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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 December 31, 2002
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 000-499-68
COMDISCO HOLDING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 54-2066534
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
6111 North River Road
Rosemont, Illinois 60018
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (847) 698-3000
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 |X| No [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No |X|
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes |X| No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 4,200,000 shares
of the registrant's Common Stock, $0.01 par value per share, were outstanding
on February 14, 2003.
COMDISCO HOLDING COMPANY, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION....................................................................1
Item 1. Financial Statements.....................................................................2
Consolidated Statements of Earnings (Loss) (Unaudited) Three months ended
December 31, 2002 (Successor) and the three months ended December 31, 2001 (Predecessor)..........2
Consolidated Balance Sheets (Unaudited) December 31, 2002 (Successor) and
September 30, 2002 (Successor)....................................................................3
Consolidated Statements of Cash Flows (Unaudited) Three months ended
December 31, 2002 (Successor) and the three months ended December 31, 2001 (Predecessor)..........4
Notes to Consolidated Financial Statements (Unaudited)............................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................18
Item 3. Quantitative and Qualitative Disclosures about Market Risk..............................31
Item 4. Controls and Procedures.................................................................31
PART II. OTHER INFORMATION...........................................................................32
Item 1. Legal Proceedings.......................................................................32
Item 2. Changes in Securities and Use of Proceeds...............................................32
Item 3. Defaults Upon Senior Securities.........................................................32
Item 4. Submission of Matters to a Vote of Security Holders.....................................32
Item 5. Other Information.......................................................................32
Item 6. Exhibits and Reports on Form 8-K........................................................32
SIGNATURES............................................................................................34
CERTIFICATIONS........................................................................................35
PART I
FINANCIAL INFORMATION
---------------------
Forward-Looking Statements
This quarterly report on Form 10-Q contains, and our periodic filings
with the Securities and Exchange Commission and written and oral statements
made by the Company's officers and directors to press, potential investors,
securities analysts and others, will contain, 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.
These forward-looking statements are not historical facts, but rather are
predictions and generally can be identified by use of statements that include
phrases such as "believe," "expect," "anticipate," "estimate," "intend,"
"plan," "foresee," "looking ahead," "is confident," "should be," "will,"
"predicted," "likely" or other words or phrases of similar import. Similarly,
statements that describe or contain information related to matters such as our
intent, belief, or expectation with respect to financial performance, claims
resolution under the Plan, cash availability and cost-cutting measures are
forward-looking statements. These forward-looking statements often reflect a
number of assumptions and involve known and unknown risks, uncertainties and
other factors that could cause our actual results to differ materially from
those currently anticipated in these forward-looking statements. In light of
these risks and uncertainties, the forward-looking events might or might not
occur, 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.
Important factors that could cause actual results to differ
materially from those suggested by these written or oral forward-looking
statements, and could adversely affect our future financial performance,
include the risk factors discussed in Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operation, below. Many of the
risk factors that could affect the results of the Company's operations are
beyond our ability to control or predict.
ITEM 1. FINANCIAL STATEMENTS
COMDISCO HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED)
(in millions except per share data)
SUCCESSOR PREDECESSOR
------------------- ------------------
Three Months Ended
December 31,
------------------- | ------------------
2002 | 2001
------------------- | ------------------
REVENUE |
Leasing |
Operating $ 100 | $ 280
Direct financing 15 | 34
Sales-type 3 | 9
------------------- | ----------------
Total leasing 118 | 323
|
Sales 53 | 95
Technology services 10 | 23
Other 6 | 13
------------------- | ----------------
Total revenue 187 | 454
------------------- | ----------------
|
COSTS AND EXPENSES |
Leasing |
Operating 84 | 223
Sales-type 1 | 8
------------------- | ----------------
Total leasing 85 | 231
|
Sales 33 | 82
Technology services 7 | 15
Selling, general and administrative 29 | 59
Write-down of equity securities 7 | 21
Bad debt expense (5) | 50
Interest (total Predecessor contractual interest |
for the three months ended December 31, 2001 - $78) 21 | 18
Reorganization items - | 267
------------------- | ----------------
Total costs and expenses 177 | 743
------------------- | ----------------
|
Earnings (loss) from continuing operations before |
income taxes (benefit) 10 | (289)
Income taxes (benefit) 1 | (71)
------------------- | ----------------
Earnings (loss) from continuing operations 9 | (218)
Earnings (loss) from discontinued operations, |
net of tax - | 206
------------------- | ----------------
Net earnings (loss) $ 9 | $ (12)
=================== | ================
|
Basic earnings (loss) per common share: |
Earnings (loss) from continuing operations $ 2.04 | $ (1.45)
Earnings (loss) from discontinued operations 0.05 | 1.37
------------------- | -----------------
Net earnings (loss) $ 2.09 | $ (0.08)
=================== | =================
|
Diluted earnings (loss) per common share: |
Earnings (loss) from continuing operations $ 2.04 | $ (1.45)
Earnings (loss) from discontinued operations 0.05 | 1.37
------------------- | ------------------
Net earnings (loss) $ 2.09 | $ (0.08)
=================== | ==================
See accompanying notes to consolidated financial statements.
COMDISCO HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, September 30,
2002 2002
---------------- ---------------
ASSETS
Cash and cash equivalents $ 223 $ 565
Cash-legally restricted 13 18
Receivables, net 78 127
Inventory of equipment 40 24
Leased assets:
Direct financing and sales-type 799 1,016
Operating (net of accumulated depreciation) 261 333
---------------- ---------------
Net leased assets 1,060 1,349
Equity securities 27 36
Assets of discontinued operations 16 128
Other assets 85 94
---------------- ---------------
$ 1,542 $ 2,341
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Term notes payable $ 7 $ 35
Discounted lease rentals 214 262
Notes payable 385 1,050
Accounts payable 21 36
Income taxes 73 82
Liabilities related to assets of discontinued operations 2 29
Deferred income 32 34
Other liabilities 139 172
---------------- ---------------
873 1,700
Stockholders' equity:
Common Stock, $.01 par value.
Authorized 10,000,000 shares;
issued 4,200,000 shares - -
Additional paid-in capital 413 413
Accumulated other comprehensive income 23 4
Retained earnings 233 224
---------------- ---------------
Total stockholders' equity 669 641
---------------- ---------------
$ 1,542 $ 2,341
================ ===============
See accompanying notes to consolidated financial statements.
COMDISCO HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
SUCCESSOR PREDECESSOR
--------------- ------------------
For the Three Months Ended
December 31,
--------------- | ------------------
2002 | 2001
--------------- | ------------------
Cash flows from operating activities: |
Operating lease and other leasing receipts $ 324 | $ 583
Leasing costs, primarily rentals paid (1) | (3)
Lease portfolio sales 6 | -
Sales of equipment 50 | 103
Sales costs (1) | (3)
Technology services receipts 7 | 15
Technology services costs (1) | (8)
Notes receivable receipts 34 | 65
Warrant proceeds - | 1
Other revenue 8 | 10
Selling, general and administrative expenses (33) | (53)
Interest (34) | (25)
Income taxes (9) | 10
--------------- | ------------------
Net cash provided by continuing operations 350 | 695
Net cash provided by discontinued operations 82 | 911
--------------- | ------------------
Net cash provided by operating activities before reorganization items 432 | 1,606
Operating cash flows from reorganization items: |
Interest received on cash accumulated because of Chapter 11 proceeding - | 5
Professional fees paid for services rendered in connection with |
the Chapter 11 proceeding - | (14)
--------------- | ------------------
Net cash used by reorganization items - | (9)
--------------- | ------------------
Net cash provided by operating activities 432 | 1,597
|
Cash flows from investing activities: |
Equipment purchased for leasing (28) | (84)
Notes receivable (1) | (6)
Equity investments - | (1)
Capital expenditures on discontinued operations - | (22)
Other 9 | 2
--------------- | ------------------
Net cash used in investing activities (20) | (111)
|
Cash flows from financing activities: |
Discounted lease proceeds - | 4
Cash provided by discontinued operations - | 22
Net decrease in notes and term notes payable (693) | (136)
Principal payments on secured debt (60) | (141)
Decrease (increase) in legally restricted cash 5 | (42)
Other (6) | (6)
--------------- | ------------------
Net cash used in financing activities (754) | (299)
|
Net increase (decrease) in cash and cash equivalents (342) | 1,187
Cash and cash equivalents at beginning of period 565 | 519
--------------- | ------------------
Cash and cash equivalents at end of period $ 223 | $ 1,706
=============== | ==================
See accompanying notes to consolidated financial statements.
COMDISCO HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
(in millions)
SUCCESSOR PREDECESSOR
--------------- -------------------
For the Three Months Ended
December 31,
--------------- | -------------------
2002 | 2001
--------------- | -------------------
|
Reconciliation of earnings (losses) from continuing |
operations to net cash provided by operating activities: |
Earnings (losses) from continuing operations $ 15 | $ (218)
Adjustments to reconcile earnings (losses) from continuing |
operations to net cash provided by operating activities |
Leasing costs, primarily |
depreciation and amortization 84 | 228
Leasing revenue, primarily principal portion of |
direct financing and sales-type lease rentals 206 | 260
Cost of sales 32 | 79
Technology services costs, primarily |
depreciation and amortization 6 | 7
Interest (13) | (7)
Income taxes (8) | (61)
Principal portion of notes receivable 30 | 56
Selling, general, and administrative expenses (8) | 77
Warrant proceeds in excess of income - | 1
Reorganization items - | 258
Lease portfolio sales 6 | -
Other, net - | 6
--------------- | -------------------
Net cash provided by continuing operations 350 | 686
Net cash provided by discontinued operations 82 | 911
--------------- | -------------------
Net cash provided by operating activities $ 432 | $ 1,597
=============== | ===================
Supplemental schedule of non-cash financing activities; |
Increase in discounted lease rentals attributable to
exchange rate gain $ 12 | $ -
=============== | ===================
See accompanying notes to consolidated financial statements.
COMDISCO HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2002 and 2001
1. Reorganization
On July 16, 2001, Comdisco, Inc. ("Predecessor") and 50 of its
domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for
the Northern District of Illinois (consolidated case number 01-24795) (the
"Filing"). Comdisco Holding Company, Inc., as the successor company
("Successor") to Comdisco, Inc., emerged from bankruptcy under a confirmed
plan of reorganization (the First Amended Joint Plan of Reorganization (the
"Plan")) that became effective on August 12, 2002 (the "Effective Date"). For
financial reporting purposes only, however, the effective date for
implementation of fresh-start reporting was July 31, 2002.
Implementation of the Plan resulted in the reorganization of
Comdisco, Inc. and its domestic and foreign subsidiaries into Comdisco Holding
Company, Inc. and three new primary subsidiaries: (i) Comdisco Global Holding
Company, Inc. (a direct wholly-owned subsidiary of Comdisco Holding Company,
Inc.), which manages the sale and run-off of the Company's reorganized
European IT Leasing operations and assets; (ii) Comdisco, Inc. (a direct
wholly-owned subsidiary of Comdisco Holding Company, Inc.), which manages the
sale and run-off of the Company's reorganized US Leasing operations and
assets; and (iii) Comdisco Ventures, Inc. (a direct wholly-owned subsidiary of
Comdisco, Inc.), which manages the sale and run-off of the Company's venture
financing operations and assets ("Ventures"). The Company's Corporate Asset
Management, or CAM, group is responsible for the sale and run-off of certain
assets held by Comdisco Global Holding Company, Inc., Comdisco, Inc. and their
subsidiaries that remained after certain pre-emergence bankruptcy asset sales.
