comdisco Ventures
Stock will still be subject to all of the risks associated with an investment
in Comdisco as a whole.
Treasury Activities
Comdisco plans to continue to manage most financial activities on a
centralized basis. These activities include the investment of surplus cash, the
issuance and repayment of short-term and long-term debt and the issuance and
repurchase of common stock. If we transfer cash or other property allocated to
one group to another group, we may account for that transfer in one of the
following ways:
. as an adjustment to allocated pooled debt, or as a short-term or
long-term loan between groups, or as a repayment of a previous
borrowing, as described under "--Inter-group Loans" on the next
page; or
. as a sale of assets between groups; or
. as a reduction or increase in Comdisco Group's retained interest
in Comdisco Ventures.
Our board of directors has not adopted specific criteria to determine
which of the foregoing will be applied to a particular transfer of cash or
property from one group to another. Our board of directors and management will
make these determinations, either in specific instances or by setting generally
applicable policies, in the exercise of its business judgment. These
determinations will be based on all relevant circumstances, including the
financing needs and objectives of the receiving group, the investment
objectives of the transferring group, the availability, cost and time
associated with alternative financing sources, prevailing interest rates and
general economic conditions. We will make all transfers of assets from one
group to another on a fair and equitable basis for the foregoing purposes.
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Although we may allocate our debt and preferred stock between groups, the
debt will remain the obligation of Comdisco as a whole and all of our
stockholders will be subject to the risks associated with those obligations.
Comdisco Debt and Preferred Stock. We may allocate our debt between the
groups or, if we so determine, in its entirety to a particular group, for
example, in the case of specific acquisition financing. We will allocate
preferred stock, if issued, in a similar manner. We refer to debt and preferred
stock allocated between groups as "pooled."
The portion of the pooled debt allocated to Comdisco Ventures will bear
interest for purposes of its financial statements at a rate to reflect the
board of directors' good faith determination as to the relative credit risks of
Comdisco Ventures, and applied to Comdisco Ventures' allocated portion of the
pooled debt balance at the beginning of each period for which interest expense
is calculable. The remainder of the interest expense on pooled debt for that
period will be allocated to Comdisco Group. Preferred stock, if issued and if
pooled in a manner similar to the pooled debt, will bear dividends for group
financial statement purposes at a rate based on the weighted average dividend
rate of the preferred stock similarly calculated and applied. Any expense
related to increases in pooled debt or preferred stock will be reflected in the
weighted average interest or dividend rate of that pooled debt or preferred
stock as a whole.
If we allocate debt for a particular financing in its entirety to one
group, that debt will bear interest for group financial statement purposes at
the rate applicable to that debt as determined by the board of directors as
provided above. If we allocate preferred stock in its entirety to one group, we
will charge the dividend cost to that group in a similar manner. Any additional
expenses related to debt or preferred stock that is allocated in its entirety
to a group will be allocated in whole to that group.
Inter-group Loans. Cash or other property that we allocate to one group
that is transferred to another group could be accounted for either as
adjustments to allocated pooled debt, or as a short-term loan or as a long-term
loan. We will establish guidelines for the terms on which loans between the
groups will be made, including the interest rates, amortization schedule,
maturity and redemption terms.
Equity Issuances and Repurchases and Dividends. We will reflect all
financial effects of issuances and repurchases of shares of Comdisco Ventures
Stock or Comdisco Stock entirely in the financial statements of that group. We
will reflect financial effects of dividends or other distributions on, and
purchases of, shares of Comdisco Ventures Stock or Comdisco Stock entirely in
the respective financial statements of the related group.
Transfers of Assets Between Groups
Our restated charter permits the transfer of assets between groups
without stockholder approval. Comdisco has established a policy that all these
transfers will be made on a fair and equitable basis, as determined in good
faith by our board of directors or management. The consideration for these
transfers may be paid by one group to another in cash or other consideration.
Taxes
We will generally determine the income tax provisions of Comdisco and its
subsidiaries on a consolidated basis. We will allocate those consolidated
income tax provisions and related tax payments or refunds between the groups
based principally on the taxable income and tax credits directly attributable
to each group. These allocations will reflect each group's contribution,
whether positive or negative, to Comdisco's consolidated taxable income and the
consolidated tax liability and tax credit position. We will credit tax benefits
that cannot be used by the group generating those benefits but can be used on a
consolidated basis to the group that generated those benefits.
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Current and deferred taxes and taxes payable or refundable allocated to
each group in its historical financial statements may differ from those that
would have been allocated to each group had they filed separate income tax
returns.
These policies are reflected in a tax sharing agreement between Comdisco
and Comdisco Ventures.
Changes in Policies
Neither our board of directors nor management has any current plans to
change the above policies. However, these policies may be modified by the board
of directors or management in its or their sole discretion without the approval
of stockholders. Any modifications to the above policies will be made by the
board of directors or management in its or their good faith business judgment
of Comdisco's best interests, taking into consideration the interests of
Comdisco and all of Comdisco's stockholders.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States
federal income tax consequences of the ownership of Comdisco Ventures Stock.
The discussion is based on the Internal Revenue Code of 1986, as amended,
Treasury regulations, published positions of the Internal Revenue Service, and
court decisions as of the date of this prospectus, all of which are subject to
change. In particular, Congress could enact legislation affecting the treatment
of stock with characteristics similar to the Comdisco Ventures Stock, or the
Treasury Department could issue regulations that change current law. Any future
legislation or regulations could apply retroactively to the offering of
Comdisco Ventures Stock. See "--Absence of Authority Regarding Tracking Stock;
Possible Legislative, Regulatory or Other Changes" below. This discussion is
based on the opinion of Hopkins & Sutter, our special tax counsel.
The discussion below does not discuss all aspects of United States
federal income taxation that may be relevant to a particular shareholder, nor
does it discuss state, local, and foreign tax consequences. Rather, it
addresses only federal income tax considerations that may be relevant to United
States stockholders who will hold their Comdisco Ventures Stock as capital
assets within the meaning of Section 1221 of the Code. It may not apply to
those stockholders who are subject to special treatment under the federal
income tax laws, such as insurance companies, corporations subject to the
alternative minimum tax, banks, dealers in securities, tax-exempt
organizations, persons that hold existing common stock as part of a straddle,
hedging or conversion transaction, persons whose functional currency is not the
U.S. dollar, or stockholders who acquired their stock pursuant to the exercise
of employee stock options or otherwise as compensation. Material U.S. federal
income and estate tax consequences to non-U.S. stockholders are set forth
further below.
Each Comdisco stockholder should consult his, her or its own tax advisor
as to the application of the federal income tax laws to their particular
situation, as well as to the applicability and effect of any state, local,
foreign or other federal tax laws.
Tracking Stock as Stock of Comdisco
In the opinion of Hopkins & Sutter, our special tax counsel, Comdisco
Ventures Stock will be considered stock of Comdisco for federal income tax
purposes. Accordingly, for federal income tax purposes, we believe that neither
you nor we will recognize any income, gain or loss as a result of the issuance
of Comdisco Ventures Stock pursuant to this offering.
Absence of Authority Regarding Tracking Stock; Possible Legislative, Regulatory
or Other Changes
The tax treatment of tracking stock has not been authoritatively settled.
The IRS has announced that it will not issue advance rulings on the
classification of tracking stock, and there are no court decisions or other
authorities that control the tax treatment of tracking stock. Hopkins &
Sutter's opinion is not binding on the IRS or a court. It is possible,
therefore, that the IRS could assert that Comdisco Ventures Stock represents
property other than stock of Comdisco. In that event, we could be required to
recognize significant taxable income or gain on the sale or distribution of
Comdisco Ventures Stock, and we might not be permitted to include the
operations of Comdisco Ventures in our consolidated federal income tax returns.
Hopkins & Sutter is of the opinion, however, that the IRS would not prevail in
those assertions under current law.
It is also possible that Congress could enact legislation or the IRS
could promulgate regulations that would adversely affect the tax treatment of
tracking stock. In particular, a legislative proposal made by the Clinton
Administration in February 2000 would, if enacted, tax stockholders on the
receipt of tracking stock as a distribution on, or in exchange for, their
existing stock, and grant the IRS authority to treat tracking stock as nonstock
or stock of another entity, effective for tracking stock issued on or after the
date of enactment. While this proposal would not directly apply to Comdisco
Ventures Stock
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purchased pursuant to this Offering prior to the date of enactment, it could,
if enacted, impede Comdisco's ability to thereafter distribute or sell Comdisco
Ventures Stock. We cannot predict whether the proposal will be enacted by
Congress and, if enacted, whether it will be in the form proposed by the
Clinton Administration. In addition, the IRS could issue regulations or other
administrative guidance, including regulations issued pursuant to its broad
authority under Section 337(d) of the Code, or a court could render a decision
that changes current law or adversely affects existing interpretations of
current law affecting tracking stock. Any of these changes, which may or may
not be retroactive, could alter the tax consequences to us or to our
stockholders discussed herein, and could be a "Tax Event" that would entitle
Comdisco to convert each outstanding share of Comdisco Ventures Stock into a
number of shares of Comdisco Stock equal to 110% of the ratio of the average
market values of the Comdisco Ventures Stock and the Comdisco Stock over a
specified trading period prior to such conversion. See "Description of Comdisco
Capital Stock--Description of Comdisco Ventures Stock," beginning on page 74.
This conversion should qualify as a tax-free recapitalization so that no gain
or loss is required to be recognized by us or by holders of the stock to be
converted.
Dividends
In general. In general, stockholders of a corporation are taxed (subject
to the intercorporate dividends-received deduction in the case of corporate
stockholders) on the receipt of dividends. In addition, under those
circumstances where some stockholders of a corporation receive cash or other
dividends from the corporation while other stockholders increase their
proportionate equity interest in the corporation, Section 305 of the Code can
tax a stockholder whose proportionate equity interest in the earnings and
profits or assets of the corporation is increased as if that stockholder
received a constructive dividend. Based on the terms and conditions of the
tracking stock proposal and other circumstances, we do not believe that this
rule will apply to you for the foreseeable future.
Backup Withholding. Non-corporate holders of Comdisco Ventures Stock
could be subject to backup withholding at a rate of 31% on the payment of
dividends on or proceeds from the sale of that stock. Backup withholding will
apply only if the stockholder (1) fails to furnish its taxpayer identification
number, which, for an individual would be his or her social security number,
(2) furnishes an incorrect taxpayer identification number, (3) is notified by
the IRS that it has failed to properly report payments of interest or dividends
or (4) under those circumstances, fails to certify under penalties of perjury
that it has furnished a correct taxpayer identification number and has not been
notified by the IRS that it is subject to backup withholding for failure to
report payments of interest or dividends. Stockholders should consult their tax
advisors regarding their qualification for exemption from backup withholding
and the procedures for obtaining that exemption if applicable. The amount of
any backup withholding from a payment to a holder of Comdisco Ventures Stock
will be allowed as a credit against that stockholder's federal income tax
liability and may entitle that holder to a refund, provided that the required
information is furnished to the IRS.
Conversion of Comdisco Ventures Stock into Comdisco Stock
Hopkins & Sutter has advised that, subject to unanticipated circumstances
that may exist at the time of conversion, if we exercise any of our options to
convert Comdisco Ventures Stock into Comdisco Stock, that conversion will be
tax-free to you (except where cash is received in lieu of fractional shares).
Your tax basis in the shares you receive as a result of that conversion will
equal your adjusted tax basis in the shares you surrender (subject to
adjustment for fractional shares redeemed for cash), and your holding period in
the shares you receive will include the holding period of the shares you
surrender in the exchange.
Material U.S. Tax Consequences to Non-U.S. Holders
The following discussion applies to you if you are a (1) a nonresident
alien individual; (2) a foreign corporation, partnership or other entity; or
(3) a foreign estate or trust (Non-U.S. Holder).
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Dividends. Dividends paid to a Non-U.S. Holder generally will be subject
to withholding of federal income tax at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty. However, if the dividend is
effectively connected with the conduct of a trade or business of the Non-U.S.
Holder within the United States, the dividend will instead be taxed at ordinary
federal income tax rates on a net income basis. Further, if the Non-U.S. Holder
is a corporation, this effectively connected dividend income may also be
subject to an additional branch profits tax.
Comdisco must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to that investor and the amount, if any, of tax
withheld with respect to those dividends. This information may also be made
available to the tax authorities in the Non-U.S. Holder's country of residence.
Sale or other Disposition of Comdisco Ventures Stock. A Non-U.S. Holder
generally will not be subject to federal income tax on any gain recognized on
the sale or other disposition of Comdisco Ventures Stock, except in the
following circumstances:
. The gain is effectively connected with a trade or business of the
Non-U.S. Holder within the United States.
. The Non-U.S. Holder is an individual who holds the Comdisco
Ventures Stock as a capital asset, is present in the United States
for 183 or more days in the taxable year of the sale or other
disposition, and either the individual has a "tax home" in the
United States for federal income tax purposes or the gain is
attributable to an office or other fixed place of business
maintained by the individual in the United States.
. The Non-U.S. Holder is subject to tax pursuant to the provisions
of the Internal Revenue Code applicable to specified United States
expatriates.
