UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 2003
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 [X] No [ ]
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: 4,197,100 shares
of the registrant's Common Stock, $0.01 par value per share, were outstanding
on February 9, 2004.
COMDISCO HOLDING COMPANY, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION............................................. 3
Item 1. Financial Statements
Consolidated Statements of Earnings (Loss) -- Three months ended
December 31, 2003 and the three months ended December 31, 2002
(Unaudited) ............................................................ 4
Consolidated Balance Sheets -- December 31, 2003 (Unaudited) and
September 30, 2003 (Audited) ........................................... 5
Consolidated Statements of Cash Flows -- Three months ended
December 31, 2003 and the three months ended December 31, 2002
(Unaudited) ............................................................ 6
Notes to Consolidated Financial Statements (Unaudited).................. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 34
Item 4. Controls and Procedures....................................... 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 35
Item 2. Changes in Securities and Use of Proceeds..................... 35
Item 3. Defaults Upon Senior Securities............................... 35
Item 4. Submission of Matters to a Vote of Security Holders........... 35
Item 5. Other Information............................................. 35
Item 6. Exhibits and Reports on Form 8-K.............................. 35
SIGNATURES................................................................ 36
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 (the "SEC") 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
(the "Securities Act") and Section 21E of the Securities Exchange Act of 1934
(the "Exchange Act"), 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 (as defined below), 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. The Company disclaims any intention or obligation
to update or revise any forward-looking statements whether as a result of new
information, future events or otherwise.
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
THE COMPANY EMERGED FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS ON AUGUST
12, 2002. THE PURPOSE OF THE COMPANY IS TO SELL, COLLECT OR OTHERWISE REDUCE
TO MONEY IN AN ORDERLY MANNER THE REMAINING ASSETS OF THE CORPORATION.
PURSUANT TO THE COMPANY'S PLAN OF REORGANIZATION AND RESTRICTIONS CONTAINED IN
THE COMPANY'S CERTIFICATE OF INCORPORATION, THE COMPANY IS SPECIFICALLY
PROHIBITED FROM ENGAGING IN ANY BUSINESS ACTIVITIES INCONSISTENT WITH ITS
LIMITED BUSINESS PURPOSE. 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 HOLDERS OF ITS COMMON STOCK AND
CONTINGENT DISTRIBUTION RIGHTS IN THE MANNER AND PRIORITIES SET FORTH IN THE
PLAN. AT THAT POINT, THE COMPANY WILL CEASE OPERATIONS AND NO FURTHER
DISTRIBUTIONS WILL BE MADE.
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.
On February 17, 2004, the Company expects to file a motion with the
Bankruptcy Court for an order in furtherance of the Plan seeking authority to
appoint a disbursing agent, prior to August 12, 2004, to fulfill the roles of
the Board of Directors and executive officers of the Company, to file a
certificate of dissolution and to take such other measures as are necessary to
complete the administration of the reorganized debtors' Plan and chapter 11
cases. The Company will furnish the motion to the SEC with a Current Report on
Form 8-K pursuant to Item 9 when the motion is filed with the Bankruptcy
Court.
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) (UNAUDITED)
(in millions except per share data)
Three months ended
December 31,
---- ----
2003 2002
---- ----
Revenue
Leasing
Operating $ 7 $ 53
Direct financing 1 1
Sales-type 1 2
---- ----
Total leasing 9 56
Sales 21 15
Technology services 1 5
Agere lease participation payment 7 -
Sale of properties 2 -
Foreign exchange gain 1 13
Other 5 6
---- ----
Total revenue 46 95
---- ----
Costs and expenses
Leasing
Operating 4 48
Sales-type 1 1
---- ----
Total leasing 5 49
Sales 17 11
Technology services 1 4
Selling, general and administrative 5 18
Contingent distribution rights - 6
Write-down of equity securities - 7
Bad debt expense (5) (6)
Interest - 18
---- ----
Total costs and expenses 23 107
---- ----
Earnings (loss) from continuing operations before income
taxes (benefit) 23 (12)
Income taxes (benefit) (3) -
---- ----
Earnings (loss) from continuing operations 26 (12)
Earnings (loss) from discontinued operations, net of
tax (12) 21
---- ----
Net earnings $ 14 $ 9
==== ====
Basic earnings (loss) per common share:
Earnings (loss) from continuing operations $6.24 $(2.77)
Earnings (loss) from discontinued operations (2.95) 4.86
----- ------
Net earnings $3.29 $ 2.09
===== ======
Diluted earnings (loss) per common share:
Earnings (loss) from continuing operations $6.24 $(2.77)
Earnings (loss) from discontinued operations (2.95) 4.86
------ ------
Net earnings $3.29 $ 2.09
====== ======
See accompanying notes to consolidated financial statements.
Comdisco Holding Company, Inc.
CONSOLIDATED BALANCE SHEETS
(in millions except share data)
(Unaudited) (Audited)
December 31, September 30,
2003 2003
------------ -------------
ASSETS
Cash and cash equivalents $ 102 $ 97
Cash - legally restricted 29 42
Receivables, net 27 41
Inventory of equipment 2 9
Leased assets:
Direct financing and sales-type 20 26
Operating (net of accumulated depreciation) 4 16
-------- --------
Net leased assets 24 42
Equity securities 15 18
Assets of discontinued operations 92 113
Other assets 6 11
-------- --------
$ 297 $ 373
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 2 $ 6
Income taxes 52 29
Liabilities related to assets of discontinued operations 5 11
Deferred income 19 27
Other liabilities:
Accrued compensation 34 62
Contingent distribution rights 36 44
Other 5 12
-------- --------
Total other liabilities 75 118
-------- --------
153 191
Stockholders' equity:
Common Stock $.01 par value. Authorized 10,000,000 shares;
issued 4,200,000 shares. 4,197,100 shares outstanding at
December 31, 2003 and September 30, 2003 - -
Additional paid-in capital 133 169
Accumulated other comprehensive income 11 13
Retained earnings - -
Common Stock held in treasury, at cost; 2,900 shares at
December 31, 2003 and September 30, 2003 - -
--------- --------
Total stockholders' equity 144 182
--------- --------
$ 297 $ 373
========= ========
See accompanying notes to consolidated financial statements.
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
For the three months ended December 31, 2003 and 2002
2003 2002
--------- --------
Cash flows from operating activities:
Operating lease and other leasing receipts $ 18 $ 63
Lease portfolio sales - 6
Sales of equipment 23 17
Sales costs - (1)
Technology services receipts - 7
Technology services costs - (1)
Note receivable receipts 1 34
Warrant proceeds 1 -
Other revenue 12 7
Selling, general and administrative expenses (32) (19)
Contingent distribution rights payments (8) -
Interest - (30)
Income taxes 25 (7)
-------- --------
Net cash provided by continuing operations 40 76
Net cash provided by discontinued operations 8 356
-------- --------
Net cash provided by operating activities 48 432
-------- --------
Cash flows from investing activities:
Equipment purchased for leasing (1) (2)
Notes receivable - (1)
Equipment purchased for leasing by discontinued operations (1) (18)
Other (1) 1
-------- --------
Net cash used in investing activities (3) (20)
-------- --------
Cash flows from financing activities:
Cash used by discontinued operations (2) (58)
Net decrease in notes and term notes payable - (293)
Principal payments on secured debt - (1)
Maturities and repurchases of senior notes - (400)
Dividends paid on Common Stock (50) -
Decrease in legally restricted cash 13 6
Other (1) (16)
-------- --------
Net cash used in financing activities (40) (762)
-------- --------
Net increase (decrease) in cash and cash equivalents 5 (350)
Cash and cash equivalents at beginning of period 97 544
-------- --------
Cash and cash equivalents at end of period $ 102 $ 194
======== ========
See accompanying notes to consolidated financial statements.
Comdisco Holding Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) -- CONTINUED
(in millions)
For the three months ended December 31, 2003 and 2002
2003 2002
-------- ---------
Reconciliation of earnings (losses) from continuing
operations to net cash provided by operating activities:
Earnings (losses) from continuing operations $ 26 $ (12)
Adjustments to reconcile earnings (losses) from continuing
operations to net cash provided by operating activities
Leasing costs, primarily
depreciation and amortization 5 49
Leasing revenue, primarily principal portion of
direct financing and sales-type lease rentals 9 7
Cost of sales 17 10
Technology services costs, primarily
depreciation and amortization 1 3
Interest - (12)
Income taxes 22 (7)
Principal portion of notes receivable 1 32
Selling, general, and administrative expenses (32) -
Contingent distribution rights (8) 6
Lease portfolio sales - 6
Other, net (1) (6)
-------- --------
Net cash provided by continuing operations 40 76
Net cash provided by discontinued operations 8 356
-------- --------
Net cash provided by operating activities $ 48 $ 432
======== ========
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, 2003 and 2002
The following discussion and analysis should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results
of Operations included in Item 2 below and in the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2003, and with the
Consolidated Financial Statements and related notes in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2003.