The CAM group's operations are managed through Comdisco, Inc. For business
segment reporting purposes, the CAM group also includes various corporate
assets and liabilities managed by Comdisco Holding Company, Inc. corporate
staff. Implementation of the Plan also resulted in the reorganization of Prism
Communication Services, Inc. and its subsidiaries ("Prism"); as a consequence,
Prism is now a direct wholly-owned subsidiary of Comdisco Domestic Holding
Company, Inc., which is itself a direct wholly-owned subsidiary of Comdisco,
Inc.
Comdisco Holding Company, Inc. was formed on August 8, 2002 for the
purpose of selling, collecting or otherwise reducing to money in a orderly
manner the remaining assets of the Company and all of its direct and indirect
subsidiaries, including Comdisco, Inc. As more fully described in the Plan,
the Company's business purpose is limited to the orderly sale or run-off of
all its remaining assets. Pursuant to the Plan and restrictions contained in
its certificate of incorporation, the Company is specifically prohibited from
engaging in any business activities inconsistent with its limited business
purpose. Prior to the bankruptcy, Comdisco, Inc. provided technology services
worldwide to help its customers maximize technology functionality,
predictability, and availability, while freeing them from the complexity of
managing their technology. Comdisco, Inc. offered leasing to key vertical
industries, including semiconductor manufacturing and electronic assembly,
healthcare, telecommunications, pharmaceutical, biotechnology and
manufacturing. Through its Comdisco Ventures group, Comdisco, Inc. provided
equipment leasing and other financing and services to venture capital-backed
companies.
Consummation of the Plan resulted in (i) the distribution of cash
totaling approximately $2.2 billion; (ii) the issuance of variable rate senior
secured notes due 2004 in aggregate principal amount of $400 million (the
"Senior Notes"); (iii) the issuance of 11% subordinated secured notes due 2005
in aggregate principal amount of $650 million (the "Subordinated Notes"); (iv)
the issuance of 4.2 million shares of new common stock ("Common Stock"); (v)
the issuance of contingent distribution rights (the "Contingent Distribution
Rights") to holders of the Predecessor company's common stock; and (vi) the
cancellation of the Predecessor company's notes, notes payable, common stock
and stock options.
Consummation of the Plan resulted in the election of a new Board of
Directors for the Company (the "Board"). The Board is comprised of five
members. The management director is Ronald C. Mishler, Chief Executive
Officer. The four additional members of the Board are Jeffrey A. Brodsky,
Robert M. Chefitz, William A. McIntosh and Randolph I. Thornton.
2. Basis of Presentation
In this quarterly report on Form 10-Q, references to "the
Company," "Comdisco Holding," "we," "us" and "our" mean Comdisco Holding
Company, Inc., its consolidated subsidiaries, including Comdisco Global
Holding Company, Inc., Comdisco, Inc., Comdisco Domestic Holding Company, Inc.
and Comdisco Ventures, Inc., and its predecessors, except in each case where
the context indicates otherwise. References to "Comdisco, Inc." mean Comdisco,
Inc. and its subsidiaries, other than the Prism entities, prior to the
Company's emergence from bankruptcy on August 12, 2002, except where the
context indicates otherwise.
Due to the Company's reorganization and implementation of fresh-start
reporting, the consolidated financial statements for the Successor company are
not comparable to those of the Predecessor company.
A black line has been drawn on the accompanying consolidated
financial statements to distinguish between the Successor company and the
Predecessor company.
Certain reclassifications, including those for discontinued
operations, have been made in the 2001 financial statements to conform to the
2002 presentation.
Legally restricted cash represents cash and cash equivalents that are
restricted solely for use as collateral in secured borrowings, cash and cash
equivalents received by the Company from non-owned lease portfolios serviced
by the Company and cash and cash equivalents held in escrow or in similar
accounts as a result of the various proposed or completed assets sales and
incentive compensation plans. Legally restricted cash is comprised of the
following at December 31, 2002 and September 30, 2002 (in millions):
December 31, September 30,
2002 2002
------------- --------------
SunGard escrow $ 2 $ 2
Professional fee escrow 2 7
Letters of credit 3 3
Incentive compensation escrow 4 -
Cash received on non-owned leases 1 6
Other 1 -
-------------- --------------
$ 13 $ 18
============== ==============
3. Discontinued Operations
Availability Solutions
The Company's Availability Solutions business was offered for sale in
the third quarter of fiscal 2001 with the sale completed in the first quarter
of fiscal 2002 (see Note 4 of Notes to Consolidated Financial Statements). The
gain for the Availability Solutions business is net of estimated wind-down
costs and asset write downs associated with the Company's German and Spanish
subsidiaries which were excluded from the sale to SunGard discussed in Note 4,
as well as wind-down costs and asset write downs associated with the Company's
Web-Availability Solutions business.
International Leasing
On October 18, 2002, the Company announced that it had sold its Swiss
and Austrian-based operations. These transactions closed on October 10, 2002
and August 14, 2002, respectively. During July 2002, the Company recorded a $1
million pre-tax loss on the sale of its Swiss and Austrian-based operations.
On December 23, 2002, the Company completed the sale of its French
operations, Comdisco France SA and Promodata SNC, to Belgium-based computer
services provider, Econocom Group and the Company received approximately $70
million from such sale. The sale was effective as of August 31, 2002. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," during July 2002, the Company recorded a pre-tax charge of
$35 million to reduce cost in excess of fair value to reflect the difference
between carrying value and estimated proceeds from the sale.
The Company also has sold substantially all of its information
technology (IT) leasing assets in Australia and New Zealand to Allco, an
Australian company specializing in equipment and infrastructure finance and
leasing. The bankruptcy court approved the sale on April 18, 2002. Under the
terms of the sale agreement, Allco agreed to purchase most of the assets in
Australia and New Zealand in a series of closings. On June 28, 2002, the
Company and Allco completed the first closing on the sale of leased assets in
Australia and New Zealand. Comdisco, Inc. received approximately $8 million
for the sale of these assets. Comdisco, Inc. has received $24 million for the
assets sold through November 2002 and the final closing is expected to occur
during the second fiscal quarter of 2003. In accordance with SFAS No. 121, the
Company recorded pre-tax charges of $6 million in the third quarter of fiscal
2002 and $2 million in the one month ended July 31, 2002 to reduce cost in
excess of fair value to reflect the difference between carrying value and
estimated proceeds from the sale.
Each of the aforementioned transactions resulted from an extensive
offering and competitive bidding process run by the Company's independent
investment banking firm.
As a result of the sale of Availability Solutions and the sale of the
Company's French, Swiss, Austrian, Australian and New Zealand-based operations
(collectively referred to as "International Leasing" in the following table)
amounts in the consolidated financial statements and related notes for all
periods shown have been restated to account for these operations as
discontinued.
Following is summary financial information for the Company's
discontinued operations. In addition to the businesses sold to SunGard, the
Availability Solutions information included below also includes the results
from the Company's Availability Solutions businesses in Germany and Spain (in
millions):
PREDECESSOR
For the Three Months Ended
December 31, 2001
------------------------------------------
Availability International
Solutions Leasing Total
------------ ------------ --------------
Revenue $ 67 $ 42 $ 109
============ ============ ==============
Gain on sale $ 326 $ - $ 326
Income from discontinued operations:
Before income taxes $ 334 $ 3 $ 337
Income taxes 130 1 131
------------ ------------ --------------
Net earnings $ 204 $ 2 $ 206
============ ============ ==============
The revenues and expenses for each of the discontinued businesses
mentioned above were immaterial during the three months ended December 31,
2002.
4. Sale of Assets
Leasing
On January 24, 2002, the bankruptcy court approved the sale of the
Company's Electronics and Laboratory and Scientific equipment leasing
businesses to General Electric Capital Corporation ("GE Capital"). In
accordance with the FASB's Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed" ("SFAS No. 121"), the Company recorded a pre-tax charge
of $250 million in the first quarter of fiscal 2002 to reduce cost in excess
of fair value to reflect the difference between carrying value and estimated
proceeds from the sale. On April 24, 2002, the Company and GE Capital
completed a first closing on the sale of approximately $794 million of assets,
or approximately 81% of the Company's Electronics and Laboratory and
Scientific net leased assets at March 31, 2002. The Company received
approximately $548 million for the sale of these assets, which included the
assumption of approximately $258 million of related secured debt and other
obligations. On May 31, 2002, the Company and GE Capital completed a second
closing on the sale of Electronics and Laboratory and Scientific assets, for
which the Company received an additional approximately $24 million, including
the assumption of approximately $5 million of related secured debt and other
obligations. The purchase price for both closings is subject to adjustment
based upon the completion of a post-closing review of the purchase price
calculation. A portion of the purchase price was held back at each closing
pending the resolution of that review. Certain assets were not purchased by GE
Capital due to documentation, credit or other issues. The Company, through its
CAM group, continues to manage the sale or run-off of those assets.
On February 5, 2002 the Company announced the completion of the
bankruptcy court supervised sales evaluation process for its leasing
businesses. During the court-supervised bidding process concluded in early
January 2002, the Company received bids for certain of its leasing business
units (North American Information Technology ("IT") Leasing,
Telecommunications, Healthcare, Electronics and Laboratory and Scientific).
At the conclusion of the bankruptcy court approved bidding process,
the Board of Directors determined to accept no bids for its North American IT
Leasing, Telecommunications and Healthcare businesses. Accordingly, on
February 5, 2002, the Company announced that it intended to retain the
remaining leasing businesses (North American IT, Telecommunications and
Healthcare). Subsequent to that date, the Company announced that it had agreed
to sell certain of its Healthcare leasing assets in the United States to GE
Capital's Healthcare Financial Services unit.
On April 18, 2002, the court approved the sale of the Company's
Healthcare leasing assets to GE Capital. In accordance with SFAS No. 121, the
Company recorded a pre-tax charge of $15 million in the second quarter of
fiscal 2002 to reduce cost in excess of fair value (primarily related to the
write-down of deferred assets) to reflect the difference between carrying
value and estimated proceeds from the sale. On May 31, 2002, the Company and
GE Capital completed a first closing on the sale of the Healthcare assets. The
Company received approximately $117 million for the sale of these assets,
including the assumption of approximately $46 million of related secured debt
and other liabilities. On June 30, 2002, the Company and GE Capital completed
a second closing on the sale of Healthcare assets for which the Company
received an additional $20 million, including the assumption of approximately
$5 million of related secured debt and other liabilities. The purchase price
for both closings is subject to adjustment based upon the completion of a
post-closing review of the purchase price calculations. A portion of the
purchase price was held back at each closing pending the resolution of that
review. Certain Healthcare assets were not purchased by GE Capital due to
documentation, credit, or other issues. The Company, through its CAM group,
continues to manage the sale or run-off of those assets.
