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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the transition period from ___________________ to
________________
Commission file number 1-7725
COMDISCO, INC.
(a Delaware Corporation)
6111 North River Road
Rosemont, Illinois 60018
Telephone (847) 698-3000
I.R.S. Employer Identification Number 36-2687938
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLES OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
$.10 par value Chicago Stock Exchange, Inc.
Common Stock Purchase Rights New York Stock Exchange
Chicago Stock Exchange, Inc.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by nonaffiliates of the
Registrant as of December 1, 1999 was approximately $2,560,000,000. For purposes
of the foregoing calculation only, all directors and executive officers of the
registrant have been deemed affiliates. As of September 30, 1998, there were
152,100,362 shares of the Registrant's common stock, $.10 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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EXPLANTORY NOTE:
This Amendment No. 1 is being filed by the undersigned registrant to
correct certain typographical and table footing errors included in information
provided in response to Part 1, Item 1 of its Annual Report on Form 10-K for the
fiscal year ended September 30, 1999 filed with the Securities and Exchange
Commission on December 22, 1999. The following changes have been made within
that section:
o Under the heading "Leasing; General," on page 8, the parenthetical
phrase "including International Operations" is changed to
"excluding International Operations."
o In the narrative Ventures business description, in the table on
page 14 ("15 Largest Commitments") and the table on page 15
("Largest Public Equity Stakes"), certain numerical corrections
have been made to amounts provided.
o In the narrative Prism business description, in the chart on page
21, the references to "960 Mbps" in the "Speed To End User" column
are changed to "960 Kbps."
The entire text of Part I, Item 1, reflecting the aforementioned
corrections, is set forth in the attached pages.
PART I.
Item 1. Business
A. GENERAL DEVELOPMENT OF BUSINESS
OVERVIEW
Comdisco, Inc. (with its subsidiaries, the "Company" or "Comdisco") provides
global technology services to help its customers maximize technology
functionality, predictability and availability. The Company provides equipment
leasing, continuity, managed network services, and desktop management solutions.
These services are designed to provide integrated, long-term, cost effective
asset and technological planning as well as data and voice availability and
recovery to users of high technology equipment. Through its subsidiary, Prism
Communication Services, Inc. ("Prism"), Comdisco is developing a high-speed,
always-on digital network, which will provide customers with leading-edge
connectivity. Through its Ventures group, Comdisco provides equipment leasing
and other financing to venture capital backed start-up companies. Additional
information about each of the business groups is include later in this section.
The executive offices of the Company are located in the Chicago area, at 6111
North River Road, Rosemont, Illinois 60018, and its telephone number is (847)
698-3000.
GENERAL DEVELOPMENT OF BUSINESS
The Company was founded in 1969 and incorporated in Delaware in 1971. Since its
incorporation, the Company's business, its markets and the services it offers
and the way it conducts its business has changed significantly and is expected
to continue to change and evolve. These changes are primarily the result of
rapid changes in technology (including declining prices, manufacturer
consolidations and the rise of new industries such as telecommunications), the
rise of new dominant technologies (such as the Internet) and their related
impact on customers' needs and requirements. Initially, Comdisco was engaged
primarily in the procurement and placement of new and used computer equipment,
principally mainframe and related peripherials. Comdisco developed disaster
recovery and contingency planning services in 1980. In the mid-1980's the
company expanded its operations to include the leasing of non-computer equipment
(office equipment, PBX, point-of-sale, and other high-technology equipment),
eventually adding healthcare, communications, semiconductor manufacturing and
other industry specific equipment leasing, remarketing and other services. In
1987, Comdisco formed Comdisco Ventures. Comdisco Ventures has grown
significantly in the last three fiscal years and has become a significant and
material contributor to the Company's earnings.
On March 24, 1999, the Company announced a major shift in corporate strategy,
including its intent to focus on high-margin service businesses and shed
low-margin businesses, such as its mainframe leasing portfolio and medical
refurbishing business. In conjunction with its repositioning, the Company
recorded a one-time pre-tax charge of $150 million, $96 million after tax, or
approximately $0.59 per share, in the quarter ended March 31, 1999. The
components of this pretax charge include $100 million associated with the
Company's plans to exit the mainframe residual leasing business, $20 million to
exit the medical refurbishing business and $30 million associated with a
realignment of the service businesses. The Company completed the sale of its
mainframe computer leasing portfolio and the sale of the medical refurbishing
business in the fiscal quarter ended June 30, 1999. In addition to these sales,
the Company completed the sale of substantially its entire vendor lease
portfolio in September, 1999.
The Company finalized the acquisition of Prism during the quarter ended March
31, 1999.
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The industry in which the company operates is in a state of constant change,
and, as part of this environment, the company's business is becoming more
service oriented, with the business driven by the company's service
capabilities. Accordingly, Comdisco has realigned to focus on technology
services, ventures, Prism, and on global leasing businesses in historically
high-margin areas such as electronics, communications, medical, laboratory and
scientific.
INVESTMENT CONSIDERATIONS
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
Certain statements herein and in the future filings by the Company with the
Securities and Exchange Commission and in the company's written and oral
statements made by or with the approval of an authorized executive officer
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
and the company intends that such forward-looking statements be subject to the
safe harbors created thereby. The words and phrases "looking ahead," "is
confident," "should be," "will" "predicted," "believe," "plan," "intend,"
"estimates," "likely," "expect" and "anticipate" and similar expressions
identify forward-looking statements.
These forward-looking statements reflect the company's current views with
respect to future events and financial performance, but are subject to many
uncertainties and factors relating to the Company's operations and business
environment which may affect the accuracy of forward-looking statements and
cause the actual results of the company to be materially different from any
future results expressed or implied by such forward-looking statements.
The Company's actual revenues and results of operations could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the "Risk Factors." As a result of
these and other factors, in some future quarter the company's operating results
may fall below the expectations of securities analysts and investors. In such an
event, the trading price of the company's common stock would likely be
materially and adversely affected. Many of the factors that will determine
results of operations are beyond the Company's ability to control or predict.
RISK FACTORS
OPERATING RESULTS ARE SUBJECT TO QUARTERLY FLUCTUATIONS
The Company's operating results are subject to quarterly fluctuations resulting
from a variety of factors, including earnings contributions from remarketing
activities and services, product announcements by manufacturers, economic
conditions and variations in the financial mix of leases written. The financial
mix of leases written is a result of a combination of factors, including, but
not limited to, changes in customer demands and/or requirements, new product
announcements, price changes, changes in delivery dates, changes in maintenance
policies and the pricing policies of equipment manufacturers, and price
competition from other lessors and finance companies.
THE COMPANY'S GROWTH STRATEGY DEPENDS ON PRODUCT AND MARKET DEVELOPMENT
The markets for the Company's principal products are characterized by rapidly
changing technology, evolving industry standards, and declining prices. The
company's operating results will depend to a significant extent on its ability
to continue to introduce new services and to control and/or reduce costs on
existing services. The success of these and other new offerings is dependent on
several factors, including proper identification of customer needs, cost, timely
completion and introduction, differentiation from offerings of the company's
competitors and market acceptance.
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THE COMPANY'S SUCCESS DEPENDS IN PART ON ANTICIPATING AND ADAPTING TO NEW
TECHNOLOGICAL DEVELOPMENTS AND CHANGING MARKET CONDITIONS.
Lower margins on large systems transactions (mainframes and related peripherals,
including DASD and tape drives) have resulted in lower margins on leasing.
Although the Company has sold its mainframe residual leasing business, which may
have a positive impact on leasing margins in future quarters, the market for
leasing and services is characterized by rapid technological developments,
evolving customer demands and frequent new product announcements and
enhancements. Failure to anticipate or adapt to new technological developments
or to recognize changing market conditions could adversely affect the Company's
business, including its lease volume, leasing revenue and earnings contributions
from leasing.
REMARKETING IS AN IMPORTANT CONTRIBUTOR TO ANNUAL AND QUARTERLY EARNINGS
Notwithstanding the sale of the mainframe lease portfolio, remarketing has been
and will continue to be an important factor in determining quarterly earnings.
To meet earnings goals for fiscal 2000, remarketing contributions, primarily for
the company's global equipment leasing businesses, must be at the level achieved
in fiscal 1999. Quarterly operating results depend substantially upon the
remarketing transactions within the quarter, which are difficult to forecast
accurately. While the Company is devoting resources to its remarketing
activities, there can be no assurance that the Company will achieve the
appropriate level of activity necessary to meet or match the Company's prior and
desired operating results.
THE COMPANY'S GROWTH STRATEGY DEPENDS IN PART ON THE COMMUNICATIONS INDUSTRY. IF
THAT INDUSTRY DOES POORLY, THE COMPANY'S BUSINESS AND FINANCIAL RESULTS MAY
SUFFER
The emergence of the communications market--facilities-based broadband
communications companies, Internet Service Providers and other
telecommunications carriers--and the growth of broadband networks, provides the
Company with an industry in which leasing is an attractive alternative to
ownership. The Company's communications equipment customers are generally
companies with accumulated net deficits and extensive liquidity requirements. To
the extent that these companies are unable to meet their business plans, or
unable to obtain funding or funding at reasonable rates to complete their
business plans, there could be an increase in the Company's credit losses above
historical levels.