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, Eastern Division (the "Bankruptcy
Court")(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 group ("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 an 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, telecommunication, 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 "CDRs"); 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 and Chairman 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," "our" and "Successor" 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." and
"Predecessor" 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,
presented herein, are not comparable to those of the Predecessor company
presented in prior filings with the SEC.
Certain reclassifications, including those for discontinued
operations, have been made in the fiscal 2003 financial statements to conform
to the fiscal 2004 presentation.
3. Discontinued Operations
Because of the sale of assets described in Note 4 of Notes to
Consolidated Financial Statements, amounts in the consolidated financial
statements and related notes for all periods shown have been restated to
account for the US Leasing operations, International Leasing and German
operations (the "German Leasing Subsidiary") as discontinued operations.
"International Leasing" refers to the Company's former French, Swiss,
Austrian, Australian and New Zealand leasing operations. The Company sold the
stock of its French, Swiss and Austrian subsidiaries and sold the assets of
its Australian and New Zealand operations. Each of the aforementioned
transactions resulted from an extensive offering and competitive bidding
process run by the Company's independent investment banking firm.
Following is summary financial information for the Company's
discontinued operations for the three months ended December 31, 2003 and 2002
(in millions):
Three months ended December 31, 2003
International German Leasing
US Leasing Leasing Subsidiary Total
---------- -------- ---------- ------
Revenue $ 7 $ 1 $ - $ 8
========== ======== ======= ======
Earnings (loss) from discontinued operations:
Before income taxes $ (7) $ 1 $ (6) $ (12)
Income taxes - - - -
---------- -------- ------- -------
Net earnings (loss) $ (7) $ 1 $ (6) $ (12)
========== ======== ======= =======
Three months ended December 31, 2002
International German Leasing
US Leasing Leasing Subsidiary Total
---------- -------- ---------- ------
Revenue $ 66 $ - $ 39 $ 105
========= ======== ======== =======
Earnings from discontinued operations:
Before income taxes $ 19 $ - $ 3 $ 22
Income taxes - - 1 1
--------- -------- -------- -------
Net earnings $ 19 $ - $ 2 $ 21
========= ======== ======== =======
4. Sale of Assets
US Leasing
On June 27, 2003, the Board of Directors approved a plan to sell
substantially all of the assets of US Leasing and authorized management to
enter into negotiations for the purpose of completing a sale transaction. On
August 25, 2003, the Company announced that it had agreed to sell its U.S.
information technology leasing business to Bay4 Capital Partners, LLC
("Bay4"). On September 9, 2003, the Company completed the sale to Bay4. Under
the terms of the asset purchase agreement, and after completion of the post
closing adjustments to the purchase price in October 2003, the Company
received approximately $19.4 million in cash, and Bay4 assumed approximately
$21.3 million in secured nonrecourse debt to third parties. The Company
retained a secured non-recourse interest of approximately $27.3 million in
certain other leases. In addition, the Company received a note in the amount
of approximately $39.9 million payable primarily from the realization of the
residual value of the assets. Furthermore, the note evidences the Company's
right to share in the proceeds, if any, realized from the assets beyond the
stated amount of the note.
On September 30, 2003, the Company completed the sale of its Canadian
information technology leasing assets to Bay4 Capital Partners, Inc. Under the
terms of the asset purchase agreement the Company received approximately 1.6
million Canadian dollars (approximately $1.2 million as of September 30,
2003).
European IT Leasing
On October 18, 2002, the Company announced that it had sold Computer
Discount GmbH, a leasing subsidiary of Comdisco, Inc. formerly known as
Comdisco Austria GmbH, to the Austrian company PH Holding GmbH. Under the
terms of the purchase agreement, PH Holding GmbH agreed to pay Euro 7 million
(approximately U.S. $8.6 million as of September 30, 2002) for 100 percent of
the stated share capital of Computer Discount GmbH. As part of the deal, PH
Holding GmbH agreed to continue to oversee the liquidation of Comdisco Ceska
Republika S.R.O., a wholly-owned Czech subsidiary of Computer Discount GmbH.
On October 18, 2002, the Company announced that it had sold Comprendium
Finance S.A., formerly known as Comdisco (Switzerland) S.A., a leasing
subsidiary of Comdisco Global Holding Company, Inc., to Comprendium
Investments S.A., a Swiss company. Pursuant to the terms of the sale
agreement, the Company received CHF 13.0 million (approximately U.S. $8.7
million as of September 30, 2002). On October 18, 2002, the Company announced
that it, along with Comdisco Global Holding 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 French leasing subsidiaries closed on December 23,
2002 and the Company received the proceeds in the amount of approximately Euro
69 million (U.S. $70 million).
On April 30, 2003, the Company announced that it had completed the
sale of the stock of its leasing subsidiary in Germany to Munich-based
Comprendium Investment (Deutschland) GmbH, which is owned by Comprendium
Investments S.A., a Swiss company. Under the terms of the Amended Share
Purchase Agreement, Comdisco received approximately Euro 285 million
(approximately $316 million) at closing, and will receive four additional
payments totaling up to approximately Euro 38 million over the 42 months
following closing, dependent upon specific portfolio performance criteria. The
four additional payments are subject to reduction if certain customers
exercise contractual termination provisions, the probability of which the
Company believes is remote. The first such payment is contractually due on
April 29, 2004. In accordance with Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company recorded a charge of $6 million ($1.46 per share) in the first quarter
of fiscal 2004 to reduce cost in excess of fair value to reflect the
difference between carrying value and estimated proceeds from a sale or early
buy-out.
For financial reporting purposes, at December 31, 2003, the four
additional payments discussed above are included in the balance sheet as
assets of discontinued operations and the results of operations of the
Company's German Leasing Subsidiary are included in the statement of earnings
(loss) as discontinued operations. The German subsidiary sold to Comprendium
Investment (Deutschland) GmbH comprised a majority of the Company's European
assets. An adjustment to the estimated fair value of the stock sold was
recognized in conjunction with the adoption of fresh-start reporting in July
2002.
Corporate Asset Management
On August 4, 2003, the Company announced the completion of the
post-closing review of the purchase price calculation for the sale of its
Electronics, Laboratory and Scientific, and Healthcare leasing portfolios to
GE Capital. The Company received approximately $25 million in the settlement
of the purchase price holdbacks. On the same date, the Company also announced
that it had agreed to a settlement with GE Capital regarding their future
contingent payment obligations on the Electronics equipment leasing business
(collectively, the "GE Settlement"). The Company received a single $40 million
cash payment and other consideration valued by the Company at approximately
$29 million. The other consideration primarily consisted of a participation
interest in certain Agere Systems, Inc. ("Agere") lease payments previously
purchased by GE Capital. The Company and GE also agreed to a mutual release of
substantially all potential indemnification claims under the sale agreements
for the Electronics, Laboratory and Scientific, and Healthcare leasing
portfolios.
On January 7, 2004, the Company completed the sale of its
participation interest in certain Agere lease payments. The aggregate purchase
price was approximately $18 million. Approximately $15 million was received in
cash and the remaining $3 million was placed in escrow pending the resolution
of post-closing adjustments, if any, to be made over the next year.
The participation interest was included in the Company's December 31,
2003 and September 30, 2003 balance sheets in receivables at the present value
of the minimum payments, or approximately $17 million and $24 million,
respectively, and, in a like amount, in deferred income. During the three
months ended December 31, 2003, the Company received approximately $7 million
in payments with respect to the participation interest. The Company received
approximately $2 million in payments in January 2004 prior to the sale. All
proceeds related to the participation interest have and will be reflected in
the Company's earnings when received.
The Company completed the sale of its Carlstadt property in November
2003 for approximately $2.2 million of which approximately $1.5 million is in
escrow pending resolution of an unrelated New Jersey state tax issue. The
Company recorded a $2.2 million gain during the quarter as a result of the
sale. The only remaining properties owned by the Company as of the date hereof
are a day-care facility adjacent to the Company's headquarters and a former
Availability Solutions facility in Eching, Germany. The Company believes the
remaining properties have an aggregate fair market value of less than $3
million.