International Leasing
On October 18, 2002, the Company announced that it had sold its Swiss
and Austrian-based operations. These transactions closed on October 10, 2002
and August 14, 2002, respectively. During the quarter ended September 30,
2002, the Company recorded a $1 million pre-tax loss on the sale of its Swiss
and Austrian-based operations. For financial reporting purposes, the assets of
the Swiss and Austrian-based operations are included in the balance sheet as
assets of discontinued operations and in the statement of earnings (loss) as
discontinued operations.
On October 18, 2002, the Company announced that it, along with
Comdisco Global Holdings Company, Inc., had entered into an agreement for the
sale of the stock of the Company's French leasing subsidiaries, Comdisco
France SA and Promodata SNC, to Econocom Group SA/NV. Comdisco France S.A. was
a wholly-owned subsidiary of Comdisco Global Holding Company, Inc. and
Promodata SNC was a wholly-owned subsidiary of Comdisco France S.A. The sale
of the leasing assets closed on December 23, 2002 and proceeds in the amount
of approximately (euro) 69 million were received. The sale was effective as of
August 31, 2002. These proceeds were converted into $70 million and
repatriated by the Company. In accordance with SFAS No. 121, the Company
recorded a pre-tax charge of $35 million in the fourth quarter of fiscal 2002
to reduce cost in excess of fair value to reflect the difference between
carrying value and estimated proceeds from the sale. For financial reporting
purposes, the assets of the French operations are included in the balance
sheet as assets of discontinued operations and in the statement of earnings as
discontinued operations.
The Company also has sold substantially all of its information
technology (IT) leasing assets in Australia and New Zealand to Allco, an
Australian company specializing in equipment and infrastructure finance and
leasing. The bankruptcy court approved the sale on April 18, 2002. Under the
terms of the sale agreement, Allco agreed to purchase most of the assets in
Australia and New Zealand in a series of closings. On June 28, 2002, the
Company and Allco completed the first closing on the sale of leased assets in
Australia and New Zealand. Comdisco, Inc. received approximately $8 million
for the sale of these assets. Comdisco, Inc. has received $24 million for the
assets sold through November 2002 and the final closing is expected to occur
during the second fiscal quarter of 2003. In accordance with SFAS No. 121, the
Company recorded pre-tax charges of $6 million in the third quarter of fiscal
2002 and $2 million in the one month ended July 31, 2002 to reduce cost in
excess of fair value to reflect the difference between carrying value and
estimated proceeds from the sale. For financial reporting purposes, the assets
of the Australia and New Zealand operations are included in the balance sheet
as assets of discontinued operations and in the statement of earnings (loss)
as discontinued operations.
Each of the aforementioned transactions resulted from an extensive
offering and competitive bidding process run by the Company's independent
investment banking firm.
Services
On November 15, 2001, the Company completed the sale of its
Availability Solutions business to SunGard Data Systems Inc. ("SunGard") for
$825 million in cash (plus approximately $25 million in cash for estimated
working capital received in excess of agreed-upon levels). At closing, $45
million of the purchase price was put into escrow to satisfy any post-closing
indemnity claims and $15 million was put into escrow to satisfy any closing
date working capital shortfalls. Of the $45 million put into escrow, the
Company has received approximately $43 million and approximately $2 million
continues to be held in escrow pending resolution of disputed matters. During
the second quarter of fiscal 2002, the Company returned the entire $15 million
working capital escrow to SunGard to settle all outstanding working capital
adjustment issues. The terms of the sale were arrived at pursuant to the
auction process approved by the bankruptcy court. The sale included the
purchase of assets of the U.S. operations of the Availability Solutions
business and the stock of its subsidiaries in the United Kingdom, France and
Canada. The sale excluded the purchase of the stock of subsidiaries in Germany
and Spain, as well as other identified assets, including Network Services and
IT CAP services business. The Company has exited the Availability Solutions
businesses in Germany and Spain.
The Company announced on February 5, 2002 that it had executed an
agreement for the sale of substantially all of its North American IT CAP
Services contracts to T-Systems Inc. ("T-Systems") for approximately $7
million, plus consideration for future business with those accounts. The sale
was approved by the bankruptcy court on February 14, 2002 and closed on
February 28, 2002. During the second quarter of fiscal 2002, the Company
recorded a $3 million pre-tax loss on the sale to T-Systems.
5. Reorganization Items
Expenses and income of the Predecessor company directly incurred or
realized as a result of the Chapter 11 cases have been segregated from the
normal operations and are disclosed separately. The major components for three
months ended December 31, 2001 are as follows (in millions):
PREDECESSOR
2001
-------------
Estimated loss on sale of leased assets $ 250
Professional fees 14
DIP facility fees 8
Interest income (5)
-------------
Total reorganization items $ 267
=============
Professional fees relate to legal, investment advisory and other
professional services. DIP facility fees relate to the write-off of previously
capitalized arrangement and structuring fees the Company incurred in
connection with the Debtor-In-Possession (DIP) facility (see Note 6 of Notes
to Consolidated Financial Statements). Interest income includes interest
earned on the Company's unrestricted cash balance that would not have been
earned if the Company had not filed for Chapter 11 protection.
6. Interest-Bearing Liabilities
In connection with the Filing, the Company obtained a two-year, $450
million senior secured Debtor-In-Possession financing facility ("DIP
facility"). During the second quarter of fiscal 2002, the Company terminated
the DIP facility, without ever drawing down upon it.
In connection with the DIP facility, the Company paid an arrangement
and structuring fee of $9 million or 2% of the credit line. The Company was
also required to pay a 50 basis point annual unused line fee and annual
administration and collateral monitoring fees, as defined in the agreement.
The unamortized fee balance as of September 30, 2001 was expensed in the first
quarter of fiscal 2002 (see Note 5 of Notes to Consolidated Financial
Statements).
Upon emergence, the Company's general unsecured creditors received,
and the Disputed Claims Reserve was funded with, their pro-rata share of an
initial cash distribution of approximately $2.2 billion. In addition, general
unsecured claim holders received, and the Disputed Claims Reserve was funded
with, their pro-rata share of two separate note issuances: the Senior Notes in
aggregate principal amount of $400 million with an interest rate of three
month LIBOR plus 3% and the Subordinated Notes in aggregate principal amount
of $650 million with an interest rate of 11%. General unsecured claimholders
also received, and the Disputed Claims Reserve also was funded with, their pro
rata share of 100% of the Common Stock of the reorganized Company.
On October 21, 2002, the Company redeemed the entire $400 million
outstanding principal amount of its Senior Notes. The Senior Notes were
redeemed at 100% of their principal amount plus accrued and unpaid interest
from August 12, 2002 to the redemption date. Following the redemption of the
Senior Notes, the Company was required to make cash interest payments on the
Subordinated Notes. The terms of the Subordinated Notes provided for the
interest to be paid-in-kind through the issuance of additional Subordinated
Notes while the Senior Notes were outstanding. The initial interest payment
date for the Subordinated Notes was December 31, 2002 and, because the Senior
Notes were no longer outstanding, the interest payment was paid in cash on
such date to registered holders of the Subordinated Notes at the close of
business on December 15, 2002.
On November 14, 2002, pursuant to its obligations under the
Subordinated Notes, the Company made a mandatory partial redemption of $65
million of the outstanding principal amount of its Subordinated Notes. On
December 23, 2002, the Company made an optional partial redemption of $200
million principal amount of its Subordinated Notes. On December 31, 2002, the
Company made an approximately $16 million interest payment with respect to the
Subordinated Notes. On January 9, 2003, the Company made an optional partial
redemption of $100 million principal amount of its Subordinated Notes. On
February 10, 2003, the Company made an optional partial redemption of $50
million principal amount of its Subordinated Notes. The total outstanding
principal amount of the Subordinated Notes subsequent to the February 10, 2003
redemption is $235 million. Each of these partial redemptions of the
Subordinated Notes were redeemed at a price equal to 100% of their principal
amount plus accrued and unpaid interest to the redemption date. On February
14, 2003, the Company announced that an optional partial redemption of $75
million principal amount of its Subordinated Notes is scheduled to occur on
March 3, 2003.
The average daily borrowings outstanding during the three months
ended December 31, 2002 were approximately $952 million, with a related
contractual weighted average interest rate of 8.84%. This compares to average
daily borrowings during the three months ended December 31, 2001 of
approximately $4.9 billion, with a contractual related weighted average
interest rate of 6.66%. A significant portion of the contractual interest for
the three months ended December 31, 2001 was not paid due to the Company's
bankruptcy proceedings.
The Company has issued contractual letters of credit totaling $3
million at December 31, 2002 to landlords of the Company's customers,
principally Ventures' customers, for the guarantee of their office space
leases in the event of default by the Company's customer. The Company believes
that $3 million, which is held in restricted cash, is the maximum potential
amount of undiscounted future payments for which the Company would be required
to remit under these guarantees. No liability has been recorded for these
letters of credit as of December 31, 2002 as the Company believes it is not
probable that it will have to perform under these guarantees. For the letters
of credit, if drawn upon, no significant recovery from the defaulting customer
would be expected.
7. Receivables
Receivables include the following as of December 31, 2002 and
September 30, 2002 (in millions):
December 31, September 30,
2002 2002
----------------- -----------------
Notes $ 74 $ 118
Accounts 117 140
Other 68 83
----------------- -----------------
Total receivables 259 341
Allowance for credit losses (181) (214)
----------------- -----------------
Total $ 78 $ 127
================= =================
Notes
The Company provided loans to privately held venture capital-backed
companies in networking, optical networking, software, communications,
Internet-based and other industries. The Company's loans were generally
structured as equipment loans or subordinated loans. Substantially all of the
loans were made by Ventures.
At December 31, 2002 and September 30, 2002, Ventures had notes
receivable of approximately $72 million and $117 million, respectively. As
part of a Ventures note transaction, the Company received warrants to purchase
an equity interest in its customer, or a conversion option, in each case at a
stated exercise price based on the price paid by other venture capitalists.
Loans provide current income from interest and fees.
Accounts
Accounts receivable represent lease rentals, notes receivable and
equipment sales proceeds due but unpaid as of the balance sheet date.
Other
This amount is primarily comprised of the portions of the purchase
price of leased assets acquired by GE Capital which were held back at each
closing pending resolution of a post-closing review (see Note 4 of Notes to
Consolidated Financial Statements.)
Allowance
The allowance for credit losses includes management's estimate of the
amounts expected to be lost on specific accounts and for losses on other as of
yet unidentified accounts, including estimated losses on future non-cancelable
lease rentals, net of estimated recoveries from remarketing of related leased
equipment. In estimating the reserve component for unidentified losses within
the receivables and lease portfolio, management relies on historical
experience, adjusted for any known trends, including industry trends, in the
portfolio.
