-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BL6y9E+DyZPuuVonq7vzDHc0gEwrSJK9FrqX9jZ1/5ln7Cp1k9qNXvemvGJUP9Qm EBP8FjQobPftImJsJ0yd3Q== /in/edgar/work/20000814/0000722487-00-000027/0000722487-00-000027.txt : 20000921 0000722487-00-000027.hdr.sgml : 20000921 ACCESSION NUMBER: 0000722487-00-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMDISCO INC CENTRAL INDEX KEY: 0000722487 STANDARD INDUSTRIAL CLASSIFICATION: [7377 ] IRS NUMBER: 362687938 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07725 FILM NUMBER: 698862 BUSINESS ADDRESS: STREET 1: 6111 N RIVER RD CITY: ROSEMONT STATE: IL ZIP: 60018 BUSINESS PHONE: 8476983000 MAIL ADDRESS: STREET 1: 6111 NOTH RIVER ROAD CITY: ROSEMONT STATE: IL ZIP: 60018 10-Q 1 0001.txt QUARTERLY REPORT ON FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------- FORM 10-Q ----------------------------------- [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 Stock, New York Stock Exchange 152,178,205 $.10 par value Chicago Stock Exchange Comdisco Ventures 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 . -1- Comdisco, Inc. and Subsidiaries
INDEX Page ---- PART I. FINANCIAL INFORMATION 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 financial statements. Holders of Comdisco Stock and holders of Comdisco Ventures 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............................................5 Consolidated Balance Sheets -- June 30, 2000 (Unaudited) and September 30, 1999..............................................6 Consolidated Statements of Cash Flows (Unaudited) -- Nine Months Ended June 30, 2000 and 1999......................................................7 Notes to Consolidated Financial Statements (Unaudited).........................................9 Comdisco Group The combined financial statements of Comdisco Group comprise the combined financial position, results of operations and cash flows of the businesses that comprise Comdisco Inc.'s technology services, global leasing, and Prism Communication Services, as well as its retained interest in Comdisco Ventures, Comdisco Inc.'s venture financing business. Accordingly, the Comdisco Group financials are supplemental financial statements and should be read in conjunction with the Comdisco, Inc. consolidated financial statements and the Comdisco Ventures financial statements. Combined Statements of Earnings (Unaudited) -- Three and Nine Months Ended June 30, 2000 and 1999...........................................18 Combined Balance Sheets -- June 30, 2000 (Unaudited) and September 30, 1999.............................................19 Combined Statements of Cash Flows (Unaudited) -- Nine Months Ended June 30, 2000 and 1999.....................................................20 Notes to Combined Financial Statements (Unaudited)............................................22 Comdisco Ventures The financial statements of Comdisco Ventures comprise the combined financial position, results of operations and cash flows of Comdisco Inc.'s venture financing business. Accordingly, the Comdisco Ventures financials are supplemental financial statements and should be read in conjunction with the Comdisco, Inc. consolidated financial statements and the Comdisco Group combined financial statements.
-2- Comdisco, Inc. and Subsidiaries
INDEX (CONTINUED). Page ---- Statements of Earnings and Division Net Worth (Unaudited) -- Three and Nine Months Ended June 30, 2000 and 1999...........................................30 Balance Sheets -- June 30, 2000 (Unaudited) and September 30, 1999.............................................31 Statements of Cash Flows (Unaudited) -- Nine Months Ended June 30, 2000 and 1999.....................................................32 Notes to Financial Statements (Unaudited).....................................................34 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Comdisco, Inc. ...............................................................................38 Comdisco Group................................................................................47 Comdisco Ventures.............................................................................55 Risk Factors..................................................................................59 Item 3. Quantitative and Qualitative Disclosures about Market Risk.....................................64 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds......................................................64 Item 6. Exhibits and Reports on Form 8-K...............................................................65 SIGNATURES.............................................................................................69
-3- 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. -4- Comdisco, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED) (in millions except per share data)
Three Months Ended Nine Months Ended June 30, June 30, --------- --------- --------- --------- 2000 1999 2000 1999 --------- --------- --------- --------- 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
-5- Comdisco, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in millions except number of shares)
June 30, September 30, 2000 1999 ----------- --------- (unaudited) (audited) 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 ======= =======
See accompanying notes to consolidated financial statements. -6- Comdisco, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in millions) For the Nine Months Ended June 30, 2000 and 1999
2000 1999 ------- ------- 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 ======= =======
-7- 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. -8- 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 Stock" and "Comdisco Ventures Stock." Comdisco Venture Stock is intended to separately track the performance of the company's venture financing business, which the company refers to as "Comdisco Ventures" and Comdisco Stock separately tracks the performance of the remaining business of the company, which the company refers to as "Comdisco Group," and a retained interest in Comdisco Ventures. 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. -9- 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 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. -10- 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 ==== ==== -11- 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. 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 -12- 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. -13- Other comprehensive earnings (loss) consists of the following (in millions):
Three months ended Nine months ended June 30, June 30, 2000 1999 2000 1999 ---------- ---------- -------- --------- 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 ========== ========== ======== =========
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):
Unrealized Foreign gain on Accumulated currency available- other translation for-sale comprehensive adjustment securities income ----------- ---------- -------------- Balance at beginning of period........ $ (34) $ 92 $ 58 Current-period change ................ (39) 143 104 ----------- --------- ------------- Balance at end of period ............. $ (73) $ 235 $ 162 =========== ========= =============
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. -14- 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):
Three months ended June 30, 2000 Leasing Services Prism Ventures Total - ------------------ ---------- ----------- ---------- ----------- ---------- 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 -15- Three months ended June 30,1999 Leasing Services Prism Ventures 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 Nine months ended June 30, 2000 Leasing Services Prism Ventures 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 Nine months ended June 30, 1999 Leasing Services Prism Ventures 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
