UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q/A
AMENDMENT NO. 1
-----------------------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to __________
------------------------
Commission file number 1-7725
I.R.S. Employer Identification number 36-2687938
COMDISCO, INC.
(a Delaware Corporation)
6111 North River Road
Rosemont, Illinois 60018
Telephone: (847) 698-3000
Name of each Number of shares
Title of exchange on outstanding as of
each class which registered June 30, 2000
-------------- ---------------- -----------------
Comdisco group stock, New York Stock Exchange 152,178,205
$.10 par value Chicago Stock Exchange
Comdisco Ventures group stock, N/A -
$.10 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes XX No .
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<PAGE>
Comdisco, Inc. and Subsidiaries
<TABLE>
<CAPTION>
INDEX Page
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Comdisco, Inc.
The consolidated financial statements of Comdisco Inc. include the accounts and
operating results of the corresponding Comdisco group and Comdisco Ventures
group financial statements. Holders of Comdisco group stock and holders of
Comdisco Ventures group stock are stockholders of Comdisco, Inc. and are subject
to all risks associated with an investment in Comdisco, Inc.
Consolidated Statements of Earnings and Retained Earnings (Unaudited) --
Three and Nine Months Ended June 30, 2000 and 1999............................................4
Consolidated Balance Sheets --
June 30, 2000 (Unaudited) and September 30, 1999..............................................5
Consolidated Statements of Cash Flows (Unaudited) --
Nine Months Ended June 30, 2000 and 1999......................................................6
Notes to Consolidated Financial Statements (Unaudited).........................................8
Comdisco Ventures Group
The financial statements of Comdisco Ventures group comprise the combined
financial position, results of operations and cash flows of Comdisco Inc.'s
venture financing business. Accordingly, the Comdisco Ventures group financials
are supplemental financial statements and should be read in conjunction with the
Comdisco, Inc. consolidated and consolidating financial statements.
Statements of Earnings and Division Net Worth (Unaudited) --
Three and Nine Months Ended June 30, 2000 and 1999...........................................24
Balance Sheets --
June 30, 2000 (Unaudited) and September 30, 1999.............................................25
Statements of Cash Flows (Unaudited) --
Nine Months Ended June 30, 2000 and 1999.....................................................26
Notes to Financial Statements (Unaudited).....................................................28
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Comdisco, Inc. ...............................................................................32
Comdisco Ventures Group.......................................................................40
Risk Factors..................................................................................46
Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................51
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................................................51
Item 6. Exhibits and Reports on Form 8-K...............................................................52
SIGNATURES.............................................................................................56
</TABLE>
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<PAGE>
Note on Forward Looking Statements
The Company believes that certain statements herein constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, and the company intends that
such forward-looking statements be subject to the safe harbors created thereby.
The words and phrases "looking ahead," "we are confident," "should be," "will
be," "predicted," "believe," "expect" and "anticipate" and similar expressions
identify forward-looking statements. These forward-looking statements reflect
the company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating to the
company's operations and business environment which may cause the actual results
of the company to be materially different from any future results expressed or
implied by such forward-looking statements. Examples of such uncertainties
include, but are not limited to, those risk factors set forth generally
throughout the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and specifically under "Risk
Factors" and should be read in conjunction with the company's Annual Report on
Form 10-K, as amended by Form 10-K/A, for the year ended September 30, 1999,
under Business-Forward-Looking Information.
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<PAGE>
Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
(in millions except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
--------- --------- --------- ---------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue
Leasing
Operating .............................................$ 414 $ 443 $ 1,288 $ 1,481
Direct financing ...................................... 44 40 130 120
Sales-type ............................................ 75 91 281 442
------- ------- ------- -------
Total leasing ...................................... 533 574 1,699 2,043
Sales ...................................................... 142 565 308 690
Technology services ........................................ 173 133 476 376
Other ...................................................... 105 30 360 66
------- ------- ------- -------
Total revenue ...................................... 953 1,302 2,843 3,175
------- ------- ------- -------
Costs and expenses
Leasing
Operating ............................................. 332 358 1,039 1,195
Sales-type ............................................ 50 53 211 337
------- ------- ------- -------
Total leasing ...................................... 382 411 1,250 1,532
Sales ...................................................... 115 553 243 662
Technology services ........................................ 161 112 424 317
Selling, general and administrative ........................ 116 77 375 219
Interest ................................................... 88 82 259 253
Prism Communication Services ............................... 65 11 135 14
Other ...................................................... 150
------- ------- ------- -------
Total costs and expenses .............................. 927 1,246 2,686 3,147
------- ------- ------- -------
Earnings before income taxes ............................... 26 56 157 28
Income taxes ............................................... 9 20 56 10
------- ------- ------- -------
Net earnings ...............................................$ 17 $ 36 $ 101 $ 18
======= ======= ======= =======
Retained earnings at beginning of period ................... 1,210 1,075 1,134 1,101
Net earnings ............................................... 17 36 101 18
Cash dividends paid on common stock ........................ (4) (4) (12) (12)
------- ------- ------- -------
Retained earnings at end of period .........................$ 1,223 $ 1,107 $ 1,223 $ 1,107
======= ======= ======= =======
Net earnings per common share:
Earnings per common share--basic ....................$ 0.11 $ 0.23 $ 0.66 $ 0.12
======= ======= ======= =======
Earnings per common share--diluted ..................$ 0.10 $ 0.22 $ 0.62 $ 0.11
======= ======= ======= =======
Common shares outstanding
Average common shares outstanding--basic ............ 151 152 152 152
======= ======= ======= =======
Average common shares outstanding--diluted........... 161 164 162 162
======= ======= ======= =======
See accompanying notes to consolidated financial statements
</TABLE>
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<PAGE>
Comdisco, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in millions except number of shares)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------- ---------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................... $ 259 $ 361
Cash - legally restricted ...................... 40 46
Receivables, net ............................... 1,052 722
Inventory of equipment ......................... 130 115
Leased assets:
Direct financing and sales-type .............. 2,174 2,107
Operating (net of accumulated depreciation) .. 3,329 3,516
------- -------
Net leased assets ........................... 5,503 5,623
Property, plant and equipment, net .............. 463 229
Equity securities ............................... 606 252
Other assets .................................... 498 459
------- -------
$ 8,551 $ 7,807
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable.................................... $ 1,502 $ 820
Term notes payable .............................. 641 550
Senior notes .................................... 3,384 3,686
Accounts payable ................................ 155 263
Income taxes .................................... 448 382
Other liabilities ............................... 651 531
Discounted lease rentals ........................ 526 515
------- -------
7,307 6,747
------- -------
Stockholders' equity:
Preferred stock $.10 par value
Authorized 100,000,000 shares - -
Comdisco stock $.10 par value
Authorized 750,000,000 shares;
issued 224,906,304 shares 22 22
(223,464,344 of Common Stock,
$.10 par value at September 30, 1999)
Additional paid-in capital .................... 375 302
Accumulated other comprehensive income ........ 162 58
Retained earnings ............................. 1,223 1,134
------- -------
1,782 1,516
Common stock held in treasury, at cost ........ (538) (456)
------- -------
Total stockholders' equity ................ 1,244 1,060
------- -------
$ 8,551 $ 7,807
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
For the Nine Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Operating lease and other leasing receipts ............... $ 1,436 $ 1,527
Direct financing and sales-type leasing receipts ......... 820 722
Leasing costs, primarily rentals paid .................... (9) (14)
Sales .................................................... 408 447
Sales costs .............................................. (106) (110)
Technology services receipts ............................. 445 357
Technology services costs ................................ (353) (271)
Note receivable receipts ................................. 194 35
Other revenue ............................................ 304 20
Selling, general and administrative expenses ............. (299) (220)
Loss on Prism Communication Services ..................... (100) (27)
Interest ................................................. (231) (254)
Income taxes ............................................. (33) (1)
------- -------
Net cash provided by operating activities .............. 2,476 2,211
------- -------
Cash flows from investing activities:
Equipment purchased for leasing .......................... (1,949) (2,127)
Investment in continuity and network service facilities .. (197) (103)
Notes receivable ......................................... (459) (225)
Acquisition and investment in Prism Communication Services (221) (65)
Other investing activities ............................... (166) (20)
------- -------
Net cash used in investing activities .................. (2,992) (2,540)
------- -------
Cash flows from financing activities:
Discounted lease proceeds ................................ 257 274
Net increase (decrease) in notes payable ................. 682 (114)
Issuance of term notes and senior notes .................. 344 1,145
Maturities of term notes and senior notes ............... (555) (644)
Principal payments on secured debt ....................... (246) (258)
Common stock purchased and placed in treasury ............ (91) (58)
Dividends paid on common stock ........................... (11) (11)
Issuance of Prism Communication Services common stock .... 11 --
Decrease (increase) in legally restricted cash ........... 6 (57)
Other, net ............................................... 17 28
------- -------
Net cash provided by financing activities .............. 414 305
------- -------
Net decrease in cash and cash equivalents ................... (102) (24)
Cash and cash equivalents at beginning of period ............ 361 63
------- -------
Cash and cash equivalents at end of period .................. $ 259 $ 39
======= =======
</TABLE>
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<PAGE>
Comdisco, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- CONTINUED
(in millions)
For the Nine Months Ended June 30, 2000 and 1999
2000 1999
------- -------
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings ...................................... $ 101 $ 18
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Leasing costs, primarily
depreciation and amortization ............... 1,241 1,517
Leasing revenue, primarily principal portion of
direct financing and sales-type lease rentals 690 195
Cost of sales ................................. 137 584
Sales revenue ................................. -- (306)
Technology services costs, primarily
depreciation and amortization .............. 90 46
Prism depreciation ............................ 22 2
Interest ...................................... 27 --
Income taxes .................................. 23 9
Other expenses ................................ -- 150
Other - net ................................... 145 (4)
------- -------
Net cash provided by operating activities .. $ 2,476 $ 2,211
======= =======
See accompanying notes to consolidated financial statements.
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<PAGE>
Comdisco, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2000 and 1999
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
disclosures required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. See Note 8 of Notes to Consolidated Financial Statements for
a description of the charge recorded in the quarter ended March 31, 1999
associated with the company's shift in corporate strategy. For further
information, refer to the consolidated financial statements and notes thereto
included in the company's Annual Report on Form 10-K, as amended by Form 10-K/A,
for the year ended September 30, 1999. The balance sheet at September 30, 1999
has been derived from the audited financial statements included in the company's
Annual Report on Form 10-K, as amended by Form 10-K/A, for the year ended
September 30, 1999.
On May 4, 2000, the company filed its amended and restated charter to implement
a tracking stock structure that was approved by the company's stockholders on
April 20, 2000. As a result, two new series of stock were created: "Comdisco
group stock" and "Comdisco Ventures group stock." Comdisco Ventures group stock
is intended to separately track the performance of the company's venture
financing business, which the company refers to as "Comdisco Ventures group" and
Comdisco group stock separately tracks the performance of the remaining business
of the company, which the company refers to as "Comdisco group," and the shares
of Comdisco Ventures group stock reserved for issuance for the benefit of
Comdisco group or to the holders of Comdisco group stock.
Certain reclassifications have been made in the 1999 financial statements to
conform to the 2000 presentation.
Legally restricted cash represents cash and cash equivalents that are restricted
solely for use as collateral in secured borrowings and are not available to
other creditors.
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<PAGE>
2. Receivables
Receivables include the following as of June 30, 2000 and September 30, 1999 (in
millions):
June September
30, 30,
2000 1999
----- -----
Notes................................ $ 645 $ 354
Accounts............................. 376 297
Unsettled equity transactions........ 62 26
Income taxes......................... 6 6
Other................................ 60 82
----- -----
Total receivables.................... 1,149 765
Allowance for credit losses.......... (97) (43)
----- -----
$ 1,052 $ 722
===== =====
Notes consist of loans, primarily to privately held companies in networking,
communications, software, Internet-based and other industries. The company's
loans are generally structured as loans secured by equipment or subordinated
loans. Interest income on loans is recorded in the Statements of Earnings as
other revenue.
At June 30, 2000 and September 30, 1999, Comdisco Ventures group had venture
debt of approximately $631 million and $343 million, respectively. As part of a
venture debt transaction, the company usually receives warrants to purchase an
equity interest in the borrower at a negotiated exercise price, based generally
on the borrower's most recent venture capital transaction. The amount of the
warrants received and the exercise price varies based upon borrower-specific
valuation factors. Loans provide current income from interest and fees.
Changes in the allowance for credit losses (combined notes and accounts
receivable) for the nine months ended June, 2000 and 1999 were as follows (in
millions):
June June
30, 30,
2000 1999
----- -----
Balance at beginning of period....... $ 43 $ 24
Provision for credit losses.......... 87 12
Net credit losses.................... (33) (6)
------ -----
Balance at end of period............. $ 97 $ 30
====== =====
3. Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property,
plant and equipment is calculated on the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of the lease term or the estimated useful life of the asset.