. Comdisco is or has been during specified periods a "United States
real property holding corporation." Comdisco believes that it will
not constitute a United States real property holding corporation
immediately after the offering and does not expect to become a
United States real property holding corporation; however, no
assurance can be given in this regard.
Backup withholding. Upon the sale or other disposition of Comdisco
Ventures Stock by a Non-U.S. Holder to or through a United States office of a
broker, that broker may be required to impose backup withholding at a rate of
31% and report the sale to the IRS, unless the investor certifies its foreign
status under penalties of perjury or otherwise establishes an exemption from
backup withholding. Upon a sale or other disposition to or through a foreign
office of a United States broker or a foreign broker with specified types of
relationships with the United States, the broker is not required to impose
backup withholding. However, the broker is required to report the sale or other
disposition to the IRS, unless the broker has documentary evidence in its files
that the seller is a Non-U.S. Holder and specified other conditions are met, or
the holder otherwise establishes an exemption.
Amounts withheld under these backup withholding rules are generally
allowable as a refund or credit against the Non-U.S. Holder's federal income
tax liability, if any, provided that the required information is furnished to
the IRS in a timely manner.
Final United States Treasury regulations, effective for payments made
after December 31, 2000, will affect the procedures to be followed by a Non-
U.S. Holder in establishing that investor's foreign status for purposes of the
withholding, backup withholding, and information reporting rules described in
the preceding paragraphs. Prospective Non-U.S. Holders should consult their tax
advisors concerning these regulations.
Federal Estate Taxes. Comdisco Ventures Stock owned or treated as owned
by an individual who is not a citizen or a resident of the United States at the
time of death will be included in that individual's gross estate for federal
estate tax purposes, unless an applicable estate tax treaty provides otherwise.
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UNDERWRITING
We intend to offer the shares of Comdisco Ventures Stock in the U.S. and
Canada through the U.S. underwriters and elsewhere through the international
managers. Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as U.S.
representative of the U.S. underwriters named below. Subject to the terms and
conditions described in a U.S. purchase agreement among us and the U.S.
underwriters, and concurrently with the sale of 1,500,000 shares of Comdisco
Ventures Stock to the international managers, we have agreed to sell to the
U.S. underwriters, and the U.S. underwriters severally have agreed to purchase
from us, the number of shares of Comdisco Ventures Stock listed opposite their
names below.
<TABLE>
<CAPTION>
Number
U.S. Underwriter of Shares
---------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................
---------
Total....................................................... 8,500,000
=========
</TABLE>
We have also entered into an international purchase agreement with the
international managers for sale of the shares of Comdisco Ventures Stock
outside the U.S. and Canada for whom Merrill Lynch International is acting as
lead manager. Subject to the terms and conditions in the international purchase
agreement, and concurrently with the sale of 8,500,000 shares of Comdisco
Ventures Stock to the U.S. underwriters pursuant to the U.S. purchase
agreement, we have agreed to sell to the international managers, and the
international managers severally have agreed to purchase, 1,500,000 shares of
Comdisco Ventures Stock from us. The initial public offering price per share
and the total underwriting discount per share are identical under the U.S.
purchase agreement and the international purchase agreement.
The U.S. underwriters and the international managers have agreed to
purchase all of the shares of Comdisco Ventures Stock sold under the U.S. and
international purchase agreements if any of these shares are purchased. If an
underwriter defaults, the U.S. and international purchase agreements provide
that the purchase commitments of the nondefaulting underwriters may be
increased or the purchase agreements may be terminated. The closings for the
sale of shares of Comdisco Ventures Stock to be purchased by the U.S.
underwriters and the international managers are conditioned on one another.
Generally, we have agreed to indemnify each U.S. underwriter and
international manager against liability arising out of any untrue statement
contained in the registration statement, any preliminary prospectus or the
final prospectus, or the omission of a material fact required to be stated in
the registration statement or such prospectus necessary to make the statements
in the registration statement or such prospectus not misleading. In addition,
we have agreed to indemnify each U.S. underwriter and international manager
against liability arising out of violations of laws or regulations of foreign
jurisdictions where reserved shares have been offered. Each U.S. underwriter
and international manager has agreed to indemnify us against liability with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the registration statement, any preliminary prospectus or
the final prospectus in reliance upon and in conformity with written
information furnished to us by that U.S. underwriter or international manager
through Merrill Lynch expressly for use in the registration statement, such
preliminary prospectus or the prospectus. For more detailed information on the
terms of indemnification contained in the purchase agreements, please see
Exhibits 1.1 and 1.2 to the registration statement.
The underwriters are offering the shares of Comdisco Ventures Stock,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by their counsel, including the validity of the
shares, and other conditions contained in the purchase agreements, such as the
receipt by the underwriters of officer's certificates and legal opinions. The
underwriters reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
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Commissions and Discounts
The U.S. representative has advised us that the U.S. underwriters propose
initially to offer the shares of Comdisco Ventures Stock to the public at the
initial public offering price on the cover page of this prospectus and to
dealers at that price less a concession not in excess of $. per share. The
U.S. underwriters may allow, and the dealers may reallow, a discount not in
excess of $. per share to other dealers. After the initial public offering,
the public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to Comdisco. The information assumes
either no exercise or full exercise by the U.S. underwriters and the
international managers of their over-allotment options.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.............. $ $ $
Underwriting discount.............. $ $ $
Proceeds, before expenses, to
Comdisco.......................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at $2,000,000 and are payable by Comdisco.
Over-allotment Option
We have granted options to the U.S. underwriters to purchase up to
1,275,000 additional shares of Comdisco Ventures Stock at the public offering
price less the underwriting discount. The U.S. underwriters may exercise these
options for thirty days from the date of this prospectus solely to cover any
over-allotments. If the U.S. underwriters exercise these options, each will be
obligated, subject to conditions contained in the purchase agreements, to
purchase a number of additional shares of Comdisco Ventures Stock proportionate
to that U.S. underwriter's initial amount reflected in the above table.
We have also granted options to the international managers, exercisable
for thirty days from the date of this prospectus, to purchase up to 225,000
additional shares of Comdisco Ventures Stock to cover any over-allotments on
terms similar to those granted to the U.S. underwriters.
Intersyndicate Agreement
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the U.S. underwriters and the
international managers may sell shares of Comdisco Ventures Stock to each other
for purposes of resale at the initial public offering price, less an amount not
greater than the selling concession. Under the intersyndicate agreement, the
U.S. underwriters and any dealer to whom they sell shares of Comdisco Ventures
Stock will not offer to sell or sell shares to persons who are non-U.S. or non-
Canadian persons or to persons they believe intend to resell to persons who are
non-U.S. or non-Canadian persons, except in the case of transactions under the
intersyndicate agreement. Similarly, the international managers and any dealer
to whom they sell shares of Comdisco Ventures Stock will not offer to sell or
sell shares to U.S. persons or Canadian persons or to persons they believe
intend to resell to U.S. or Canadian persons, except in the case of
transactions under the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares of Comdisco Ventures Stock offered
by this prospectus for sale to some of Comdisco Ventures' employees and other
of our business associates and related persons and for purchase by Comdisco as
a contribution to our retirement plan. If these persons purchase reserved
shares, this will
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reduce the number of shares available for sale to the general public. Any
reserved shares that are not orally confirmed for purchase within one day of
the pricing of this offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We have agreed, with exceptions, not to sell or transfer any Comdisco
Ventures Stock for 180 days after the date of this prospectus without first
obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Specifically, we have agreed not to directly or indirectly:
. offer, pledge, sell or contract to sell any Comdisco Ventures
Stock;
. sell any option or contract to purchase any Comdisco Ventures
Stock;
. purchase any option or contract to sell any Comdisco Ventures
Stock;
. grant any option, right or warrant for the sale of any Comdisco
Ventures Stock other than options granted pursuant to our stock-
based compensation plans;
. lend or otherwise dispose of or transfer any Comdisco Ventures
Stock;
. request or demand that we file a registration statement related to
the Comdisco Ventures Stock; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of any Comdisco
Ventures Stock, whether any such swap or transaction is to be
settled by delivery of shares or other securities, in cash or
otherwise.
This lockup provision applies to Comdisco Ventures Stock and to
securities convertible into or exchangeable or exercisable for or repayable
with Comdisco Ventures Stock.
Quotation on the Nasdaq National Market
We anticipate the shares to be approved for quotation on the Nasdaq
National Market, subject to notice of issuance, under the symbol "CDOV."
Before this offering, there has been no public market for our Comdisco
Ventures Stock. The initial public offering price will be determined through
negotiations among us and the U.S. representative and lead manager. In addition
to prevailing market conditions, the factors to be considered in determining
the initial public offering price are:
. the valuation multiples of publicly traded companies that the U.S.
representative and the lead manager believe to be comparable to
Comdisco Ventures;
. Comdisco Ventures' financial information;
. the history of, and the prospects for, Comdisco Ventures and the
industry in which Comdisco Ventures competes;
. an assessment of Comdisco Ventures' management, its past and
present operations, and the prospects for, and timing of, Comdisco
Ventures' future revenues;
. the present state of Comdisco Ventures' development; and
. the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to those of Comdisco Ventures.
An active trading market for the shares may not develop. It is also
possible that after the offering the Comdisco Ventures Stock will not trade in
the public market at or above the initial public offering price.
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Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares of Comdisco Ventures Stock is
completed, SEC rules may limit underwriters and selling group members from
bidding for and purchasing our Comdisco Ventures Stock. However, the U.S.
representative may engage in transactions that stabilize the price of the
Comdisco Ventures Stock, such as bids or purchases to peg, fix or maintain that
price.
If the underwriters create a short position in Comdisco Ventures Stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the U.S. representative may reduce that short
position by purchasing shares of Comdisco Ventures Stock in the open market.
The U.S. representative may also elect to reduce any short position by
exercising all or part of the over-allotment option described above. Purchases
of the Comdisco Ventures Stock to stabilize its price or to reduce a short
position may cause the price of the Comdisco Ventures Stock to be higher than
it might be in the absence of such purchases.
The U.S. representative may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representative purchases
shares of Comdisco Ventures Stock in the open market to reduce the
underwriters' short position or to stabilize the price of such shares, it may
reclaim the amount of the selling concession from the underwriters and selling
group members who sold those shares. The imposition of a penalty bid may also
affect the price of the shares of Comdisco Ventures Stock in that it
discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Comdisco Ventures Stock. In
addition, neither we nor any of the underwriters makes any representation that
the U.S. representative or the lead manager will engage in these transactions
or that these transactions, once commenced, will not be discontinued without
notice.
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions.
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LEGAL MATTERS
Jeremiah M. Fitzgerald, Vice President and Chief Legal Officer of
Comdisco and McBride Baker & Coles, Chicago, Illinois, will pass upon the
validity of the issuance of the shares of Comdisco Ventures Stock offered by
this prospectus. As of March 1, 2000, Mr. Fitzgerald held 71,292 shares of
Comdisco Stock and options to purchase 164,415 shares of Comdisco Stock.
McBride Baker & Coles has from time to time represented and may continue to
represent, Comdisco and its affiliates in legal matters. As of March 1, 2000,
attorneys at McBride Baker & Coles participating in the representation of
Comdisco in this matter held approximately 2,500 shares of Comdisco Stock.
Hopkins & Sutter will render an opinion to Comdisco with respect to specified
tax matters relating to the issuance of the shares of Comdisco Ventures Stock
offered by this prospectus. Brown & Wood llp will pass upon the validity of the
issuance of the shares of Comdisco Ventures Stock offered by this prospectus
for the underwriters.
EXPERTS
We have included in this prospectus and our registration statement:
. our consolidated financial statements of Comdisco, Inc. as of
September 30, 1999 and 1998 and for each of the years in the three-
year period ended September 30, 1999, and
. the financial statements of Comdisco Ventures as of September 30,
1999 and 1998 and for each of the years in the three-year period
ended September 30, 1999.
We have relied on the reports of KPMG LLP, independent certified public
accountants, included in this prospectus and our registration statement, and
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Comdisco filed a registration statement on Form S-3 to register the
Comdisco Ventures Stock offered by this prospectus with the SEC. This
prospectus is part of the registration statement and constitutes a prospectus
of Comdisco. The registration statement (including the attached exhibits and
schedules) that we filed with the SEC contains additional relevant information
about Comdisco. The rules and regulations of the SEC allow us to omit some of
the information included in the registration statement from this prospectus.
The full registration statement can be obtained from the SEC as indicated
below, or from us.
We also file reports, proxy statements, and other information with the
SEC. You may read and copy any reports, proxy statements, and other information
we file at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional
450 Fifth Street, N.W. 7 World Trade Center Office
Room 1024 Suite 1300 Citicorp Center
Washington, D.C. 20549 New York, New York 10048 500 West Madison
Street
Suite 1400
Chicago, Illinois
60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. Further information on the
operation of the Commission's Public Reference Room in Washington, D.C. can be
obtained by calling the Commission at 1-800-SEC-0330. Our SEC filings are also
available to the public from commercial documents retrieval services and at the
Internet world wide web site maintained by the SEC at www.sec.gov. Our SEC
filings are also available to the public at the Internet worldwide web site we
maintain at www.comdisco.com.