5. Interest-Bearing Liabilities
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 creditors 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%.
On October 21, 2002, the Company redeemed the entire $400 million
outstanding principal amount of its Senior Notes. On April 28, 2003, the
Company made the final redemption of its Subordinated Notes. The Senior and
Subordinated Notes were redeemed at 100% of their principal amount plus
accrued and unpaid interest from August 12, 2002 to their respective
redemption dates.
The average daily borrowings outstanding during the three months
ended December 31, 2003 were nominal. This compares to average daily
borrowings during the three months ended December 31, 2002 of approximately
$952 million, with a contractual weighted average interest rate of 8.84%.
6. Receivables
Receivables included the following as of December 31, 2003 and
September 30, 2003 (in millions):
December 31, September 30,
2003 2003
--------- ---------
Notes $ 18 $ 27
Accounts 8 17
Other 6 8
--------- ---------
Total receivables 32 52
Allowance for credit losses (5) (11)
--------- ---------
Total $ 27 $ 41
========= =========
Notes
The payments due from Agere are included in the balance sheet in
Receivables at the present value of the minimum lease payments, or
approximately $17 million and $24 million at December 31, 2003 and September
30, 2003, respectively and, in a like amount, in Deferred Income. As payments
are received, the Company records earnings equal in amount to the payment
received. See Note 4 of Notes to Consolidated Financial Statements.
Prior to the Filing, 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 September 30, 2003, Ventures had notes receivable of approximately
$2.6 million. No notes were outstanding as of December 31, 2003. As part of a
Ventures note transaction, the Company customarily 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 provided 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
Included in other receivables at December 31, 2003 is approximately
$1.3 million of estimated recoveries on venture leases currently in default,
approximately $2.9 million resulting from a terminated interest rate swap
agreement and miscellaneous global receivables of approximately $1.4 million.
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
inherent 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, 2003 and 2002 were as follows (in millions):
Consolidated Ventures
----------------------------- -------------------------
December 31, December 31,
2003 2002 2003 2002
---------- ------------- ----------- ---------
Balance at beginning of period $ 11 $ 158 $ 2 $ 110
Provision for credit losses (5) (6) (5) (7)
Net credit recoveries
(losses) (1) (19) 4 (21)
-------- -------- ------ --------
Balance at end of period $ 5 $ 133 $ 1 $ 82
======== ======== ====== ========
7. Equity Securities
Prior to Filing, 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 in privately held companies, 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 market and customer specific events and
circumstances indicate the carrying value might be impaired. All write-downs
are considered permanent impairments for financial reporting purposes.
Impairments in equity securities totaled $0 million and $7 million during the
three months ended December 31, 2003 and 2002, respectively.
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 during either the three months ended December 31, 2003 or 2002.
Net realized gains are included in other revenue in the consolidated
statements of earnings (loss).
The Company estimated the fair value at September 30, 2003 for equity
investments in private companies, including warrants, at approximately $12
million. This estimate took into consideration the following factors: (i)
non-binding cash bids received from independent third parties; (ii)
management's analysis; and (iii) a limited, independent third party review of
the Company's portfolio. The Company is unaware of any developments between
September 30, 2003 and December 31, 2003 which would materially impact the
Company's estimated fair value for equity investments in private companies.
The Company did not sell or adjust the carrying value of its equity
investments in private companies during the quarter ended December 31, 2003.
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. These gains were $1 million during the
three months ended December 31, 2003. There were no warrant gains during the
three months ended December 31, 2002. These amounts are included in other
revenue in the consolidated statements of earnings (loss).
Ventures' publicly-traded security holdings were as follows (in
millions):
Gross Gross
unrealized unrealized Market
Cost gains losses value
----------- ---------- ---------- --------
December 31, 2003 $ 1 $ 8 $ - $ 9
September 30, 2003 $ 1 $ 11 $ - $ 12
The decrease in the market value of Ventures' publicly-traded
security holdings from $12 million at September 30, 2003 to $9 million at
December 31, 2003 is due to changes in the unrealized gain in the Company's
holdings of iPass, Inc. ("iPass") common stock from $10 million to $7 million
at the respective dates. The Company's practice is to sell its marketable
equity securities upon the expiration of the lock-up period. The lock-up
period for iPass expired in late January 2004. As of February 9, 2004, the
Company had liquidated approximately 83 percent of its holdings in iPass for
approximately $6 million.
8. Stockholders' Equity
When the Company emerged from bankruptcy, 4,200,000 shares of Common
Stock were issued. As of December 31, 2003, the Company had 4,197,100 shares
of Common Stock outstanding and 2,900 shares of Common Stock held in treasury.
All shares of the Predecessor company's common stock were cancelled
on August 12, 2002. The Predecessor company's common stockholders were
entitled to distributions of CDRs under the Plan if they properly completed a
transmittal form and surrendered shares of the Predecessor company's common
stock to Mellon Investor Services LLC prior to August 12, 2003. Approximately
five hundred thousand CDRs were forfeited because holders of Comdisco, Inc.
common stock did not exchange their cancelled shares for CDRs prior to the
deadline prescribed in the Plan. More information on the CDRs can be found in
a Registration Statement on Form 8-A filed by the Company on August 12, 2002
with the SEC and in two Bankruptcy Court orders entered in respect of the CDRs
(incorporated by reference to Exhibits 99.3 and 99.4 filed with the Company's
Quarterly Report on Form 10-Q as filed with the Commission on May 14, 2003).
From May 2003 to September 30, 2003, the Company distributed
approximately $568 million to stockholders in the form of dividends paid on
the Company's Common Stock. In December 2003, the Company distributed
approximately $50 million to stockholders in the form of a dividend paid on
the Company's Common Stock. Comdisco intends to treat the dividend
distributions for federal income tax purposes as part of a series of
liquidating distributions in complete liquidation of the Company.
Stockholders' equity consists of the following (in millions):
Additional Accumulated
Common paid-in other compre- Retained
Stock capital hensive income earnings Total
- ------------------------------------- ----------- ------------ --------------- --------- ---------
Balance at September 30, 2003 $ - $ 169 $ 13 $ - $ 182
Net income 14 14
Translation adjustment 1 1
Change in unrealized gain (3) (3)
------
Total comprehensive income 12
Liquidating dividend (36) (14) (50)
----- ------ ----- ------ ------
Balance at December 31, 2003 $ - $ 133 $ 11 $ - $ 144
===== ====== ===== ====== ======
Total comprehensive income (loss) consists of the following (in
millions):
Three months ended December 31,
2003 2002
--------------- -------------
Foreign currency translation adjustments $ 1 $ 19
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during the period (2) -
Reclassification adjustment for gains
included in earnings before
income taxes (1) -
----------- ---------
Net unrealized gains (losses), before
income taxes (3) -
Income taxes - -
----------- ---------
Net unrealized gains (losses) (3) -
----------- ---------
Other comprehensive income (loss) (2) 19
Net earnings 14 9
----------- ---------
Total comprehensive income $ 12 $ 28
=========== =========
9. Other Financial Information
Legally restricted cash is comprised of the following at December 31,
2003 and September 30, 2003 (in millions):
December 31, September 30,
2003 2003
---------- ----------
SunGard escrow $ - $ 1
Letter of credit - 3
Incentive compensation escrows 28 37
Other 1 1
---------- ----------
$ 29 $ 42
========== ==========
In November 2003, the Company and SunGard resolved all disputed
matters associated with the SunGard escrow and, as a result, the Company
received $763,000. The Company's exposure at September 30, 2003 on the letter
of credit was eliminated in November 2003 by the customer prepaying its
obligation. The decrease in the incentive compensation escrow is primarily the
result of payments, approved by the Board of Directors, made in October and
November 2003 under the Company's Bankruptcy Court approved compensation
plans.
Other liabilities consists of the following (in millions):
December 31, September 30,
2003 2003
----------- ------------
Accrued compensation $ 34 $ 62
CDRs 36 44
Other:
Customer advances, deposits 1 7
Taxes other than income - 2
Accrued professional services 2 1
Due SunGard 1 1
Other 1 1
----------- ------------
Total Other 5 12
----------- ------------
$ 75 $ 118
=========== ============
The liability for accrued compensation includes payroll and estimated
amounts payable under the Company's Bankruptcy Court approved compensation
plans. The decrease in the accrued compensation liability from $62 million at
September 30, 2003 to $34 million at December 31, 2003 is primarily the result
of the payments approved by the Board of Directors and made by the Company in
October and November 2003 (see Item 11, Bankruptcy Court-Approved Compensation
Plans in the Company's Annual Report on Form 10-K for the year ended September
30, 2003).