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<PAGE>
The company capitalizes costs associated with the design and implementation of
the Prism Communication Services ("Prism") network, including internally and
externally developed software. Capitalized external software costs include the
actual costs to purchase existing software from vendors. Capitalized internal
software costs generally include personnel costs incurred in the enhancement and
implementation of purchased software packages.
Customer premise equipment consists of communications equipment that will be
installed at customer premises for the duration of their service agreement with
the company.
Property, plant and equipment consist of the following assets (in millions):
June September
30, 30,
2000 1999
----- -----
Technology services property, plant and equipment
-------------------------------------------------
Land ................................................ $ 9 $ 8
Buildings ........................................... 65 62
Leasehold improvements .............................. 125 110
Computers and telecom equipment ..................... 58 58
Furniture, fixtures and office equipment ............ 32 32
---- ----
Total .................................. 289 270
Less: Accumulated depreciation and amortization ..... (173) (162)
---- ----
Technology services property, plant and
equipment, net......................... 116 108
Prism property, plant and equipment
------------------------------------
Network, communication and customer premise
equipment .............................. 167 27
Uninstalled customer premise equipment .............. 6 3
Computers and software .............................. 37 10
Leasehold improvements .............................. 66 24
Furniture, fixtures and office equipment ............ 7 1
Construction work-in-progress ....................... 3 1
---- ----
Total .................................. 286 66
Less: Accumulated depreciation and amortization ..... (18) (3)
---- ----
Prism property, plant and equipment, net 268 63
Other property, plant and equipment, net ............ 79 58
---- ----
Total property, plant and equipment, net $463 $229
==== ====
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<PAGE>
4. Equity Securities
The company provides financing to privately held companies, in networking,
communications, software, Internet-based and other industries through the
purchase of equity securities. Substantially all of these investments are made
by Comdisco Ventures group. For equity investments, which are non-quoted
investments, the company's policy is to regularly review the assumptions
underlying the operating performance and cash flow forecasts in assessing the
carrying values. The company identifies and records impairment losses on equity
securities when events and circumstances indicate that such assets might be
impaired. During fiscal year 2000, certain of these investments in privately
held companies became available-for-sale securities when the issuers completed
initial public offerings.
Equity securities include the following as of June 30, 2000 and September 30,
1999 (in millions):
June September
30, 30,
2000 1999
----- -----
Available-for-sale-securities:
Cost .............................. $ 43 $ 49
Unrealized gain ................... 367 152
--- ---
Market value ........................ 410 201
Equity investments (at cost less
valuation adjustments) ........... 196 51
--- ---
Carrying value .................... $606 $252
=== ===
Realized gains or losses are recorded upon disposition of equity securities
based upon the difference between the proceeds and the cost basis determined
using the specific identification method. Changes in the valuation of
available-for-sale securities are included as changes in the unrealized holding
gains in accumulated comprehensive income. Net realized gains from the sales of
equity securities were $146 million during the first nine months of fiscal 2000.
During the nine months ended June 30, 1999, the company did not realize any
gains from the sale of equity securities. Net realized gains are included in
other revenue.
The company records the proceeds received from the sale or disposition of
warrants received in conjunction with its lease or other financings as income
when sold. These proceeds were $154 million during the first nine months of
fiscal 2000 compared to $32 million in the year earlier period. These amounts
are included in other revenue.
5. Interest-Bearing Liabilities
At June 30, 2000, the company had $1.7 billion of available domestic and
international borrowing capacity under various lines of credit from commercial
banks and commercial paper facilities.
The average daily borrowings outstanding during the nine months ended June 30,
2000 were approximately $5.4 billion, with a related weighted average interest
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<PAGE>
rate of 6.38%. This compares to average daily borrowings during the first nine
months of fiscal 1999 of approximately $5.4 billion, with a related weighted
average interest rate of 6.24%.
6. Senior Notes
On October 9, 1998, the company filed a registration statement on Form S-3 with
the Securities and Exchange Commission (the "SEC") for a shelf offering of up to
$1.5 billion of senior debt securities on terms to be set at the time of each
sale (the "1998 Shelf"). On January 19, 1999, the company designated $600
million (later reduced to $500 million as described below) in Senior Debt
Securities as "Senior Medium-Term Notes, Series H" to be issued under the 1998
Shelf, of which $37 million remained available for issuance as of June 30, 2000.
Pursuant to the 1998 Shelf, the company, on January 26, 1999, issued $350
million of 6.0% Senior Notes due January 30, 2002, and, on April 21, 1999, $350
million of 5.95% Notes due April 30, 2002. On August 26, 1999, the company
redesignated $100 million of the "Series H Medium-Term Notes", which together
with the remaining $200 million in securities previously unallocated under the
shelf registration, were issued by the company as $300 million of 7.25% Notes
due September 1, 2002.
On September 24, 1999, the company filed a registration statement on Form S-3
with the SEC for a shelf offering of up to $1.5 billion senior debt securities
on terms to be set at the time of each sale (the "1999 Shelf"). On February 29,
2000, the company designated $500 million in Senior Debt Securities as "Senior
Medium-Term Notes, Series I" under the 1999 Shelf, of which $425 million
remained available for issuance as of June 30, 2000.
Pursuant to the 1999 Shelf, the company on August 8, 2000, issued $500 million
of 9.5% Senior Notes due August 15, 2003, leaving $500 million of securities
currently undesignated under the 1999 Shelf.
7. Stockholders' Equity
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130-
Reporting Comprehensive Income, which requires presentation of comprehensive
earnings (net earnings plus all changes in net assets from non-owner sources)
and its components in the financial statements.
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<PAGE>
Other comprehensive earnings (loss) consists of the following (in millions):
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Foreign currency translation adjustments........ $ (7) $ (10) $ (39) $ (35)
Unrealized gains on securities:
Unrealized holding gains arising
during the period............................ 45 50 515 86
Reclassification adjustment for gains
included in earnings before
income taxes (benefit)....................... (83) (15) (300) (32)
---------- ---------- -------- ---------
Net unrealized gains (losses), before
income taxes (benefit)....................... (38) 35 215 54
Income taxes (benefit).......................... (18) 13 72 19
---------- ---------- -------- ---------
Net unrealized gains (losses)................... (20) 22 143 35
---------- ---------- -------- ---------
Other comprehensive income (loss)............... (27) 12 104 -
Net earnings.................................... 17 36 101 18
---------- ---------- -------- ---------
Total comprehensive income (loss)............... $ (10) $ 48 $ 205 $ 18
========== ========== ======== =========
</TABLE>
Accumulated other comprehensive income presented below and in the accompanying
balance sheets consists of the accumulated net unrealized loss on foreign
currency translation adjustments and the accumulated net unrealized gain on
available-for-sale securities (in millions):
<TABLE>
<CAPTION>
Unrealized
Foreign gain on Accumulated
currency available- other
translation for-sale comprehensive
adjustment securities income
----------- ---------- --------------
<S> <C> <C> <C>
Balance at beginning of period........ $ (34) $ 92 $ 58
Current-period change ................ (39) 143 104
----------- --------- -------------
Balance at end of period ............. $ (73) $ 235 $ 162
=========== ========= =============
</TABLE>
On July 25, 2000, the Board of Directors declared a quarterly cash dividend of
$.025 per common share to be paid on September 11, 2000 to holders of record on
August 11, 2000.
During the quarter ended June 30, 2000, the company purchased 1,283,600 shares
of its common stock at an aggregate cost of approximately $30 million. During
the nine months ended June 30, 2000, the company purchased 4,446,500 shares of
its common stock at an aggregate cost of approximately $91 million.
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<PAGE>
8. Acquisition and Sales of Assets
On February 28, 1999, the company completed the acquisition of Prism for a cash
purchase price of approximately $53 million, of which approximately $45 million
was paid in fiscal 1999. Prism is a provider of dedicated high-speed
connectivity and other services to small businesses, telecommuters and other
power users.
The Prism acquisition has been accounted for by the purchase method of
accounting and, accordingly, the results of operations of Prism from the period
February 28, 1999 are included in the accompanying consolidated financial
statements. Assets acquired and liabilities assumed were recorded at their fair
values.
The excess of cost over the estimated fair value of net assets acquired was
approximately $61 million and has been recorded as goodwill, which is being
amortized on a straight-line basis over 10 years.
As Prism builds its network within existing and into new regions, it will
require significant capital expenditures as well as sales and marketing
expenditures. Accordingly, the company expects to incur substantial and
increasing operating expenses and net losses from Prism operations for at least
the next few years.
On March 24, 1999, the company announced a major shift in corporate strategy,
including focusing on high-margin service businesses and shedding low-margin
businesses, including its mainframe leasing and vendor lease portfolios and its
medical refurbishing business. In conjunction with this repositioning, the
company recorded a pre-tax charge of $150 million in the quarter ended March 31,
1999. The components of the pre-tax charge included $100 million associated with
the company's plan to exit the mainframe residual leasing business, $20 million
to exit the medical refurbishing business and $30 million associated with the
realignment of the company's services businesses. The sale of the mainframe
portfolio and the sale of the medical refurbishing business were both concluded
in the fiscal quarter ended June 30, 1999. The sale of a majority of the vendor
lease portfolio was completed in the fiscal quarter ended September 30, 1999.
9. Industry Segment and Operations by Geographic Areas
During fiscal 1999, the company adopted SFAS No.131, "Disclosures about Segments
of an Enterprise and Related Information." The company evaluates the performance
of its operating segments based on earnings before income taxes. Intersegment
sales are not significant. Summarized financial information concerning the
company's reportable segments for the three- and nine-months ended June 30, 2000
and 1999 is shown in the following tables (in millions):
<TABLE>
<CAPTION>
Comdisco
Three months ended Ventures
June 30, 2000 Leasing Services Prism group Total
------------------ ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 629 $ 173 $ 1 $ 150 $ 953
Segment profit (loss)........... 24 12 (64) 54 26
Capital expenditures............ 448 22 54 269 793
Depreciation and amortization... 350 56 13 40 459
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Comdisco
Three months ended Ventures
June 30,1999 Leasing Services Prism group Total
------------------ ---------- ----------- ---------- ----------- ----------
Revenues........................ $ 1,109 $ 133 $ - $ 60 $ 1,302
Segment profit (loss)........... 24 21 (11) 22 56
Capital expenditures............ 555 61 20 156 792
Depreciation and amortization... 382 26 2 23 433
Comdisco
Nine months ended Ventures
June 30, 2000 Leasing Services Prism group Total
------------------ ---------- ----------- ---------- ----------- ----------
Revenues......................... $ 1,913 $ 476 $ 3 $ 451 $ 2,843
Segment profit (loss)............ 60 52 (133) 178 157
Capital expenditures............. 1,725 197 221 849 2,992
Depreciation and amortization.... 1,139 90 22 102 1,353
Comdisco
Nine months ended Ventures
June 30, 1999 Leasing Services Prism group Total
------------------ ---------- ----------- ---------- ----------- ----------
Revenues......................... $ 2,661 $ 376 $ - $ 138 $ 3,175
Segment profit (loss)............ (33) 29 (14) 46 28
Capital expenditures............. 1,980 103 65 392 2,540
Depreciation and amortization.... 1,455 46 2 62 1,565
</TABLE>
The following table presents total assets for each of the company's reportable
segments (in millions):
June September
30, 30,
2000 1999
----- -----
Leasing..................... $ 5,857 $ 6,332
Services.................... 644 479
Prism....................... 359 124
Comdisco Ventures group..... 1,691 872
----- -----
Total....................... $ 8,551 $ 7,807
====== =====
-15-
<PAGE>
The following tables present revenue by geographic location based on the
location of the company's local office (in millions):
Three months ended Nine months ended
June 30, June 30,
2000 1999 2000 1999
---------- ----------- ----------- ----------
North America.......... $ 743 $ 1,134 $ 2,242 $ 2,443
Europe................. 169 144 494 479
Pacific Rim............ 41 24 107 253
---------- ----------- ----------- ----------
Total.................. $ 953 $ 1,302 $ 2,843 $ 3,175
========== =========== =========== ==========
The following table presents total assets by geographic location based on the
location of the asset (in millions):
June September
30, 30,
2000 1999
----- -----
North America.......... $ 6,975 $ 6,272
Europe................. 1,006 1,029
Pacific Rim............ 570 506
----- -----
Total.................. $ 8,551 $ 7,807
====== =====
10. Comdisco, Inc. Consolidating Financial Information
The following schedules present consolidating financial information of Comdisco,
Inc. The financial information reflects the businesses of Comdisco group and
Comdisco Ventures group, including the allocation of expenses between Comdisco
group and Comdisco Ventures group in accordance with our allocation policies. We
have presented this information to illustrate the respective financial results
of Comdisco group and Comdisco Ventures group, including the impact of
inter-group allocated expenses, and how the financial results of those groups
relate to the consolidated financial results of Comdisco, Inc. This information,
which has been prepared in accordance with generally accepted accounting
principles, should be read together with the consolidated financial statements
of Comdisco, Inc. beginning on page 4 and "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Comdisco, Inc." beginning on
page 31 and the financial statements of Comdisco Ventures group beginning on
page 23 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Comdisco Ventures Group" beginning on page 39.