THE COMPANY'S SUCCESS IS HIGHLY DEPENDENT ON DEVELOPING AND EXPANDING ITS
SERVICES' BUSINESS. THE SERVICES BUSINESS MAY BE LESS PREDICTABLE AND THE
REVENUE IS LESS RECURRING THAN CONTRACTUAL LEASE AND CONTINUITY SERVICES
REVENUE. COMPETITION IN SERVICES MAY NEGATIVELY IMPACT THE COMPANY'S BUSINESS
STRATEGY. REVENUE RECOGNITION CAN BE NEGATIVELY AFFECTED BY LONGER SALES CYCLES
As a result of the evolving nature of its services business, particularly the
emerging desktop management and managed network services, the Company has
limited meaningful historical data in which to base its planned operating
expenses. Accordingly, a significant portion of the company's expense levels
(investment in continuity facilities and hardware, consultants, experts and back
office personnel) are based in part on its expectations as to future services
revenues, and are, to a large extent, fixed. Conversely, the Company's revenue
base has become more diverse with the growth of other technology services
revenue. To attain its services earnings contribution goals for fiscal 2000, the
Company must: meet its obligations under the agreements underlying transactions
in process at September 30, 1999 (also referred to by the company as its "sales
backlog"); expand its contract subscription base (through new contract signings
and contract renewals); increase its revenues from other technology services,
develop, promote and sell additional service products, such as IT CAP Solutions,
advanced recovery services, availability options, remote computing services and
web hosting; and contain costs. The Company must also successfully compete with
organizations offering similar services. The Company's ability to obtain new
business and realize revenue on its sales backlog depends on its ability to
anticipate technological changes, develop services to meet customer requirements
and achieve delivery of services that meet customer requirements. In addition,
there can be no assurance that the Company will be able to maintain and/or
increase its margins on technology services in fiscal 2000.
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One impact of the Company's changing business model is the lengthening of the
sales cycle--the length of time between initial sales contact and final delivery
of contracts--as compared to its traditional leasing business. This increase in
sales cycle results in an increase in negotiations in progress which ultimately
impacts the timing of revenue, earnings and volume recognition.
COMDISCO VENTURES CUSTOMERS ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY BE
UNABLE TO COMPLETE THEIR BUSINESS PLANS. EQUITY INSTRUMENTS HELD BY COMDISCO
VENTURES ARE RISKY INVESTMENTS AND THE PUBLIC MARKET FOR THESE COMPANIES IS
EXTREMELY VOLATILE. TO THE EXTENT THESE COMPANIES DO NOT MEET THEIR PLANS OR THE
COMPANY IS UNABLE TO DISPOSE OF ITS EQUITY SECURITIES, THE COMPANY'S BUSINESS
AND FINANCIAL RESULTS MAY SUFFER.
The Company has made loans to and equity investments in various privately held
companies. These companies typically are in an early stage of development with
limited operating histories, and limited or no revenues and may be expected to
incur substantial losses. Accordingly, investments in these companies may not
result in any return and the Company may lose its entire investment and/or
principal balance.
Equity instruments held by the Company are subject to lockup agreements
restricting its ability to sell until several months after an initial public
offering. The public market for high technology and other emerging growth
companies is extremely volatile. Such volatility may adversely affect the
ability of the company to dispose of the equity securities and the value of
those securities on the date of sale.
The Company has established working relationships with successful venture
capital organizations. There can be no assurance that these relationships can be
maintained or sustained. To the extent that the company is unable to maintain
these relationships, its ability to identify potential customers may be
substantially impaired.
The current economic environment has been sustained over a number of years and
is currently the longest continuous period of economic growth in the last thirty
years. This environment has encouraged entrepreneurs to conceive, develop and
bring to market new products and services. The Company targets these early-stage
companies for its services and products. A slow down in economic growth could
materially affect the market in which the Company operates. Furthermore, a slow
down would impact potential investors in any limited partnerships the Company
may form, and this in turn, would have a material impact on the Ventures
liquidity and access to funds.
Many of the companies to which the Company provides financing are dependent on
third parties for liquidity. Any significant change in the availability of
funds, would have a material impact on the Company's customer base, and,
potentially, its loan collectability, as well as, the fair market value of its
equity instruments.
If companies with which Ventures has effected transactions are not successful or
the markets become unfavorable, Ventures' customers may not be able to complete
securities offering and Ventures may not be able to generate gains or receive
proceeds from the sale of securities.
Fluctuations in future periods may be greater that those experienced in past
periods as a result of Ventures' focus on companies related to the Internet and
telecommunications. Furthermore, for those customers whose securities are not
publicly traded, the realizable value of Ventures' interests may ultimately
prove to be lower than the carrying value currently reflected in the
consolidated and the separate Ventures' financial statements.
In the past Ventures financed its operations with inter-company loans from
Comdisco. Ventures my need to obtain funding from outside sources and may not be
able to obtain funding from outside sources. Furthermore, even if funding is
available, such financing may not be on terms as favorable as those obtained
from Comdisco.
Ventures depends on certain important employees and the loss of those employees
could harm and disrupt Ventures' business.
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THE COMPANY'S PRISM SUBSIDIARY IS A START UP COMPANY WITH AN AGGRESSIVE BUSINESS
PLAN IN A NEW AND UNPROVEN INDUSTRY.
Prism is a start up company that has incurred operating losses since inception
and the company expects that Prism's operating losses will continue to increase
as it introduces its services throughout New York City and the Northeast
corridor. In addition, Prism will require substantial additional capital to
support its data network, to expand its services, to increase its sales and
marketing efforts and to support the its growth. To the extent that revenues do
not grow at anticipated rates or that increases in such operating expenses
precede or are not subsequently followed by commensurate increases in revenues,
or that the company is unable to adjust operating expense levels and/or capital
expenditures of Prism accordingly, the company's business, results of operations
and financial condition could be significantly affected. There can be no
assurance that in the future Prism will be profitable on a quarterly or annual
basis.
Prism operates in a highly regulated environment. Changes in regulatory policies
may adversely impact its ability to provide services and increase the costs of
providing those services.
Prism's business strategy is largely unproven. A number of factors may affect
Prism's ability to attain its business plan, including the following:
o its ability to successfully market it's existing and planned services to
current and new customers;
o its ability to generate customer demand for it's services in target
markets;
o the development of its target market and market opportunities;
o market pricing for its services and for competing services;
o the extent of increasing competition;
o ability to acquire funds to expand its network;
o the ability of its equipment and service suppliers to meet its needs;
o trends in regulatory, legislative and judicial developments;
o its ability to manage growth of its operations;
o its ability to access regions and enter into suitable interconnection
agreements with traditional telephone companies;
o its ability to improve its existing services and introduce new service
offering without interruption or interference with its operations, in a
timely and cost effective manner;
o its ability to improve its technology infrastructure to respond to
technological change and new industry standards;
o its ability and that of its customers to be year 2000 compliant;
o its reliance on third parties, including some of its competitors and
potential competitors to develop and provide Prism with access to
communications and networking technology;
o its ability to rapidly expand the geographic coverage of its services;
o its ability to attract, retain and motivate qualified persons;
o its ability to rapidly install high-speed access lines;
o its ability to effectively manage growth of operations; and
o its ability to deliver additional value-added services to its customers.
Furthermore, Prism's operating results are likely to fluctuate significantly in
the future as a result of numerous factors, many of which are outside of its
control. These factors include, but are not limited to:
o the timing and willingness of traditional telephone companies to provide
it with central office space and the prices, terms and conditions on which
they make available the space to Prism;
o the amount and timing of capital expenditures and other costs relating to
the expansion of its networks and the marketing of its services
o delays in the commencement of operations in new regions and the generation
of revenue because certain network elements have lead times that are
controlled by traditional telephone companies and other third parties;
o the ability to develop and commercialize new services by Prism or its
competitors
o the ability to deploy on a timely basis its services to adequately satisfy
end-user demand
o the ability to successfully operate its networks;
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o the rate at which customers subscribe to its services;
o decreases in the prices for its services due to competition, volume-based
pricing and other factors;
o the mix of line orders between consumer end-users and business
end-users (which typically have higher margins);
o the success of its relationship with Williams, Nortel and potential third
parties;
o the development and operation of Prism's billing and collection systems
and other operational systems and processes;
o the rendering of accurate and verifiable bills by Prism's traditional
telephone suppliers and resolution of billing disputes;
o the incorporation of enhancements, upgrades and new software and hardware
products into its network and operation processes that may cause
unanticipated disruptions; and
o the interpretation and enforcement of regulatory developments and court
rulings concerning the 1996 telecommunications act, interconnection
agreements and the anti-trust laws.
Prism's business strategy is largely unproven.
ECONOMIC CONDITIONS AND OTHER FACTORS MAY NEGATIVELY IMPACT THE COMPANY'S
OPERATIONS
With respect to economic conditions, a recession can cause customers to put off
new investments and increase the company's bad debt experience.
Other uncertainties include continued business conditions, trend of movement to
client/server environment, competition, including competition from other
technology service providers, reductions in technology budgets and related
spending plans, price competition from other technology service providers, and
the Year 2000 readiness of the company's customers, suppliers and business
partners.
B. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
See Note 16 of Notes to Consolidated Financial Statements on page 52 of the
Annual Report to Stockholders for the year ended September 30, 1999 for
financial information about the Company's segments.
C. NARRATIVE DESCRIPTION OF BUSINESS
Principal Services:
The Company's operations are organized into four reportable groups of
businesses. These groups are Leasing, Services, Ventures and Prism.
The following is a narrative description of the Leasing and Services businesses.
Leasing:
General: Leasing and remarketing services for distributed computing
systems--servers, workstations, PCs, local area networks and other high
technology equipment; acquisition management, expenditures tracking and other
services that facilitate equipment procurement and expense tracking.
The Company buys, sells and leases and remarkets PCs and workstations made by
most of the leading manufacturers. The Company's lease transactions also include
high-end servers, printers and other desktop related equipment. The Company's
strategy for the distributed systems market is to provide financing,
professional services and software tools (see "Services") to its existing and
prospective customers. The Company estimates that approximately 34% of the cost
of equipment placed on lease by the Company (excluding International operations)
in fiscal 1999 was distributed equipment
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Industry Specific: Leasing and remarketing, asset management and reconditioning
services for industry specific equipment, including semiconductor manufacturers,
communication and pharmaceutical companies.
ELECTRONICS GROUP: The Company leases new and used electronic manufacturing,
testing and monitoring equipment, including semiconductor production equipment,
automated test equipment and assembly equipment. Additionally, the Company
maintains a dedicated refurbishing and sales facility in the Silicon Valley
area. The semiconductor manufacturing industry is characterized by rapidly
advancing technology, high capital outlays, increased competition, and a growing
concern over the total cost of ownership in high technology equipment. The
Company assists its customers in developing an effective strategy for acquiring
and managing its high-tech assets.