Changes in the allowance for credit losses for the three months ended
December 31, 2002 and 2001 were as follows (in millions):
Consolidated Ventures
------------------------------- --------------------------------
SUCCESSOR | PREDECESSOR SUCCESSOR | PREDECESSOR
December 31, | December 31, December 31, | December 31,
2002 | 2001 2002 | 2001
------------- | --------------- -------------- | --------------
Balance at beginning of period $ 214 | $ 302 110 | $ 202
Provision for credit losses (5) | 50 (7) | 45
Net credit losses (28) | $ (86) (21) | (72)
------------- | --------------- -------------- | -------------
Balance at end of period $ 181 | $ 266 $ 82 | $ 175
============= | =============== ============== | =============
8. Equity Securities
The Company provided financing to privately held companies, in
networking, optical networking, software, communications, Internet-based and
other industries through the purchase of equity securities. Substantially all
of these investments were made by the Company's Ventures group. For equity
investments which are non-quoted investments, the Company's policy is to
regularly review the assumptions underlying the operating performance and cash
flow forecasts in assessing the carrying values. The Company identifies and
records impairment losses on equity securities when events and circumstances
indicate that such assets might be impaired. Impairments in equity securities
totaled $7 million and $21 million during the three months ended December 31,
2002 and 2001, respectively.
Ventures publicly traded security holdings were as follows (in
millions):
Gross Gross
unrealized unrealized Market
Cost gains losses value
-------- ----------- ----------- ---------
December 31, 2002 $ - $ - $ - $ -
September 30, 2002 $ 1 $ - $ - $ 1
Realized gains or losses are recorded on the trade date 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 other comprehensive income (loss). There were no net or gross
realized gains or losses in either the three months ended December 31, 2002 or
December 31, 2001. Net realized gains would be included in other revenue in
the consolidated statements of earnings (loss).
The Company records the proceeds received from the sale or
liquidation of warrants received in conjunction with its lease or other
financings as income on the trade date. There were no warrant gains in either
the three months ended December 31, 2002 or December 31, 2001. These amounts
would be included in other revenue in the consolidated statements of earnings
(loss).
9. Stockholders' Equity
The Predecessor company's common stock was cancelled on August 12,
2002. The Predecessor company's common shareholders are entitled to
distributions of Contingent Distribution Rights under the Plan. In order to be
eligible to receive any distribution of Contingent Distribution Rights, those
former common shareholders must properly complete a transmittal form and
surrender all of their shares of the Predecessor company's common stock to
Mellon Investors Services LLC prior to August 12, 2003.
Any payments to Contingent Distribution Right holders will be based
upon the present value of distributions to creditors as a percentage of Class
C-4 Claims in accordance with the Contingent Distribution Rights Agreement.
The Company has estimated the liability for Contingent Distribution Rights to
be $16 million at December 31, 2002.
Total comprehensive income (loss) consists of the following (in
millions):
SUCCESSOR PREDECESSOR
Three Months
Ended December 31,
-------------------------------
2002 2001
------------- | -------------
|
Foreign currency translation adjustments, $ 19 | $ (6)
net of taxes of $0 |
|
Unrealized gains (losses) on derivative instruments - | (2)
|
Unrealized gains (losses) on securities: |
Unrealized holding gains (losses) arising |
during the period - | 13
Reclassification adjustment for gains |
included in earnings before |
income taxes (benefit) - | -
------------- | -------------
Net unrealized gains (losses), before |
income taxes (benefit) - | 13
Income taxes (benefit) - | 5
------------- | -------------
Net unrealized gains (losses) - | 8
------------- | -------------
Other comprehensive income (loss) 19 | -
Net earnings (loss) 9 | (12)
------------- | -------------
Total comprehensive income (loss) $ 28 | $ (12)
============= | =============
Accumulated other comprehensive income presented below and in the
accompanying balance sheets consists of the following (in millions):
Unrealized
Foreign Gain on Unrealized Accumulated
Currency Available- Gain on Other
Translation for-Sale Derivative Comprehensive
Adjustment Securities Instruments Income
Balance at September 30, 2002 $ 4 $ - $ - $ 4
Current period change 19 - - 19
------------- ------------ ------------ -------------
Balance at December 31, 2002 $ 23 $ - $ - $ 23
============= ============ ============ =============
10. Financial Information by Business Segment and Geographic Area
Following the Company's emergence from bankruptcy on August 12, 2002,
the Company's operations were reorganized into four reportable business
groups. These business groups are: (i) US Leasing, which includes leasing
operations in the US and Canada and is managed by Comdisco, Inc.; (ii)
European IT Leasing, which is managed by Comdisco Global Holdings Company,
Inc.; (iii) Ventures, which is managed by Comdisco Ventures, Inc.; and (iv)
the Corporate Asset Management, or CAM, group. The Company's CAM group is
responsible for the sale and run-off of certain assets held by Comdisco Global
Holding Company, Inc., Comdisco, Inc. and their subsidiaries that remained
after certain pre-emergence bankruptcy asset sales. The CAM group's operations
are managed through Comdisco, Inc. For business segment reporting purposes,
the CAM group also includes various corporate assets and liabilities managed
by Comdisco Holding Company, Inc. corporate staff.
The Company evaluates the performance of its operating segments based
on cash flow from operations and on earnings (loss) before income taxes.
Intersegment sales are not significant and all intersegment balances have been
eliminated in the summarized financial information presented below. The
information for 2001 has been restated from the prior year's presentation in
order to conform to the 2002 presentation. Cash flow from operations for 2001
are not available.
The following table presents cash flow from operations (in millions):
SUCCESSOR
Three months
ended
December 31, 2002
-------------------
US Leasing $ 209
European IT Leasing 60
CAM group (4)
Ventures 85
Discontinued Operations 82
-------------------
Total $ 432
===================
The following table presents segment revenues and earnings (loss)
before income taxes (in millions):
SUCCESSOR PREDECESSOR
----------------- -----------------
Three Months Ended
December 31,
2002 | 2001
----------------- | -----------------
REVENUES: |
US Leasing $ 68 | $ 115
European IT Leasing 47 | 61
CAM group 24 | 199
Ventures 48 | 79
----------------- | -----------------
Total $ 187 | $ 454
================= | =================
|
SEGMENT EARNINGS (LOSS): |
US Leasing $ 8 | $ 2
European IT Leasing 3 | 8
CAM group 2 | (230)
Ventures (3) | (69)
----------------- | -----------------
Total $ 10 | $ (289)
================= | =================
The following table presents revenue by geographic location based on
the location of the Company's local offices (in millions):
SUCCESSOR PREDECESSOR
------------------ -----------------
For the Three Months Ended
December 31,
2002 2001
------------------ | -----------------
|
North America $ 130 | $ 305
|
Europe 57 | 78
|
Pacific Rim - | 71
------------------ | -------------------
Total $ 187 | $ 454
================== | ===================
The following table presents total assets by geographic location
based on the location of the Company's local offices (in millions):
December 31, September 30,
2002 2002
------------------ ------------------
North America $ 813 $ 1,474
Europe 682 815
Pacific Rim 47 52
------------------ ------------------
Total $ 1,542 $ 2,341
================== ==================
The following table presents total assets for each of the Company's
reportable segments (in millions):
December 31, September 30,
2002 2002
------------------ ------------------
US Leasing $ 383 $ 549
European IT Leasing 628 616
CAM group 354 807
Ventures 161 241
Assets of discontinued
operations held for sale 16 128
------------------ ------------------
Total $ 1,542 $ 2,341
================== ==================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMDISCO HOLDING COMPANY, INC. WAS FORMED ON AUGUST 8, 2002 FOR THE
PURPOSE OF SELLING, COLLECTING OR OTHERWISE REDUCING TO MONEY IN AN ORDERLY
MANNER THE REMAINING ASSETS OF THE COMPANY AND ALL OF ITS DIRECT AND INDIRECT
SUBSIDIARIES, INCLUDING COMDISCO, INC. THE COMPANY'S BUSINESS PURPOSE IS
LIMITED TO THE ORDERLY SALE OR RUN-OFF OF ALL OF ITS REMAINING ASSETS.
PURSUANT TO THE PLAN OF REORGANIZATION AND RESTRICTIONS CONTAINED IN ITS
CERTIFICATE OF INCORPORATION, THE COMPANY IS SPECIFICALLY PROHIBITED FROM
ENGAGING IN ANY BUSINESS ACTIVITIES INCONSISTENT WITH ITS LIMITED BUSINESS
PURPOSE.
AS A RESULT OF THE REORGANIZATION AND THE IMPLEMENTATION OF
FRESH-START REPORTING, AS FURTHER DESCRIBED HEREIN, THE COMPANY'S RESULTS OF
OPERATIONS AFTER JULY 31, 2002 ARE NOT COMPARABLE TO RESULTS REPORTED IN PRIOR
PERIODS FOR COMDISCO, INC.
General
Overview
On July 16, 2001, Comdisco, Inc. and 50 of its domestic subsidiaries
voluntarily filed for bankruptcy. Prior to bankruptcy, the Company provided
technology services including leasing to customers worldwide, offered leasing
to key vertical industries and, through its venture financing group, provided
equipment leasing and other financing and services to venture capital-backed
companies. Comdisco Holding Company, Inc., as the successor company to
Comdisco, Inc., emerged from bankruptcy under a confirmed plan of
reorganization that was effective on August 12, 2002. In accordance with the
Plan, Comdisco Holding became the successor to Comdisco, Inc. In addition, the
Company's operations were reorganized into four reportable groups of business:
US Leasing; European IT Leasing; the Corporate Asset Management, or CAM,
group; and Ventures.
Since the Company emerged from Chapter 11 bankruptcy proceedings on
August 12, 2002, the Company's business activities have been limited to the
orderly sale or run-off of all of its existing asset portfolios. Pursuant to
the Plan and restrictions contained in its certificate of incorporation, the
Company is specifically prohibited from engaging in any business activities
inconsistent with its limited business purpose. The Company has not engaged in
any new leasing or financing activities, except for previously existing
customer commitments and to restructure existing equipment leases and loans to
maximize the value of the Company's assets.
All funds generated from the Company's remaining asset portfolios in
excess of defined cash reserves and operating expenses is required by the Plan
to be used to satisfy creditors of the Company and, if available after the
redemption of all debt with respect to the Senior Notes and Subordinated
Notes, pay dividends on the Company's Common Stock and, if applicable, make
distributions with respect to the Contingent Distribution Rights in the manner
and priorities set forth in the Plan. Because of the composition and nature of
its asset portfolios, the Company expects to generate funds from the sale or
run-off of its asset portfolios at a decreasing rate over time.
The Company has material restrictions on its ability, and does not
expect, to make significant investments in new or additional assets. The
Company continually evaluates opportunities for the orderly sale and run-off
of its remaining assets, including the sale of one or more of its leasing
asset portfolios. Accordingly, within the next few years, it is anticipated
that the Company will have reduced all of its assets to cash and made
distributions of all available cash to its Common Stock and Contingent
Distribution Rights holders in the manner and priorities set forth in the
Plan. At that point, it is expected that the Company will cease operations as
a going concern and that no further distributions will be made.
Fresh-Start Reporting
Upon its emergence from bankruptcy on August 12, 2002, the Company
adopted fresh-start reporting in accordance with Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") effective as of July 31, 2002 for financial reporting purposes.
SOP 90-7 requires the Company to allocate the reorganization value of the
reorganized Company to its assets, and to state liabilities existing at the
Plan confirmation date at present values of amounts to be paid determined at
appropriate current interest rates. As a result, the adjustments made in
accordance with SOP 90-7 have materially impacted the financial statements of
the Company.