The consolidating statements of earnings of Comdisco, Inc. for the three and
nine months ended June, 2000 and 1999 and the consolidating balance sheets at
June 30, 2000 have been derived from our unaudited financial statements. These
financial statements of Comdisco, Inc. begin on page 4. The statements of
earnings of Comdisco Ventures group for the three and nine months ended June 30,
2000 and 1999 and the balance sheet at June 30, 2000 have been derived from
Comdisco Ventures group's unaudited financial statements. These financial
statements of Comdisco Ventures group begin on page 23. The consolidating
balance sheets as of September 30, 1999 have been derived from our audited
financial statements.
In the accompanying consolidating statements of earnings, earnings per share for
Comdisco group and for Comdisco Ventures group are not presented because neither
group has been a "stand-alone entity" and, as a result, the presentation of
earnings per share is not applicable. If Comdisco, Inc. issues a separate series
of common stock, it will present in its consolidating financial statements the
earnings per share for each outstanding series of its common stock.
-16-
<PAGE>
COMDISCO, INC.
CONSOLIDATING STATEMENTS OF EARNINGS (UNAUDITED)
(in millions, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30, Three months ended June 30,
2000 1999
------------------------------ ------------------------------
Consolidated Comdisco Consolidated Comdisco
Comdisco, Comdisco Ventures Comdisco, Comdisco Ventures
Inc. group group Inc. group group
------------ -------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Leasing:
Operating.............. $ 414 $ 363 $ 51 $ 443 $ 412 $ 31
Direct financing....... 44 44 -- 40 40 --
Sales-type............. 75 75 -- 91 91 --
----- ----- ---- ------ ------ ----
Total leasing......... 533 482 51 574 543 31
----- ----- ---- ------ ------ ----
Sales................... 142 139 3 565 563 2
Technology services..... 173 173 -- 133 133 --
Other................... 105 9 96 30 3 27
----- ----- ---- ------ ------ ----
Total revenue......... 953 803 150 1,302 1,242 60
----- ----- ---- ------ ------ ----
COSTS AND EXPENSES
Leasing:
Operating.............. 332 293 39 358 335 23
Sales-type............. 50 50 -- 53 53 --
----- ----- ---- ------ ------ ----
Total leasing......... 382 343 39 411 388 23
Sales................... 115 113 2 553 552 1
Technology services..... 161 161 -- 112 112 --
Selling, general and
administrative......... 116 78 38 77 70 7
Interest................ 88 71 17 82 75 7
Prism Communication
Services............... 65 65 -- 11 11 --
----- ----- ---- ------ ------ ----
Total costs and
expenses............. 927 831 96 1,246 1,208 38
----- ----- ---- ------ ------ ----
Earnings (loss) before
income taxes........... 26 (28) 54 56 34 22
Income taxes (benefit).. 9 (13) 22 20 11 9
----- ----- ---- ------ ------ ----
Net earnings (loss)..... $ 17 $ (15) $ 32 $ 36 $ 23 $ 13
===== ===== ==== ====== ====== ====
Net earnings per common
share:
Basic.................. $0.11 $ 0.23
===== ======
Diluted................ $0.10 $ 0.22
===== ======
-17-
<PAGE>
COMDISCO, INC.
CONSOLIDATING STATEMENTS OF EARNINGS (UNAUDITED)
(in millions, except per share data)
Nine months ended June 30, Nine months ended June 30,
2000 1999
------------------------------ ------------------------------
Consolidated Comdisco Consolidated Comdisco
Comdisco, Comdisco Ventures Comdisco, Comdisco Ventures
Inc. group group Inc. group group
------------ -------- -------- ------------ -------- --------
REVENUE
Leasing:
Operating.............. $1,288 $1,154 $134 $1,481 $1,397 $84
Direct financing....... 130 130 -- 120 120 --
Sales-type............. 281 279 2 442 442 --
------ ------ ---- ------ ------ ---
Total leasing......... 1,699 1,563 136 2,043 1,959 84
------ ------ ---- ------ ------ ---
Sales................... 308 300 8 690 686 4
Technology services..... 476 476 -- 376 376 --
Other................... 360 53 307 66 16 50
------ ------ ---- ------ ------ ---
Total revenue......... 2,843 2,392 451 3,175 3,037 138
------ ------ ---- ------ ------ ---
COSTS AND EXPENSES
Leasing:
Operating.............. 1,039 937 102 1,195 1,133 62
Sales-type............. 211 210 1 337 337 --
------ ------ ---- ------ ------ ---
Total leasing......... 1,250 1,147 103 1,532 1,470 62
Sales................... 243 239 4 662 660 2
Technology services..... 424 424 -- 317 317 --
Selling, general and
administrative......... 375 250 125 219 206 13
Interest................ 259 218 41 253 238 15
Prism Communication
Services............... 135 135 -- 14 14 --
Other................... -- -- -- 150 150 --
------ ------ ---- ------ ------ ---
Total costs and
expenses............. 2,686 2,413 273 3,147 3,055 92
------ ------ ---- ------ ------ ---
Earnings (loss) before
income taxes........... 157 (21) 178 28 (18) 46
Income taxes (benefit).. 56 (15) 71 10 (8) 18
------ ------ ---- ------ ------ ---
Net earnings (loss)..... $ 101 $ (6) $107 $ 18 $ (10) $28
====== ====== ==== ====== ====== ===
Net earnings per common
share:
Basic.................. $ 0.66 $ 0.12
------ ------
Diluted................ $ 0.62 $ 0.11
====== ======
-18-
<PAGE>
COMDISCO, INC.
CONSOLIDATING BALANCE SHEETS
(in millions, except number of shares and per share data)
June 30, 2000
-----------------------------------------------------
(unaudited)
Consolidated Comdisco
Comdisco, Reclassification Comdisco Ventures
Inc. & Eliminations group group
------------ ---------------- -------- ------------
ASSETS
Cash and cash
equivalents............ $ 259 $ -- $ 225 $ 34
Cash--legally
restricted............. 40 -- 40 --
Receivables, net........ 1,052 -- 410 642
Inter-group receivable.. -- (1,033) 1,033 --
Inventory of equipment.. 130 -- 127 3
Leased assets:
Direct financing and
sales-type........... 2,174 -- 2,169 5
Operating (net of
accumulated
depreciation)........ 3,329 -- 2,871 458
------- ------ ------ ------
Net leased assets..... 5,503 (1,033) 5,040 463
Property, plant and
equipment, net......... 463 -- 462 1
Equity securities....... 606 -- 83 523
Other assets............ 498 -- 473 25
------- ------ ------ ------
$ 8,551 $ (1,033) $7,893 $1,691
======= ====== ====== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Notes payable........... $ 1,502 $ -- $1,502 $ --
Term notes payable...... 641 -- 641 --
Senior debt............. 3,384 -- 3,384 --
Inter-group payable..... -- (1,033) -- 1,033
Accounts payable........ 155 -- 153 2
Income taxes............ 448 -- 288 160
Other liabilities....... 651 -- 594 57
Discounted lease
rentals................ 526 -- 526 --
------- ------ ------ ------
7,307 (1,033) 7,088 1,252
------- ------ ------ ------
Stockholders' equity:
Preferred stock $.10
par value
Authorized 100,000,000
shares............... -- -- -- --
Comdisco group stock,
$.10 par value
Authorized 750,000,000
shares; issued
224,906,304 shares.... 22 -- 22 --
Additional paid-in
capital............... 375 -- 375 --
Accumulated other
comprehensive income
(loss)................ 162 -- (56) 218
Retained earnings...... 1,223 -- 1,002 221
------- ------ ------ ------
1,782 -- 1,343 439
Common stock held in
treasury, at cost..... (538) -- (538) --
------- ------ ------ ------
Total stockholders'
equity................ 1,244 -- 805 439
------- ------ ------ ------
$ 8,551 $ (1,033) $7,893 $1,691
======= ====== ====== ======
-19-
<PAGE>
September 30, 1999
-----------------------------------------------------
(audited)
Consolidated Comdisco
Comdisco, Reclassification Comdisco Ventures
Inc. & Eliminations group group
------------ ---------------- -------- ------------
ASSETS
Cash and cash
equivalents............ $ 361 $ -- $ 361 $ --
Cash--legally
restricted............. 46 -- 46 --
Receivables, net........ 722 -- 355 367
Inter-group receivable.. -- (559) 559 --
Inventory of equipment.. 115 -- 113 2
Leased assets:
Direct financing and
sales-type........... 2,107 -- 2,102 5
Operating (net of
accumulated
depreciation)........ 3,516 -- 3,233 283
------- ------ ------ ------
Net leased assets..... 5,623 (559) 5,335 288
Property, plant and
equipment, net......... 229 -- 228 1
Equity securities....... 252 -- 55 197
Other assets............ 459 -- 442 17
------- ------ ------ ------
$ 7,807 $ (559) $7,494 $ 872
======= ====== ====== ======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Notes payable........... $ 820 $ -- $ 820 $ --
Term notes payable...... 550 -- 550 --
Senior debt............. 3,686 -- 3,686 --
Inter-group payable..... -- (559) -- 559
Accounts payable........ 263 -- 262 1
Income taxes............ 382 -- 310 72
Other liabilities....... 531 -- 491 40
Discounted lease
rentals................ 515 -- 515 --
------- ------ ------ ------
6,747 (559) 6,634 672
------- ------ ------ ------
Stockholders' equity:
Preferred stock $.10
par value
Authorized 100,000,000
shares............... -- -- -- --
Comdisco group stock,
$.10 par value
Authorized 750,000,000
shares; issued
223,464,344 shares.... 22 -- 22 --
Additional paid-in
capital............... 302 -- 302 --
Accumulated other
comprehensive income
(loss)................ 58 -- (28) 86
Retained earnings...... 1,134 -- 1,020 114
------- ------ ------ ------
1,516 -- 1,316 200
Common stock held in
treasury, at cost..... (456) -- (456) --
------- ------ ------ ------
Total stockholders'
equity................ 1,060 -- 860 200
------- ------ ------ ------
$ 7,807 $ (559) $7,494 $ 872
======= ====== ====== ======
-20-
<PAGE>
COMDISCO, INC.
CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
Nine months ended June 30, Nine months ended June 30,
2000 1999
------------------------------- ------------------------------
Consolidated Comdisco Consolidated Comdisco
Comdisco, Comdisco Ventures Comdisco, Comdisco Ventures
Inc. group group Inc. group group
------------ -------- -------- ------------ -------- --------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS:
Cash flows from
operating activities:
Operating lease and
other leasing
receipts............. $ 1,436 $ 1,296 $ 140 $ 1,527 $1,450 $ 77
Direct financing and
sales-type receipts.. 820 818 2 722 722 --
Leasing costs,
primarily rentals
paid................. (9) (9) -- (14) (14) --
Sales................. 408 401 7 447 442 5
Sales costs........... (106) (106) -- (110) (110) --
Technology services
receipts............. 445 445 -- 357 357 --
Technology services
costs................ (353) (353) -- (271) (271) --
Note receivable
receipts............. 194 3 191 35 -- 35
Other expense......... -- -- -- (16) (16) --
Warrant proceeds...... 304 41 263 36 -- 36
Selling, general and
administrative
expenses............. (299) (257) (42) (220) (214) (6)
Loss on Prism
Communication
Services............. (100) (100) -- (27) (27) --
Interest.............. (231) (231) -- (254) (254) --
Income taxes.......... (33) (33) -- (1) (1) --
------- ------- ----- ------- ------ -----
Net cash provided by
operating
activities.......... 2,476 1,915 561 2,211 2,064 147
------- ------- ----- ------- ------ -----
Cash flows from
investing activities:
Equipment purchased
for leasing.......... (1,949) (1,667) (282) (2,127) (1,980) (147)
Investment in
continuity and
network service
facilities........... (197) (197) -- (103) (103) --
Notes receivable...... (459) (5) (454) (225) -- (225)
Equity investments.... (145) (32) (113) (20) -- (20)
Acquisition of and
investment in Prism
Communication
Services............. (221) (221) -- (65) (65) --
Other investing
activities........... (21) (21) -- -- -- --
------- ------- ----- ------- ------ -----
Net cash used in
investing
activities.......... (2,992) (2,143) (849) (2,540) (2,148) (392)
------- ------- ----- ------- ------ -----
-21-
<PAGE>
Cash flows from
financing activities:
Discounted lease
proceeds............. 257 257 -- 274 274 --
Net increase
(decrease) in notes
payable.............. 682 682 -- (114) (114) --
Issuance of term notes
and senior notes..... 344 344 -- 1,145 1,145 --
Maturities of term
notes and senior
notes................ (555) (555) (644) (644)
Principal payments on
secured debt......... (246) (246) -- (258) (258) --
Common stock purchased
and placed in
treasury............. (91) (91) -- (58) (58) --
Dividends paid on
common stock......... (11) (11) -- (11) (11) --
Issuance of Prism
Communication
Services common
stock................ 11 11 -- -- -- --
Decrease (increase) in
legally restricted
cash................. 6 6 -- (57) (57) --
Net increase
(decrease) in inter-
group transactions... -- (322) 322 -- (245) 245
Other................. 17 17 -- 28 28 --
------- ------- ----- ------- ------ -----
Net cash provided by
financing
activities.......... 414 92 322 305 60 245
------- ------- ----- ------- ------ -----
Net increase (decrease)
in cash and cash
equivalents........... (102) (136) 34 (24) (24) --
Cash and cash
equivalents at
beginning of period... 361 361 -- 63 63 --
------- ------- ----- ------- ------ -----
Cash and cash
equivalents at end of
period................ $ 259 $ 225 $ 34 $ 39 $ 39 $ --
======= ======= ===== ======= ====== =====
-22-
<PAGE>
CONSOLIDATING STATEMENTS OF CASH FLOWS (UNAUDITED)--CONTINUED
(in millions)
Nine months ended June 30, Nine months ended June 30,
2000 1999
------------------------------ ------------------------------
Consolidated Comdisco Consolidated Comdisco
Comdisco, Comdisco Ventures Comdisco, Comdisco Ventures
Inc. group group Inc. group group
------------ -------- -------- ------------ -------- --------
RECONCILIATION OF NET
EARNINGS (LOSS) TO NET
CASH PROVIDED BY
OPERATING ACTIVITIES:
Net earnings (loss)..... $ 101 $ (6) $107 $ 18 $ (10) $ 28
Adjustments to reconcile
net earnings (loss) to
net cash provided by
operating activities:
Leasing costs,
primarily
depreciation and
amortization......... 1,241 1,139 102 1,517 1,455 62
Leasing revenue,
primarily principal
portion of direct
financing and sales-
type lease rentals... 690 690 -- 195 195 --
Cost of sales......... 137 133 4 584 581 3
Sales revenue......... -- -- -- (306) (306) --
Principal portion of
notes receivable..... 153 -- 153 22 -- 22
Technology service
costs, primarily
depreciation and
amortization......... 90 90 -- 46 46 --
Prism depreciation.... 22 22 -- 2 2 --
Selling, general and
administrative
expenses............. 76 (7) 83 (1) (7) 6
Interest.............. 27 (14) 41 -- (15) 15
Income taxes.......... 23 (48) 71 9 (10) 19
Other expense......... -- -- -- 150 150 --
Other--net............ (84) (84) -- (25) (17) (8)
------ ------ ---- ------ ------ ----
Net cash provided by
operating
activities........... $2,476 $1,915 $561 $2,211 $2,064 $147
====== ====== ==== ====== ====== ====
</TABLE>
-23-
<PAGE>
Comdisco Ventures Group
STATEMENTS OF EARNINGS AND DIVISION NET WORTH
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue
Leasing
Operating .............................. $ 50,687 $ 30,917 $ 133,524 $ 82,886
Direct financing ....................... 123 180 355 772
Sales-type ............................. -- -- 1,858 --
--------- --------- --------- ---------
Total leasing ...................... 50,810 31,097 135,737 83,658
Sales ....................................... 2,812 1,958 7,676 3,843
Interest income on notes .................... 14,745 6,330 38,456 12,754
Warrant sale proceeds and capital gains ..... 80,341 20,000 267,565 37,000
Other ....................................... 923 178 1,820 507
--------- --------- --------- ---------
Total revenue ....................... 149,631 59,563 451,254 137,762
--------- --------- --------- ---------
Costs and expenses
Leasing
Operating .............................. 39,267 23,143 101,641 62,271
Sales-type ............................. -- -- 1,134 --
--------- --------- --------- ---------
Total leasing ...................... 39,267 23,143 102,775 62,271
Sales ....................................... 1,613 1,319 4,385 2,693
Selling, general and administrative ......... 21,465 5,718 63,388 8,806
Interest .................................... 17,385 6,601 41,304 15,165
Bad debt expense ............................ 16,000 800 61,801 2,400
--------- --------- --------- ---------
Total costs and expenses ............. 95,730 37,581 273,653 91,335
--------- --------- --------- ---------
Earnings before income taxes ................ 53,901 21,982 177,601 46,427
Income taxes ................................ 21,493 8,765 70,818 18,512
--------- --------- --------- ---------
Net earnings ................................ $ 32,408 $ 13,217 $ 106,783 $ 27,915
========= ========= ========= =========
Division net worth at beginning of period ... $ 433,179 $ 119,608 $ 199,649 $ 71,080
Net earnings ................................ 32,408 13,217 106,783 27,915
Other comprehensive income - Unrealized gains
(losses), net of tax ..................... (26,497) 10,376 132,658 44,206
--------- --------- --------- ---------
Total comprehensive income ............. 5,911 23,593 239,441 72,121
--------- --------- --------- ---------
Division net worth at end of period ......... $ 439,090 $ 143,201 $ 439,090 $ 143,201
========= ========= ========= =========
See accompanying notes to financial statements.
</TABLE>
Explanatory Note: Earnings per share is not presented because Comdisco Ventures
group is a division of Comdisco and not a "stand-alone entity" and, as a result,
the presentation of earnings per share is not applicable. If Comdisco issues a
separate series of common stock, it will present in its financial statements the
earnings per share for all outstanding series of its common stock.
-24-
<PAGE>
Comdisco Ventures Group
BALANCE SHEETS
(in thousands)
June 30, September 30,
2000 1999
------------ ----------
(unaudited) (audited)
ASSETS
Cash ................................................ $ 34,049 $ --
Equity securities ................................... 523,094 197,335
Receivables, net .................................... 642,231 367,339
Inventory ........................................... 3,137 1,762
Leased assets:
Direct financing and sales-type ................... 4,658 5,106
Operating (net of accumulated depreciation) ....... 458,635 283,241
---------- ----------
Net leased assets ............................... 463,293 288,347
Other assets ........................................ 25,569 17,069
---------- ----------
$ 1,691,373 $ 871,852
========== ==========
LIABILITIES AND DIVISION NET WORTH
Inter-group payable ................................. $ 1,033,040 $ 559,575
Accounts payable .................................... 1,587 329
Income taxes ........................................ 160,244 72,265
Other liabilities ................................... 57,412 40,034
---------- ----------
1,252,283 672,203
---------- ----------
Accumulated other comprehensive income .............. 218,403 85,745
Accumulated net earnings ............................ 220,687 113,904
---------- ----------
Total division net worth ........................... 439,090 199,649
---------- ----------
$ 1,691,373 $ 871,852
========== ==========
See accompanying notes to financial statements.
-25-
<PAGE>
Comdisco Ventures Group
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Nine Months Ended June 30, 2000 and 1999
2000 1999
--------- ---------
Cash flows from operating activities:
Operating lease and other leasing receipts .. $ 142,239 $ 76,541
Leasing costs, primarily rentals paid ....... (405) (137)
Sales ....................................... 7,482 4,455
Warrant proceeds ............................ 261,666 36,454
Promissory note receipts .................... 190,980 35,117
Selling, general and administrative expenses (42,192) (5,466)
Other ....................................... 1,820 --
--------- ---------
Net cash provided by operating activities . 561,590 146,964
--------- ---------
Cash flows from investing activities:
Equipment purchased for leasing ............. (282,488) (146,355)
Purchase of property and equipment .......... -- (115)
Equity investments .......................... (112,276) (20,326)
Issuance of promissory notes ................ (454,144) (225,026)
--------- ---------
Net cash used in investing activities ..... (848,908) (391,822)
--------- ---------
Cash flows from financing activities:
Net change in inter-group payable ........... 321,367 244,858
--------- ---------
Net cash provided by financing activities . 321,367 244,858
--------- ---------
Net increase in cash and cash equivalents ...... 34,049 --
Cash and cash equivalents at beginning of period -- --
--------- ---------
Cash and cash equivalents at end of period ..... $ 34,049 $ --
========= =========
-26-
<PAGE>
Comdisco Ventures Group
STATEMENTS OF CASH FLOWS (UNAUDITED) - Continued
(in thousands)
For the Nine Months Ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings .............................................. $ 106,783 $ 27,915
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Leasing costs, primarily
depreciation and amortization ....................... 102,370 62,134
Cost of sales ......................................... 4,385 2,693
Principal portion of promissory notes ................. 152,524 22,363
Selling, general, and administrative expenses ......... 82,997 5,740
Interest .............................................. 41,304 15,165
Income taxes .......................................... 70,818 18,512
Other - net ........................................... 409 (7,558)
--------- ---------
Net cash provided by operating activities $ 561,590 $ 146,964
========= =========
See accompanying notes to financial statements.
</TABLE>
-27-
<PAGE>
Comdisco Ventures Group
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2000 and 1999
1. Basis of Presentation
The accompanying unaudited combined financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and disclosures
required by generally accepted accounting principles for annual financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
On May 4, 2000, the company filed its amended and restated charter to implement
a tracking stock structure that was approved by the company's stockholders on
April 20, 2000. As a result, two new series of stock were created: "Comdisco
group stock" and "Comdisco Ventures group stock." Comdisco Ventures group stock
is intended to separately track the performance of the company's venture
financing business, which the company refers to as "Comdisco Ventures group" and
Comdisco group stock separately tracks the performance of the remaining business
of the company, which the company refers to as "Comdisco group," and the shares
of Comdisco Ventures group stock reserved for issuance for the benefit of
Comdisco group or to the holders of Comdisco group stock.
The company has allocated, for financial reporting purposes, all of its
consolidated assets, liabilities, revenue, expenses and cash flow between
Comdisco group and Comdisco Ventures group. Notwithstanding these financial
reporting allocations, holders of Comdisco Ventures group stock and holders of
Comdisco group stock are stockholders of the company and are subject to all of
the risks associated with an investment in the company and all of its
businesses, assets and liabilities. These allocations do not affect title to the
assets or responsibility for the liabilities of the company or any of its
subsidiaries. The results of operations or financial condition of one group
could affect the results of operations or financial condition of the other
group. Accordingly, the financial statements of each group should be read in
conjunction with company's consolidated financial statements included herein and
with the notes to the consolidated and group financial statements included
herein and in conjunction with the company's consolidated financial statements
and notes thereto included in the company's Annual Report on Form 10-K, as
amended by Form 10-K/A, for the year ended September 30, 1999.
Certain reclassifications have been made in the 1999 financial statements to
conform to the 2000 presentation.
2. Equity Securities
Comdisco Ventures group provides financing to privately held companies, in
networking, communications, software, Internet-based and other industries by
purchasing equity securities. For equity investments, which are non-quoted
investments, Comdisco Ventures group's policy is to regularly review the
assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. Comdisco Ventures group identifies and records
impairment losses on equity securities when events and circumstances indicate
that such assets might be impaired.
-28-
<PAGE>
During fiscal year 2000, certain of these investments in privately held
companies became available-for-sale securities when the issuers completed
initial public offerings.
Equity securities include the following as of June 30, 2000 and September 30,
1999 (in thousands):
June September
30, 30,
2000 1999
-------- --------
Available-for-sale-securities:
Cost ......................... $ 27,048 $ 7,735
Unrealized gain .............. 363,248 142,612
-------- --------
Market value ................... 390,296 150,347
Equity investments (at cost less
valuation adjustments) ...... 132,798 46,988
-------- --------
Carrying value ............... $523,094 $197,335
======== ========
Realized gains or losses ("capital gains") are recorded upon disposition of
equity securities based upon the difference between the proceeds and the cost
basis determined using the specific identification method. Changes in the
valuation of available-for-sale securities are included as changes in the
unrealized holding gains in accumulated comprehensive income. Comdisco Ventures
group records the proceeds received from the sale or disposition of warrants
("warrant sale proceeds") received in conjunction with its lease or other
financings as income when sold. Revenue from the sale of equity investments
(warrant sale proceeds and capital gains) for the three and nine months ended
June 30, 2000 and 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Proceeds from the sale of equity securities $ 25,709 $ 7,561 $ 139,251 $ 7,561
Less: cost of equity securities ........... (5,126) (2,938) (14,060) (2,938)
--------- --------- --------- ---------
Capital gains ............................. 20,583 4,623 125,191 4,623
Warrant sale proceeds ..................... 59,758 15,377 142,374 32,377
--------- --------- --------- ---------
Total ..................................... $ 80,341 $ 20,000 $ 267,565 $ 37,000
========= ========= ========= =========
</TABLE>
See "Risk Factors" for a discussion of the factors that may affect proceeds from
the sale of warrants and capital gains.