From May 2003 to September 2003, the Company made payments to holders
of CDRs totaling approximately $18.7 million. In December 2003, the Company
made a cash payment of $.0514 per CDR (an aggregate distribution of
approximately $7.8 million) to CDR holders. No expense for CDRs was recorded
in the three months ended December 31, 2003. Accordingly, the liability for
CDRs has decreased from $44 million to $36 million from September 30, 2003 to
December 31, 2003, respectively.
Management has adopted a methodology for estimating the amount due to
CDR holders following the provisions of Statement of Financial and Accounting
Standards No. 5, Accounting For Contingencies ("SFAS No. 5"). Under SFAS No.
5, a liability must be booked that is probable and reasonably estimatable as
of the balance sheet date.
The amount due to CDR holders is based on the amount and timing of
distributions made to former creditors of the Company's predecessor, Comdisco,
Inc., and is impacted by both the value received from the orderly sale or
run-off of Comdisco Holding's assets and on the resolution of Disputed Claims
still pending in the bankruptcy estate of Comdisco, Inc.
The Company is not able to definitively estimate either the ultimate
value to be received for the remaining assets or the final resolution of
remaining Disputed Claims. Accordingly, the Company does not forecast these
outcomes in calculating the liability. Instead, the liability calculation uses
the Company's equity value as the basis for remaining asset value, reduced for
estimated operating expenses and increased for two items which did not impact
equity for financial reporting purposes at December 31, 2003: the estimated
fair market value of the remaining properties held for sale, and the
participation interest in certain lease rental payments due from Agere. See
Notes 4 and 6 of Notes to Consolidated Financial Statements for further
discussion of these items. In addition, the liability for CDRs is calculated
as if all remaining Disputed Claims are allowed. The amounts due to CDR
holders will be greater to the extent that Disputed Claims are disallowed. The
disallowance of a Disputed Claim results in a distribution from the Disputed
Claims Reserve to previously allowed creditors that is entirely in excess of
the minimum percentage recovery threshold. In contrast, the allowance of a
Disputed Claim results in a distribution to a newly allowed creditor that is
only partially in excess of the minimum percentage recovery threshold.
The remaining estimated Disputed Claims in the bankruptcy estate of
Comdisco, Inc. were reduced from $290 million to $289 million as part of the
quarterly distribution from the Disputed Claims Reserve, which occurred on
February 13, 2004. Two groups of Disputed Claims (related to the Shared
Investment Plan and a Ventures compensation plan dispute) represent more than
78 percent of the remaining aggregate estimated amount. The portion of the CDR
liability that is based on the resolution of Disputed Claims assumes the
entire $289 million of estimated Disputed Claims is allowed. Utilizing the
December 31, 2003 assumptions, if the liability had been calculated as if the
entire $289 million of estimated Disputed Claims are disallowed, the
incremental expense for the quarter ended December 31, 2003 would have been
approximately $110 million.
Gross cash distributions related to general unsecured claims totaled
$3.935 billion through February 13, 2004. The distributions funded claims
allowed on the initial distribution date and the Disputed Claims
Reserve, where cash and Common Stock are being held pending the outcome of the
remaining Disputed Claims. A portion of the original Disputed Claims have been
allowed subsequent to the initial distribution date.
Pursuant to the Rights Agent Agreement that established the terms of
the CDRs distributed in accordance with the Plan, the Company agreed to
provide information in its annual and quarterly reports regarding the Present
Value of Distributions (as defined in the Rights Agent Agreement) made to
certain former creditors of Comdisco, Inc. The Present Value of Distributions
calculation requires the Company to discount the cash distributions to the
initially allowed claimholders from the date the distribution is made to the
date of the Company's emergence from bankruptcy on August 12, 2002. The gross
distributions through February 13, 2004 of approximately $3.588 billion made
to initially allowed claimholders equates to a present value of $3.461
billion. The associated percentage recovery was approximately 95.4 percent as
of February 13, 2004.
See Management's Discussion and Analysis of Financial Condition and
Results of Operations, "Recent Developments" for a description of the motion
filed by Wells Fargo Financial Leasing, Inc. ("Wells Fargo"). If the
Bankruptcy Court reconsiders its disallowance and/or subsequently allows
Wells Fargo's claim, in full or in part, then future distributions may be
negatively impacted.
Other assets consists of the following (in millions):
December 31, September 30,
2003 2003
------------- -------------
Deferred costs $ - $ 5
Prepaid expenses 2 2
Deposits on rent 1 1
Other 3 3
------------- -------------
$ 6 11
============= =============
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 Holding Company,
Inc.; (iii) Ventures, which is managed by Comdisco Ventures, Inc.; and (iv)
the Corporate Asset Management 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 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.
For financial reporting purposes, the assets ($52 million) and
liabilities ($4 million) of the Company's US Leasing operations as of December
31, 2003 are included in the balance sheet as assets of discontinued
operations and liabilities related to assets of discontinued operations and
the results of operations of the Company's US Leasing operations for the all
periods presented are included in the statement of earnings (loss) as
discontinued operations.
Historically, the Company evaluated the performance of its business
segments based on cash flow from operations, revenues and earnings (loss)
before income taxes. As a result of the wind-down of operations, the Company
believes that the relevance of the reportable business segment results has
significantly diminished since emergence and, accordingly, the Company expects
to consolidate business units and cease to report independent business segment
results in fiscal 2004.
Intersegment sales are not significant and all intersegment balances
have been eliminated in the summarized financial information presented below.
The information for fiscal 2003 has been restated from the prior year's
presentation in order to conform to the fiscal 2004 presentation.
The following table presents cash flow from operations (in millions):
Three months Three months
ended December 31, ended December 31,
2003 2002
-------- ---------
European IT Leasing $ 27 (5)
CAM group 9 (4)
Ventures 4 85
Discontinued operations 8 356
-------- --------
Total $ 48 432
======== ========
The following table presents segment revenues and earnings (loss)
before income taxes, excluding the gain (loss) from discontinued operations
(in millions):
Three months Three months
ended December 31, ended December 31,
2003 2002
-------- ---------
REVENUES:
European IT Leasing $ 4 $ 10
CAM group 40 37
Ventures 2 48
-------- ---------
$ 46 $ 95
======== =========
SEGMENT EARNINGS (LOSS):
European IT Leasing $ (1) $ -
CAM group 22 (9)
Ventures 2 (3)
-------- ---------
$ 23 $ (12)
======== =========
The following table presents total assets for each of the Company's
reportable segments (in millions):
December 31, September 30,
2003 2003
------- -------
European IT Leasing $ 25 $ 27
CAM group 155 196
Ventures 25 37
Assets of discontinued
operations held for sale:
US leasing 52 69
Other 40 44
------- -------
Total 92 113
------- -------
Total $ 297 $ 373
======= =======
European IT Leasing assets at December 31, 2003 include $15 million
in direct financing leased assets for which the lessee is an affiliate of
Cable & Wireless Plc.
CAM group assets include corporate cash balances of approximately
$110 million.
Other assets of discontinued operations held for sale at December 31,
2003 are principally the present value of the remaining payments due from the
sale of the Company's German Leasing Subsidiary (see Note 5 of Notes to
Consolidated Financial Statements).
The following table presents total revenue by geographic location
based on the location of the Company's local offices (in millions):
Three months ended Three months ended
December 31, December 31,
2003 2002
---------- --------
North America $ 30 $ 77
Europe 16 18
---------- --------
Total $ 46 $ 95
========== ========
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,
2003 2003
---------- --------
North America $ 225 $ 286
Europe 70 84
Pacific Rim 2 3
--------- ---------
Total $ 297 $ 373
========= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and related notes included
elsewhere in this Quarterly Report on Form 10-Q and in the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 2003, and with the
information under the heading Management's Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form
10-K for the fiscal year ended September 30, 2003.
THE COMPANY EMERGED FROM CHAPTER 11 BANKRUPTCY PROCEEDINGS ON AUGUST
12, 2002. THE PURPOSE OF THE COMPANY IS TO SELL, COLLECT OR OTHERWISE REDUCE
TO MONEY IN AN ORDERLY MANNER THE REMAINING ASSETS OF THE CORPORATION.