For financial reporting purposes only, the "effective date" of the
emergence from bankruptcy was selected as the close of business on July 31,
2002. Accordingly, the effects of the adjustments on the reported amounts of
individual assets and liabilities resulting from the adoption of fresh-start
reporting are reflected in the Company's financial statements as of July 31,
2002. As a result of the reorganization and the recording of the restructuring
transaction and the implementation of fresh-start reporting pursuant to SOP
90-7, the Company's results of operations after July 31, 2002 are not
comparable to results reported in prior periods for Comdisco, Inc.
Critical Accounting Policies
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires Comdisco to use
estimates and assumptions that affect reported amounts of assets and
liabilities, revenues and expenses and disclosure of contingent assets and
liabilities. These estimates are subject to known and unknown risks,
uncertainties and other factors that could materially impact the amounts
reported and disclosed in the financial statements.
The Securities and Exchange Commission issued Financial Reporting
Release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies" ("FRR No. 60") which recommends that companies provide
additional disclosure and analysis of those accounting policies considered
most critical.
The Company believes the following to be among the most critical
judgment areas in the application of its accounting policies:
o Fresh-Start Reporting: Upon the emergence from bankruptcy
proceedings, the Company adopted fresh-start reporting which
resulted in material adjustments to the historical carrying amounts
of the Company's assets and liabilities. Fresh-start reporting was
applied in accordance with SOP 90-7, which required the Company to
allocate the reorganization value to its assets and liabilities
based upon their estimated fair value in accordance with the
procedures specified by Statement of Financial Accounting Standards
No. 141, Business Combinations ("SFAS No. 141"). The fair values of
the assets as determined for fresh-start reporting were based on
estimates of anticipated future cash flows of assets discounted at
rates consistent with the discount rates used in the Plan.
Liabilities existing at the Plan confirmation date are stated at the
present values of amounts to be paid discounted at appropriate
current rates. Deferred taxes are reported in conformance with
existing generally accepted accounting principles. Debt issued in
connection with the Plan is recorded at the stated value. The
difference between the net fair value of the assets and the
liabilities existing at the confirmation date (excluding
restructured debt in accordance with the Plan) and the
reorganization value is "Excess of the Net Fair Value over
Reorganization Value." "Excess of the Net Fair Value over
Reorganization Value" is subject to the provisions of SFAS No. 141.
Under SFAS No. 141, the excess of the net fair value is used to
reduce certain assets, as defined by SFAS No. 141 (generally
long-lived non-financial assets), to zero. Any excess net fair value
remaining after the reduction is recognized as an extraordinary
gain. The determination of the net fair values of the assets and
liabilities is subject to significant estimation and assumptions.
Actual results could differ from the estimates made.
o Ventures Investments: Ventures provided venture leases, venture debt
and direct equity financing to venture capital-backed companies
(collectively the "investments"). Venture leases are leases with
warrants that were intended to compensate Ventures for providing
equipment leases with terms having lower periodic rental payments
than leases without warrants. Similarly, venture debt is a high-risk
loan with warrants or a conversion-to-equity feature with more
flexible terms than more traditional debt financing. Direct equity
financings involved Ventures' purchase of convertible preferred
stock and common stock from its customers. The Company carries the
investments at the lower cost or net realizable value. The Company
regularly estimates the net realizable value of these investments by
adjusting their carrying value for known trends and historical
collection experience. This estimate could require further
adjustment based on changing circumstances, including changes in the
economy or in the particular circumstances of a specific investment.
o Allowance for Doubtful Accounts: The Company maintains an allowance
for doubtful accounts. This allowance reflects management's estimate
of the amount of the Company's receivables that it will be unable to
collect and is based on current trends and historical collection
experience. The estimate could require adjustments based on changing
circumstances, including changes in the economy or in the particular
circumstances of individual customers. Accordingly, the Company may
be required to increase or decrease the allowance.
o Residual Value of Rental Equipment: Direct financing and sale-type
leased assets consist of the present value of the future minimum
lease payments plus the present value of the residual (collectively
referred to as the "Net Investment"). Residual is the estimated fair
market value of the equipment on lease at lease termination. Revenue
on operating leases consists of the contractual lease payments which
is recognized on a straight-line basis over the lease term. Costs
and expenses are principally depreciation of the equipment.
Depreciation is recognized on a straight-line basis over the lease
term to the Company's estimate of the equipment's fair market value
at lease termination, commonly referred to as "residual value." In
estimating the equipment's fair value at lease termination, the
Company relies on historical experience by equipment type and
manufacturer and, where available, valuations by independent
appraisers, adjusted for known trends. The Company's estimates are
reviewed continuously to ensure reasonableness; however, the amounts
the Company will ultimately realize could differ from the amounts
assumed in determining the fair market value of the equipment at
lease termination and the ultimate gain or loss on disposition of
assets.
The above listing is not intended to be a comprehensive list of all
the Company's accounting policies. Please refer to the Company's consolidated
financial statements and notes thereto which contain the Company's significant
accounting policies and other disclosures required by accounting principles
generally accepted in the United States of America provided in the Company's
Annual Report on Form 10-K for the year ended September 30, 2002.
Basis of Presentation
The Company and 50 of its domestic subsidiaries filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Northern District of Illinois on
July 16, 2001. Prior to emerging from Chapter 11 on August 12, 2002, Comdisco,
Inc. operated its business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court. The reorganized Company
adopted fresh-start reporting and gave effect to its emergence as of July 31,
2002 for financial reporting purposes.
Under fresh-start reporting, the final consolidated balance sheet as
of July 31, 2002 became the opening consolidated balance sheet of the
reorganized Company. Since fresh-start reporting has been reflected in the
accompanying consolidated balance sheet as of December 31, 2002 and September
30, 2002, the consolidated balances as of those dates are not comparable in
certain material respects to any such balance sheet for any period prior to
July 31, 2002. In addition, Comdisco, Inc.'s results of operations prior to
July 31, 2002 are not comparable to the Company's results of operations after
its emergence from bankruptcy due to the adoption of fresh-start reporting.
Recent Developments
On October 18, 2002, the Company announced that it had sold its Swiss
and Austrian-based operations. These transactions closed on October 10, 2002
and August 14, 2002, respectively. During July 2002, the Company recorded a $1
million pre-tax loss on the sale of its Swiss and Austrian-based operations.
On December 23, 2002, the Company completed the sale of its French
operations, Comdisco France SA and Promodata SNC, to Belgium-based computer
services provider, Econocom Group and the Company received approximately $70
million from such sale. The sale was effective as of August 31, 2002. In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," during July 2002, the Company recorded a pre-tax charge of
$35 million to reduce cost in excess of fair value to reflect the difference
between carrying value and estimated proceeds from the sale.
The Company also has sold substantially all of its information
technology (IT) leasing assets in Australia and New Zealand to Allco, an
Australian company specializing in equipment and infrastructure finance and
leasing. The bankruptcy court approved the sale on April 18, 2002. Under the
terms of the sale agreement, Allco agreed to purchase most of the assets in
Australia and New Zealand in a series of closings. On June 28, 2002, the
Company and Allco completed the first closing on the sale of leased assets in
Australia and New Zealand. Comdisco, Inc. received approximately $8 million
for the sale of these assets. Comdisco, Inc. has received $24 million for the
assets sold through November 2002 and the final closing is expected to occur
during the second fiscal quarter of 2003. In accordance with SFAS No. 121, the
Company recorded pre-tax charges of $6 million in the third quarter of fiscal
2002 and $2 million in the one month ended July 31, 2002 to reduce cost in
excess of fair value to reflect the difference between carrying value and
estimated proceeds from the sale.
On October 21, 2002, the Company voluntarily redeemed the entire $400
million outstanding principal amount of its Senior Notes at a price equal to
100% of their principal amount plus accrued and unpaid interest from August
12, 2002 to the redemption date. On November 14, 2002, pursuant to its
obligations under the Subordinated Notes, the Company made a mandatory partial
redemption of $65 million of the outstanding principal amount of its
Subordinated Notes. On December 23, 2002, the Company made an optional partial
redemption of $200 million principal amount of its Subordinated Notes. On
December 31, 2002, the Company made an approximately $16 million interest
payment with respect to the Subordinated Notes. On January 9, 2003, the
Company made an optional partial redemption of $100 million principal amount
of its Subordinated Notes. On February 10, 2003, the Company made an optional
partial redemption of $50 million principal amount of its Subordinated Notes.
The total outstanding principal amount of the Subordinated Notes subsequent to
the February 10, 2003 redemption is $235 million. Each of these partial
redemptions of the Subordinated Notes were redeemed at a price equal to 100%
of their principal amount plus accrued and unpaid interest to the redemption
date. On February 14, 2003, the Company announced that an optional partial
redemption of $75 million principal amount of its Subordinated Notes is
scheduled to occur on March 3, 2003.
Results of Operations
Certain reclassifications have been made to the prior period
financial statements to conform to the presentation used in the December 31,
2002 consolidated financial statements. As a result of the reorganization, the
recording of the restructuring transactions, the asset disposition
transactions and the implementation of fresh-start reporting pursuant to SOP
90-7, the Company's results of operations for the three months ended December
31, 2002 are not comparable to the results of operations for the three months
ended December 31, 2001. The information in this section should be read in
conjunction with the consolidated financial statements and the related notes
thereto.
Three Months Ended December 31, 2002 Compared to Three Months Ended December
31, 2001
Total Revenue
Total revenue decreased 58 percent to $187 million for the three
months ended December 31, 2002 from $454 million for the three months ended
December 31, 2001. The decrease is due to lower revenues from all of the
Company's operations. During the three months ended December 31, 2001 and
2002, the Company's operations were limited by the Company's financial
constraints and the related impact on new business volume and remarketing,
general economic conditions, anticipated asset sales and actual lease
portfolio sales, significant reductions in personnel and the impact of the
filing on the business. See the Risk Factor entitled "Uncertainties Relating
to the Bankruptcy Plan" in this Item 2, below, for more information.
Additional revenue information for each of the Company's current four business
segments, US Leasing, European IT Leasing, Ventures and CAM group, is set
forth below.
Total Leasing Revenue
Total leasing revenue decreased 64 percent to $118 million for the
three months ended December 31, 2002 from $323 million for the three months
ended December 31, 2001. The decrease in total leasing revenue is primarily
due to the continued orderly run-off of the lease base, the absence of
significant new business volume and the emphasis by the Company on sales
rather than the extension of existing leases. Total leasing revenue from the
Company's US Leasing operations decreased 57 percent to $37 million for the
three months ended December 31, 2002. Total leasing revenue from the Company's
European IT Leasing operations decreased 33 percent to $31 million for the
three months ended December 31, 2002. Ventures total leasing revenue decreased
40 percent to $40 million for the three months ended December 31, 2002. Total
leasing revenue from the Company's CAM group decreased 92 percent to $10
million for the three months ended December 31, 2002. The decrease in total
leasing revenue from the Company's CAM group is primarily due to the leased
asset sales to GE Capital and other organizations discussed in Note 4 of Notes
to Consolidated Financial Statements.