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<PAGE>
Comdisco Stock is listed on the New York Stock Exchange. Reports and
other information concerning Comdisco can also be inspected at the office of
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
INCORPORATION OF INFORMATION COMDISCO FILES WITH THE SEC
The SEC allows us to "incorporate by reference" the information Comdisco
files with them, which means:
. incorporated documents are considered part of this prospectus;
. we can disclose important information to you by referring you to
those documents; and
. information that we file with the SEC will automatically be
considered to update and supersede this prospectus.
We incorporate by reference the documents listed below, which Comdisco
filed with the SEC under the Securities Exchange Act of 1934, as amended:
. Annual Report on Form 10-K of Comdisco for the year ended
September 30, 1999 as amended by Form 10-K/A filed with the SEC on
February 24, 2000;
. Quarterly Report on Form 10-Q of Comdisco for the quarter ended
March 31, 2000 filed with the SEC on May 15, 2000;
. Quarterly Report on Form 10-Q of Comdisco for the quarter ended
December 31, 1999, as amended by Form 10-Q/A filed with the SEC on
February 29, 2000;
. Current Report on Form 8-K of Comdisco filed with the SEC on March
9, 2000;
. the description of Comdisco's Comdisco Ventures Stock contained in
Comdisco's Registration Statement on Form 8-A filed with the SEC
under the Exchange Act and any amendments or reports filed for the
purpose of updating that description; and
. Current Report on Form 8-K of Comdisco filed with the SEC on June
14, 2000.
We also incorporate by reference into this prospectus additional
documents that may be filed with the SEC pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act from the date of this prospectus prior to the
termination of the offering of the securities made by this prospectus. These
include periodic reports, such as Annual Reports on Form 10-K, quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, as well as prospectuses.
Any statements contained in a previously filed document incorporated by
reference herein is deemed to be modified or superseded for purposes of the
prospectus to the extent that a statement contained herein (or in a
subsequently filed documents which also is incorporated by reference herein)
modifies or supersedes that statement.
If you are a shareholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through us, the SEC
or the SEC's Internet world wide web site as described on the preceding page
under "Where You Can Find More Information."
We will provide without charge upon written or oral request, a copy of
any or all of the documents that are incorporated by reference into this
prospectus, other than exhibits which are specifically incorporated by
reference into those documents. You should direct your requests in writing or
by telephone at the following address:
Comdisco, Inc.
6111 North River Road
Rosemont, Illinois 60018
Telephone: (847) 698-3000
Attention: Corporate Secretary
107
<PAGE>
ANNEX I
ILLUSTRATION OF TERMS OF COMDISCO VENTURES STOCK
The following illustrations show how to calculate the:
. Retained Interest Percentage;
. Outstanding Interest Percentage;
. number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures; and
. total number of notional shares deemed outstanding with respect to
Comdisco Ventures,
after giving effect to those hypothetical dividends, issuances, repurchases and
transfers, and in each case based on the assumptions, set forth in this Annex.
In these illustrations, the number of shares issuable with respect to
Comdisco Group's retained interest in Comdisco Ventures is initially assumed to
be 100. Unless otherwise specified, each illustration below should be read
independently as if none of the other transactions referred to below had
occurred. Actual calculations may be slightly different due to rounding. The
illustrations are not intended to be complete and are qualified in their
entirety by the more detailed information contained in this document and the
annexes to this document. The following illustrations are purely hypothetical
and the numbers used herein, including assumptions of market values, were
chosen to simplify the calculations and are not intended to represent estimates
of actual numbers or values. Capitalized terms used but not otherwise defined
in this illustration of terms have the respective meanings ascribed to them in
this document.
"Total number of notional shares deemed outstanding with respect to
Comdisco Ventures" means the number of shares of Comdisco Ventures Stock
outstanding plus the number of shares issuable with respect to Comdisco Group's
retained interest in Comdisco Ventures.
At any given time, the percentage interest in Comdisco Ventures intended
to be represented by the outstanding shares of Comdisco Ventures Stock--which
we call the Outstanding Interest Percentage--is equal to:
Number of outstanding shares of Comdisco Ventures Stock
------------------------------------------------------------------
Total number of notional shares deemed outstanding with respect to Comdisco
Ventures
and the remaining percentage interest in Comdisco Ventures intended to be
represented by Comdisco Group's retained interest in Comdisco Ventures--which
we call the Retained Interest Percentage--is equal to:
Number of shares issuable with respect to Comdisco Group's retained interest in
Comdisco Ventures
---------------------------------------------------------------------------
Total number of notional shares deemed outstanding with respect to Comdisco
Ventures
The sum of the Outstanding Interest Percentage and the Retained Interest
Percentage would always equal 100%. In our example, before the first issuance
of shares of Comdisco Ventures Stock the number of shares issuable with respect
to Comdisco Group's retained interest in Comdisco Ventures is equal to 100, the
Retained Interest Percentage is 100% and the Outstanding Interest Percentage is
0%.
ISSUANCE OF COMDISCO VENTURES STOCK
The following illustrations reflect an assumed issuance by Comdisco of 20
shares of Comdisco Ventures Stock in the offering.
I-1
<PAGE>
Offering For Account of Comdisco Ventures
Assume the issuance is attributed to Comdisco Ventures as an increase in
its equity, with the net proceeds credited solely to Comdisco Ventures.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 0
Newly issued shares for account of Comdisco Ventures................... 20
---
Total issued and outstanding after the offering.................... 20
===
</TABLE>
. The number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures (100) would remain unchanged.
. As a result, the issued and outstanding shares (20) would represent an
Outstanding Interest Percentage of approximately 17%, calculated as
follows:
20
------
20 + 100
The Retained Interest Percentage would accordingly be about 83%.
. In this case, in the event of any dividend or other distribution paid on
the outstanding shares of Comdisco Ventures Stock (other than a dividend
or other distribution payable in shares of Comdisco Ventures Stock),
Comdisco Group would be credited, and Comdisco Ventures would be
charged, with an amount equal to 500% (representing the ratio of the
number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures (100) to the total number of shares of
Comdisco Ventures Stock issued and outstanding following the offering
(20)) of the aggregate amount of such dividend or distribution.
Additional Issuance of Comdisco Ventures Stock
The following illustrations reflect an assumed issuance of an additional
15 shares by Comdisco of Comdisco Ventures Stock after the assumed initial
issuance of 20 shares attributed to Comdisco Ventures as an increase in its
equity.
Additional Offering for Account of Comdisco Group
Assume the issuance is attributed to Comdisco Group in respect of its
retained interest, with the net proceeds credited solely to Comdisco Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 20
Newly issued shares for account of Comdisco Group...................... 15
---
Total issued and outstanding after additional offering............. 35
===
</TABLE>
. The number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures would decrease by the number of shares of
Comdisco Ventures Stock issued for the account of Comdisco Group.
<TABLE>
<S> <C>
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures prior to the additional offering...... 100
Newly issued shares for account of Comdisco Group.................... 15
---
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures after the additional offering......... 85
===
</TABLE>
I-2
<PAGE>
. As a result, the total issued and outstanding shares (35) would in the
aggregate represent an Outstanding Interest Percentage of approximately
29%, calculated as follows:
35
-----
35 + 85
The Retained Interest Percentage would accordingly be reduced to
approximately 71%.
. In this case, in the event of any dividend or other distribution paid on
Comdisco Ventures Stock (other than a dividend or other distribution
payable in shares of Comdisco Ventures Stock), Comdisco Group would be
credited, and Comdisco Ventures would be charged, with an amount equal
to approximately 243% (representing the ratio of the number of shares
issuable with respect to Comdisco Group's retained interest in Comdisco
Ventures (85) to the total number of shares of Comdisco Ventures Stock
issued and outstanding following the additional offering (35)) of the
aggregate amount of such dividend or distribution.
Additional Offering for Account of Comdisco Ventures
Assume the issuance is attributed to Comdisco Ventures as an increase in
its equity, with the net proceeds credited solely to Comdisco Ventures.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 20
Newly issued shares for account of Comdisco Ventures................... 15
---
Total issued and outstanding after the additional offering......... 35
===
</TABLE>
. The number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures (100) would remain unchanged.
. As a result, the total issued and outstanding shares (35) would in the
aggregate represent an Outstanding Interest Percentage of approximately
26%, calculated as follows:
35
------
35 + 100
The Retained Interest Percentage would accordingly be reduced to
approximately 74%.
. In this case, in the event of any dividend or other distribution paid on
Comdisco Ventures Stock (other than a dividend or the distribution
payable in shares of Comdisco Ventures stock), Comdisco Group would be
credited, and Comdisco Ventures would be charged, with an amount equal
to approximately 286% (representing the ratio of number of shares
issuable with respect to Comdisco Group's retained interest in Comdisco
Ventures (100) to the total number of shares of Comdisco Ventures Stock
issued and outstanding following the additional offering (35)) of the
aggregate amount of such dividend or distribution.
Offerings of Convertible Securities
If Comdisco were to issue any securities convertible into or exercisable
for shares of Comdisco Ventures stock, the Outstanding Interest Fraction and
the Retained Interest Fraction would be unchanged at the time of such issuance.
If any shares of Comdisco Ventures Stock were issued upon conversion or
exercise of such securities, however, then the Outstanding Interest Fraction
and the Retained Interest Fraction would be affected as shown above under
"Additional Offering for Account of Comdisco Group", if such securities were
attributed to Comdisco Group, or under "Additional Offering for Account of
Comdisco Ventures", if such securities were attributed to Comdisco Ventures.
I-3
<PAGE>
REPURCHASES OF COMDISCO VENTURES STOCK
The following illustrations reflect an assumed repurchase by Comdisco of
5 shares of Comdisco Ventures Stock after the assumed initial issuance of 20
shares of Comdisco Ventures Stock attributed to Comdisco Ventures as an
increase in its equity.
Repurchase for the Account of Comdisco Group
Assume the repurchase is attributed to Comdisco Group as an increase in
its retained interest in Comdisco Ventures, with the cost charged solely
against Comdisco Group.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 20
Shares repurchased for account of Comdisco Group....................... 5
---
Total issued and outstanding after repurchase...................... 15
===
</TABLE>
. The Number of Shares Issuable with Respect to Comdisco Group's Retained
Interest in Comdisco Ventures would be increased by the number of any
shares of Comdisco Ventures Stock repurchased for the account of
Comdisco Group.
<TABLE>
<S> <C>
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures prior to repurchase.................. 100
Number of shares repurchased for the account of Comdisco Group...... 5
---
Number of shares Issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures after repurchase..................... 105
===
</TABLE>
. As a result, the total issued and outstanding shares (15) would in the
aggregate represent an Outstanding Interest Percentage of approximately
12.5%, calculated as follows:
15
------
15 + 105
The Retained Interest Percentage would accordingly be increased to
approximately 87.5%.
Repurchase for Account of Comdisco Ventures Without Participation by Comdisco
Group
Assume the repurchase is attributed to Comdisco Ventures, with the cost
being charged solely against Comdisco Ventures. Further assume that the board
of directors does not determine to transfer assets from Comdisco Ventures to
Comdisco Group to hold constant the Outstanding Interest Fraction and Retained
Interest Fraction.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 20
Shares repurchased for account of Comdisco Ventures.................... 5
---
Total issued and outstanding after repurchase...................... 15
===
</TABLE>
. The number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures (100) would remain unchanged.
. As a result, the total issued and outstanding shares (15) would in the
aggregate represent an Outstanding Interest Percentage of approximately
13%, calculated as follows:
15
------
15 + 100
The Retained Interest Percentage would accordingly be increased to
approximately 87%.
I-4
<PAGE>
Repurchase for Account of Comdisco Ventures With Participation by Comdisco
Group
Assume the repurchase is attributed to Comdisco Ventures, with the cost
being charged solely against Comdisco Ventures. Further assume that the
repurchase is made in connection with a tender offer for 5, or 25%, of the then
outstanding shares at a price of $20 per share, and that the board of directors
determines to transfer cash or other assets from Comdisco Ventures to Comdisco
Group to hold constant the Outstanding Interest Fraction and Retained Interest
Fraction.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 20
Shares repurchased for account of Comdisco Ventures.................... 5
---
Total issued and outstanding after repurchase...................... 15
===
</TABLE>
. In order to hold constant the Outstanding Interest Fraction and Retained
Interest Fraction, the board of directors determines that the market
value of a share of Comdisco Ventures Stock in this context is $20 and
transfers from Comdisco Ventures to Comdisco Group an amount of cash or
other assets equal to about 500% (representing the ratio of the number
of shares issuable with respect to Comdisco Group's retained interest in
Comdisco Ventures (100) to the total number of shares of the Comdisco
Ventures Stock issued and outstanding (20), in each case immediately
prior to the repurchase) of the aggregate amount of the cash paid in the
tender offer to holders of outstanding shares of the Comdisco Ventures
Stock ($100), for a total of $500.
. In that case, the number of shares issuable with respect to Comdisco
Group's retained interest in Comdisco Ventures (100) would be decreased
to reflect the amount of cash so transferred ($500) divided by the
market value per share of the Comdisco Ventures Stock ($20).