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 Ventures............. 1,691 872 ----- ----- Total................ $ 8,551 $ 7,807 ====== ===== -16- 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 ====== ===== -17- COMDISCO GROUP COMBINED STATEMENTS OF EARNINGS (UNAUDITED) (in millions)
Three Months Ended Nine Months Ended June 30, June 30, --------- --------- --------- --------- 2000 1999 2000 1999 --------- --------- --------- --------- Revenue Leasing Operating .............................................$ 363 $ 412 $ 1,154 $ 1,397 Direct financing ...................................... 44 40 130 120 Sales-type ............................................ 75 91 279 442 ------- ------- ------- ------- Total leasing ...................................... 482 543 1,563 1,959 Sales ...................................................... 139 563 300 686 Technology services ........................................ 173 133 476 376 Other ...................................................... 9 3 53 16 ------- ------- ------- ------- Total revenue ...................................... 803 1,242 2,392 3,037 ------- ------- ------- ------- Costs and expenses Leasing Operating ............................................. 293 335 937 1,133 Sales-type ............................................ 50 53 210 337 ------- ------- ------- ------- Total leasing ...................................... 343 388 1,147 1,470 Sales ...................................................... 113 552 239 660 Technology services ........................................ 161 112 424 317 Selling, general and administrative ........................ 78 70 250 206 Interest ................................................... 71 75 218 238 Prism Communication Services ............................... 65 11 135 14 Other ...................................................... -- -- -- 150 ------- ------- ------- ------- Total costs and expenses .............................. 831 1,208 2,413 3,055 ------- ------- ------- ------- Earnings (loss) before income (taxes) benefit and retained interest in Comdisco Ventures ............... (28) 34 (21) (18) Income (taxes) benefit ..................................... 13 (11) 15 8 ------- ------- ------- ------- Earnings (loss) before retained interest in Comdisco Ventures ............................. (15) 23 (6) (10) Net earnings of Comdisco Ventures .......................... 32 13 107 28 ------- ------- ------- ------- Net earnings ...............................................$ 17 $ 36 $ 101 $ 18 ======= ======= ======= =======
See accompanying notes to combined financial statements. Explanatory Note: Earnings per share is not presented because Comdisco Group is 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. -18- Comdisco Group COMBINED BALANCE SHEETS (in millions)
June September 30, 30, 2000 1999 --------- --------- unaudited) (audited) ASSETS Cash and cash equivalents ...................... $ 225 $ 361 Cash - legally restricted ...................... 40 46 Receivables, net ............................... 410 355 Inter-group receivables ........................ 1,033 559 Inventory of equipment ......................... 127 113 Leased assets: Direct financing and sales-type .............. 2,169 2,102 Operating (net of accumulated depreciation) .. 2,871 3,233 ------- ------- Net leased assets ........................... 5,040 5,335 Property, plant and equipment, net .............. 462 228 Retained interest in Comdisco Ventures........... 439 200 Other assets .................................... 556 497 ------- ------- $ 8,332 $ 7,694 ======= ======= LIABILITIES AND DIVISION NET WORTH Notes payable.................................... $ 1,502 $ 820 Term notes payable .............................. 641 550 Senior notes .................................... 3,384 3,686 Accounts payable ................................ 153 262 Income taxes .................................... 288 310 Other liabilities ............................... 594 491 Discounted lease rentals ........................ 526 515 ------- ------- 7,088 6,634 ------- ------- Division net worth: Accumulated other comprehensive income ......... 162 58 Division equity................................. 1,082 1,002 ------- ------- Division net worth............................. 1,244 1,060 ------- ------- $ 8,332 $ 7,694 ======= =======
See accompanying notes to combined financial statements. -19- Comdisco Group COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (in millions) For the Nine Months Ended June 30, 2000 and 1999
2000 1999 ------- ------- Cash flows from operating activities: Operating lease and other leasing receipts ............... $ 1,296 $ 1,450 Direct financing and sales-type leasing receipts ......... 818 722 Leasing costs, primarily rentals paid .................... (9) (14) Sales .................................................... 401 442 Sales costs .............................................. (106) (110) Technology services receipts ............................. 445 357 Technology services costs ................................ (353) (271) Note receivable receipts ................................. 3 -- Other revenue (expense) .................................. 41 (16) Selling, general and administrative expenses ............. (257) (214) Loss on Prism Communication Services ..................... (100) (27) Interest ................................................. (231) (254) Income taxes ............................................. (33) (1) ------- ------- Net cash provided by operating activities .............. 1,915 2,064 ------- ------- Cash flows from investing activities: Equipment purchased for leasing .......................... (1,667) (1,980) Investment in continuity and network service facilities .. (197) (103) Notes receivable ......................................... (5) -- Acquisition and investment in Prism Communication Services (221) (65) Other investing activities ............................... (53) -- ------- ------- Net cash used in investing activities .................. (2,143) (2,148) ------- ------- 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) Increase in inter-group receivable ....................... (322) (245) 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 .............. 92 60 ------- ------- Net decrease in cash and cash equivalents ................... (136) (24) Cash and cash equivalents at beginning of period ............ 361 63 ------- ------- Cash and cash equivalents at end of period .................. $ 225 $ 39 ======= =======
-20- Comdisco Group COMBINED 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 ............... 1,139 1,455 Leasing revenue, primarily principal portion of direct financing and sales-type lease rentals 688 195 Cost of sales ................................. 133 581 Sales revenue ................................. -- (306) Technology services costs, primarily depreciation and amortization .............. 90 46 Prism depreciation ............................ 22 2 Earnings from retained interest in Comdisco Ventures .................................... (107) (28) Interest ...................................... (14) (15) Income tax benefit............................. (48) (10) Other expenses ................................ -- 150 Other - net ................................... (89) (24) ------- ------- Net cash provided by operating activities .. $ 1,915 $ 2,064 ======= ======= See accompanying notes to combined financial statements. -21- Comdisco Group NOTES TO COMBINED 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 adjustments) considered necessary for a fair presentation have been included. See Note 7 of Notes to Combined 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. 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 Stock" and "Comdisco Ventures Stock." Comdisco Venture Stock is intended to separately track the performance of the company's venture financing business, which the company refers to as "Comdisco Ventures" and Comdisco Stock separately tracks the performance of the remaining business of the company, which the company refers to as "Comdisco Group," and a retained interest in Comdisco Ventures. 