Sales Revenue
The Company generates sales from two sources: (a) the sale of used
equipment from its inventory; and (b) the sale 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. Given the
Company's limited business purpose, it is focused on completing these types of
sales transactions rather than extending existing leases or re-leasing its
inventory of equipment. Revenue from sales decreased 44 percent to $53 million
for the three months ended December 31, 2002 from $95 million for the three
months ended December 31, 2001. This decrease is due primarily to the
declining lease base and the completion of a sale to a single customer in the
CAM group which generated $38 million of sales revenue during the three months
ended December 31, 2001. US Leasing sales revenue increased 11 percent to $31
million for the three months ended December 31, 2002. European IT Leasing
sales revenue increased 175 percent to $11 million for the three months ended
December 31, 2002. Ventures sales revenue increased 33 percent to $4 million
for the three months ended December 31, 2002. CAM group sales revenue
decreased 88 percent to $7 million for the three months ended December 31,
2002.
Technology Services Revenue
Revenue from technology services decreased 57 percent to $10 million
for the three months ended December 31, 2002 from $23 million for the three
months ended December 31, 2001. The decrease is primarily the result of the
sale of the North American portion of the IT CAP Services business in February
2002.
Other Revenue
Other revenue decreased 54 percent to $6 million for the three months
ended December 31, 2002 from $13 million for the three months ended December
31, 2001. Interest income on notes decreased 55 percent to $4 million compared
for the three months ended December 31, 2002 from $9 million for the three
months ended December 31, 2001. The components of other revenue were as
follows (in millions):
SUCCESSOR PREDECESSOR
For the three months ended
December 31,
2002 2001
------------------ | -----------------
Ventures: |
|
Sale of equity holdings $ - | $ -
Interest income on notes 4 | 9
------------------ | -----------------
Total 4 | 9
Other reportable segments: |
Investment income 1 | -
Other 1 | 4
------------------ | -----------------
Total 2 | 4
------------------ | -----------------
Total other revenue $ 6 | $ 13
================== | =================
Total Costs and Expenses
Total operating costs and expenses decreased 76 percent to $177
million for the three months ended December 31, 2002 from $743 million for the
three months ended December 31, 2001. In the three months ended December 31,
2001, the Company recorded $267 million of reorganization items, including the
$250 million of pre-tax charges for the sales of electronics, laboratory and
scientific leased asset portfolios discussed in Note 4 of Notes to
Consolidated Financial Statements. Additional cost and expense information for
each of the Company's current business segments is set forth below.
Total Leasing Costs and Expenses
Total leasing costs and expenses decreased 63 percent to $85 million
for the three months ended December 31, 2002 from $231 million for the three
months ended December 31, 2001. The decrease in total leasing costs and
expenses is primarily due to the continued orderly run-off of the lease base,
the absence of significant new business volume and the emphasis by the Company
on sales rather than the extension of existing leases. Total leasing costs and
expenses from the Company's US Leasing operations decreased 75 percent to $13
million for the three months ended December 31, 2002. Total leasing costs and
expenses from the Company's European IT Leasing operations decreased 30
percent to $26 million for the three months ended December 31, 2002. Ventures
total leasing costs and expenses decreased 30 percent to $38 million for the
three months ended December 31, 2002. Total leasing costs and expenses from
the Company's CAM group decreased 90 percent to $8 million for the three
months ended December 31, 2002. The decrease in total leasing costs and
expenses from the Company's CAM group is primarily due to the leased asset
sales to GE Capital and other organizations discussed in Note 4 of Notes to
Consolidated Financial Statements.
Sales Costs and Expenses
Sales costs and expenses decreased 60 percent to $33 million for the
three months ended December 31, 2002 from $82 million for the three months
ended December 31, 2001. The decrease in the three months ended December 31,
2002 compared to the three months ended December 31, 2001 reflects continued
reductions in assets available for sale, while margins have improved due to
the Company's focus on sales transactions. US Leasing sales costs and expenses
decreased 18 percent to $18 million for the three months ended December 31,
2002. Margins on those sales were 42 percent and 21 percent in the three
months ended December 31, 2002 and 2001, respectively. European IT Leasing
sales costs and expenses increased 133 percent to $7 million for the three
months ended December 31, 2002. Ventures sales costs and expenses were zero
for the three months ended December 31, 2002 compared to $2 million for the
three months ended December 31, 2001. CAM group sales costs and expenses
decreased 85 percent to $8 million for the three months ended December 31,
2002. CAM group sales in the current quarter are primarily electronics
equipment remarketed from inventory.
Technology Services Costs and Expenses
Technology services costs and expenses decreased 53 percent to $7
million for the three months ended December 31, 2002 from $15 million for the
three months ended December 31, 2001. The decrease is primarily the result of
the sale of the North American portion of the IT CAP Services business in
February 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 51 percent to
$29 million for the three months ended December 31, 2002 from $59 million for
the three months ended December 31, 2001. The following table summarizes
selling, general and administrative expenses (in millions):
SUCCESSOR PREDECESSOR
For the three months ended
December 31,
2002 2001
----------------- | ----------------
|
Incentive compensation $ 11 | $ 13
Other compensation and benefits 10 | 25
Outside professional services 12 | 8
Foreign exchange gain (12) | -
Other expenses 8 | 13
---------------- | -----------------
$ 29 | $ 59
================ | =================
The decreases in compensation and benefits in the current year
compared to the year earlier period reflect the continued reduction in
personnel. As of July 16, 2001, the date the Company filed bankruptcy, the
Company had approximately 2,100 domestic employees. As of the date of
emergence from bankruptcy, the Company had approximately 400 domestic
employees. As of December 31, 2002, the Company had approximately 325 domestic
employees. Included in other expenses for the three months ended December 31,
2002 is $6 million related to the increase in the estimated liability for
Contingent Distribution Rights as of December 31, 2002. The liability
increased primarily due to the distributions on February 14, 2003 and the
increase in shareholders' equity for the three months ended December 31, 2002.
Write-down of Equity Securities
The charge for write-down of equity securities decreased 66 percent
to $7 million for the three months ended December 31, 2002 from $21 million
for the three months ended December 31, 2001. The decrease reflects the
overall reduction in the carrying value of the Company's equity securities.
Bad Debt Expense
Bad debt expense decreased 110 percent to $(5) million for the three
months ended December 31, 2002 from $50 million for the three months ended
December 31, 2001 primarily due to management's reassessment of the reserves
necessary for the Company's Ventures portfolio.
Interest Expense
Interest expense increased 17 percent to $21 million for the three
months ended December 31, 2002 from $18 million for the three months ended
December 31, 2001. Effective August 12, 2002, the Company, along with its
direct wholly-owned subsidiary, Comdisco, Inc., co-issued the Senior Notes in
the aggregate principal amount of $400 million and the Subordinated Notes in
the aggregate principal amount of $650 million.
As of July 16, 2001, the Company ceased accruing interest on the
unsecured debt obligations of the Debtors. Contractual interest on all
obligations for the three months ended December 31, 2001 was $60 million in
excess of recorded interest expense included in the accompanying financial
statements.
Reorganization Items
Charges for reorganization items were $267 million for the three
months ended December 31, 2001. See Note 5 of Notes to Consolidated Financial
Statements, which is incorporated in this section by reference, for a
discussion of reorganization items. Included in reorganization items is the
$250 million of pre-tax charges for the sales of electronics, laboratory and
scientific leased asset portfolios.
Net Earnings (Loss) from Continuing Operations
Net earnings from continuing operations were $9 million in the three
months ended December 31, 2002, or $2.04 per common share, compared to a net
loss of $218 million, or $1.45 per share in the three months ended December
31, 2001. The net loss from continuing operations in the three months ended
December 31, 2001 is primarily the result of losses on asset sales during the
quarter, (see Note 4 of Notes to Consolidated Financial Statements).
Discontinued operations
Net earnings from discontinued operations were $197 thousand for the
three months ended December 31, 2002 compared to net earnings from
discontinued operations of $206 million for the three months ended December
31, 2001.
o International Leasing: On October 18, 2002, the Company announced
that it had sold Comprendium Finance S.A., Computer Discount GmbH
and the Company's French leasing subsidiaries, Comdisco France SA
and Promodata SNC. The results of operations of these European
subsidiaries as well as the Company's Australian and New Zealand
operations ("International Leasing") have been classified as
discontinued operations and prior year periods have been restated.
Revenue from discontinued International Leasing was immaterial
during the three months ended December 31, 2002 compared to $42
million during the three months ended December 31, 2001. Costs and
expenses for these operations were immaterial during the three
months ended December 31, 2002 compared to $39 million during the
three months ended December 31, 2001. The decrease in both revenues
and costs in the current year period compared to the prior year
period is a result of the sale. Net earnings for International
Leasing was $2 million during the three months ended December 31,
2001.
o Availability Solutions: On November 15, 2001, the Company completed
the sale of its availability solutions business to SunGard. The
results of operations of availability solutions have been classified
as discontinued operations and prior periods have been restated.
Revenue from availability solutions was $67 million for the three
months ended December 31, 2001. Availability solutions costs were
$59 million for the three months ended December 31, 2001.
Net earnings of the availability solutions business were $204 million
for the three months ended December 31, 2001. Approximately $199
million of the net earnings within discontinued operations for the
three months ended December 31, 2001 relates to the gain on the sale
of the availability solutions business.
The sale excluded the purchase of the stock of subsidiaries in Germany
and Spain. However, as a result of the Company's intention to exit
the availability solutions businesses of Germany and Spain
(including the possible sale of assets in either or both countries),
the Company has also accounted for these businesses as discontinued
operations. Revenue and expenses for the Company's operations in
Germany and Spain for the three months ended December 31, 2002 and
2001 were immaterial.
Net Earnings (Loss)
Net earnings for the three months ended December 31, 2002 were $9
million compared to a net loss of $12 million for the three months ended
December 31, 2001.
Financial Condition
On September 30, 2002, in accordance with the Plan, the Company made
an initial distribution to the holders of certain Allowed Claims (as defined
in the Plan) against the Comdisco, Inc. bankruptcy estate. As part of that
initial distribution, the Company, along with its direct wholly-owned
subsidiary, Comdisco, Inc., co-issued the Senior Notes in aggregate principal
amount of $400 million and the Subordinated Notes in aggregate principal
amount of $650 million.
The Senior Notes were issued pursuant to an indenture dated as of
August 12, 2002 and amended as of October 7, 2002 (the "Senior Note
Indenture"). Similarly, the Subordinated Notes were issued pursuant to an
indenture dated as of August 12, 2002 and amended as of October 7, 2002 (the
"Subordinated Note Indenture"). On October 21, 2002, the Company voluntarily
redeemed the entire $400 million outstanding principal amount of its Senior
Notes at a price equal to 100% of their principal amount plus accrued and
unpaid interest from August 12, 2002 to the redemption date. On November 14,
2002, pursuant to its obligations under the Subordinated Notes, the Company
made a mandatory partial redemption of $65 million of the outstanding
principal amount of its Subordinated Notes. On December 23, 2002, the Company
made an optional partial redemption of $200 million principal amount of its
Subordinated Notes. On December 31, 2002, the Company made an approximately
$16 million interest payment with respect to the Subordinated Notes. On
January 9, 2003, the Company made an optional partial redemption of $100
million principal amount of its Subordinated Notes. On February 10, 2003, the
Company made an optional partial redemption of $50 million principal amount of
its Subordinated Notes. The total outstanding principal amount of the
Subordinated Notes subsequent to the February 10, 2003 redemption is $235
million. Each of these partial redemptions of the Subordinated Notes were
redeemed at a price equal to 100% of their principal amount plus accrued and
unpaid interest to the redemption date. On February 14, 2003, the Company
announced that an optional partial redemption of $75 million principal amount
of its Subordinated Notes is scheduled to occur on March 3, 2003.