Comdisco formed Hybrid Venture Partners, LP ("Hybrid Fund"), in October 1999 to
originate venture debt and direct equity financing products for the benefit of
Comdisco Ventures group. Comdisco committed $250 million as the sole limited
partner to Hybrid Fund, all of which has been invested in, or committed to,
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<PAGE>
Comdisco Ventures group customers. The Hybrid Fund has been closed and it will
not seek additional capital commitments.
3. Receivables
Receivables include the following as of June 30, 2000 and September 30, 1999 (in
thousands):
June September
30, 30,
2000 1999
--------- ---------
Notes receivable ............ $ 631,397 $ 343,105
Accounts .................... 6,526 7,148
Unsettled equity transactions 54,707 26,278
Other ....................... 19,390 7,321
--------- ---------
Total receivables ........... 712,020 383,852
Allowance for credit losses . (69,789) (16,513)
--------- ---------
Balance at end of period .... $ 642,231 $ 367,339
========= =========
Notes receivable ("venture debt") consist of loans to privately held companies
in networking, communications, software, Internet-based and other industries.
Comdisco Ventures group's venture debt is generally structured as loans secured
by equipment and other assets or subordinated loans.
At June 30, 2000 and September 30, 1999, Comdisco Ventures group had venture
debt of approximately $631.4 million and $343.1 million, respectively. As part
of a venture debt transaction, Comdisco Ventures group receives warrants to
purchase an equity interest in the borrower at a negotiated exercise price,
generally based on the borrower's most recent venture capital transaction. The
amount of the warrants received and the exercise price varies based upon
borrower-specific valuation factors. Loans provide current income from interest
and fees.
Changes in the allowance for credit losses (combined notes and accounts
receivable) for the nine months ended June 30, 2000 and 1999 were as follows (in
thousands):
June June
30, 30,
2000 1999
-------- --------
Balance at beginning of period $ 16,513 $ 6,000
Provision for credit losses .. 61,801 2,400
Net credit losses ............ (8,525) (950)
-------- --------
Balance at end of period ..... $ 69,789 $ 7,450
======== ========
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<PAGE>
4. Comprehensive Income
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130-
Reporting Comprehensive Income, which requires presentation of comprehensive
earnings (net earnings plus all changes in net assets from non-owner sources)
and its components in the financial statements.
Other comprehensive earnings (loss) consists of the following (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising
during the period .................. $ 36,270 $ 37,257 $ 488,201 $ 110,523
Reclassification adjustment for gains
included in earnings before income
taxes (benefit) .................... (80,341) (20,000) (267,565) (37,000)
--------- --------- --------- ---------
Net unrealized gains (losses), before
income taxes (benefit) ............. (44,071) 17,257 220,636 73,523
Income taxes (benefit) ................ (17,574) 6,881 87,978 29,317
--------- --------- --------- ---------
Net unrealized gains (losses) ......... (26,497) 10,376 132,658 44,206
--------- --------- --------- ---------
Other comprehensive income (loss) ..... (26,497) 10,376 132,658 44,206
Net earnings .......................... 32,408 13,217 106,783 27,915
--------- --------- --------- ---------
Total comprehensive income ............ $ 5,911 $ 23,593 $ 239,441 $ 72,121
========= ========= ========= =========
</TABLE>
Accumulated other comprehensive income for the nine months ended June 30, 2000,
presented below and in the accompanying balance sheets, consists of the
accumulated net unrealized gain on available-for-sale securities (in thousands):
Accumulated
other
comprehensive
income
--------
Balance at beginning of period ........................... $ 85,745
Change in unrealized gain on available-for-sale securities 132,658
--------
Balance at end of period ................................. $218,403
========
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<PAGE>
Comdisco, Inc. and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
--------
The industry in which the company operates has become service oriented, with the
business driven by service capabilities. Accordingly, Comdisco has aligned into
four primary business lines: (1) technology services; (2) global leasing
(referred to as "Leasing") in areas such as electronics, communications,
medical, laboratory and scientific equipment and other high technology equipment
(including information technology equipment); (3) Prism Communication Services,
Inc. (referred to as "Prism"), the company's subsidiary which provides
high-speed data connectivity, local and long-distance voice, video, Internet and
secure business applications such as automatic data storage and recovery along
with other teleworking and business-critical solutions , (services, Leasing and
Prism are collectively referred to as "Comdisco group"); and (4) Comdisco
Ventures group, our venture financing business.
On March 24, 1999, the company announced a major shift in corporate strategy,
including focusing on high-margin service businesses and shedding low-margin
businesses, including its mainframe leasing portfolio and medical refurbishing
business. In conjunction with this repositioning, the company recorded a pretax
charge of $150 million in the quarter ended March 31, 1999. The components of
the pre-tax charge included $100 million associated with the company's plan to
exit the mainframe residual leasing business, $20 million to exit the medical
refurbishing business and $30 million associated with the realignment of the
company's services businesses. The sale of the mainframe portfolio (the "Sale")
and the sale of the medical refurbishing business were both concluded 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.
On May 4, 2000, the company filed its amended and restated charter to implement
a tracking stock structure that was approved by the company's stockholders on
April 20, 2000. As a result, two new series of stock were created: "Comdisco
group stock" and "Comdisco Ventures group stock." Comdisco Ventures group stock
is intended to separately track the performance of the company's venture
financing business, which the company refers to as "Comdisco Ventures group" and
Comdisco group stock separately tracks the performance of the remaining business
of the company, which the company refers to as "Comdisco group," and the shares
of Comdisco Ventures group stock reserved for issuance for the benefit of
Comdisco group or to the holders of Comdisco group stock.
Three and nine months ended June 30, 2000 compared to three and nine months
ended June 30, 1999
Net Earnings
Net earnings for the three months ended June 30, 2000 were $17 million, or $.10
per diluted common share, as compared to net earnings of $36 million, or $.22
per share, for the three months ended June 30, 1999. Net earnings for the nine
months ended June 30, 2000 were $101 million, or $.62 per diluted share, as
compared to net earnings of $18 million, or $.11 per share, in the year earlier
period. Net earnings for the nine months ended June 30, 1999 were reduced by
$150 million of pre-tax charges recorded in March, 1999, related to the
divestiture of low-margin businesses and in the realignment of Comdisco, Inc.'s
service businesses. See "Business" below for a discussion of this pre- tax
charge.
Excluding the Prism losses, Comdisco had net earnings of $58 million, or $.36
per share, compared to $43 million, or $.26 per share, for the three months
ended June 30, 2000 and 1999, respectively. The increase for three and nine
months ended June 30, 2000 compared to the year earlier period is primarily due
to increased earnings by Comdisco Ventures group, offset by lower earnings
contributions from Comdisco group, primarily from leasing activities. Excluding
the charges in fiscal 1999 and the Prism losses in both fiscal 2000 and 1999,
Comdisco had net earnings of $186 million, or $1.14 per share, compared to $123
million, or $.76 per share, for the nine months ended June 30, 2000 and 1999,
respectively.
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<PAGE>
Business
Comdisco group:
Services: Comdisco's technology services business attained record revenues for
the three and nine months ended June 30, 2000; however, higher costs, primarily
associated with higher personnel costs and continued investment in new service
development, negatively impacted margins on Comdisco's technology services
business. Technology services had pretax earnings of $12 million in the quarter
ended June 30, 2000, compared to $21 million in the quarter ended June 30, 1999
and $18 million in the quarter ended March 31, 2000. The third quarter of fiscal
2000 was the third consecutive quarter of declining earnings contributions from
services. Network services had pretax losses for the three and nine months ended
June 30, 2000 of $9 million and $14 million, respectively. Comdisco expects
network services to incur losses in the fourth quarter of fiscal 2000. Web
services, a new service offered by Comdisco, incurred losses of $3 million in
the quarter ended June 30, 2000. Revenue from continuity contracts, which is
recognized monthly during the noncancelable continuity contract and is therefore
typically recurring and predictable, was approximately $89 million, $82 million
and $92 million during the three months ended June 30, 2000 and 1999, and March
31, 2000, respectively, representing approximately 52%, 62% and 59% of
technology services revenue. Included in the $150 million pre-tax charge, as
discussed below, is $30 million associated with the relocation of some of its
continuity services facilities worldwide.
Leasing: Leasing had pretax earnings of $24 million and $60 million in the three
and nine months ended June 30, 2000, compared to $24 million and $87 million in
the three and nine months ended June 30, 1999, respectively. The pretax earnings
recorded in the nine months ended June 30, 1999, $87 million, excludes $120
million in pre-tax charges recorded in the second quarter of fiscal 1999 related
to Comdisco's divestiture of low-margin businesses. The decrease in pretax
earnings contribution from leasing is due to a number of factors, including, but
not limited to, the Sale, a change in the mix of leases written, with a higher
percentage of new leases written as direct financing leases and higher costs,
primarily personnel costs, associated with our operations. Cost of equipment
placed on lease was $556 million during the quarter ended June 30, 2000. This
compares to cost of equipment placed on lease of $657 million and $528 million
during the quarters ended June 30, 1999 and March 31, 2000, respectively. During
the nine months ended June 30, 2000 and 1999, cost of equipment placed on lease
totaled $1.9 billion and $2.1 billion, respectively. Comdisco's residual leasing
business in the areas of electronics, communications, medical, laboratory and
scientific had worldwide cost of equipment placed on lease of $218 million and
$655 million in the three and nine months ended June 30, 2000, respectively,
compared to $89 million and $398 million in the prior year periods. See below
for a discussion of remarketing.
In addition to originating new equipment lease financing, Comdisco's remarkets
used equipment from its lease portfolio. Remarketing is the sale or re-lease of
equipment either at original lease termination or during the original lease.
These transactions may be with existing lessees or, when equipment is returned,
with new customers. Remarketing activities generate earnings from follow-on
leases and gross profit on equipment sales. Remarketing activity, an important
factor in quarterly earnings, increased in the current quarter as compared to
both the second quarter of fiscal 2000 and the third quarter of fiscal 1999.
Remarketing activity should continue to be an important contributor to quarterly
earnings in the near and long term because of the size of Comdisco's lease
portfolio. In addition, remarketing activity will be critical in the residual
leasing business.
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<PAGE>
Prism: Prism revenues from subscribers were approximately $1 million and $3
million in the three months and nine months ended June 30, 2000, respectively.
Prism had pretax losses of $64 million and $133 million in the three and nine
months ended June 30, 2000, respectively. During the three months ended June 30,
1999, Prism had a pretax loss of $11 million. From February 28, 1999 (date of
acquisition) to June 30, 1999, Prism had a pretax loss of $14 million.
Prism has incurred losses in every month since its inception. Prism expects to
continue to incur substantial operating losses, net losses and net operating
cash outflows for the next several years as it attempts to grow its customer
base in its markets.
Prism recently signed a $120 million agreement with the network unit of Williams
Communications Group, Inc. to provide Prism long-term capacity and fiber on
Williams' fiber-optic network. Comdisco believes that the majority of the value
in the transaction is in long-term network capacity on the Williams
Multi-Service Broadband Network(TM). Williams Communications will also provide
collocation and fiber maintenance services over the twenty-year agreement.
Funding of the $120 million transaction consists of $110 million in cash paid
over the life of the contract as well as Prism's issuance of $10 million of
common stock to Williams Communications for these services representing a 1%
fully diluted ownership of Prism.
Nortel Networks(TM) also recently acquired a 1% fully diluted common stock
ownership position in Prism for US $10 million. The relationship between the two
companies began in early 1998 when Prism awarded Nortel Networks an initial
contract for constructing its data network enhanced by Nortel Networks' digital
modem high-speed Internet access. Since that time, Prism has continued to expand
upon this original agreement and has agreed to purchase up to $460 million of
switches, integrated line cards, customer premises equipment and ancillary
technology.
Comdisco Ventures group:
The third quarter of fiscal 2000 was a record third quarter for Comdisco
Ventures group, with record revenues from leasing and interest income on venture
debt. For the three months ended June 30, 2000 and 1999, Comdisco Ventures group
recorded revenue of $ 150 million and $60 million, which represented increases
of 151% and 83%, respectively, over the prior year periods. For the nine months
ended June 30, 2000 and 1999, Comdisco Ventures group recorded revenue of $451
million and $138 million, which represented increases of 228% and 54%,
respectively, over the prior year periods. Revenue from the sale of equity
investments, consisting of warrant sale proceeds and capital gains, for the
three and nine months ended June 30, 2000 and 1999 were as follows (in
millions):
Nine
Three months months
ended ended
June 30, June 30,
--------------- ----------
2000 1999 2000 1999
------ ------ ---- ----
Proceeds from the sale of equity securities....... $ 26 $ 8 $139 $ 8
Less: cost of equity securities................... (5) (3) (14) (3)
------ ------ ---- ---
Capital gains..................................... 21 5 125 5
Warrant sale proceeds............................. 60 15 143 32
------ ------ ---- ---
Total............................................. $ 81 $ 20 $268 $37
====== ====== ==== ===
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<PAGE>
Comdisco Venture group's policy has been to sell its equity positions in an
orderly manner as soon as reasonably possible after a liquidity event. This
general policy allows Comdisco Ventures group to generate cash for reinvestment
in new transactions; Comdisco Ventures group believes it is preferable to make
new advances to start-ups rather than hold the securities of public companies.