HEALTHCARE GROUP: Through its healthcare subsidiaries, the Company leases
medical and other high technology equipment to healthcare providers, including
used, reconditioned medical equipment. The Company's portfolio includes
angiography, MRI systems, CT Scanners, nuclear imaging devices, test equipment
such as oscilloscopes, analyzers and testers and laboratory equipment such as
microscopes and centrifuges.
LABORATORY AND SCIENTIFIC GROUP: The Company's laboratory and scientific group
assists organizations in the pharmaceutical, chemical, research, healthcare and
biotechnology industries through the implementation of an equipment life-cycle
management strategy. Its marketing strategy includes financing, technology risk
management and remarketing.
Services:
CONTINUITY SERVICES: These services include continuity services for large
central processing sites, client/server, workstation and PC environments, local
and wide area networks and voice availability and recovery capabilities, as well
as consulting services in continuity planning, network services and data
protection, and other related data processing services throughout the United
States, Canada and Europe. The Company provides backup capabilities for, among
others, Digital Equipment Corporation, Hitachi Data Systems, IBM, Hewlett
Packard, Sequent, Stratus, Sun Micro Systems, Tandem and Unisys equipment users.
Comdisco's services are designed to help customers avoid and minimize the impact
of a significant interruption to critical business functions as a result of the
inaccessibility to the customer's data processing facility, communications
network(s) or workstations.
Through its network and facilities strategy entitled CCS Net, the Company offers
customers access to its North American facilities, including a range of data
processing recovery services at hot sites, Customer Control Centers ("CCC") and
shell sites. Hot sites are equipped computer facilities that include central
processing units, peripherals and communications equipment. A CCC interfaces
customers to geographically separated hot sites by means of telecommunications
lines. Most facilities also include workstation and/or desktop recovery, voice,
and network capabilities. Capabilities also include client/server platforms and
midrange systems. These facilities also are used for the Company's Millennium
Testing Services, which allows customers to test their Year 2000 conversion
projects.
Of the Company's approximately forty continuity locations, nine serve as data
center recovery environments providing hot site and/or shell site services.
These nine regional recovery centers serve major commercial centers, including
New York, Chicago, Northern and Southern California, Texas, Georgia, as well as
a location in Southern New Jersey that serves the Mid-Atlantic region and a
center located in Toronto, Canada. Each recovery center has at least one hot
site or CCC and includes telecommunications capabilities, conference rooms,
office space, support areas, and appropriate on-site technical personnel.
Comdisco believes it operates one of the largest communications networks in
North America.
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MANAGED NETWORK SERVICES: Comdisco Network Services offers network assessment,
design, implementation, help desk and professional management services designed
to reduce the total cost of network technology. The Company's customer base is
primarily North American-based enterprises as its monitoring and on-site support
capabilities are predominantly within the United States.
IT CAP: The Company provides strategic solutions for desktop management services
to its customers to assist them in managing their information technology assets
with the objective of increasing productivity and reducing technology cost and
risk. These technology service solutions are built around the collection,
integration, and management of information on enterprise assets through the
implementation of an integrated database of asset information. These solutions
may also include improving, supporting, and managing distributed systems and
critical business processes through a single point of contact. The services,
which are designed to complement the Company's leasing activities, include
transitional strategies, integration planning and implementation, financing
(hardware and software), and continuity planning. The Company's integrated
desktop management software tools let customers order, track and manage their
inventory of distributed systems equipment.
The Company's operations are conducted through its principal office in the
Chicago area and approximately one hundred offices in the United States, Canada,
Europe and the Pacific Rim. Subsidiaries in Europe and Canada offer services
similar to those offered in the United States.
The Company's services are provided through separate business units. Each
business is directed by its own management team and has its own sales,
marketing, product development, operations and customer support personnel.
Overall corporate control and coordination are achieved through centralized
budgeting, financial and legal reporting, cash management, additional customer
support and strategic planning.
The Company may, from time-to-time, enter into marketing relationships with high
technology equipment manufacturers and value-added resellers in order to expand
its customer base and name recognition. In its marketing operations, the Company
attempts to cross-sell services where and when appropriate.
Customers and Raw Materials
Comdisco's business is diversified by customer, customer type, equipment
segments, geographic location of its customers and maturity of its lease and
notes receivables. The Company's customers include "Fortune 1000" corporations
or companies of a similar size as well as smaller organizations, including
privately-held corporations. The Company's businesses are not dependent on any
single customer or on any single source for the purchasing, selling or leasing
of equipment, or in connection with its continuity services.
Competition
The Company competes as a lessor and as a dealer of new and used computer and
selected other high technology equipment. The Company competes with different
firms in each of its activities. The Company's competition includes equipment
manufacturers such as IBM, Hewlett Packard ("HP"), Amdahl, Hitachi Data Systems,
AT&T, Rolm, Hitachi Medical Systems, Siemens Medical Systems and General
Electric, other equipment dealers, brokers and leasing companies (including
captive or related leasing companies of IBM, HP and General Electric and others)
as well as financial institutions, including commercial banks and investment
banking firms. While its competitive methodologies will differ, in general, the
Company competes mainly on the basis of its expertise in remarketing equipment,
terms offered in its transactions, its reliability in meeting its commitments,
its independence from the manufacturer and its ability to develop and offer
alternative solutions and options to high technology equipment users.
Primarily as a result of technological changes, competition has increased in the
leasing industry and the number of companies offering competitive services, such
as desktop management and other high technology equipment leasing, has
increased. Competitive alliances have also impacted the leasing industry.
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In PCs, workstations, electronics, healthcare and telecommunications, the
Company believes it competes with the manufacturers and their captive leasing
companies and approximately three significant leasing companies, as well as
banks and other lessors and financial and lending institutions throughout the
United States and Canada. In its other services, the Company competes with
manufacturers and other national and regional consulting and services
organizations.
In continuity services, the Company believes that its major competitors are IBM
and SunGard Data Systems, Inc. Additionally, it competes with regional firms in
the domestic, Canadian and European marketplace, which provide contract
continuity services. Comdisco believes that it is the largest international
provider of such services.
In managed network services, the Company competes with telecommunications firms,
such as AT&T and MCI Communications, consulting organizations, such as Andersen
Consulting and EDS, and other local and regional providers.
In desktop management, the Company believes it competes with a number of large
general contractors such as AT&T, GE Capital ITS, Hewlett-Packard and IBM, all
companies with significant resources and with experience in leasing and
financing. In addition, other companies, such as Amdahl and Unisys--companies
that have traditionally focused on equipment break/fix and maintenance
services--have begun offering more comprehensive asset management strategies.
The Company's continued ability to compete is also affected by its ability to
attract and retain well qualified personnel and the availability of financing.
Other
The Company does not own any patents, licenses, or franchises which it considers
to be material to the Company's businesses.
The Company's businesses are not seasonal, however, quarter-to-quarter results
from operations can vary significantly.
The Company currently believes that the amount of backlog orders is not material
to understanding the Company's business.
Because of the nature of the Company's business, the Company is not required to
carry significant amounts of inventory either for delivery requirements or to
assure continuous availability of goods from suppliers.
At September 30, 1999, the Company had approximately 3600 full-time employees.
-11-
<PAGE>
Ventures:
The following is a narrative description of the Ventures business.
Overview
Ventures is a leading provider of financing to venture capital-backed companies.
Its long-term relationships with certain leading venture capital firms help
Ventures identify well-positioned companies in attractive high growth
industries. Ventures offers companies a broad range of innovative equity-linked
financing products, primarily venture debt and venture leases, which are loans
or leases combined with warrants or equity conversion options that give Ventures
the right to purchase or convert into common or preferred stock at a
predetermined price. In addition to venture debt and leases, Ventures may also
purchase direct equity stakes in companies. Its financing products complement
equity from venture capital firms and debt from commercial banks and asset-based
lenders.
Ventures was formed in 1987, and since that time, Ventures has committed
approximately $1.7 billion in venture debt, venture leasing and equity financing
to over six hundred seventy-five venture-backed companies. Of the companies
Ventures has helped finance, over one hundred fifty have gone public and over
one hundred ten have been acquired. During the last two years, some of its most
successful customers include Ariba Technologies, Ask Jeeves, Copper Mountain
Networks, Critical Path, e-Loan, e.Piphany, e-Toys, Extreme Networks, Gadzoox,
Inktomi, Next Card, Northpoint Communications, Siara Systems, and Stratum One.
Venture debt and venture leasing can be utilized at various stages of a
company's development and for various purposes including the following:
o Early stage capital to supplement the initial venture capital raised
and support growth requirements;
o Expansion capital between venture capital rounds to enable an emerging
company to reach milestones and increase the prospect of raising future
capital at higher valuations;
o Capital to help a company acquire additional equipment, technology, and
businesses;
o Late stage capital to provide financial flexibility to deal with the
uncertainty of a liquidity event such as an initial public offering or the
sale of the company; and
o Various other stages of capital to provide financing flexibility and
negotiating strength versus mezzanine and corporate equity rounds.
As a result of the specialized nature of venture debt and venture leasing,
providers of these products must have expertise in technology-related industry
sectors, access to capital, the ability to assess risk, relationships with
venture capital firms, access to deal flow, and the ability to structure
transactions appropriately.
Markets
Ventures focuses its activities on what it believes are the most attractive
emerging industries. Within these industries, Ventures leverages its industry
knowledge and strong relationships to provide financing to the most promising
emerging companies. Ventures identified the following common characteristics of
potential customers, which help to guide financing decisions:
Growth. Ventures seek to fund customers that have or are projected to
have significant and sustainable growth in their business operations
and industry sectors.
Foreseeable liquidity event. Prior to entering into a commitment with
a customer, Ventures reviews the likelihood of a liquidity event in a
time frame acceptable to us and estimate the fair market value, which
could be realized from such a liquidity event. Typical liquidity
events include an initial public offering or a sale of the company.
Liquidity events historically have enhanced the value of Ventures
equity-linked and equity interests in many cases.