The Company's obligations with respect to payment of interest and
principal under the Subordinated Notes have been secured by a first-priority
security interest in all the capital stock of Comdisco Global Holding Company,
Inc., Comdisco, Inc., Comdisco Domestic Holding Company, Inc. and Comdisco
Ventures, Inc. and certain other property that may be acquired by the Company
in the future. Because the Company's investments in its subsidiaries are
pledged to secure the obligations under the Subordinated Notes, Comdisco
Holding's ability to obtain additional or alternate financing is severely
restricted. Accordingly, the Company must rely on cash generated from the
orderly sale and run-off of its assets to meet its liquidity needs.
Permitted uses of cash are specified in the Subordinated Note
Indenture and the Plan. Generally, the Company is permitted to use cash only
to fund its operating reserve, pay operating expenses, and make certain
payments under its management incentive plan and stay-bonus plan. All cash in
excess of amounts necessary to satisfy those obligations must be used to
redeem Subordinated Notes in accordance with the Subordinated Note Indenture.
The Company is not permitted to make distributions with respect to its Common
Stock or Contingent Distribution Rights until all debt evidenced by the
Subordinated Notes is extinguished.
The Company continually evaluates opportunities for the orderly sale
and run-off of its remaining assets, including the sale of one or more of its
leasing asset portfolios. Comdisco, Inc.'s bankruptcy filing and the potential
sale of some or all of these businesses created uncertainty that had an
adverse impact on the Company's business, ability to obtain credit, customer's
confidence, its ability to retain employees and employees' performance in
future periods. The Company believes this uncertainty negatively impacted the
Company's financial results for the three months ended December 31, 2002.
Furthermore, and in addition to the uncertainty created by the Company's
limited business purpose, this uncertainty will continue to have an impact on
the Company's operations and its ability to implement the Plan. See Risk
Factors below for additional risks associated with the bankruptcy filing and
the Company's future results of operations.
At December 31, 2002, the Company had unrestricted cash and cash
equivalents of approximately $223 million, a decrease of approximately $342
million compared to September 30, 2002. Net cash provided by operating
activities for the three months ended December 31, 2002 was $432 million. Net
cash used in investing activities was $20 million for the three months ended
December 31, 2002.
The Company's operating activities during the three months ended
December 31, 2002, including capital expenditures, were funded primarily by
cash flows from operations (primarily lease receipts), including the
realization of residual values through remarketing activities. The Company's
liquidity has typically been augmented by the realization of cash from the
remarketing of leased equipment. Liquidity from remarketing during the three
months ended December 31, 2002 decreased compared to the year earlier period
and this trend is expected to continue as the Company's asset base decreases
and is reduced to cash. See the risk factor entitled "Remarketing Results Are
Uncertain" in Risk Factors Relating to the Company, below, for information
regarding remarketing.
The Company's current and future liquidity depends on cash on hand,
cash provided by operating activities and asset sales. As of February 11,
2003, the Company's unrestricted cash balances exceeded $100 million. The
Company expects its cash on hand and cash flow from operations to be
sufficient to fund operating expenses, interest payments and debt obligations
for the foreseeable future.
The Company's cash flow from operating activities is dependent on a
number of variables, including, but not limited to, the ability of the Company
to implement its reorganization Plan, timely payment by its customers, global
economic conditions and controlling operating costs and expenses.
Contingent Distribution Rights
As previously discussed, all shares of the Predecessor company's
common stock were cancelled on August 12, 2002. Holders of the Predecessor
company's common stock meeting certain requirements may exchange their shares
for Contingent Distribution Rights. More information on the Contingent
Distribution Rights can be found in a Registration Statement on Form 8-A filed
by the Company on August 12, 2002 with the Securities and Exchange Commission.
Pursuant to the terms of the Contingent Distribution Rights
distributed in accordance with the Plan, the Company agreed to provide
information regarding the present value of distributions to holders of allowed
Class C-4 Claims in its annual and quarterly reports. As the present value of
distributions to those creditors reaches certain levels of recovery
established pursuant to the Plan, the holders of the Contingent Distribution
Rights are entitled to share in distributions made by the Company on the terms
set forth in the Plan and further clarified in the Contingent Distribution
Rights Agreement. As of February 14, 2003, and after giving effect to the cash
portion (approximately $56 million) of the distributions under the Plan that
were made on such date, the present value of the distributions to creditors
holding Class C-4 Claims that have been allowed was approximately $2.754
billion and the aggregate amount of Class C-4 Claims that have been allowed
was approximately $3.657 billion. Accordingly, the percentage recovery of
creditors holding Class C-4 Claims that have been allowed is approximately 75
percent through February 14, 2003. The present value of distributions to
creditors includes the present value of each of the following, after deducting
amounts contributed to the Disputed Claims Reserve:
o the cash portion (approximately $2.2 billion) of the initial
distribution on September 30, 2002;
o the optional redemption of the entire $400 million principal amount
of Senior Notes (plus accrued interest) on October 21, 2002;
o the mandatory partial redemption of $65 million principal amount of
Subordinated Notes (plus accrued interest) on November 14, 2002;
o the optional partial redemption of $200 million principal amount of
Subordinated Notes (plus accrued interest) on December 23, 2002;
o the approximately $16 million interest payment with respect to the
Subordinated Notes on December 31, 2002;
o the optional partial redemption of $100 million principal amount of
Subordinated Notes (plus accrued interest) on January 9, 2003;
o the optional partial redemption of $50 million principal amount of
Subordinated Notes (plus accrued interest) on February 10, 2003;
o the cash portion (approximately $22 million) paid on February 14,
2003 to newly-allowed Class C-4 Claims in the face amount of
approximately $29 million that received a distribution from the
Disputed Claims Reserve; and
o the cash portion (approximately $34 million) of the supplemental
distribution made on February 14, 2003 to creditors holding Class
C-4 Claims that have been allowed as of that date.
Cash contributed to the Disputed Claims Reserve through February 14,
2003 in respect of claims that have not been allowed or otherwise resolved
totaled approximately $288 million. Claims remaining in the Disputed Claims
Reserve as of February 14, 2003, which claims have not been allowed or
otherwise resolved, were estimated by the Company in the amount of $375
million pursuant to bankruptcy court authority.
Risk Factors Relating to the Company
The following risk factors and other information included in this
quarterly report on Form 10-Q should be carefully considered. The risks and
uncertainties described below are not the only ones the Company confronts.
Additional risks and uncertainties not presently known to it or that it
currently deems immaterial also may impair the Company's business operations
and the implementation of the Plan. If any of the following risks actually
occurs, the Company's business, financial condition, operating results and the
implementation of the Plan could be materially adversely affected.
Uncertainties Relating to the Bankruptcy Plan
The results of the Company's operations may be affected by (i) the
reluctance of customers and third parties to do business with a company
recently emerged from bankruptcy proceedings; (ii) the ability of the Company
to retain employees; (iii) limitations imposed by the Plan's focus on the
orderly run-off or sale of assets; and (iv) third party competitive pressures.
In addition, the Company has incurred and will continue to incur
significant costs associated with its reorganization and implementation of the
Plan. The amount of these costs, which are being expensed as incurred, are
expected to have a significant adverse affect on the results of operations.
Inherent Uncertainty of Limited Business Plan
The Company's post-bankruptcy business plan is limited to an orderly
run-off or sale of its remaining assets. Pursuant to the Plan and restrictions
contained in its certificate of incorporation, the Company is specifically
prohibited from engaging in any business activities inconsistent with its
limited business plan. This business plan is based on numerous assumptions
including the anticipated future performance of the Company in running off its
operations, the time frame for the run-off, general business and economic
conditions, and other matters, many of which are beyond the control of the
Company and some of which may not materialize. As a result, the Company's
ability to effectively implement this business plan is inherently uncertain.
In addition, unanticipated events and circumstances occurring subsequent to
the date of this quarterly report may affect the actual financial results of
the Company's operations.
The Company's Liquidity is Dependent on a Number of Factors
The Company's liquidity generally depends on cash provided by
operating activities. The Company's cash flow from operating activities is
dependent on a number of variables, including, but not limited to, timely
payment by its customers, global economic and political conditions, control of
operating costs and expenses and the ability of the Company to dispose of its
assets. In addition, the Company continues to honor its existing lease funding
obligations, including significant obligations related to its technology
refresh option product within European IT Leasing. If the technology refresh
option assets are not sold in the near term, the continued funding requirement
could have a negative impact on liquidity. Any inability of the Company to
fund such commitments could have a negative impact on the realization of value
from these assets.
Remarketing Results Are Uncertain
Quarterly operating results and cash from the sale of assets depend
substantially upon remarketing transactions, which are difficult to forecast
accurately. The general economic slowdown and particularly the decrease in
corporate technology equipment spending may have a negative impact on
equipment values and remarketing results. There can be no assurance that the
Company's current financial condition and emergence from bankruptcy will not
continue to have a negative impact on the ability of the Company to sell its
remaining assets.
The Company is Affected By Product and Market Development
The markets for the Company's principal products are characterized by
rapidly changing technology, frequent new product announcements and
enhancements, evolving industry standards and customer demands and declining
prices. These rapidly changing market conditions could adversely affect the
Company's business, including its leasing and remarketing revenue and earnings
contributions.
The Company's Investments in Certain Industries May Cause Business
and Broader Financial Results to Suffer
The Company has significant exposures to companies engaged in the
telecommunications, electronics and other high-technology industries that have
been severely negatively impacted by the recent economic downturn. To the
extent that these companies are unable to meet their business plans, or are
unable to obtain funding at reasonable rates to execute their business plans,
there could be an increase in the Company's credit losses. There can be no
assurance that the economic and operating environment for these industries
will rebound to levels seen prior to the economic downturn, nor that the
environment for these industries will not continue to deteriorate.
Current Economic Conditions Have Made It Difficult for Ventures to
Timely Realize on its Investments and Have Adversely Affected the Ability of
Ventures Customers to Timely Meet Their Obligations to the Company
Ventures, through Comdisco, Inc.'s former Ventures group, leased
equipment to, made loans to and equity investments in various privately held
companies. The Company's Ventures operations are now directed by Comdisco
Ventures, Inc., a wholly-owned subsidiary of Comdisco, Inc. Prior to the
bankruptcy filing, the companies in which Ventures invested were typically in
an early stage of development with limited operating histories and limited or
no revenues and expectations of substantial losses. The current slowdown in
economic growth has and could continue to materially affect these companies.