In addition, Comdisco Ventures group has benefited from a strong IPO market for
venture capital-backed companies. There can be no assurance that the strong IPO
market for venture capital-backed companies will continue in the near or long
term.
Comdisco formed Hybrid Venture Partners, LP ("Hybrid Fund"), in October 1999 to
originate venture debt and direct equity financing products for the benefit of
Comdisco Ventures group. Comdisco committed $250 million as the sole limited
partner to Hybrid Fund, all of which has been invested in, or committed to,
Comdisco Ventures group customers. The Hybrid Fund has been closed and it will
not seek additional capital commitments.
Results of Operations
Three Months Ended June 30, 2000
Total revenue for the three months ended June 30, 2000 was $953 million compared
to $1.3 billion in the prior year quarter and $1.01 billion in the quarter ended
March 31, 2000. The decrease in total revenue is primarily due to the Sale,
which increased sales revenue by $485 million in the three months ended June 30,
1999. Total leasing revenue of $533 million for the quarter ended June 30, 2000
represented a decrease of 7% compared to the year earlier period. Total leasing
revenue was $611 million in the second quarter of fiscal 2000. The decrease in
operating lease revenue is due to a change in the mix of leases written, with a
higher percentage of new leases classified as direct financing leases rather
than operating leases. Sales-type lease revenue decreased 18% in the current
year quarter compared to the year earlier quarter, primarily as a result of a
higher percentage of remarketing transactions done as sales rather than as
leases.
Operating Lease Margin was $82 million, or 19.8% of operating lease revenue, and
$85 million, or 19.2% of operating lease revenue, in the three months ended June
30, 2000 and 1999, respectively. The Operating Lease Margin was $84 million, or
19.1% in the quarter ended March 31, 2000. Comdisco expects the Operating Lease
Margin to be at or below current levels throughout the remainder of fiscal 2000,
depending on the equipment leased and the volume of operating leases. The
decrease in operating lease revenue minus operating lease cost in the current
year quarter compared to the year earlier quarter is due the change in the mix
of leases written. Comdisco expects the growth of the operating lease portfolio
to slow as the mix of leases results in more direct financing leases rather than
operating leases.
Revenue from sales, which includes remarketing by selling and buy/sell
activities, for the three months ended June 30, 2000 and 1999 were as follows
(in millions, except percentages):
2000 1999
---------------------- ----------------------
Revenue Expense Margin Revenue Expense Margin
------- ------- ------ ------- ------- ------
Sales........................... $142 $115 19% $ 62 $ 50 19%
Sale of mainframe Portfolio..... -- -- -- 485 485 --
Sale of medical Refurbishment
business....................... -- -- -- 18 18 --
---- ---- --- ---- ---- ---
Total........................... $142 $115 19% $565 $553 2%
==== ==== === ==== ==== ===
Revenue from technology services for the three months ended June 30, 2000 and
1999 was $173 million and $133 million, respectively, a 30% increase. Cost of
technology services for the three months ended June 30, 2000 and 1999 was $161
million and $112 million, respectively, a 44% increase. The increase in cost of
technology services is attributed to the development and implementation of
Comdisco's network services infrastructure.
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<PAGE>
Other revenue for the three months ended June 30, 2000 and 1999 was $105 million
and $30 million, respectively. Revenue from the sale of equity positions by
Comdisco Ventures group was $80 million and $20 million in the three months
ended June 30, 2000 and 1999, respectively. Prism revenue from subscribers was
approximately $1 million in the quarter ended June 30, 2000.
Total costs and expenses for the quarter ended June 30, 2000 were $927 million
compared to $1.25 billion in the prior year period. The decrease in total costs
and expenses is primarily due to the $150 million pre-tax charge included in the
prior year and the Sale, offset by higher expenses incurred by Prism in the
current year quarter.
Leasing costs totaled $382 million for the three months ended June 30, 2000,
compared to $411 million and $458 million in the three months ended June 30,
1999 and March 31, 2000, respectively. The decreases in the current quarter is
due to reduced operating lease revenue resulting from the change in the mix of
leases written and, with respect to the second quarter of fiscal 2000, a
reduction in sales-type lease transactions. The decrease in sales-type
transactions is primarily a result of a higher percentage of remarketing
transaction done as sales rather than leases. See above for a discussion of
Operating Lease Margins.
Sales costs were $115 million, $553 million and $78 million in the three months
ended June 30, 2000 and 1999 and March 31, 2000, respectively. The three months
ended June 30, 1999 includes the Sale. The increase in current quarter compared
to the second quarter of fiscal 2000 is due to a higher volume of remarketing
transactions done as sales. See above for information on sales margins.
Technology services costs were $161 million in the three months ended June 30,
2000, $112 million in the three months ended June 30, 1999 and $138 million in
the three months March 31, 2000. The increases were due to higher personnel
costs and continued investment in new service development.
Selling, general and administrative expenses totaled $116 million in the quarter
ended June 30, 2000 compared to $77 million in the quarter ended June 30, 1999
and $143 million in the quarter ended March 31, 2000. The increase in the
current year quarter compared to the year earlier period is primarily due to an
increase in bad debt expense and an increase in Comdisco Ventures group
incentive compensation costs as a result of gains realized on the sale of equity
positions. The following table summarizes selling, general and administrative
expenses (in millions):
2000 1999
---- ----
Incentive compensation............................... $ 34 $18
Other compensation and benefits...................... 34 31
Outside services..................................... 15 9
Bad debt expense Comdisco Ventures group............. 16 1
Bad debt expense Comdisco group...................... 4 2
Other expenses....................................... 13 16
--- ---
$116 $77
=== ===
Comdisco expects selling, general and administrative expenses to increase
throughout fiscal 2000 primarily because of higher revenue from Comdisco
Ventures group, which will increase incentive compensation costs, and higher
personnel costs.
Interest expense for the three months ended June 30, 2000 and 1999 totaled $88
and $82 million, respectively. Increases in interest costs resulted from higher
interest rates in the current period compared to the prior year period.
Prism expenses for the three months ended June 30, 2000 totaled $65 million,
compared to $11 million in the year earlier quarter and $42 million in the
second quarter of fiscal 2000. Network and product costs were $25 million for
the three months ended June 30, 2000 compared to $17 million in the
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<PAGE>
second quarter of fiscal 2000. These costs are attributable to the expansion of
Prism's networks and increased orders resulting from their sales and marketing
efforts. Sales, marketing, general and administrative expenses were $19 million
and $14 million for the three months ended June 30, 2000 and March 31, 2000,
respectively. These costs are attributable to growth in headcount in all areas
of Prism, continued expansion of Prism's sales and marketing efforts, deployment
of Prism's networks and building of Prism's operating infrastructure.
Depreciation and amortization was approximately $13 million for the current
quarter compared to $6 million for the second quarter of fiscal 2000.
Nine months ended June 30, 2000
Total revenue was $2.8 billion and $3.2 billion for the nine months ended June
30, 2000 and 1999, respectively. The decrease in total revenue in the current
year period is due to the Sale in the prior year period. Total leasing revenue
was $1.7 billion and $2.0 billion for the nine months ended June 30, 2000 and
1999, respectively. The decrease in total leasing revenue compared to the prior
year period was primarily due to the reduced revenue from sales-type
transactions, and a reduction in operating lease revenue. Remarketing activity
was strong in the third quarter of fiscal 2000 and, although sales-type revenue
decreased, sales, which also represents remarketing activity, increased in the
current year period.
Operating Lease Margin was $249 million, or 19.3% of operating lease revenue,
and $286 million, or 19.3% of operating lease revenue, in the nine months ended
June 30, 2000 and 1999, respectively. The decrease in Operating Lease Margin in
the current year period compared to the year earlier period was due to a change
in the mix of leases written, with a higher percentage of leases written as
direct financing leases rather than operating leases. We expect the growth of
the operating lease portfolio to slow as the mix of leases written results in
more direct financing leases rather than operating leases.
Revenue from sales, which includes remarketing by selling and buy/sell
activities, for the nine months ended June 30, 2000 and 1999 were as follows (in
millions, except percentages):
2000 1999
---------------------- ----------------------
Revenue Expense Margin Revenue Expense Margin
------- ------- ------ ------- ------- ------
Sales........................... $308 $243 21% $187 $159 15%
Sale of mainframe portfolio..... -- -- -- 485 485 --
Sale of medical refurbishment
business....................... -- -- -- 18 18 --
---- ---- --- ---- ---- ---
Total........................... $308 $243 21% $690 $662 4%
==== ==== === ==== ==== ===
The increase in sale margins during the nine months ended June 30, 2000 is
primarily due to remarketing of communications equipment, which had above
average margins on their remarketing transactions.
Revenue from technology services for the nine months ended June 30, 2000 and
1999 was $476 million and $376 million, respectively, a 27% increase. Cost of
technology services for the nine months ended June 30, 2000 and 1999 was $424
million and $317 million, excluding the pre-tax charge, respectively, a 34%
increase. The increase in revenue is due to higher revenue from network and
desktop management services. The decrease in technology services margins is due
to increasing infrastructure costs associated with the development of the
network services business and costs associated with the development of
Comdisco's web hosting and availability services.
Other revenue for the nine months ended June 30, 2000 and 1999 was $360 million
and $66 million, respectively. Revenue from the sale of available-for- sale
securities by Comdisco Ventures group was $268 million and $37 million in the
nine months ended June 30, 2000 and 1999, respectively. During the nine months
ended June 30, 2000, approximately eighty-four companies in the equity
securities portfolio were acquired/merged or completed an IPO, compared to
forty-three companies in the
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<PAGE>
prior year period. During the current period Comdisco realized an additional $32
million of revenues from the sale other available-for-sale securities. Prism
revenue from subscribers was approximately $3 million in the nine months ended
June 30, 2000.
Total costs and expenses for the nine months ended June 30, 2000 were $2.7
billion compared to $3.2 billion in the prior year period. The decrease is due
to the Sale and the Charge in the prior year period.
Selling, general and administrative expenses totaled $375 million in nine months
ended June 30, 2000 compared to $219 million in the prior year period. The
principal reasons for the increase in the current year period compared to the
year earlier period are an increase in bad debt expense for Comdisco Ventures
group and an increase in incentive compensation costs as a result of gains
realized on the sale of equity positions held in the Comdisco Ventures group
portfolio. The following table summarizes selling, general and administrative
expenses (in millions):
2000 1999
---- ----
Incentive compensation.............................. $101 $ 41
Other compensation and benefits..................... 102 91
Outside services.................................... 46 29
Bad debt expense Comdisco Ventures group............ 62 2
Bad debt expense Comdisco group..................... 25 9
Other expenses...................................... 39 47
---- ----
$375 $219
==== ====
On May 26, 2000, Comdisco granted non-qualified stock options for Comdisco
Ventures group stock under a management incentive plan to employees responsible
for the operations of Comdisco Ventures group and to a former employee of
Comdisco Ventures group. Of the options granted, 10,391,250 were granted at
$2.5647 per share and 1,275,000 were granted at $7.20 per share. Comdisco
measures compensation costs for these options, excluding the former employee
that resigned, using the intrinsic value based method of accounting. For the
former employee, Comdisco utilizes the fair market value for measuring
compensation costs. For options granted where the exercise price is less than
the market value as determined by an independent appraisal, and for the former
employee, is less than the fair market value as determined using an
option-pricing model, compensation expense will be recorded over the three-year
vesting period. Stock-based compensation expense, which is included in incentive
compensation for the three and nine months ended June 30, 2000, totaled $2
million. Stock-based incentive compensation to be recorded in the fourth quarter
of fiscal 2000 will be approximately $5 million. Stock-based compensation
expense for fiscal 2001, 2002 and 2003 will be approximately $16 million, $7
million and $2 million, respectively.
Interest expense for the nine months ended June 30, 2000 and 1999 totaled $259
and $253 million, respectively. Increases in interest costs resulted from higher
interest rates in the current period compared to the prior year period.
Prism expenses for the nine months ended June 30, 2000 totaled $135 million,
compared to $14 million in the year earlier period. Network and product costs
were $51 million for the nine months ended June 30, 2000. Sales, marketing,
general and administrative expenses were $46 million for the nine months ended
June 30, 2000. Depreciation and amortization was approximately $22 million for
the current period.