-12-
<PAGE>
Providing capital through innovative products
Ventures success has been fueled by its ability to identify the capital needs of
its customers and to develop and customize attractive financings to meet those
needs. Its initial venture lease products have evolved and expanded over time.
Ventures currently offers a broad spectrum of innovative financing alternatives.
Its primary financing products currently are leases with warrants, subordinated
debt with warrants, as well as direct investments in convertible preferred stock
and common stock.
Typically, Ventures products are structured as commitments to provide financing
in one or more advances during a specified period of time. This commitment to
finance is typically subject to the absence of any default or material adverse
change under the loan or lease and compliance with other loan requirements.
Ventures generally receives warrants to purchase equity securities or the right
to convert some of the debt into equity securities of the customer in connection
with the lease and debt financings. Warrants typically represent less than 10%
of the customer's ownership at the date of origination. The terms of the
warrants or equity conversion, including the expiration date, exercise price and
terms of the equity security for which the warrant may be exercised, will be
negotiated individually with each customer, and will likely be affected by the
price and terms of securities issued by the customer to its venture capitalists
and other holders. Based upon its past experience, it is anticipated that most
warrants will be exercisable for a term of three to ten years. The equity
securities for which the warrant will be exercised generally will be convertible
preferred stock or common stock (of which there may be one or more classes).
Substantially all the warrants and underlying equity securities will be
restricted securities.
Venture Leasing
Ventures' equipment-based venture lease and loans activities consist primarily
of the direct origination of non-cancelable, full-payout leases or loans
structured like leases (collectively "Venture Leasing"). These leases are
generally for a variety of equipment including information technology,
scientific hardware, facilities, software and production equipment. The rental
rate and all other transaction terms are individually negotiated.
Substantially all equipment leases that Ventures originate have specified
non-cancelable initial terms ranging from 2 to 5 years. The general terms and
conditions of all of its leases are substantially similar and are embodied in a
master lease agreement. For each lessee, the lease term, rent interval, lease
rate factor and other specific terms for each piece of leased equipment are set
forth on equipment schedules, which also incorporate the terms and conditions of
its master lease agreement.
Venture Debt
Most subordinated and other debt financings are made pursuant to subordinated,
secured loan agreements. The loans bear fixed interest rates with coupons
currently ranging from 8.0% to 13.0% per annum, although the effective rate may
be greater. These loans are generally scheduled to be repaid in 36 monthly
installments; with a varying number of installments of interest only, the
balance being amortizing installments of principal and interest. In addition,
fees, typically ranging from 0.75% to 1.25% of the principal amount of the loan,
may be paid at closing.
Subordinated loans are often times secured by a lien on all of the borrower's
assets, which, in most cases, is subordinated to the lien of the borrower's
senior lenders. Loan documents generally do not contain extensive financial
covenants, although the documentation usually contains cross-default provisions
linked to any defaults by the customer on any debt outstanding and may have
specific provisions governing future financing or pledging of assets.
-13-
<PAGE>
Direct Equity Investments
Ventures also provides equity financing to customers by purchasing common or
preferred convertible stock. Ventures generally purchases equity at a valuation
based on the most recent previous financing round to venture capitalists or, as
applicable, a current or contemplated financing round.
During the fiscal years ended September 30, 1998 and September 30, 1999,
Ventures made direct equity investments with 36 and 91 customers, representing
$7 million and $39 million, respectively. As of September 30, 1999, Ventures has
made total direct investments with an original cost of $61 million.
The following table shows total new lease, debt and equity commitments for
Ventures in the last five years.
Total New Commitments By Year-Last 5 Years
(Dollars in Millions)
1995 1996 1997 1998 1999
----- ------ ------ ------ ------
Leases..... $77.3 $103.5 $144.3 $220.6 $332.1
Debt....... 2.5 7.5 19.5 67.7 367.1
Equity..... 1.6 3.1 3.7 7.4 39.0
----- ------ ------ ------ ------
Total...... $81.4 $114.1 $167.5 $295.7 $738.2
===== ====== ====== ====== ======
The following table shows the 15 largest original commitments for Ventures at
September 30, 1999
15 Largest Commitments
(Dollars in millions)
<TABLE>
<CAPTION>
As of September 30, 1999
Original Book Open
Commitment(1) Value (2) Commitments(3)
---------- ----- -----------
<S> <C> <C> <C>
HomeGrocer.com, Inc. ........... $18.1 $2.8 $10.2
Avici Systems, Inc. ............ 15.3 9.6 2.5
Digital Generation Systems, Inc. 15.0 2.0 --
Equinix, Inc. .................. 15.0 7.4 5.3
CORVIS Corporation ............. 14.0 13.7 --
Telocity, Inc. ................. 11.6 7.7 0.6
NextCard, Inc. ................. 11.2 10.2 --
Concur Technologies, Inc. ...... 10.4 7.5 --
Living.com, Inc. ............... 10.3 9.3 0.8
Acusphere, Inc. ................ 10.1 7.5 --
RemarQ Communities, Inc. ....... 9.8 7.9 0.7
Integral Development Corporation 9.5 6.0 0.9
StockPower, Inc. ............... 9.3 8.0 0.9
PlanetRx, Inc. ................. 12.7 10.7 2.0
FlyCast Communications Corp. ... 9.1 7.7 0.1
------ ------ -----
Total .......................... $181.4 $118.0 $24.0
====== ====== =====
<FN>
(1) Since inception.
(2) Book Value represents total capital currently owed by customers as of
September 30, 1999 and/or cost of equity investment.
(3) Open commitments equal the total amount of commitments that customers have
the right to draw upon.
</FN>
</TABLE>
CURRENT EQUITY STAKES. Ventures exercises its warrants only after a
liquidity event, such as an initial public offering or acquisition/merger. Using
an outside manager, Ventures generally sells its equity positions as soon as
reasonably possible after an initial public offering and in a manner intended to
maximize the return on its original investment subject in most cases to
securities law restrictions on transfer and contractual lock-up provisions which
restrict its ability to sell its equity position for several months after the
initial public offering.
-14-
<PAGE>
As of September 30, 1999, Ventures current public equity holdings had a market
value of $194 million and represented ownership in 65 companies. The 10 largest
equity holdings represented 74% of the total of these holdings and was composed
of the following companies:
<TABLE>
<CAPTION>
Largest Public Equity Stakes held by Ventures as of September 30, 1999
Company Industry Sector Date of Original Commitment Shares Held
- -------------------------- --------------------------- --------------------------- -----------
<S> <C> <C> <C>
e.Piphany, Inc. Software & Computer Services June 10, 1999 389,062
BabyCenter, Inc. Internet October 18, 1998 360,762
FlyCast Communications Corp. Internet December 1, 1997 502,051
Agile Software Corporation Software & Computer Services August 22, 1995 158,301
NextCard, Inc. Consumer Related May 29, 1998 412,945
Vignette Corporation(1) Internet December 8, 1998 180,716
Northpoint Communications, Inc. Communications & Networking December 8, 1997 394,710
Critical Path, Inc. Software & Computer Services May 6, 1998 161,603
Lightera Networks, Inc. Communications & Networking June 4, 1998 151,976
Copper Mountain Networks, Inc. Communications & Networking September 30, 1997 160,211
<FN>
(1) Shares listed as held at September 30, 1999 reflect the two-for-one stock
split that occurred subsequent to September 30, 1999.
</FN>
</TABLE>
In addition to its public equity holdings, as of September 30, 1999 Ventures
held warrants and other equity positions in approximately 360 companies that are
still private.
Expanding its funding sources
Historically, Comdisco has funded Ventures' business with inter-division loans
and retained earnings. In order to continue to capitalize on increasing demand,
Comdisco is pursuing alternative means of funding Ventures, activities,
including, but not limited to, the establishment of a limited partnership and
the offering of partnership interests to a limited number of accredited
investors, including Comdisco. The limited partnership, or possibly
partnerships, could become a significant source of liquidity for Ventures for
fiscal 2000. In addition, Ventures may use public markets or any other funding
sources.
Capitalizing on the Comdisco affiliation
As a division of Comdisco, Ventures is able to bring a number of benefits to its
customers. First, as a result of Comdisco's experience in leasing and
remarketing equipment and Comdisco's equipment purchasing power, Ventures is
able to offer its customers an equipment procurement service designed to save
them time, effort and money. Second, because all of Comdisco's other businesses
are technology related and the bulk of its customers are technology related,
some natural business relationships evolve with Comdisco, as either vendor to,
or customer of, its customers. Comdisco can supply network bandwidth and
co-location space, serve as a beta test site, enter into marketing arrangements
and supply business continuity services to its customers. Comdisco also provides
more traditional leasing services to its customers once they develop beyond the
venture stage.
Competition
Ventures primary competitors include financial institutions, equipment lessors
and manufacturers, venture capital firms, large corporate investors, and
non-traditional lenders that provide debt and/or equity financing to emerging,
high technology companies. Ventures believes that it competes effectively with
these competitors based on creative and innovative deal structuring,
flexibility, reputation, quality of service, timely credit analysis and timely
decision-making.
-15-
<PAGE>
Employees
As of September 30, 1999, Ventures employed 38 people on a full time basis. 10
personnel were involved in marketing and sales, 25 were in processing, servicing
and administrative support and 3 were executive employees. No employees are
represented by a labor union. Ventures believes that its future success will
depend in part on its continued ability to attract, hire and retain qualified
personnel. Competition for those personnel is intense, and Ventures may be
unable to identify, attract and retain those personnel in the future.
Legal Proceedings
Ventures is not currently a party to any material litigation.