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. Notwithstanding these financial reporting allocations, holders of Comdisco Ventures Stock and holders of Comdisco 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 the 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. 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. -22- 2. Receivables Receivables include the following as of June 30, 2000 and September 30, 1999 (in millions): June September 30, 30, 2000 1999 ----- ----- Notes........................... $ 14 $ 11 Accounts........................ 369 289 Income taxes.................... 6 6 Other........................... 48 76 ----- ----- Total receivables............... 437 382 Allowance for credit losses..... (27) (27) ----- ----- Balance at end of period........ $ 410 $ 355 ===== ===== Changes in the allowance for credit losses for the nine months ended June 30, 2000 and 1999 were as follows (in millions): June June 30, 30, 2000 1999 ----- ----- Balance at beginning of period $ 27 $ 17 Provision for credit losses 25 10 Net credit losses (25) (5) ----- ----- Balance at end of period $ 27 $ 22 ===== ===== 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. 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. -23- Property, plant and equipment consist of the following assets at June 30, 2000 and September 30, 1999 (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 ............ 78 57 ---- ---- Total property, plant and equipment, net $462 $228 ==== ==== 4. 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 six months ended June 30, 2000 were approximately $4.7 billion, with a related weighted average interest -24- rate of 6.20%. This compares to average daily borrowings during the first nine months of fiscal 1999 of approximately $5.2 billion, with a related weighted average interest rate of 6.19%. 5. 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 ("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. 6. 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. -25- Other comprehensive earnings (loss) consists of the following:
Three months ended Nine months ended June 30, June 30, 2000 1999 2000 1999 ---------- ---------- -------- --------- Foreign currency translation adjustments........ $ (7) $ (10) $ (39) $ (35) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during the period............................ 9 13 27 (24) Reclassification adjustment for (gains)losses included in earnings before income taxes (benefit)....................... (3) 5 (32) 5 ---------- ---------- -------- --------- Net unrealized gains (losses), before income taxes (benefit)....................... 6 18 (5) (19) Income taxes (benefit).......................... -- 6 15 (10) ---------- ---------- -------- --------- Net unrealized gains (losses)................... 6 12 10 (9) ---------- ---------- -------- --------- Other comprehensive income (loss)............... (1) 2 (29) (44) Appreciation (depreciation) in equity of retained interest in Comdisco Ventures ...... (26) 10 133 44 Net earnings.................................... 17 36 101 18 ---------- ---------- -------- --------- Total comprehensive income (loss)............... $ (10) $ 48 $ 205 $ 18 ========== ========== ======== =========
Accumulated other comprehensive income presented below and in the accompanying balance sheets consists of the accumulated net unrealized loss on foreign currency translation adjustments, the accumulated net unrealized gain on available-for-sale securities and the appreciation in equity of retained interest in Comdisco Ventures (in millions):
Appreciation Unrealized in equity Foreign gain on of retained Accumulated currency available- interest in other translation for-sale Comdisco comprehensive adjustment securities Ventures income ------------ ----------- ----------- ------------- Balance at beginning of period............... $ (34) $ 6 $ 86 $ 58 Current-period change........................ (39) 10 133 104 ----------- ----------- ----------- ------------- Balance at end of period..................... $ (73) $ 16 $ 219 $ 162 =========== =========== =========== =============
7. Acquisition and Sale 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. -26- The Prism acquisition has been accounted for by the purchase method of accounting and, accordingly, the results of operations of Prism from the period February 28, 1999 are included in the accompanying consolidated financial statements. Assets acquired and liabilities assumed have been recorded at their estimated fair values, and are subject to adjustment when additional information concerning asset and liability valuations is finalized. The excess of cost over the estimated fair value of net assets acquired was approximately $61 million and has been recorded as goodwill, which is being amortized on a straight-line basis over 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. 8. 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):
Three months ended June 30, 2000 Leasing Services Prism Total - ------------------ ---------- ----------- ---------- ----------- Revenues........................ $ 629 $ 173 $ 1 $ 803 Segment profit (loss)........... 24 12 (64) (28) Capital expenditures............ 448 22 54 524 Depreciation and amortization... 350 56 13 419 -27- Three months ended June 30,1999 Leasing Services Prism Total - ------------------ ---------- ----------- ---------- ----------- Revenues........................ $ 1,109 $ 133 $ - $ 1,242 Segment profit (loss)........... 24 21 (11) 34 Capital expenditures............ 555 61 20 636 Depreciation and amortization... 382 26 2 410 Nine months ended June 30, 2000 Leasing Services Prism Total - ------------------ ---------- ----------- ---------- ----------- Revenues......................... $ 1,913 $ 476 $ 3 $ 2,392 Segment profit (loss)............ 60 52 (133) (21) Capital expenditures............. 1,725 197 221 2,143 Depreciation and amortization.... 1,139 90 22 1,251 Nine months ended June 30, 1999 Leasing Services Prism Total - ------------------ ---------- ----------- ---------- ----------- Revenues......................... $ 2,661 $ 376 $ -- $ 3,037 Segment profit (loss)............ (33) 29 (14) (18) Capital expenditures............. 1,980 103 65 2,148 Depreciation and amortization.... 1,455 46 2 1,503
The following table presents total assets for each of the company's reportable segments (in millions): June September 30, 30, 2000 1999 ----------- ------------ Leasing .................................... $6,890 $6,891 Services ................................... 644 479 Prism ...................................... 359 124 Retained interest in Comdisco Ventures ....................... 439 200 ------ ------ Total ...................................... $8,332 $7,694 ====== ====== -28- 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 .............. $ 593 $1,074 $1,791 $2,305 Europe ..................... 169 144 494 479 Pacific Rim ................ 41 24 107 253 ------ ------ ------ ------ Total ...................... $ 803 $1,242 $2,392 $3,037 ====== ====== ====== ====== The following table presents total assets by geographic location based on the location of the asset. The retained interest in Comdisco Ventures is included in the North America amounts (in millions). June September 30, 30, 2000 1999 ------ ------ North America ............................ $6,756 $6,159 Europe ................................... 1,006 1,029 Pacific Rim .............................. 570 506 ------ ------ Total .................................... $8,332 $7,694 ====== ====== -29- Comdisco Ventures STATEMENTS OF EARNINGS AND DIVISION NET WORTH (in thousands)
Three Months Ended Nine Months Ended June 30, June 30, ---------------------- --------------------- 2000 1999 2000 1999 --------- --------- --------- --------- 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.