<TABLE>
<S> <C>
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures prior to transfer................... 100
Adjustment in respect of Comdisco Group's retained interest to
reflect transfer to Comdisco Group of funds allocated to Comdisco
Ventures.......................................................... 25
---
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures after transfer...................... 75
===
</TABLE>
. As a result, the total issued and outstanding shares (15) would in the
aggregate continue to represent an Outstanding Interest Percentage of
approximately 17%, calculated as follows:
15
-----
15 + 75
The Retained Interest Percentage would accordingly continue to remain
83%.
. Assuming that the board of directors transferred only half of the $500
amount, or $250, from Comdisco Ventures to Comdisco Group, the number of
shares issuable with respect to Comdisco Group's retained interest in
Comdisco Ventures (100) would decrease by the amount of cash so
transferred ($250) divided by the market value per share of Comdisco
Ventures Stock ($20).
<TABLE>
<S> <C>
Number of shares issuable with respect to Comdisco Group's
retained interest in Comdisco Ventures prior to transfer......... 100
Adjustment in respect of Comdisco Group's retained interest to
reflect transfer to Comdisco Group of cash allocated to Comdisco
Ventures......................................................... 12.5
-----
Number of shares issuable with respect to Comdisco Group's
retained interest in Comdisco Ventures after transfer............ 87.5
=====
</TABLE>
I-5
<PAGE>
. In that case, as a result, the total issued and the outstanding shares
(15) would in the aggregate represent an Outstanding Interest Percentage
of a little less than 15%, calculated as follows:
15
-------
15 + 87.5
The Retained Interest Percentage would accordingly be increased to a
little more than 85%.
COMDISCO VENTURES STOCK DIVIDENDS
The following illustrations reflect assumed dividends of Comdisco
Ventures Stock on outstanding shares of Comdisco Stock and outstanding shares
of the Comdisco Ventures Stock , respectively, after the assumed initial
issuance of 20 shares of Comdisco Ventures Stock attributed to Comdisco
Ventures as an increase in its equity.
Comdisco Ventures Stock Dividend on Comdisco Stock
Assume 1,000 shares of Comdisco Stock are outstanding and Comdisco
declares a dividend of 1/20 of a share of Comdisco Ventures Stock on each
outstanding share of Comdisco Stock.
<TABLE>
<S> <C>
Shares previously issued and outstanding................................ 20
Newly issued shares for account of Comdisco Group....................... 50
---
Total issued and outstanding after dividend......................... 70
===
</TABLE>
. Any dividend of shares of Comdisco Ventures Stock to the holders of
shares of Comdisco Stock would be treated as a reduction in the number
of shares issuable with respect to Comdisco Group's retained interest in
Comdisco Ventures.
<TABLE>
<S> <C>
Number of shares issuable with respect to Comdisco Group's retained
interest in
Comdisco Ventures prior to dividend................................. 100
Number of shares distributed on outstanding shares of Comdisco Stock
for account of Comdisco Group....................................... 50
---
Number of shares issuable with respect to Comdisco Group's retained
interest in
Comdisco Ventures after dividend.................................... 50
===
</TABLE>
. As a result, the total issued and outstanding shares (70) would in the
aggregate represent an Outstanding Interest Percentage of approximately
58%, calculated as follows:
70
-----
70 + 50
The Retained Interest Percentage would accordingly be reduced to
approximately 42%. Note, however, that after the dividend, the holders of
Comdisco Stock would also hold 50 shares of the Comdisco Ventures Stock, which
would represent half the value attributable to Comdisco Ventures originally
held by Comdisco Group.
Comdisco Ventures Stock Dividend on Comdisco Ventures Stock
Assume Comdisco declares a dividend of 1/5 of a share of Comdisco
Ventures Stock on each outstanding share of the Comdisco Ventures Stock of the
same series.
<TABLE>
<S> <C>
Shares previously issued and outstanding.............................. 20
Newly issued shares for account of Comdisco Ventures.................. 4
---
Total issued and outstanding after dividend....................... 24
===
</TABLE>
I-6
<PAGE>
. The number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures would reflect the stock dividend payable
in shares of Comdisco Ventures Stock to holders of shares of Comdisco
Ventures Stock. That is, the number of shares issuable with respect to
Comdisco Group's retained interest in Comdisco Ventures would be
increased by a number equal to 500% (representing the ratio of the
number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures (100) to the number of shares of Comdisco
Ventures Stock issued and outstanding (20), in each case immediately
prior to such dividend) of the aggregate number of shares issued in
connection with such dividend (4), or 20.
<TABLE>
<S> <C>
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures prior to dividend................... 100
Adjustment in respect of Comdisco Group's retained interest to
reflect shares distributed on outstanding shares of the Comdisco
Ventures Stock.................................................... 20
---
Number of shares Issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures after dividend...................... 120
===
</TABLE>
. As a result, the total issued and outstanding shares (24) would in the
aggregate represent an Outstanding Interest Percentage of approximately
17%, calculated as follows:
24
------
24 + 120
The Retained Interest Percentage would accordingly remain approximately
83%.
CAPITAL TRANSFERS OF CASH OR OTHER ASSETS BETWEEN COMDISCO GROUP
AND COMDISCO VENTURES
Capital Contribution of Cash or Other Assets From Comdisco Group To Comdisco
Ventures
The following illustration reflects the assumed contribution by Comdisco
Group to Comdisco Ventures, after the assumed initial issuance of 20 shares of
Comdisco Ventures Stock attributed to Comdisco Ventures as an increase in its
equity, of $100 of assets allocated to Comdisco Group at a time when the market
value of the Comdisco Ventures Stock is $20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 20
Newly issued shares.................................................... 0
---
Total issued and outstanding after contribution.................... 20
===
</TABLE>
. The number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures would increase to reflect the contribution
to Comdisco Ventures of assets allocated by Comdisco Group by a number
equal to the value of the assets contributed ($100) divided by the
market value of Comdisco Ventures Stock at that time ($20), or 5 shares.
<TABLE>
<S> <C>
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures prior to contribution................. 100
Increase to reflect contribution to Comdisco Ventures of assets
allocated to Comdisco Group......................................... 5
---
Number of shares issuable with Respect to Comdisco Group's retained
interest in Comdisco Ventures after contribution.................... 105
===
</TABLE>
. As a result, the total issued and outstanding shares (20) would in the
aggregate represent an Outstanding Interest Percentage of 16%,
calculated as follows:
20
------
20 + 105
I-7
<PAGE>
The Retained Interest Percentage would accordingly increase to 84%.
Return of Capital Transfer of Cash or Other Assets from Comdisco Ventures To
Comdisco Group
The following illustration reflects the assumed transfer by Comdisco
Ventures to Comdisco Group, after the assumed initial issuance of 20 shares of
Comdisco Ventures Stock attributed to Comdisco Ventures as an increase in its
equity, of $100 of assets allocated to Comdisco Ventures on a date on which the
market value of Comdisco Ventures Stock is $20 per share.
<TABLE>
<S> <C>
Shares previously issued and outstanding............................... 20
Newly issued shares.................................................... 0
---
Total issued and outstanding after contribution.................... 20
===
</TABLE>
. The number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures would decrease to reflect the transfer to
Comdisco Group of assets allocated to Comdisco Ventures by a number
equal to the value of the assets transferred ($100) divided by the
market value of Comdisco Ventures Stock at that time ($20), or 5 shares.
<TABLE>
<S> <C>
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures prior to contribution................. 100
Decrease to reflect transfer to Comdisco Group of assets allocated to
Comdisco Ventures................................................... 5
---
Number of shares issuable with respect to Comdisco Group's retained
interest in Comdisco Ventures after contribution.................... 95
===
</TABLE>
. As a result, the total issued and outstanding shares (20) would in the
aggregate represent an Outstanding Interest Percentage of approximately
17.4%, calculated as follows:
20
------
20 + 95
The Retained Interest Percentage would accordingly decrease to
approximately 82.6%.
I-8
<PAGE>
COMDISCO VENTURES AND COMDISCO, INC.
FINANCIAL STATEMENTS
For the Years Ended September 30, 1999, 1998 and 1997
(With Independent Auditors' Report Thereon)
and For the Three and Six Months Ended March 31, 2000 and 1999 (Unaudited)
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Comdisco Ventures:
Report of Independent Auditors........................................... F-3
Statements of Earnings and Division Net Worth--Years ended September 30,
1999, 1998 and 1997 and three and six months ended March 31, 2000 and
1999 (Unaudited)........................................................ F-4
Balance Sheets--September 30, 1999 and September 30, 1998 and March 31,
2000 (Unaudited)........................................................ F-5
Statements of Cash Flows--Years ended September 30, 1999, 1998 and 1997
and six months ended March 31, 2000 and 1999 (Unaudited)................ F-6
Notes to Comdisco Ventures Financial Statements.......................... F-7
Comdisco, Inc.:
Report of Independent Auditors........................................... F-17
Consolidated Statements of Earnings and Retained Earnings--Years ended
September 30, 1999, 1998 and 1997 and three and six months ended March
31, 2000 and 1999 (Unaudited)........................................... F-18
Consolidated Balance Sheets--September 30, 1999 and September 30, 1998
and March 31, 2000 (Unaudited).......................................... F-19
Consolidated Statements of Stockholders' Equity--Years Ended September
30, 1999, 1998 and 1997................................................. F-20
Consolidated Statements of Cash Flows--Years ended September 30, 1999,
1998 and 1997 and six months ended March 31, 2000 and 1999 (Unaudited).. F-21
Notes to Comdisco, Inc. Financial Statements............................. F-23
</TABLE>
F-1
<PAGE>
COMDISCO VENTURES FINANCIAL STATEMENTS
NOTE: The financial statements included in this prospectus with respect
to Comdisco Ventures are being presented to supply additional information to
potential investors in Comdisco Ventures Stock. The unaudited financial
statements have been prepared assuming that:
. the tracking stock structure approved by Comdisco's stockholders
on April 20, 2000 and implemented by the filing of our restated
charter was in place during the periods reported on in these
financial statements.
. Comdisco, Inc. has two series of common stock--the Comdisco Stock
and the Comdisco Ventures Stock.
. the Comdisco Ventures Stock is intended to track the performance
of Comdisco's venture financing business division.
. the Comdisco Stock is intended to track the performance of the
rest of Comdisco's businesses, as well as Comdisco's retained
interest in Comdisco Ventures.
. no Comdisco Ventures stock has been issued, and Comdisco Group
holds a 100 percent retained interest in Comdisco Ventures during
all periods reported on in these financial statements.
. Comdisco has allocated, for financial reporting purposes, all of
its consolidated assets, liabilities, revenue, expenses and cash
flow between Comdisco Group and Comdisco Ventures.
Notwithstanding these financial reporting allocations, holders of
Comdisco Ventures Stock and holders of Comdisco Stock are shareholders of
Comdisco and are subject to all of the risks associated with an investment in
Comdisco and all of its businesses, assets and liabilities. Such allocation
does not affect title to the assets or responsibility for the liabilities of
Comdisco or any of its subsidiaries. The results of operations or financial
condition of one group could affect the results of operations or financial
condition of the other group. Accordingly, the financial statements of Comdisco
Ventures should be read in conjunction with Comdisco's consolidated financial
statements and the notes to the consolidated financial statements included in
this prospectus and in conjunction with Comdisco's consolidated financial
statements and related notes included in Comdisco's Annual Report on Form 10-K,
as amended by Form 10-K/A, for the year ended September 30, 1999.
Earnings per share is not presented for Comdisco Ventures as it has not
been a "stand-alone" entity and, as a result, the presentation of earnings per
share is not applicable. Comdisco, Inc. presents earnings per share
historically, and will in the future, present in its financial statements the
earnings per share for each outstanding series of its common stock.
Certain reclassifications have been made in the 1999 financial statements
to conform to the 2000 presentation.