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<PAGE>
Financial Condition
The company's current financial resources and estimated cash flows from
operations are considered adequate to fund anticipated future growth and
operating requirements. The company utilizes a variety of financial instruments
to fund its short and long-term needs.
The company plans to continue to be active in issuing senior debt during the
remainder of fiscal 2000, primarily to support the anticipated growth of the
company's four primary business lines: technology services, global leasing,
Prism, Comdisco Ventures group, and, where appropriate, to refinance maturities
of interest-bearing liabilities.
Capital expenditures for equipment are generally financed by cash provided by
operating activities, recourse debt, or by assigning the noncancelable lease
rentals to various financial institutions at fixed interest rates on a
nonrecourse basis. Cash provided by operating activities for the nine months
ended June 30, 2000 and 1999 was $2.5 billion and $2.2 billion, respectively.
Cash provided by operations has been used to finance equipment purchases and,
accordingly, had a positive impact on the level of borrowing required to support
the company's investment in its lease portfolio. The company expects this trend
to continue, with cash flow from leasing and remarketing reinvested in the
equipment portfolio.
Risk Factors That May Affect Future Results
See "Risk Factors" included in this Report.
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<PAGE>
Comdisco Ventures Group
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read along with the Comdisco, Inc. consolidated
financial statements and Risk Factors included in this Quarterly Report on Form
10-Q. Comdisco Ventures group financial statements should be read in conjunction
with Comdisco's audited consolidated financial information contained in
Comdisco's 1999 Annual Report on form 10-K, as amended by Form 10K/A.
Historical results and percentage relationships may not necessarily be
indicative of operating results for any future periods. The financial statements
of Comdisco Ventures group include the balance sheets, statements of earnings,
cash flow and division net worth of Comdisco's venture financing businesses.
The financial statements of Comdisco Ventures group include the balance sheets,
statements of earnings and division net worth, and cash flows of our venture
financing business. These financial statements give effect to all allocation and
related party transaction policies as adopted by the board of directors of
Comdisco. Comdisco Ventures group's financial statements have been prepared in a
manner which management believes is reasonable and appropriate. These financial
statements include the financial position, results of operations and cash flows
of Comdisco Ventures group, presented to give effect to the accounting
principles applicable to Comdisco's tracking stock proposal.
Overview
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Comdisco Ventures group provides venture leases, venture debt and direct equity
financing to venture capital-backed companies. Comdisco Ventures group's
relationships with established venture capital firms help it identify what it
believes are the best-positioned companies in the most attractive high growth
industries. Comdisco Ventures group offers a broad range of equity-linked
financing products, which complement equity from venture capital firms and debt
from venture-oriented banks and asset-based lenders. Comdisco Ventures group is
a division of Comdisco.
Three months Ended June 30, 2000
Total revenue for the three months ended June 30, 2000 was $149.6 million
compared to $59.6 million in the quarter ended June 30, 1999 and $160.4 in the
quarter ended March 31, 2000; this an represented increase of 151% over the
prior quarterly period.
Net earnings for the three months ended June 30, 2000 were $32.4 million, as
compared to $13.2 million for the three months ended June 30, 1999. The
principal reasons for the increase in net earnings during the three months ended
June 30, 2000 compared to the year earlier period are the significant increases
in warrant sale proceeds and capital gains, increased interest income on notes,
and increased earnings contributions from leasing.
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Lease revenue: Total leasing revenue of $50.8 million for the quarter ended June
30, 2000 represented an increase of 63% over $31.1 million recorded for the
quarter ended June 30, 1999. Total leasing revenue was $46.9 million in the
second quarter of fiscal 2000. Cost of equipment placed on lease was $115.2
million during the quarter ended June 30, 2000, compared to $59.1 million and
$96.5 million during the quarters ended June 30, 1999 and March 31, 2000,
respectively. These increases are the result of increases in both number of
customers and average lease size.
Operating Lease Margin was $11.4 million, or 22.5%, and $7.8 million, or 25.1%
of operating lease revenue, in the three months ended June 30, 2000 and 1999,
respectively. The Operating Lease Margin was $10.9 million, or 24.2% in the
quarter ended March 31, 2000. The decrease in the Operating Lease Margin in the
current year period compared to the second quarter of fiscal 2000 is due to an
increase in the quarterly lease volume. Generally, new leases written have lower
margins in their initial quarter compared to future quarters.
Interest income: Interest income on venture debt was $14.7 million in the
quarter ended June 30, 2000 compared to $6.3 million and $12.0 million during
the quarters ended June 30, 1999 and March 31, 2000, respectively. During the
quarter ended June 30, 2000, Comdisco Ventures group funded loans totaling
$167.7 million, compared to $85.0 million and $157.8 million in the quarters
ended June 30, 1999 and March 31, 2000, respectively.
Sale of equity holdings: Revenue from the sale of equity holdings, that is
warrant sale proceeds and capital gains, for the quarters ended June 30, 2000
and 1999 and March 31, 2000 were as follows (in millions):
Three
months Three months
ended ended
June 30, March 31,
------------ ------------
2000 1999 2000
----- ----- ------------
Proceeds from the sale of equity securities.......... $25.7 $ 7.5 $57.7
Less: cost of equity securities...................... (5.1) (2.9) (5.6)
----- ----- -----
Capital gains........................................ 20.6 4.6 52.1
Warrant sale proceeds................................ 59.7 15.4 46.4
----- ----- -----
Total................................................ $80.3 $20.0 $98.5
===== ===== =====
During the quarter ended June 30, 2000, Comdisco Ventures group funded equity
financings totaling $40.1 million, compared to $12.0 million and $81.6 million
in the quarters ended June 30, 1999 and March 31, 2000, respectively.
The increase in revenue from the sale of equity holdings in the current quarter
compared to the prior year period is due to an increase in the number of
companies in which Comdisco Ventures group has equity holdings that have
experienced liquidity events, which impacts the number of securities available-
for-sale. Market valuations from an initial public offering can also
significantly affect the revenue from the sale of equity investments. Comdisco
Venture group's general policy has been to sell its equity positions in an
orderly manner as soon as reasonably possible after a liquidity event. This
general policy allows Comdisco Ventures group to generate cash for reinvestment
in new transactions; Comdisco Ventures group believes it is preferable to make
new advances to start-ups rather than hold the securities of public companies.
The valuation of Comdisco Ventures group's warrant and other public equity
holdings has increased significantly during the twelve months ended June 30,
2000, primarily as a result of strong equity markets for those securities.
Accordingly, Comdisco Ventures group expects, based on current stock market
valuations, an increase in revenue and earnings contributions from its equity
holdings in the
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remainder of fiscal 2000. See "Risk Factors," beginning on page 31 for a
discussion of the factors that may affect proceeds from the sale of warrants and
capital gains.
Total costs and expenses for the quarter ended June 30, 2000 were $95.7 million
compared to $37.6 million in the prior year period. Total costs and expenses
were $97.6 million in the quarter ended March 31, 2000. The increase in total
costs and expenses in the current quarter compared to the prior year's quarter
and the second quarter of fiscal 2000 is due to the increase in venture lease
and venture debt activities, and higher selling, general and administrative
expenses related to increased personnel costs and higher incentive compensation.
Selling, general and administrative: Selling, general and administrative
expenses totaled $21.5 million in the quarter ended June 30, 2000 compared to
$5.7 million in the quarter ended June 30, 1999 and $23.5 million in the quarter
ended March 31, 2000. The principal reason for the increase in the current year
quarter compared to the year earlier period is an increase in incentive
compensation expenses as a result of higher revenue from the sale of equity
holdings.
On May 26, 2000, Comdisco granted non-qualified stock options for Comdisco
Ventures group stock under a management incentive plan to employees responsible
for the operations of Comdisco Ventures group and to a former employee of
Comdisco Ventures group. Of the options granted, 10,391,250 were granted at
$2.5647 per share and 1,275,000 were granted at $7.20 per share. Comdisco
measures compensation costs for these options, excluding the former employee
that resigned, using the intrinsic value based method of accounting. For the
former employee that resigned, Comdisco utilizes the fair market value for
measuring compensation costs. For options granted where the exercise price is
less than the market value as determined by an independent appraisal, and for
the former employee that resigned, is less than the fair market value as
determined using an option-pricing model, compensation expense will be recorded
over the three-year vesting period. Stock-based compensation expense, which is
included in incentive compensation for the three and nine months ended June 30,
2000, totaled $2 million. Stock-based incentive compensation to be recorded in
the fourth quarter of fiscal 2000 will be approximately $5 million. Stock-based
compensation expense for fiscal 2001, 2002 and 2003 will be approximately $16
million, $7 million and $2 million, respectively.
Interest: Interest expense for the three months ended June 30, 2000 was $17.4
million compared to $6.6 million in the prior year period and $13.1 million in
the quarter ended March 31, 2000. The increase in the current quarter compared
to the prior year period and prior quarter is due to higher average daily
inter-group borrowings resulting from the growth in Comdisco Ventures group's
business.
Bad debt expense: Bad debt expense for the three months ended June 30, 2000
totaled $16.0 million compared to $0.8 million in the quarter ended June 30,
1999 and $24.0 million in the quarter ended March 31, 2000. The increase in the
current quarter compared to the prior year period reflects the increase in the
reserve related to increased growth in venture lease, venture debt and direct
equity financing volumes.
Income taxes: The effective income tax rate was 40% in the quarter ended June
30, 2000 compared to 40% and 41% in the quarters ended June 30, 1999 and March
31, 2000, respectively. The effective income tax rate approximates the statutory
rate.
Nine Months Ended June 30, 2000
Total revenue was $451.3 million and $137.8 million for the nine months ended
June 30, 2000 and 1999, respectively.
Net earnings for the nine months ended June 30, 2000 were $106.8 million, as
compared to $27.9 million in the year earlier period.
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Lease revenue: Total leasing revenue of $135.7 million for the nine months ended
June 30, 2000 represented an increase of 62% over $83.7 million recorded in the
year earlier period. Cost of equipment placed on lease for the nine months ended
June 30, 2000 and 1999 was $291 million and $147 million, respectively.
Operating lease revenue minus operating lease cost was $31.9 million, or 23.9%
and $20.6 million, or 24.9% of operating lease revenue, in the nine months ended
June 30, 2000 and 1999, respectively.
Interest income: Interest income on venture debt was $38.5 million for the nine
months ended June 30, 2000 as compared to $12.8 million for the year earlier
period. During the nine months ended June 30, 2000 and 1999, Comdisco Ventures
group funded loans totaling $454.1 million and $225.0 million, respectively.
Sale of equity holdings: Revenue from the sale of equity holdings, that is
warrant sale proceeds and capital gains, for the nine ended June 30, 2000 and
1999 were as follows (in millions):
Nine months
ended
June 30,
-------------
2000 1999
------ -----
Proceeds from the sale of equity securities...................... $139.3 $ 7.5
Less: cost of equity securities.................................. (14.1) (2.9)
------ -----
Capital gains.................................................... 125.2 4.6
Warrant sale proceeds............................................ 142.4 32.4
------ -----
Total............................................................ $267.6 $37.0
====== =====
During the nine months ended June 30, 2000 and 1999, Comdisco Ventures group
funded equity financings totaling $112.3 million and $20.3 million,
respectively.
The increase in revenue from the sale of equity holdings in the current period
compared to the prior year period is due to an increase in the number of
companies in which Comdisco Ventures group has equity holdings that have
experienced liquidity events, which impacts the number of securities available-
for-sale. Market valuations from an initial public offering can also
significantly affect the revenue from the sale of equity investments. During the
nine months ended June 30, 2000, approximately eighty-four companies were
acquired/merged or completed an initial public offering, compared to forty-
three companies in the year earlier period.
The valuation of Comdisco Ventures group's warrant and other public equity
holdings has increased significantly during the twelve months ended June 30,
2000, primarily as a result of strong equity markets for those securities.
Accordingly, Comdisco Ventures group expects, based on current stock market
valuations, an increase in revenue and earnings contributions from its equity
holdings in the remainder of fiscal 2000. See "Risk Factors," beginning on page
31 for a discussion of the factors that may affect proceeds from the sale of
warrants and capital gains.
Total costs and expenses for the nine months ended June 30, 2000 were $273.7
million compared to $91.3 million in the prior year period. The increase in
total costs and expenses reflects the growth in business activities.
Selling, general and administrative: Selling, general and administrative
expenses totaled $63.4 million during the first nine months of fiscal 2000
compared to $8.8 million in the prior year period. The increase is due to higher
incentive compensation costs, which totaled $52.1 million in the nine months
ended June 30, 2000 compared to $4.8 million in the year earlier period.
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Interest expense: Interest expense for the nine months ended June 30, 2000 was
$41.3 million compared to $15.2 million in the prior year period. The increase
is primarily due to higher inter-group borrowings.