Explanatory Note: Earnings per share is not presented because Comdisco Ventures 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. -30- Comdisco Ventures 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 Division equity ..................................... 220,687 113,904 ---------- ---------- Total division net worth ........................... 439,090 199,649 ---------- ---------- $ 1,691,373 $ 871,852 ========== ========== See accompanying notes to financial statements. -31- Comdisco Ventures 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 .......................... (112,776) (20,326) Issuance of promissory notes ................ (454,144) (225,026) --------- --------- Net cash used in investing activities ..... (849,408) (391,822) --------- --------- Cash flows from financing activities: Net change in inter-group payable ........... 321,867 244,858 --------- --------- Net cash provided by financing activities . 321,867 244,858 --------- --------- 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 $ -- ========= ========= -32- Comdisco Ventures STATEMENTS OF CASH FLOWS (UNAUDITED) - Continued (in thousands) 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 .............................................. $ 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.
-33- Comdisco Ventures 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 Stock" and "Comdisco Ventures Stock." Comdisco Venture Stock is intended to separately track the performance of the company's venture financing business, which the company refers to as "Comdisco Ventures" and Comdisco Stock separately tracks the performance of the remaining business of the company, which the company refers to as "Comdisco Group," and a retained interest in Comdisco Ventures. 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. Notwithstanding these financial reporting allocations, holders of Comdisco Ventures Stock and holders of Comdisco 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 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' policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. Comdisco Ventures identifies and records impairment losses on equity securities when events and circumstances indicate that such assets might be impaired. -34- 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 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):
Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- --------- 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 ========= ========= ========= =========
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. Comdisco committed $250 million as the sole limited partner to Hybrid Fund, all of which has been invested in, or committed to, Comdisco -35- Ventures 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' 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 had venture debt of approximately $631.4 million and $343.1 million, respectively. As part of a venture debt transaction, Comdisco Ventures 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 ======== ======== -36- 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):
Three months ended Nine months ended June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- --------- 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 ========= ========= ========= =========
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 ======== -37- 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, 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 Stock" and "Comdisco Ventures Stock." Comdisco Venture Stock is intended to separately track the performance of the company's venture financing business, which the company refers to as "Comdisco Ventures" and Comdisco Stock separately tracks the performance of the remaining business of the company, which the company refers to as "Comdisco Group," and a retained interest in Comdisco Ventures. 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 the company's service businesses (see "Business" for a discussion of this pre-tax charge). Excluding the Prism losses, the company 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. Excluding the charges in fiscal 1999 -38- and the Prism losses in both fiscal 2000 and 1999, the company 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. The increase for the three and nine months ended June 30, 2000 compared to the year earlier periods is primarily due to increased earnings by Comdisco Ventures, offset by lower earnings contributions from Comdisco Group, primarily from leasing activities. Business - -------- Comdisco Group: Services: The company'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 the company'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. The company expects network services to incur losses in the fourth quarter of fiscal 2000. Web services, a new service offered by the company, 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. See "Risk Factors" for a discussion of the factors that may affect earnings contributions from services. 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 the company's divestiture of low-margin businesses. The decrease in pretax earnings contribution from leasing is due 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 the company's 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. The residual leasing business of the company in the areas of electronics, communications, medical, laboratory and scientific had worldwide cost of equipment placed on lease of $333 million and $946 million in the three and nine months ended June 30, 2000, respectively, compared to $148 million and $545 million in the prior year periods. See below for a discussion of remarketing and "Risk Factors" for a discussion of leasing. In addition to originating new equipment lease financing, the company remarkets used equipment from its lease portfolio. Remarketing is the sale or re-lease of equipment either at original lease termination or during the original lease. -39- These transactions may be with existing lessees or, when equipment is returned, with new customers. Remarketing activities are comprised of earnings from follow-on leases and gross profit on equipment sales. Remarketing activity, an important factor in quarterly earnings, increased in the current quarter as compared to both the 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 the company's lease portfolio. In addition, remarketing activity will be critical in the residual leasing business. 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 announced that it has signed a $130 million agreement with the network unit of Williams Communications Group, Inc. to provide Prism long-term capacity and fiber on Williams' award-winning fiber-optic network. The majority of the value in the transaction is in long-term network capacity on the Williams Multi-Service Broadband NetworkTM. Williams Communications will also provide collocation and fiber maintenance services over the 20-year agreement. Funding of the $130 million transaction consists of $120 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, a global leader in telephony, data, wireless and wireline solutions for the high-performance Internet, 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. On July 26, 2000, the company announced its intention to review strategic alternatives for its investment in Prism. Prism intends to focus its network expansion efforts in ten markets for the near term. -40- Comdisco Ventures: The third quarter of fiscal 2000 was a third record quarter for Comdisco Ventures, with record revenues from leasing and interest income on venture debt. For the three months ended June 30, 2000 and 1999, Comdisco Ventures 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 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 (warrant sale proceeds and capital gains) for the three and nine months ended June 30, 2000 and 1999 were as follows (in millions):
Three Months Ended Nine Months 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 gain ................................................ 21 5 125 5 Warrant sale proceeds ....................................... 60 15 143 32 ----- ----- ----- ----- Total ....................................................... $ 81 $ 20 $ 268 $ 37 ===== ===== ===== =====