Additional Information
FOR INFORMATIONAL PURPOSES ONLY, Ventures financial statements are attached to
this Form 10-K as Exhibit 99.02. These statements are not incorporated by
reference in this or any other filing with the Securities and Exchange
Commission. THESE STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE COMDISCO,
INC. CONSOLIDATED FINANCIAL STATEMENTS AND THIS INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
-16-
<PAGE>
Prism:
The following is a narrative description of the Prism business:
Overview
Prism intends to become a leading integrated communications carrier by directly
offering communications services that enhance productivity. Its array of
services will include high-speed data connectivity, local and long distance
voice, video conferencing, virtual private networks, business continuity and
teleworking solutions. Prism will provide these services over a facilities-based
network consisting of splitterless, integrated data and voice line card
technology from Nortel Networks(TM) ("Nortel") and an optical backbone that
enables the Company to efficiently transport voice and data traffic from network
edge to the Internet, a LAN/WAN or other destinations. Prism intends to build
long-term relationships with target customers, which include small and mid-sized
businesses, teleworkers and residential power users, by initially providing
affordable, reliable data and voice services supported by integrated, simple
billing and excellent customer service. Prism intends to build its brand, RED,
because the Company believes a well-recognized brand can reduce costs required
to acquire new customers, lower customer turnover and serve as a platform from
which to sell additional, complementary business and communications services. In
the future, Prism plans to expand its applications offerings, utilizing its
customers' high-speed data connectivity to offer broadband content and
business-to-business services. Over time, Prism believes such applications will
increase in importance to its customers and business model. Through its
relationship with Comdisco, Prism plans to further extend its service
distribution by utilizing Comdisco's strong customer relationships among larger
corporations.
Prism launched its RED high-speed data connectivity services in February 1999 in
New York City. Initially, Prism focused on the greater New York City
metropolitan area because of its population density, robust telephone network
infrastructure, and perceived high user demand. Since February, approximately
1,000 customers have been placed in service, and Prism has expanded its service
territory in the greater New York City market from six to thirty-nine
collocations and points of presence. These points of presence allow Prism to
provide services to Manhattan, Brooklyn, Queens, and areas of Westchester
County, Long Island and Connecticut. In addition, Prism recently opened the
northern New Jersey market and is providing service out of ten collocations in
the state. Based on the response to its service offering in the greater New York
City metropolitan area, Prism has initiated a nationwide rollout of its network
and services to thirty-three of the largest markets in the United States, as
well as three markets in Canada.
Prism currently offers three high-speed data connectivity services that enable
customers to access the Internet at speeds ranging from 56 Kilobits per second
(Kbps) to 1.0 Megabits per second (Mbps). In the first quarter of 2000, Prism
will upgrade its current high-speed data services to speeds of up to 1.3 Mbps in
the downstream direction and 320 Kbps in the upstream direction. Beginning in
the second quarter of 2000, Prism plans to offer a burst, rate adaptive ethernet
technology that delivers bandwidth of up to 6 Mbps in either direction. Prism
also intends to offer services at speeds of up to 7 Mbps in the downstream
direction, and up to 2 Mbps in the upstream direction. These services will be
packaged in a combination of symmetrical and asymmetrical product offerings
depending on customer requirements, distance between the premise and the traffic
aggregation equipment, and the copper binder group environment that these
services will run through.
Based on its market research, Prism believes its primary target market, small
and medium sized businesses, prefer to have their voice and data services
provided by a single company. Prism is testing its voice services in the greater
New York City metropolitan area and plans to commence a commercial offering in
the first quarter of 2000. Its voice services include local and local toll
calling, long distance calling, and a bundle of four features- three-way
calling, call waiting, call forwarding and caller ID.
In preparation for its national expansion, Prism has aggressively pursued
obtaining the necessary legal and regulatory qualifications to offer integrated
voice and data services in its thirty-three target markets. Prism has signed
interconnection agreements with Bell Atlantic, BellSouth, Ameritech and
Cincinnati Bell covering seventeen states and obtained Certificate of Public
Convenience and Necessity status in twenty-one states. As a result, Prism has
-17-
<PAGE>
obtained authority as a competitive local exchange carrier or has been permitted
to operate as a competitive local exchange carrier in twenty-six of its
thirty-three target markets. Prism anticipates obtaining the remainder of the
necessary approvals and entering into the remaining necessary interconnection
agreements by March 2000, although Prism is dependent on state and local
authorities, as well as incumbent local exchange companies to meet its
expectations.
In addition to its regulatory activities, Prism has proceeded with establishing
a national network. Prism has approximately 130 collocations in its target
markets, of which 49 are ready to receive customers. Prism anticipates
approximately 350 more collocations by March 2000, bringing its total
collocations to approximately 480. Further, Prism plans to bring total
collocations to over 750 by the fourth quarter of 2000.
Prism has entered into an agreement with Nortel to purchase up to $460 million
of switches, integrated line cards, customer premise equipment and ancillary
technology to establish a national, facilities-based network. Based on its
financial commitments to date, Prism will deploy the largest amount of Nortel's
digital modem technology in the United States, and because of the magnitude of
its relationship with Nortel, Prism expects to further benefit from advances in
Nortel's future network technology, such as its optical Internet platform. Prism
believes its network architecture, centered on Nortel's integrated voice and
data approach, offers cost benefits and could reduce provisioning time lags. See
"Customer Service--Hot Cut Provisioning" As part of the Nortel strategic
relationship, Prism recently issued to Nortel $10 million of its common stock.
Because it is its aim to achieve carrier class reliability and security in its
network, Prism recently entered into an agreement to purchase a 20-year
indefeasible right to use ("IRU") approximately 2,500 miles of dark fiber from
Williams Communications, Inc. ("Williams"). This purchase will allow Prism to
transport data and voice traffic, utilizing dense wave division multiplexing
("DWDM") and high speed SONET technology, over its own dedicated fibers covering
the Eastern half of the United States for the foreseeable future. Prism also
agreed to purchase a minimum of approximately $110 million of network capacity
from Williams over the next 20 years to convey voice and data traffic in areas
not covered by its dark fiber IRU purchase. In return, Prism issued to Williams
$10 million of common stock and will pay for the remainder of its obligation to
Williams with cash as capacity is used or as Prism accepts segments of the dark
fiber IRU. With this transaction and the Nortel relationship, Prism believes it
can achieve carrier class network reliability and performance, a world class
benchmark for all telecommunications companies.
Market Opportunity
Prism believes that a substantial market opportunity exists as a result of a
number of factors including:
o the growing demand for and increased adoption of high-speed data networks
in order to increase productivity in the workplace;
o the need among small and mid-sized businesses for integrated communications
solutions which include bundled services, competitive pricing and excellent
customer service;
o the inherent limitations of current data network connectivity options,
including dial-up modems; and
o the growing willingness of consumers and businesses to switch from
traditional telephone companies to competitive local exchange carriers
("CLECs") offering more options at competitive prices.
-18-
<PAGE>
Additionally, Prism believes current research supports its strategy.
International Data Corporation projects that the small business data and voice
markets will grow substantially over the next three years, as noted below
(dollars in millions):
COMPOUND ANNUAL
1999 2002 GROWTH RATE
---- ---- -----------
High speed lines 60,000 1,700,000 205%
High speed revenue $50 $1,690 222%
Voice lines 63,300,000 84,600,000 10%
Voice revenue $58,123 $75,684 9%
Prism believes its strategy and network positions it to gain a portion of the
rapidly growing data market while also participating in the multi-billion local
and long distance voice markets.
NEEDS OF SMALL AND MID-SIZED BUSINESSES FOR INTEGRATED COMMUNICATIONS. Prism
expects that a significant portion of the growth in data communications will be
generated by small and mid-sized businesses with up to 500 employees. Within the
business market, the small and medium business segment is perceived by many data
communications providers as the largest untapped market for their services.
Industry sources estimate that there are over 10 million businesses in the U.S.
with between 1 and 500 employees. Following the high penetration of personal
computers (98% or more have a personal computer), the perceived importance of
the Internet in future business activity and the limited financial resources of
many of these businesses, it has become increasingly important to develop
technologies to connect these personal computers cost-effectively. DSL-based
technologies have emerged as the high-speed, cost-effective solution for these
customers.
GROWING DEMAND FOR HIGH-SPEED DATA COMMUNICATION SERVICES. Businesses are
implementing internal networks using Internet technology, or intranets, and
remote local area networks to enable employees to work from remote locations and
home, and to create private networks that connect corporate networks in multiple
locations. Gartner Group estimates that the U.S. market for packet-based,
virtual private network and Internet data services will grow from $3.4 billion
in 1997 to $18.5 billion in 2002, a compounded annual growth rate of 40.3%.
Gartner also indicates that business demand for Internet access, e-mail, video
and audio services, Web hosting and electronic commerce is increasing.
High-speed data communications have become important to businesses in part due
to the dramatic increase in Internet usage. According to International Data
Corporation, the number of Internet users worldwide reached approximately 69
million in 1997 and is forecasted to grow to approximately 320 million by 2002.
International Data Corporation also estimates that the value of goods and
services sold worldwide through the Internet will increase from $12 billion in
1997 to over $400 billion in 2002. To remain competitive, businesses
increasingly need high-speed connections to maintain complex Web sites, access
critical business information and communicate more efficiently with employees,
customers and business partners.
NEEDS OF HOME OFFICE AND TELEWORKERS. Prism expects that people using computers
from their homes to connect to corporate networks or to the Internet for in-home
business purposes will also be a significant source of demand for high-speed
data connectivity. According to International Data Corporation, there were 26
million residences with computers in their home offices in the U.S. in 1998,
growing to an estimated 39.2 million by 2002. A significant number of home
office and teleworkers need access to corporate networks and/or the Internet for
a variety of applications, including e-mail, databases and corporate intranets.
According to The Yankee Group, the market for remote access services is expected
to grow from $460 million in 1998 to $2 billion by 2002.
LIMITATIONS OF DIAL-UP MODEMS AND ISDN. Neither the slow dial-up modems and
integrated services digital network ("ISDN") service nor the expensive T1 option
is an adequate solution for most small- and mid-sized businesses, home office
and teleworkers. The lack of optimal price-performance solutions has left these
end users underserved.
-19-
<PAGE>
Traditionally, small and mid-sized businesses, home office and teleworkers have
relied on low-speed connectivity options for data transport. For example,
according to IDC, approximately 78% of Internet access revenues derived from
small- and mid-sized businesses in 1997 were generated through the traditional
telephone system, using relatively slow 28.8 Kbps to 56 Kbps dial-up modems or
ISDN lines. For higher speed connections, these end users have had to purchase
T1 service, a digital transmission link which operates at (1.544 Mbps) and,
while always on, is expensive for these markets (typically up to $1000 per month
depending upon distance and region).