Accordingly, investments in these companies may not result in any return and
the Company may lose its entire investment and/or principal balance. Many of
the companies to which Ventures provided venture financing prior to the
bankruptcy filing are dependent on third parties for liquidity. The
significant change in the availability of funds has had, and may continue to
have, a material impact on the fair market value of the Company's equity
instruments and credit risk on its debt instruments. If more of these
companies are unable to meet their business plans, or unable to obtain funding
or funding at reasonable rates to execute their business plans, there could be
an increase in the Company's credit losses. Further, increases in credit
losses during fiscal year 2002 indicate that there is an increasing number of
companies in the Ventures' portfolio that are currently experiencing or will
be experiencing liquidity shortfalls in the near term. Early-stage companies,
unable to obtain additional financing, are reducing overhead or closing down
completely. Management has an on-going portfolio review process intended to
identify problem companies within the Ventures' financing portfolio. To the
extent there are revisions in management's estimates requiring additional bad
debt provisions, the Company's operating results and financial condition could
be materially adversely affected.
Current economic conditions also have adversely affected the
opportunities for the acquisition/merger of the Internet-related,
communications and other high technology and emerging growth companies that
make up the substantial majority of Ventures' portfolio. Additionally, the
public market for high technology and other emerging growth companies is
extremely volatile. Such volatility has adversely affected the ability of the
Company to dispose of the equity securities and the value of those securities
on the date of sale. Exacerbating these conditions is the fact that the equity
instruments held by the Company are subject to lockup agreements restricting
its ability to sell until several months after an initial public offering.
Without an available liquidity event, the Company is unable to dispose of its
equity securities. As a result, Ventures may not be able to generate gains or
receive proceeds from the sale of equity holdings and the Company's business
and financial results may suffer. Additionally, liquidation preferences may
continue to be offered by companies in the Ventures portfolio to parties
willing to lend to such companies. The liquidation preferences have had, and
may continue to have, an adverse impact on the value of Ventures equity and
warrant holdings. For those securities without a public trading market, the
realizable value of Ventures' interests may prove to be lower than the
carrying value currently reflected in the financial statements.
Company Exposed to Customer Concentration Risk
The Company's customer concentrations expose the Company to
additional risk in that the failure of any single customer, which represents a
concentration in the Company's existing portfolio of assets, to meet its
obligations to the Company could significantly negatively impact the Company's
revenues and cash flows.
Impact of Interest Rates and Foreign Exchanges Rates
Changes in interest rates and foreign exchange rates affect the fair
market value of the Company's leased assets. Decreases in interest rates would
positively impact the US dollar value of the Company's assets and a
strengthening of the dollar would negatively impact the value of our net
foreign assets.
Discontinued Operations and the Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reported period. With respect to the
Company's discontinued operations, actual losses could differ from those
estimates and will be reflected as adjustments in future financial statements
when probable and estimable.
Limited Public Market for Common Stock
There is currently a limited public market for the Company's Common
Stock. Holders of the Company's Common Stock may, therefore, have difficulty
selling their Common Stock, should they decide to do so. In addition, there
can be no assurances that such markets will continue or that any shares of
Common Stock which may be purchased may be sold without incurring a loss. Any
such market price of the Common Stock may not necessarily bear any
relationship to the Company's book value, assets, past operating results,
financial condition or any other established criteria of value, and may not be
indicative of the market price for the Common Stock in the future. Further,
the market price of the Common Stock may be volatile depending on a number of
factors, including the status of the Company's business performance, industry
dynamics, news announcements or changes in general economic conditions.
Limited Public Market for Contingent Distribution Rights
There is currently a limited public market for the Company's
Contingent Distribution Rights. Holders of the Company's Contingent
Distribution Rights may, therefore, have difficulty selling their Contingent
Distribution Rights, should they decide to do so. In addition, there can be no
assurances that such markets will continue or that any Contingent Distribution
Rights which may be purchased may be sold without incurring a loss. Any such
market price of the Contingent Distribution Rights may not necessarily bear
any relationship to the Company's book value, assets, past operating results,
financial condition or any other established criteria of value, and may not be
indicative of the market price for the Contingent Distribution Rights in the
future. Further, the market price of the Contingent Distribution Rights may be
volatile depending on a number of factors, including the status of the
Company's business performance, industry dynamics, news announcements or
changes in general economic conditions.
Other
Other uncertainties include general business conditions, ability to
sell assets, reductions in technology budgets and related spending plans and
the impact of workforce reductions on the Company's operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no material change during the first three months ended
December 31, 2002 from the disclosures about market risk provided in the
Company's Annual Report on Form 10-K for the year ended September 30, 2002.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The disclosure controls and procedures of the Company are designed to
ensure that information required to be disclosed by the Company in the reports
that it files under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within required time periods. In addition,
the Company has formed a Disclosure Controls Committee. The Company's chief
executive officer, the Company's principal financial officer and the
Disclosure Controls Committee have evaluated the effectiveness of the
Company's disclosure controls and procedures as of a date within ninety days
prior to the filing date of this report. Based on that evaluation, the
Company's chief executive officer and the Company's principal financial
officer have concluded that the Company's controls and procedures were
effective as of a date within 90 days prior to the filing date of this report
at ensuring that required information will be disclosed on a timely basis in
the Company's reports filed under the Exchange Act.
Change in Internal Controls
We maintain a system of internal accounting controls that is
designed to provide reasonable assurance that the Company's books and records
accurately reflect the Company's transactions and that the Company's
established policies and procedures are carefully followed. The Company's
internal controls were further enhanced, to support the Company's emergence
from bankruptcy, by the implementation of a Disclosure Controls Committee, an
Asset Divestiture and Credit Committee, a Related Party Transaction Policy and
the redistribution of the Company's code of conduct and insider trading
policies to all employees. Otherwise, there were no significant changes to the
Company's internal controls, or in other factors that could significantly
affect the Company's internal controls, and the Company has not identified any
significant deficiencies or material weaknesses in its internal controls.
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Certificate of Incorporation of Registrant dated August 8,
2002 (Incorporated by reference to Exhibit 3.1 filed with
the Company's Annual Report of Form 10-K dated September
30, 2002, as filed with the Commission on January 14, 2003,
File No. 0-49968).
3.2 By-Laws of Registrant dated August 9, 2002 (Incorporated by
reference to Exhibit 3.2 filed with the Company's Annual
Report of Form 10-K dated September 30, 2002, as filed with
the Commission on January 14, 2003, File No. 0-49968).
11.1 Statement re computation of per share earnings (Filed herewith).
99.1 Certification of the Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (Filed herewith).
99.2 Certification of the Principal Financial Officer Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (Filed herewith).
Reports on Form 8-K
On October 17, 2002, the Company filed a Current Report on Form 8-K,
dated September 30, 2002. Pursuant to Item 5 of its Report, the Company
reported that it issued a press release on October 1, 2002 announcing that the
initial distribution to holders of allowed claims commenced on September 30,
2002. The Company also issued a press release on October 9, 2002 announcing
the redemption of the entire $400 million outstanding principal amount of the
Variable Rate Senior Secured Notes due 2004. Prism Communication Services,
Inc. issued a press release on October 10, 2002 announcing that it had
commenced its initial distribution to holders of allowed claims. Finally, the
Report added the press releases as exhibits pursuant to Item 7.
On October 18, 2002, the Company filed a Current Report on Form 8-K,
dated October 18, 2002. Pursuant to Item 5 of its Report, the Company reported
that it issued a press release on October 18, 2002 announcing that it had
entered into an agreement for the sale of its French operations to Econocom
Group SA/NV. In addition, it announced that it had sold its Swiss and
Austrian-based operations. The Report added the press release as an exhibit
pursuant to Item 7.
On October 28, 2002, the Company filed a Current Report on Form 8-K,
dated October 21, 2002. Pursuant to Item 5 of its Report, the Company reported
that it issued a press release on October 12, 2002 announcing that it had
redeemed the entire $400 million outstanding principal amount of its Variable
Rate Senior Secured Notes due 2004. The Report added the press release as an
exhibit pursuant to Item 7.
On October 30, 2002, the Company filed a Current Report on Form 8-K,
dated October 29, 2002. Pursuant to Item 5 of its Report, the Company reported
that it issued a press release on October 29, 2002 announcing the mandatory
partial redemption of $65 million of the outstanding principal amount of its
11 percent Subordinated Secured Notes due 2005. The Report added the press
release as an exhibit pursuant to Item 7.
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 HOLDING COMPANY, INC.
Dated: February 14, 2003 By: /s/ David S. Reynolds
---------------------------------
Name: David S. Reynolds
Title: Senior Vice President and
Controller (Principal
Financial and Accounting Officer)
CERTIFICATION
Certification of Principal Executive Officer
I, Ronald C. Mishler, Chairman, Chief Executive Officer and
President, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comdisco
Holding Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: February 14, 2003 By: /s/ Ronald C. Mishler
----------------------------
Name: Ronald C. Mishler
Title: Chairman, Chief Executive
Officer and President
CERTIFICATION
Certification of Principal Financial Officer
I, David S. Reynolds, Senior Vice President and Controller,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Comdisco
Holding Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: February 14, 2003 By: /s/ David S. Reynolds
---------------------------
Name: David S. Reynolds
Title: Senior Vice President
and Controller
Exhibit 11.1
COMDISCO HOLDING COMPANY, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(in thousands except per share data)
Average shares used in computing earnings (loss) per common and
common equivalent share were as follows:
SUCCESSOR PREDECESSOR
----------------- -------------------
Three Months Ended
December 31,
2002 2001
----------------- | --------------------
Average shares outstanding-basic 4,200 | 150,559
Effect of dilutive options - | -
----------------- | --------------------
Average shares outstanding-diluted 4,200 | 150,559
================= | ====================
Net earnings (loss) to common stockholders $ 8,782 | $ (12,115)
================= | ====================
Net earnings (loss) per common share: |
Earnings (loss) per common share-basic: |
Earnings (loss) from continuing operations $ 2.04 | $ (1.45)
Earnings from discontinued operations 0.05 | 1.37
----------------- | --------------------
$ 2.09 | $ (0.08)
================= | ====================
Net Earnings (loss) per common share-diluted: |
Earnings (loss) from continuing operations $ 2.04 | $ (1.45)
Earnings from discontinued operations 0.05 | 1.37
----------------- | --------------------
$ 2.09 | $ (0.08)
================= | ====================
In accordance with Statement of Financial Accounting Standards No.
128--Earnings Per Share, no potential common shares (the assumed exercise of
stock options) are included in the computation of any diluted per share amount
when a loss from continuing operations exists.
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Form 10-Q of Comdisco Holding Company, Inc.
(the "Company") for the period ending December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Ronald C. Mishler, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: February 14, 2003 By: /s/ Ronald C. Mishler
------------------------
Name: Ronald C. Mishler
Title: Chairman, Chief Executive
Officer and President
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Form 10-Q of Comdisco Holding Company, Inc.
(the "Company") for the period ending December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, David
S. Reynolds, Controller and the principal financial officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or Section 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: February 14, 2003 By: /s/ David S. Reynolds
---------------------------
Name: David S. Reynolds
Title: Senior Vice President
and Controller