F-2
<PAGE>
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., "the Company") as of September 30, 1999 and 1998,
and the related statements of earnings and division net worth, 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 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 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, 1998
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
December 2, 1999
Chicago, Illinois
F-3
<PAGE>
COMDISCO VENTURES
STATEMENTS OF EARNINGS AND DIVISION NET WORTH
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31, Years Ended September 30,
------------------ ------------------- ---------------------------
2000 1999 2000 1999 1999 1998 1997
-------- --------- --------- --------- --------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Leasing:
Operating............. $ 44,955 $ 26,643 $ 82,837 $ 51,969 $ 116,678 $ 83,147 $ 61,544
Direct financing...... 121 403 232 592 1,389 1,073 2,771
Sales-type............ 1,858 -- 1,858 -- 336 866 4,305
-------- --------- --------- --------- --------- -------- --------
Total leasing....... 46,934 27,046 84,927 52,561 118,403 85,086 68,620
Sales................... 2,546 616 4,864 1,885 6,142 7,136 6,942
Interest income on
notes.................. 11,952 4,110 23,711 6,424 22,580 6,655 3,139
Warrant sale proceeds
and capital gains...... 98,499 10,000 187,224 17,000 80,731 14,938 16,435
Other................... 489 178 897 329 683 483 195
-------- --------- --------- --------- --------- -------- --------
Total revenue......... 160,420 41,950 301,623 78,199 228,539 114,298 95,331
-------- --------- --------- --------- --------- -------- --------
Cost and expenses
Leasing:
Operating............. 34,081 20,723 62,375 39,128 87,860 59,884 42,740
Sales-type............ 1,133 -- 1,133 -- 254 479 3,615
-------- --------- --------- --------- --------- -------- --------
Total leasing....... 35,214 20,723 63,508 39,128 88,114 60,363 46,355
Sales................... 1,764 338 2,772 1,374 4,460 3,980 4,423
Selling, general and
administrative......... 23,501 1,526 41,923 3,088 18,166 5,793 5,436
Interest................ 13,128 4,550 23,919 8,564 23,373 10,835 7,670
Bad debt expense........ 24,001 800 45,801 1,600 23,200 4,786 6,250
-------- --------- --------- --------- --------- -------- --------
Total costs and
expenses............. 97,608 27,937 177,923 53,754 157,313 85,757 70,134
-------- --------- --------- --------- --------- -------- --------
Earnings before income
taxes.................. 62,812 14,013 123,700 24,445 71,226 28,541 25,197
Income taxes............ 25,640 5,587 49,325 9,747 28,402 11,381 10,047
-------- --------- --------- --------- --------- -------- --------
Net earnings............ $ 37,172 $ 8,426 $ 74,375 $ 14,698 $ 42,824 $ 17,160 $ 15,150
======== ========= ========= ========= ========= ======== ========
Division net worth at
beginning of period.... $351,007 $ 93,726 $ 199,649 $ 71,080 $ 71,080 $ 53,920 $ 38,770
Net earnings............ 37,172 8,426 74,375 14,698 42,824 17,160 15,150
Other comprehensive
income--unrealized
gains, net of tax...... 45,000 17,456 159,155 33,830 85,745 -- --
-------- --------- --------- --------- --------- -------- --------
Total comprehensive
income............. 82,172 25,882 233,530 48,528 128,569 17,160 15,150
-------- --------- --------- --------- --------- -------- --------
Division net worth at
end of period.......... $433,179 $ 119,608 $ 433,179 $ 119,608 $ 199,649 $ 71,080 $ 53,920
======== ========= ========= ========= ========= ======== ========
</TABLE>
Explanatory Note: Earnings per share is not presented because Comdisco
Ventures has not been a "stand-alone entity" and, as a result, the presentation
of earnings per share is not applicable. If Comdisco issues a separate series
of common stock, it will present in its financial statements the earnings per
share for each outstanding series of its common stock.
See accompanying notes to financial statements.
F-4
<PAGE>
COMDISCO VENTURES
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30,
March 31, -----------------
2000 1999 1998
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
ASSETS
Equity securities................................. $ 581,136 $197,335 $ 16,995
Receivables, net.................................. 526,286 367,339 66,425
Inventory of equipment............................ 3,237 1,762 1,120
Leased assets:
Direct financing and sales-type................. 5,471 5,106 7,344
Operating (net of accumulated depreciation)..... 385,299 283,241 182,403
---------- -------- --------
Net leased assets............................... 390,770 288,347 189,747
Other assets...................................... 20,434 17,069 6,956
---------- -------- --------
$1,521,863 $871,852 $281,243
========== ======== ========
LIABILITIES AND DIVISION NET WORTH
Inter-group payable............................... $ 846,613 $559,575 $189,281
Accounts payable.................................. 515 329 561
Deferred income taxes............................. 177,817 72,265 4,116
Other liabilities................................. 63,739 40,034 16,205
---------- -------- --------
1,088,684 672,203 210,163
---------- -------- --------
Division net worth:
Division equity................................. 188,279 113,904 71,080
Accumulated other comprehensive income.......... 244,900 85,745 --
---------- -------- --------
Total division net worth...................... 433,179 199,649 71,080
---------- -------- --------
$1,521,863 $871,852 $281,243
========== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
COMDISCO VENTURES
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31, Years Ended September 30,
------------------- -------------------------------
2000 1999 1999 1998 1997
--------- -------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Operating lease and
other leasing
receipts............ $ 83,471 $ 51,471 $ 117,504 $ 91,632 $ 80,051
Leasing costs,
primarily rentals
paid................ (150) (99) (90) (1,269) (111)
Sales................ 6,207 2,944 6,671 7,220 6,104
Cost of sales........ -- -- (113) (980) (423)
Warrant proceeds..... 194,782 18,970 80,731 14,938 16,435
Promissory note
receipts............ 128,173 18,573 66,912 32,685 15,753
Other revenue........ -- -- 15,231 6,883 3,334
Selling, general, and
administrative
expenses............ (18,971) (3,095) (7,546) (6,794) (5,435)
--------- -------- --------- --------- ---------
Net cash provided
by operating
activities...... 393,512 88,764 279,300 144,315 115,708
--------- -------- --------- --------- ---------
Cash flows from
investing activities:
Equipment purchased
for leasing......... (176,223) (88,172) (205,624) (114,188) (91,297)
Purchase of property
and equipment....... (66) (59) (324) (140) (249)
Equity investments... (117,842) (8,326) (39,641) (7,945) (4,294)
Issuance of
promissory notes.... (286,359) (139,996) (323,876) (57,213) (34,319)
Other................ -- -- (5,558) 2,366 16,273
--------- -------- --------- --------- ---------
Net cash used in
investing
activities...... (580,490) (236,553) (575,023) (177,120) (113,886)
--------- -------- --------- --------- ---------
Cash flows from
financing activities:
Net change in inter-
group loans......... 186,978 147,789 295,723 32,931 (1,948)
Principal payments on
nonrecourse debt.... -- -- -- (126) 126
--------- -------- --------- --------- ---------
Net cash provided
by financing
activities...... 186,978 147,789 295,723 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................ $ -- $ -- $ -- $ -- $ --
========= ======== ========= ========= =========
Reconciliation of net
earnings to net cash
provided by operating
activities:
Net earnings......... $ 74,375 $ 14,698 $ 42,824 $ 17,160 $ 15,150
Adjustments to
reconcile net
earnings to net cash
provided by
operating
activities:
Leasing costs,
primarily
depreciation and
amortization...... 63,238 39,128 88,024 59,094 46,244
Leasing revenue.... -- -- 2,238 6,231 11,425
Principal portion
of promissory
notes............. 104,993 12,149 44,332 26,030 12,614
Cost of sales...... 2,772 -- 4,347 3,000 4,000
Selling, general,
and administrative
expenses.......... 68,753 1,600 33,820 3,785 6,251
Income taxes....... 49,325 9,534 28,402 11,381 10,047
Interest........... 23,919 8,564 23,373 10,835 7,670
Other--net......... 6,137 3,091 11,940 6,799 2,307
--------- -------- --------- --------- ---------
Net cash provided
by operating
activities...... $ 393,512 $ 88,764 $ 279,300 $ 144,315 $ 115,708
========= ======== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS
(dollars in thousands)
(1) Summary of Significant Accounting Policies
Nature of Operations
Formed in 1987 as a division of Comdisco, Inc., Comdisco Ventures (the
"Company") 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.
The Company's cash activity is reflected through the intergroup payable
account. Interest expense on each payable 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.
The Company is allocated certain shared services and support activity of
Comdisco, Inc., consisting of, among other things, financial and accounting
services, information technology 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. The Company 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
The Company is included in the consolidated Federal and state income tax
returns of Comdisco, Inc. Income tax expense has been computed as if the
Company filed its own income tax returns. Related current tax liabilities are
settled through the intracompany payable account.
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 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.
F-7
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
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 changes in
unrealized gains and losses reported in other comprehensive income. Equity
investments for which there is no readily determinable fair value are carried
at cost, less any appropriate valuation allowance.
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:
. 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.
. 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.
Stock-Based Compensation
The Company utilizes the intrinsic value based method of accounting for
its stock-based compensation arrangements.
Interim Financial Information
The unaudited financial statements as of March 31, 2000 and for the
three and six month periods ended March 31, 2000 and 1999 include, in the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the Company's
financial position, results of operations, and cash flows for such periods.
(2) 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 those companies completed initial public
offerings.
F-8
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS--(Continued)
Equity securities include the following as of September 30:
<TABLE>
<CAPTION>
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
Available-for-sale-securities:
Cost..................................................... $ 7,735 $ 3,390
Unrealized gain.......................................... 142,612 --
-------- -------
Market value............................................. 150,347 3,390
-------- -------
Equity investments (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.
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 sold. 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
-------- -------
(in thousands)
<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
Unsettled equity transactions............................. 26,278 --
Other..................................................... 7,321 3,781
-------- -------
Total receivables......................................... 383,852 72,425
Allowance for credit losses............................... (16,513) (6,000)
-------- -------
Total................................................. $367,339 $66,425
======== =======
</TABLE>
The Company provides loans to early-stage high technology privately held
companies in networking, communications, software, and Internet-based and other
industries. The Company's loans are generally structured as equipment loans or
subordinated loans.
The amount of each loan varies, but generally does not exceed $10.0
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 0.75% to 1.5% 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 or the right to convert into an equity interest in the borrower at a
nominal exercise price. The amount of the warrants
F-9
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
-------- ------- ------
(in thousands)
<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>
(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
. 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.
. Operating leased assets consist of the equipment cost, less the
amount depreciated to date.
Revenue, Costs and Expenses
. 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.
. 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.
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
F-10
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
. Initial direct costs related to operating and direct financing
leases, including salesperson's commissions, are capitalized and
amortized over the lease term.
(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
------ ------
(in
thousands)
<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:
<TABLE>
<CAPTION>
Minimum
payments
----------
(in
thousands)
<S> <C>
Years ending September 30,
2000........................ $3,147
2001........................ 1,954
2002........................ 422
2003........................ 17
2004........................ --
------
$5,540
======
</TABLE>
Operating leased assets include the following as of September 30:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Operating leased assets............................... $432,862 $294,352
Less: accumulated depreciation
And amortization..................................... (149,621) (111,949)
-------- --------
Net................................................... $283,241 $182,403
======== ========
</TABLE>
F-11
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
Minimum
payments
--------
(in
thousands)
<S> <C> <C>
Years ending September 30,
2000..................... $129,127
2001..................... 109,085
2002..................... 66,515
2003..................... 10,565
2004..................... --
--------
$315,292
========
</TABLE>
(6) 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:
<TABLE>
<CAPTION>
Projected year of lease
Cost at termination
lease --------------------------------
Year lease commenced inception 2000 2001 2002 2003
-------------------- --------- ------- ------- -------- -------
(in thousands)
<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 64,508 4,532
1999........................... 204,202 13 9,325 115,465 79,399
-------- ------- ------- -------- -------
$446,306 $97,617 $83,573 $180,711 $84,405
======== ======= ======= ======== =======
</TABLE>
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:
<TABLE>
<CAPTION>
Net book Projected year of lease
value at termination
lease -----------------------------
Year lease commenced termination 2000 2001 2002 2003
-------------------- ----------- ------- ------ ------- ------
(in thousands)
<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>
F-12
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(7) Income Taxes
The Company files its U.S. income tax return as part of the consolidated
return with its parent. In accordance with a tax sharing agreement, the Company
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
------- ------- -------
(in thousands)
<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>
The reasons for the difference between the U.S. Federal income tax rate
and the effective income tax rate for earnings were as follows:
<TABLE>
<CAPTION>
Percent of pre-
tax earnings
-----------------
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%
===== ===== =====
</TABLE>
Deferred tax assets and liabilities at September 30, 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
1999 1998
--------- --------
(in thousands)
<S> <C> <C>
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>
F-13
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8) Commitments
The Company leases office spaces under operating leases that expire
periodically through February 29, 2004. Under the renewal options of the
agreement, the Company 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:
<TABLE>
<CAPTION>
Minimum lease
payments
-------------
(in
thousands)
<S> <C>
Years ending September 30,
2000..................... $214
2001..................... 218
2000..................... 25
2003..................... 25
2004 and thereafter...... 11
----
$493
====
</TABLE>
(9) Fair Value of financial instruments
The estimated fair value of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C>
Assets:
Equity securities.................. $197,335 $197,335 $16,995 $16,995
Receivables including noncurrent
portion........................... 367,339 367,339 66,425 66,425
</TABLE>
Fair values were determined as follows:
. 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.
. Receivables are estimated by discounting future cash flows using
the current rates at which similar loans would be made to
borrowers with similar business profiles.
F-14
<PAGE>
COMDISCO VENTURES
NOTES TO FINANCIAL STATEMENTS--(Concluded)
(10) Comprehensive Income
Comprehensive income for the years ended September 30, 1999, 1998, and
1997 consists of the following (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during the
period........................................ $223,343 $ 14,938 $ 16,435
Reclassification adjustment for gains included
in earnings before income taxes............... (80,731) (14,938) (16,435)
-------- -------- --------
Net unrealized gains, before income taxes........ 142,612 -- --
Income taxes..................................... (56,867) -- --
-------- -------- --------
Net unrealized gains............................. 85,745 -- --
-------- -------- --------
Other comprehensive income....................... 85,745 -- --
Net earnings..................................... 42,824 17,160 15,150
-------- -------- --------
Total comprehensive income................... $128,569 $ 17,160 $ 15,150
======== ======== ========
</TABLE>
Accumulated other comprehensive income presented below and in the
accompanying balance sheets consists of the accumulated net unrealized gain on
available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
-------------
<S> <C>
September 30, 1996............................................... $ --
Change in unrealized gain on available-for-sale securities ...... --
-------
September 30, 1997............................................... --
Change in unrealized gain on available-for-sale securities ...... --
-------
September 30, 1998............................................... --
Change in unrealized gain on available-for-sale securities....... 85,745
-------
September 30, 1999............................................... $85,745
=======
</TABLE>
Net unrealized gains in available-for-sale securities are shown net of
deferred taxes of $56,867 at the end of fiscal 1999.