PURSUANT TO THE COMPANY'S PLAN OF REORGANIZATION AND RESTRICTIONS CONTAINED IN
THE COMPANY'S CERTIFICATE OF INCORPORATION, THE COMPANY IS SPECIFICALLY
PROHIBITED FROM ENGAGING IN ANY BUSINESS ACTIVITIES INCONSISTENT WITH ITS
LIMITED BUSINESS PURPOSE. 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 HOLDERS OF ITS COMMON STOCK AND
CONTINGENT DISTRIBUTION RIGHTS IN THE MANNER AND PRIORITIES SET FORTH IN THE
PLAN. AT THAT POINT, THE COMPANY WILL CEASE OPERATIONS AND NO FURTHER
DISTRIBUTIONS WILL BE MADE.
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
Wind-Down of Operations
Since emerging from bankruptcy proceedings on August 12, 2002, the
Company has, pursuant to the Plan, focused on the monetization of its
remaining assets. The Company's asset base has decreased by approximately 87
percent to $297 million at December 31, 2003 from $2.341 billion at September
30, 2002, and has decreased by 20 percent from $373 million at September 30,
2003. Total revenue and cash flow from operations have decreased by 52 percent
and 89 percent, respectively, during the three months ended December 31, 2003
as compared to the prior year period. The Company expects total revenue and
net cash flow from operations to continue to decrease until the wind-down of
its operations is completed; however, the Company cannot accurately predict
the net amount to be realized, or the timing of such realization, from the
continued monetization of its assets. Therefore, comparisons of
quarter-to-quarter or year-to-year results of operations should not be relied
upon as an indication of the Company's future performance.
The Company has reduced, and expects to continue to reduce, the size
and complexity of its organizational and systems infrastructure concurrently
with the monetization of its assets. As of February 9, 2004, the Company had a
total of 66 employees, a decrease of approximately 90 percent from
approximately 600 employees upon emergence from bankruptcy proceedings on
August 12, 2002. On January 6, 2004, the Bankruptcy Court approved an order
granting authority for the Company to migrate from its legacy mainframe-based
information system to a simplified, alternative information system during
fiscal 2004. Further, the Company plans to consolidate its management
structure into a single business unit during fiscal 2004.
On February 17, 2004, the Company expects to file a motion with the
Bankruptcy Court for an order in furtherance of the Plan seeking authority to
appoint a disbursing agent, prior to August 12, 2004, to fulfill the roles of
the Board of Directors and executive officers of the Company, to file a
certificate of dissolution and to take such other measures as are necessary to
complete the administration of the reorganized debtors' Plan and chapter 11
cases. The Company will furnish the motion to the SEC with a Current Report on
Form 8-K pursuant to Item 9 when the motion is filed with the Bankruptcy
Court.
Overview
Bankruptcy: On July 16, 2001, Comdisco, Inc. and 50 of its domestic
subsidiaries voluntarily filed for bankruptcy. 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.
leased information technology equipment to a variety of industries and more
specialized equipment to key vertical industries, including semiconductor
manufacturing and electronic assembly, healthcare, telecommunications,
pharmaceutical, biotechnology and manufacturing. Through its Ventures group,
Comdisco, Inc. provided equipment leasing and other financing and services to
venture capital-backed companies.
Emergence from Bankruptcy: 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
business groups: US Leasing; European IT Leasing; the Corporate Asset
Management group ("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. Since emerging from
bankruptcy, 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.
The Company's revenues are generated by the Company's existing lease
base, by sales of equipment from inventory or from off-lease sales and, for
the quarter ended December 31, 2003, from its participation interest in
certain Agere lease payments and the sale of its property in Carlstadt, New
Jersey. As a global company, the Company's revenues are denominated in
multiple currencies and may be significantly impacted by currency
exchange-rate fluctuations. The strengthening of various currencies versus the
U.S. dollar, particularly the Euro and Canadian currencies, resulted in
favorable currency translation and increased reported revenues, particularly
in the three months ended December 31, 2002. Because of the Company's
declining assets, revenue has declined significantly in the current year
period compared to the year earlier period and, because of the Company's
limited business purpose, this trend is expected to continue. The Company's
expenses are primarily depreciation of leased equipment, cost of equipment
sold, CDRs, and selling, general and administrative expense (including legal
costs associated with litigation of Disputed Claims). As a result of the
wind-down of operations, the Company expects continued declines in total costs
and expenses, subject to volatility in the amount of the expense associated
with the liability for CDRs.
All funds generated from the Company's remaining asset portfolios are
required by the Plan to be used to satisfy liabilities of the Company and, to
the extent funds are available, to pay dividends on the Company's Common Stock
and to make distributions with respect to the CDRs in the manner and
priorities set forth in the Plan. Dividends paid on Common Stock and payments
to CDR holders were $50 million and $8 million, respectively, in the three
months ended December 31, 2003. 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. 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 holders of its Common Stock and
CDRs in the manner and priorities set forth in the Plan. At that point, the
Company will cease operations and no further distributions will be made.
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 the Company 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 consolidated financial statements.
The SEC issued Financial Reporting Release No. 60, "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" 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 CDRs and CDR Liability: The Plan entitles holders of Comdisco
Holding's CDRs to share at increasing percentages in the proceeds
realized from the Company's assets based upon the present value of
distributions made to the general unsecured creditors in the
bankruptcy estate of Comdisco, Inc.
Management has adopted a methodology for estimating the
amount due to CDR holders following the provisions of Statement of
Financial and Accounting Standards No. 5, Accounting For
Contingencies ("SFAS No. 5"). Under SFAS No. 5, a liability must be
booked that is probable and reasonably estimatable as of the balance
sheet date.
The amount due to CDR holders is based on the amount and
timing of distributions made to former creditors of the Company's
predecessor, Comdisco, Inc., and is impacted by both the value
received from the orderly sale or run-off of Comdisco Holding's
assets and the resolution of Disputed Claims still pending in the
bankruptcy estate of Comdisco, Inc.
The Company is not able to definitively estimate either the ultimate
value to be received for the remaining assets or the final resolution
of remaining Disputed Claims. Accordingly, the Company does not
forecast these outcomes in calculating the liability. Instead, the
liability calculation uses the Company's equity value as the basis
for remaining asset value, reduced for estimated operating expenses
and increased for two assets which did not impact equity for
financial reporting purposes at December 31, 2003: the estimated fair
market value of the remaining properties held for sale; and the
participation interest in certain lease rental payments due from
Agere. See Notes 4 and 6 of Notes to Consolidated Financial
Statements for further discussion of these items. In addition, the
liability for CDRs is calculated as if all remaining Disputed Claims
are allowed. The amounts due to CDR holders will be greater to the
extent that Disputed Claims are disallowed. The disallowance of a
Disputed Claim results in a distribution from the Disputed Claims
Reserve to previously allowed creditors that is entirely in excess of
the minimum percentage recovery threshold. In contrast, the allowance
of a Disputed Claim results in a distribution to a newly allowed
creditor that is only partially in excess of the minimum percentage
recovery threshold.
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 and 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 Equity Investments In Private Companies: Equity investments in
private companies consist primarily of small investments in over two
hundred private companies that are non-quoted securities. The Company
carries its common stock and preferred stock investments at the lower
of cost or estimated fair market value in the financial statements.
Warrants in non-public companies are carried at zero value. The
Company regularly estimates the value of these investments in private
companies and adjusts carrying value when market and customer
specific events and circumstances indicate that such assets might be
impaired. All write-downs are considered permanent impairments for
financial reporting purposes.
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 sales-type
leased assets consist of the present value of the future minimum
lease payments plus the present value of the residual (collectively
referred to as the "Net Investment"). Residual is the estimated fair
market value 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 periodically 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.
Basis of Presentation
Comdisco, Inc. and fifty of its domestic subsidiaries filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code in
the Bankruptcy Court 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 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 sheets as of December 31, 2003 and September
30, 2003, 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 November 26, 2003, the Company filed a motion with the Bankruptcy
Court seeking authority to migrate from its legacy mainframe-based information
system to a simplified, alternative information system. After a hearing on
December 18, 2003, the Bankruptcy Court on January 6, 2004 entered an order
granting the authority for such migration subject to certain conditions
pertinent to ongoing litigation and existing discovery requests. Pursuant to
the authority granted by the Bankruptcy Court, the Company is implementing its
information systems migration strategy.