EMERGENCE OF BROADBAND AND PACKET-BASED TECHNOLOGIES. The full potential of the
Internet and remote local area network applications cannot be realized without
removing the performance bottlenecks of the local telephone networks. Broadband
technology removes this performance bottleneck by increasing the data carrying
capacity of copper telephone lines from the 56 kbps speeds available with common
dial-up modems and 128 kbps speeds available on ISDN. Because broadband
technology reuses existing copper telephone lines, broadband requires a lower
initial fixed investment than that needed for existing alternative technologies,
such as cable modems, fiber, wireless, and satellite communications systems.
Subsequent investments in broadband technology are directly related to the
number of paying customers.
For companies such as Prism to provide broadband services, they must become a
CLEC to gain access to the traditional telephone company's or incumbent's
central office which is granted only to CLECs. Over the last two years, the FCC
has taken a series of steps to make it easier for competitors to gain access to
the central office. One recent move requires the traditional telephone companies
to offer "cageless" collocation, thereby eliminating the need for CLECs to rent
a cage of predetermined size and a fixed number of racks in a central office.
This order should permit CLECs to extend the reach of their broadband networks
more easily and inexpensively. The process of ordering space in a central office
and then ordering lines can take up to six months, requiring advance planning.
The state regulatory commissions are also undertaking initiatives intended to
improve the ability of competitive carriers offering advanced services to
compete in the marketplace. For example, the New York Public Service Commission
recently held a series of collaboratives and working groups between the
competitive data carriers and Bell Atlantic to develop processes to address the
ordering, provisioning and maintenance issues unique to advanced services
offerings.
WILLINGNESS OF CONSUMERS AND BUSINESSES TO SWITCH TELECOMMUNICATION PROVIDERS.
The Yankee Group estimates that from 1984 to 1999, AT&T's share of the long
distance voice market declined from 68% to 39%. Further, since 1993, CLECs
offering local voice services have also been successful in taking market share
from incumbent local exchange carriers ("ILECs"). The Federal Communications
Commission ("FCC") reports that CLECs have grown from 0.2% of the local voice
market to 2.4% today. Consumer and business experience with choice in the local
and long distance voice market enhances CLEC prospects to garner more market
share in the future.
The RED Solution
PRISM DATA SERVICES. In February 1999, Prism began commercially offering its RED
services. RED uses a variety of DSL technologies to provide high speed
continuously connected packet- based and channelized communications services.
RED currently connects business users to the Internet, And in the future, will
connect customers to LAN/WANS and extranets, using broadband technologies over
traditional copper telephone lines. As Prism completes its national expansion,
RED customers will be able to connect to its regional network either within a
city or between cities, to obtain high capacity, secure and reliable connections
between geographically dispersed locations. Prism plans to deliver a true wide
area, virtual private network with the capacity, speed, reliability and level of
service that its customers require.
-20-
<PAGE>
Prism offers three high-speed data services designed to answer the needs of its
various target market segments:
o RED HomeWork and RED PowerWork are applicable primarily for single users in
residential or small office settings requiring a dedicated, "always-on"
connection to the Internet and, in the future, a LAN/WAN, or other
destinations.
o RED NetWork serves the small to medium-sized business with capacity for
multiple users. Prism includes a router and multiple e-mail accounts with
each NetWork package, and customers have the option to support their own
Web and e-mail servers behind the router.
The chart below shows the service, speed, retail price (which includes equipment
installed at the customer's location), range and performance of its RED
services, as of December, 1999:
<TABLE>
<CAPTION>
RETAIL LIST
SPEED TO SPEED RETAIL LIST PRICE RANGE FROM
END FROM END PRICE FOR FOR MONTHLY CENTRAL
SERVICE USER USER ACTIVATION SERVICE OFFICE (FEET) MARKET/USAGE
- -------------------------- ------------ ----------- --------------- ----------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
RED HOMEWORKSM 960 Kbps 120 Kbps $299 $80 18,000 SOHO, Teleworker
RED POWERWORKSM 960 Mbps 120 Kbps $299 $150 18,000 Small Business
RED NETWORKSM 960 Mbps 320 Kbps $399 $300-$350 18,000 Small to Medium
Business
</TABLE>
In addition to the services noted above, Prism is developing a new family of
higher-speed data and voice products, some of which Prism is testing in the
greater New York City metropolitan area. These products fall into the following
categories:
o Burst, rate adaptive ethernet technology that delivers bandwidth up to 6
Mbps in either direction over copper loops. This solution uses Etherloop
technology from Elastic Networks, an independent unit of Nortel, and
allocates bandwidth dynamically based on changing transmission conditions
and crosstalk environment detected within a copper binder group.
o Higher-speed broadband services at speeds up to 7 Mbps in the downstream
direction, and up to 2 Mbps in the upstream directions. These services will
be packaged in a combination of symmetrical and asymmetrical product
offerings depending on customer requirements, distance between the premise
and the location of the broadband aggregation equipment and the copper
binder group environment that these services will run through.
Prism plans to bundle together and differentiate these services based on
customers' preferences for transmission speeds, security and flexibility to
choose transmission paths. Prism anticipates offering some of these services
beginning in the second quarter of 2000.
Prism also offers standard 56k and ISDN dial-up services to those customers who
are not located in a high-speed service area or who do not wish to take
high-speed service. Prism prices such services as $8.00 and $19.95 per month for
unlimited use, respectively. Prism plans to solicit this base of approximately
3,000 customers for upgrades to its high-speed access services, as well as for
voice services.
PRISM VOICE SERVICES. Prism plans to offer voice services in the greater New
York City metropolitan area in the first quarter of 2000 and expects to make a
similar offering in every market entered. Prism voice services include local and
local toll calling, long distance calling, and a bundle of four features-
three-way calling, call waiting, call forwarding and caller ID. In addition, as
a standard voice carrier, Prism is required to provide emergency (911) services
and directory and operator assistance. To be consistent with its goal of
offering its customers simple, integrated billing, Prism plans to offer such
services for a flat monthly charge, plus flat rate per minute charges for local
toll and long distance services.
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Prism prices for voice services will vary from market to market depending on
local competitive conditions and regulatory considerations. Further, the prices
listed above may change over time.
ADDITIONAL PRISM SERVICES. Prism either offers or is planning to offer several
services to RED customers by the first quarter of calendar 2000, including
domain name hosting, on-line data back-up and web hosting, as described below:
o Domain name hosting- RED customers can switch from their current Internet
service providers to its services without having to change their e-mail
addresses. Prism offers three types of domain name hosting based on the
size of the customer and whether they have their own mail servers.
o On-line data back-up- Prism plans to offer automatic data backup service to
RED customers together with its high-speed data services. This service
stores redundant copies of files from customer desktops and servers as
often as requested by the customer, protecting customers against unexpected
loss of critical data.
o Web hosting- Prism intends to host Web addresses for both residential and
small and medium sized business Web sites. Prism basic Web hosting service
includes 10 Mbps of web space, one e-mail address and online tutorial and
support. Heavy-user business Web site hosting will include 25 to 50 Mbps of
Web space, eight e-mail accounts and security features to ensure secure
communications between a server and Web browser.
Later in calendar year 2000, Prism plans to introduce virtual private network
capability and broadband content such as media and entertainment presentations.
Over the next several years, Prism believes that enhancements to the
applications described above, together with new applications, will be key to
retaining existing customers, attracting new ones, and offsetting potential
revenue declines from competition in high speed data and voice services.
The Prism Strategy
Prism intends to become a leading integrated communications carrier by directly
offering customers, namely small and mid-sized businesses, teleworkers and
residential power users, communications services that enhance productivity.
Prism's array of services will include high-speed connectivity, local and long
distance voice, video conferencing and secure applications such as automatic
data storage and recovery and teleworking solutions currently utilizing
broadband technology. Prism believes there are five key components of its
strategy that will enable us to achieve its objective:
o Build a national, facilities-based network to offer integrated data and
voice services to the largest and most densely populated markets.
o Pursue multiple marketing channels supported by brand advertising.
o Focus on building customer relationships.
o Develop applications that benefit from high-speed connectivity.
o Leverage the key benefits of its strategic relationship with Comdisco.
Customers, Sales And Marketing
CUSTOMERS. Prism offers its services to small-to mid-sized businesses,
teleworkers and residential power users. Currently, more than half of its
customers are small and medium sized businesses. The average recurring monthly
revenue per customer is slightly in excess of $160.
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PRISM MARKETS SERVICES THROUGH PRINT AND BROADCAST ADVERTISING, OUTBOUND
TELEMARKETING, direct sales force, indirect value - added resale agreements and
through its relationship with Comdisco.
ADVERTISING. Prism has established a strong brand identity in the greater New
York City metropolitan area through its advertising on television, billboards,
and in newspapers, as well as by selectively sponsoring public relations and
other events. Prism intends to accompany the launch of its voice and data
services in other markets with similar advertising efforts as appropriate.
DIRECT SALES. Prism markets its services in the greater New York City
metropolitan area through a direct sales force of 20 people. Prism also
generates lead referrals for its direct sales force through in-house
telemarketing efforts. Prism intends to increase the size of its sales and
technical support force to sell and support these services as Prism expands its
business. Prism plans to have up to 20 salespersons in each of its designated
market areas depending upon market size. Prism's direct sales process, from
initial solicitation to installation, generally ranges from 30 to 60 days for
small and medium businesses and individuals, while sales to larger businesses
with more complex communications requirements may require more time to develop
customized solutions. The large business sales process may take up to six months
and may involve:
o coordination with other Comdisco-offered services;
o a significant technical evaluation;
o an initial trial roll-out of its services; and
o a commitment of capital and other resources by the customer.
INDIRECT SALES CHANNELS. Prism also markets services, under the RED brand, to
small and medium businesses through indirect channels, value-added resellers,
and integrators. RED is available in New York City from select high-end computer
retail outlets, including DataVision and J&R Computer, as well as 67
valued-added resellers. Prism intends to pursue indirect sales channels in its
other markets as it expands.