F-15
<PAGE>
COMDISCO, INC. CONSOLIDATED FINANCIAL STATEMENTS
F-16
<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.
Chicago, Illinois
November 2, 1999
F-17
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Six
Months ended Months ended Years ended
March 31, March 31, September 30,
------------- ------------ ---------------------
2000 1999 2000 1999 1999 1998 1997
------ ------ ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Leasing:
Operating............... $ 440 $ 507 $ 874 $1,038 $1,938 $1,897 $1,635
Direct financing........ 43 41 86 80 174 162 145
Sales-type.............. 128 191 206 351 543 376 336
------ ------ ----- ------ ------ ------ ------
Total leasing......... 611 739 1,166 1,469 2,655 2,435 2,116
Sales..................... 98 67 166 125 891 329 269
Technology services....... 156 125 303 243 522 433 354
Other..................... 148 21 255 36 91 46 80
------ ------ ----- ------ ------ ------ ------
Total revenue......... 1,013 952 1,890 1,873 4,159 3,243 2,819
------ ------ ----- ------ ------ ------ ------
COSTS AND EXPENSES
Leasing:
Operating............... 356 407 707 837 1,563 1,528 1,297
Sales-type.............. 102 157 162 284 406 263 237
------ ------ ----- ------ ------ ------ ------
Total leasing......... 458 564 869 1,121 1,969 1,791 1,534
Sales..................... 78 58 128 109 846 275 210
Technology services....... 138 105 263 205 440 362 296
Selling, general and
administrative........... 143 73 258 142 306 249 244
Interest.................. 87 87 171 171 337 326 299
Prism Communication
Services................. 42 3 70 3 36 -- --
Other..................... -- 150 -- 150 150 -- 25
------ ------ ----- ------ ------ ------ ------
Total costs and
expenses............. 946 1,040 1,759 1,901 4,084 3,003 2,608
------ ------ ----- ------ ------ ------ ------
Earnings (loss) before
income taxes............. 67 (88) 131 (28) 75 240 211
Income taxes (benefit).... 24 (32) 47 (10) 27 87 80
------ ------ ----- ------ ------ ------ ------
Net earnings (loss) before
preferred dividends...... 43 (56) 84 (18) 48 153 131
Preferred dividends....... -- -- -- -- -- (2) (8)
------ ------ ----- ------ ------ ------ ------
Net earnings (loss) to
common stockholders...... $ 43 $ (56) $ 84 $ (18) $ 48 $ 151 $ 123
====== ====== ===== ====== ====== ====== ======
Net earnings (loss) per
common share:
Earnings (loss) per
common
share--basic........... $ .28 $ (.37) $ .55 $ (.12) $ .32 $ .99 $ .83
====== ====== ===== ====== ====== ====== ======
Earnings (loss) per
common
share--diluted......... $ .26 $ (.37) $ .52 $ (.12) $ .30 $ .93 $ .78
====== ====== ===== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
CONSOLIDATED BALANCE SHEETS
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, September 30,
----------- ---------------
2000 1999 1998
----------- ------- ------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... $ 87 $ 361 $ 63
Cash-legally restricted........................... 35 46 30
Receivables, net.................................. 962 722 340
Inventory of equipment............................ 112 115 165
Leased assets:
Direct financing and sales-type................. 2,172 2,107 1,779
Operating (net of accumulated depreciation)..... 3,466 3,516 4,121
------ ------- ------
Net leased assets............................. 5,638 5,623 5,900
Buildings, equipment and other, net............... 441 229 137
Equity securities................................. 636 252 80
Other assets...................................... 504 459 348
------ ------- ------
$8,415 $ 7,807 $7,063
====== ======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable..................................... $1,157 $ 820 $1,121
Term notes........................................ 550 550 550
Senior notes...................................... 3,683 3,686 2,768
Accounts payable.................................. 164 263 308
Income taxes...................................... 467 382 333
Other liabilities................................. 609 531 408
Discounted lease rentals.......................... 512 515 596
------ ------- ------
7,142 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 224,116,824
(223,464,344 and 221,657,318 at September 30,
1999 and 1998, respectively)................... 22 22 22
Additional paid-in capital...................... 361 302 257
Accumulated other comprehensive income.......... 189 58 (13)
Retained earnings............................... 1,210 1,134 1,101
------ ------- ------
1,782 1,516 1,367
Common stock held in treasury, at cost.......... (509) (456) (388)
------ ------- ------
Total stockholders' equity.................... 1,273 1,060 979
------ ------- ------
$8,415 $ 7,807 $7,063
====== ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<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
other
Additional Deferred comprehen- Common
Preferred Common paid-in compens- sive - Retained stock in
stock stock capital ation 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
==== === ==== ==== === ====== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS)
<TABLE>
<CAPTION>
Six Months
ended March Years ended September
31, 30,
-------------- -----------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ -------
(unaudited)
<S> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS:
Cash flows from operating activities:
Operating lease and other leasing
receipts........................... $1,009 $1,042 $2,002 $2,013 $ 1,739
Direct financing and sales-type
leasing receipts................... 544 471 958 905 861
Sale of direct financing and sales-
type receivables................... -- -- -- 125 81
Leasing costs, primarily rentals
paid............................... (8) (9) (14) (20) (32)
Sales............................... 208 169 818 335 264
Sales costs......................... (51) (58) (105) (69) (84)
Technology services receipts........ 284 239 485 408 343
Technology services costs........... (230) (185) (390) (278) (204)
Other revenue....................... 130 19 57 44 55
Notes receivable receipts........... 195 8 66 33 16
Selling, general and administrative
expenses........................... (192) (152) (289) (249) (225)
Loss on Prism Communication
Services........................... (53) -- -- -- --
Litigation settlement............... -- -- -- -- 25
Interest............................ (165) (171) (338) (326) (291)
Income taxes........................ (27) (16) (12) (34) (44)
------ ------ ------ ------ -------
Net cash provided by operating
activities....................... 1,644 1,357 3,238 2,887 2,504
------ ------ ------ ------ -------
Cash flows from investing activities:
Equipment purchased for leasing..... (1,449) (1,468) (2,838) (3,026) (2,940)
Investment in continuity and network
services facilities................ (175) (42) (151) (87) (61)
Notes receivable.................... (290) (140) (324) (57) (28)
Acquisition and investment in Prism
Communication Services............. (167) (45) (136) (8) --
Other............................... (118) (53) (31) (2) (19)
------ ------ ------ ------ -------
Net cash used in investing
activities....................... (2,199) (1,748) (3,480) (3,180) (3,048)
------ ------ ------ ------ -------
Cash flows from financing activities:
Discounted lease proceeds........... 166 215 341 279 430
Net increase (decrease) in notes
payable............................ 337 320 (301) 97 (103)
Issuance of term notes and senior
notes.............................. 72 719 1,842 1,017 1,151
Maturities of term notes and senior
notes.............................. (75) (319) (924) (617) (378)
Principal payments on secured debt.. (169) (163) (322) (425) (469)
Decrease (increase) in legally
restricted cash.................... (11) (13) (16) 15 (18)
Preferred stock purchased........... -- -- -- (89) --
Common stock purchased and placed in
treasury........................... (61) (31) (82) (88) (45)
Issuance of Prism Communication
Services common stock.............. 10 -- -- -- --
Dividends paid on common stock...... (8) (8) (15) (15) (14)
Dividends paid on preferred stock... -- -- -- (2) (8)
Shared Investment Program........... -- -- -- 109 --
Other............................... 20 (26) 17 38 6
------ ------ ------ ------ -------
Net cash provided by financing
activities....................... 281 694 540 319 552
------ ------ ------ ------ -------
Net increase (decrease) in cash and
cash equivalents..................... (274) 303 298 26 8
Cash and cash equivalents at beginning
of period............................ 361 63 63 37 29
------ ------ ------ ------ -------
Cash and cash equivalents at end of
period............................... $ 87 $ 366 $ 361 $ 63 $ 37
====== ====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMDISCO, INC. AND SUBSIDIARIES
(IN MILLIONS)
<TABLE>
<CAPTION>
Six Months
ended March Years ended
31, September 30,
------------- --------------------
2000 1999 1999 1998 1997
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET EARNINGS (LOSS) TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net earnings (loss)........................ $ 84 $ (18) $ 48 $ 153 $ 131
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities:
Leasing costs, primarily depreciation and
amortization............................ 860 1,112 1,954 1,771 1,502
Leasing revenue, primarily principal
portion of direct financing and sales-
type lease rentals...................... 458 38 371 478 484
Sale of direct financing and sales-type
receivables............................. -- -- -- 125 81
Cost of sales............................ 74 51 641 193 126
Technology services costs, primarily
depreciation and amortization........... 34 20 50 84 92
Interest................................. 5 -- -- -- 8
Income taxes (benefit)................... 21 (26) 15 45 36
Other expense............................ -- 150 150 -- --
Other, net............................... 108 30 9 38 44
------ ------ ------ ------ ------
Net cash provided by operating
activities.............................. $1,644 $1,357 $3,238 $2,887 $2,504
====== ====== ====== ====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES:
Reduction of discounted lease rentals in
lease portfolio sale.................... $ -- $ -- $ 100 $ -- $ --
====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
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 F-25 and F-26 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.
F-23
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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:
. 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.
. 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.
Interim Financial Information: The unaudited financial statements as of
March 31, 2000 and for the three and six month periods ended March 31, 2000
and 1999 include, in the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation of the
Company's financial position, results of operations, and cash flows for such
periods.
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.
F-24
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
<TABLE>
<S> <C>
Total revenue..................................................... $4,159
Net earnings...................................................... $ 35
Net earnings per common share:
Basic........................................................... $ .23
Diluted......................................................... $ .22
</TABLE>
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
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.
F-25
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Leased Assets:
. 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.
. Operating leased assets consist of the equipment cost, less the
amount depreciated to date.
Revenue, Costs and Expenses:
. 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.
. 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.
. 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.
. 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:
<TABLE>
<CAPTION>
1999 1998
------ ------
(in millions)
<S> <C> <C>
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
====== ======
</TABLE>
F-26
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Unearned revenue is recorded as leasing revenue over the lease terms.
Operating leased assets include the following as of September 30:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in millions)
<S> <C> <C>
Operating leased assets................................. $ 6,054 $ 6,803
Less: accumulated depreciation and amortization......... (2,538) (2,682)
------- -------
Net..................................................... $ 3,516 $ 4,121
======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
Projected year of lease
Cost at termination
earYlease lease --------------------------------
ommencedc inception 00 01 02 03 04+
---------- --------- ------ ------ ------ ------ ----
<S> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ====== ====
</TABLE>
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):
<TABLE>
<CAPTION>
Net book Projected year of lease
value at termination
earYlease lease ------------------------
ommencedc termination 00 01 02 03 04+
---------- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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
====== ==== ==== ==== ==== ====
</TABLE>
F-27
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Years Ending September 30,
<TABLE>
<CAPTION>
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>
Financing
Note 7 Interest-Bearing Liabilities
Interest-bearing liabilities include the following:
<TABLE>
<CAPTION>
99 98
---- ----
At At
September 30 Average September 30 Average
------------ ------------ ------------ ------------
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
(in millions)
<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>
F-28
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The changes in financing activities for the years ended September 30 were
as follows (notes payable changes are shown net):
<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
----------- --------- ----------- ----- ----------- ----------- --------- ----------- -----------
(in millions)
<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:
<TABLE>
<CAPTION>
Years ending September 30,
-----------------------------
2000 2001 2002 2003 2004+ Total
------ ---- ------ ---- ----- ------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
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
====== ==== ====== ==== ==== ======
</TABLE>
Notes payable: The company had the following unsecured bank lines
available in the United States and foreign countries at September 30:
<TABLE>
<CAPTION>
1999 1998
------ ------
(in millions)
<S> <C> <C>
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
====== ======
</TABLE>
F-29
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
Expiration
Facility Number of banks date
-------- --------------- --------------
<S> <C> <C>
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
</TABLE>
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.
F-30
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Senior Notes: Senior notes include the following at September 30:
<TABLE>
<CAPTION>
1999 1998
------ ------
(in millions)
<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(1)............................ 300 --
6.125% Senior Notes due 2003(2)............................ 250 250
6.130% Senior Notes due 2006............................... 275 279
------ ------
Total senior notes..................................... $3,686 $2,768
====== ======
</TABLE>
--------
(1) 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%.
(2) 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.
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.