On December 24, 2003, Wells Fargo Financial Leasing, Inc. ("Wells
Fargo") filed a motion with the Bankruptcy Court seeking reconsideration of
the Bankruptcy Court's order of July 31, 2002 disallowing Wells Fargo's
contingent and unliquidated claim against Comdisco, Inc. The basis for the
request for reconsideration is the alleged recent discovery of evidence of
alleged fraud, and the alleged breach of an Indemnity Agreement by Comdisco,
Inc. Wells Fargo is seeking to assert a claim in the estate for $116.2
million. Wells Fargo has also asked that no further distributions be made to
general unsecured creditors pending a determination of its motion unless an
adequate reserve exists for the payment of its claim.
On January 22, 2004, the Bankruptcy Court held a hearing on the Wells
Fargo motion after which it took the matter of reconsideration under
advisement. The Court informed the parties that it would rule by the February
26, 2004 Omnibus Hearing. The Company is vigorously contesting any
reconsideration by the Bankruptcy Court and denies the occurrence of any such
fraud or breach by Comdisco, Inc. However, if the Bankruptcy Court reconsiders
its disallowance and/or subsequently allows Wells Fargo's claim, in full or in
part, then future distributions may be negatively impacted.
On January 7, 2004, the Company completed the sale of its
participation interest in certain Agere lease payments. The aggregate purchase
price was approximately $18 million. Approximately $15 million was received in
cash and the remaining $3 million was placed in escrow pending the resolution
of post-closing adjustments, if any, to be made over the next year. The
participation interest was included in Comdisco's December 31, 2003 and
September 30, 2003 balance sheets in receivables at the present value of the
minimum payments, or approximately $17 million and $24 million, respectively,
and, in a like amount, in deferred income. During the three months ended
December 31, 2003, the Company received approximately $7 million in payments
with respect to the participation interest. The Company received approximately
$2 million in payments in January 2004 prior to the sale. All proceeds related
to the participation interest have been and will be reflected in Comdisco's
earnings when received.
As of February 9, 2004, the Company had liquidated approximately 83
percent of its holdings in iPass for approximately $6 million (see Note 7 of
Notes to Consolidated Financial Statements).
On February 13, 2004, the Company announced a cash payment of $.0187
per CDR payable March 4, 2004 to CDR holders of record on February 23, 2004.
The aggregate payment of approximately $2.8 million is primarily an
incremental payment related to the amended present value of distributions to
the initially allowed general unsecured creditors in the bankruptcy estate of
Comdisco, Inc. disclosed in a Form 8-K/A filed with the SEC on December 16,
2003.
On February 17, 2004, the Company expects to file a motion with the
Bankruptcy Court for an order in furtherance of the Plan seeking authority to
appoint a disbursing agent, prior to August 12, 2004, to fulfill the roles of
the Board of Directors and executive officers of the Company, to file a
certificate of dissolution and to take such other measures as are necessary to
complete the administration of the reorganized debtors' Plan and chapter 11
cases. The Company will furnish the motion to the SEC with a Current Report on
Form 8-K pursuant to Item 9 when the motion is filed with the Bankruptcy
Court.
Results of Operations
Certain reclassifications have been made to the prior period
financial statements to conform to the presentation used in the December 31,
2003 consolidated financial statements.
Three Months Ended December 31, 2003 Compared to the Three Months Ended
December 31, 2002
Total Revenue
Total revenue decreased 52 percent to $46 million for the three
months ended December 31, 2003 from $95 million for the three months ended
December 31, 2002. The decrease is due to lower revenues from all of the
Company's operations. Since September 30, 2002, the Company has monetized a
substantial amount of assets (portfolio sales, sales of stock in subsidiaries
(see Note 4 of Notes to Consolidated Financial Statements) and mid-term
off-lease sales to existing customers). Furthermore, the Company's business
purpose is limited to selling, collecting, or otherwise reducing to money in
an orderly manner the remaining assets of the Company. Since emerging from
bankruptcy, 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. Accordingly, the Company expects continued declines in total
revenue throughout fiscal 2004 as its asset base continues to decline.
Additional revenue information for each of the three remaining
business segments: European IT Leasing, Ventures and CAM group, is set forth
below (the Company's US Leasing segment was discontinued in fiscal 2003-see
Notes 3 and 4 of Notes to Consolidated Financial Statements).
Total Leasing Revenue
Total leasing revenue is comprised of three revenue components: (i)
operating lease revenue; (ii) direct financing lease revenue; and (iii)
sales-type lease revenue. Total leasing revenue from operations decreased 84
percent to $9 million for the three months ended December 31, 2003 from $56
million for the three months ended December 31, 2002. The decrease is
primarily due to the continued orderly run-off of the lease base, the absence
of any new business volume and the sale of leased assets rather than the
extension of existing leases or the re-leasing of the Company's inventory of
equipment. Total leasing revenue from European IT Leasing operations decreased
67 percent to $2 million for the three months ended December 31, 2003. Total
leasing revenue from CAM group decreased 40 percent to $6 million for the
three months ended December 31, 2003. Total leasing revenue from Ventures
operations decreased 98 percent to $1 million for the three months ended
December 31, 2003.
Sales Revenue
The Company generates sales revenue from two sources: (a) the sale of
equipment from its inventory; and (b) the sale of equipment to the lessee
either at original lease termination or during the original lease. Given the
Company's limited business purpose, it conducts these types of sales
transactions rather than extending existing leases or re-leasing its inventory
of equipment. Revenue from sales increased 40 percent to $21 million for the
three months ended December 31, 2003 from $15 million for the three months
ended December 31, 2002. European IT Leasing sales revenue was nominal for the
three months ended December 31, 2003 compared to $4 million for the three
months ended December 31, 2002. CAM group sales revenue increased 186 percent
to $20 million for the three months ended December 31, 2003 from $7 million
for the three months ended December 31, 2002. These sales are primarily
electronics equipment from inventory and from the sale of equipment to the
lessee prior to original lease termination. Ventures sales revenue decreased
75 percent to $1 million for the three months ended December 31, 2003 from $4
million for the three months ended December 31, 2002.
Technology Services Revenue
Revenues from technology services were $1 million and $5 million for
the three months ended December 31, 2003 and 2002, respectively.
Agere lease participation payment
During the three months ended December 31, 2003, the Company recorded
$7 million of revenue from its interest in certain lease rental payments from
Agere. See "Recent Developments" and Notes 4 and 6 of Notes to Consolidated
Financial Statements for information on the Agere lease participation
payment.
Sale of properties
The Company completed the sale of its Carlstadt building in November
2003 for approximately $2.2 million of which approximately $1.5 million is in
escrow pending resolution of an unrelated New Jersey state tax issue. See Note
4 of Notes to Consolidated Financial Statements for additional information
about the property sales.
Foreign exchange gain
Foreign exchange gain of approximately $1 million is due to the
strengthening of the Euro and Canadian dollar compared to the U.S. dollar
during the three months ended December 31, 2003. Transaction gains and losses
arise from the impact of exchange rate fluctuations on transactions
denominated in a currency other than the functional currency.
Other Revenue
Other revenue decreased 17 percent to $5 million for the three months
ended December 31, 2003 from $6 million for the three months ended December
31, 2002. The components of other revenue were as follows (in millions):
Three months ended
December 31,
2003 2002
------ ------
Sale of equity holdings $ 1 $ -
Interest income on notes - 4
Investment income 1 1
Other 3 1
------ ------
Total other revenue $ 5 $ 6
====== ======
Interest income on notes was nominal in the current quarter compared
to $4 million for the three months ended December 31, 2002. The decrease is
primarily due to the declining number and amount of notes receivable.
Total Costs and Expenses
Total operating costs and expenses decreased 79 percent to $23
million for the three months ended December 31, 2003 from $107 million for the
three months ended December 31, 2002. The Company expects total costs and
expenses to continue to decline throughout fiscal 2004, as compared to fiscal
2003, as a result of continued declines in assets and the consolidation of its
management structure into a single business unit, subject to volatility in the
amount of the expense associated with the liability for CDRs.
Additional cost and expense information for each of the business
segments is set forth below.
Total Leasing Costs and Expenses
Total leasing costs and expenses decreased 90 percent to $5 million
for the three months ended December 31, 2003 from $49 million for the three
months ended December 31, 2002. Total leasing costs and expenses is comprised
of two components: (i) operating lease costs and expenses and (ii) sales-type
lease costs and expenses. Operating and sales-type lease costs declined in all
business segments in the current year period compared to the prior year
period. The decreases are primarily due to the continued orderly run-off of
the lease base, the absence of significant new business volume and the sale of
leasing assets rather than the extension of existing leases or the re-leasing
of the Company's inventory of equipment. Total leasing costs and expenses from
European IT Leasing operations decreased 33 percent to $2 million for the
three months ended December 31, 2003 from $3 million for the three months
ended December 31, 2002. Total leasing costs and expenses from CAM group
decreased 63 percent to $3 million for three months ended December 31, 2003
from $8 million for the three months ended December 31, 2002. Total leasing
costs and expenses from Ventures were nominal for the three months ended
December 31, 2003 compared to $38 million for the three months ended December
31, 2002.