See "Risk Factors" for a discussion of the factors that may affect proceeds from the sale of warrants and capital gains. The company'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 to generate cash for reinvestment in new transactions; Comdisco Ventures believes it is preferable to make new advances to start-ups rather than hold the securities of public companies. In addition, Comdisco Ventures has benefited from a strong IPO market for venture capital-backed companies. There can be no assurance that the strong IPO market for venture capital-backed companies will continue in the near or long term. Comdisco 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. Comdisco committed $250 million as the sole limited partner to Hybrid Fund, all of which has been invested in, or committed to, Comdisco Ventures customers. The Hybrid Fund has been closed and will not seek additional capital commitments. 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 -41- 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 revenue minus operating lease cost was $82 million, or 19.8% of operating lease revenue (collectively, the "Operating Lease Margin"), 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. The company 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. The company expects the growth of the operating lease portfolio is expected to slow as the mix of leases results in more direct financing leases rather than operating leases. See "Risk Factors" for a discussion of factors that could affect the Operating Lease Margin. 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:
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 the company's network services infrastructure. 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 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 -42- prior year and the Sale, offset by higher expenses incurred by Prism in the current year quarter. 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 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....... 16 1 Bad debt expense Comdisco Group ......... 4 2 Other expenses .......................... 13 16 --- --- $ 116 $ 77 === === The company expects selling, general and administrative expenses to increase throughout fiscal 2000 primarily because of higher revenue from Comdisco Ventures, which will increase incentive compensation costs, and higher personnel costs. Interest expense for the three months ended 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 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 $3.18 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 -43- was $1.7 billion and $2.04 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 revenue minus operating lease cost 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 revenue minus operating lease cost 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. The company expects the growth of the operating lease portfolio to slow as the mix of leases written results in more direct financing leases rather than operating leases. See "Risk Factors" for a discussion of factors that could affect the Operating Lease Margin. 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:
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, 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 the company'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 was $268 million and $37 million in the nine months ended June 30, 2000 and 1999, respectively. During the nine months ended -44- June 30, 2000, approximately eighty-four companies in the equity securities portfolio were acquired/merged or completed an initial public offering, compared to forty-three companies in the prior year period. During the current period the company 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 and an increase in incentive compensation costs as a result of gains realized on the sale of equity positions held in the Comdisco Ventures portfolio. 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....... 62 2 Bad debt expense Comdisco Group ......... 25 9 Other expenses .......................... 39 47 --- --- $ 375 $ 219 === === 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. -45- 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, 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. -46- Comdisco 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, Comdisco Ventures financial statements and Risk Factors included in this Quarterly Report on Form 10-Q. Comdisco 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 necessary be indicative of operating results for any future periods. The financial statements of Comdisco Group include the balance sheets, statements of earnings, cash flow and division net worth of the following businesses of Comdisco: o Comdisco's technology services businesses, including: continuity services, managed network services, desktop management services and web hosting and availability; o Comdisco's global leasing and remarketing businesses in areas such as electronics, communications and laboratory and scientific equipment as well as the leasing of information technology equipment and industrial automation equipment; and o Prism Communication Services, Inc. The Comdisco Group financial statements also include its retained interest in Comdisco Ventures, currently 100 percent. The Comdisco Group financial statements and Comdisco Ventures financial statements comprise all of the accounts included in the consolidated financial statements of Comdisco. The separate business financial statements give effect to all allocation and related party transaction policies as adopted by the board of directors of Comdisco. The Comdisco Group financial statements have been prepared in a manner which management believes is reasonable and appropriate. Comdisco Group's retained interest in 100% of the division net worth of Comdisco Ventures is reflected as "Retained interest in Comdisco Ventures" in Comdisco Groups balance sheets. Similarly, Comdisco Group's retained interest in 100% of the division net earnings of Comdisco Ventures is reflected as "Net earnings related to retained interest in Comdisco Ventures" in its combined statements of earnings. Overview - -------- 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. -47- 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 Stock" and "Comdisco Ventures Stock." Comdisco Venture Stock is intended to separately track the performance of the company's venture financing business, which the company refers to as "Comdisco Ventures" and Comdisco Stock separately tracks the performance of the remaining business of the company, which the company refers to as "Comdisco Group," and a retained interest in Comdisco Ventures. Business - -------- Services: The company'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 the company'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. The company expects network services to incur losses in the fourth quarter of fiscal 2000. Web services, a new service offered by the company, 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, 1999, 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. See "Risk Factors" for a discussion of the factors that may affect earnings contributions from services. 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 decrease in pretax earnings contribution from leasing is due 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 the company's operations. Cost of equipment placed on lease was $441 million during the quarter ended June 30, 2000. This compares to cost of equipment placed on lease of $599 million and $431 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 $1.6 billion and $2.0 billion, respectively. The residual leasing business of the company in the areas of electronics, communications, medical, laboratory and scientific had worldwide cost of equipment placed on lease of $204 million and $607 million in the three and nine months ended June 30, 2000, respectively, compared to $75 million and $363 million in the year earlier periods. See below for a discussion of remarketing and "Risk Factors" for a discussion of leasing. In addition to originating new equipment lease financing, the company remarkets used equipment from its lease portfolio. Remarketing is the sale or re-lease of equipment either at original lease termination or during the original lease. These transactions may be with existing lessees or, when equipment is returned, with new customers. Remarketing activities are comprised of earnings from -48- 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 the company's lease portfolio. In addition, remarketing activity will be critical in the residual leasing business. 