F-31
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
<TABLE>
<CAPTION>
Rentals to be
received by Discounted
financial lease Interest
institutions rentals expense
------------- ---------- --------
<S> <C> <C> <C>
2000.................................... $331 $303 $28
2001.................................... 150 139 11
2002.................................... 54 51 3
2003.................................... 20 19 1
2004.................................... 3 3 --
---- ---- ---
$558 $515 $43
==== ==== ===
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
Notional Fair Notional Fair
amount value amount value
-------- ----- -------- -----
(in millions)
<S> <C> <C> <C> <C>
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)
</TABLE>
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.
F-32
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Financial Information
Note 8 Receivables
Receivables include the following as of September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in
millions)
<S> <C> <C>
Notes.......................................................... $354 $ 75
Accounts....................................................... 297 215
Unsettled equity transactions.................................. 26 --
Income taxes................................................... 6 6
Other.......................................................... 82 68
---- ----
Total receivables.............................................. 765 364
Allowance for credit losses.................................... (43) (24)
---- ----
Total...................................................... $722 $340
==== ====
</TABLE>
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):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
United States............................................... $12 $183 $163
Outside United States....................................... 63 57 48
--- ---- ----
$75 $240 $211
=== ==== ====
</TABLE>
F-33
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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
=== ==== ===
</TABLE>
The reasons for the difference between the U.S. Federal income tax rate
and the effective income tax rate for earnings were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
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%
==== ==== ====
</TABLE>
Deferred tax assets and liabilities at September 30, 1999 and 1998 were
as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
(in
millions)
<S> <C> <C>
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)
===== =====
</TABLE>
F-34
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
<TABLE>
<CAPTION>
Year scheduled to expire Net operating loss
------------------------ ------------------
<S> <C>
2004................................................. $ 2
2005................................................. 5
2006................................................. 3
2007................................................. 82
2009................................................. 3
2012................................................. 27
2018................................................. 54
----
$176
====
</TABLE>
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.
F-35
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Equity securities, which are included in Other Assets, include the
following as of September 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
(In
millions)
<S> <C> <C>
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
==== ===
</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 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.
F-36
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
<TABLE>
<CAPTION>
Years ended September
30,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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.
Information on these forward agreements is as follows:
<TABLE>
<CAPTION>
1999 1998
Average Average
forward price forward price
Amount Shares per share Amount Shares per share
------ ------ ------------- ------ ------ -------------
(in millions except per share data)
<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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
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
==== ==== ====
</TABLE>
F-37
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in
millions
except
per share
data)
<S> <C> <C>
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
</TABLE>
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.
F-38
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional information on shares subject to options is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -----------------
Weighted- Weighted- Weighted-
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
------- --------- ------ --------- ------ ---------
(in thousands except weighted- average exercise
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
Options Outstanding Exercisable
---------------------------- ----------------
Weighted-
average Weighted- Weighted-
Number remaining average Number average
of contractual exercise of exercise
Range of exercise prices shares life price shares price
------------------------ ------ ----------- --------- ------ ---------
<S> <C> <C> <C> <C> <C>
$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:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
Carrying Fair Carrying Fair
amount value amount value
-------- ----- -------- -----
(in millions)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents..................... $ 361 $ 361 $ 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>
F-39
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
December September
31, March 31, June 30, 30,
--------- ----------- ----------- ---------
1998 1997 1999 1998 1999 1998 1999 1998
---- ---- ----- ---- ------ ---- ---- ----
Quarter ended
<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.
F-40
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 provides 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 and 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 than 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.
F-41
<PAGE>
COMDISCO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summarized financial information concerning the company's reportable
segments is shown in the following table.
<TABLE>
<CAPTION>
Leasing Services Ventures Prism Total
------- -------- -------- ----- ------
(in millions)
<S> <C> <C> <C> <C> <C>
1999
Revenues.............................. $3,407 $522 $229 $ 1 $4,159
Segment profit (loss)................. (12) 52 71 (36) 75
Total assets.......................... 6,332 479 872 124 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
</TABLE>
The following table presents revenue by geographic location based on the
location of the company's local office:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C>
North America................................ $3,254 $2,584 $2,249
Europe....................................... 628 592 537
Pacific Rim.................................. 277 67 33
------ ------ ------
Total........................................ $4,159 $3,243 $2,819
====== ====== ======
</TABLE>
The following table presents total assets by geographic location based on
the location of the asset:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(in millions)
<S> <C> <C> <C> <C> <C>
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
====== ====== ======
</TABLE>
F-42
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
10,000,000 Shares
COMDISCO, INC.
Comdisco Ventures Stock
---------------
PROSPECTUS
---------------
Merrill Lynch & Co.
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This preliminary prospectus +
+is not an offer to sell these securities and it is not soliciting an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[Alternative Page for International Prospectus]
Subject to Completion
Preliminary Prospectus Dated July 24, 2000
PROSPECTUS
10,000,000 Shares
Comdisco, Inc.
Comdisco Ventures Stock
------------
We are offering Comdisco Ventures Stock, a new series of our common stock
intended to reflect the performance of Comdisco Ventures, our venture financing
business. The international managers are offering 1,500,000 shares outside the
U.S. and Canada and the U.S. underwriters are offering 8,500,000 shares in the
U.S. and Canada.
We anticipate that the price to the public will be between $14.00 and
$16.00 per share. Currently, no public market exists for Comdisco Ventures
Stock. We intend to list our Comdisco Ventures Stock on the Nasdaq National
Market, under the symbol "CDOV."
Investing in Comdisco Ventures Stock involves risks. See "Risk Factors,"
beginning on page 13.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price............................. $ $
Underwriting discount............................. $ $
Proceeds, before expenses, to Comdisco............ $ $
</TABLE>
The international managers may also purchase up to an additional 225,000
shares of Comdisco Ventures Stock at the public offering price, less the
underwriting discount, within 30 days from the date of this prospectus to cover
over-allotments. The U.S. underwriters may similarly purchase up to an
additional 1,275,000 shares.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares of Comdisco Ventures Stock will be ready for delivery on or
about , 2000.
------------
Merrill Lynch International
------------
The date of this prospectus is , 2000.
<PAGE>
[Alternative Page for International Prospectus]
UNDERWRITING
We intend to offer the shares of Comdisco Ventures Stock outside the U.S.
and Canada through the international managers and in the U.S. and Canada
through the U.S. underwriters. Merrill Lynch International is acting as lead
manager for the international managers named below. Subject to the terms and
conditions described in an international purchase agreement among us and the
international managers, and concurrently with the sale of 8,500,000 shares of
Comdisco Ventures Stock to the U.S. underwriters, we have agreed to sell to the
international managers, and the international managers severally have agreed to
purchase from us, the number of shares of Comdisco Ventures Stock listed
opposite their names below.
<TABLE>
<CAPTION>
Number
International Manager of Shares
--------------------- ---------
<S> <C>
Merrill Lynch International...................................
..................................................
---------
Total.................................................... 1,500,000
=========
</TABLE>
We have also entered into a U.S. purchase agreement with the U.S.
underwriters for sale of the shares of Comdisco Ventures Stock in the U.S. and
Canada for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated is acting as
U.S. representative. Subject to the terms and conditions in the U.S. purchase
agreement, and concurrently with the sale of 1,500,000 shares of Comdisco
Ventures Stock to the international managers pursuant to the international
purchase agreement, we have agreed to sell to the U.S. underwriters, and the
U.S. underwriters severally have agreed to purchase, 8,500,000 shares of
Comdisco Ventures Stock from us. The initial public offering price per share
and the total underwriting discount per share are identical under the
international purchase agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters have agreed to
purchase all of the shares of Comdisco Ventures Stock sold under the
international and U.S. purchase agreements if any of these shares are
purchased. If an underwriter defaults, the U.S. and international purchase
agreements provide that the purchase commitments of the nondefaulting
underwriters may be increased or the purchase agreements may be terminated. The
closings for the sale of shares of Comdisco Ventures Stock to be purchased by
the international managers and the U.S. underwriters are conditioned on one
another.
Generally, we have agreed to indemnify each international manager and
U.S. underwriter against liability arising out of any untrue statement
contained in the registration statement, any preliminary prospectus or the
final prospectus, or the omission of a material fact required to be stated in
the registration statement or such prospectus necessary to make the statements
in the registration statement or such prospectus not misleading. In addition,
we have agreed to indemnify each international manager and U.S. underwriter
against liability arising out of violations of laws or regulations of foreign
jurisdictions where reserved shares have been offered. Each international
manager and U.S. underwriter has agreed to indemnify us against liability with
respect to untrue statements or omissions, or alleged untrue statements or
omissions, made in the registration statement, any preliminary prospectus or
the final prospectus in reliance upon and in conformity with written
information furnished to us by that international manager or U.S. underwriter
through Merrill Lynch expressly for use in the registration statement, such
preliminary prospectus or the prospectus. For more detailed information on the
terms of indemnification contained in the purchase agreements, please see
Exhibits 1.1 and 1.2 to the registration statement.
The underwriters are offering the shares of Comdisco Ventures Stock,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by their counsel, including the validity of the
shares, and other conditions contained in the purchase agreements, such as the
receipt by the underwriters of officer's certificates and legal opinions. The
underwriters reserve the right to withdraw, cancel or modify offers to the
public and to reject orders in whole or in part.
102
<PAGE>
[Alternative Page for International Prospectus]
Commissions and Discounts
The lead manager has advised us that the international managers propose
initially to offer the shares of Comdisco Ventures Stock to the public at the
initial public offering price on the cover page of this prospectus and to
dealers at that price less a concession not in excess of $. per share. The
international managers may allow, and the dealers may reallow, a discount not
in excess of $. per share to other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to Comdisco. The information assumes
either no exercise or full exercise by the international managers and the U.S.
underwriters of their over-allotment options.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.............. $ $ $
Underwriting discount.............. $ $ $
Proceeds, before expenses, to
Comdisco.......................... $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount,
are estimated at $2,000,000 and are payable by Comdisco.
Over-allotment Option
We have granted options to the international managers to purchase up to
225,000 additional shares of Comdisco Ventures Stock at the public offering
price less the underwriting discount. The international managers may exercise
these options for thirty days from the date of this prospectus solely to cover
any over-allotments. If the international managers exercise these options, each
will be obligated, subject to conditions contained in the purchase agreements,
to purchase a number of additional shares of Comdisco Ventures Stock
proportionate to that international manager's initial amount reflected in the
above table.
We have also granted options to the U.S. underwriters, exercisable for
thirty days from the date of this prospectus, to purchase up to 1,275,000
additional shares of Comdisco Ventures Stock to cover any over-allotments on
terms similar to those granted to the international managers.
Intersyndicate Agreement
The international managers and the U.S. underwriters have entered into an
intersyndicate agreement that provides for the coordination of their
activities. Under the intersyndicate agreement, the international managers and
the U.S. underwriters may sell shares of Comdisco Ventures Stock to each other
for purposes of resale at the initial public offering price, less an amount not
greater than the selling concession. Under the intersyndicate agreement, the
international managers and any dealer to whom they sell shares of Comdisco
Ventures Stock will not offer to sell or sell shares to U.S. or Canadian
persons or to persons they believe intend to resell to U.S. or Canadian
persons, except in the case of transactions under the intersyndicate agreement.
Similarly, the U.S. underwriters and any dealer to whom they sell shares of
Comdisco Ventures Stock will not offer to sell or sell shares to persons who
are non-U.S. or non-Canadian persons or to persons they believe intend to
resell to non-U.S. or non-Canadian persons, except in the case of transactions
under the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares of Comdisco Ventures Stock offered
by this prospectus for sale to some of Comdisco Ventures' employees and other
of our business associates and related persons and for purchase by Comdisco as
a contribution to our retirement plan. If these persons purchase reserved
shares, this will reduce the number of shares available for sale to the general
public. Any reserved shares that are not orally confirmed for purchase within
one day of the pricing of this offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus.
103
<PAGE>
[Alternative Page for International Prospectus]
No Sales of Similar Securities
We have agreed, with exceptions, not to sell or transfer any Comdisco
Ventures Stock for 180 days after the date of this prospectus without first
obtaining the written consent of Merrill Lynch International. Specifically, we
have agreed not to directly or indirectly:
. offer, pledge, sell or contract to sell any Comdisco Ventures
Stock;
. sell any option or contract to purchase any Comdisco Ventures
Stock;
. purchase any option or contract to sell any Comdisco Ventures
Stock;
. grant any option, right or warrant for the sale of any Comdisco
Ventures Stock;
. lend or otherwise dispose of or transfer any Comdisco Ventures
Stock;
. request or demand that we file a registration statement related to
the Comdisco Ventures Stock; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of any Comdisco
Ventures Stock, whether any such swap or transaction is to be
settled by delivery of shares or other securities, in cash or
otherwise.
This lockup provision applies to Comdisco Ventures Stock and to
securities convertible into or exchangeable or exercisable for or repayable
with Comdisco Ventures Stock.
Quotation on the Nasdaq National Market
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "CDOV."