WEB SITE SALES. Prism recently upgraded its Web site to enable customers to
order dial-up and high-speed data services electronically. This automated
process generates a completed customer contract and authorizes and charges
credit cards for payment. All 56k and ISDN dial-up orders are routed through its
Web site, reducing its costs of processing and billing these lower price point
customers.
FUTURE INTEGRATED COMMUNICATIONS SERVICES DEVELOPMENT. Prism believes it can
develop a significant competitive advantage by bundling core service offerings
(high-speed data connectivity and voice service) with other applications, tools
and content that have been tailored to meet the specific needs of an individual
or a business. These bundled communications packages will be comprised of a full
suite of complementary services including voice, data connectivity, broadband
applications, software, content, as well as appropriate equipment and corporate
incentives for those businesses with needs across multiple locations. This
integral solution will capitalize on favorable partnership arrangements
including its unique relationship with Comdisco. For example, a medical office
that needs imaging equipment in addition to the appropriate imaging software
will be able to realize significant savings through favorable leasing of
equipment through Comdisco's Lab/Scientific division.
Prism has designed the flexibility into its network to support this evolutionary
strategy and Prism believes it will enable us to fully support its promise to
deliver a bundled service and billing solution to its customers. Additionally,
these services will be made available to customers in an online retail
environment via the Web. A vertically- and geographically-driven user interface
will enable prospective customers to select (or Prism to recommend) services
packages that are commensurate with their needs. Prism's marketing approach
within this environment will allow us to offer real-time promotions and
incentives e.g., vertical market or corporate group discounts. In this way,
Prism believes it will be able to differentiate Prism from others whose
offerings and network capacities have not been designed to support this
integrated strategy.
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Customer Service
Prism offers customers a single point of contact for implementation,
maintenance, and billing. Prism's network operations center in New York City
provides both proactive and customer initiated maintenance services 24 hours a
day, seven days a week.
Prism's comprehensive solution includes:
o Customer line installation.
o "Hot Cut" provisioning.
o End user premises wiring and modem configuration.
o Network monitoring.
o Customer reporting and billing.
o Customer service and technical support.
o Operating support systems.
Prism believes that "Hot Cut" provisioning will enable Prism to provision voice
and data customers faster than other companies that are required to provide a
new copper telephone line as part of the service. Hot Cut Provision avoids the
customer line installation process by simply re-terminating the customer's
existing local loop from the ILEC switch to Prism's switch within the central
office collocation space.
Network Architecture
OVERVIEW. Prism intends to deploy a national, facilities-based network utilizing
Nortel's high-speed digital modem technology. Prism believes this technology,
combined with its network architecture, will yield cost savings in three areas:
o INITIAL CAPITAL COST OF EQUIPMENT- Because its network will transport both
data and voice, Prism believes its initial investment in switching
equipment is lower than if Prism attempted to build a voice network first,
and then overlaid additional data switching capabilities. Prism believes it
is one of the first companies, if not the first, to initiate the building
of a network in this fashion.
While Prism believes its costs may be lower due to its network design,
Prism also is planning for service flexibility. Prism believes the
broadband services market is still in its infancy, and technology and
products are evolving rapidly. Prism plans to deploy ITU-standardized
G992.2 G.Lite splitterless modems if and when this technology becomes
ubiquitous in the marketplace. To hedge against this possible technology
discontinuity, Prism is deploying multiple services access shelf technology
from Nortel that will support its current services as well as G.Lite,
full-rate ADSL, and SDSL access applications for both voice and high-speed
data. Furthermore, this multiple services access shelf technology in
collocations permits us to offer a suite of services from the same access
platform, reducing overall network provisioning and operations costs. A
multiple services platform allows us to invest in one network management
and operations support system infrastructure, instead of seeking solutions
with multiple access platforms and backend network products.
o PROVISIONING AND INSTALLATION- A 1998 Bellcore white paper compared the
provisioning and operating costs of a digital subscriber line access
multiplexer ("DSLAM") network to an integrated line card network (like the
one Prism is deploying) and found that the integrated line card network
resulted in operations cost savings. These savings result primarily from an
ability to offer both data and voice transport over the same copper circuit
between the customer and its remote node, thereby potentially eliminating
the need for an installation visit by ILEC technicians or Prism
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installation technicians. Further, Nortel's digital modem and integrated
line card technology has been approved by the Federal Communications
Commission ("FCC") and is the only high speed data technology that has been
specifically authorized by the FCC to operate on regular telephone loops,
rather than qualified data loops. By purchasing non-qualified POTS loops to
offer its services using Nortel's technology, Prism is able to avoid the
nonrecurring charges associated with the DSL qualified loops offered by the
incumbent carriers.
o NETWORK FACILITIES- By utilizing asynchronous transfer mode ("ATM")
technology, Prism has the ability to transport both data and voice over a
single network, thereby more efficiently using facilities that connect its
network elements. Prism plans to use a combination of ILEC and competitive
access providers for intra-city facilities, and both dark fiber and network
capacity provided through the agreement with Williams (see "Optical
Backbone" below) for longer distances.
Prism is constructing a voice network using Nortel DMS-500, Access Node Express,
RSC, and multiple services access shelf technology using the Universal Edge 9000
and Succession 9000 products. Prism is building its voice network to
carrier-grade voice standards found in many of today's copper-based voice
networks. Prism believes its carrier-grade standard will enable Prism to provide
high network reliability and consistent data bandwidth availability to its
customers.
Prism's network is designed to be highly secure between the subscriber's premise
and the integrated line card located in its collocation. Prism broadband service
gateway technology is based on a powerful IP Services platform that offers
firewall and IP address anti-spoofing capabilities for public high-speed data
access networks. Prism security solution means that data and voice traffic
cannot be viewed by others until it reaches a provider network, such as a
corporate network, or the Internet, and upon reaching its destination, traffic
is shared as directed by the customer and subject to rules established by the
customer. In the future, Prism plans to provide virtual private network ("VPN")
services to its customers that will offer equivalent or enhanced security to
today's frame relay or ATM managed network offerings. For RED HomeWork and RED
PowerWork subscribers, Prism will also optionally configure and package personal
firewall software to provide additional protection from accidental or
intentional attacks to the subscriber's personal computer from other Internet
users.
COMPONENTS. Prism components are integrated into networks across local,
metropolitan and wide areas that combine speed and balanced capacity in a manner
designed to deliver a high performance networking experience for its customers.
o CUSTOMER EQUIPMENT. Prism leases to the customer a Nortel digital modem as
part of its complete service offering, the cost of which is included in the
list price of the service. Prism configures and installs these modems with
the end user's computer AND NETWORK EQUIPMENT ALONG WITH ANY REQUIRED
ON-site wiring needed to connect the modem and the telephone line. Under
FCC policies, a customer also is free to obtain compatible modems from
sources other than us. For customers with multiple users, Prism also
provides routers that efficiently route data traffic over a single digital
modem and copper circuit.
o COPPER TELEPHONE LINES. Prism leases copper telephone lines, known as
unbundled network elements, or local loops, which run from its network
access points in central offices or other remote node locations, to the
customer location under terms specified in telecommunications regulations
and its interconnection agreements. Prism works closely with traditional
telephone companies to define specifications that ensure the quality of the
copper telephone lines Prism receives, thereby ensuring the transmission
speed of end user connections.
o CENTRAL OFFICE COLLOCATION SPACES AND OTHER REMOTE NODE LOCATIONS. Through
FCC and state telecommunications regulatory policies as well as its
interconnection agreements with traditional telephone companies, Prism
secures collocation space in central offices from which it desires to offer
services. These collocation spaces are designed to offer the same high
reliability and availability standards as traditional telephone company's
other central office space. In approximately 85% of its collocation spaces,
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Prism has installed or plans to install its own switch in a secure cage,
accessible only by its switch operations technicians. In the limited number
of cases where Prism has been unable to obtain physical space within a
desired central office, Prism has obtained SCOPE or cageless collocation
rights. With SCOPE collocation, Prism installs and maintains its equipment
in the traditional telephone company's central offices, but its access to
the space is non-exclusive. Pursuant to a recent order by the FCC, Prism
expects in the future to be entitled to additional collocation options,
including adjacent collocation. Typical equipment in a collocation space
includes a Nortel remote switching device, such as an access node, with
integrated line cards used to process both data and voice traffic.
o HOST SITES. A host site is a physical location where Prism connects all of
its remote nodes and aggregate voice and data traffic in one city for
transport to other cities, the Internet, LAN's/WAN's and other networks. A
typical Prism host site includes a Nortel switch, such as a DMS-500, as
well as additional equipment used to efficiently switch and route voice and
data traffic. Prism currently has a host site in New York City, has secured
leases for an additional 26 sites, and is currently installing host
switches in eight of such sites.
o OPTICAL BACKBONE. In the Eastern half of the United States, Prism plans to
connect hub sites to regional hubs using a dedicated backbone of fiber
Prism obtained in its agreement with Williams. Prism plans to purchase
Nortel optical Internet equipment to enable us to efficiently transport
data and voice traffic over this dedicated fiber. In other areas, Prism
intends to lease network capacity from Williams and other providers as
needs dictate. In those areas where Prism does not have dedicated fiber,
Prism will establish data hubs in regional offices throughout the United
States as traffic requires.
o NETWORK OPERATIONS CENTER. Prism manages its network from its network
operations center located in New York City. Prism provides end-to-end
network management to its customers using advanced network management tools
on a 24-hour-a-day, seven-day-a-week basis. This enhances its ability to
address performance or connectivity issues before they affect the end user
experience. From its network operations center, Prism can monitor its
network, including the equipment and circuits in its metropolitan area
networks and central offices, and its customers' networks, including
individual end user lines and DSL modems.
o NORTEL NETWORKS MONITORING CENTER. Through its relationship with Nortel,
Prism also has the monitoring and diagnosis capabilities of its network
management center (NMC). This facility provides network surveillance and
analysis to remotely address trouble reports and establish preventative
maintenance in advance of problems. In addition, Nortel personnel are
available for dispatch to assist us in the field.