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 announced that it has signed a $130 million agreement with the network unit of Williams Communications Group, Inc. to provide Prism long-term capacity and fiber on Williams' award-winning fiber-optic network. The majority of the value in the transaction is in long-term network capacity on the Williams Multi-Service Broadband NetworkTM. Williams Communications will also provide collocation and fiber maintenance services over the 20-year agreement. Funding of the $130 million transaction consists of $120 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, a global leader in telephony, data, wireless and wireline solutions for the high-performance Internet, 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. On July 26, 2000, the company announced its intention to review strategic alternatives for its investment in Prism. Prism intends to focus its network expansion efforts in ten markets for the near term. Three months ended June 30, 2000 Total revenue for the three months ended June 30, 2000 was $803 million compared to $1.2 billion in the prior year quarter and $853 million 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 $482 million for the quarter ended June 30, 2000 represented a decrease of 11% compared to the year earlier period. Total leasing revenue was $564 million in the second quarter of fiscal 2000. The decrease in operating lease revenue in the current quarter compared to the year earlier quarter 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. -49- Operating lease revenue minus operating lease cost was $70 million, or 19.3% of operating lease revenue (collectively, the "Operating Lease Margin"), and $77 million, or 18.7% of operating lease revenue, in the three months ended June 30, 2000 and 1999, respectively. The Operating Lease Margin was $73 million, or 18.5% in the quarter ended March 31, 2000. The company expects the Operating Lease Margin to be at or below current levels throughout the remainder of fiscal 2000, depending on the equipment leased and the volume of operating leases. The decrease in operating lease revenue minus operating lease cost in the current quarter compared to the year earlier period was the change in the mix of leases written. The growth of the operating lease portfolio is expected to slow as the mix of leases written results in more direct financing leases rather than operating leases. See "Risk Factors that May Affect Future Results" for a discussion of factors that could affect the Operating Lease Margin. 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:
2000 1999 ----------------------------- ------------------------------ Revenue Expense Margin Revenue Expense Margin ------- ------- ------ ------- ------- ------ Sales ........................ $ 139 $ 113 19% $ 60 $ 49 18% Sale of mainframe portfolio .................. - - - 485 485 - Sale of medical refurbishment business...... - - - 18 18 - --- --- --- --- --- --- Total .................. $ 139 $ 113 19% $ 563 $ 552 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 the company's network services infrastructure and web services offering. Other revenue for the three months ended June 30, 2000 and 1999 was $9 million and $3 million, respectively. Other revenue for the second quarter of fiscal 2000 was $38 million. 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 $831 million compared to $1.21 billion in the prior year period. The decrease in total costs and expenses is primarily due to the Sale offset by higher expenses incurred by Prism in the current quarter. Selling, general and administrative expenses totaled $78 million in the quarter ended June 30, 2000 compared to $70 million in the quarter ended June 30, 1999 and $95 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 higher personnel costs. Comdisco Group expects selling, general and -50- administrative expenses to increase throughout the remainder of the fiscal year. Although, Comdisco Group is taking steps to control its selling, general and administrative expenses, Comdisco Group continues to invest in its infrastructure to increase revenue and support the business volume. Interest expense for the three months ended June 30, 2000 and 1999 totaled $71 million and $75 million, respectively. The decrease in the current quarter compared to the prior year period is due to lower average daily borrowings by Comdisco Group. 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 second quarter of fiscal 2000. These costs are attributable to the expansion of Prism's networks and increased orders resulting from Prism's 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 $2.4 billion and $3.0 billion for the nine months ended June 30, 2000 and 1999, respectively. The decrease in total revenue in the current year period compared to the prior year period was primarily due to the Sale. Total leasing revenue was $1.6 billion and $2.0 billion for the nine months ended June 30, 2000 and 1999, respectively. The decrease in operating lease revenue in the current period compared to the year earlier period 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 36% 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 revenue minus operating lease cost was $217 million, or 18.8% of operating lease revenue (collectively, the "Operating Lease Margin"), and $264 million, or 18.9% of operating lease revenue, in the nine months ended June 30, 2000 and 1999, respectively. The decrease in operating lease revenue minus operating lease cost in the current year period compared to the year earlier period is due a change in the mix of leases written. The company expects the growth of the operating lease portfolio to slow as the mix of leases written results in more direct financing leases rather than operating leases. See "Risk Factors" for a discussion of factors that could affect the Operating Lease Margin. -51- 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:
2000 1999 ----------------------------- ------------------------------ Revenue Expense Margin Revenue Expense Margin ------- ------- ------ ------- ------- ------ Sales ........................ $ 300 $ 239 20% $ 183 $ 157 14% Sale of mainframe portfolio .................. - - - 485 485 - Sale of medical refurbishment business...... - - - 18 18 - --- --- --- --- --- --- Total .................. $ 300 $ 239 20% $ 686 $ 660 4% === === === === === ===
The increase in sale margins during the nine months ended June 30, 2000 is primarily due to remarketing of communications equipment, which have 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, respectively, a 33% 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 the company's web hosting and availability services. Other revenue for the nine months ended June 30, 2000 and 1999 was $53 million and $16 million, respectively. During the nine months ended June 30, 2000, the company realized $32 million of revenues from the sale of 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 and 1999 were $2.40 billion compared to $3.06 billion in the prior year period. The decrease in the current year period compared to the year earlier period is due to the Sale. -52- Selling, general and administrative expenses totaled $250 million in the nine months ended June 30, 2000 compared to $206 million in the prior year period. The increase in the current year period is primarily due to higher personnel costs and an increase in the allowance for bad debts. The following table summarizes selling, general and administrative expenses (in millions): 2000 1999 ---- ---- Incentive compensation .................. $ 49 $ 36 Other compensation and benefits ......... 98 89 Outside services ........................ 43 29 Bad debt expense ........................ 25 9 Other expenses .......................... 35 43 --- --- $ 250 $ 206 === === Interest expense for the nine months ended June 30, 2000 and 1999 totaled $218 million compared to $238 million in the prior year period. The decrease in interest expense is due to lower average daily borrowings as a result of the Sale. Prism expenses for the nine months ended June 30, 2000 totaled $135 million, compared to $14 million in the year earlier period. 