Before this offering, there has been no public market for our Comdisco
Ventures Stock. The initial public offering price will be determined through
negotiations among us and the U.S. representative and lead manager. In addition
to prevailing market conditions, the factors to be considered in determining
the initial public offering price are
. the valuation multiples of publicly traded companies that the U.S.
representative and the lead manager believe to be comparable to
Comdisco Ventures,
. Comdisco Ventures' financial information,
. the history of, and the prospects for, Comdisco Ventures and the
industry in which Comdisco Ventures competes,
. an assessment of Comdisco Ventures' management, its past and
present operations, and the prospects for, and timing of, Comdisco
Ventures' future revenues,
. the present state of Comdisco Ventures' development, and
. the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to those of Comdisco Ventures.
An active trading market for the shares may not develop. It is also
possible that after the offering the Comdisco Ventures Stock will not trade in
the public market at or above the initial public offering price.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares of Comdisco Ventures Stock is
completed, SEC rules may limit underwriters and selling group members from
bidding for and purchasing our Comdisco Ventures
104
<PAGE>
[Alternative Page for International Prospectus]
Stock. However, the U.S. representative may engage in transactions that
stabilize the price of the Comdisco Ventures Stock, such as bids or purchases
to peg, fix or maintain that price.
If the underwriters create a short position in the Comdisco Ventures
Stock in connection with the offering, i.e., if they sell more shares than are
listed on the cover of this prospectus, the U.S. representative may reduce that
short position by purchasing shares of Comdisco Ventures Stock in the open
market. The U.S. representative may also elect to reduce any short position by
exercising all or part of the over-allotment option described above. Purchases
of the Comdisco Ventures Stock to stabilize its price or to reduce a short
position may cause the price of the Comdisco Ventures Stock to be higher than
it might be in the absence of such purchases.
The U.S. representative may also impose a penalty bid on underwriters and
selling group members. This means that if the U.S. representative purchases
shares of Comdisco Ventures Stock in the open market to reduce the
underwriter's short position or to stabilize the price of such shares, it may
reclaim the amount of the selling concession from the underwriters and selling
group members who sold those shares. The imposition of a penalty bid may also
affect the price of the shares of Comdisco Ventures Stock in that it
discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Comdisco Ventures Stock. In
addition, neither we nor any of the underwriters makes any representation that
the U.S. representative or the lead manager will engage in these transactions
or that these transactions, once commenced, will not be discontinued without
notice.
UK Selling Restrictions
Each international manager has agreed that
. it has not offered or sold and will not offer or sell any shares
of Comdisco Ventures Stock to persons in the United Kingdom,
except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or
otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995;
. it has complied and will comply with all the applicable provisions
of the Financial Services Act of 1986 with respect to anything
done by it in relation to the Comdisco Ventures Stock in, from or
otherwise involving the United Kingdom; and
. it has only issued or passed on and will only issue or pass on in
the United Kingdom any document received by it in connection with
the issuance of Comdisco Ventures Stock to a person who is of a
kind described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 as amended by
the Financial Services Act (Investment Advertisements)
(Exemptions) Order 1997 or is a person to whom such document may
otherwise lawfully be issued or passed on.
No Public Offering Outside the United States
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of common
stock, or the possession, circulation or distribution of this prospectus or any
other material relating to the our company or shares of our Comdisco Ventures
Stock in any jurisdiction where action for that purpose is required.
Accordingly, the shares of our common stock may not be offered or sold,
directly or indirectly, and neither this prospectus nor any other offering
material or advertisements in connection with the shares of Comdisco Ventures
Stock may be distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations of any such
country or jurisdiction.
105
<PAGE>
[Alternative Page for International Prospectus]
Purchasers of the shares of Comdisco Venture Stock offered by this
prospectus may be required to pay stamp taxes and other charges in accordance
with the laws and practices of the country of purchase in addition to the
offering price on the cover pages of this prospectus.
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions.
106
<PAGE>
[Alternative Page for International prospectus]
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
10,000,000 Shares
COMDISCO, INC.
Comdisco Ventures Stock
---------------
PROSPECTUS
---------------
Merrill Lynch International
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses, other than underwriting
discounts and commissions, we will pay in connection with the sale of the
securities being registered. All the amounts shown are estimates, except for
the SEC registration fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration fee.......................................... $ 48,576
Nasdaq National Market listing fee............................ 10,000
Blue Sky fees and expenses.................................... 5,000
Printing and engraving expenses............................... 350,000
Legal fees and expenses....................................... 1,000,000
Accounting fees and expenses.................................. 515,000
Transfer Agent and registrar fees and expenses................ 5,000
Miscellaneous................................................. 66,424
----------
Total......................................................... $2,000,000
==========
</TABLE>
Item 15. Indemnification of Officers and Directors.
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Law") empowers a Delaware corporation to indemnify any persons who
were or are, or are threatened to be made, parties to any threatened, pending
or completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person was an officer or
director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such officer or director acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe
his or her conduct was illegal. A Delaware corporation may indemnify officers
and directors against expenses (including attorneys' fees) in connection with
the defense or settlement of an action by or in the right of the corporation
under the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such officer or director
reasonably incurred.
In accordance with the Delaware Law, our restated certificate of
incorporation contains a provision to limit the personal liability of the
directors of Comdisco for violations of their fiduciary duty. This provision
eliminates each director's liability to Comdisco or its stockholders for
monetary damages except (i) for any breach of the director's duty of loyalty to
Comdisco or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware law providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions, or
(iv) for any transaction from which a director derived an improper personal
benefit. The effect of this provision is to eliminate the personal liability of
directors for monetary damages for actions involving a breach of their
fiduciary duty of care, including any such actions involving gross negligence.
Pursuant to most of Comdisco's employee benefit plans, including, without
limitation, its long-term incentive plans and stock option plans, directors,
officers and employees of Comdisco are indemnified against all loss, cost,
liability or expense resulting from any claim, action, suit or proceeding in
which such persons are involved by reason of any action taken or failure to act
under such plans.
II-1
<PAGE>
Pursuant to underwriting agreements filed as exhibits to registration
statements relating to underwritten offerings of securities issued or
guaranteed by Comdisco, the underwriters have agreed to indemnify Comdisco,
each officer and director of Comdisco and each person, if any, who controls
Comdisco within the meaning of the Securities Act of 1933, against specified
liabilities, including liabilities under said Act.
Comdisco is insured for liabilities it may incur pursuant to its restated
certificate of incorporation relating to the indemnification of its directors,
officers and employees. In addition, directors, officers and key employees are
insured against losses which may arise out of their employment and which are
not recoverable under the indemnification provisions of Comdisco's restated
certificate of incorporation.
Item 16. Exhibits.
(a) Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of U.S. Underwriting Agreement between Comdisco, Inc. and
the U.S. Underwriters.
1.2* Form of International Underwriting Agreement between Comdisco,
Inc. and the International Underwriters.
4.1 The rights of holders of Comdisco Ventures Stock are defined in
the Fourth Article of the Amended and Restated Certificate of
Incorporation of Comdisco, Inc. (filed as Exhibit 4.1 to
Comdisco, Inc.'s Form 10-Q for the Quarterly Period ended March
31, 2000 and incorporated herein by reference).
4.2* The Policy Statement regarding Comdisco Ventures Stock Matters
of Comdisco, Inc.
4.3 Amended and Restated Rights Agreement of Comdisco, Inc. (filed
as Exhibit 4.1 to Comdisco Inc.'s Current Report on Form 8-K
filed with the SEC on June 14, 2000).
4.4* Form of Temporary Certificate of Comdisco Ventures Stock.
5.1* Opinion of Jeremiah M. Fitzgerald, Vice President and Chief
Legal Officer of Comdisco, Inc., as to the legality of the
Comdisco Ventures Stock being registered.
8.1* Tax Opinion of Hopkins & Sutter.
10.1 Form of Comdisco Ventures Management Incentive Plan (filed as
Annex III to Comdisco Inc.'s Proxy Statement on Schedule 14A,
dated March 20, 2000 and incorporated herein by reference).
10.2 Form of Amended and Restated 1998 Long-Term Stock Ownership
Incentive Plan (filed as Annex IV to Comdisco Inc.'s Proxy
Statement on Schedule 14A, dated March 20, 2000 and incorporated
herein by reference).
10.3 Form of Amended and Restated 1999 Non-Employee Directors' Stock
Option Plan (filed as Annex V to Comdisco Inc.'s Proxy Statement
on Schedule 14A, dated March 20, 2000 and incorporated herein by
reference).
10.4 Form of Amended and Restated U.S. Employee Stock Purchase Plan
(filed as Annex VI to Comdisco Inc.'s Proxy Statement on
Schedule 14A, dated March 20, 2000 and incorporated herein by
reference).
23.1* Consent of Jeremiah M. Fitzgerald, Vice President and Chief
Legal Officer of Comdisco, Inc. (included in the opinion of
counsel filed as Exhibit 5.1).
23.2 Consent of KPMG LLP.
23.3* Consent of Hopkins & Sutter (included in the opinion of counsel
filed as
Exhibit 8.1).
24.1* Powers of Attorney.
</TABLE>
--------
*previously filed
II-2
<PAGE>
(b) Financial Statement Schedules
None
Item 17. Undertakings.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in the Registration Statement
shall be deemed to be a new registration statement relating to the securities
offered herein and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The undersigned Registrant hereby further undertakes that:
1. For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
2. For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Comdisco, Inc., certifies that is has reasonable grounds to believe
that it meets all the requirements for filing on Form S-3 and has duly caused
this Amendment No. 2 to Registration Statement (No. 333-34590) to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Village of
Rosemont, State of Illinois, on July 21, 2000.
Comdisco, Inc.
/s/ John J. Vosicky
By: _______________________________
John J. Vosicky,
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 2 to Registration Statement (No. 333-34590) has been signed by
the following persons in the capacities indicated on July 21, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
/s/ * President, Chief Executive Officer and
___________________________________________ Director (Principal Executive Officer)
(Nicholas K. Pontikes)
/s/ John J. Vosicky Executive Vice President, Chief Financial
___________________________________________ Officer and Director (Principal
(John J. Vosicky) Financial Officer)
/s/ * Senior Vice President and Controller
___________________________________________ (Principal Accounting Officer)
(David J. Keenan)
/s/ * Director
___________________________________________
(Robert A. Bardagy)
/s/ * Director
___________________________________________
(C. Keith Hartley)
/s/ * Director
___________________________________________
(Harry M. Jansen Kraemer, Jr.)
/s/ * Director
___________________________________________
(Carolyn N. Murphy)
/s/ * Director
___________________________________________
(Thomas H. Patrick)
/s/ * Director
___________________________________________
(William N. Pontikes)
/s/ * Director
___________________________________________
(Rick Kash)
/s/ * Director
___________________________________________
(Philip A. Hewes)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ * Director
___________________________________________
(James Voelker)
</TABLE>
/s/ John J. Vosicky
*By: ___________________________________
John J. Vosicky, Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of U.S. Underwriting Agreement between Comdisco, Inc. and the
U.S. Underwriters.
1.2* Form of International Underwriting Agreement between Comdisco, Inc.
and the International Underwriters.
4.1 The rights of holders of Comdisco Ventures Stock are defined in the
Fourth Article of the Amended and Restated Certificate of
Incorporation of Comdisco, Inc. (filed as Exhibit 4.1 to Comdisco,
Inc.'s Form 10-Q for the Quarterly Period ended March 31, 2000 and
incorporated herein by reference).
4.2* The Policy Statement regarding Comdisco Ventures Stock Matters of
Comdisco, Inc.
4.3 Amended and Restated Rights Agreement of Comdisco, Inc. (filed as
Exhibit 4.1 to Comdisco, Inc.'s Current Report on Form 8-K filed
with the SEC on June 14, 2000).
4.4* Form of Temporary Certificate of Comdisco Ventures Stock.
5.1* Opinion of Jeremiah M. Fitzgerald, Vice President and Chief Legal
Officer of Comdisco, Inc., as to the legality of the Comdisco
Ventures Stock being registered.
8.1* Form of Tax Opinion of Hopkins & Sutter.
10.1 Form of Comdisco Ventures Management Incentive Plan (filed as Annex
III to Comdisco Inc.'s Proxy Statement on Schedule 14A, dated March
20, 2000 and incorporated herein by reference).
10.2 Form of Amended and Restated 1998 Long-Term Stock Ownership
Incentive Plan (filed as Annex IV to Comdisco Inc.'s Proxy Statement
on Schedule 14A, dated March 20, 2000 and incorporated herein by
reference).
10.3 Form of Amended and Restated 1999 Non-Employee Directors' Stock
Option Plan (filed as Annex V to Comdisco Inc.'s Proxy Statement on
Schedule 14A, dated March 20, 2000 and incorporated herein by
reference).
10.4 Form of Amended and Restated U.S. Employee Stock Purchase Plan
(filed as Annex VI to Comdisco Inc.'s Proxy Statement on Schedule
14A, dated March 20, 2000 and incorporated herein by reference).
23.1* Consent of Jeremiah M. Fitzgerald, Vice President and Chief Legal
Officer of Comdisco, Inc. (included in the opinion of counsel filed
as Exhibit 5.1).
23.2 Consent of KPMG LLP.
23.3* Consent of Hopkins & Sutter (included in the opinion of counsel
filed as
Exhibit 8.1).
24.1* Powers of Attorney.
</TABLE>
--------
*previously filed