Bad debt expense: Bad debt expense for the nine months ended June 30, 2000
totaled $61.8 million compared to $2.4 million for the prior year period. The
increase reflects the growth in business volume.
Income taxes: The effective income tax rate was 40% during the nine months ended
June 30, 2000 and 1999. The effective income tax rate approximates the statutory
rate.
Liquidity and Capital Resources
The board of directors of Comdisco, Inc. and its capital stock committee each
has a wide degree of discretion over the cash management policies of both the
Comdisco Ventures group and the Comdisco group, consistent with their respective
fiduciary duties to Comdisco, Inc. as a whole. Pursuant to this discretion,
these entities may freely transfer cash generated by the Comdisco Ventures group
to the Comdisco group and vice versa, as well as determine the allocation of
proceeds from future issuances of Comdisco Ventures group stock. In addition,
the timing and decision to finance capital expenditures of the Comdisco Ventures
group remains at the discretion of the board of directors of Comdisco, Inc.
Pursuant to the policy statement, the board of directors and senior management
of Comdisco, Inc. have the authority to determine the uses of the net proceeds
allocated to the Comdisco Ventures group. This policy statement is subject to
change at the discretion of the board of directors of Comdisco, Inc. This
flexibility could potentially make it difficult to assess the Comdisco Ventures
group's liquidity and capital resource needs, and in turn, the future prospects
of Comdisco Ventures group based on its past performance.
While Comdisco has been the primary source of funds for Comdisco Ventures group,
Comdisco has no obligation to provide funds to Comdisco Ventures group in the
future and has made no formal commitments about its ability or willingness to
continue to provide funds beyond fiscal year 2000. There can be no assurance
that any limited partnerships formed by Comdisco Ventures group in the future
will be funded at levels that will permit Comdisco Ventures group to effectively
pursue its business strategy. If Comdisco Ventures group were otherwise unable
to obtain funding, from Comdisco or otherwise, on acceptable terms, Comdisco
Ventures group's ability to fund its expansion or respond to competitive
pressures would be significantly impaired.
Comdisco Ventures group's operating activities during the first nine months of
fiscal 2000 and 1999, including capital expenditures for equipment and venture
debt originations, were funded primarily by cash flow from operations and
inter-group loans from Comdisco. Total net cash provided by Comdisco was $321.4
million in the first nine months of fiscal 2000, compared to $244.9 million in
the prior year period. The increase in the first nine months of fiscal 2000
compared to the prior year period, is primarily due to increased business
opportunities in venture leases, venture debt and direct equity financings. In
order to continue to be able to pursue these increased opportunities, Comdisco
Ventures group is pursuing alternative means of funding its activities,
including, but not limited to, the establishment of limited partnerships to
raise funds from third parties, in addition to Comdisco Ventures group.
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Comdisco Ventures group's capital requirements may vary based upon the timing
and the success of implementation of its business plan and as a result of
competitive developments or if:
. demand for Comdisco Ventures group's services or its cash flow
from operations is less than or more than expected;
. development plans or projections change or prove to be inaccurate;
. Comdisco Ventures group makes any acquisitions or commitments in
excess of the current plan; or
. Comdisco Ventures group accelerates or otherwise alters the
schedule or targets of its business plan implementation.
Risk Factors That May Affect Future Results
See "Risk Factors" included in this Report.
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RISK FACTORS
This Report contains forward-looking statements that involve risks and
uncertainties. 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 below. 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.
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 Comdisco
Ventures, remarketing activities and services, product announcements by
manufacturers, economic conditions and variations in the financial mix of leases
written, and continued losses from Prism. 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. Comdisco Ventures group's earnings contributions are
impacted by volatility in the public markets.
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.
THE COMPANY'S SUCCESS DEPENDS IN PART ON ANTICIPATING AND ADAPTING TO NEW
TECHNOLOGICAL DEVELOPMENTS AND CHANGING MARKET CONDITIONS
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.
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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 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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Comdisco, Inc.'s business is becoming more service oriented, with the business
driven by our service offerings. These transactions, which generally include a
combination of services and leasing, are more complex than Comdisco, Inc.'s
traditional leasing business. In addition, because these service offerings
represent new services, Comdisco, Inc. has to spend more time explaining the
value of these services to the customer. Accordingly, one impact of Comdisco,
Inc.'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 our 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 GROUP 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 Comdisco Ventures
group 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 Comdisco Ventures group has effected transactions are
not successful or the markets become unfavorable, Comdisco Ventures group's
customers may not be able to complete securities offering and Comdisco Ventures
group 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
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publicly traded, the realizable value of Comdisco Ventures group's interests may
ultimately prove to be lower than the carrying value currently reflected in the
consolidated and the separate Comdisco Ventures group's financial statements.
In the past Comdisco Ventures group financed its operations with cash flow from
operations and inter-group loans from Comdisco. Comdisco Ventures group may 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.
Comdisco Ventures group depends on certain important employees and the loss of
those employees could harm and disrupt Comdisco Ventures group's business.
THE COMPANY'S PRISM SUBSIDIARY HAS AN AGGRESSIVE BUSINESS PLAN IN A NEW AND
UNPROVEN INDUSTRY.
Prism has incurred operating losses since inception and the company expects that
Prism's operating losses will continue to increase as it introduces and builds
its network and adds service to other areas. 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 its existing and planned services to
current and new customers;
o its ability to generate customer demand for its 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 to introduce new service
offerings 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 reliance on third parties, including some of its competitors and potential
competitors to develop and provide Prism with access to communications and
networking technology;
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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 andwillingness 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; 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 other potential
strategic partners; 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.
Recently, Prism determined to focus its network expansion efforts in ten markets
for the near term. Also, Comdisco has announced its intention to review
strategic alternatives for its investment in Prism. The implementation of these
decisions could significantly affect Prism's business, results of operations and
financial condition and could also have an impact on Comdisco's results of
operations and financial condition.
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 and price competition from other technology service providers.
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Due to all of the foregoing factors, in some future quarter the company's
operating results may fall below the expectations of securities analysts and
investors. In such an event, the trading price of the company's common stock
would likely be materially and adversely affected.
The company undertakes no obligation to publicly update or revise any
forward-looking statements whether as a result of new information, further
events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the company's market risk during the
three months ended June 30, 2000. For additional information, refer to page 33
of the company's Annual Report to Stockholders for the fiscal year ended
September 30, 1999.
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds.
On May 4, 2000, the company filed its amended and restated charter to implement
a tracking stock structure that was approved by the company's stockholders on
April 20, 2000. As a result, two new series of stock were created: "Comdisco
group stock" and "Comdisco Ventures group stock." Comdisco Ventures group stock
is intended to separately track the performance of the company's venture
financing business, which the company refers to as "Comdisco Ventures group" and
Comdisco group stock separately tracks the performance of the remaining business
of the company, which the company refers to as "Comdisco group," and the shares
of Comdisco Ventures group stock reserved for issuance for the benefit of
Comdisco group or to the holders of Comdisco group stock. A description of the
rights of the holders of Comdisco group stock and Comdisco Ventures group stock
is included at pages 12 through 20 and pages 46 through 62 of the Company's
Proxy Statement on Schedule 14A, dated March 20, 2000, as filed with the
Commission on March 20, 2000, and is incorporated herein by reference.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Exhibit
3.01 Amended and Restated Certificate of Incorporation of
Registrant filed with the Secretary of State of Delaware
on May 4, 2000
Incorporated by reference to Exhibit 4.1 filed
with the Company's Form 10-Q for the Quarterly
Period ended March 31, 2000, as filed with the
Commission May 14, 2000, File No. 1-7725.
3.02 By-Laws of Registrant dated November 4, 1997
Incorporated by reference to Exhibit 3.1 filed
with the company's Current Report on Form 8-K
dated November 12, 1997, as filed with the
Commission November 14, 1997 File No. 1-7725.
4.01 Indenture Agreement between Registrant and Citibank,
N.A., as Trustee dated as of June 15, 1992
Incorporated by reference to Exhibit 4.1 filed
with the company's Current Report on Form 8-K
dated September 1, 1992, as filed with the
Commission on September 2, 1992, File No. 1-7725,
the copy of Indenture, dated as of June 15, 1992,
between Registrant and Citibank, N.A., as Trustee
(said Indenture defines certain rights of
security holders).
4.02 Indenture Agreement between Registrant and Chemical
Bank, N.A., as Trustee, dated as of April 1, 1988
Incorporated by reference to Exhibit 4.5 filed
with the company's Form 8 dated February 21,
1991, File No. 1-7725, the copy of Indenture
dated as of April 1, 1988, between Registrant and
Manufacturers Hanover Trust Company (said
Indenture defines certain rights of security
holders).
4.03 First Supplemental Indenture between Registrant and
Chemical Bank, N.A., as Trustee, dated as of
January 1, 1990
Incorporated by reference to Exhibit 4.8 filed
with the company's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1990, File No.
1-7725, the copy of the First Supplemental
Indenture dated as of January 1, 1990, between
Registrant and Manufacturers Hanover Trust
Company, as Trustee (said Indenture defines
certain rights of security holders).
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Exhibit No. Description of Exhibit
4.04 Amended and Restated Rights Agreement, dated as of
May 4,2000, between the Registrant and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, which
includes Designations, Preferences and Rights of Series C
Junior Participating Preferred Stock and Series D
Junior Participating Preferred Stock and the Form of
Rights Certificates
Incorporated by reference to Exhibit 4.1 filed
with the company's Current Report on Form 8-K
dated May 4, 2000, as filed with the
Commission June 14, 2000 File No. 1-7725.
4.05 Indenture Agreement between Registrant and The Fuji
Bank and Trust Company, as Trustee, dated as of
February 1, 1995
Incorporated by reference to Exhibit 4.1 filed
with the company's Current Report on Form 8-K
dated May 15, 1995, as filed with the Commission
on May 15, 1995, File No. 1-7725, the copy of the
Indenture dated as of February 1, 1995 between
the Registrant and The Fuji Bank and Trust
Company, as Trustee (said Indenture defines
certain rights of security holders).
4.06 Indenture Agreement between Registrant and Yasuda
Bank and Trust Company (U.S.A.), as Trustee, dated
as of December 1, 1995
Incorporated by reference to Exhibit 4.1 filed
with the company's Current Report on Form 8-K
dated January 12, 1996, as filed with the
Commission on January 17, 1996, File No. 1-7725,
the copy of the Indenture dated as of December 1,
1995 between the Registrant and Yasuda Bank and
Trust Company (U.S.A), as Trustee (said Indenture
defines certain rights of security holders).
4.07 Indenture Agreement between Registrant and The Fuji
Bank and Trust Company, as Trustee, dated as of
December 15, 1998
Incorporated by reference to Exhibit 4.1 filed
with the company's Current Report on Form 8-K
dated January 19, 1999, as filed with the
Commission on January 20, 1999, File No. 1-7725,
the copy of the Indenture dated as of December
15, 1998 between the Registrant and The Fuji Bank
and Trust Company, as Trustee (said Indenture
defines certain rights of security holders).
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4.08 Indenture Agreement between Registrant and SunTrust Bank,
as Trustee, dated as of September 15, 1999
Incorporated by reference to Exhibit 4.1
filed with the company's Form 8-K dated
February 29, 2000, the copy of the Indenture
dated as of September 15, 1999 between the
Registrant and SunTrust Bank, as Trustee
(said Indenture defines certain rights of
security holders).
4.09 Description of the Rights of Holders of Comdisco Stock
and Comdisco Ventures Group Stock.
Incorporated by reference to pages 12 through 20
and pages 46 through 62 of the Company's Proxy
Statement on Schedule 14A, dated March 20, 2000,
as filed with the Commission March 20, 2000,
File No. 1-7725.
11.00 Computation of Earnings Per Share
12.00 Ratio of Earnings to Fixed Charges
27.00 Financial Data Schedule
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b) Reports on Form 8-K:
On June 13, 2000, the company filed a current report on Form
8-K, dated May 4, 2000 reporting Item 5. Other Events and Item
7. Financial Statements, Pro Forma Financial Information and
Exhibits. The filing contained exhibits relating to the
company's amended and restated rights agreement.
On July 27, 2000, the company filed a current report on Form
8-K, dated July 26, 2000 reporting Item 5. Other Events. The
filing contained exhibits relating to the company's earnings
for the three and nine months ended June 30, 2000 and 1999.
On August 10, 2000, the company filed a current report on Form
8-K, dated August 3, 2000, reporting Item 7. Financial
Statements, Pro Forma Financial Information and Exhibits. The
filing contained exhibits relating to the company's 9.5% Senior
Notes Due August 15, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMDISCO, INC.
Registrant
Date: October 12, 2000 /s/ David J. Keenan
-------------------
David J. Keenan
Senior Vice President and
Corporate Controller
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