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. Financial Condition Comdisco Group's current financial resources and estimated cash flows from operations are considered adequate to fund anticipated future growth and operating requirements. Comdisco Group 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, 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 $1.9 billion and $2.1 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 Comdisco Group's investment in its lease portfolio. Comdisco Group expects this trend to continue, with cash flow from leasing and remarketing reinvested in the equipment portfolio. -53- Risk Factors That May Affect Future Results See "Risk Factors" included in this Report. -54- Comdisco Ventures 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, Comdisco Group financial statements and Risk Factors included in this Quarterly Report on Form 10-Q. Comdisco Ventures 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 include the balance sheets, statements of earnings, cash flow and division net worth of Comdisco's venture financing businesses. The Comdisco Ventures financial statements and Comdisco Group financial statements comprise all of the accounts included in the consolidated financial statements of Comdisco. The separate business financial statements give effect to all allocation and related party transaction policies as adopted by the board of directors of Comdisco. The Comdisco Ventures financial statements have been prepared in a manner which management believes is reasonable and appropriate. Overview - -------- Comdisco Ventures provides venture leases, venture debt and direct equity financing to venture capital-backed companies. Comdisco Ventures' relationships with established venture capital firms help it identify what it believes are the best-positioned companies in the most attractive high growth industries. Comdisco Ventures offers a broad range of innovative equity-linked financing products, which complement equity from venture capital firms and debt from venture-oriented banks and asset-based lenders. Comdisco Ventures is a division of Comdisco. Net Earnings - ------------ 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. 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. The principal reasons for the increase in net earnings during the three and nine months ended June 30, 2000 compared to the year earlier periods are the significant increases in warrant sale proceeds and capital gains, increased interest income on notes, and increased earnings contributions from leasing. Three Months Ended June 30, 2000 The third quarter of fiscal 2000 was a record third quarter for Comdisco Ventures, with record revenues from leasing and interest income on venture debt. Total revenue for the three months ended June 30, 2000 was $149.6 million compared to $59.6 million in the prior year quarter and $160.4 million in the quarter ended March 31, 2000. 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 -55- 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 revenue minus operating lease cost was $11.4 million, or 22.5% (collectively, the "Operating Lease Margin"), 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 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 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. Revenue from the sale of equity holdings (warrant sale proceeds and capital gains) for the quarter ended June 30, 2000 and 1999 were $80.3 million and $20.0 million, respectively. Revenue from the sale of equity holdings was $98.5 million in the quarter ended March 31, 2000. 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 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. See Note 2 of Notes to Financial Statements for information on equity securities and revenue from the sale of equity securities. The company'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 to generate cash for reinvestment in new transactions; Comdisco Ventures believes it is preferable to make new advances to start-ups rather than hold the securities of public companies. In addition, Comdisco Ventures has benefited from a strong IPO market for venture capital-backed companies. There can be no assurance that the strong IPO market for venture capital-backed companies will continue in the near or long term. During the quarter ended June 30, 2000, Comdisco Ventures 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. 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 expenses. 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. -56- 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' business. 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. 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. 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 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 funded loans totaling $454.1 million and $225.0 million, respectively. Revenue from the sale of equity holdings (warrant sale proceeds and capital gains) for the nine months June 30, 2000 and 1999 were $267.6 million and $37.0 million, respectively. 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 company'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 to generate cash for reinvestment in new transactions; Comdisco Ventures believes it is preferable to make new advances to start-ups rather than hold the securities of public companies. In addition, Comdisco Ventures has benefited from a strong IPO market for venture capital-backed companies. There can be no assurance that the strong IPO market for venture capital-backed companies will continue in the near or long term. During the nine months ended June 30, 2000 and 1999, Comdisco Ventures funded equity financings totaling $112.8 million and $20.3 million, respectively. 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 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 -57- totaled $52.1 million in the nine months ended June 30, 2000 compared to $4.8 million in the year earlier period. 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 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. 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 Since inception, Comdisco Ventures' operating activities, including capital expenditures for equipment and venture debt originations, have been funded primarily by cash flow from operations and by inter-group loans from Comdisco. Total net cash provided by Comdisco was $321.9 million during the nine months ended June 30, 2000, compared to $244.9 million during the prior year period. The increase in fiscal 2000 is primarily due to increased business opportunities in venture leases, venture debt and direct equity financings. Comdisco Ventures' capital requirements may vary based upon the timing and the success of implementation of its business plan and as a result of competitive developments or if: o demand for Comdisco Ventures' financings or its cash flow from operations is less than or more that expected; o development plans or projections change or prove inaccurate; o Comdisco Ventures makes any acquisitions or commitments in excess of the current plan; or o Comdisco Ventures accelerates or otherwise alters the schedule or targets of its business plan implementation. While Comdisco has been the primary source of funds for Comdisco Ventures, Comdisco has made no formal commitments about its ability or willingness to continue to provide funds beyond fiscal year 2000. If Comdisco Ventures were otherwise unable to obtain funding, from Comdisco or otherwise, on acceptable terms, Comdisco Ventures' ability to fund its expansion or respond to competitive pressures would be significantly impaired. Other Matters Following the approval of the tracking stock proposal, the company granted options under the Comdisco Ventures Management Incentive Plan to senior management of Comdisco Ventures. The exercise price per share is less than the fair market value of Comdisco Ventures on the grant dates, as determined by an independent appraisal. As a result of these grants, there will be significant stock-based compensation expense in future periods. Stock based compensation expense, which is included in commission expense for the three and nine months ended June 30, 2000, totaled $2.0 million. Risk Factors That May Affect Future Results See "Risk Factors" included in this Report. -58- 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 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. -59- 