Sales Costs and Expenses
Sales costs and expenses increased 55 percent to $17 million for the
three months ended December 31, 2003 from $11 million for the three months
ended December 31, 2002. The increase in the current year period compared to
the prior year period is due to increased sales by CAM group. European IT
Leasing sales costs and expenses decreased 67 percent to $1 million for the
three months ended December 31, 2003 from $3 million for the three months
ended December 31, 2002. CAM group sales costs and expenses increased 88
percent to $15 million for the three months ended December 31, 2003 from $8
million for three months ended December 31, 2002. Ventures sales costs and
expenses were $1 million for the three months ended December 31, 2003. During
the prior year period, Ventures did not realize any sales costs and expenses.
Technology Services Costs and Expenses
Services costs were $1 million and $4 million for the three months
ended December 31, 2003 and 2002, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased 72 percent to
$5 million for the three months ended December 31, 2003 from $18 million for
the three months ended December 31, 2002. The following table summarizes
selling, general and administrative expenses (in millions):
Three months ended
December 31,
2003 2002
--------------- ---------------
Compensation and benefits $ 1 $ 9
Outside professional services 3 9
Other expenses 1 -
--------------- ---------------
$ 5 $ 18
=============== ===============
The decrease in compensation and benefits in the current year
compared to the year earlier period reflects the continued reduction in
personnel.
Contingent Distribution Rights
The Company recorded no expense associated with the liability for
CDRs in the three months ended December 31, 2003, compared to $6 million for
the three months ended December 31, 2002. See Critical Accounting Policies and
Contingent Distribution Rights for a discussion of the CDR liability.
Write-down of Equity Securities
There was no charge for write-down of equity securities for the three
months ended December 31, 2003 compared to $7 million for the three months
ended December 31, 2002. The decrease reflects the overall reduction in the
carrying value of the Company's equity securities, market conditions and
management's assessment of the ability of the portfolio companies to meet
their business plans.
Bad Debt Expense
Bad debt expense was $(5) million for the three months ended December
31, 2003 and $(6) million for the three months ended December 31, 2002. The
negative provisions are primarily due to better than anticipated collection
results during the three months ended December 31, 2003 and 2002 on the
Company's assets, improving market and economic conditions (including
continued low interest rates) and management's estimate of the reserves
necessary for the Company's remaining assets as of December 31, 2003 (See Note
6 of Notes to Consolidated Financial Statements).
Interest Expense
Interest expense was nominal during the three months ended December
31, 2003 compared to $18 million for the three months ended December 31, 2002.
The decrease in the current year period compared to the year earlier period is
primarily due to lower average daily borrowings during the current year
period.
Income Taxes
The Company recorded an income tax benefit of approximately $3
million as a result of the utilization of the Company's deferred tax assets.
In October 2003, the Company's United Kingdom subsidiary received a
tax refund of approximately GBP 15 million relating to the 2002 tax year. The
UK Inland Revenue has one year to challenge and propose any adjustments to
this refund. The Company expects to recognize any benefit of this refund when
Inland Revenue completes its review. The Company's liability for income taxes
increased from $29 million at September 30, 2003 to $52 million at December
31, 2003 primarily as a result of this refund, offset by the benefit recorded
of approximately $3 million.
Net Earnings (Loss) from Continuing Operations
The net earnings from continuing operations were $26 million for the
three months ended December 31, 2003, or $6.24 per share-diluted, compared to
a net loss of $12 million for the three months ended December 31, 2002, or
$2.77 per share-diluted.
Discontinued Operations
Net loss from discontinued operations was $12 million, or $2.95 per
share-diluted, for the three months ended December 31, 2003 compared to net
earnings of $21 million, or $4.86 per share-diluted, for the three months
ended December 31, 2002.
o US Leasing operations: On September 9, 2003, the Company completed
the sale of its U.S. information technology leasing business to Bay4.
On September 30, 2003, the Company completed the sale of its Canadian
information technology leasing business to Bay4 Capital Partners,
Inc. The results of operations for this business segment have been
classified as discontinued operations and prior year periods have
been restated. Revenue was $7 million during the three months ended
December 31, 2003 compared to $66 million during the three months
ended December 31, 2002. Costs and expenses for US Leasing were $14
million during the three months ended December 31, 2003 compared to
$47 million during the three months ended December 31, 2002. The net
loss for US Leasing was $7 million for the three months ended
December 31, 2003 compared to net earnings of $19 million for the
three months ended December 31, 2002. See Notes 5 and 10 of Notes to
Consolidated Financial Statements for a description of the Company's
US Leasing assets as of December 31, 2003.
o German Leasing Subsidiary: On April 30, 2003, the Company announced
that it had completed the sale of the stock of its German Leasing
Subsidiary to Munich-based Comprendium Investment (Deutschland) GmbH,
which is owned by Comprendium Investment SA, a Swiss corporation.
During the three months ended December 31, 2003, the Company recorded
a $6 million charge against the note receivable balance due from the
sale (see Note 4 of Notes to Consolidated Financial Statements).
Revenue was $39 million for the three months ended December 31, 2002.
Costs and expenses for these operations were $36 million for the
three months ended December 31, 2002. Net loss was $6 million for the
three months ended December 31, 2003 compared to net earnings of $2
million for the three months ended December 31, 2002.
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 Company sold substantially all of its information
technology assets in Australia and New Zealand to Allco pursuant to a
sale approved by the Bankruptcy Court on April 18, 2002. The
financial results of these operations have been classified as
discontinued operations and prior year periods have been restated.
During the three months ended December 31, 2003, revenues were $1
million. The revenues relate to foreign exchange gains and are
noncash. Revenues and cost and expenses were immaterial during the
three months ended December 31, 2002.
Net Earnings (Loss)
Net earnings were $14 million, or $3.29 per share-diluted, for the
three months ended December 31, 2003 compared to net earnings of $9 million,
or $2.09 per share-diluted, for the three months ended December 31, 2002.
Off-Balance Sheet Arrangements
The Company does not maintain any off-balance sheet arrangements,
transactions, obligations or other relationships with unconsolidated entities
that would be expected to have a material current or future effect upon the
Company's financial condition or results of operations.
Liquidity and Capital Resources
The Company must rely on cash generated from the orderly sale and
run-off of its assets to meet its liquidity needs. All funds generated from
the Company's remaining asset portfolios are required by the Plan to be used
to satisfy liabilities of the Company and, to the extent funds are available,
to pay dividends on the Company's Common Stock and to make distributions with
respect to the CDRs 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.
At December 31, 2003, the Company had unrestricted cash and cash
equivalents of approximately $102 million, an increase of approximately $5
million compared to September 30, 2003. Net cash provided by operating
activities for the three months ended December 31, 2003 was $48 million. Net
cash used in investing activities of $3 million for the three months ended
December 31, 2003 was primarily related to tax payments.
The Company's operating activities during the three months ended
December 31, 2003, including minimal capital expenditures, were funded by cash
flows from operations (primarily lease and sale receipts). During the three
months ended December 31, 2003, the Company received approximately $7 million
in payments with respect to the participation interest in certain Agere lease
payments and approximately $1 million from the sale of its Carlstadt facility.
The Company's cash expenditures are primarily operating expenses (principally
compensation and professional services), dividends and payments to CDR
holders.
The Company's current and future liquidity depends on cash on hand,
cash provided by operating activities and asset sales. As of February 9, 2004,
the Company's unrestricted cash balances exceeded $130 million. The Company
expects its cash on hand and cash flow from operations to be sufficient to
fund operations and to meet its obligations (including its obligation to make
payments to CDR holders) under the Plan for the foreseeable future.
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 conditions and controlling operating costs and
expenses.
Dividends
In December 2003, the Company distributed approximately $50 million
in the form of a dividend to stockholders paid on the Company's Common Stock.
Comdisco intends to treat this dividend distribution for federal income tax
purposes as part of a series of liquidating distributions in complete
liquidation of the Company.
Contingent Distribution Rights
For financial reporting purposes, the Company records CDRs as a
liability and as an operating expense although the CDRs trade
over-the-counter.