Competition
Prism believes that its most direct competition for high-speed data
communications services will come from traditional telephone companies and other
major DSL providers operating in its target markets. However, Prism also
anticipates competition from service providers using other technologies.
TRADITIONAL TELEPHONE COMPANIES. Traditional telephone companies present in its
target markets are conducting technical and/or market trials or have commenced
commercial deployment of DSL-based services. Prism recognizes that each
traditional telephone company has the potential to quickly overcome many of the
obstacles that Prism believes have delayed widespread deployment of DSL services
by traditional telephone companies in the past.. The traditional telephone
companies have an established brand name, a large number of existing customers
and a reputation for high quality in their service areas. They also possess
sufficient capital to deploy DSL equipment rapidly, have their own copper lines
and can bundle digital data services with their existing analog voice services
to achieve economies of scale in serving customers. In the absence of strong
oversight by the FCC and state telecommunications regulators, traditional
telephone companies also have an economic incentive to benefit their own DSL
retail operations by providing themselves with the copper telephone lines,
collocation, support services and other essential DSL service inputs on more
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favorable terms than they provide these facilities and services to their
broadband competitors, ;like Prism. These factors give the traditional telephone
companies a potential competitive advantage compared with Prism. Accordingly,
Prism may be unable to compete successfully against Bell Atlantic or the other
traditional telephone companies, and any failure to do so would materially and
adversely affect its business, operating results and financial condition.
MAJOR DSL PROVIDERS. Other competitive telecommunications companies plan to
offer or have begun offering DSL-based access services in its targeted markets,
and others are likely to do so in the future. Competitive telecommunications
companies that provide DSL service include Covad Communication Group Inc.,
Rhythms NetConnections Inc., NorthPoint Communications Group Inc. and Network
Access Solutions Corp., but currently, Prism believes such companies only
provide data services.
OTHER SERVICE PROVIDERS. Many of its competitors are offering, or may soon
offer, technologies and services that will compete with some or all of its
broadband service offerings. These technologies include T1, integrated services
digital network, satellite, cable modems and analog modems and could be provided
by:
o Cable Modem Service Providers
o Traditional Long Distance Carriers
o Interexchange Carriers
o Internet Service Providers
o Wireless and Satellite Data Service Providers
VOICE SERVICES. In each designated market area in which Prism introduces voice
services, it will face, and expect to continue to face, significant competition
from the traditional telephone companies, which currently dominate their local
telecommunications markets. Prism competes with the traditional telephone
companies for local exchange services on the basis of product offerings,
reliability, state-of-the-art technology, price, route diversity, ease of
ordering and customer service. However, the traditional telephone companies have
long-standing relationships with their customers and provide those customers
with various transmission and switching services that Prism, in many cases, does
not currently offer. Prism has sought, and will continue to seek, to achieve
parity with the traditional telephone companies in order to become able to
provide a full range of local telecommunications services. Existing competition
for private line and special access services is based primarily on quality,
capacity and reliability of network facilities, customer service, response to
customer needs, service features and price, and is not based on any proprietary
technology.
Prism will also face competition from other potential competitors with respect
to its local and long distance voice services. In addition to the traditional
telephone companies and competitive access providers, potential competitors
capable of offering switched local and long distance services include long
distance carriers such as AT&T Corp., MCI WorldCom and Sprint Corporation, cable
television companies, such as Tele-Communications, Inc. and Time Warner Inc.,
electric utilities, microwave carriers, wireless telephone system operators and
private networks built by large end-users.
Prism believes that the 1996 Telecom Act as well as a recent series of completed
and proposed transactions between traditional telephone companies and long
distance companies and cable companies increase the likelihood that barriers to
local exchange competition will be removed. The 1996 Telecom Act states that
regional Bell operating companies must meet certain requirements that
essentially lower barriers to entry to competitive carriers before they are
permitted to provide in-region, interLATA services. When traditional telephone
companies that are regional Bell operating company subsidiaries are permitted to
provide those services, they will be in a position to offer single source
service. Traditional telephone companies that are not regional Bell operating
company subsidiaries may offer single source service presently.
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In some cases, cable television companies are upgrading their networks with
fiber optics and installing facilities to provide fully interactive transmission
of broadband voice, video and data communications. In addition, under the 1996
Telecom Act, electric utilities may install fiber optic telecommunications cable
and may facilitate provision of telecommunications services by electric
utilities over those networks if granted regulatory authority to do so. Cellular
and PCS providers may also be a source of competitive local telephone service.
A continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors. In addition,
many of its existing and potential competitors have financial, personnel and
other resources, including name recognition, significantly greater than Prisms'.
Prism also competes with long distance carriers in the provision of long
distance services. Although the long distance market is dominated by three major
competitors, AT&T, MCI WorldCom and Sprint, hundreds of other companies also
compete in the long distance marketplace.
Relationship with Traditional Telephone Companies
Prism's relationships with traditional telephone companies are critical to its
business. Prism depends on traditional telephone companies for collocation
facilities, copper telephone lines, support services and some of the fiber optic
transport that Prism uses for its network. Prism's interconnection agreements
with each of the traditional telephone companies in its market areas govern much
of this critical relationship. Prism has signed interconnection agreements with
Bell Atlantic in New York, New Jersey, Pennsylvania, Maryland, Virginia,
Connecticut, Delaware, Massachusetts and Washington D.C., with Ameritech in
Illinois, Ohio, Indiana, Michigan and Wisconsin and with BellSouth in North
Carolina, Florida, Georgia and Kentucky and with Cincinnati Bell for the greater
Cincinnati area.
These interconnection agreements all have terms which expire within the next two
years, subject to certain regulatory mandated extensions. Thus, Prism may be
required to renegotiate its agreements in the future. Although Prism expects to
renew its interconnection agreements, there can be no assurance that Prism can
extend or renegotiate agreements on favorable terms.
Additionally, the FCC, state telecommunications regulators and the courts have
authority to interpret its interconnection agreements and to resolve disputes in
the event of a disagreement between a contracting traditional telephone company
and Prism. There can be no assurance that these bodies will not interpret the
terms or prices of its interconnection agreements in ways that could adversely
affect its business, operating results and financial condition.
In order to expand into other regions, Prism is also negotiating interconnection
agreements with the other incumbent LECs, including U S WEST, SBC (including
Southwestern Bell and PacBell) and GTE.
Government Regulation
The facilities and services that Prism obtains from traditional telephone
companies in order to provide its services are regulated extensively by the FCC
and state telecommunications regulatory agencies. To a lesser extent, the FCC
and state telecommunications regulators exercise direct regulatory control over
the terms under which Prism provides services to the public. Municipalities also
regulate limited aspects of the telecommunications business by imposing zoning
requirements, permit or right-of-way procedures or fees, among other
regulations. The FCC and state regulatory agencies generally have the authority
to condition, modify, cancel, terminate or revoke operating authority for
failure to comply with applicable laws, or rules, regulations or policies. Fines
or other penalties also may be imposed for these violations. Prism cannot assure
you that regulators or third parties would not raise issues regarding its
compliance or non-compliance with applicable laws and regulations. Prism
believes that it operates its business in compliance with applicable laws and
regulations of the various jurisdictions in which Prism operate and that it
possesses the approvals necessary to conduct its current operations.
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Employees
As of December 1999 Prism had approximately 285 employees. Prism believes that
its future success will depend in part on its continued ability to attract, hire
and retain qualified personnel. Competition for those personnel is intense, and
Prism may be unable to identify, attract and retain those personnel in the
future. None of its employees are represented by a labor union or are the
subject of a collective bargaining agreement. Prism has never experienced a work
stoppage and believes that its employee relations are good.
Legal Proceedings
Prism is not currently involved in any legal proceedings that Prism believes
could have a material adverse effect on its business, financial position,
results of operations or cash flows. Prism is, however, subject to state
telecommunications regulators, FCC and court decisions as they relate to the
interpretation and implementation of the 1996 Telecomm Act, the Federal
Communications Act of 1934, as amended, various state telecommunications
statutes and regulations, the interpretation of competitive telecommunications
company interconnection agreements in general, and its interconnection
agreements in particular. In some cases, Prism may be deemed to be bound by the
results of ongoing proceedings of these bodies or the legal outcomes of other
contested interconnection agreements that are similar to its agreements. The
results of any of these proceedings could have a material adverse affect on its
business, operating results, and financial condition.
Additional Information
FOR INFORMATIONAL PURPOSES ONLY, Prism financial statements are attached to this
Form 10-K as Exhibit 99.03. These statements are not incorporated by reference
in this or any other filing with the Securities and Exchange Commission. THESE
STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE COMDISCO, INC. CONSOLIDATED
FINANCIAL STATEMENTS AND THIS INFORMATION IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
D. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
See Note 16 of Notes to Consolidated Financial Statements for information about
foreign and domestic operations.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
COMDISCO, INC.
DATE: February 10, 2000 BY: /S/ DAVID J. KEENAN
-------------------------
David J. Keenan
Senior Vice President and
Corporate Controller
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ NICHOLAS K. PONTIKES
Nicholas K. Pontikes
CHIEF EXECUTIVE OFFICER /S/PHILIP A. HEWES
(Principal Executive Officer), Philip A. Hewes
President and Director Director
/S/ JOHN J. VOSICKY
John J. Vosicky James Voelker
Chief Financial Officer (Principal Director
Financial Officer) and Director
/S/ DAVID J. KEENAN /S/ WILLIAM N. PONTIKES
David J. Keenan William N. Pontikes
Senior Vice President Director
(Principal Accounting Officer)
and Corporate Controller
Robert A. Bardagy Thomas H. Patrick
Director Director
Harry M. Jansen Kraemer, Jr. Rick Kash
Director Director
/s/ C. KEITH HARTLEY /S/ CAROLYN L. MURPHY
C. Keith Hartley Carolyn L. Murphy
Director Director
Each of the above signatures is
AFFIXED AS OF FEBRUARY 10, 2000