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. -60- One impact of the company's changing business model is the lengthening of the sales cycle--the length of time between initial sales contact and final delivery of contracts--as compared to its traditional leasing business. This increase in sales cycle results in an increase in negotiations in progress which ultimately impacts the timing of revenue, earnings and volume recognition. COMDISCO VENTURES CUSTOMERS ARE IN AN EARLY STAGE OF DEVELOPMENT AND MAY BE UNABLE TO COMPLETE THEIR BUSINESS PLANS. EQUITY INSTRUMENTS HELD BY COMDISCO VENTURES ARE RISKY INVESTMENTS AND THE PUBLIC MARKET FOR THESE COMPANIES IS EXTREMELY VOLATILE. TO THE EXTENT THESE COMPANIES DO NOT MEET THEIR PLANS OR THE COMPANY IS UNABLE TO DISPOSE OF ITS EQUITY SECURITIES, THE COMPANY'S BUSINESS AND FINANCIAL RESULTS MAY SUFFER. The company has made loans to and equity investments in various privately held companies. These companies typically are in an early stage of development with limited operating histories, and limited or no revenues and may be expected to incur substantial losses. Accordingly, investments in these companies may not result in any return and the company may lose its entire investment and/or principal balance. Equity instruments held by the company are subject to lockup agreements restricting its ability to sell until several months after an initial public offering. The public market for high technology and other emerging growth companies is extremely volatile. Such volatility may adversely affect the ability of the company to dispose of the equity securities and the value of those securities on the date of sale. The company has established working relationships with successful venture capital organizations. There can be no assurance that these relationships can be maintained or sustained. To the extent that the company is unable to maintain these relationships, its ability to identify potential customers may be substantially impaired. The current economic environment has been sustained over a number of years and is currently the longest continuous period of economic growth in the last thirty years. This environment has encouraged entrepreneurs to conceive, develop and bring to market new products and services. The company targets these early-stage companies for its services and products. A slow down in economic growth could materially affect the market in which the company operates. Furthermore, a slow down would impact potential investors in any limited partnerships the company may form, and this in turn, would have a material impact on Comdisco Ventures liquidity and access to funds. Many of the companies to which the company provides financing are dependent on third parties for liquidity. Any significant change in the availability of funds would have a material impact on the company's customer base, and, potentially, its loan collectability, as well as, the fair market value of its equity instruments. If companies with which Comdisco Ventures has effected transactions are not successful or the markets become unfavorable, Comdisco Ventures' customers may not be able to complete securities offering and Comdisco Ventures may not be able to generate gains or receive proceeds from the sale of securities. Fluctuations in future periods may be greater that those experienced in past periods as a result of Ventures' focus on companies related to the Internet and telecommunications. Furthermore, for those customers whose securities are not -61- publicly traded, the realizable value of Comdisco Ventures' interests may ultimately prove to be lower than the carrying value currently reflected in the consolidated and the separate Comdisco Ventures' financial statements. In the past Comdisco Ventures financed its operations with cash flow from operations and inter-group loans from Comdisco. Comdisco Ventures 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 depends on certain important employees and the loss of those employees could harm and disrupt Ventures' 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; -62- 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. -63- 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 Stock" and "Comdisco Ventures Stock." Comdisco Venture Stock is intended to separately track the performance of the company's venture financing business, which the company refers to as "Comdisco Ventures" and Comdisco Stock separately tracks the performance of the remaining business of the company, which the company refers to as "Comdisco Group," and a retained interest in Comdisco Ventures. A description of the rights of the holders of Comdisco Stock and Comdisco Ventures 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. -64- 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). -65- 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). -66- 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 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 -67- 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. -68- 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: August 14, 2000 /s/ John J. Vosicky ------------------- John J. Vosicky Executive Vice President and Chief Financial Officer -69- EX-11 2 0002.txt COMPUTATION OF EARNINGS PER COMMON SHARE Comdisco, Inc. and Subsidiaries Exhibit 11.00 COMPUTATION OF EARNINGS PER COMMON SHARE (in millions except per share data)
Three Months Nine Months ended ended June 30, June 30, 2000 1999 2000 1999 ---- ---- ---- ---- Average shares outstanding--basic ......... 151 152 152 152 Effect of dilutive options ................ 10 12 10 10 ---- ---- ---- ---- Average shares outstanding--diluted ....... 161 164 162 162 ==== ==== ==== ==== Net earnings to common stockholders $ 17 $ 36 $ 101 $ 18 ==== ==== ==== ==== Net earnings per common share: Basic .......................... $ .11 $ .23 $ .66 $ .12 ==== ==== ==== ==== Diluted ........................ $ .10 $ .22 $ .62 $ .11 ==== ==== ==== ====
-70- EX-12 3 0003.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Comdisco, Inc. and Subsidiaries Exhibit 12.00 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (dollars in millions)
Nine months ended June 30 For the years ended September 30 ----------------- -------------------------------- 2000 1999 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- Fixed charges Interest expense (1).................................. $277 $230 $341 $329 $301 $267 $278 Approximate portion of rental expense representative of an interest factor .............................. 5 4 6 5 4 7 11 ---- ---- ---- ---- ---- ---- ---- Fixed charges ........................................ 282 234 347 334 305 274 289 Earnings before income taxes, net of preferred stock dividends .................... 157 28 75 238 203 176 160 ---- ---- ---- ---- ---- ---- ---- Earnings before income taxes, net of preferred stock dividend, plus fixed charges .................................. $439 $262 $422 $572 $508 $450 $449 ==== ==== ==== ==== ==== ==== ==== Ratio of earnings to fixed charges ..................... 1.56 1.12 1.22 1.71 1.67 1.64 1.55 ==== ==== ==== ==== ==== ==== ==== Rental expense: Equipment subleases .................................. $ 2 $ 3 $ 4 $ 5 $ 6 $ 14 $ 22 Office space, furniture, etc ......................... 13 10 14 9 7 8 10 ---- ---- ---- ---- ---- ---- ---- Total ............................................. $ 15 $ 13 $ 18 $ 14 $ 13 $ 22 $ 32 ==== ==== ==== ==== ==== ==== ==== 1/3 of rental expense ............................. $ 5 $ 4 $ 6 $ 5 $ 4 $ 7 $ 11 ==== ==== ==== ==== ==== ==== ==== 1 Includes interest expense incurred by technology services and included in technology services expenses on the statements of earnings and interest expense incurred by Prism Communication Services and included in Prism expenses on the statements of earnings.
-71- EX-27 4 0004.txt FINANCIAL DATA SCHEDULE
5 This Schedule contains summary financial information extracted from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and is qualified in its entirety by reference to such financial statements. 0000722487 Comdisco, Inc. 1,000,000 U.S. Dollar 9-MOS SEP-30-2000 Oct-01-1999 Jun-30-2000 1 299 606 1,149 97 130 4,284 8,055 2,552 8,551 2,143 3,384 22 0 0 1,222 8,551 1,699 2,843 1,250 2,427 0 0 259 157 56 101 0 0 0 101 0.660 0.620
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