In December 2003, the Company distributed a cash payment of $.0514
per CDR (an aggregate distribution of approximately $7.8 million) to CDR
holders of record on December 1, 2003.
On February 13, 2004, the Company announced a cash payment of $.0187
per CDR payable March 4, 2004 to CDR holders of record on February 23, 2004.
The aggregate payment of approximately $2.8 million is primarily an
incremental payment related to the amended present value of distributions to
the initially allowed general unsecured creditors in the bankruptcy estate of
Comdisco, Inc. disclosed in a Form 8-K/A filed with the SEC on December 16,
2003.
Gross cash distributions related to general unsecured claims totaled
$3.935 billion through February 13, 2004. The distributions funded claims
allowed on the initial distribution date and the Disputed Claims
Reserve, where cash and Common Stock are being held pending the outcome of the
remaining Disputed Claims. A portion of the original Disputed Claims have been
allowed subsequent to the initial distribution date.
Pursuant to the Rights Agent Agreement that established the terms of
the CDRs distributed in accordance with the Plan, the Company agreed to
provide information in its annual and quarterly reports regarding the Present
Value of Distributions (as defined in the Rights Agent Agreement) made to
certain former creditors of Comdisco, Inc. The Present Value of Distributions
calculation requires the Company to discount the cash distributions to the
initially allowed claimholders from the date the distribution is made to the
date of the Company's emergence from bankruptcy on August 12, 2002. The gross
distributions through February 13, 2004 of approximately $3.588 billion made
to initially allowed claimholders equates to a present value of $3.461
billion. The associated percentage recovery was approximately 95.4 percent as
of February 13, 2004.
See Critical Accounting Policies and Note 9 of Notes to Consolidated
Financial Statements for a further discussion of CDRs and the methodology for
estimating the CDR liability. See Recent Developments for a discussion of the
Wells Fargo claim and its potential negative impact on future distributions.
See also Risk Factors--Impact of Disallowance of Disputed Claims on the
Company's Obligation To Make Payments in Respect of Contingent Distribution
Rights and Impact of Reconsideration and/or Allowance of Newly Filed Claims,
Late Filed Claims or Previously Disallowed Claims.
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 or currently deemed
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. The Company's remaining lease funding obligations are immaterial.
The Payment of Dividends and Distributions
All funds generated from the Company's remaining asset portfolios are
required by the Plan to be used to satisfy liabilities of the Company and, to
the extent funds are available, to pay dividends on the Company's Common Stock
and to 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 or
intend, to make any significant investments in new or additional assets.
Accordingly, the amount of funds potentially available to pay dividends on the
Company's Common Stock and to make distributions with respect to the
Contingent Distribution Rights is limited to the funds (in excess of the
Company's liabilities) that may be generated from the remaining asset
portfolios.
Impact of Disallowance of Disputed Claims on the Company's Obligation
To Make Payments in Respect of Contingent Distribution Rights
Because the present value of distributions to certain former
creditors of Comdisco, Inc. reached a threshold level of percentage recovery
established pursuant to the Plan, holders of CDRs are entitled to receive
specified payments from the Company. All payments by the Company in respect of
CDRs are made from the Company's available cash-on-hand and not from funds
released from the Disputed Claims Reserve. The Company expects to maintain
cash reserves sufficient to make any required payments on the CDRs. The
Company's success in reducing the Disputed Claims Reserve through disallowance
of Disputed Claims could have a significant negative impact on the cash
available to be distributed to common shareholders.
Impact of Reconsideration and/or Allowance of Newly Filed Claims,
Late Filed Claims or Previously Disallowed Claims
The reconsideration and/or allowance by the Bankruptcy Court of newly
filed claims, late filed claims, or previously disallowed claims, in full or
in part, may negatively impact future distributions.
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 sustained 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 will be able to remarket its assets at
expected or historical levels.
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.
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 Market 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 managed 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. Many of the companies to
which Ventures provided venture financing prior to the bankruptcy filing are
dependent on third parties for liquidity. The continued limited availability
of funds has had, and may continue to have, a material impact on the fair
market value of the Company's equity securities and on the ability of its
customers to meet their remaining debt and lease obligations.
Current market conditions also have adversely affected, and continue
to adversely affect, 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, and
continues to adversely affect, the ability of the Company to dispose of the
equity securities. 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 Asset Concentration Risk
The Company's asset concentrations expose the Company to additional
risk in that the inability of the obligor to meet its obligations to the
Company could significantly negatively impact the Company's future cash flow.
Impact of Interest Rates and Foreign Exchanges Rates
Increases in interest rates would negatively impact the value of
certain of the Company's assets and a strengthening of the US dollar would
negatively impact the value of the Company's net foreign assets.
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, its
limited business purpose, 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 three months ended
December 31, 2003 from the disclosures about market risk provided in the
Company's Annual Report on Form 10-K for the year ended September 30, 2003.
See Note 7 of Notes to Consolidated Financial Statements for a discussion of
the changes in unrealized gains in the Company's holdings of iPass common
stock.
Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's
Chief Executive Officer and Principal Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Principal Financial Officer have
concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective in recording, processing, summarizing
and reporting, on a timely basis, information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act.
Internal Controls Over Financial Reporting
During the fiscal quarter to which this report relates, the Company
reengineered its business processes to be consistent with a more simplified
alternative information system. Management documented and tested key process
workflows and related internal controls. The results of these assessments
evidenced that there have not been any changes to the Company's internal
controls over financial reporting (as such term is defined in Rules 13a-15(f)
and 15d-15 (f) under the Exchange Act) during the fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to
materially effect, the Company's internal control over financial reporting.
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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, adopted as of 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).
31.1 Certificate of Chief Executive Officer Pursuant to Rule
13a-14 and Rule 15d-14 of the Exchange Act, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith).
31.2 Certificate of Principal Financial Officer Pursuant to Rule
13a-14 and Rule 15d-14 of the Exchange Act, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(Filed herewith).
32.1 Certification of Chief Executive Officer and 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).
(b) Reports on Form 8-K
Since the beginning of the first quarter of fiscal 2004, the Company
filed the following current reports on Form 8-K:
On November 21, 2003, the Company filed a Current Report on Form 8-K,
dated November 20, 2003. Pursuant to Item 5 of its Report, the Company
reported that it had issued a press release on November 20, 2003 announcing
that its Board of Directors had declared a cash dividend on the outstanding
shares of common stock and announcing a cash payment on its CDRs. The Report
added the press release as an exhibit pursuant to Item 7.
On December 16, 2003, the Company filed a Current Report on Form
8-K/A announcing the present value of distributions to the initially allowed
general unsecured creditors in the bankruptcy estate of Comdisco, Inc. was
approximately $3.461 billion (not the $3.449 billion as previously reported
and as utilized in determining the cash payment of $.0514 per contingent
distribution right paid on December 11, 2003). This increase in the present
value of distributions to the initially allowed general unsecured creditors in
the bankruptcy estate of Comdisco, Inc. entitles holders of CDRs to receive an
incremental cash payment of approximately $2.8 million, or approximately
$0.018 per CDR.
On December 24, 2003, the Company filed a Current Report on Form 8-K,
dated December 23, 2003. Pursuant to Item 12 of its Report, the Company
reported that it had issued a press release on December 23, 2003 announcing
its financial results for its fiscal year ended September 30, 2003. The Report
furnished the press release as an exhibit pursuant to Item 12.
On January 8, 2004, the Company filed a Current Report on Form 8-K,
dated January 7, 2004. Pursuant to Items 9 and 12 of its Report, the Company
reported that it had issued a press release on January 7, 2004 announcing the
sale to Marathon Structured Finance Fund, Ltd. of the Company's participation
interest in certain Agere Systems, Inc. lease payments. The Report furnished
the press release as an exhibit pursuant to Item 12.
On February 13, 2004, the Company filed a Current Report on Form 8-K,
dated February 13, 2004. Pursuant to Item 5 of its Report, the Company
reported that it had issued a press release on February 13, 2004 announcing a
cash payment of $.0187 per right on its CDRs, payable on March 4, 2004 to CDR
holders of record on February 23, 2004. The aggregate payment of approximately
$2.8 million is primarily an incremental payment related to the amended
present value of distributions to the initially allowed general unsecured
creditors in the bankruptcy estate of Comdisco, Inc. disclosed in a Form 8-K/A
filed with the SEC on December 16, 2003. 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 17, 2004 By: /s/ David S. Reynolds
--------------------------
Name: David S. Reynolds
Title: Senior Vice President
and Controller
(Principal Financial Officer)